Cash is King. If you are invested in China Sky One Medical (OTCPK:CSKI), I have bad news for you. The King has abdicated. The Chinese government requires CSKI to renew its business license annually. The law mandates audited financial statements as part of the submission. The 2008 audited reports for all three operational subsidiaries show total year end cash of CNY 9,871,000 which is about $1,440,000 (6.82 CNY = $1.00). The cash reported in China by CSKI is 1/30th the amount reported in the US.
“Hey, they just got $25,000,000 last February in that stock offering and are making money hand over fist. They have to be rolling in dough.” American investors have certainly been led to think that is the case. A completely different story is shockingly told by audited balance sheets signed by the officers of CSKI, confirmed by independent Chinese CPA’s, approved by government regulatory and taxing agencies, and corroborated with written verifications from the capital transfer bank. The story told in China is short and not so sweet The cash is gone. CSKI has less than $1,000,000.
By the time it made its way to Chinese shores, the PIPE was reduced to $22,000,000 by fees and expenses. 2008 Chinese financials show beginning cash of CNY2,347,000 and ending cash of only CNY9,871,000 including the inflow of CNY150,040,000 from the American PIPE. The cash depletion is largely traceable to expenses of CNY127,211,000 (~$18.6mm) classified as “Advances to Suppliers”. CSKI used 85% of the money they had just raised for “Advances to Suppliers”??? Do three question marks adequately highlight the extraordinary nature of such a use of funds? Inexplicably the 10-K doesn’t include this massive transaction in Inventory or Prepaid Assets. To add to the puzzlement, even after the monumental prepayment CSKI still reports CNY 26mm in payables, virtually unchanged from the previous year.
Cash was further reduced during the year by consolidated operating losses of CNY2,294,000. “Other Receivables” (not the product related “Accounts Receivable”) increased by an additional CNY5.7mm. More cash out the door.
Five acquisitions, Chenlong, First Bio, Haina, Peng Lai and Tianlong resulted in an additional CNY21,615,000 of “Long-Term Investments”. The conflicting claims made in US documents and Chinese filings make it impossible to determine what portion of this line item was cash and what portion was the value assigned to the 405,456 shares transferred in the acquisitions.. Since Cash was down to ~CNY 20mm after the “Advance to Suppliers” we have to assume the majority of that amount reflects treasury stock.
Little wonder that CSKI’s President has hinted at possible new equity offerings. If successful, it will be another red letter event for the Suppliers.
I am short this equity, assuming that term is not overly inclusive.
Documents at www.waldomushman.com/cash.html