Manuel Asensio's  Instablog

On <a href="www.asensio.com/Reports/ReportView.aspx?...;>August 6th</a>, asensio.com first reported on discrepancies between the financial statements of China Sky One Medical, Inc. (NASDAQ: CSKI) filed with U.S. and Chinese regulatory agencies.  CSKI files consolidated financial statements with the U.S. Securities and Exchange Commission (SEC), and CSKI's operating subsidiaries, all located in China, file financial statements with the China State Administration for Industry and Commerce (SAIC). 

Apparently in response to the SAIC controversy, CSKI issued a <a href="www.asensio.com/CSKI/SAICrelease.pdf";>press release</a> on August 26, stating that "it is contemplated that in future filings there will be no material differences in the information contained in the financial statements filed with the SAIC and the SEC." 

At the time of the August 6th report, the 2008 SAIC filings for Harbin Tian Di Ren Medical Science and Techology Co. (TDR), CSKI's main operating subsidiary, were not available.  Since then, the 2008 SAIC filings for TDR have been made available, and the discrepancies with CSKI's SEC filings appear larger than in the 2007 filings.

According to the SAIC filings, TDR had revenue of only 6.9 million RMB, or about US$1 million, in 2008, and TDR's revenue decreased 24.7% from 2007 to 2008.  By contrast, CSKI's SEC filings show 2008 revenue of US$91.8 million, an increase of 86.2% over the prior year.

TDR shows a 2008 net loss of 779,161 RMB, or about US$114,000, while CSKI reported 2008 net income of US$28.9 million.

Click <a href="www.asensio.com/CSKI/TDR2008.pdf";>here</a> for TDR's SAIC-filed financial statements in English, and <a href="www.asensio.com/CSKI/TDR2008chinese.pdf";>here</a> for the original Chinese documents.

The website waldomushman.com has posted a <a href="www.waldomushman.com/cash.html";>comprehensive analysis</a> of the CSKI subsidiaries' SAIC filings, and shows that CSKI subsidiaries' SAIC filings, taken altogether, do not reconcile with CSKI's SEC filings in revenues, net income, or cash balance. 

Disclosure: Short CSKI.

China Sky One Medical, Inc. (NASDAQ: CSKI) released its third-quarter earnings on November 17, 2009.  The financial irregularities that asensio.com began reporting on in April 2009 continued to be evident in CSKI’s third-quarter financial statements.

China Sky continues to report a questionably low inventory level.  asensio.com compared CSKI to three U.S.-listed competitors (AOB, TCM, and TPI) in terms of days of inventory on hand.  The <a href="www.asensio.com/CSKI/Q3comps.pdf";>three comparables</a> have at least double CSKI's inventory level relative to sales.

China Sky's <a href="www.asensio.com/CSKI/Q3comps.pdf";>gross profit margin</a> also continues to be questionably high in contrast to its competitors.  CSKI reported third-quarter gross margin of 75%, while the three comps averaged 55% - a full 20% lower than CSKI. 

As discussed in a <a href="www.asensio.com/Reports/ReportView.aspx?...;>previous asensio.com report</a>, CSKI's reported gross margin has remained relatively constant, despite dramatic changes in reported product mix.  The third-quarter continues the same trend.  While gross margin was 75%, within one percent of gross margin for the prior quarter and the prior-year period, CSKI’s 10-Q states, "Due to the Company’s acquisitions of Tianlong and Peng Lai, there have been material changes to its product portfolio in the three months ended September 30, 2009."

CSKI has not shown any significant intellectual property for its products that would suggest any barriers to entry to make such high margins possible.  Indeed, CSKI’s CFO, Stanley Hao, recently did an interview with the <a href="www.asensio.com/CSKI/WST.pdf";>Wall Street Transcript</a>, in which he identifies at least two other companies as competitors for one of CSKI's new best-selling products, "Compound Camphor Cream" for the treatment of dermatitis.  Hao states that the competition is "running red hot."

Hao also makes questionable statements in the interview concerning distribution of CSKI’s slim patch product in the U.S.  Hao states, "…during a roadshow in Los Angeles in the middle of September, we signed another distribution agreement with a distributor in Los Angeles for our Slim Patch product."  The ability of CSKI to distribute its slim patch in the U.S. lawfully seems doubtful.  As noted in a <a href="www.asensio.com/Reports/ReportView.aspx?...;>previous asensio.com report</a>, the U.S. Federal Trade Commission (FTC) as recently as 2007 obtained a court order banning a company from selling patches for weight-loss.  The FTC stated, "Products worn or rubbed on the skin do not cause weight loss."

Most importantly, CSKI has apparently not addressed two issues that should be principal concerns for all CSKI shareholders: financial statements filed with the China State Administration for Industry and Commerce vastly different from CSKI's SEC filings, and the suspension of the subsidiary supposedly holding all of CSKI's operating assets.

Today asensio.com released a separate report on CSKI's SAIC filings; <a href="www.asensio.com/Reports/ReportView.aspx?...;>click here</a> to view the report.

CSKI still has not corrected the suspension of its main subsidiary, American California Pharmaceutical Group, Inc. (ACPG).  ACPG was organized in California, and according to CSKI, ACPG owns 100% of TDR, CSKI’s Chinese operating subsidiary.  However, <a href="www.asensio.com/CSKI/ACPG2.mht";>ACPG's status</a> with the California Secretary of State is shown as "suspended."  According to website for the California Secretary of State, suspension means that "the business entity's powers, rights and privileges were suspended or forfeited in California 1) by the Franchise Tax Board for failure to file a return and/or failure to pay taxes, penalties, or interest; and/or 2) by the Secretary of State for failure to file the required Statement of Information and, if applicable, the required Statement by Common Interest Development Association."

It appears problematic for CSKI shareholders to have any claim on assets held through a business whose status is "suspended," and at the very least suggests continuing negligence on the part of CSKI management.

Disclosure: short CSKI.

GLP Acquisition:

On April 18, 2006, American Oriental Bioengineering, Inc. (NYSE: AOB) completed the acquisition of a privately-held Chinese company called Guangxi Lingfeng Pharmaceutical Company Limited (“GLP”).  AOB paid approximately $24.5 million for GLP, comprised of $18.9 million in cash and $5.6 million in stock, according to AOB’s 2006 10-K.

AOB’s <a href="www.asensio.com/AOB/GLP/1.pdf";>Form 8-K</a> dated June 30, 2006 shows that AOB acquired GLP from an individual, Yu Xiaosheng, who owned 100% of the company.  Xiaosheng is shown owning 29% of GLP at December 31, 2005, but then acquired the other 71% in February 2006 for $707,554, according to the 8-K.

Two months later Yu Xiaosheng sold his GLP shares to AOB for $24.5 million.

Based upon AOB’s filing it appears that Xiaosheng “flipped” the newly-acquired 71% of GLP to AOB for approximately $17.4 million, over 24 times his cost just two months later.  AOB’s SEC filings do not appear to provide any explanation for this transaction.

Filings with the China State Administration for Industry and Commerce (“SAIC”) show that Xiaosheng appears to have been a significant stakeholder in AOB’s operating company, Harbin Three Happiness Bioengineering Co., Ltd., prior to its reverse merger with a U.S. shell in 2002.

The <a href="www.asensio.com/AOB/GLP/2.pdf";>attached document</a> shows that 25% of Harbin Three Happiness was acquired by Harbin Xiaosheng Advertising Company (<a href="www.asensio.com/AOB/GLP/3.pdf";>see translation</a>).  AOB’s 8-K filed June 30, 2006 states that <a href="www.asensio.com/AOB/GLP/4.pdf";>Harbin Xiaosheng Advertising is owned by Yu Xiaosheng</a>.

Despite the Chinese filing showing Xiaosheng Advertising’s 25% stake in Harbin Three Happiness, neither Xiaosheng Advertising nor Yu Xiaosheng appears as a shareholder in <a href="www.asensio.com/AOB/GLP/5.pdf";>AOB’s reverse merger</a>. 


CAXG Acquisition:

On April 16, 2008, American Oriental Bioengineering, Inc. (NYSE: AOB $4.57) paid $18 million in cash for a 38% stake in China Aoxing Pharmaceutical Co., Inc. (OTC: CAXG $1.24), according to AOB’s and CAXG’s SEC filings. (<a href="asensio.com/AOB/CAXG/A.pdf";>See AOB’s filing</a> and <a href="asensio.com/AOB/CAXG/B.pdf";>CAXG’s filing</a>.) According to CAXG’s 2008 10-K, on April 16, 2008, CAXG ‘simultaneously’ acquired Shijazhuang Lerentang Pharmaceutical Company, Ltd. (“LRT”) for $22.9 million, comprised of $12.4 million in cash from the funds it received from AOB and 8 million shares of CAXG common stock valued at $10.5 million.
 
One year before AOB’s investment in CAXG (and CAXG’s simultaneous acquisition of LRT), CAXG stated that it had signed a letter of intent to acquire LRT for “approximately $10 Million,” according to <a href="www.asensio.com/AOB/CAXG/2.pdf";>CAXG’s 2007 10-K</a>. 

Like AOB, CAXG is a Chinese company listed in the U.S. through a reverse merger.  AOB’s CAXG investment presents several issues.

CAXG’s auditor is a firm called Paritz & Company, P.A.  Paritz has one office in Hackensack, New Jersey. 

Paritz has given CAXG a “going concern” qualification for the past four consecutive years, commencing in 2006, two years prior to AOB’s investment.  Even after AOB’s investment, Paritz still found that CAXG’s working capital deficit raises “substantial doubt about its ability to continue as a going concern.”  The auditor also notes that “the Company is in default of the repayment of note payable-bank of $6,094,428.” (<a href="asensio.com/AOB/CAXG/D.pdf";>Click here</a> to see auditor’s letters from past four CAXG 10-Ks.)

CAXG’s restated 2007 earnings show interest expense of more than $16 million with under $2 million of revenue.  CAXG also restated its earnings for 2006. (<a href="asensio.com/AOB/CAXG/E.pdf";>Click here</a> to see 2006 and 2007 income statement.)

In 2008, CAXG recorded a gain on “change in fair value of warrant and derivative liabilities” of $8.5 million, which was greater than CAXG’s $7.1 million in revenue for the year. (<a href="asensio.com/AOB/CAXG/F.pdf";>Click here</a> to see 2008 and 2009 income statement.)

CAXG reported an operating loss each fiscal year since its reverse merger in 2006.

AOB and CAXG appear to be connected by Warner Technology and Investment Corp. and possibly American Union Securities.

Warner obtained an <a href="www.asensio.com/AOB/CAXG/3.pdf";>option to acquire 551,415 CAXG shares</a> in connection with CAXG’s reverse merger, and also later <a href="www.asensio.com/AOB/CAXG/4.pdf";>served as consultant</a>.  Warner’s <a href="www.asensio.com/AOB/CAXG/5.mht";>English website</a> describes its business as “assisting private companies seeking to become public company [sic] through IPO or reverse merger processes” and cites <a href="www.asensio.com/AOB/CAXG/6.mht";>AOB as one of its “case studies”</a>.  Warner also appears as an agent for AOB in certain of AOB’s <a href="www.asensio.com/AOB/CAXG/7.pdf";>SEC filings from 2002</a>, around the time of AOB’s reverse merger.  Warner’s Chinese website shows a <a href="www.asensio.com/AOB/CAXG/8.mht";>statement from Huakang Zhou</a>, Warner’s chairman, discussing arranging CAXG’s reverse merger and working with American Union Securities to arrange financing for CAXG (<a href="www.asensio.com/AOB/CAXG/9.pdf";>see translation</a>).  

<a href="www.asensio.com/AOB/CAXG/10.pdf";>American Union Securities</a> is currently majority owned by Dong Dong “Peter” Zhou, who may be related to Huakang Zhou of Warner. American Union’s founder, former majority owner and former President, <a href="www.asensio.com/AOB/CAXG/11.pdf";>John C. Leo, was a director of CAXG from the time of CAXG’s reverse merger in April 2006 until January 2007</a>.

A person named <a href="www.asensio.com/AOB/CAXG/12.pdf";>Jason Liu has appeared on websites for Warner and American Union</a> apparently as an employee of Warner and consultant to American Union.  A Jason Liu also appears as a shareholder of a Hong Kong company, <a href="www.asensio.com/AOB/CAXG/13.pdf";>Silver Linkage Holdings Limited</a>, where AOB’s Chairman Tony Liu is the controlling shareholder, according to filings with the Hong Kong Companies Registry (“HKCR”).  Silver Linkage is discussed in a <a href="www.asensio.com/Reports/ReportView.aspx?...;>previous asensio.com report</a>.  HKCR filings show Jason Liu transferring his Silver Linkage shares to Tony Liu in 2008.  Like Tony Liu, Jason Liu is listed in HKCR filings with a <a href="www.asensio.com/AOB/CAXG/14.pdf";>passport from the Commonwealth of Dominica</a>, with a passport number two digits apart from <a href=www.asensio.com/AOB/CAXG/15.pdf";>Tony Liu’s</a>.

Disclosure: No position in AOB.