When comparing US and Chinese filings, China-Biotics' (OTC:CHBT) 2009 revenue appears to be 70 million dollars off.
China-Biotics' subsidiary filed its audited numbers with Chinese government agencies last year, including the Shanghai Administration for Industry and Commerce (SHAIC, 上海市工商行政管理局制). The 2009 official documents are now available.1
In brief, total revenue for 2009 as claimed in China was 3,440,950 RMB … which is approximately $530,000 USD. For the same time period, China-Biotics claimed revenue of $71,376,507 USD in its SEC filings (March 31, 2010 10k).2 This is a difference of more than $70,000,000 dollars.
China-Biotics' revenue generating subsidiary in China during that time was 上海双金生物科技有限公司, filed in SEC documents as "Shanghai Shining Biotechnology Co.，Ltd." ("Shanghai Shining"). The other relevant subsidiary in China during this time period was Growing Bioengineering (Shanghai) Co. Ltd., located in Qingpu. Operations did not begin for its facility until February 2010.
But even if there were other revenue generating subsidiaries, Shanghai Shining's "flagship" product "Shining Essence" -- all by itself -- sends its revenue into the stratosphere, according to documents filed in the SEC (March 2010 10-k).
We launched Shining Essence in Shanghai in April 2001, and it [sic] currently our best-selling product. Sales of Shining Essence represent approximately 29% of our total sales for the year ended March 31, 2010...
If so, 2009 revenue for Shining Essence alone would be over $20,000,000 USD, squashing the $530,000 USD claimed in China.
Do we have a serious conflict between Chinese and US revenue claims? At this point in China-Biotics' story, we have a forensic question and not a financial one. Imagine that someone is murdered -- hit over the head with an accounting book. Columbo arrives but the chief stops him at the door, "Sorry. You can't solve this one, You're not an accountant." We're in a similar situation. At this point we are not yet concerned with China-Biotics' finances, as claimed; we are concerned with a physical verification of a conflict underlying and taking priority over this claim. Is the conflict real? If the conflict is real, then it is meaningless to work with the reported numbers.
I'd like to keep the following presentation as simple and free of interpretation as possible. A fingerprint can be worth a thousand words, and while I don't quite have the equivalent of a fingerprint here, I will get as close as I can to the forensic discipline. I will present the key number -- revenue -- in a way that will allow one to directly observe the evidence and judge for oneself with as few intermediaries as possible.
Two different copies of the 2009 Income Statement arrived through Inter-credit (click to enlarge images):
One with Shanghai Shining's seal (pg. 72)3....
.. and another copy without the seal (pg. 76)...
They are otherwise identical.
Is it Shanghai Shining? Here's a screen shot of the official web site, with the URL -- shiningbt.com -- and Chinese characters for Shanghai Shining at the top of the page.
Note how the company name on the official website matches the name on the official documents received from the Chinese government.
Is this a document from the Shanghai Administration for Industry and Commerce (digital pg. 68)?
Here is Shanghai Shining revenue for 2009.
Using the Google translator we can verify the Chinese.
- "一，营业总收入" means "Total Revenue"
- "利润表" means "Income Statement"
- "上期金额" means "Previous Period"
You can see a "live" translation here.
"本期金额 " was a little tricky. When side-by-side, Google translates them simply as "amount."4 A more precise translation of this key term can be deduced however. In the 2009 statement, the amount for 上期金额 (Previous Period column) matches the amount for the 本期金额 column in the 2008 statement. It's a bit of a logical pretzel but here goes: What is referred to in this year's statement as last year's number would in last year's statement be this year's number.
But there is another reason why I chose to show these two reports together. Note the amount in the 2009 statement for the column, "Previous Year." It matches the current year in the 2008 statement which Chinese Company Analyst independently received, translated, and published last year. See it here.
So total revenue for 2009 was 3,440,950.61 RMB - which is approximately $530,000 USD. Of course this is using today's exchange rate.
Using the exchange rate of December 31, 2009, we come up with different numbers.
May 7, 2011
3440950.61 CNY x 0.154 = 529,906 USD
|Dec. 31, 2009|| |
3440950.61 CNY x 0.146 = 502,379 USD
But we're not comparing an elephant to an elephant here; rather, an elephant to a mouse. For the same time period, CHBT reported revenue of $71,376,507. We could look at the numbers filed in China from 2008 to 2009 and note the decline in revenue of 253,971 RMB. But to note that Shangai Shining was losing market share would be like noting that Bruce Willis had a receding hairline. Revenue from 2009 as claimed in China comes up short 70 million dollars when compared to the SEC filings.
Now if I cut the relevant pieces from the evidence and paste them into a single graphic we wouldn't exactly have Leonardo da Vinci but we would have something like a fingerprint. There is definitely a conflict between the SEC filings and the filings made to the Chinese government. At least one of these documents is incorrect and will need to be restated.
Can this all be explained by a difference in accounting systems? A gap in GAAP? Seventy million versus five hundred thousand dollars? (That's a ratio of 140 to 1.) I don't think so.
During this same time period CHBT was supposedly operating over 100 retail outlets and these were supposed to be making a significant contribution to revenue. Then on August 30th, 2010 a crisis unfolded. Short sellers dared the company to prove that the retail outlets existed. The company quickly posted a list of 79 addresses (even though it had claimed 103 outlets at this time). Investigators immediately visited 43 of those locations and took photos. Only two of the visited locations were Shanghai Shining "dedicated retail outlets." The great majority of the addresses were supermarkets, business and residential buildings, a parking lot, a cigarette store, a hotel, a department store ... (see here).
In the SEC 10-Q, September 31 (that's just one month later) CHBT claimed to have closed 95 outlets. To this day we do not have a credible address list for the claimed retail outlets.
Which makes more sense?
A) CHBT closed 95 outlets in a single month because the heretofore profitable "roll out" took a sudden and unexpected turn for the worse.
Now with the 2009 SHAIC documents in our hands, we have a choice to trust the SEC documents or the Chinese filings (or perhaps neither).
Which makes more sense?
A) In 2010, the company closed 95 outlets in one month -- with an increase in revenue for the quarter! -- and after using many of those same retail outlets in 2009 to pull in 71 million dollars in revenue.
B) Most of the outlets never existed, and an annual revenue of $500,000 confirms that.
1 Download a copy of the 2009 SAIC/SHAIC document here. The copy was ordered through Inter-credit. There is also an independent and professional translation of the 2009 Income Statement for Shanghai Shining. The document must be downloaded into an Adobe Reader first: here.
2 Note that CHBT's fiscal year ended Mar. 31, 2010. For a more accurate comparison with the Chinese filings, I refer to January 1 through December 31 2009.)
3 In the documents themselves, there are different sets of numbers at the top right and bottom of the page. Since these page numbers are sometimes different, missing, skipped, restarted, or repeated, I opted to use the page numbers in the Scribd navigator at the bottom of the web page.
4 本期金额 -- If you use a carriage return to split them up ...
... you find the translation as "Current Issue Amount," which is a bit closer to what one would expect given that it is positioned next to the column "Previous period." Try it here. Fortunately, the translation of this accounting term is nothing new, and there are web based references that clear this up, many of which you can find here.
See my video analysis here.
Disclosure: I am short OTC:CHBT.