China Sky One Admits Under-Reported Revenue

China Sky One Medical (NSDQ: CSKI) (中国天字一号医药公司) admitted that its financial reports filed with the State Administration for Industry and Commerce (SAIC) under-reported the income of China Sky One’s China-based subsidiaries. The company said it expects the SAIC to assess a penalty for the misstatements, but it does not think the penalty will be “material to the company.”

As explanation, China Sky One said it must file annual financial reports to the SAIC to renew its business license. The purpose of the filings, according to the company, is to report the “payment and authenticity of its registered capital.” The company must confirm that the minimum required amount has been paid in by the company’s shareholders and verify the sources of the funds. That part of the report was done correctly, says China Sky One, though the revenue statements were wrong.

The company did not explain why its SAIC filings under-reported the subsidiaries’ income. To prevent any future problems, the company will have its CFO, Mr. Stanley Hao, review the SAIC filings along with its reports to the SEC in the US to make sure everything is accurate. The company said its SEC filings correctly reflected the company’s financial results, using the usual statement that its reports are “in accordance with generally accepted accounting principles.”

China Sky One made the admission a few weeks after US-based short sellers noticed a large discrepancy in revenues between the company’s SAIC reports and the ones it files with the SEC in the US.

This was just one of several charges made by short sellers, who have been attacking China Sky One on a number of fronts. They also allege the company’s accounting for finished goods inventory is suspicious. At year-end, China Sky One listed just one day’s worth of finished goods inventory. The number looks suspicious, say the short sellers, because it has dropped to almost nothing while China Sky One’s sales have gone up 20-fold.

The short sellers have also questioned the efficacy of the company’s major revenue-driver, a weight-loss patch.

To dispel suspicion about its financial statements, China Sky One has hired PricewaterhouseCoopers as an advisor. It was given the job of overseeing financial reporting and procedures. However, the short sellers want the company to let PricewaterhouseCoopers handle all of the auditing, instead of acting only as a consultant, to make certain that China Sky One’s reports depict its financial condition accurately.

See our other articles on China Sky One Medical.

Disclosure: none.

Comments

[balabanovj:]

CSKI is a company that stradles markets from prescription meds to the occasional dubious nutriceutical. They are certainly not the only company who promotes what are probably less than effective weight loss products. At the other end of the spectrum, they are making nice inroads into the Chinese biotech market with various test kits, injectables, etc. I happen to like the company and the way they're run. They just need to stop taking "baby steps" when it come to their accounting. My communications with Stanley Hao, I've come to the conclusion that there is probably nothing really amiss with their general financial picture. They are clearly wanting for experience though when it comes to GAAP/non-GAAP accounting and in my view should just let PWC do the entire job.

James B. Balaban, M.D.

Sep 01 05:49 AM

[Waldo Mushman:]

The difficulty presented with any analysis of CSKI is that the CFO has publicly admitted to "material differences" between the financial information presented in China and the information presented to US investors. I have put up a website that provides scanned copies of the Chinese filings, waldomushman.com. The SAIC annual reports contain a wealth of information that contradicts CSKI claims in the US. As a very small example, exports are listed by country and value. Duties are collected by the tax authorities from the shipper and must verify that export duties are fully paid before the license renewal is approved. CSKI would have an American investor believe that the export numbers reported in the company literature are accurate. Contradicting that claim are agency reviewed sales volumes and collected export duties indicating that CSKI's actual exports are less than 5% of the American claims.

Sep 02 04:41 PM