China Sky One Medical Announces Fourth Quarter and Fiscal Year 2010 Results

Fourth Quarter 2010 Highlights

• Total revenues decreased by $3.0 million, or 10.2% to $26.8 million as compared to the corresponding period of 2009
• Gross profit was $19.1 million with gross margin of 71.2%
• Operating income was $4.3 million, as compared to $9.1 million in the corresponding period of 2009
• Net income was $2.5 million, or $0.15 per diluted share
• Excluding the effect of non-cash items related to changes in the fair value of the Company's derivative warrant liabilities and share based compensation expenses, non-GAAP net income was $3.6 million, or $0.21 per diluted share, as compared to $7.9 million, or $0.47 per diluted share a year ago
• Acquired rights to cultivate and produce herbs and other ingredients for use in traditional Chinese medicines (TCM) and other health food products on 74,000 acres of forested land in the Xiao Xing'an Mountain region

Full Year 2010 Highlights

• Total revenues increased 2.0% to $132.7 million, in-line with management guidance
• Gross profit was $96.7 million with gross margin of 72.9%
• Operating income decreased 18.7% to $37.6 million
• Net income increased 16.1% to $36.0 million, or $2.14 per diluted share
• Excluding the effect of non-cash items related to changes in the fair value of the Company's derivative warrant liabilities and share based compensation expenses, non-GAAP net income was $28.2 million, or $1.68 per diluted share, as compared to $37.0 million, or $2.22 per diluted share in 2009
• Relocated corporate headquarters to Harbin Song Bei New Development District
• Acquired rights to cultivate and produce herbs and other ingredients for use in traditional Chinese medicine (TCM) and other health food products on 74,000 acres of forested land in the Xiao Xing'an Mountain region

"Our full year financial results were in line with our expectations.  We saw a modest increase in our top line as we took aggressive steps to replace the two major distributors who discontinued their business relationships with us in the third quarter.  Our sales network now covers 18 provinces in mainland China and several countries and regions overseas. We are now co-operating with nationwide chain pharmacies to reach all major metropolitan areas throughout China while relying on larger regional sales agents to resell our products to smaller distributors and retail stores," said Mr. Yan-Qing Liu, Chairman and CEO of China Sky One Medical, Inc. "In 2011, we will introduce a number of new products, and we will continue to invest heavily in high margin branded drugs to support long-term sustainable growth."

Fourth Quarter 2010 Results

In the fourth quarter of 2010, China Sky One's total revenues decreased 10.2% to $26.8 million compared to $29.9 million in the same quarter last year. This decrease was primarily attributable to the termination of business relationships with one domestic distributor and one overseas sales agent during the third quarter of 2010.

By product category, lower sales from patches and sprays contributed to the Company's overall year-over-year decline in revenue.  This was partially offset by increases in ointments, drops, diagnostic kits and other diversified products.

Revenues generated from ointment products increased $2.0 million, or 38.8%, year-over-year to $7.4 million in the fourth quarter of 2010, which account for 27.4% of total revenue. The increase was primarily due to increased revenues generated from Compound Camphor Cream.

Revenues generated from patch products decreased $5.5 million, or 55.9%, year-over-year to $4.4 million in the fourth quarter of 2010, which account for 16.3% of total revenue. The decrease in revenues was primarily due to certain regulations and restrictions the Chinese government launched in the fourth quarter of 2009, which prohibit television advertising of weight loss products in the PRC.

Revenues generated from spray products decreased $1.7 million, or 42.5%, year-over-year to $2.3 million in the fourth quarter of 2010, which account for 8.6% of total revenue. The decrease was primarily due to decreased sales of several spray products due to the loss in the third quarter of 2010 of a key domestic distributor.

Revenues generated from drops products increased $0.8 million, or 32.5%, year-over-year to $3.4 million in the fourth quarter of 2010, which account for 12.6% of total revenue. The increase was primarily due to increased revenues from six additional Drops products launched by the Company in 2010.

Revenues generated from suppositories products increased $0.6 million, or 50.2%, year-over-year to $1.8 million in the fourth quarter of 2010, which account for 6.8% of total revenue. The increase was primarily due to the increase sales of original products and two additional Suppositories products launched by the Company in 2010.

Revenues generated from diagnostic kits products increased $0.2 million, or 25.5%, year-over-year to $1.0 million in the fourth quarter of 2010, which account for 3.9% of total revenue.

Revenues generated from other products increased $0.5 million, or 8.4%, year-over-year to $6.5 million in the fourth quarter of 2010, which account for 24.3% of total revenue.

Gross profit decreased 16.6% to $19.1 million in the fourth quarter of 2010. Gross margin was 71.2%, as compared to 76.6% in the fourth quarter of 2009 primarily due to higher cost of goods sold and lower sales price of certain products. The increased raw materials costs were mainly due to inflation and unforeseen natural disasters which caused an increase in the price of raw materials we use to produce certain of our products, including Honey Suckle Flower and Notoginseng. Lower sales price of certain products was due to our sales and marketing strategy which is to promote certain of our products with less market competition by coordinating with reputable distributors who have extensive market channels and seek lower margin products. This sales strategy has had and will continue to have a negative impact on our overall gross product margin.

Operating expenses increased 7.0% to $14.7 million in the fourth quarter of 2010. The increase was principally due to higher amortization resulting from acquisition of two proprietary technologies acquired in the fourth quarter of 2009 and the increased research and development expenses. Research and development expenses were $4.3 million, up 9.3% from the fourth quarter of 2009.

Operating income decreased 52.3% year over year to $4.3 million, representing operating margin of 16.2%.

In the fourth quarter of 2010, the Company recorded a non-cash gain in the fair value of its derivative warrant liability of $42,000, compared to a non-cash loss of $6.1 million in the fourth quarter of 2009.

Provision for income taxes was $1.9 million in the fourth quarter of 2010, as compared to $2.5 million in the same period of last year.  

Net income for the fourth quarter of 2010 was $2.5 million, or $0.15 per diluted share, compared to $0.5 million, or $0.03 per diluted share, in the fourth quarter of 2009.

Excluding the effect of non-cash items related to changes in the fair value of the Company's derivative warrant liabilities and the share based compensation expenses, non-GAAP net income was $3.6 million or $0.21 per diluted share, as compared to $7.9 million, or $0.47 per diluted share a year ago.

Full Year 2010 Results

For the full year 2010, total revenues were $132.7 million, up 2.0% from $130.1 million in 2009. Of the 120 products commercialized by China Sky One Medical in 2010, ointments, patches, sprays, drops, suppositories, diagnostic kits and other products accounted for 28.9%, 21.7%, 10.6%, 9.0%, 5.9%, 4.1% and 19.7% of total revenues, respectively.

Gross profit was $96.7 million, down 1.8% from $98.4 million in 2009. Gross margin was 72.9% in 2010, as compared to 75.7% in 2009. Operating income was $37.6 million, down 18.7% from $46.3 million in 2009. Operating margin was 28.4% in 2010 versus 35.6% in 2009.

In 2010, the Company recorded a non-cash gain in the fair value of its derivative warrant liabilities of $8.9 million, as compared to a non-cash loss of $4.8 million in 2009.

Net income for 2010 was $36.0 million, or $2.14 per diluted share, up 16.1% from $31.0 million, or $1.86 per diluted share, in 2009. Excluding the effect of non-cash items related to changes in the fair value of the Company's derivative warrant liabilities and share based compensation expenses, non-GAAP net income was $28.2 million, or $1.68 per diluted share, as compared to $37.0 million or $2.22 per diluted share in 2009.

Financial Condition

As of December 31, 2010, China Sky One had $43.1 million in cash and equivalents, with a current ratio of 8.0. Working capital was approximately $57.4 million. Stockholders' equity at December 31, 2010, was $164.0 million, a 35.7% increase over the $120.9 million recorded at December 31, 2009.

Average accounts receivable turnover days increased to 60.8 days in 2010 from 51.6 days in 2009. Average inventory turnover days for 2010 increased to approximately 36.7 days from 21.6 days for 2009. The Company increased its inventory levels since the second half of 2009 in anticipation of certain cost increases of raw materials.

During 2010, the Company generated $32.6 million in net cash flow from operating activities. Capital expenditures were $44.6 million in 2010, including a $36.0 million payment to Heilongjiang Tang Wang He Forest Bureau for the right to cultivate and produce herbs and other ingredients for use in traditional Chinese medicine (TCM) and other health food products, on approximately 74,000 acres of forested land in the Xiao Xing'an Mountain region for the next 30 years, and a land deposit of approximately $7.3 million for the auction. The Company plans to build a new biopharmaceutical research center and manufacturing facilities on this land if it wins the bid. Management believes its current working capital and borrowing capabilities are sufficient to cover its operating and capital commitments for 2011.

Conference Call

China Sky One Medical will conduct a conference call at 9:00 a.m. Eastern Time (ET) on Tuesday, March 15, 2011, to discuss full year and fourth quarter 2010 financial results.

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 49924375.

If you are unable to participate in the call at this time, a replay will be available for two weeks starting on Tuesday, March 15, 2011 at 10:00 a.m. ET. To access the replay, dial 800-642-1687, international callers dial 706-645-9291. The Conference Replay Passcode is 49924375.

Use of Non GAAP Financial Measures

GAAP results for the three and twelve month periods ended December 31, 2010 and 2009 include non-cash items related to the change in fair value of the Company's derivative warrant liability and share-based compensation. To supplement the Company's consolidated financial statements presented on a GAAP basis, the Company has provided non-GAAP adjusted financial information which excludes the impact of these items in this release. The Company's management believes that these adjusted measures provide investors with a better understanding of how the results relate to the Company's historical performance. A reconciliation of adjustments 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 timing and success of new product introductions, the ability of the company to control raw materials costs through the cultivation of herbs and other plants; 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 -