China Sky One Medical first-quarter total revenues increase 16.4% to $28.9 million

China Sky One Medical, Inc. ("China Sky One" or "the Company") (Nasdaq: CSKI), a leading fully integrated pharmaceutical company producing over-the-counter drugs in the People's Republic of China ("PRC"), today announced record financial results for the first quarter of 2010. Management is working diligently to finalize the amended Annual Report on Form 10-K for 2009.

First Quarter 2010 Financial Highlights -- Total revenues increased 16.4% year-over-year to $28.9 million -- Gross profit rose 15.1% to $21.6 million -- Operating income grew 11.8% to $10.1 million -- GAAP net income, including a non-cash gain from change in the fair value of derivative warrant liability, increased 73.8% year-over-year to $12.6 million, or $0.74 per diluted share -- Excluding the non-cash gain, non-GAAP adjusted net income rose 5.8% to $7.7 million or $0.45 per diluted share First Quarter 2010 Accomplishments -- Received CE certification for Myocardial Infarction and Urine Microalbumin Diagnostic Kits. -- Commenced commercial launch of Oxymetazoline Hydrochloride Nasal Drops and Moschus Liniment for Pain Relief in March 2010. -- Myocardial Infarction Diagnostic Kit and Antroquinonol (Hocena) capsule were recognized as "National Innovation Project" and "Breakthrough Drug" by Chinese government, respectively. -- Shifted R&D focus of Heilongjiang Tianlong Pharmaceutical Company, the Company's wholly owned subsidiary, from external use medicines to antibiotics and cardiac drugs. -- Listed the Company's common shares on the NASDAQ Global Select Market on January 4, 2010. -- Completed relocation of corporate headquarters to Harbin Song Bei New Development district to better accommodate significant growth opportunity

"Our first quarter double-digit revenue growth was partly driven by strength in the sales of our ointment products, including Compound Camphor Cream, which grew nearly 54% year-over-year and has become our best selling product," said Mr. Yan-Qing Liu, Chairman and CEO of China Sky One Medical, Inc. "While Slim Patch sales were adversely affected by new government restrictions limiting the promotion of weight loss products on TV and sales of our diagnostic kits were lower due to limited internal promotional support in the first quarter, we remain confident in our outlook to accelerate revenue growth in the coming quarters, driven by increased sales, marketing and distribution of our rich portfolio of over 90 products and new product launches."

First Quarter 2010 Results

In the first quarter of 2010, China Sky One's total revenues increased 16.4% to $28.9 million from $24.8 million in the same quarter last year. The top-line growth was primarily attributable to strong sales from the Ointment and Others product categories, which together represented 56.1% of total revenue. Sales of ointments increased 53.6% year-over-year to $7.8 million, primarily due to the rapid growth of the Company's Compound Camphor Cream and Kecuo Yintong Ointment. With the successful marketing of Compound Camphor Cream under the well established Yu Fu brand, the product has replaced Slim Patch to become China Sky One's best selling product, accounting for 10.5% of total revenues in the first quarter of 2010. Sales of acne prevention product Kecuo Yintong Ointment also increased significantly, reflecting the successful efforts of a new distributor since the third quarter of 2009.

Sales of Other Products grew 82.0% in the current year quarter to $8.4 million. Higher sales in this category were mainly driven by strong market demand for Naphazoline Hydrochloride eye drops, Napadil tablet and Tinea liniment.

Sales of patch products declined 9.9% year-over-year to $8.2 million in the first quarter of 2010 due to a decrease in Slim Patch sales to $1.6 million, as compared to $4.6 million in the comparable period of 2009. In late 2009, the Chinese government introduced new regulations limiting TV advertisement for weight loss products starting in 2010. As such, the Company's 2010 guidance already assumes more modest sales levels of the Slim Patch, with sales expected to increase in the second and third quarters relative to the first quarter due to seasonality. Excluding the Slim Patch, sales of other patch products, including Pain Relief Patch, Asthma Patch and Hypertension Patch, rose 46.7% to $6.6 million in the first quarter of 2010, as compared to $4.5 million in the year ago quarter.

Sales of spray products were up slightly from the prior year at $3.0 million. Diagnostic kit sales fell year-over-year to $1.5 million from $3.1 million. The Company has begun to improve training of its sales professionals to enhance cooperation with its distributors to increase marketing support and reviewing its distribution policies to provide additional sales incentives.

Gross profit rose 15.1% to $21.6 million in the first quarter of 2010. Gross margin in the quarter was 74.8%, as compared to 75.7% in the 2009 quarter. As reflected in the Company's 2010 financial guidance, full year gross margin will be affected by two key factors. First is the anticipated increase in raw material prices and storage cost for the raw materials. Second, the Company has increased its sales and marketing strategy to increase promotion of certain products by partnering with reputable distributors with extensive channels. Sales of these products via these channels are expected to drive product volume growth and yield a lower margin.

Operating expenses increased 18.1% year-over-year to $11.5 million in the first quarter of 2010. The increase was principally due to $1.4 million increase in R&D expenses, as well as $0.4 million increase in depreciation & amortization expenses associated with two proprietary technologies acquired in the fourth quarter of 2009. First quarter 2010 operating income was $10.1 million, representing an operating margin of 35.0%, as compared to $9.1 million and 36.4% in the year ago quarter.

Total other income was $4.9 million in the first quarter of 2010, as compared to $12,000 in the prior year quarter. The increase reflected a non-cash gain related to change in the fair value of derivative warrant liability related to the private placement in January 2008.

Provision for income taxes was $2.5 million in the first quarter of 2010, as compared to $1.8 million in the same period last year.

GAAP net income for the first quarter of 2010 was $12.6 million, as compared to $7.2 million in the first quarter of 2009. Excluding the non-cash $4.9 million gain related to the change in fair value of derivative warrant liability, the Company's non-GAAP adjusted net income rose 5.8% to $7.7 million or $0.45 per diluted share.

Financial Condition

As of March 31, 2010, China Sky One had $65.4 million in cash and equivalents, with a current ratio of 5.8x. Working capital was approximately $71.3 million, up from $56.9 million at the end of 2009. Stockholders' equity at March 31, 2010, was $134.4 million, an 11.2% increase over the $120.9 million recorded at December 31, 2009.

Accounts receivable turnover days increased to 61.9 days in the three months ended March 31, 2010, as compared to 52.7 days in the same period of 2009. Accounts receivable collections are generally slower during the first fiscal quarter, partly due to the Chinese New Year holiday. Inventory turnover days increased to 28.6 days in the first quarter of 2010 from 13.3 days in the year ago quarter. This increase primarily reflected management's decision to increase raw material inventory during the second half of 2009, ahead of anticipated price increases and in anticipation of expected sales growth in 2010.

The Company generated $12.6 million in net cash flow from operating activities in the first quarter of 2010, an increase from $8.5 million in the year ago quarter. The increase was primarily attributable to higher income from operations, decreased level of accounts receivable and increased level of accounts payable and accrued expenses in the 2010 quarter. The management believes current working capital and borrowing capabilities are sufficient to cover their operating and capital requirements in the near future.

Guidance Update and Business Outlook

China Sky One is raising its previous 2010 revenue guidance by $4 million to a range of $160 million to $164 million to reflect incremental sales from the previously announced 13 new products, which have been launched or will be launched in 2010. Similarly, the Company's net income guidance, excluding any non-cash item (gain or loss related to change in the fair market value of derivative warrant liability), increased by $1 million to a range of $40 million to $41 million. The net income guidance continues to represent a net profit margin of 25%. Estimated R&D expenditure remains at 15% of total revenue in 2010.

The first quarter is typically the slowest period, partly due to a temporary slow down in customer orders during the Chinese New Year holiday. China Sky One's management expects revenue growth to accelerate in future quarters, driven by further optimization of the Company's distribution channels and enhancement of product promotional efforts, and is confident in achieving the 2010 financial guidance.

"Looking ahead, we will continue our efforts in research and development of high margin branded products. We look forward to receiving SFDA final approvals for 3-5 new products in 2010. In addition, we will focus on increasing the sales and promotion of our current products, including our promising portfolio of diagnostic kits," concluded Mr. Liu.

Pending 2009 Restatement

On May 11, 2010, the Company announced that it will file an amendment to its 2009 Annual Report on Form 10-K to reflect the application of accounting standards related to the valuation of 750,000 warrants issued in 2008 (the "Warrants"). This analysis is ongoing and the Company is working closely with its counsel and auditor, under the guidance of the SEC, to amend the 2009 Form 10-K filing as soon as practical.

As already announced, China Sky One's previously reported 2009 income from operations of $46.3 million and cash flow from operations of $33.4 million will not be affected by the restatement. The Company continues to expect to restate 2009 GAAP net income to include a non-cash, non-operating charge of estimated $4.5 to $5.5 million to reflect the change in the fair value of the Warrants, partly offset by approximately $1.3 million of previously recorded liability in connection with a registration rights obligation related to the Warrants.


China Sky One Medical, Inc.


The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of News Medical.
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