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"Our second quarter revenue grew by nearly 27% year-over-year, driven bystrong product sales across a number of our product categories, partiallyoffset by lower revenue from Slim Patch and Diagnostic Kit Sales. A noteworthycontributor to our growth this quarter continues to be strength in the salesof our ointment products, including Compound Camphor Cream, which grew 85%year-over-year and remains our best selling product," said Mr. Yan-Qing Liu,Chairman and CEO of China Sky One Medical, Inc. "In 2010, we have increasedour cooperation with several larger scale distributors, who provide us with apowerful channel to expand our addressable market. We continue to make asignificant investment in research and development, with a focus on innovativeproprietary drugs and diagnostic kits that we expect will drive future salesgrowth."
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Second Quarter 2010 Results
In the second quarter of 2010, China Sky One's total revenues increased26.7% to $40.8 million from $32.2 million in the same quarter last year.Top-line growth was primarily attributable to strong sales from the Ointmentand Others product categories, which together represented 57.9% of totalrevenue. Sales of ointments increased 51.7% year-over-year to $11.6 million,primarily due to the rapid growth of the Company's Compound Camphor Cream andKecuo Yintong Ointment. With the successful marketing of Compound CamphorCream under the well established Yu Fu brand, the product has replaced SlimPatch to become China Sky One's best selling product, accounting for 15.0% oftotal revenues in the second quarter of 2010 up from 10.5% of sales during thefirst quarter of 2010. Sales of the acne prevention product, Kecuo YintongOintment, also increased significantly, reflecting the successful efforts of anew distributor since the third quarter of 2009.
Sales of Other Products grew 98.5% in the current year quarter to $12.0million. Higher sales in this category were mainly driven by strong marketdemand for Naphazoline Hydrochloride eye drops, Napadil tablet and Tinealiniment.
Sales of patch products declined 2.3% year-over-year to $9.7 million inthe second quarter of 2010 due to a 31.1% decrease in Slim Patch sales to $4.8million, as compared to $6.9 million in the comparable period of 2009.Excluding the Slim Patch, sales of other patch products, including Pain ReliefPatch, Asthma Patch and Hypertension Patch, rose 63.6% to $4.9 million in thesecond quarter of 2010, as compared to $3.0 million in the year ago quarter.
Sales of spray products were up 5.5% from the prior year at $5.1 million.Diagnostic kit sales fell year-over-year to $2.3 million from $3.7 million.The Company has implemented training of its sales professionals to enhancecooperation with its distributors to increase marketing support for thiscategory and is confident that new diagnostic kits under development have verysignificant market potential.
Gross profit rose 20.9% to $29.5 million in the second quarter of 2010.Gross margin in the quarter was 72.5%, as compared to 75.9% in the 2009quarter. Regional flooding and droughts in the second quarter of 2010 led tohigher pricing of herbal raw materials used by the Company to producetraditional Chinese medicine (TCM) products.
Operating expenses increased 28.3% year-over-year to $15.8 million in thesecond quarter of 2010. The increase was principally due to $2.2 millionhigher R&D expenses, a $0.7 million increase in general and administrative anda $0.4 million increase in depreciation and amortization expenses associatedwith two proprietary technologies acquired in the fourth quarter of 2009.Second quarter 2010 operating income was $13.7 million, representing anoperating margin of 33.6%, as compared to $12.1 million and 37.5% in the sameperiod a year ago.
Total other income was $2.1 million in the second quarter of 2010, ascompared to an expense of $1.1 million in the prior year quarter. The increasereflected a non-cash gain related to the change in the fair value of ourderivative warrant liability related to the private placement in January 2008.
Provision for income taxes was $3.6 million in the second quarter of 2010,as compared to $2.6 million in the same period last year.
GAAP net income for the second quarter of 2010 was $12.2 million, ascompared to $8.4 million in the second quarter of 2009. Excluding the non-cash$2.1 million gain related to the change in fair value of derivative warrantliability, the Company's non-GAAP adjusted net income rose 7.4% to $10.2million or $0.60 per diluted share, as compared to $9.5 million or $0.57 perdiluted share, in the prior year period.
Financial Condition
As of June 30, 2010, China Sky One had $64.7 million in cash andequivalents, with a current ratio of 5.5. Working capital was approximately$77.2 million, up from $60.6 million at the end of second quarter 2009.Stockholders' equity at June 30, 2010, was $147.2 million, a 21.8% increaseover the $120.9 million recorded at December 31, 2009.
Accounts receivable turnover days increased to 53.4 in the three monthsended June 30, 2010, as compared to 47.1 days in the same period of 2009.Inventory turnover days increased to 30.4 in the second quarter of 2010 from15.4 days in the year ago quarter. This increase primarily reflectedmanagement's decision to increase raw material inventory ahead of anticipatedprice increases and in anticipation of expected sales growth in 2010.
The Company generated $19.3 million in net cash flow from operatingactivities in the first six months of 2010, an increase from $17.8 million inthe year ago comparable period. Management believes current working capitaland borrowing capabilities are sufficient to cover their operating and capitalrequirements in the near future.
Business Outlook
The Company is currently in the process of negotiating with a few of itskey customers for business in the second half of 2010 and plans to provide anupdate to its annual guidance in the near future if there is any materialchange.
"We delivered strong organic revenue growth of nearly 27% this quarter andcontinued to invest in our pipeline. Our strong balance sheet and cash flowprovide us with the flexibility to invest in new products, expand our capacityand pursue additional acquisitions. We remain optimistic that we will obtainSFDA approval of 3 to 5 of new products during the second half of 2010,leading to new revenue streams beginning in 2011. We will continue our effortsin research and development of high margin branded products, while focusing onincreasing sales and promotion of our current products, including ourpromising portfolio of diagnostic kits," concluded Mr. Liu.
Conference Call
China Sky One Medical will conduct a conference call at 8:00 a.m. EasternDaylight Time (EDT) on Tuesday, August 10, 2010, to discuss its second quarter2010 financial results. To participate on the live call, please dial thefollowing number five to ten minutes prior to the scheduled conference calltime: 877-585-2309. International callers should dial 706-902-4207. TheConference ID for this call is 92105755.
If you are unable to participate in the call at this time, a replay willbe available for two weeks starting on Tuesday, August, 2010 at 9:00 a.m. EDT.To access the replay, dial 800-642-1687, international callers dial706-645-9291. The Conference Replay Passcode is 92105755.
Use of Non GAAP Financial Measures
GAAP results for the three and six month periods ended June 30, 2010 andJune 30, 2009 include gains or losses related to the change in the fair marketvalue of the derivative warrant liability. To supplement its consolidatedfinancial statements presented on a GAAP basis, the Company has provided non-GAAP adjusted financial information, which are adjusted net income andadjusted diluted earnings per share, excluding the impact of these items. TheCompany's management believes that this adjusted measure provides investorswith a better understanding of how the results relate to the Company'shistorical performance. A reconciliation of adjustment to GAAP results appearsin the tables accompanying this press release. This additional adjustedinformation is not meant to be considered in isolation or as a substitute forGAAP financials. The adjusted financial information that the Company providesalso may differ from the adjusted information provided by other companies.
About China Sky One Medical, Inc.
China Sky One Medical, Inc., a Nevada corporation, is a holding company.The Company engages in the manufacturing, marketing and distribution ofpharmaceutical, medicinal and diagnostic products. Through its wholly-ownedsubsidiaries, Harbin Tian Di Ren Medical Science and Technology Company("TDR"), Harbin First Bio-Engineering Company Limited ("First"), Tianlong andPeng Lai Jin Chuang Pharmaceutical Company ("Jin Chuang") the Companymanufactures and distributes over-the-counter pharmaceutical products, whichmake up its major revenue source. For more information, visithttp://www.cski.com.cn .
Safe Harbor Statement
Certain of the statements made in the press release constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These statements can be identified by the useof forward- looking terminology such as "believe," "expect," "intend,""anticipate," "estimate," "should", "would", "could", "may", "plan","possible", "project" or similar expressions. Such statements typicallyinvolve risks and uncertainties and may include financial projections orbusiness development. Actual results could differ materially from theexpectations reflected in such forward-looking statements as a result of avariety of factors, including the risks associated with the effect of changingeconomic conditions in PRC, the ability to achieve guidance, the announcementor execution of any acquisitions or other strategic deals, the success of anypipeline projects, variations in cash flow, reliance on collaborative retailpartners and on new product development, variations in new product development,risks associated with rapid technological change, and the potential ofintroduced or undetected flaws and defects in products, and other risk factorsdetailed in reports filed with the Securities and Exchange Commission fromtime to time.Second Quarter 2010 Financial Highlights -- Total revenues increased 26.7% year-over-year to $40.8 million -- Gross profit rose 20.9% to $29.5 million -- Operating income grew 13.4% to $13.7 million -- GAAP net income, including a non-cash gain from change in the fair value of derivative warrant liability, increased 45.9% year-over-year to $12.2 million, or $0.73 per diluted share -- Excluding the non-cash gain, non-GAAP adjusted net income rose 7.4% to $10.2 million, or $0.60 per diluted share Second Quarter 2010 Accomplishments -- Obtained SFDA approval for Ciclopirox Olamine Vaginal Suppositories, a broad-spectrum antibacterial that treats fungal infection and inflammation -- Obtained SFDA renewal of the Good Manufacturing Practices Certificate for Pharmaceutical Products ("GMP Certificate") for the Company's subsidiary, Heilongjiang Tianlong Pharmaceutical, Inc. ("Tianlong")
SOURCE China Sky One Medical, Inc.
