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Third Quarter 2007 Results
In the third quarter of 2007, net sales were to $4.2 million, compared to$5.1 million in the same quarter of 2006. Sales of Xuesaitong Soft Capsules,the Company's primary product, accounted for more than 80% of total sales,unchanged from a year ago. The decline in sales resulted from the Company'sadoption of more stringent credit policies, which caused a shift in itscustomer base and led to a decline in sales volume.
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"The tighter credit policies posed a short-term challenge for ChinaShenghuo, but we have since replaced these customers with larger, moreestablished buyers, which should help to bolster sales during the typicallystrong fourth quarter," said Mr. Lan Guihua, Chairman and Chief ExecutiveOfficer of China Shenghuo. "Despite the short-term topline decline, wecontinue to see new opportunities, such as the recent launch of our 12Ways(R)Herbal Skin Care products and continued development of our Wei Dinkang SoftCapsules and other new products."
Gross profit for the second quarter was $3.2 million, compared to $3.8million a year ago. Gross margin was 75.3%, up from 74.4% the prior year and75.1% in the second quarter of 2007. The increased gross margin was attributedto an increase in sales prices.
Selling expenses were $1.5 million, compared with $1.2 million a yearearlier, primarily because of increased advertisement and production expensesrelated to the launch of the Company's new cosmetics line, as well asincreased salaries for newly recruited employees in the Company's ShenghuoCosmetic Co. LTD subsidiary. However, selling expense declined 23.9%sequentially from $2.0 million in the second quarter of 2007, primarilybecause of the decline in sales. The Company continues to expect sellingexpenses for the full year to be in the range of 30% to 35% of sales goingforward.
General and administrative expenses declined to approximately $0.3 millionfrom $1.7 million in the third quarter of 2006, primarily because of a declinein receivables and the recovery of approximately $1.0 million of bad debtexpenses.
Overall, total operating expenses during the quarter declined 35.7% fromthe prior year to $1.9 million. Sequentially, operating expenses were reduced44.1% from $3.4 million in the second quarter of this year.
Net income during the quarter was $0.9 million, or $0.04 per diluted share,compared with net income of $0.3 million, or $0.02 per diluted share, in thesame quarter of 2006.
Nine-Month Results
For the first nine months of 2007, net sales increased 7.9% to $14.9million from revenues of $13.8 million a year ago. Gross profit was $11.1million, or 74.7% of sales, up 19.4% from gross profit of $9.3 million, or67.5% of sales, in the first three quarters of 2006. Operating income declinedto $3.2 million, or 21.7% of sales, from $3.6 million, or 26.0% of sales, theprior year. For the first nine months of 2007, net income increased 68.9% to$3.7 million, or $0.19 per diluted share, from $2.2 million, or $0.13 perdiluted share, in the same period of 2006.
Financial Condition
As of September 30, 2007, the Company had cash and cash equivalents of$3.6 million and working capital of $9.8 million. The Company also had $5.3million in long-term debt and had shareholders' equity of $12.7 million.
Business Outlook
For the 2007 fiscal year, the Company has revised its guidance. It nowexpects full-year revenues of between $20.0 million and $22.0 million and netearnings of between $4.0
