China Sky One Medical Announces Third Quarter 2011 Results

HARBIN, China, Nov. 9, 2011 /PRNewswire-Asia/ -- 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 financial results for the third quarter of 2011.

Third Quarter 2011 Financial Highlights

• Total revenues decreased 26.6% year-over-year to $26.6 million
• The Company marketed 85 products, compared with 115 products in the quarter ended September 30, 2010
• Gross profit fell 38.1% to $16.3 million
• Operating income declined to $1.3 million
• GAAP net income, including a non-cash gain from change in the fair value of derivative warrant liability, was $0.5 million, or $0.03 per diluted share

"Our third quarter revenue declined 26.6% compared to the third quarter last year due to an increasingly challenging market environment and the appropriate restructuring of our products portfolio," said Mr. Yan-Qing Liu, Chairman and CEO of China One Medical, Inc.

"We remain confident in the fundamentals of our business and believe that we continue to be well poised to deploy our financial resources so as to emerge in the marketplace as highly viable and successful company," Chairman and CEO Liu continued. "To accomplish this goal, the Company has taken several strategic steps to ensure its competitive edge.  We have acquired 74,000 acres of forest land in the Xiao Xing'an Mountain region and started trial planting of herbs as a strategic step to secure sourcing, and have reached several milestones in the construction of our new facilities on our newly acquired land in the High-Tech Development Zone of Song Bei District in Harbin, China which will strongly enhance our R&D, production, logistic and general management capabilities. We believe that these decisive actions will serve as the cornerstone of the Company in years to come and will enable our long-term sustainability and growth."

Third Quarter 2011 Results

In the third quarter of 2011, China Sky One's total revenues decreased 26.6% to $26.6 million from $36.2 million in the same quarter last year. The decrease was primarily due to the decline in sales of certain product categories due to the termination of production and sales of 32 products in the second and third quarters of 2011. In the second quarter of 2011, Management decided to temporarily discontinue the production and sales of 16 products which were less competitive and generated lower relative sales volume. In the third quarter of 2011, Management decided to discontinue the production and sales of an additional 16 products because of new regulations by China's SFDA.

By product category, sales from Ointments, Patches, Sprays, Suppositories and Drops contributed to the Company's overall year-over-year revenue decline, offset somewhat by top-line growth in Wash Fluids and Diagnostic Kits.

In terms of the Company's top-selling products, revenue generated from its Metronidazole and Chlorhexidine Wash Fluids in the third quarter of 2011 increased 78.2% year-over-year to $1.6 million as a result of our successful market promotion.  Revenue generated from the Company's Cardiac Arrest Early Examination Kits and Kidney Disease Testing Kit in the third quarter of 2011 was $1.9 million, four times that of the year-ago quarter.

However, revenue generated from the Company's Hemorrhoids Ointment and Compound Camphor Cream in the third quarter of 2011 decreased 57.6% year-over-year to $3.8 million. The sales decrease of the Company's Hemorrhoids Ointment was due to the SFDA's enforcement of new regulations as concerns the advertising of certain medicinal products which negatively impacted sales to end users. The sales decrease of the Company's Compound Camphor Cream was primarily due to market competition. Revenue generated from the Company's Slim Patch in the third quarter of 2011 decreased 66.2% year-over-year to $1.3 million primarily because of more aggressive market competition. Revenue generated from our Naphazoline Hydrochloride Eye Drop in the third quarter of decreased 62.9% year-over-year to $0.9 million also due to tougher market competition.

Gross profit declined 38.1% to $16.3 million in the third quarter of 2011. Gross margin in the quarter was 61.5%, as compared to 72.9% in the third quarter of 2010, mainly due to increases in the price of certain raw materials used to produce the Company's products, and lower sales prices of certain products due to the competitive sales market.  Another contributing factor in this decline was the Company's sales and marketing strategy to promote certain of its products which have less market competition by coordinating with distributors who have extensive market channels. These distributors generally seek lower sales prices which had a negative impact on the Company's overall gross product margins.

Operating expenses decreased 11.1% year-over-year to $15.1 million in the third quarter of 2011. The decrease was principally due to $1.9 million in lower selling expenses and $0.8 million in lower R&D expenses, which were somewhat offset by $0.6 million in higher depreciation and amortization expenses and $0.2 million in higher general and administrative expenses. 

Third quarter 2011 operating income was $1.3 million, or 4.8% of revenue, as compared to an operating income of $9.5 million, or 26.1% of revenue, in the same period a year ago.

Provision for income taxes was $0.8 million in the third quarter of 2011, as compared to $2.7 million in the same period last year. 

GAAP net income for the third quarter of 2011 was $0.5 million, as compared to $8.6 million in the third quarter of 2010. Excluding the non-cash gain related to the change in fair value of derivative warrant liability, the Company's non-GAAP adjusted net income was $0.5 million, or $0.03 per diluted share, as compared to $6.8 million, or $0.40 per diluted share, in the prior year period.

Nine Month Operating Highlights

Total revenues for nine months ended September 30, 2011 decreased 12.5% year-over-year to $92.6 million. The decrease was primarily due to the termination of two major customer relationships (one domestic distributor and one overseas agent) in the third quarter of 2010. Revenues generated from these two customers in the nine months ended September 30, 2010 were approximately $12.9 million or 12.1% of the Company's revenues for that period. Gross margin was about 65.4% compared to 73.3% for the first nine months of 2010. Total R&D expenses were approximately $14.8 million (or 16.0% of sales) for the first nine months of 2011 as compared to $15.3 million (or 14.4% of sales) for the comparable period of 2010. Net income for the first nine months of 2011 was $12.8 million, or $0.75 per diluted share, as compared to net income of $33.4 million, or $1.99 per diluted share, in the same period of 2010.

Financial Condition

As of September 30, 2011, China Sky One had $21.3 million in cash and equivalents, with a current ratio of 6.3. The Company had working capital of approximately $41.6 million. Stockholders' equity at September 30, 2011, was $183.7 million, 12.0% higher than the $164.0 million recorded as of December 31, 2010.

Accounts receivable turnover days increased to 58.3 for the nine months ended September 30, 2011, as compared to 55.7 in the same period of 2010. Inventory turnover days increased to 50.9 for the first nine months of 2011 from 35.7 in the year ago period. The increase of inventory turnover days was due to higher inventory levels since the beginning of 2011 in order to satisfy the Company's future production needs, as well as to limit the effects of possible future price increase of raw materials.

The Company generated $12.2 million in net cash flow from operating activities in the first nine months of 2011, compared to $25.6 million in the comparable year ago period. The decrease in cash provided by operating activities was primarily due to the decline in net income in the nine months ended September 30, 2011 as compared to the year-ago period.

Cash flows used in investing activities were approximately $35.5 million for the nine months ended September 30, 2011, compared to $7.8 million in the same period of 2010. Major cash flows in investing activities primarily related to the Company's expenditures of approximately $22.7 million as related to its new facilities located in the High-Tech Development Zone of Song Bei District in Harbin, China.

Cash flows provided from financing activities were zero for the nine months ended September 30, 2011, compared to approximately $94,000 for the same period in 2010.

Management believes that capital is sufficient to take advantage of new investment opportunities and to meet future liquidity and capital needs.

Recent Developments

In the third quarter of 2011, the Company's wholly-owned subsidiary, Harbin Tian Di Ren Medical Science and Technology Company (TDR) acquired the 50-year land use rights covering approximately 85,000 square meters of land located in the High-Tech Development Zone of Song Bei District in Harbin, China, for total consideration of approximately $7.5 million. The Company intends to build an R&D center, an injection manufacturing facility, a logistics center, and an office building on the land during the first phase of development, which the Company currently expects to complete by mid-2012 at an estimated cost of completion of approximately $45 million to $49 million. As of September 30, 2011, the Company has invested approximately $22.8 million in the construction project.

Conference Call

China Sky One will conduct a conference call at 9:00 a.m. Eastern Time (ET) on Wednesday, November 9, 2011, to discuss third quarter 2011 financial results. A full version of the Company's quarterly report will be filed with the SEC on Form 10-Q prior to the call. To participate in the live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: (866) 395-5819. International callers should dial (706) 643-6986. The Conference ID for this call is 23256684. If you are unable to participate in the call at this time, a replay will be available for two weeks starting on Wednesday, November 9, 2011 at 10:00 a.m. ET. To access the replay, dial (855) 859-2056 or (404) 537-3406, international callers dial +1 800-585-8367. The Conference Replay Passcode is 23256684.

Use of Non GAAP Financial Measures

GAAP results for the three and nine month periods ended September 30, 2011 and September 30, 2010 include gains or losses related to the change in the fair market value of the derivative warrant liability. To supplement its consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP adjusted financial information, which are adjusted net income and adjusted diluted earnings per share, excluding the impact of these items. The Company's management believes that this adjusted measure provides investors with a better understanding of how the results relate to the Company's historical performance. A reconciliation of adjustment to GAAP results appears in the tables accompanying this press release. This additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also 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 of pharmaceutical, medicinal and diagnostic products. Through its wholly-owned subsidiaries, Harbin Tian Di Ren Medical Science and Technology Company ("TDR"), Harbin First Bio-Engineering Company Limited ("First"), Tianlong and Peng Lai Jin Chuang Pharmaceutical Company ("Jin Chuang") the Company manufactures and distributes over-the-counter pharmaceutical products, which make up its major revenue source. For more information, visit http://www.cski.com.cn.

Safe Harbor Statement

Certain of the statements made in the press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward- looking terminology such as "believe," "expect," "intend," "anticipate," "estimate," "should", "would", "could", "may", "plan", "possible", "project" or similar expressions. Such statements typically involve risks and uncertainties and may include financial projections or business development. Actual results could differ materially from the expectations reflected in such forward-looking statements as a result of a variety of factors, including the risks associated with the effect of changing economic conditions in PRC, the ability to achieve guidance, the announcement or execution of any acquisitions or other strategic deals, the success of any pipeline projects, variations in cash flow, reliance on collaborative retail partners and on new product development, variations in new product development, risks associated with rapid technological change, and the potential of introduced or undetected flaws and defects in products, and other risk factors detailed in reports filed with the Securities and Exchange Commission from time to time.

-- Financial Tables Follow --

SOURCE China Sky One Medical, Inc.