China Sky One Medical first quarter total revenue decreases 1.9% to $28.4 million

China Sky One Medical, Inc. ("China Sky One Medical" or "the Company") (NASDAQ: CSKI), a leading fully integrated pharmaceutical company in the People's Republic of China ("PRC"), today announced financial results for the first quarter of 2011.

First Quarter 2011 Highlights

• Total revenue declined 1.9% year-over-year to $28.4 million, but increased sequentially by 5.5% compared to fourth quarter 2010 revenue
• Gross profit decreased 10.8% year-over-year to $19.3 million
• Operating income decreased 34.4% year-over-year to $6.6 million
• GAAP net income, including a non-cash gain from change in the fair value of derivative warrant liability, decreased 51.4% year-over-year to $6.1 million, or $0.36 per diluted share
• Excluding the non-cash gain from change in the fair value of derivative warrant liability, non-GAAP adjusted net income decreased 38.1% to $4.7 million, or $0.28 per diluted share
• The Company acquired 13 new drug production licenses from Heilongjiang Traditional Chinese Medical University

"In the first quarter of 2011, we saw encouraging early signs of a sales recovery as we took aggressive steps to rebuild and expand our distribution base after the loss of two major distributor relationships during the third quarter of 2010. Sales have been spread out across a number of new distributors and we begin 2011 with a more diversified client base compared to prior years. Not one of our customers accounted for more than 10% of our total revenue or accounts receivable in the quarter ending March 31, 2011," said Mr. Yan-Qing Liu, the Company's Chairman and CEO. "A more diversified and richer product portfolio also favorably impacted first quarter results and we plan to reinforce China Sky One's long term growth prospects by continuing to invest in our higher margin branded portfolio while introducing additional new drugs in 2011 and beyond."

First Quarter 2011 Results

In the first quarter of 2011, China Sky One's total revenues decreased 1.9% to $28.4 million from $28.9 million in the same quarter last year, reflecting sales declines in the Company's Patches, Ointments and Sprays product categories, partially offset by sales increases in its Wash Fluids, Diagnostic Kits, Drops and Others product categories. During the first quarter of 2011, the Company manufactured and marketed 117 products, compared to 89 products in the first quarter of 2010.

Sales of Ointments decreased 14.6% year-over-year to $6.7 million, or approximately 23.5% of total sales in the first of quarter 2011, primarily due to lower sales of the Company's Hemorrhoids Ointment. Revenue generated from the Hemorrhoids Ointment declined from $2.3 million in the first quarter of 2010 to $0.8 million this quarter, mainly due to the SFDA's enforcement of new regulations on the advertisement of certain medicinal products, which negatively impacted our certain of our distributors' sales. Seven new Ointment products the Company launched after the first quarter of 2010 contributed incremental sales of $0.3 million during the first quarter of 2011, which partially offset the overall Ointments sales decrease.

Sales of Patches declined 41.9% year-over-year to $4.8 million, or approximately 16.8% of total sales in the first quarter of 2011, reflecting lower sales of the Company's Pain Relief Patch and Asthma Patch products after the termination of a key distribution relationship during the third quarter of 2010.

Sales of Wash Fluids increased 206.6% year-over-year to $2.7 million, or approximately 9.5% of total sales in the first quarter of 2011, mainly driven by higher sales of the Company's Metronidazole and Chlorhexidine Washing Fluids after adding a new distributor in the second quarter of 2010.

Sales of Sprays decreased 15.3% year-over-year to $2.5 million, or approximately 9.0% of total sales in the first quarter of 2011, primarily due to the lower sales of several of the Company's Spray products.

Sales of Drops increased 25.4% year-over-year to $2.3 million, or approximately 8.0% of total sales in the first quarter of 2011, mainly attributable to incremental sales of six new Drops products launched after the first quarter of 2010.

Sales of Diagnostic Kits climbed 32.5% year-over-year to $1.9 million, or approximately 6.8% of total sales in the first quarter of 2011, primarily driven by the increased sales of the Company's Cardiac Arrest Early Examination Kit.

Sales of Suppositories increased 60.0% year-over-year to $1.9 million, or approximately 6.8% of total sales in the first quarter of 2011, due to higher sales of the Company's existing Suppositories products and incremental revenue from two new Suppositories products the Company launched after the first quarter of 2010.

Sales of products in the Others category grew 22.5% year-over-year to $5.5 million, or approximately 19.5% of total sales in the first quarter of 2011, reflecting incremental revenues from thirteen products the Company launched after the first quarter of 2010.

Gross profit decreased 10.8% year-over-year to $19.3 million in the first quarter of 2011. Gross margin in the quarter was 68.0%, compared to 74.8% in the first quarter of 2010.  The gross margin decline on a year-over-year basis reflects an increase in certain raw material prices, as well as lower average selling prices the Company extended to certain distributors with extensive market channels, as part of the Company's sales promotion strategy.

Operating expenses increased 10.1% year-over-year to $12.7 million in the first quarter of 2011, due to $0.4 million of incremental selling expenses, $0.3 million of higher research and development expenditures, and $0.5 million of increased depreciation and amortization expenses.

First quarter 2011 operating income was $6.6 million, or 23.4% of total sales, as compared to $10.1 million, or 35.0% of total sales in the first quarter of the prior year.

Total other income, which includes a non-cash gain related to change in the fair value of derivative warrant liability related to the Company's issuance of warrants in the private placement it completed in January 2008, was $1.4 million in the first quarter of 2011, as compared to $4.9 million in the same quarter of the prior year.

Provision for income taxes was $1.9 million in the first quarter of 2011, as compared to $2.5 million in the same period last year.  

GAAP net income for the first quarter of 2011 was $6.1 million, or $0.36 per diluted share, as compared to $12.6 million, or $0.74 per diluted share, in the first quarter of 2010.

Excluding the non-cash gain of $1.4 million related to the change in fair value of derivative warrant liability, the Company's non-GAAP adjusted net income decreased 38.1% year-over-year to $4.7 million, or $0.28 per diluted share, in the first quarter of 2011, as compared to net income of $7.66 million, or $0.45 per diluted share in the first quarter 2010.

Financial Condition

As of March 31, 2011, China Sky One had $48.1 million in cash and equivalents, with a current ratio of 6.9. Working capital was approximately $61.0 million, up from $57.4 million at the end of 2010. Stockholders' equity at March 31, 2011, was $171.6 million, a 4.6% increase over the $164.0 million recorded at December 31, 2010.

Accounts receivable turnover days decreased to 58.3 days in the three months ended March 31, 2011, as compared to 61.9 days in the same period of 2010. Inventory turnover days increased to 44.7 days in the first quarter of 2011 from 28.6 days in the first quarter of 2010. This increase primarily reflected management's decision to increase raw material inventory in response to anticipated raw material price increases as well as to fulfill expected sales in the coming period.

The Company generated $9.0 million in net cash flow from operating activities in the first quarter of 2011, down from $12.6 million in the year ago quarter. The decrease was primarily attributable to lower income from operations and an increased level of inventories. In the first quarter of 2011, approximately $4.4 million was spent to purchase thirteen drug batch numbers from Heilongjiang Traditional Chinese Medical University. The Company is preparing for trial production and defining optimal production process for these thirteen products, which the Company's management believes could be introduced to the market as soon as the fourth quarter of 2011.

Business Outlook

On December 21, 2010, China Sky One entered into an agreement with Heilongjiang Tang Wang He Forest Bureau that gives the Company the right to grow and harvest herbs, among other plants, on approximately 74,000 acres of forested land in the Xiao Xing'an Mountain region. The Company's management believes this arrangement will provide its TCM business with a hedge against fluctuations in raw material prices. The Company plans to evaluate the land in the second quarter of 2011 and subsequently develop a strategic plan for its future operation.

"We commenced 2011 by engaging several new distributors and recently acquired thirteen new drug licenses, which we expect to launch as soon as the fourth quarter of this year," said Mr. Liu. "Throughout 2011, we anticipate a more strict regulated medicinal market in China, which may impose more challenges on the Company's operating performance. However, given our strong management team, rich product portfolio, outstanding R&D capability, and extensive sales network, we believe we are in a good position to compete and improve shareholder value."

SOURCE China Sky One Medical, Inc.