QUARTERLY
REPORT ON FORM 10-Q
OF
CHINA SKY ONE MEDICAL, INC. AND SUBSIDIARIES
FOR
THE PERIOD ENDED JUNE 30, 2008
TABLE
OF CONTENTS
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PAGE
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PART I
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-
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements
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1
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Condensed
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and
December
31, 2007
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1
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Condensed
Consolidated Statements of Income for the Three and Six Months
Ended June
30, 2008 and 2007 (unaudited)
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2
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Condensed
Consolidated Statements of Cash Flows for the Six Months Ended
June 30,
2008 and 2007 (unaudited)
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3
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Notes
to Condensed Consolidated Financial Statements (unaudited)
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4
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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29
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Item
4.
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Controls
and Procedures
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29
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PART II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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31
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Item
1A.
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Risk
Factors
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31
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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31
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Item
3.
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Defaults
Upon Senior Securities
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32
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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32
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Item
5.
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Other
Information
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32
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Item
6.
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Exhibits
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32
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Signatures
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33
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Exhibit
Index
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
China
Sky One Medical, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
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June
30, 2008
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December 31, 2007*
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(Unaudited)
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ASSETS
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Current
Assets
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|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
42,531,405
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|
$
|
9,190,870
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Accounts
receivable
|
|
|
9,307,335
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|
|
10,867,106
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|
Other
receivables
|
|
|
6,572
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|
|
40,200
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|
Inventories
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|
|
1,424,155
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|
371,672
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Prepaid
expenses
|
|
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32,314
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|
|
17,707
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|
Total
current assets
|
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53,301,781
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20,487,555
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Property
and equipment, net
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13,888,867
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6,861,432
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Land
deposit
|
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8,507,202
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8,003,205
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Intangible
assets, net
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4,489,344
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1,933,014
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$
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80,187,194
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$
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37,285,206
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
Liabilities
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Accounts
payable and accrued expenses
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$
|
4,193,102
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|
2,845,308
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Wages
payable
|
|
|
633,203
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|
381,482
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|
Welfare
payable
|
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|
210,730
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|
221,911
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Taxes
payable
|
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|
3,403,698
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1,567,188
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Deferred
revenues
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-
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24,504
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Total
current liabilities
|
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8,440,733
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5,040,393
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Stockholders'
Equity
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Preferred
stock ($0.001 par value, 5,000,000 shares authorized,
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none
issued and outstanding)
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-
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-
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Common
stock ($0.001 par value, 20,000,000 shares authorized,
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14,982,531
and 12,228,363 issued and outstanding, respectively)
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14,982
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12,228
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Additional
paid-in capital
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33,940,144
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9,572,608
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Accumulated
other comprehensive income
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7,635,977
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2,271,843
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Retained
earnings
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30,155,358
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20,388,134
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Total
stockholders' equity
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71,746,461
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32,244,813
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$
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80,187,194
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$
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37,285,206
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|
See
accompanying summary of accounting policies and notes to the condensed
consolidated financial statements.
* |
Derived from audited financial
statements for
the year ended December 31, 2007 (see Form 10-KSB Annual Report
filed with
the Securities and Exchange Commission on March 31,
2008).
|
China
Sky One Medical, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
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|
Three
Months Ended June 30,
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Six
Months Ended June 30,
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2008
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2007
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2008
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2007
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Revenues
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$
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23,748,592
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$
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14,645,247
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$
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36,162,022
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$
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19,824,363
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Cost
of Goods Sold
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|
5,522,314
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|
3,308,648
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8,382,742
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|
4,435,343
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Gross
Profit
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|
18,226,278
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11,336,599
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27,779,280
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15,389,020
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Operating
Expenses
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Selling,
general and administrative
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6,587,059
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5,654,199
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10,543,854
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|
7,697,975
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|
Depreciation
and amortization
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|
|
139,004
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|
137,587
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|
215,352
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|
220,942
|
|
Research
and development
|
|
|
1,372,579
|
|
|
380,630
|
|
|
2,042,412
|
|
|
395,840
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|
Total
operating expenses
|
|
|
8,098,642
|
|
|
6,172,416
|
|
|
12,801,618
|
|
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8,314,757
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|
|
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|
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Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
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Other
(expense) income
|
|
|
(35,539
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)
|
|
7,228
|
|
|
27,509
|
|
|
12,027
|
|
Interest
expense
|
|
|
(132,495
|
)
|
|
-
|
|
|
(133,642
|
)
|
|
(16,494
|
)
|
Total
other income (expense)
|
|
|
(168,034
|
)
|
|
7,228
|
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|
(106,133
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)
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|
(4,467
|
)
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|
|
|
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|
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Net
Income Before Provision for Income Tax
|
|
|
9,959,602
|
|
|
5,171,411
|
|
|
14,871,529
|
|
|
7,069,796
|
|
|
|
|
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|
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|
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Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
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Current
|
|
|
1,848,935
|
|
|
943,887
|
|
|
2,895,951
|
|
|
1,288,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
Income
|
|
$
|
8,110,667
|
|
$
|
4,227,524
|
|
$
|
11,975,578
|
|
$
|
5,781,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$
|
0.54
|
|
$
|
0.35
|
|
$
|
0.84
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
14,971,652
|
|
|
12,084,938
|
|
|
14,253,547
|
|
|
12,060,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$
|
0.50
|
|
$
|
0.34
|
|
$
|
0.78
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Weighted Average Shares Outstanding
|
|
|
16,090,211
|
|
|
12,531,385
|
|
|
15,372,106
|
|
|
12,504,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Components of Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
8,110,667
|
|
$
|
4,227,524
|
|
$
|
11,975,578
|
|
$
|
5,781,644
|
|
Foreign
currency translation adjustment
|
|
|
3,743,618
|
|
|
327,771
|
|
|
5,364,134
|
|
|
586,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
11,854,285
|
|
$
|
4,555,295
|
|
$
|
17,339,712
|
|
$
|
6,368,181
|
|
See
accompanying summary of accounting policies and notes to the condensed
consolidated financial statements.
China
Sky One Medical, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
11,975,578
|
|
$
|
5,781,644
|
|
Adjustments
to reconcile net cash provided by
|
|
|
|
|
|
|
|
operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
352,833
|
|
|
251,441
|
|
Share-based
compensation expense
|
|
|
20,234
|
|
|
215,239
|
|
Net
change in assets and liabilities
|
|
|
|
|
|
|
|
Accounts
receivables and other receivables
|
|
|
1,972,239
|
|
|
(587,516
|
)
|
Inventories
|
|
|
(807,993
|
)
|
|
(821,187
|
)
|
Prepaid
expenses
|
|
|
(14,607
|
)
|
|
91,539
|
|
Accounts
payable and accrued expenses
|
|
|
2,217,365
|
|
|
1,914,466
|
|
Advances
by customers
|
|
|
-
|
|
|
(67,541
|
)
|
Wages
payable
|
|
|
268,274
|
|
|
405,264
|
|
Welfare
payable
|
|
|
(11,181
|
)
|
|
34,484
|
|
Taxes
payable
|
|
|
1,872,324
|
|
|
1,212,705
|
|
Deferred
revenues
|
|
|
(24,504
|
)
|
|
-
|
|
Net
cash provided by operating activities
|
|
|
17,820,563
|
|
|
8,430,538
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(667,432
|
)
|
|
(2,304,372
|
)
|
Land
deposit
|
|
|
-
|
|
|
(7,664,751
|
)
|
Purchases
of subsidiaries
|
|
|
(8,437,375
|
)
|
|
-
|
|
Purchase
of intangible assets
|
|
|
(7,139
|
)
|
|
(58,751
|
)
|
Net
cash used in investing activities
|
|
|
(9,111,946
|
)
|
|
(10,027,874
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Sale
of common stock for cash, net of offering costs
|
|
|
23,487,963
|
|
|
-
|
|
Proceeds
from warrants conversion
|
|
|
840,000
|
|
|
90,000
|
|
Proceeds
from short-term loan
|
|
|
-
|
|
|
(511,672
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
24,327,963
|
|
|
(421,672
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate
|
|
|
303,955
|
|
|
586,537
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
33,340,535
|
|
|
(1,432,471
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
9,190,870
|
|
|
6,586,800
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
42,531,405
|
|
$
|
5,154,329
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,157
|
|
$
|
5,940
|
|
Taxes
paid
|
|
$
|
6,366,350
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
On
April 3, 2008, the Company acquired a 100% ownership interest
in
Heilongjiang Tianlong Pharmaceutical. Approximate net assets
acquired (see
note 2) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
$
|
6,314,871
|
|
|
|
|
Intangible
assets
|
|
|
1,786,990
|
|
|
|
|
Other
|
|
|
170,000
|
|
|
|
|
Net
assets acquired
|
|
$
|
8,271,861
|
|
|
|
|
|
|
|
|
|
|
|
|
On
April 18, 2008, the Company acquired Heilongjiang Haina Pharmaceutical
Inc. ("Haina"). Approximate net assets acquired (see note 2)
consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
$
|
437,375
|
|
|
|
|
See
accompanying summary of accounting policies and notes to the condensed
consolidated financial statements.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
The
accompanying unaudited consolidated financial statements of China Sky One
Medical, Inc., a Nevada corporation, and subsidiaries have been prepared
in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article
10 of
Regulation S-X. Accordingly, they do not include all of the information
and
footnotes required by U.S. GAAP for complete financial statements. The
financial
statements for the periods ended June 30, 2008 and 2007 are unaudited and
include all adjustments necessary to a fair statement of the results of
operations for the periods then ended. All such adjustments are of a normal
recurring nature. The results of the company's operations for any interim
period
are not necessarily indicative of the results of the company's operations
for a
full fiscal year. For further information, refer to the financial statements
and
footnotes thereto included in the company's annual report on Form 10-KSB
for the
year ended December 31, 2007 as filed with the Securities and Exchange
Commission ("SEC") on March 31, 2008.
China
Sky
One Medical, Inc. ("China Sky One" or the “Company”), a Nevada corporation, was
formed on February 7, 1986, and was formerly known as Comet Technologies,
Inc.
(“Comet”). On July 26, 2006, the change in the name of the reporting
company from "Comet Technologies, Inc." to "China Sky One Medical, Inc.,"
became
effective.
American
California Pharmaceutical Group, Inc. (“ACPG”), the Company’s non
operating United States holding company subsidiary, was incorporated on
December
16, 2003, in the State of California, under the name “QQ Group, Inc.” It changed
its name to “American California Pharmaceutical Group, Inc.” in anticipation of
the Stock Exchange Agreement with China Sky One (then known as “Comet
Technologies, Inc.”) and Harbin Tian Di Ren Medical Science and Technology
Company (“TDR”), a limited liability company organized under the laws of the
PRC, described herein. On December 8, 2005, ACPG completed a stock exchange
transaction with TDR and TDR’s subsidiaries (the “TDR Acquisition”), each of
which were fully operating companies in the PRC. Under the terms of the
agreement, ACPG exchanged 100% of its issued and outstanding common stock
for
100% of the capital stock of TDR and its subsidiaries, described below.
Thereafter,
on May 11, 2006, ACPG entered into a Stock Exchange Agreement (the “Exchange
Agreement”) with the shareholders of China Sky One. The terms of the Exchange
Agreement were consummated and the acquisition was completed on May 30,
2006. As
a result of the transaction, the Company issued a total of 10,193,377 shares
of
its common voting stock to the stockholders of ACPG, in exchange for 100%
of the
capital stock of ACPG resulting in ACPG becoming our wholly-owned subsidiary.
The transaction is treated as a reverse merger for accounting
purposes.
TDR,
formerly known as “Harbin City Tian Di Ren Medical Co.,” was originally formed
in 1994 and maintained its principal executive office in Harbin City of
Heilongjiang Province, in the PRC. TDR was reorganized and incorporated
as a
limited liability company on December 29, 2000, under the “Corporation Laws and
Regulations” of the PRC. At the time of the TDR Acquisition by ACPG in December
of 2005, TDR had two wholly-owned subsidiaries, Harbin First Bio-Engineering
Company Limited and Kangxi Medical Care Product Factory, until July, 2006,
when
the two were merged, with Harbin First Bio-Engineering Company Limited
(“First”)
as the surviving subsidiary of TDR. The principal activities of TDR and
First
are the research, manufacture and sale of over-the-counter non-prescription
health care products. TDR commenced its business in the sale of branded
nutritional supplements and over-the-counter pharmaceutical products in
the
Heilongjiang Province. TDR has subsequently evolved into an integrated
manufacturer, marketer, and distributor of external use natural Chinese
medicine
products sold primarily to and through China’s various domestic pharmaceutical
chain stores.
China
Sky
One is a holding company whose principal operations are through its
subsidiaries. It has no revenues separate from its subsidiaries, and has
nominal
expenses related to its status as a public reporting company and to its
ownership interest in ACPG, TDR and TDR’s subsidiaries in the PRC.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
2.
|
Acquisition
of Businesses
|
On
April
3, 2008, TDR completed an acquisition pursuant to an Equity Transfer Agreement
dated February 22, 2008, between TDR and Heilongjiang Tianlong Pharmaceutical,
Inc., a corporation with a multitude of State Food and Drug Administration
(“SFDA”) approved medicines and new medicine applications, organized under the
laws of the PRC (“Tianlong”), which is in the business of manufacturing
external-use pharmaceuticals. Our TDR subsidiary previously acquired the
Beijing
sales office of Tianlong in mid-2006. Pursuant to the Equity Transfer Agreement,
TDR acquired 100% of the issued and outstanding capital stock of Tianlong
from
Heilongjiang’s sole stockholder Wu Jiechen, a resident of China, in
consideration for an aggregate purchase price of approximately $8,300,000,
consisting of (i) $8,000,000 in cash, and (ii) 23,850 shares of China Sky
One
(fair value at April 3, 2008 of $271,861). The acquisition received regulatory
approval and closed on April 3, 2008.
The
following table summarizes the approximate estimated fair values of the
assets
acquired in the Tianlong acquisition:
Fixed
assets
|
|
$
|
6,314,871
|
|
Intangible
assets
|
|
|
1,786,990
|
|
Other
|
|
|
170,000
|
|
Net
assets acquired
|
|
$
|
8,271,861
|
|
On
April
18, 2008, China Sky One, through its subsidiary TDR, consummated a share
acquisition pursuant to an Equity Transfer Agreement with the shareholders
of
Heilongjiang Haina Pharmaceutical Inc., a recently formed corporation organized
under the laws of the PRC (“Haina”), licensed as a wholesaler of TCD,
bio-medicines, bio-products, medicinal devices, antibiotics and chemical
medicines. Haina does not have an established sales network and was acquired
for
its primary asset, a Good Supply Practice (GSP) license (License No.
A-HLJ03-010) issued by the Heilongjian office of the SFDA. The SFDA recently
started issuing such licenses to resellers of medicines that maintain certain
quality controls. The GSP license was issued as of December 21, 2006, and
will
expire on January 29, 2012. The GSP License will enable the Company to
expand
its sales of medicinal products without having to go through a lengthy
license
application process.
The
following table summarizes the approximate estimated fair values of the
assets
acquired in the Haina acquisition:
Intangible
assets
|
|
$
|
437,375
|
|
Pursuant
to the Equity Transfer Agreement, TDR acquired 100% of the issued and
outstanding capital stock of Haina from its three stockholders in consideration
for payment of 3,000,000 RMB (approximately $437,375). TDR has been overseeing
the operations of Haina since January of 2008 as part of its due diligence
prior
to closing of this acquisition.
The
following table contains pro forma condensed
consolidated income statement information assuming the Tianlong and Haina
transactions closed on January 1, 2007, for the six month periods ended
June 30,
2008 and 2007.
|
|
2008
|
|
2007
|
|
Revenues |
|
$ |
36,723,407 |
|
$ |
20,895,559 |
|
Operating
Income |
|
$ |
15,065,026 |
|
$ |
7,249,262 |
|
Net
Income |
|
$ |
12,052,245 |
|
$ |
5,935,209 |
|
Basic
Earnings Per Share |
|
$ |
0.85 |
|
$ |
0.49 |
|
Diluted
Earnings Per Share |
|
$ |
0.78 |
|
$ |
0.47 |
|
On
June
9, 2008, TDR entered into a Merger and Acquisition Agreement (the “Acquisition
Agreement”) with Peng Lai Jin Chuang Company, a corporation organized under the
laws of the PRC (“Jin Chuang”), which was recently organized to develop,
manufacture and distribute pharmaceutical, medicinal and diagnostic products
in
the PRC. Pursuant to the Acquisition Agreement, TDR shall acquire all of
the assets of Jin Chuang in consideration for an aggregate of approximately
(i)
$2,500,000 in cash, and (ii) 381,606 shares of common stock of the Registrant
(fair value of approximately $4,600,000). The acquisition, which is subject
to
the Registrant’s due diligence review of Jin Chuang, had not closed as of June
30, 2008.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Basis
of Preparation of Financial
Statements
|
Principles
of Consolidation – The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
ACPG,
TDR, First, Haina and Tianlong. All significant inter-company transactions
and
balances were eliminated.
The
accompanying financial statements are stated in U.S. Dollars and have been
prepared in accordance with accounting principles generally accepted in
the
United States of America. This basis of accounting differs from that used
under
applicable accounting requirements in the PRC. No material adjustment was
required.
4.
|
Summary
of Significant Accounting
Policies
|
Use
of estimates –
The
preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, disclosure of contingent assets and liabilities
at the
dates of the financial statements, and the reported amounts of revenues
and
expenses during the reported periods.
Significant
estimates included values and lives assigned to acquired tangible and intangible
assets, reserves for customer returns and allowances, uncollectible accounts
receivable, valuation of equity issuances such as shares of the Company’s common
stock and stock options and warrants to purchase shares of the Company’s common
stock, and slow moving and/or obsolete/damaged inventory. Actual results
may
differ from these estimates.
Earnings
per share - Basic
net
earnings per common share is computed by dividing net earnings applicable
to
common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted net earnings per common share is determined
using the
weighted-average number of common shares outstanding during the period,
adjusted
for the dilutive effect of common stock equivalents, consisting of shares
that
might be issued upon exercise of common stock options and warrants.
Cash
and cash equivalents – The Company
considers all highly liquid debt instruments purchased with maturity period
of
six months or less to be cash equivalents. The carrying amounts reported
in the
accompanying consolidated balance sheets for cash and cash equivalents
approximate their fair value.
Accounts
receivable – Accounts
receivable are stated at net realizable value, net of an allowance for
doubtful
accounts. Provision of allowance is made for estimated bad debts based
on a
periodic analysis of individual customer balances including an evaluation
of
days of sales outstanding, payment history, recent payment trends, and
perceived
credit worthiness. At June 30, 2008, the Company’s allowance for doubtful
accounts was $10,735. At December 31, 2007, the Company had no allowance
for
doubtful accounts.
Inventories –
Inventories include finished goods, raw materials, freight-in, packing
materials, labor, and overhead costs accounted for using the weighted average
method. Provisions are made for slow moving, obsolete and/or damaged inventory
based on a periodic analysis of individual inventory items including an
evaluation of historical usage and/or movement, age, expiration date, and
general conditions. There was no inventory reserve provision recorded at
June
30, 2008 and December 31, 2007.
Property
and equipment –
Property and equipment are stated at historical cost less accumulated
depreciation. Depreciation on property, plant, and equipment is provided
using
the straight-line method over the estimated useful lives of the assets.
An
estimated residual value of 5% of cost, or valuation, was made for each
items
for both financial and income tax reporting purposes. The estimated lengths
of
useful lives are as follows:
Buildings
|
|
30 years
|
Land use rights
|
|
50 years
|
Furniture & equipment
|
|
5 to 7 years
|
|
|
5 to 15 years
|
Machinery
|
|
7 to 14 years
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
4.
|
Summary
of Significant Accounting Policies
(continued)
|
Expenditures for
renewals and betterments is capitalized while repairs and maintenance
costs are
normally charged to the statement of operations in the year in which
they were
incurred. In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic benefits
expected
to obtain from the use of the asset, the expenditure is capitalized as
an
additional cost of the asset. Upon sale or disposal of an asset, the
historical
cost and related accumulated depreciation or amortization of such asset
were
removed from their respective accounts, and any gain or loss is recorded
in the
statements of operations.
Property
and equipment are evaluated for impairment in value annually or whenever
an
event or change in circumstances indicates that the carrying values may
not be
recoverable. If such an event or change in circumstances occurs and potential
impairment is indicated because the carrying values exceed the estimated
future
undiscounted cash flows of the asset, the Company will measure the impairment
loss as the amount by which the carrying value of the asset exceeds its
fair
value.
Construction-in-progress –
Properties currently under development are accounted for as
construction-in-progress. Construction-in-progress is recorded at acquisition
cost, including land rights cost, development expenditures, professional
fees,
and the interest expenses for the purpose of financing the project capitalized
during the course of construction.
Upon
completion and readiness for use of the project, the cost of
construction-in-progress is to be transferred to the facility. In the case
of
construction-in-progress, management takes into consideration the estimated
cost
to complete the project when making the lower of cost or market
calculation.
Intangible
assets – Intangible
assets consists of patents, distribution rights and customer lists. Patent
costs
are being amortized over a total life of ten years. Distribution rights
and
customer lists are being amortized over ten years.
Intangible
assets are accounted for in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill
and Other Intangible Assets
(“SFAS
142”). Intangible assets with finite useful lives are amortized while
intangible assets with indefinite useful lives are not amortized. As prescribed
by SFAS 142, goodwill and intangible assets are tested periodically for
impairment. The Company adopted SFAS No. 144, "Accounting for the Impairment
or
Disposal of Long- Lived Assets," effective January 1, 2002. Accordingly,
the
Company reviews its long-lived assets, including property and equipment
and
finite-lived intangible assets for impairment whenever events or changes
in
circumstances indicate that the carrying amount of the assets may not be
fully
recoverable. To determine recoverability of its long-lived assets, the
Company
evaluates the probability that future undiscounted net cash flows will
be less
than the carrying amount of the assets. Impairment costs, if any, are measured
by comparing the carrying amount of the related assets to their fair value.
There were no impairments of long-lived assets during the six months ended
June
30, 2008 and 2007.
Foreign
Currency -
The
Company’s principal country of operations is in The People’s Republic of China.
The financial position and results of operations of the Company are recorded
in
RMB as the functional currency. The results of operations denominated in
foreign
currency are translated at the average rate of exchange during the reporting
period.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
4.
|
Summary
of Significant Accounting Policies
(continued)
|
Assets
and liabilities denominated in foreign currencies at the balance sheet
date are
translated at the market rate of exchange ruling at that date. The registered
equity capital denominated in the functional currency is translated at
the
historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements
into the
reporting currency (“US Dollars”) are recorded as accumulated other
comprehensive income, a component of stockholders’ equity.
Revenue
recognition–
Revenue
is recognized when the following criteria are met: (1) persuasive evidence
of an arrangement exists; (2) the product has been shipped and the customer
takes ownership and assumes the risk of loss; (3) the selling price is
fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied
upon
shipment from its facilities. Revenue is reduced by provisions for estimated
returns and allowances as well as specific known claims, if any, which
are based
on historical averages that have not varied significantly for the periods
presented.
The
Company occasionally applies to various government agencies for research
grants.
Revenue from such research grants is recognized when earned. In situations
where
TDR receives payment in advance for the performance of research and development
services, such amounts are deferred and recognized as revenue as the related
services are performed.
Deferred
revenues - The
Company recognizes revenues as earned. Amounts billed in advance of the
period
in which goods are delivered are recorded as a liability under “Deferred
revenues.”
Research
and development—Research
and development expenses include the costs associated with the Company’s
internal research and development as well as research and development conducted
by third parties. These costs primarily consist of salaries, clinical trials,
outside consultants, and materials. All research and development costs
are
expensed as incurred.
Third-party
expenses reimbursed under non-refundable research and development contracts
are
recorded as a reduction to research and development expense in the statement
of
operations.
The
Company recognizes in-process research and development in accordance with
FASB
Interpretation No. 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method and
the AICPA
Technical Practice Aid, Assets Acquired in a Business Combination to be
used in
Research and Development Activities: A Focus on Software, Electronic
Devices, and Pharmaceutical Industries. Assets to be used in research and
development activities, specifically, compounds that have yet to receive
new
drug approval and would have no alternative use, should approval not be
given,
are immediately charged to expense when acquired.
For
the
six months ended June 30, 2008, the Company incurred $2,042,412
in
research and development costs and $395,840 for the six months ended June
30,
2007.
Advertising—Advertising
and promotion costs are expensed as incurred. Total advertising costs for
the six months ended June 30, 2008 and 2007 was $3,165,426
and
$1,943,172,
respectively. Advertising costs are reported as part of selling, general
and
administrative expenses in the statements of operations.
Taxation –
The
Company uses the asset and liability method of accounting for deferred
income
taxes. The Company’s provision for income taxes includes income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities. The
Company records liabilities for income tax contingencies based on our best
estimate of the underlying exposures.
The
Company estimates its tax obligations using historical experience in tax
jurisdictions and informed judgments. There are inherent uncertainties
related
to the interpretation of tax regulations in the jurisdictions in which
the
Company transacts business. The judgments and estimates made at a point
in time
may change based on the outcome of tax audits, as well as changes to, or
further
interpretations of, regulations. The Company adjusts income tax expense in
the period in which these events occur.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
4.
|
Summary
of Significant Accounting Policies
(continued)
|
Provision
for the PRC enterprise income tax is calculated at the prevailing rate
based on
the estimated assessable profits less available tax relief for losses
brought
forward.
The
Company does not accrue taxes on unremitted earnings from foreign operations
as
it is the Company’s intention to invest these earnings in the foreign operations
indefinitely.
Enterprise
income tax
Under
the
Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated
by the PRC, income tax is payable by enterprises at a rate of 25% of their
taxable income. Preferential tax treatment may, however, be granted pursuant
to
any law or regulations from time to time promulgated by the State
Council.
According
to “Enterprise Income Tax and Certain Preferential Policies Notice” published by
the Ministry of Finance and the National Tax Affairs Bureau, if the enterprise
is authorized by the State Council as a special entity, the enterprise
income
tax rate is reduced to 15%. The income tax rate for TDR and Tianlong is
15%
based on State Council approval.
Value
added tax
The
Provisional Regulations of PRC Concerning Value Added Tax promulgated by
the
State Council came into effect on January 1, 1994. Under these regulations
and
the Implementing Rules of the Provisional Regulations of the PRC Concerning
Value Added Tax, value added tax is imposed on goods sold in, or imported
into,
the PRC and on processing, repair and replacement services provided within
the
PRC.
Value
added tax payable in the PRC is charged on an aggregated basis at a rate
of 13%
or 17% (depending on the type of goods involved) on the full price collected
for
the goods sold or, in the case of taxable services provided, at a rate
of 17% on
the charges for the taxable services provided, but excluding, in respect
of both
goods and services, any amount paid in respect of value added tax included
in
the price or charges, and less any deductible value added tax already paid
by
the taxpayer on purchases of goods and services in the same financial
year.
According
to “Agriculture Product Value Added Tax Rate Adjustment and Certain Items’ Value
Added Tax Waiver” published by the Ministry of Finance and the National Tax
Affairs Bureau, the value added tax for agriculture related products is
to be
taxed at 13%. Furthermore, traditional Chinese medicine and medicinal plant
are
by definition agriculture related products.
Comprehensive
Income – Comprehensive
income consists of net income and other gains and losses affecting stockholders’
equity that, under generally accepted accounting principles are excluded
from
net income. For the Company, such items consist entirely of foreign currency
translation gains and losses.
Related
companies –
A
related company is a company in which the director has beneficial interests
in
and in which the Company has significant influence.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
4.
|
Summary
of Significant Accounting Policies
(continued)
|
Retirement
benefit costs –
According to the PRC regulations on pension plans, the Company contributes
to a
defined contribution retirement plan organized by the municipal government
in
the province in which the Company was registered and all qualified employees
are
eligible to participate in the plan.
Contributions
to the pension or retirement plan are calculated at 23.5% of the employees’
salaries above a fixed threshold amount. The employees contribute between
2% to 8% to the pension plan, and the Company contributes the balance .
The
Company has no other material obligations for the payment of retirement
benefits
beyond the annual contributions under this plan.
Fair
value of financial instruments – The
carrying amounts of certain financial instruments, including cash and cash
equivalents , accounts receivable, other receivables, accounts payable,
accrued
expenses, and other payables approximate their fair values as at June 30,
2008 and December 31, 2007 because of the relatively short-term maturity
of
these instruments.
Recent
accounting pronouncements
In
February 2007, the FASB issued Statement No. 159 “The Fair Value Option
for Financial Assets and Financial Liabilities” (SFAS 159). This statement
permits companies to choose to measure many financial assets
and
liabilities at fair value. Unrealized gains and losses on items
for which
the fair value option has been elected are reported in earnings.
SFAS 159
is effective for fiscal years beginning after November 15, 2007.
The
adoption of SFAS 159, effective January 1, 2008, did not have
a material
impact on the Company’s financial statements.
|
In
September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157,
Fair Value Measurements
(“SFAS 157”). The statement provides enhanced guidance for using
fair value to measure assets and liabilities and also responds
to
investors’ requests for expanded information about the extent to which
company’s measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements
on
earnings. While the standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair
value, it
does not expand the use of fair value in any new circumstances.
Statement No. 157 is effective for financial statements issued
for fiscal
periods beginning after November 15, 2007. This statement did
not have a
material impact on the Company’s financial statements.
|
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
business combinations. Under SFAS No. 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities
assumed in a transaction at the acquisition-date fair value with
limited
exceptions. SFAS No. 141(R) will change the accounting treatment and
disclosure for certain specific items in a business combination.
SFAS
No. 141(R) applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first
annual
reporting period beginning on or after December 15, 2008. SFAS 141(R)
will impact the Company in the event of any acquisition after
December 31,
2008.
|
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research
Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and
reporting standards for the non-controlling interest in a subsidiary
and
for the deconsolidation of a subsidiary. SFAS No. 160 is effective
for fiscal years beginning on or after December 15, 2008. The Company
does not believe that SFAS 160 will have a material impact on
the
Company’s financial statements.
|
In
March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
("SFAS 161"). This Statement will require enhanced disclosures
about
derivative instruments and hedging activities to enable investors
to
better understand their effects on an entity's financial position,
financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning
after
November 15, 2008, with early application encouraged. We are
assessing the impact of the adoption of this
Statement.
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
5.
|
Concentrations
of Business and Credit
risk
|
The
Company maintains certain bank accounts in the PRC which are not protected
by
FDIC insurance or other insurance. As of June 30, 2008 the Company held
$2,433,863 of cash balances within the United States of which $2,133,863
was in
excess of FDIC insurance limits. At June 30, 2008, the Company had $40,097,542,
in China bank deposits, which may not be insured. Historically, the Company
has
not experienced any losses in such accounts.
Nearly
all of the Company’s sales are concentrated in China. Accordingly, the Company
is susceptible to fluctuations in its business caused by adverse economic
conditions in this country. Difficult economic conditions in other geographic
areas into which the Company may expand may also adversely affect its business,
operations and finances.
The
Company provides credit in the normal course of business. Substantially
all
customers are located in PRC. The Company performs ongoing credit evaluations
of
its customers and maintains allowances for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends, and
other
information.
Substantially
all of the Company's fixed assets and operations are located in the PRC.
The
Company is self-insured for all risks and carries no liability or property
insurance coverage of any kind.
Substantially
all of the Company's business are generated from operations in mainland
China.
Major
Customers
For
the
three and six months ended June 30, 2008 and 2007 no individual customer
accounted for more than 10% of sales revenues.
Major
Suppliers
Heilongjiang
Kangda Medicine Co. accounted for approximately 45% of the Company’s inventory
purchases for the six months ended June 30, 2008. There were no major single
suppliers during the six months ended June 30, 2007.
Payments
of dividends may be subject to some restrictions due to the Company’s operating
subsidiaries all being located in the PRC.
We
have
applied SFAS No. 128, “Earnings Per Share” in its calculation and presentation
of earnings per share - “basic” and “diluted”. Basic earnings per share are
computed by dividing net earnings available to common shareholders (the
numerator) by the weighted average number of common shares (the denominator)
for
the period presented. The computation of diluted earnings per share is
similar
to basic earnings per share, except that the denominator is increased to
include
the number of additional common shares that would have been outstanding
if the
potentially dilutive common shares had been issued.
Stock
warrants and options to purchase 1,147,796 shares of common stock were
outstanding and exercisable during the six months ended June 30, 2008.
Stock warrants and options to purchase 1,798,500 shares of common stock,
all but
113,500 of which were exercisable and outstanding during the six months
ended
June 30, 2007, were included in the computation of diluted earnings per
share because the option exercise prices were less than the average market
price
of our common stock during these periods.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
6.
|
Earnings
per share
(continued)
|
The
dilutive potential common shares on warrants and options is calculated
in
accordance with the treasury stock method, which assumes that proceeds
from the
exercise of all warrants and options are used to repurchase common stock
at
market value. The amount of shares remaining after the proceeds are exhausted
represent s the potential dilutive effect of the securities.
The
following table sets forth our computation of basic and diluted net income
(loss) per share:
|
|
Three months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income used in calculation of basic and diluted earnings per
share
|
|
$
|
8,110,667
|
|
$
|
4,227,524
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding used in calculation of basic earnings
per
share
|
|
|
14,971,652
|
|
|
12,084,938
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Stock
options and equivalents
|
|
|
1,118,559
|
|
|
446,447
|
|
Weighted-average
common shares used in calculation of diluted earnings (loss)
per
share
|
|
|
16,090,211
|
|
|
12,531,385
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.54
|
|
$
|
0.35
|
|
Diluted
|
|
$
|
0.50
|
|
$
|
0.34
|
|
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income used in calculation of basic and diluted earnings per
share
|
|
$
|
11,975,578
|
|
$
|
5,781,644
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding used in calculation of basic earnings
per
share
|
|
|
14,253,547
|
|
|
12,060,865
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Stock
options and equivalents
|
|
|
1,118,559
|
|
|
443,980
|
|
Weighted-average
common shares used in calculation of diluted earnings per
share
|
|
|
15,
372,106
|
|
|
12,504,845
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.84
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.78
|
|
$
|
0.46
|
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
7.
|
Equity
and Share-based Compensation
|
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123R, Share-Based Payment (“SFAS No. 123R”), for options granted
to employees and directors, using the modified prospective transition method,
and therefore have not restated results from prior periods. Compensation
cost
for all stock-based compensation awards granted is based on the grant date
fair
value estimated in accordance with the provisions of SFAS No. 123R. Under
the fair value recognition provisions of SFAS No. 123R, we recognize
stock-based compensation net of an estimated forfeiture rate and only recognize
compensation cost for those shares expected to vest on a straight-line
prorated
basis over the requisite service period of the award. In March 2005, the
SEC
issued Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB
No. 107”), regarding the SEC’s guidance on SFAS No. 123R and the
valuation of share-based payments for public companies. We have applied
the
provisions of SAB No. 107 in the adoption of SFAS No. 123R. Under SFAS
123R, the Company remeasures the intrinsic value of the options at the
end of
each reporting period until the options are exercised, cancelled or expire
unexercised.
In
July
2006, the Company’s stockholders approved the 2006 Stock Incentive Plan (the
“2006 Plan”). The 2006 Plan, provides for the grant of stock options, restricted
stock awards, and performance shares to qualified employees, officers,
directors, consultants and other service providers. The 2006 Plan originally
authorized the Company to grant options and/or rights to purchase up to
an
aggregate of 1,500,000 shares of common stock. As of June 30, 2008,
non-qualified options to purchase a total of 113,500 shares have been granted
under the 2006 Stock Incentive Plan. All options were granted in October
2006.
All options have an exercise price of $3.65 per share, the weighted fair
market
value on the date of grant was $4.25 per share. Of these 113,500 options
a total
of 60,500 were granted to employees and a total of 53,000 were granted
to
consultants. These options were valued under the following Black-Scholes
assumptions: no dividends; risk-free interest rate of 4%; a contractual
life of
5 years and volatility of 39%. An additional 50,000 shares registered under
the
2006 Plan were issued outright to employees of the Company. All 113,500
options
vest over various periods for the various options granted to employees
and
consultants. There were no options granted in the six months ended June
30,
2008. As of June 30, 2008, these options have a remaining life of approximately
4 years, and remain outstanding and continue to be remeasured at the intrinsic
value over their remaining vesting period ranging from 6 months to 2 years.
Compensation expense in any given period is calculated as the difference
between
total earned compensation at the end of the period, less total earned
compensation at the beginning of the period. Compensation earned is calculated
on a straight line basis over the requisite service period for any give
option
award. The effect of adoption of the new standard for the six months ended
June
30, 2008 and 2007 related to stock options to employees were additional
non-cash
expenses of $10,117.
Options
or stock awards issued to non-employees and consultants are recorded at
their
fair value as determined in accordance with SFAS No. 123R and EITF
No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, and
recognized over the related vesting or service period. In connection with
closing of the Stock Exchange Agreement, the Company agreed to grant warrants
to
advisors for the services they already performed for the reverse merger
in July
2006, entitling them to purchase up to 500,000 shares on or before July
31,
2009, at a price of US$2.00 per share and options to purchase up to 50,000
shares on or before December 20, 2008 at a price of US$3.00 per share.
The
fair value of these warrants and options were determined to be $772,275
and
deducted as expenses using the Black-Scholes option-pricing model with
the
following weighted assumptions: no dividends; risk-free interest rate of
4%; the contractual life of 2.5-3.5 years and volatility of 39%. The Company
based its estimate of expected volatility on the historical, expected or
implied
volatility of similar entities whose share or option prices are publicly
available.
One
January 3, 2007, the holder of 50,000 warrants dated March 11, 1999,
granted
prior to the May 30, 2006 company reorganization, stock exchange exercised
the
warrants by electing to use cashless conversion provision of the warrants
and
acquired 5,160 shares of the Company common stock (after giving effect
to the
8-to-1 reverse stock split effected after the warrant was issued).
At
various times during the six months ended June 30, 2008 warrant holders
exercised their warrants, at various exercise prices, for total proceeds
of
approximately $840,000.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
8.
|
Securities
Purchase Agreement and Related
Transaction
|
On
January 31, 2008, China Sky One entered into a Securities Purchase Agreement
(the “Securities Purchase Agreement”) with certain accredited investors, for the
purchase and sale of units consisting of: (i) one (1) share of the Company’s
common stock; and (ii) 750,000 Class A Warrants exercisable at $12.50 per
share,
and expiring on July 31, 2011 (the “Class A Warrants”), for a purchase price of
$10.00 per Unit (the “January 2008 Offering”), and gross offering proceeds of
$25,000,000.
Holders
of the 2,500,000 shares of common stock sold in the Company’s January 2008
Offering have certain put rights and rights to receive additional shares
from
the Company if it sells low priced securities or from certain key shareholders
in the event that certain thresholds are not met, in addition to registration
rights. Specifically, these investors have:
|
·
|
The
right to receive additional shares of common stock from China
Sky One in
the event that the Company sells shares (or convertible securities
or
warrants convertible into or exercisable for common stock) prior
to
January 31, 2009 at per share price (or exercise or conversion
price) of
less than $10.00, in such amount so as to reduce the average
price paid by
such shareholder to the price per share being paid by the new
investors,
and
|
|
·
|
The
right to receive up to 3,000,000 shares deposited into escrow
by the
Company’s principal shareholder, in the event that fails to attain
Earnings Per Share, as adjusted of at least (i) $1.05 per share
for fiscal
year ended December 31, 2007 based on fully diluted shares outstanding
before the January 2008 offering (an aggregate of 13,907,696),
and/or (ii)
$1.63 per share for fiscal year ending December 31, 2008 based
on fully
diluted shares outstanding after the January 2008 Offering (an
aggregate
of 16,907,696 shares). While the Company has satisfied the criterion
of
(i) above for 2007, no assurance can be made that we will satisfy
our
earnings goal for 2008.
|
The
Class
A Warrants represent the right to purchase an aggregate of 750,000 shares
of
common stock, at an exercise price of $12.50 per share. Additional information
relating to these Class A Warrants is provided in Note 9 to this Quarterly
Report on Form 10-Q.
9.
|
Outstanding
Warrants and Options
|
|
|
Shares
Underlying
Warrants
|
|
Weighted
average
Exercise
Price
Warrants
|
|
Shares
underlying
Options
|
|
Weighted
average
Exercise
Price
Options
|
|
Outstanding as of January
1, 2006
|
|
|
25,000
|
|
$
|
1.50
|
|
|
-
|
|
|
|
|
Granted
|
|
|
1,650,000
|
|
|
2.58
|
|
|
163,500
|
|
$
|
3.45
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Expired
or cancelled
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
as of December 31, 2006
|
|
|
1,675,000
|
|
|
2.57
|
|
|
163,500
|
|
$
|
3.45
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Expired
or cancelled
|
|
|
(161,667
|
)
|
|
3.19
|
|
|
-
|
|
|
-
|
|
Outstanding
as of December 31, 2007
|
|
|
1,513,333
|
|
$
|
2.48
|
|
|
163,500
|
|
$
|
3.45
|
|
Granted
|
|
|
750,000
|
|
|
12.50
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(277,502
|
)
|
|
3.03
|
|
|
-
|
|
|
-
|
|
Expired
or cancelled
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
as of June 30, 2008
|
|
|
1,985,831
|
|
$
|
6.14
|
|
|
163,500
|
|
$
|
3.45
|
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
9.
|
Outstanding
Warrants and Options
(continued)
|
The
following table summarizes information about stock warrants outstanding
and
exercisable as of June 30, 2008.
Exercise
Price
|
|
Outstanding
June 30,,
2008
|
|
Weighted
Average
Remaining
Life in
Years
|
|
Number
exercisable
|
|
$
|
2.00
|
|
1,000,000
|
|
1.08
|
|
1,000,000
|
|
$
|
3.50
|
|
235,831
|
|
.28
|
|
235,831
|
|
$
|
12.50
|
|
750,000
|
|
2.75
|
|
-
|
|
|
|
|
1,985,831
|
|
|
|
1,235,831
|
|
Out of the 1,985,831 outstanding
warrants, 1,235,831 were exercisable as of June 30, 2008.
The
Class
A Warrants issued in our January 2008 Offering described in Note 8 above,
represent the right to purchase an aggregate of 750,000 shares of common
stock,
at an exercise price of $12.50 per share, and have the following additional
characteristics:
|
·
|
The
Class A Warrants are exercisable beginning on the six-month anniversary
of
the closing of the January 2008 Offering and will expire July
31,
2011.
|
|
·
|
Commencing
on one-year anniversary of the Closing Date, in the event the
Warrant
Shares may not be freely sold by the holders of the Class A Warrants
due
to the Company’s failure to satisfy its registration requirements, and an
exemption for such sale is not otherwise available to the Warrant-holders
under Rule 144, the Class A Warrants will be exercisable on a
cashless
basis.
|
|
·
|
The
Exercise Price and number of Warrant Shares will be subject to
adjustment
for standard dilutive events, including the issuance of common
stock, or
securities convertible into or exercisable for shares of common
stock, at
a price per share, or conversion or exercise price per share
less than the
Class A Warrant exercise price of $12.50 per
share.
|
|
·
|
At
anytime following the date a Registration Statement covering
the Warrant
Shares is declared effective, we will have the ability to call
the Class A
Warrants at a price of $0.01 per Class A Warrant, upon thirty
(30) days
prior written notice to the holders of the Class A Warrants,
provided (i)
the closing price of the common stock exceeded $18.75 for each
of the ten
(10) consecutive trading days immediately preceding the date
that the call
notice is given by the Company, and (ii) the Company has attained
an
Adjusted EPS of at least $1.63 per share for the fiscal year
ending
December 31, 2008, as set forth in our audited financial statements
of the
Company.
|
|
·
|
If,
among other things, we fail to cause a Registration Statement
covering the
Warrant Shares to be declared effective prior to the applicable
dates set
forth in the Registration Rights Agreement, the expiration date
of the
Class A Warrants shall be extended one day for each day beyond
the
Effectiveness Deadlines.
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
9.
|
Outstanding
Warrants and Options
(continued)
|
|
·
|
If
a Warrant-holder exercises its Put Right under the Put Agreement
(as
previously defined above), such Warrant-holder’s right to exercise the
Class A Warrants shall be suspended, pending the satisfaction
of our
obligations to pay the Warrant-holder the applicable Repurchase
Price.
Upon receipt of the Repurchase Price in full by the Warrant-holder,
the
Warrant-holder’s right to exercise the Class A Warrants shall
automatically and permanently terminate and expire, and the Class
A
Warrants shall be immediately cancelled on the books of the
Company.
|
The
following table summarizes information about stock options outstanding
and
exercisable as of June 30, 2008.
Exercise
Price
|
|
Outstanding
June 30 ,
2008
|
|
Weighted
Average
Remaining
Life in
Years
|
|
Exercisable
Options
|
|
Unvested
Options
|
|
$
|
3.00
|
|
50,000
|
|
.28
|
|
50,000
|
|
-
|
|
$
|
3.65
|
|
113,500
|
|
3.50
|
|
54,150
|
|
59,350
|
|
|
|
163,500
|
|
|
|
104,150
|
|
59,350
|
|
The Company values its
inventories at the lower of cost and market method. Inventories are accounted
for using the first-in, first-out method. Inventories include packing materials,
raw materials, supplemental materials, work-in-process, and finished
products.
As
of
June 30, 2008 and December 31, 2007, inventories consist of the
following:
|
|
June 30, 2008
|
|
December 31,
2007
|
|
Raw
Material
|
|
$
|
296,666
|
|
$
|
252,318
|
|
Supplemental
Material
|
|
|
233,152
|
|
|
32,296
|
|
Work-in-Process
|
|
|
411,108
|
|
|
57,337
|
|
Finished
Products
|
|
|
483,229
|
|
|
29,721
|
|
Total
Inventories
|
|
$
|
1,424,155
|
|
$
|
371,672
|
|
11.
|
Property
and Equipment
|
As
of June 30, 2008 and December 31, 2007, Property and Equipment consist
of the
following:
|
|
June 30, 2008
|
|
December 31,
2007
|
|
Buildings
|
|
$
|
7,120,444
|
|
|
2,861,011
|
|
Machinery
and equipment
|
|
|
3,166,352
|
|
|
1,568,958
|
|
Land
use rights
|
|
|
1,148,066
|
|
|
563,469
|
|
Transportaion
equipment
|
|
|
786,718
|
|
|
318,779
|
|
Furniture
and equipment
|
|
|
228,693
|
|
|
96,501
|
|
Construction
in progress
|
|
|
2,248,177
|
|
|
2,113,957
|
|
Total
Property and Equipment
|
|
|
14,698,450
|
|
|
7,522,675
|
|
Less:
Accumulated Depreciation
|
|
|
(809,583
|
)
|
|
(661,243
|
)
|
Property
and Equipment, Net
|
|
$
|
13,888,867
|
|
$
|
6,861,432
|
|
For
the six months ended June 30, 2008 and 2007,
depreciation expense totaled $213,935 and $124,724 respectively. In addition,
depreciation included in cost of goods sold for the six months ended June
30,
2008 and 2007 was $137,481 and $30,499, respectively.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
As
of the
six months ended June 30, 2008 and December 31, 2007, the Company’s net
unamortized intangible assets consist of:
|
|
June 30, 2008
|
|
December 31,
2007
|
|
Patents
|
|
$
|
3,741,859
|
|
$
|
1,599,814
|
|
Distribution
rights and customer lists
|
|
|
747,485
|
|
|
333,200
|
|
Total
Intangible Assets, net
|
|
$
|
4,489,344
|
|
$
|
1,933,014
|
|
Amortization
expense for the six months ended June 30, 2008 and 2007 was $138,898,
and
$126,717 respectively.
Patents
are amortized over the life of the patent of ten years and the distribution
rights and customer lists are amortized over ten years.
Taxes
payable consists of the following:
|
|
June 30, 2008
|
|
December 31,
2007
|
|
Value Added Tax, net
|
|
$
|
1,433,931
|
|
$
|
612,602
|
|
Enterprise
Income Tax
|
|
|
1,887,104
|
|
|
940,819
|
|
City
Tax
|
|
|
27,563
|
|
|
4,789
|
|
Other
Taxes and additions
|
|
|
55,100
|
|
|
8,978
|
|
Total
Taxes Payable
|
|
$
|
3,403,698
|
|
$
|
1,567,188
|
|
14.
|
Land
Use Rights Purchase
Agreement
|
During
the second quarter in 2007 TDR entered into an agreement with the Development
and Construction Administration Committee of Harbin Song Bei New Development
District to purchase the land use rights for 50 years for development of
a new
biotech engineering project. Terms of the agreement called for a deposit
of 30%
of the total land price within 15 days after signing the agreement, 40%
payment
7 days prior to the start of construction and the balance of 30% 7 days
after
getting the formal land use right.
The
project consists of two phases:
|
(1)
|
Construction
of main workshop, R&D center and office using land area of 30,000
square meters. Construction started in May 2007 and is projected
to be
completed by end of 2008.
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
14.
|
Land
Use Rights Purchase Agreement
(continued)
|
|
(2)
|
Construction
of Second workshop and show room using land area of 20,000 square
meters.
Construction is expected to start in September 2008 to be completed
by
December 2009.
|
TDR
has
committed to the Development and Construction Administration Committee
of the
Harbin Song Bei New Development District that the minimum investment per
square
meter will be $394.
As
of
June 30, 2008 and December 31, 2007, the Company has deposits totaling
$8,507,202 and $8,003,205 respectively, related to the acquisition of these
land
use rights.
15.
|
Commitments
and Contingencies
|
The
formulation, manufacturing, processing, packaging, labeling, advertising,
distribution and sale of external use Chinese medicine such as those sold
by the
Company are subject to regulations by one or more federal agencies. The
principal federal agencies include the State Food and Drug Administration
of the
Government of the Peoples Republic of China, the Food and Drug Administration
(the “FDA”), Heilongjiang Provincial Food and Drug Administration of the
People's Republic of China (PFDA), National Biology Products Inspection
Institute (NBPI) and the National Food and Drug Administration (NFDA) of
the
People's Republic of China and, to a lesser extent, the Consumer Product
Safety
Commission. These activities are also regulated by various governmental
agencies
for the countries, states and localities in which the Company’s products are
sold.
Although
management believes that the Company is in material compliance with the
statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company’s compliance with the
applicable statutes, laws, rules and regulations will not be challenged by
governing authorities or private parties, or that such challenges will
not lead
to material adverse effects on the Company’s financial position, results of
operations, or cash flows.
The
Company, like any other distributor or manufacturer of products is exposed
to
the inherent risk of product liability claims in the events of possible
injuries
caused by the use of its products. The Company does not have liability
insurance
with respect to product liability claims. The insurance environment of
China is
neither sufficient nor mature. Inadequate insurance or lack of contractual
indemnification from parties supplying raw materials or marketing its products,
and product liabilities related to defective products could have a material
adverse effects on the Company.
The
Company is not involved in any legal matters arising in the normal course
of
business. While incapable of estimation, in the opinion of the management,
the
individual regulatory and legal matters in which the Company might be involved
in the future are not expected to have a material adverse effect on the
Company’s financial position, results of operations, or cash flows.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
FORWARD
LOOKING STATEMENTS
The
following discussion should be read in conjunction with the information
contained in our consolidated financial statements and the notes thereto
appearing elsewhere herein, and in the risk factors and “Forward Looking
Statements” summary set forth in the forepart of our Annual Report for the year
ended December 31, 2007. This quarterly report on Form 10-Q contains
forward-looking statements that are afforded the safe harbor provisions
of
Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended. Readers should carefully review the risk
factors disclosed in our Annual Report for the year ended December 31,
2007, and
other documents filed by us with the SEC.
DISCUSSION
We
primarily generate revenues, through our China based indirect subsidiaries
described below, in the development, manufacture, marketing and sale of
over-the-counter, branded nutritional supplements and over-the-counter
plant and
herb based pharmaceutical and medicinal products. Our principal
products are external use Traditional Chinese Herbal Remedies/ Medicines
commonly referred to in the industry as “TCM.” We have evolved into an
integrated manufacturer, marketer and distributor of external use Chinese
medicine products sold primarily in China and through Chinese domestic
pharmaceutical chains and have been expanding our worldwide sales effort
as
well. We sell both our own manufactured products, as well as medicinal and
pharmaceutical products manufactured by others in China.
We
achieved continuing growth on the sale of our own product line and products
which we sell through our distribution channel. For the three months ended
June 30, 2008, total revenue was $23,748,592, a 62% increase over the same
period in 2007, and net income was $8,110,667, or $0.50 per share, compared
to net income of $4,227,524, or $0.34 per share on a diluted basis in the
same
period in 2007. For the six months ended June 30, 2008, total revenue was
$36,162,022, an 82% increased over the same period in 2007, and net income
was $11,975,578, or $0.78 per share compared to net income of $5,781,644,
or $0.46 per share on a diluted basis in the same period in 2007.
All
of
our business is conducted through our wholly-owned subsidiary, ACPG which,
in
turn, wholly owns Harbin Tian Di Ren Medical Science and Technology Company
(referred to herein as “TDR”) a company organized in the PRC and TDR’s
subsidiaries.
TDR,
formerly known as “Harbin City Tian Di Ren Medical Co.,” was originally formed
in 1994 and maintained its principal executive office in Harbin City of
Heilongjiang Province, in the PRC. TDR was reorganized and incorporated
as a
limited liability company on December 29, 2000, under the “Corporation Laws and
Regulations” of the PRC. At the time of the TDR’s acquisition by ACPG in
December of 2005, TDR had two wholly-owned subsidiaries, Harbin First
Bio-Engineering Company Limited and Kangxi Medical Care Product Factory,
until
July, 2006, when the two were merged, with Harbin First Bio-Engineering
Company
Limited (“First” or “Harbin Bio Engineering”) as the surviving subsidiary of
TDR.
We
have
also recently organized Harbin Tian Qing Biotech Application Company as
a
wholly-owned PRC subsidiary of TDR, to conduct research and development
in the
areas of tissue and stem cell banks, which is described in more detail
below.
Recent
Developments
On
June
9, 2008, TDR entered into a Merger and Acquisition Agreement (the “Acquisition
Agreement”) with Peng Lai Jin Chuang Company, a corporation organized under the
laws of the PRC (“Jin Chuang”), which was recently organized to develop,
manufacture and distribute pharmaceutical, medicinal and diagnostic products
in
the PRC. Pursuant to the Acquisition Agreement, TDR shall acquire all of
the assets of Peng Lai in consideration for an aggregate of approximately
(i)
$2,500,000 in cash, and (ii) 381,606 shares of our common stock with a
fair
value of approximately $4,600,000, at $12 per share. The acquisition, which
is
subject to our due diligence review of Jin Chuang, had not closed as of
June 30,
2008.
On
April
3, 2008, TDR completed an acquisition pursuant to an Equity Transfer Agreement
dated February 22, 2008, between TDR and Heilongjiang Tianlong Pharmaceutical,
Inc. (“Tianlong”), a corporation with a multitude of SFDA approved
medicines and new medicine applications, organized under the laws of the
PRC,
which is in the business of manufacturing external-use pharmaceuticals.
Our TDR
subsidiary previously acquired the Beijing sales office of Tianlong in
mid-2006.
Pursuant to the Equity Transfer Agreement, TDR acquired 100% of the issued
and
outstanding capital stock of Tianlong from Tianlong’s’s sole stockholder Wu
Jiechen, a resident of China, in consideration for an aggregate purchase
price
of approximately $8,300,000, consisting of (i) approximately $8,000,000
in cash,
and (ii) approximately $300,000 of shares of our common stock (23,850 shares,
$.001 par value per share) of the Registrant.
On
April
18, 2008, TDR consummated a share acquisition pursuant to an Equity Transfer
Agreement with the shareholders of Heilongjiang Haina Pharmaceutical Inc.,
a
recently formed corporation organized under the laws of the PRC (“Haina”),
licensed as a wholesaler of TCD, bio-medicines, bio-products, medicinal
devices,
antibiotics and chemical medicines. Haina does not have an established
sales
network and was acquired for its primary asset, a Good Supply Practice
(GSP)
license (License No. A-HLJ03-010) issued by the Heilongjiang office of
the State
Food and Drug Administration (“SFDA”). The SFDA recently started issuing such
licenses to resellers of medicines that maintain certain quality controls.
The
GSP license was issued as of December 21, 2006 and will expire on January
29,
2012, and will enable us to expand our sales of medicinal products without
having to go through a lengthy license application process.
Pursuant
to the Equity Transfer Agreement, TDR acquired 100% of the issued and
outstanding capital stock of Haina from its three stockholders in consideration
for payment of 3,000,000 RMB (approximately $427,838). TDR has been overseeing
the operations of Haina since January of 2008 as part of its due diligence
prior
to closing of this acquisition.
Summary
of Our Research and Development Activities
We
currently conduct all of our research and development (“R&D”) activities,
either internally or through collaborative arrangements with universities
and
research institutions in the PRC. We have our own research, development
and
laboratory facilities located at TDR’s principal headquarters in the city of
Harbin, Heilongjiang Province, PRC.
Additionally,
we have established several long-term partnerships with well-known universities
and enterprises in the PRC. We have built a gene medicine laboratory through
a
collaborative effort with Harbin Medical University; established a cell
laboratory with North East Agricultural University; and founded a monoclonal
antibody laboratory with Jilin University. The foregoing are more fully
described in our annual report Form 10-KSB for the year ended December
31,
2007.
In
collaboration with Harbin Medical University, we have completed a laboratory
experimental study pertaining to Endothelin-1, which is required prior
to
clinical trials, and we are currently applying for approval to enter clinical
experiments. This medicine has been recognized by the PRC as the “Top
Category in New Medicine.” In order to qualify as the “Top Category in New
Medicine,” a company must have intellectual property rights, high technology
involvement, strong innovation, and the medicine must be the first of its
kind
to be introduced to the PRC. We hold the intellectual property rights
pertaining to this technology, and we have obtained an invention patent
to this
intellectual property in the PRC. Under our partnership arrangements with
other universities and research institutions, we will generally hold the
intellectual property rights to any developed technology.
At
present, our ongoing research is divided into five general areas: (1) the
development of an enzyme linked immune technique to prepare extraneous
diagnostic kits (see table below); (2) the development of an enzyme linked
gold
colloid technique to prepare extraneous rapid diagnostic test strip; (3)
the
development of a gene recombination technique to prepare gene drug; (4)
the
development of a biology protein chip for various tumor diagnostic applications;
and (5) the development of a cord blood stem cell bank, as more fully described
in our other reports.
We
currently have eight biological products under development: An HIV
detection kit; a uterus cancer diagnostic kit; a breast cancer diagnostic
kit; a
liver cancer diagnostic kit; a rectum cancer diagnostic kit; a gastric
cancer
diagnostic kit; a gene recombination drug; and a multi-tumor marker protein
chip
detection kit. We are also working to establish additional sales networks
and cell banks covering domestic and international markets.
Testing
Kits and Other Products in Production
We
also
have three products: AMI Diagnostic Kit, Human Urinary Albumin Elisa Kit
and
Early Pregnancy Diagnostic Kit that passed the final stages of national
inspection in 2006 or 2007. These diagnostic kits are being sold through
drug
stores, hospitals, examination stations and independent sales agents throughout
the PRC. We also plan to market these products in Vietnam, Indonesia,
Philippines and eventually in Africa. We expect our sales in this product
category to increase in mid-2008.
Our
AMI
Diagnostic Kit, which entered markets in 2007, is used for early
diagnosis of Myocardial Infarction (MI), also known as heart disease. All
the
test kits require users to place a blood or urine sample on the marker
and a
positive (+) or negative (-) reaction signal will result, showing if a
user
should consult his or her doctor for further testing. According to the
China Medical Newspaper, several million people die from MI every year.
MI
often occurs to people who are, but not limited to, smokers, over-weight
and
diabetic. There are approximately 8 million new MI patients in China every
year. Recent medical studies have shown that heart failure or heart
attacks are increasing among younger people in China. This is a result
from a
more modern life style, the fast pace of city life and increased pressure
from
work or school. The use of AMI Diagnostic Kits will help in early detection
that
can help in reducing these statistics.
We
are
continuing our marketing efforts with respect to these testing kits which
we
anticipate will result in continued increased sales of these products in
2008.
Significant
Accounting Estimates and Policies
The
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements which have been prepared in accordance
with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments
that
affect the reported amounts of assets and liabilities. On an on-going basis,
we
evaluate our estimates including the allowance for doubtful accounts, the
salability and recoverability of our products, income taxes and contingencies.
We base our estimates on historical experience and on other assumptions
that we
believes to be reasonable under the circumstances, the results of which
form our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions.
Property
and equipment are evaluated for impairment whenever indicators of impairment
exist. Accounting standards require that if an impairment indicator is
present,
we must assess whether the carrying amount of the asset is unrecoverable
by
estimating the sum of the future cash flows expected to result from the
asset,
undiscounted and without interest charges. If the recoverable amount is
less
than the carrying amount, an impairment charge must be recognized based
on the
fair value of the asset.
As
part
of the process of preparing our financial statements, we are required to
estimate our income taxes. This process involves estimating our current
tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in
deferred tax assets and liabilities. We must then assess the likelihood
that our
deferred tax assets will be recovered from future taxable income, and,
to the
extent we believe that recovery is not likely, we must establish a valuation
allowance.
We
cannot
predict what future laws and regulations might be passed that could have
a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update
the
assumptions and estimates used to prepare our financial statements when
we deem
it necessary.
We
have
determined the significant principles by considering accounting policies
that
involve the most complex or subjective decisions or assessments. Our most
significant accounting policies are those related to intangible assets
and
research and development.
Intangible
assets -
Intangible assets consist of patents, distribution rights and customer
lists.
Patent costs are being amortized over the remaining term of the patent.
Distribution rights and customer lists are being amortized over 10
years.
Intangible
assets are accounted for in accordance with Statement of Financial Accounting
Standards No. 142,
Goodwill and Other Intangible Assets
(“SFAS
142”). Intangible assets with finite useful lives are amortized while
intangible assets with indefinite useful lives are not amortized. As prescribed
by SFAS 142, goodwill and intangible assets are tested periodically for
impairment. We adopted SFAS No. 144, "Accounting for the Impairment or
Disposal
of Long- Lived Assets," effective January 1, 2002. Accordingly, we review
our
long-lived assets, including property and equipment and finite-lived intangible
assets for impairment whenever events or changes in circumstances indicate
that
the carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, we evaluate the probability that
future
undiscounted net cash flows will be less than the carrying amount of the
assets.
Impairment costs, if any, are measured by comparing the carrying amount
of the
related assets to their fair value.
Research
and development -
Research and development expenses include the costs associated with our
internal
research and development as well as research and development conducted
by third
parties. These costs primarily consist of salaries, clinical trials, outside
consultants, and materials. All research and development costs are expensed
as
incurred.
Third-party
expenses were reimbursed under non-refundable research and development
contracts, and are recorded as a reduction to research and development
costs in
the statement of operations.
We
recognize in-process research and development in accordance with FASB
Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted
for by
the Purchase Method
and
the
AICPA
Technical Practice Aid, Assets Acquired in a Business Combination to be
used in
Research and Development Activities: A Focus on Software, Electronic
Devices, and Pharmaceutical Industries. Assets to be used in research and
development activities, specifically, compounds that have yet to receive
new
drug approval and would have no alternative use, should approval not be
given,
are immediately charged to expense when acquired.
For
the
six and three months ended June 30, 2008, we incurred $2,042,412 and $1,372,529,
respectively, in research and development expenditures. For the six and
three
months ended June 30, 2007, such costs were $395,840 and $380,630.
RESULTS
OF OPERATIONS
Three
months ended June 30, 2008 as compared to Three months ended June 30,
2007
Our
principal business operations are conducted through our wholly owned subsidiary,
TDR, and TDR’s wholly owned subsidiaries.
|
|
June
30
|
|
|
|
2008
|
|
Variance
|
|
2007
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Product
Sales (net of sales allowance)
|
|
$
|
21,901,582
|
|
|
103
|
%
|
$
|
10,773,940
|
|
Contract
Sales
|
|
|
1,847,010
|
|
|
(52
|
)%
|
|
3,871,307
|
|
Total
revenues
|
|
|
23,748,592
|
|
|
62
|
%
|
|
14,645,247
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOOD SOLD
|
|
|
|
|
|
|
|
|
|
|
Cost
of good sold
|
|
|
5,522,314
|
|
|
67
|
%
|
|
3,308,648
|
|
Gross
Profit
|
|
$
|
18,226,278
|
|
|
61
|
%
|
$
|
11,336,559
|
|
Total
revenues increased by 62% in the three months ended June 30, 2008 compared
to
2007. The $9,103,345 increase in sales is attributable to strong
performances from our sales distribution channels.
Product
sales increased by 103% in the three months ended June 30, 2008, to $21,901,582
from $10,773,940 in 2007. This growth in sales is attributable to volume
and our efforts to continue to develop our distribution channels by hiring
additional direct territory managers and sales agents to assure that our
products and their associated benefits are seen by those making or influencing
the purchasing decisions.
Contract
sales of non-manufactured products amounted to $1,847,010 in the three
months
ended June 30, 2008, or a significant decrease of $2,024,297 from sales
of
$3,871,307 in 2007. In 2008, TDR began to discontinue contract sales as
part of
its strategic goals.
Sales
by Product Line
A
break-down of our sales by product line for the three months ended June
30, 2008
and 2007 is as follows:
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
2008
|
|
2007
|
|
Period-on-
|
|
Product
category
|
|
Units
|
|
Sales
USD
|
|
%
of
Sales
|
|
Units
|
|
Sales
USD
|
|
%
of
Sales
|
|
period
Unit
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spray
|
|
|
1,135,436
|
|
$ |
3,100,075
|
|
|
13
|
%
|
|
1,045,658
|
|
$ |
2,587,016
|
|
|
18
|
%
|
|
89,778
|
|
Plaster
|
|
|
849,287
|
|
|
2,012,726
|
|
|
8
|
%
|
|
152,226
|
|
|
408,364
|
|
|
3
|
%
|
|
697,061
|
|
Ointment
|
|
|
3,538,944
|
|
|
6,559,479
|
|
|
28
|
%
|
|
464,170
|
|
|
807,126
|
|
|
6
|
%
|
|
3,074,774
|
|
Cleaning
liquid
|
|
|
550,237
|
|
|
796,469
|
|
|
3
|
%
|
|
380,716
|
|
|
487,920
|
|
|
3
|
%
|
|
169,521
|
|
Lose
weight series
|
|
|
1,086,170
|
|
|
6,013,639
|
|
|
25
|
%
|
|
404,109
|
|
|
4,270,031
|
|
|
29
|
%
|
|
682,061
|
|
Antihypertension
|
|
|
153,030
|
|
|
1,259,624
|
|
|
5
|
%
|
|
218,320
|
|
|
2,102,988
|
|
|
14
|
%
|
|
(65,290
|
)
|
Contract
products
|
|
|
1,250,670
|
|
|
1,861,225
|
|
|
8
|
%
|
|
2,020,422
|
|
|
3,573,381
|
|
|
24
|
%
|
|
(769,752
|
) |
Biochemical
products
|
|
|
429,943
|
|
|
2,145,355
|
|
|
10
|
%
|
|
177,950
|
|
|
408,421
|
|
|
3
|
%
|
|
251,993
|
|
Total
|
|
|
8,993,717
|
|
$ |
23,748,592
|
|
|
100
|
%
|
|
4,863,571
|
|
$ |
14,645,247
|
|
|
100
|
%
|
|
4,130,146 |
|
A
break-down of our sales by product line for the three months ended March
31 2008
and 2007 is as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
2008
|
|
2007
|
|
Period-on-
|
|
Product
category
|
|
Units
|
|
Sales
USD
|
|
%
of
Sales
|
|
Units
|
|
Sales
USD
|
|
%
of
Sales
|
|
period
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spray
|
|
|
723,142
|
|
$ |
1,870,457
|
|
|
15
|
%
|
|
534,729
|
|
$ |
1,349,377
|
|
|
26
|
%
|
|
188,413
|
|
Plaster
|
|
|
126,623
|
|
|
356,053
|
|
|
3
|
%
|
|
101,099
|
|
|
269,893
|
|
|
5
|
%
|
|
25,524
|
|
Ointment
|
|
|
1,163,937
|
|
|
1,476,118
|
|
|
12
|
%
|
|
417,680
|
|
|
618,889
|
|
|
12
|
%
|
|
746,257
|
|
Cleaning
liquid
|
|
|
353,423
|
|
|
495,714
|
|
|
4
|
%
|
|
245,810
|
|
|
296,365
|
|
|
6
|
%
|
|
107,613
|
|
Lose
weight series
|
|
|
261,100
|
|
|
1,984,588
|
|
|
16
|
%
|
|
9,127
|
|
|
64,503
|
|
|
1
|
%
|
|
251,973
|
|
Antihypertension
|
|
|
136,969
|
|
|
1,419,747
|
|
|
11
|
%
|
|
93,187
|
|
|
886,171
|
|
|
17
|
%
|
|
43,782
|
|
Contract
products
|
|
|
1,525,670
|
|
|
2,974,847
|
|
|
24
|
%
|
|
952,481
|
|
|
1,691,548
|
|
|
33
|
%
|
|
573,189
|
|
Biochemical
products
|
|
|
278,320
|
|
|
1,835,905
|
|
|
15
|
%
|
|
19,622
|
|
|
2,371
|
|
|
0
|
%
|
|
258,698
|
|
Total
|
|
|
4,569,184
|
|
$ |
12,413,430
|
|
|
100
|
%
|
|
2,373,735
|
|
$ |
5,179,116
|
|
|
100
|
%
|
|
2,195,449 |
|
There
were various changes in the break-down of sales among our product lines
over the
three months ended June 30, 2008 as we continue to develop new products
and
expand into new markets. As shown in the table above, sales volume for
the
majority of our products increased as compared to the three months ended
June
30, 2007. To maintain our competitiveness in the PRC markets, unit
selling prices were moderately
reduced in 2008. However, we were able to negotiate a lower purchase
price from our suppliers which negated the decrease in the selling prices
of our
products. Overall, we were able to maintain our 2007 product gross margins
of
77% in the year 2008.
Cost
of Goods Sold and Product Gross Margin
|
|
Three
months ended June 30,
|
|
|
|
2008
|
|
Variance
|
|
2007
|
|
Total
sales
|
|
$
|
23,748,592
|
|
|
62
|
%
|
$
|
14,645,247
|
|
Cost
of goods sold
|
|
$
|
5,522,314
|
|
|
67
|
%
|
$
|
3,308,648
|
|
Product
gross margin
|
|
|
77
|
%
|
|
|
|
|
77
|
%
|
Operating
Expenses
The
following table summarizes the changes in our operating expenses from $6,172,416
to $8,098,642 for each of the three month periods ended June 30, 2007 and
2008,
respectively:
|
|
Three
months ended June 30,
|
|
|
|
2008
|
|
Variance
|
|
2007
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
1,372,579
|
|
|
261
|
%
|
$
|
380,630
|
|
Selling,
general and administrative
|
|
|
6,587,059
|
|
|
16
|
%
|
|
5,654,199
|
|
Depreciation
and amortization
|
|
|
139,004
|
|
|
1
|
%
|
|
137,587
|
|
Total
operating expenses
|
|
$
|
8,098,642
|
|
|
31
|
%
|
$
|
6,172,416
|
|
Selling,
general and administrative expenses for the three months ended June 30,
2008
increased $1,926,226 over the same period in 2007. The higher selling,
general
and administrative expenses were primarily attributable to the increased
costs
of marketing our products for sale and additional variable costs to
support our increased product sales from $14,645,247 in 2007 to $23,748,592
in 2008.
Research
and development expenses were $1,372,579 in the three months ended June
30,
2008, compared to $380,630 for 2007. The increased R&D expenses in
2008 were primarily due to additional clinical trials and development of
patents,.
Six
months ended June 30, 2008 as compared to six months ended June 30,
2007
Our
principal business operations are conducted through our wholly-owned subsidiary,
TDR, and TDR’s wholly owned subsidiaries.
|
|
June
30
|
|
|
|
2008
|
|
Variance
|
|
2007
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
Product
Sales (net of sales allowance)
|
|
$
|
32,797,580
|
|
|
133
|
%
|
$
|
14,098,586
|
|
Contract
Sales
|
|
|
3,364,442
|
|
|
(41
|
)%
|
|
5,725,777
|
|
Total
revenues
|
|
|
36,162,022
|
|
|
82
|
%
|
|
19,824,363
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOOD SOLD
|
|
|
|
|
|
|
|
|
|
|
Cost
of good sold
|
|
|
8,382,742
|
|
|
89
|
%
|
|
4,435,343
|
|
Gross
Profit
|
|
$
|
27,779,280
|
|
|
81
|
%
|
$
|
15,389,020
|
|
Total
revenues increased by 82% in the six months ended June 30, 2008, compared
to the
same period in 2007. The $18,698,994 increase in sales is attributable to
strong performances from our sales distribution channels.
Product
sales increased by 133% in the six months ended June 30, 2008, to $32,797,580
from $14,098,586 in 2007. This growth in sales is attributable to volume
and our efforts to continue to develop our distribution channels by hiring
additional direct territory managers and sales agents to assure that our
products and their associated benefits are seen by those making or influencing
the purchasing decisions.
Contract
sales amounted to $3,364,442 in the six months ended June 30, 2008, or
a
significant decrease of $2,361,335 from sales of $5,725,777 for the same
period
in 2007. In 2008, TDR began to discontinue contract sales as a part of
its
strategic goals.
Sales
by Product Line
A
break-down of our sales by product line for the six months ended June 30
2008
and 2007 is as follows:
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
2008
|
|
2007
|
|
Period-on-
|
|
Product
category
|
|
Units
|
|
Sales
USD
|
|
%
of
Sales
|
|
Units
|
|
Sales
USD
|
|
%
of
Sales
|
|
period
Unit
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spray
|
|
|
1,858,578
|
|
|
4,970,532
|
|
|
14
|
%
|
|
1,580,387
|
|
|
3,936,393
|
|
|
20
|
%
|
|
278,191
|
|
Plaster
|
|
|
975,910
|
|
|
2,368,779
|
|
|
7
|
%
|
|
253,325
|
|
|
678,256
|
|
|
3
|
%
|
|
722,585
|
|
Ointment
|
|
|
4,702,881
|
|
|
8,035,597
|
|
|
22
|
%
|
|
881,850
|
|
|
1,426,015
|
|
|
7
|
%
|
|
3,821,031
|
|
Cleaning
liquid
|
|
|
903,660
|
|
|
1,292,183
|
|
|
4
|
%
|
|
626,526
|
|
|
784,285
|
|
|
4
|
%
|
|
277,134
|
|
Lose
weight series
|
|
|
1,347,270
|
|
|
7,998,228
|
|
|
22
|
%
|
|
413,236
|
|
|
4,334,534
|
|
|
22
|
%
|
|
934,034
|
|
Antihypertension
|
|
|
289,999
|
|
|
2,679,371
|
|
|
7
|
%
|
|
311,507
|
|
|
3,989,159
|
|
|
15
|
%
|
|
(21,508
|
)
|
Contract
sales
|
|
|
2,776,340
|
|
|
4,836,072
|
|
|
13
|
%
|
|
2,972,903
|
|
|
5,264,929
|
|
|
27
|
%
|
|
(196,563
|
)
|
Bio-chemical
Products
|
|
|
708,263
|
|
|
3,981,260
|
|
|
11
|
%
|
|
197,572
|
|
|
410,791
|
|
|
2
|
%
|
|
510,691
|
|
Total
|
|
|
13,562,901
|
|
|
36,162,022
|
|
|
100
|
%
|
|
7,237,306
|
|
|
19,824,363
|
|
|
100
|
%
|
|
6,325,595 |
|
There
were various changes in the break-down of sales among our product lines
over the
six months ended June 30, 2008, due to developing new products and our
expansion
into new markets. As shown in the table above, sales volume for a majority
of product increased as compared to the six months ended June 30, 2007. To
maintain our competitiveness in the PRC markets, unit selling prices
were moderately reduced in 2008. However, we were able to negotiate a lower
price from our suppliers which partially negated the lower sale prices
for our
products. Overall, our gross margins were 77% for the six months ended
June 30,
2008 as compared to 78% for the same period in the prior year.
Cost
of Goods Sold and Product Gross Margin
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
Variance
|
|
2007
|
|
Total
sales
|
|
$
|
36,162,022
|
|
|
89
|
%
|
$
|
19,824,363
|
|
Cost
of goods sold
|
|
$
|
8,382,742
|
|
|
81
|
%
|
$
|
4,435,343
|
|
Product
gross margin
|
|
|
77
|
%
|
|
|
|
|
78
|
%
|
Operating
Expenses
The
following table summarizes the changes in our operating expenses from $8,314,757
to $12,801,618 for each of the six month periods ended June 30, 2007 and
2008,
respectively:
|
|
June
30
|
|
|
|
2008
|
|
Variance
|
|
2007
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
2,042,412
|
|
|
416
|
%
|
$
|
395,840
|
|
Selling,
general and administrative
|
|
|
10,543,854
|
|
|
37
|
%
|
|
7,697,975
|
|
Depreciation
and amortization
|
|
|
215,352
|
|
|
(3
|
)%
|
|
220,942
|
|
Total
operating expenses
|
|
$
|
12,801,618
|
|
|
54
|
%
|
$
|
8,314,757
|
|
Selling,
general and administrative expenses for the six months ended June 30, 2008
increased by $2,845,879 over the same period in 2007. Increased costs were
primarily attributable to higher marketing costs of approximately $1.2
million
and certain variable costs to support our increased revenues from $19,824,363
in
2007 to $36,162,022 in 2008.
Research
and development expenses were $2,042,412 in the six months ended June 30,
2008,
compared to $395,840 for the same period in 2007. The increased R&D
expenses in 2008 were primarily due to additional clinical trials and
development of patents.
2008
Outlook
We
expect
our revenues in 2008 versus 2007 to increase by 62% to approximately $80
million
with increase in all categories of our product sales. Sales in 2008 are
expected
to increase $0.77 million in Spray products, $0.27 million in Plaster products,
$5.32 million in Ointment products, $0.62 million in Cleaning Liquid products,
$5.60 million in Lose Weight Series, $0.77 million in Antihypertension
products,
$8.07 million in Bio-chemical products. Contract sales are expected to
decrease
$5 million due to the acquisition of Tianlong, while using the Tianlong
distribution networks will increase $14.40 million. We expect our year 2008
versus 2007 cost of sales will increase $6.26 million, gross profit will
increase $24.52 million, and gross margin will be at 78.5%.
LIQUIDITY
AND CAPITAL RESOURCES
The
following table summarizes our cash and cash equivalents position , our
working
capital, and our cash flow activity as of the end of, and for each of,
six month
periods ended June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
As
of June 30:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
42,531,405
|
|
$
|
5,154,329
|
|
Working
capital
|
|
$
|
44,861,048
|
|
$
|
15,447,162
|
|
Inventories
|
|
$
|
1,424,155
|
|
$
|
1,099,749
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30:
|
|
|
|
|
|
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
17,820,563
|
|
$
|
8,430,538
|
|
Investing
activities
|
|
$
|
(9,102,409
|
)
|
$
|
(10,027,874
|
)
|
Financing
activities
|
|
$
|
24,327,963
|
|
$
|
(421,672
|
)
|
As
of
June 30, 2008, cash and cash equivalents were $42,531,405 as compared to
$5,154,329 at June 30, 2007. The increase of approximately $37.4 million
in 2008
was primarily due to our increase in net income of approximately $6.2
million ($5,781,644 to $11,975,578 for each of the six months ended June
30,
2007 and 2008, respectively) and the receipt of net proceeds of approximately
$23.5 million from the 2008 issuance of 2,500,000 shares of common
stock.
Our
current ratio was 6.31, versus 4.06 and the quick ratio was 6.14 versus
3.98 at
June 30, 2008 and 2007, respectively. Management endeavors to ensure that
funds are available to take advantage of new investment opportunities and
that
funds are sufficient to meet future liquidity and capital needs. Management
considers current working capital and borrowing capabilities adequate to
cover
our current operating and capital requirements for the full year
2008.
At
June
30, 2008, there are no restrictive bank deposits pledged as security.
Cash
flows provided by operating activities was approximately $17.8 million
for the
six months ended June 30, 2008, compared to $8.4 million for the same period
in
2007. The increase in cash provided by operating activities of approximately
$9.4 million is primarily attributable to the increase of revenues from
approximately $19.8 million to $36.2 million for each of the periods ended
June
30, 2007 and 2008, respectively.
Our
working capital position at June 30, 2008 was approximately $44.9 million,
compared to $15.4 million at June 30, 2007. The increase of working capital
at
June 30, 2008 versus June 30,2007 was principally due to the 2008 capital
raising activities which generated net proceeds of approximately $23.5
million.
Our
inventory position amounted to approximately $1.4 million at June 30, 2008,
as
compared to $1.1 million at June 30, 2007. The increased inventory position
primarily results from our business acquisition of Tianlong in 2008.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that are currently material or
reasonably likely to be material to our financial position or results of
operations.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
As
of
June 30, 2008, we had no material derivative instruments. We may enter into
derivative financial instrument transactions in order to mitigate its interest
rate risk on a related financial instrument in the future.
Our
balance sheet includes amount of assets and liabilities whose fair values
are
subject to market risk. Market risk is the risk of loss arising from adverse
changes in market prices or interest rates. Generally, our borrowing is short
to
medium term in nature and therefore approximates fair value. We currently
have
interest rate risk as it relates to its fixed maturity mortgage participation
interest. We seek to limit the impact of interest rate changes on earnings
and
cash flows and to lower its overall borrowing costs by closely monitoring
its
interest rate debt.
We
have
certain risks as it relates to its investments denominated in foreign
currencies. Us and our subsidiaries are mainly located in China, and there
were
no significant translation gains and losses recorded within each of the
reporting periods presented in these financial statements. We are subject
to
commodity price risks arising from price of construction materials.
We
are
subject to market and channel risks. Over 90% of our sales are made in the
PRC,
where we primarily sell our products through drug chain stores. Because of
this, we are dependent to a large degree upon the success of that distribution
channel as well as the success of specific retailers in the distribution
channel. Many of the drug stores are individual stores or very small chains,
and
only a few are large chain drug stores. We rely on these distribution channels
to purchase, market, and sell its products. Our success is dependent, to
a large
degree, on the growth and success of the drug stores, which may be outside
its
control. There can be no assurance that the drug store distribution channels
will be able to grow or prosper as it faces price and service pressure from
other channels, including the mass market. There can be no assurance that
retailers in the drug store distribution channel, in the aggregate, will
respond
or continue to respond to our marketing commitment in these channels.
We
are
highly dependent upon the public perception and quality of its products,
consumers’ perception of the safety and quality of its products, as well as
similar products distributed by other companies. Thus, the mere publication
of
reports asserting that such products may be harmful could have a material
adverse effect on us, regardless of whether these reports are scientifically
supported. Adverse publicity may have a material adverse effect on our business,
financial condition, and results of operations. There can be no assurance
of
future favorable scientific results and media attention, or of the absence
of
unfavorable or inconsistent findings.
Currency
Exchange Fluctuations
All
of
our revenues and majority of the expenses during the six months ended June
30,
2008 were denominated primarily in Renminbi (“RMB”), the currency of China, and
was converted into US dollars at the exchange rate of 7.006 RMB to 1 U.S.
Dollar. In the third quarter of 2005, the Renminbi began to rise against
the US
dollar. There could be no assurance that RMB-to-U.S. dollar exchange rates
will
remain stable. A devaluation of RMB relative to the U.S. dollar would adversely
affect our business, financial condition and results of operations. We do
not
engage in currency hedging.
Item
4. Controls and Procedures.
Disclosure
Controls and Procedures
Our
management, with the participation of our chief executive officer and interim
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures pursuant to Rule 13a-15 under the Securities Exchange Act
of 1934
as of June 30, 2008. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance
of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their
costs.
Based
on our evaluation, our chief executive officer and interim chief financial
officer concluded that our disclosure controls and procedures are designed
at a
reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.
Changes
in Internal Control Over Financial Reporting
There
was
no change in our internal control over financial reporting that occurred
during
our second quarter ended June 30, 2008 of fiscal 2008, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. The Company regularly reviews its internal controls
and plans on updating and expanding the same as an accelerated filer.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
We
are
not a party to any pending legal proceedings.
Item
1A. Risk Factors.
In
the
three month period ended June 30, 2008, and subsequent period through the
date
hereof, there were no material changes to our risk factors previously disclosed
in Item 1 to Part 1 of our Annual Report on Form 10-KSB for the year
ended December 31, 2007.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
In
the
three-month period ended June 30, 2008, and subsequent period through the
date
hereof, we did not engage in any unregistered sales of equity securities
other
than as set forth below:
Tianlong
Acquisition
On
April
3, 2008, Harbin Tian Di Ren Medical Science and Technology Company, a limited
liability company organized under the laws of the PRC, a wholly-owned subsidiary
of American California Pharmaceutical Group, Inc., our wholly-owned California
subsidiary, acquired 100% of the equity of Heilongjiang Tianlong Pharmaceutical,
Inc., a corporation organized under the laws of the PRC, in consideration
for
approximately $8,000,000 in cash, and 23,850 shares of our common
stock.
Management
believes that this transaction was exempt from the registration requirements
of
the Securities Act of 1933, as amended (the “Securities Act”), pursuant to
Regulation D and Section 4(2) of the Securities Act, among other exemptions,
since sales were made on an unsolicited basis, to a limited number of investors
who represented that they are accredited investors.
Warrant
Exercises
Between
April 1, 2008 and June 30, 2008, we issued an aggregate of 120,317 shares
of our
common stock to seven persons in connection with their exercise of warrants,
at
exercise prices ranging from $3.00 to $3.50 per share.
Between
July 1, 2008 and the date hereof, we issued an aggregate of 35,839 shares
of our
common stock to five persons in connection with their exercise of warrants,
at
an exercise price of $3.50 per share.
Management
believes that these transactions were exempt from the registration requirements
of the Securities Act, pursuant to Regulation D and Section 4(2) of the
Securities Act, among other exemptions, since sales were made on an unsolicited
basis, to a limited number of investors who represented that they are accredited
investors.
Issuance
of Shares
As
of
July 15, 2008, we issued 28,975 “restricted” shares of our common stock to
certain employees, directors and advisors of ours, pursuant to our 2006 Stock
Incentive Plan.
Management
believes that these transactions were exempt from the registration requirements
of the Securities Act, pursuant to Regulation D and Section 4(2) of the
Securities Act, among other exemptions, since sales were made on an unsolicited
basis, to a limited number of investors who represented that they are accredited
investors.
Item
3. Defaults Upon Senior Securities.
In
the
three-month period ended June 30, 2008, and subsequent period through the
date
hereof, we did not default upon any senior securities.
Item
4. Submission of Matters to a Vote of Security Holders.
In
the
three-month period ended June 30, 2008, and subsequent period through the
date
hereof, we did not submit any matters to a vote of our
stockholders.
Item
5. Other Information.
There
was
no information we were required to disclose in a report on Form 8-K during
the
three-month period ended June 30, 2008, or subsequent period through the
date
hereof, which was not so reported.
Item
6. Exhibits
Exhibit No.
|
|
Description
of Exhibit
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation as filed with the Secretary of State
of Nevada
on July 11, 2008*
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14 and Rule
15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended*
|
|
|
|
31.2
|
|
Certification
of Interim Principal Financial and Accounting Officer pursuant
to Rule
13a-14 and Rule 15d-14(a), promulgated under the Securities and
Exchange
Act of 1934, as amended*
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Principal Executive
Officer)*
|
|
|
|
32.2
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Interim Principal Financial and
Accounting
Officer)*
|
*
Filed herewith
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
CHINA
SKY ONE MEDICAL, INC.
|
Dated:
August 11, 2008
|
|
By:
|
/s/
Liu Yan-Qing |
|
|
|
Liu
Yan-Qing
President
and Chief Executive Officer
|
|
|
|
|
Dated:
August 11, 2008
|
|
By:
|
/s/
Zhang Yukun |
|
|
|
Interim
Chief Financial Officer
|