China Sky One second-quarter 2010 total revenues up 26.7%

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 record financial results for the second quarter of 2010.

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")

"Our second quarter revenue grew by nearly 27% year-over-year, driven by strong product sales across a number of our product categories, partially offset by lower revenue from Slim Patch and Diagnostic Kit Sales. A noteworthy contributor to our growth this quarter continues to be strength in the sales of 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 increased our cooperation with several larger scale distributors, who provide us with a powerful channel to expand our addressable market. We continue to make a significant investment in research and development, with a focus on innovative proprietary drugs and diagnostic kits that we expect will drive future sales growth."

Second Quarter 2010 Results

In the second quarter of 2010, China Sky One's total revenues increased 26.7% 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 Ointment and Others product categories, which together represented 57.9% of total revenue. 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 and Kecuo Yintong Ointment. With the successful marketing of Compound Camphor Cream under the well established Yu Fu brand, the product has replaced Slim Patch to become China Sky One's best selling product, accounting for 15.0% of total revenues in the second quarter of 2010 up from 10.5% of sales during the first quarter of 2010. Sales of the acne prevention product, Kecuo Yintong Ointment, also increased significantly, reflecting the successful efforts of a new distributor since the third quarter of 2009.

Sales of Other Products grew 98.5% in the current year quarter to $12.0 million. Higher sales in this category were mainly driven by strong market demand for Naphazoline Hydrochloride eye drops, Napadil tablet and Tinea liniment.

Sales of patch products declined 2.3% year-over-year to $9.7 million in the second quarter of 2010 due to a 31.1% decrease in Slim Patch sales to $4.8 million, as compared to $6.9 million in the comparable period of 2009. Excluding the Slim Patch, sales of other patch products, including Pain Relief Patch, Asthma Patch and Hypertension Patch, rose 63.6% to $4.9 million in the second 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 enhance cooperation with its distributors to increase marketing support for this category and is confident that new diagnostic kits under development have very significant 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 2009 quarter. Regional flooding and droughts in the second quarter of 2010 led to higher pricing of herbal raw materials used by the Company to produce traditional Chinese medicine (TCM) products.

Operating expenses increased 28.3% year-over-year to $15.8 million in the second quarter of 2010. The increase was principally due to $2.2 million higher R&D expenses, a $0.7 million increase in general and administrative and a $0.4 million increase in depreciation and amortization expenses associated with two proprietary technologies acquired in the fourth quarter of 2009. Second quarter 2010 operating income was $13.7 million, representing an operating margin of 33.6%, as compared to $12.1 million and 37.5% in the same period a year ago.

Total other income was $2.1 million in the second quarter of 2010, as compared to an expense of $1.1 million in the prior year quarter. The increase reflected a non-cash gain related to the change in the fair value of our derivative 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, as compared 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 warrant liability, the Company's non-GAAP adjusted net income rose 7.4% to $10.2 million or $0.60 per diluted share, as compared to $9.5 million or $0.57 per diluted share, in the prior year period.

Financial Condition

As of June 30, 2010, China Sky One had $64.7 million in cash and equivalents, 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% increase over the $120.9 million recorded at December 31, 2009.

Accounts receivable turnover days increased to 53.4 in the three months ended 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 from 15.4 days in the year ago quarter. This increase primarily reflected management's decision to increase raw material inventory ahead of anticipated price increases and in anticipation of expected sales growth in 2010.

The Company generated $19.3 million in net cash flow from operating activities in the first six months of 2010, an increase from $17.8 million in the year ago comparable period. Management believes current working capital and borrowing capabilities are sufficient to cover their operating and capital requirements in the near future.

Business Outlook

The Company is currently in the process of negotiating with a few of its key customers for business in the second half of 2010 and plans to provide an update to its annual guidance in the near future if there is any material change.

"We delivered strong organic revenue growth of nearly 27% this quarter and continued to invest in our pipeline. Our strong balance sheet and cash flow provide us with the flexibility to invest in new products, expand our capacity and pursue additional acquisitions. We remain optimistic that we will obtain SFDA 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 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.