China Shenghuo Reports Third Quarter 2007 Financial Results

KUNMING, China, Nov. 14 /Xinhua-PRNewswire/ -- China Shenghuo Pharmaceutical Holdings, Inc. ("China Shenghuo") (the "Company"), which is engaged in the research, development, manufacture, and marketing of pharmaceutical, nutritional supplement and cosmetic products in the People's Republic of China ("PRC"), announced its financial results for the third quarter ended September 30, 2007.

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's adoption of more stringent credit policies, which caused a shift in its customer base and led to a decline in sales volume.

"The tighter credit policies posed a short-term challenge for China Shenghuo, but we have since replaced these customers with larger, more established buyers, which should help to bolster sales during the typically strong fourth quarter," said Mr. Lan Guihua, Chairman and Chief Executive Officer of China Shenghuo. "Despite the short-term topline decline, we continue to see new opportunities, such as the recent launch of our 12Ways(R) Herbal Skin Care products and continued development of our Wei Dinkang Soft Capsules and other new products."

Gross profit for the second quarter was $3.2 million, compared to $3.8 million a year ago. Gross margin was 75.3%, up from 74.4% the prior year and 75.1% in the second quarter of 2007. The increased gross margin was attributed to an increase in sales prices.

Selling expenses were $1.5 million, compared with $1.2 million a year earlier, primarily because of increased advertisement and production expenses related to the launch of the Company's new cosmetics line, as well as increased salaries for newly recruited employees in the Company's Shenghuo Cosmetic Co. LTD subsidiary. However, selling expense declined 23.9% sequentially from $2.0 million in the second quarter of 2007, primarily because of the decline in sales. The Company continues to expect selling expenses for the full year to be in the range of 30% to 35% of sales going forward.

General and administrative expenses declined to approximately $0.3 million from $1.7 million in the third quarter of 2006, primarily because of a decline in receivables and the recovery of approximately $1.0 million of bad debt expenses.

Overall, total operating expenses during the quarter declined 35.7% from the prior year to $1.9 million. Sequentially, operating expenses were reduced 44.1% 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 the same quarter of 2006.

Nine-Month Results

For the first nine months of 2007, net sales increased 7.9% to $14.9 million from revenues of $13.8 million a year ago. Gross profit was $11.1 million, or 74.7% of sales, up 19.4% from gross profit of $9.3 million, or 67.5% of sales, in the first three quarters of 2006. Operating income declined to $3.2 million, or 21.7% of sales, from $3.6 million, or 26.0% of sales, the prior 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 per diluted 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 $5.3 million 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 now expects full-year revenues of between $20.0 million and $22.0 million and net earnings of between $4.0 million and $5.0 million. The Company forecasts earnings per share of between $0.20 and $0.25 for the full fiscal year.

"As we look forward to the final quarter of 2007, we expect much of our top-line growth to return as we install new distribution agreements and our new cosmetics line benefits from our retail pharmacy strategy and our expanded sales network. The future of this Company appears quite positive as we prepare for 2008," said Mr. Lan.

Recent Events

In July 2007, China Shenghuo completed testing during Phase II clinical trials for its Wei Dingkang Soft Capsules. The Company is applying to the Yunnan Provincial Development and Reform Committee and Yunnan Agriculture Bureau to begin a pilot cultivation project to produce 72 tons per year of Daemonorops margaritae palms, the key ingredient used to produce Wei Dingkang Soft capsules, on 3.35 square kilometers of land.

In September, the Company began the full-scale launch of its 12Ways Chinese herbal skin care products ("12Ways"). The 12Ways series is based on the use of traditional Chinese herbs, such as Sanchi, Tuckahoe, and Salvia miltiorrhiza. The planned full-scale launch includes 34 products in seven categories, including: a group of Sanchi-based skin moisturizers; a Salvia-based fading cream; a skin lightener; Yunnan bamboo-based acne treatment; an anti-aging cream that utilizes eucommia ulmoide; sunscreen; and dietary supplements.

In October, China Shenghuo's showcase 12Ways Chinese Herbal Beauty Salon ("Salon") debuted in Kunming, China. The Company's first full-service Salon is located in Xiao Xi Men, one of the major commercial districts in Kunming, which attracts more than 400,000 people each day. Unlike China Shenghuo's previous salons, this centerpiece, free-standing store is the first of its salons to offer traditional Chinese medicine services. It is expected to be used as a training center in the future. All products used in the salon will be supplied by Shenghuo Cosmetics Company, a subsidiary of China Shenghuo Pharmaceutical. In addition, the professionals will instruct customers in the appropriate dietary supplements to treat any symptoms discovered during a traditional Chinese medical diagnosis.

At the end of October, the Company had opened 10 retail counters in Shanghai, Beijing, and Zhejiang Province. These retail counters offer the 34 major products in seven categories outlined above.

Conference Call

The conference call previously scheduled for 8 a.m. EST Friday to discuss the Company's third quarter results has been canceled. The Company plans to conduct regular conference calls beginning with its fourth quarter results.

About China Shenghuo Pharmaceutical Holdings, Inc.

China Shenghuo is primarily engaged in the research, development, manufacture, and marketing of pharmaceutical, nutritional supplement and cosmetic products. Almost all of our products are derived from the medicinal herb Panax notoginseng, also known as Sanqi, Sanchi or Tienchi. Panax notoginseng is a greyish-brown or greyish-yellow plant that only grows in a few geographic locations on Earth, one of which is Yunnan Province in southwest China, where the Company is located. Panax notoginseng saponins (PNS), the active ingredients in Panax notoginseng, are extracted from the plant using high-tech equipment and in accord with Good Manufacturing Practice (GMP) standards. Our main product, Xuesaitong Soft Capsules, accounted for more than 80% and 90% of sales for the years ended December 31, 2006 and 2005, respectively. Since its establishment, the Company has focused primarily on the development of products to serve three major markets-cardiovascular and cerebrovascular disease, peptic ulcer disease and health products. China Shenghuo's goal has been to focus on the development of pharmaceutical products and over the counter products based on traditional Chinese medicines designed to address these areas.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This press release contains certain "forward-looking statements," as defined in the United States Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. There can be no assurance that such statements will prove to be accurate and the actual results and future events could differ materially from management's current expectations. Such factors include, but are not limited to, the Company's current reliance on a single product and on a limited number of suppliers for Sanchi, ability to develop and market new products, the fact that additional capital may be needed to adequately fund operations, the Company's ability to properly manage its growth, the Company's expansion into international markets, the Company's reliance on certain key personnel, the Company's ability to establish and maintain a strong brand, existing and increased levels of competition, continued maintenance of certificates, permits and licenses required to conduct business in China, the Company's ability to collect accounts receivable, protection of the Company's intellectual property rights, market acceptance of the Company's existing and new products, changes in the laws of the People's Republic of China that affect the Company's operations, the Company's planned expansion of retail sales of its cosmetic products, the effects of any product liability claims, any recurrence of severe acute respiratory syndrome or avian flu, the Company's ability to obtain all necessary government certifications and/or licenses to conduct the Company's business, cost of complying with current and future governmental regulations and the impact of any changes in the regulations on the Company's operations and other factors detailed from time to time in the Company's filings with the United States Securities and Exchange Commission and other regulatory authorities. The risks included here are not exhaustive. Furthermore, our forward looking statements regarding the full year are subject to fluctuation and no assurance can be given that these levels will be met. The Company undertakes no obligation to publicly update or revise any forward- looking statements, whether as a result of new information, future events or otherwise. The Company operates in a very competitive and rapidly changing environment. New risks emerge from time to time and we cannot predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. Moreover, reported results should not be considered an indication of the Company's expected future performance.



September December

30, 2007 31, 2006



Current Assets:

Cash and cash equivalents $3,584,937 $3,691,438

Restricted cash 119,315 474,576

Accounts receivable, less allowance

for doubtful accounts of $1,784,341

at September 30, 2007 and $794,468

at December 31, 2006, respectively 12,516,957 9,907,184

Employee advances, less allowance

for doubtful accounts of $1,481,881

and $1,429,426 at September

30, 2007, and December 31, 2006,

respectively 6,800,429 3,130,045

Advances to suppliers 403,565 46,620

Inventory, net of reserve for

obsolescence of $100,382

and $111,128 at September 30, 2007

and December 31, 2006, respectively 4,404,054 2,581,519

Receivable from related parties 75,217 76,751

Other current assets 230,860 17,454

Total Current Assets 28,135,334 19,925,587

Property, plant and equipment,

net of accumulated depreciation of

$3,966,246 and $3,333,305 at

September 30, 2007, and December 31,

2006, respectively 7,455,094 7,554,747

Intangible assets, net of accumulated

amortization of $36,058 and $22,569

at September 30, 2007 and December 31,

2006, respectively 635,131 624,426

Deferred income taxes 793,050 655,223

TOTAL ASSETS $37,018,609 $28,759,983

Current Liabilities:

Accounts payable $1,356,884 $764,636

Accrued expenses 2,538,819 1,966,822

Deposits 2,792,895 1,573,426

Payable to related parties 77,623 393,213

Short-term notes payable 9,299,863 12,758,426

Advances from customers 191,987 342,531

Taxes and related payables 785,610 3,057,471

Current portion of long-term debt 1,330,219 --

Total Current Liabilities 18,373,900 20,856,525

Long-Term Debt 5,320,875 --

Total Liabilities 23,694,775 20,856,525

Minority Interest in Net Assets

of Subsidiaries 583,252 385,067

Stockholders' Equity:

Preferred stock, $0.0001 par value,

10,000,000 shares authorized,

0 shares outstanding at September 30,

2007 and December 31, 2006, respectively -- --

Common stock, $0.0001 par value,

100,000,000 shares authorized, 19,579,400

and 19,119,400 shares issued and

outstanding, respectively 1,958 1,912

Additional paid-in capital 5,943,936 4,829,633

Statutory reserves 147,023 147,023

Retained earnings 5,977,603 2,318,950

Other comprehensive income, foreign

Currency translation 670,062 220,873

Total Stockholders' Equity 12,740,582 7,518,391






For the Three Months For the Nine Months

Ended Ended

September 30, September 30,

2007 2006 2007 2006

Sale of Products $4,201,613 $5,142,567 $14,884,955 $13,796,773

Cost of Products Sold 1,039,578 1,314,466 3,761,754 4,478,021

Gross Profit 3,162,035 3,828,101 11,123,201 9,318,752

Operating Expenses:

Selling expense 1,545,554 1,236,817 5,179,968 2,951,964

General and


expense 341,372 1,692,825 2,703,843 2,724,668

Research and


expense 5,371 13,296 10,720 58,700

Total Operating

Expenses 1,892,297 2,942,938 7,894,531 5,735,332

Income from

Operations 1,269,738 885,163 3,228,670 3,583,420

Other Income (Expense):

Interest income 5,446 2,037 14,712 4,242

Non-operating income 384 31,360 81,388 102,508

Interest expense (275,514) (191,018) (665,155) (561,390)

Non-operating expense -- (190) -- (5,071)

Net Other Expense (269,684) (157,811) (569,055) (459,711)

Income Before Income

Taxes 1,000,054 727,352 2,659,615 3,123,709

Benefit from

(provision for)

income taxes (86,861) (259,234) 1,223,386 (697,357)

Minority interest in income

of subsidiaries (45,552) (152,811) (224,348) (260,746)

Net Income $867,641 $315,307 $3,658,653 $2,165,606

Foreign currency


adjustment 174,392 88,901 449,189 118,094

Comprehensive Income $1,042,033 $404,208 $4,107,842 $2,283,700

Basic and Diluted

Earnings Per Share $0.04 $0.02 $0.19 $0.13

Weighted-Average Shares


Basic 19,579,400 17,170,309 19,292,953 16,545,024

Diluted 19,635,898 17,170,309 19,345,401 16,545,024




For the Nine Months Ended

September 30,

2007 2006

Cash Flows from Operating Activities:

Net income $3,658,653 $2,165,606

Adjustments to reconcile net

income to net cash provided

by operating activities:

Depreciation and amortization 503,559 515,307

Deferred income taxes (109,382) (239,262)

Minority interest in income of

subsidiaries 224,348 482,584

Stock issued for services -- 1,122,912

Warrants issued for services 19,968 --

Change in current assets and liabilities:

Accounts receivable (2,168,849) (8,275,347)

Employee advances (3,472,425) (203)

Advances to suppliers (347,767) (35,078)

Inventory (1,684,096) 2,220,140

Other current assets (212,717) 42,906

Accounts payable 550,162 47,068

Accrued expenses and deposits 1,619,494 440,100

Advances from customers (160,826) 183,863

Unearned revenue -- (45,383)

Taxes and related payables (2,344,511) 2,261,745

Net Cash (Used in) Operating Activities (3,924,389) 886,958

Cash Flows from Investing Activities:

Receivable from related parties 13,198 179,357

Restricted cash 366,485 (141,514)

Capital expenditures (96,833) (106,287)

Acquisition of land use rights -- (20,202)

Net Cash (Used in) Provided by Investing

Activities 282,850 (88,646)

Cash Flows from Financing Activities:

Payable to related parties (324,450) (92,687)

Issuance of stock for cash 1,094,381 --

Proceeds from short and long-term loans 17,978,676 2,938,466

Payments on short-term loans (15,350,496) (2,243,120)

Purchase of minority interest (260,654)

Net Cash Provided by Financing Activities 3,398,111 342,005

Effect of exchange rate changes on cash 136,927 (152,084)

Net Increase in Cash and Cash Equivalents (106,501) 988,233

Cash and Cash Equivalents at Beginning

of Period 3,691,438 1,104,043

Cash and Cash Equivalents at End of Period $3,584,937 $2,092,276

Supplemental Information

Cash paid for interest $606,376 $207,576

Source: China Shenghuo Pharmaceutical Holdings, Inc.
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