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China Medicine Reports Second Quarter 2010 Financial Results

Friday, August 13, 2010 Corporate News J E 4
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Gross Margin Increases to 35.6% from 23.4%

GUANGZHOU, China, Aug. 12 /PRNewswire-Asia-FirstCall/ -- China Medicine Corporation (OTC Bulletin Board: CHME) ("China Medicine" or "the Company"), a leading manufacturer, developer and distributor of Western pharmaceuticals, traditional Chinese medicines ("TCM"), and other health products, today announced financial results for the second quarter ended June 30, 2010.

    Second Quarter 2010 Financial Performance
    -- Revenue increased 14.2% to $17.2 million from $15.1 million in the
       prior year period.
    -- Gross margin was 35.5%, compared to 23.4% in the prior year period.
    -- Operating income increased 113.0% to $3.8 million from $1.8 million in
       the prior year period.
    -- Net income available to common shareholders increased to $4.1 million,
       or $0.10 per diluted share, from $41,996, or $0.00 per diluted share,
       in the prior year period.

Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation, stated, "We are very happy with our performance this quarter, which marked a successful period of transition for us as we move from a pure pharmaceutical distributor to a vertically-integrated pharmaceutical enterprise. We are especially pleased with the improvement in gross margin, which was mainly driven by a product mix shift within our distribution business and the revenue contribution from our LifeTech proprietary products. Additionally, our addressable market in China continues to grow, and our efforts to capitalize on this growth are progressing very well. We believe that we are well-positioned to be a leading consolidator in this fragmented industry and we'll strive to work responsibly and aggressively on behalf of our shareholders."

In the second quarter of 2010, revenue increased 14.2% year over year to $17.2 million from $15.1 million, reflecting a combination of continued strong demand for our existing products and contributions from the newly-acquired Guangzhou LifeTech Pharmaceutical Co., Ltd. ("LifeTech"). Revenue from distribution increased 4.1% to $15.2 million from $14.6 million in the prior year period, driven by increased sales of high-margin products mainly for the treatment of cardiovascular and cerebral-vascular diseases. Revenue from proprietary products increased to $2.0 million from $0.5 million in the prior year period, reflecting the inclusion of revenues from LifeTech's products, which were acquired at the end of 2009.

Gross profit increased 73.1% to $6.1 million from $3.5 million in the prior year period. Gross margin increased to 35.5% from 23.4% in the prior year period, primarily due to a revenue mix shift toward higher-margin products. The shift was aided by the product mix shift within our distribution business and increased revenue contribution from LifeTech products.

Operating income in the second quarter of 2010 increased 113.0% to $3.8 million from $1.8 million in the prior year period. Selling, general and administrative expenses increased to $2.0 million from $1.3 million in the same period last year, primarily due to additional overhead costs related to the LifeTech acquisition. Research and development expenses were $0.3 million, compared to $0.4 million in the prior year period.

Net income available to common shareholders in the second quarter of 2010 increased to $4.1 million, or $0.10 per diluted share, from $41,996, or $0.00 per diluted share, in the second quarter of 2009. The earnings per share calculation is based on 40.0 million diluted shares outstanding, compared to 15.4 million diluted shares outstanding in the prior year period. Non-GAAP net income, which excludes a one-time non-cash charge related to the warrants and the change in fair value of warrant liabilities, was $2.7 million, or $0.07 per diluted share, compared to $1.3 million, or $0.08 per diluted share, in the prior year period.

Financial Performance for the Six Months Ended June 30, 2010

For the six months ended June 30, 2010, revenue increased 10.4% to $27.8 million from $25.2 million in the first six months of 2009. During the same time period, gross profit increased 48.3% to $9.4 million from $6.3 million. Income from operations increased 42.0% to $5.0 million from $3.5 million in the first six months of 2009. Net loss available to common shareholders was ($242,870), or ($0.01) per share, compared to net income available to common shareholders of $592,078, or $0.04 per share, in the first six months of 2009. This net loss included a one-time $6.1 million non-cash charge in connection with a deemed preferred stock dividend related to the Company's private placement financing in January 2010. The deemed preferred stock dividend reflects the beneficial conversion feature of the convertible preferred stock issued to OEP CHME Holdings, LLC ("OEP") in the January 2010 private placement in accordance with SAB No.98.

Balance Sheet

As of June 30, 2010, the Company had cash and cash equivalents of $62.9 million, of which $53.9 million was restricted cash. This compares to $72.9 million as of March 31, 2010 and $2.4 million as of June 30, 2009. Restricted cash represents amounts set aside by the Company in accordance with its debt agreements with a financial institution and the Stock Subscription Agreement that was completed on January 29, 2010. Working capital was $87.6 million as of June 30, 2010. The increase was mainly due to the cash and cash equivalents obtained from OEP upon the completion of the private placement.

Full Year 2010 Financial Guidance

China Medicine reiterates its expectation that full year 2010 revenue will be in the range of $72 to $76 million, 11% to 17% higher than 2009, and gross margin will be in the range of 33% to 38%, as compared to 29.3% in 2009. The Company revised its expectation of full year operating expenses to represent approximately 12-15% of revenue. This guidance reflects China Medicine's current and preliminary views, which are subject to change.

Conference Call

The Company will hold a conference call on Friday, August 13th, at 8:00 a.m. U.S. Eastern Time following the announcement. Listeners may access the call by dialing the following numbers:

United States toll free: 1-866-293-8969

    International:           1-913-312-0677

Listeners may access the replay through August 27, 2010 by dialing the following numbers:

    United States toll free: 1-888-203-1112
    International:           1-719-457-0820
    Password:                4400886

Use of Non-GAAP Financial Measures

GAAP results for three and six months periods ended June 30, 2010 and June 30, 2009 include non-cash gains and expenses related to change in the fair value of the Company's warrant liabilities and a deemed preferred stock dividend related to outstanding convertible preferred stock issued to OEP. The non-GAAP measure provides a consistent basis for investors to understand our financial performance in comparison to historical periods without variation of non-recurring items and non-operating related gains and charges. In addition, it allows investors to evaluate our performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, the Company compensates for these limitations by providing the relevant disclosure of the items excluded.

Because these expenses are non-cash, and not related to the Company's operating results, the Company believes that the non-GAAP information is useful to supplement the Company's condensed consolidated financial statements. A reconciliation of the adjustments to GAAP results appears in the table accompanying this press release. This additional non-GAAP information is not meant to be considered as a substitute for GAAP financials. The non-GAAP financial information that the Company provides also may differ from the non-GAAP information provided by other companies.

About China Medicine Corporation

China Medicine Corporation, a vertically integrated enterprise with a research and development centre, manufacturing facility and well established sales network, engages in the production and distribution of prescription and over the counter ("OTC") drugs, traditional Chinese medicine ("TCM") products, herbs and dietary-supplements, medical devices, and medical formulations in China. The Company is developing a number of proprietary products for a variety of indications, including oncology, high blood pressure and toxin removal from food and animal feeds. For more information, please visit the Company's website at http://www.cmc621.com .

Safe-Harbor Statement

This press release contains forward-looking statements concerning the Company's business and products. The Company's actual results may differ materially depending on a number of risk factors including, but not limited to, the following: general economic and business conditions, obtaining regulatory approval for new products, government support for rural health care, competition from existing and new competitors, changes in technology, and various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed in the Company's reports filed with the Securities and Exchange Commission. China Medicine Corporation undertakes no duty to revise or update any forward-looking statement to reflect events or circumstances after the date of this release.




                   CHINA MEDICINE CORPORATION AND SUBSIDIARIES
     CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
                                   (UNAUDITED)

                            For Three Months Ended    For Six Months Ended
                                   June 30,                 June 30,
                              2010         2009         2010         2009
    REVENUES
     Distribution products $15,153,848  $14,553,440  $24,708,356  $24,199,863
     Proprietary products    2,036,239      501,653    2,904,308      953,620
     Medical technology             --           --      149,712           --
      Total revenues        17,190,087   15,055,093   27,762,376   25,153,483

    COST OF REVENUES
     Distribution products  10,022,502   11,154,440   16,791,185   18,171,868
     Proprietary products    1,060,143      371,426    1,616,361      672,760
     Medical technology             --           --           --           --
      Total cost of
       revenues             11,082,645   11,525,866   18,407,546   18,844,628

    GROSS PROFIT             6,107,442    3,529,227    9,354,830    6,308,855

    OPERATING EXPENSES
     Research and
      development              344,517      432,764      708,924      763,506
     Selling, general and
      administrative         1,974,259    1,318,152    3,610,912    1,999,474
      Total operating
       expenses              2,318,776    1,750,916    4,319,836    2,762,980

    INCOME  FROM
     OPERATIONS              3,788,666    1,778,311    5,034,994    3,545,875

    OTHER INCOME
     (EXPENSE):
     Other income
      (expense), net           (46,257)     (26,400)    (166,960)     (20,847)
     Change in fair value
      of warrant
      liabilities            1,371,780   (1,213,218)   2,481,474   (1,971,907)

    INCOME BEFORE INCOME
     TAXES
     AND NONCONTROLLING
      INTERESTS              5,114,189      538,693    7,349,508    1,553,121

    PROVISION FOR INCOME
     TAXES                   1,089,308      570,014    1,602,263    1,115,500

    NET INCOME (CHINA
     MEDICINE CORPORATION
     AND
     NONCONTROLLING
      INTERESTS)             4,024,881      (31,321)   5,747,245      437,621

    Add: Net loss
     attributable to
     noncontrolling
     interests                  78,444       73,317      153,885      154,457

    NET INCOME
     ATTRIBUTABLE TO CHINA
     MEDICINE
     CORPORATION             4,103,325       41,996    5,901,130      592,078

    OTHER COMPREHENSIVE
     INCOME (LOSS)
     Foreign currency
      translation
      adjustment               289,762         (277)     295,105      (58,985)
     Foreign currency
      translation
      attributable to
      noncontrolling
      interests                     15           68          (11)      (1,065)

    COMPREHENSIVE INCOME    $4,393,102      $41,787   $6,196,224     $532,028

    Less: Deemed preferred
     stock dividend                 --           --   (6,144,000)          --

    NET INCOME (LOSS)
     AVAILABLE TO CHINA
     MEDICINE CORPORATION
     COMMON SHAREHOLDERS    $4,103,325      $41,996    $(242,870)    $592,078

    EARNINGS (LOSS) PER
     SHARE
     Basic                       $0.19          $--       $(0.01)       $0.04
     Diluted                     $0.10          $--       $(0.01)       $0.04

    WEIGHTED AVERAGE
     COMMON SHARES
     OUTSTANDING
     Basic                  21,885,645   15,231,214   20,419,738   15,228,966
     Diluted                39,992,703   15,355,660   20,419,738   15,248,178



                   CHINA MEDICINE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

              ASSETS
                                                June 30,         December 31,
                                                  2010               2009
                                                Unaudited
    CURRENT ASSETS
      Cash                                       $9,004,104          $471,769
      Restricted Cash                            53,889,986         1,760,400
      Accounts receivable, trade, net of
       allowance for doubtful accounts
       of $157,725 and $157,083 as of
       June 30, 2010 and December 31,
       2009, respectively                        24,877,145        22,314,660
      Inventories                                 3,883,201         2,731,097
      Advances to suppliers                       6,383,691         2,518,396
      Other current assets                        1,199,197           465,407
        Total current assets                     99,237,324        30,261,729

    PLANT AND EQUIPMENT, NET                     11,550,038        12,000,687

    OTHER ASSETS
      Long term prepayments                       7,876,181         7,900,212
      Intangible assets, net                     16,479,014        16,681,854
        Total other assets                       24,355,195        24,582,066

          Total assets                         $135,142,557       $66,844,482

              LIABILITIES AND SHAREHOLDERS' EQUITY

    CURRENT LIABILITIES
      Short term loans                           $4,873,052        $9,506,160
      Accounts payable, trade                     2,523,532         1,324,269
      Other payables and accrued
       liabilities                                  672,035           939,887
      Customer deposits                             690,122           483,358
      Taxes payable                               2,808,197         2,119,745
      Liquidated damages payable                     44,003            44,003
        Total current liabilities                11,610,941        14,417,422

    Fair value of warrant liabilities               634,659         6,918,068
        Total liabilities                        12,245,600        21,335,490

    Commitments and contingencies

    Redeemable convertible preferred
     stock, $0.0001 par value, 1,653,333
     and Nil shares issued and
     outstanding at June 30, 2010 and
     December 31, 2009, respectively             49,600,000                --

    SHAREHOLDERS' EQUITY
      Common stock, $0.0001 par value;
       90,000,000 shares authorized,
       23,097,806 and 15,451,105 shares
       issued and outstanding
       at June 30, 2010 and December
       31, 2009, respectively                         2,309             1,544
      Stock Subscription                          2,088,000                --
      Paid-in capital                            39,181,305        13,380,444
      Statutory reserves                          4,389,665         4,293,116
      Retained earnings                          22,536,568        22,875,987
      Accumulated other comprehensive
       income                                     4,733,199         4,438,094
        Total shareholders' equity               72,931,046        44,989,185

    NONCONTROLLING INTERESTS                        365,911           519,807

        Total equity                             73,296,957        45,508,992

          Total liabilities and
           shareholders' equity                $135,142,557       $66,844,482



                   CHINA MEDICINE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                 Six months ended June 30,
                                                  2010               2009
    CASH FLOWS FROM OPERATING
     ACTIVITIES:
      Net income attributable to China
       Medicine Corporation                     $5,901,130          $592,078
      Net loss attributable to
       noncontrolling interests                   (153,885)         (154,457)
      Net income                                 5,747,245           437,621
      Adjustments to reconcile net
       income to cash provided by
       (used in) operating activities:
           Depreciation and amortization           929,154           433,934
           Bad debt expense                        118,848                --
           Loss on sale of assets                       --            27,816
           Stock-based compensation                 92,904            48,050
           Change in fair value of
            warrants liabilities                (2,481,474)        1,971,907
        Change in operating assets and
         liabilities:
           Accounts receivable, trade           (2,460,984)        3,845,752
           Inventories                          (1,136,217)       (3,288,910)
           Advances to suppliers                (3,957,879)       (1,538,563)
           Other current assets                   (729,086)           39,706
           Accounts payable, trade               1,188,906           139,758
           Other payables and accrued
            liabilities                           (269,764)          (25,157)
           Customer deposits                       203,939           157,601
           Taxes payable                           676,969          (717,560)
             Net cash provided by (used
              in) operating activities          (2,077,439)        1,531,955

    CASH FLOWS FROM INVESTING
     ACTIVITIES:
           Purchase of plant and
            equipment                             (172,056)         (381,321)
           Purchase of intangible assets                --          (234,512)
           Proceeds from sale of
            equipment                                   --            21,986
           Advances on long-term
            prepayments                             56,109        (1,934,767)
             Net cash used in investing
              activities                          (115,947)       (2,528,614)

    CASH FLOWS FROM FINANCING
     ACTIVITIES:
      Proceeds from exercise of options
       and warrants                              1,070,338            21,875
      Repayments on short-term loans            (8,416,339)               --
      Proceeds from short-term loans             3,763,699                --
      Proceeds from issuance of common
       stock                                    12,000,000                --
      Proceeds from issuance of
       redeemable preferred stock               57,600,000                --
      Payments on private placement
       related expenses                         (3,219,552)               --
      Increase in restricted cash              (52,122,386)               --
             Net cash provided by
              financing activities              10,675,760            21,875

    EFFECT OF EXCHANGE RATE ON CASH                 49,961            (2,830)

    CHANGE IN CASH                               8,532,335          (977,614)

    CASH, beginning of period                      471,769         2,791,814

    CASH, end of period                         $9,004,104        $1,814,200

    Supplemental disclosure of cash
     flows:
      Cash paid interest                          $177,927               $--
      Cash paid income tax                        $742,846        $1,092,747



                         China Medicine Corporation
                      Reconciliation of GAAP to Non-GAAP

                                         For the Three Months ended June 30,
                                               2010               2009
                                            Net    Diluted     Net     Diluted
                                           Income    EPS     Income      EPS
    Adjusted amount of net income
     available to common shareholders    $2,731,545  $0.07  $1,255,214  $0.08

    Adjustments:
    Change in fair value of warrant
     liabilities                         (1,371,780) (0.03)  1,213,218   0.08
    Deemed preferred stock dividend              --     --          --     --

    Amount per consolidated statements
     of operations                       $4,103,325  $0.10     $41,996  $0.00


    Weighted average diluted shares for
     the period ended                    39,992,703         15,355,660


                                          For the Six Months ended June 30,
                                               2010               2009
                                            Net    Diluted     Net     Diluted
                                           Income    EPS     Income      EPS
    Adjusted amount of net income
     available to common shareholders   $3,419,656   $0.17  $2,563,985  $0.17

    Adjustments:
    Change in fair value of warrant
     liabilities                        (2,481,474)  (0.12)  1,971,907   0.13
    Deemed preferred stock dividend      6,144,000    0.30          --     --

    Amount per consolidated statements
     of operations                       $(242,870) $(0.01)   $592,078  $0.04


    Weighted average diluted shares for
     the period ended                   20,419,738          15,248,178



    For further information, please contact:

    ICR, Inc.
     In New York:
     Ms. Christine Duan
     Tel: +1-203-682-8200

     In Beijing:
     Ms. Wen Lei Zheng
     Tel: +86-10-6599-7968

    China Medicine Corporation
     In Guangzhou:
     Ms. Gavin Chen
     Tel: +86-20-8737-2102

SOURCE China Medicine Corporation

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