China Sky One Medical (PINK:CSKI)

Third Quarter 2011 Results

First Quarter Results:

• 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."

GeoTeam Notes:

Business has been negatively impacted by the termination of business relationships with one domestic distributor and one overseas sales agent during the third quarter of 2010. The Company did not issue 2011 guidance, but estimates indicate that EPS growth will be dismal over the next two years.

The need for a capital restatement in the 2010 10K is somewhat more ambiguous that comments made in prior filings, where it was more evident that the company would not need to tap capital markets.

EPS: $0.21 vs. $0.36 est.

HARBIN, China, Jan. 11, 2011 /PRNewswire-Asia-FirstCall/ -- China Sky One Medical, Inc. today announced that following the Tang Wang He forest land acquisition, the Company plans to develop, manufacture and market thirteen new health food products, including teas, oral liquids and herbal wines. These products are expected to receive approvals from China's State Food and Drug Administration ("SFDA") in 2011. The Company will leverage its existing sales network to sell the following new products to consumers through pharmacies:

The Company also reached an agreement with the research division of Heilongjiang Traditional Chinese Medicine University, which will transfer the ownership of eleven patch products at fair market value prices to the Company upon receipt of corresponding production approvals. These products include: Breast and Uterus Patch, Heart Patch, Headache Patch, Intestines Patch, Bowel Relaxing Patch, Onychomycosis Patch, Dry Skin Patch, Cold and Fever Patch, Carsickness Patch, Bone Healing Patch, and Waist Patch.

"We look forward to the commercial launch of these new health food and patch products and expect to continue to diversify our rich product portfolio to strengthen the Company's competitive position and support sustainable long-term growth," said Mr. Yan-Qing Liu, Chairman and CEO of China Sky One Medical. "We are now working on the sales forecast for these new products and will update investors with the 2011 full year financial forecast soon."

• For the three months ended September 30, 2010, total revenues decreased by approximately $7,034,000, or 16.3%, as compared to the same period of 2009.

• Net income decreased to $8.6 million from $12.6 million.

• EPS decreased to $0.51 from $0.76.

• Our sales and marketing strategy is to promote certain of our products which have less market competition by coordinating with reputable distributors who have extensive market channels. However, these distributors seek lower sales prices which will have a negative impact on our overall gross product margins.

Historically, our Slim Patch products have been one of our best selling products both domestically and outside of the PRC. Beginning in the fourth quarter of 2009, China domestic sales of Slim Patch products began to decline. The regulations and restrictions launched at that time by the Chinese government prohibiting television advertisement of weight loss products in the PRC have negatively impacted the Slim Patch distribution channel in the PRC. The revenue generated from the China domestic market of Slim Patch products was $4,193,000 and $9,879,000 for the nine months ended September 30, 2010 and 2009, respectively. In addition, following Hangzhou Jiupin’s termination of its business relationship with us, our overseas sales of Slim Patch products also decreased. Revenues generated from the Slim Patch overseas sales were $5,928,000 and $8,956,000 for the nine months ended September 30, 2010 and 2009, respectively. We expect sales of our Slim Patch products in the PRC to remain lower for the foreseeable future due to the Chinese government’s restrictions, and to remain lower overseas until we are able to locate a new overseas sales agent to handle sales in the affected or new markets.

For the remainder of fiscal year 2010, we anticipate price increases of certain raw materials due to unforeseen natural disasters and inflation that will result in the increase of our cost of goods sold. In addition, our sales and marketing strategy to promote certain of our products which have less market competition by coordinating with reputable distributors who have extensive market channel and will launch these products at lower margins. These factors will have negative impact on our overall gross product margins.

Business Outlook

The Company reiterates guidance for 2010 of

• Revenue from $128 million to $136 million

• Adjusted net income, excluding the impact of the derivative warrant liability, from $26 million to $31 million.  

• The Company currently is in the process of evaluating its outlook for 2011 and will provide guidance for next year once its forecast has been finalized.

"We believe that our strong and efficient sales network, combined with new relationships with national and provincial distributors, provides a solid base from which we can rekindle growth heading into 2011. Furthermore, our healthy cash position provides us with flexibility to pursue value creating acquisitions and to enter into beneficial strategic relationships. We are very excited about our recently announced joint application with Heilongjiang Traditional Chinese Medical University ("HTCMU") for production licenses of 15 new medical products.  We look forward to revenue and earnings contribution in 2011 from these products as well as from another 3 to 5 products that we hope will obtain SFDA approval by the end of 2010.  We will continue our efforts in research and development of high margin branded products, while focusing on increasing sales and promotion of our current products, including our promising portfolio of diagnostic kits," concluded Mr. Liu.

2010 Second Quarter Highlights:

• Revenues increased by approximately $8,579,000, or 26.7%, as compared to the same period of 2009. The increase is primarily due to the strong sales from products in our Ointment and Others product categories, partially offset by the decreased revenue from the sales of our Slim Patch and Diagnostic Kits.
  
• Non-GAAP EPS after taking warrant gains/losses into account was $0.61 vs $.57.

"Historically, we signed agreements with suppliers that allowed us to hold extra raw materials at the cost of the suppliers. As a result, we were able to minimize our own inventory carrying costs, and improve our cash management, by keeping the inventory at the minimum level required to support the short-term sales. However, due to our forecasts for certain cost increases of raw materials and the overhead costs for storing such raw materials in fiscal 2010, we began to increase our inventory levels toward the second half of 2009 and in 2010. We expect this practice to continue for the foreseeable future.

For the remainder of fiscal year 2010, we anticipate price increases of certain raw materials due to unforeseen natural disasters and inflation that will result in the increase of our cost of goods sold. In addition, our sales and marketing strategy to promote certain of our products which have less market competition by coordinating with reputable distributors who have extensive market channel and will launch these products at lower margins. These factors will have negative impact on our overall gross product margins."

"We are confident about the prospects for our business in 2009 and will continue to focus on increasing market share by both strengthening and further refining our sales and distribution network, building and enhancing our brand image, and seeking out strategic acquisitions that support our growth. In the first nine months of 2009, we increased our number of sales representatives to roughly 1,500 from 1,300. Currently, our products are sold in approximately 5,500 pharmacies in 24 provinces in China compared to 4,500 pharmacies in 22 provinces in 2008. Over the long term, we will continue to focus on developing and manufacturing our biological diagnostic kits and on our cord stem cell bank initiative, areas that we believe have very promising market opportunities," said Mr. Liu.

"Based on our progress so far this year, we are reaffirming our guidance for the year," added Mr. Liu. "We expect 2009 full year revenue to increase by 40%, or approximately $37.0 million, to $130 million, driven by growth in all of our product sales categories. We estimate that 2009 gross margin to be approximately 75%, which factors in market competition and possibly higher raw material costs. We expect 2009 net income will increase to approximately $39 million, resulting in net profit margin of approximately 30%."

Source: PR Newswire (November 17, 2009)