Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended
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June
30, 2009
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from _______________________________________ to
_______________________________________
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Commission
File Number:
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000-26059
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CHINA
SKY ONE MEDICAL, INC.
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(Exact
name of registrant as specified in its
charter)
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Nevada
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87-0430322
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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Room
1706, Di Wang Building, No. 30 Gan Shui Road,
Nangang
District, Harbin, People’s Republic of China
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150001
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(Address
of principal executive offices)
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(Zip
Code)
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86-451-53994069
(China)
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(Registrant’s
telephone number, including area code)
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(Former
name, former address and former fiscal year, if changed since last
report)
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Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days.
x
Yes o
No
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactice Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files).
o
Yes o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filed,”
“accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
o
Yes x
No
The
registrant had 16,652,016
shares of Common Stock issued and outstanding as of August 13,
2009.
QUARTERLY
REPORT ON FORM 10-Q
OF
CHINA SKY ONE MEDICAL, INC. AND SUBSIDIARIES
FOR
THE PERIOD ENDED JUNE 30, 2009
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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Condensed
Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December
31, 2008
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1
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Condensed
Consolidated Statements of Operations and Comprehensive Income for the
Three and Six Months Ended June 30, 2009 and 2008
(unaudited)
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2
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Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2009 and 2008 (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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23
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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31
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Item
4.
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Controls
and Procedures
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31
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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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32
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Item
1A.
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Risk
Factors
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32
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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32
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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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33
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Item
6.
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Exhibits
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33
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Signatures
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34
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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,
2009
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December 31,
2008
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(Unaudited)
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(Audited)
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ASSETS
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Current
Assets
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Cash
and cash equivalents
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$
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48,233,324
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$
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40,288,116
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Accounts
receivable, net
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16,172,625
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14,978,648
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Inventories
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1,571,465
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462,351
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Prepaid
and other current assets
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76,763
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106,386
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Land
and construction deposit
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8,525,025
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8,513,284
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Total
current assets
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74,579,202
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64,348,785
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Property
and equipment, net
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30,553,224
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21,058,779
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Intangible
assets, net
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15,193,190
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15,851,765
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$
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120,325,616
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$
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101,259,329
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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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$
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4,274,858
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$
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2,937,068
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Taxes
payable
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4,265,075
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3,362,888
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Deferred
revenues
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-
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26,079
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Total
current liabilities
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8,539,933
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6,326,035
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Commitments
and Contingencies
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-
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-
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Stockholders'
Equity
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Preferred
stock ($0.001 par value, 5,000,000 shares authorized, none issued and
outstanding)
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-
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-
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Common
stock ($0.001 par value, 50,000,000 shares authorized, 16,652,016 and
16,306,184 issued and outstanding, respectively)
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16,652
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16,306
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Additional
paid-in capital
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40,133,957
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40,105,134
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Accumulated
other comprehensive income
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5,690,195
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5,566,806
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Retained
earnings
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65,944,879
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49,245,048
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Total
stockholders' equity
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111,785,683
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94,933,294
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$
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120,325,616
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$
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101,259,329
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|
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
Operations and Comprehensive Income
(Unaudited)
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Three Months Ended June 30,
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Six
Months Ended June 30,
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2009
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2008
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2009
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2008
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Revenues
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$ |
32,181,590 |
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$ |
23,748,592 |
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$ |
57,015,282 |
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$ |
36,162,022 |
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Cost
of Goods Sold
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7,752,371 |
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5,522,314 |
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13,793,289 |
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8,382,742 |
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Gross
Profit
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24,429,219 |
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18,226,278 |
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43,221,993 |
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27,779,280 |
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Operating
Expenses
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Depreciation
and amortization
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|
449,294 |
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139,004 |
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|
900,666 |
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|
215,352 |
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Research
and development
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3,681,914 |
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1,372,579 |
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|
6,094,694 |
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|
2,042,412 |
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Selling,
general and administrative
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|
8,216,348 |
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6,587,059 |
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|
15,093,816 |
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|
10,543,854 |
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Total
operating expenses
|
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|
12,347,556 |
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|
8,098,642 |
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22,089,176 |
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12,801,618 |
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Other
Income (Expense)
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|
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|
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|
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|
|
|
|
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Other
income (expense)
|
|
|
(1,918 |
) |
|
|
(35,539 |
) |
|
|
(1,128 |
) |
|
|
27,509 |
|
Interest
income (expense), net
|
|
|
15,921
|
|
|
|
( 132,495
|
) |
|
|
26,954
|
|
|
|
( 133,642
|
) |
Total
other income (expense)
|
|
|
14,003
|
|
|
|
( 168,034
|
) |
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25,826
|
|
|
|
( 106,133
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
Income Before Provision for Income Tax
|
|
|
12,095,666 |
|
|
|
9,959,602 |
|
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|
21,158,643 |
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|
14,871,529 |
|
|
|
|
|
|
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Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Current
|
|
|
2,638,673 |
|
|
|
1,848,935 |
|
|
|
4,458,812 |
|
|
|
2,895,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net
Income
|
|
$ |
9,456,993 |
|
|
$ |
8,110,667 |
|
|
$ |
16,699,831 |
|
|
$ |
11,975,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
Earnings Per Share
|
|
$ |
0.57 |
|
|
$ |
0.54 |
|
|
$ |
1.01 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
16,537,066 |
|
|
|
14,971,652 |
|
|
|
16,475,833 |
|
|
|
14,253,547 |
|
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Diluted
Earnings Per Share
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
|
$ |
1.01 |
|
|
$ |
0.78 |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Diluted
Weighted Average Shares Outstanding
|
|
|
16,628,892 |
|
|
|
16,090,211 |
|
|
|
16,547,037 |
|
|
|
15,372,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
9,456,993 |
|
|
$ |
8,110,667 |
|
|
$ |
16,699,831 |
|
|
$ |
11,975,578 |
|
Foreign
currency translation adjustment
|
|
|
6,447
|
|
|
|
1,507,587 |
|
|
|
123,389 |
|
|
|
3,155,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
9,463,440 |
|
|
$ |
9,618,254 |
|
|
$ |
16,823,220 |
|
|
$ |
15,131,358 |
|
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
(Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
Income
|
|
$ |
16,699,831 |
|
|
$ |
11,975,578 |
|
Adjustments
to reconcile net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,168,601 |
|
|
|
352,833 |
|
Share-based
compensation expense
|
|
|
- |
|
|
|
20,234 |
|
Net
change in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivables
|
|
|
(1,184,343 |
) |
|
|
1,972,239 |
|
Inventories
|
|
|
(1,108,724 |
) |
|
|
(807,993 |
) |
Prepaid
expenses and other current assets
|
|
|
40,536 |
|
|
|
(14,607 |
) |
Accounts
payable and accrued expenses
|
|
|
1,307,906 |
|
|
|
2,474,459 |
|
Taxes
payable
|
|
|
897,750 |
|
|
|
1,872,324 |
|
Deferred
revenues
|
|
|
- |
|
|
|
(24,504 |
) |
Net
cash provided by operating activities
|
|
|
17,821,557 |
|
|
|
17,820,563 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(83,687 |
) |
|
|
(667,432 |
) |
Purchase
of subsidiary-TianLong and Haina
|
|
|
- |
|
|
|
(8,437,375 |
) |
Purchase
of construction in progress
|
|
|
(9,877,830 |
) |
|
|
- |
|
Purchase
of intangible assets
|
|
|
- |
|
|
|
(7,139 |
) |
Net
cash used in investing activities
|
|
|
(9,961,517 |
) |
|
|
(9,111,946 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Sale
of common stock for cash, net of offering costs
|
|
|
- |
|
|
|
23,487,963 |
|
Proceeds
from warrants conversion
|
|
|
29,169 |
|
|
|
840,000 |
|
Net
cash provided by financing activities
|
|
|
29,169 |
|
|
|
24,327,963 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
55,997 |
|
|
|
303,955 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
7,945,206 |
|
|
|
33,340,535 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
40,288,117 |
|
|
|
9,190,870 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
48,233,324 |
|
|
$ |
42,531,405 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
- |
|
|
$ |
1,157 |
|
Taxes
paid
|
|
$ |
3,928,870 |
|
|
$ |
6,366,350 |
|
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
1.
|
Description
of Business
|
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
notes required by U.S. GAAP for complete financial statements. The financial
statements for the periods ended June 30, 2009 and 2008 are unaudited and
include all adjustments necessary for 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 notes thereto included in the company's annual report on Form
10-K for the year ended December 31, 2008 as filed with the Securities and
Exchange Commission ("SEC") on April 15, 2009.
China Sky
One Medical, ("China Sky One" or the “Company”), a Nevada corporation, was
formed on February 7, 1986, and formerly known as Comet Technologies, Inc.
(“Comet”). On July 26, 2006, the Company changed the name of the reporting
company from "Comet Technologies, Inc." to "China Sky One Medical, Inc."
American
California Pharmaceutical Group, Inc. (“ACPG”), our non operating United
States holding company subsidiary, was incorporated on December 16, 2003, in the
State of California, under the name “QQ Group, Inc.” QQ Group, Inc. 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 TDR, described herein. On December 8, 2005, ACPG completed a stock
exchange transaction with Harbin Tian Di Ren Medical Science and Technology
Company (“TDR”), a company organized under the laws of the People’s
Republic of China (“PRC”) 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 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 was 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 wholly-owned
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 and TDR.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
1.
|
Description
of Business (Continued)
|
On
September 30, 2008 (the “Record Date”), we obtained the written consent of the
holders of 8,158,251 shares of our common stock, which as of the Record Date,
represented 51.3% of our outstanding voting securities, to increase our number
of authorized shares of common stock from twenty million (20,000,000) to fifty
million (50,000,000) shares.
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 medicines approved by China’s
State Food and Drug Administration (“SFDA”) 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 its 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’s common stock (valued at $12 per share or
approximately $286,000). 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 Traditional
Chinese Herbal Remedies/Medicines “TCM”, 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 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 $437,000). TDR has been overseeing
the operations of Haina since January of 2008 as part of its due diligence prior
to closing of this acquisition.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
2.
|
Acquisition
of Businesses (Continued)
|
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 (“Peng Lai”), which was organized to develop, manufacture
and distribute pharmaceutical, medicinal and diagnostic products in the PRC.
Pursuant to the Acquisition Agreement, TDR acquired all of the assets of
Peng Lai in consideration for an aggregate of approximately (i) US$2.5 million
in cash, and (ii) 381,606 shares of the Company’s common stock with a fair value
of approximately $4.6 million (value at $12 per share). The
acquisition of Peng Lai closed on September 5, 2008.
The
following table summarizes the approximate estimated fair values of the assets
acquired in the Peng Lai acquisition.
Fixed
assets
|
|
$ |
4,176,922 |
|
Intangible
assets
|
|
|
2,917,386 |
|
Net
assets acquired
|
|
$ |
7,094,308 |
|
The
following table contains pro forma condensed consolidated statements of
operations information assuming the TianLong, Haina and Peng Lai transactions
closed on January 1, 2008 for the six months ended June 30, 2008. Peng Lai had
dormant operations until October 2008.
|
|
Six Months Ended June 30, 2008
|
|
Revenue
|
|
$ |
36,723,407 |
|
Operating
income
|
|
$ |
15,065,026 |
|
Net
income
|
|
$ |
12,052,245 |
|
Basic
earnings per common share
|
|
$ |
0.85 |
|
Basic
weighted average shares outstanding
|
|
|
14,253,547 |
|
Diluted
earnings per common share
|
|
$ |
0.78 |
|
Diluted
weighted average shares outstanding
|
|
|
15,372,106 |
|
3.
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation –
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, ACPG, TDR, First, Haina, TianLong,
and Peng Lai. All significant inter-company transactions and balances were
eliminated.
These
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.
Certain
items in the 2008 financial statements have been reclassified to conform with
the 2009 financial statements presentation.
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 include assigned lives to tangible and intangible assets, reserves for
customer returns and allowances, uncollectible accounts receivable, and
impairment testing of tangible and intangible assets. Actual results may differ
from these estimates.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Earnings per share - Basic
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. When applicable, diluted 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.
Potential
common shares issued are calculated using the treasury stock method, which
recognizes the use of proceeds that could be obtained upon the exercise of
options and warrants in computing diluted earnings per share. It assumes that
such proceeds would be used to purchase common stock at the average market price
of the common stock during the period.
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.
A
significant amount of our cash and cash equivalents are held in China’s
commercial bank checking accounts and earned an annual interest income yield of
approximately 0.36% for the six months ended June 30, 2009. For all the bank
accounts in China and overseas, the Company earned interests of
approximately $26,000 and $79,000 for the six months ended June 30, 2009 and
2008, respectively.
Accounts receivable – Accounts receivable are
stated at net realizable value, net of an allowance for doubtful accounts. The
allowance for estimated bad debts is based upon the 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, 2009 and December 31, 2008, the Company’s allowance for
doubtful accounts was $50,000.
Inventories – Inventories
include finished goods, raw materials, freight-in, packing materials, labor, and
overhead costs and are valued at the lower of cost or market using the first-in,
first-out method. Inventory units are valued using the weighted
average method. Provisions are made for slow moving, obsolete and/or damaged
inventory based upon the 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, 2009 and December 31, 2008.
Property and equipment –
Property and equipment are stated at historical cost less accumulated
depreciation. Depreciation on property and equipment is provided using the
straight-line method over the estimated useful lives of the assets. The Company
uses an estimated residual value of 5% of cost, or valuation for both financial
and income tax reporting purposes. The estimated lengths of useful lives are as
follows:
Building
and Improvements
|
30
years
|
Land
use rights
|
50
years
|
Furniture
& Equipment
|
5
to 7 years
|
Transportation
Equipment
|
5
to 15 years
|
Machinery
and Equipment
|
7
to 14 years
|
Expenditures
for renewals and betterments are 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 be obtained 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 is
removed from their respective accounts, and any gain or loss is recorded in the
consolidated statements of operations.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Property
and equipment are evaluated for impairment in value 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. The
Company did not record any impairment charges during the three and six months
ended June 30, 2009 and 2008.
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 capitalized interest costs during the course of construction.
Upon
completion and readiness for use of the project, the cost of
construction-in-progress is 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 (see
Note 14).
Intangible assets – Intangible
assets consists of patents and goodwill. Patent costs are amortized over an
estimated life of 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. The Company recognizes an impairment loss based on the excess of the
carrying amount of the assets over their respective fair values. Fair value is
determined by discounted future cash flows, appraisals or other methods. If the
assets determined to be impaired are to be held and used, the Company recognizes
an impairment loss thru a charge to operating results to the extent the present
value of anticipated cash flows attributable to the assets are less than the
asset’s carrying value. The Company would depreciate the remaining value over
the remaining estimated useful life of the asset to operating results. The
Company did not record any impairment charges during the three and six months
ended June 30, 2009 and 2008.
Foreign Currency - The Company’s principal
country of operations is in the PRC. 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.
Assets
and liabilities denominated in foreign currencies at the balance sheet date are
translated at the market rate of exchange at that date. The registered equity
capital denominated in the functional currency is translated at the historical
rate of exchange at the time of the 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.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
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 all of 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 trends 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
the Company 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 consolidated
statement of operations.
The
Company recognizes in-process research and development in accordance with
Financial Accounting Standard Board (“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. Certain assets and other
technologies acquired that has foreseeable future cash flows are capitalized as
intangible assets. Such intangible assets are amortized starting from the year
revenue is generated and amortized over a period of 10 years. Should under any
circumstances these capitalized intangible assets have no future benefit, the
Company will record an immediate write-off for the remaining net carrying value
within the consolidated statement of operations.
The
Company incurred $3,681,914, $6,094,694, $1,372,579 and $2,042,412 in research
and development costs for the three and six months ended June 30, 2009 and 2008,
respectively.
Advertising – Advertising and
promotion costs are expensed as incurred. Total advertising costs for the three
and six months ended June 30, 2009 and 2008 was $3,437,828,
$6,213,958, $2,796,123 and $3,165,426, 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.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
The
Company periodically 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.
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%. In 2009, the income tax rate for TDR, TianLong,
and First is 15% based on State Council approval. The income tax rate
for Haina is 25%. The income tax rate for Peng Lai is regulated by local
government at 2% of total revenue commencing January 1, 2009.
In 2008,
the income tax rate for TDR and TianLong was 15% and 12%, respectively. The
income tax rate for First, Haina, and Peng Lai was 25%.
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.
Accounting for uncertainty in income
taxes – In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is
intended to clarify the accounting for uncertainty in income taxes recognized in
a company’s financial statements and prescribes the recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement.
Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the
threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the first subsequent
financial reporting period in which the threshold is no longer met.
The
Company did not have any FIN 48 income tax issues during the six months ended
June 30, 2009 and 2008.
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.
Retirement benefit costs –
According to the PRC regulations on pension plans, the Company contributes to a
defined contribution retirement plan organized by municipal government in the
province in which the Company was registered and all qualified employees as
defined by statutory regulations are eligible to participate in the
plan.
Contributions
to the pension or retirement plan are calculated at 22.5% 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. The Company incurred costs of
$50,868, $89,972, $17,737 and $25,186 for the three and six months ended
June 30, 2009 and 2008, respectively.
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 at June 30, 2009 and 2008 because of
the relatively short-term maturity of these instruments.
Recent
accounting pronouncements:
In
June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162 . This standard establishes only two
levels of U.S. generally accepted accounting principles (“GAAP”), authoritative
and non-authoritative. The FASB Accounting Standards Codification (the
“Codification”) will become the source of authoritative, nongovernmental GAAP,
except for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC
accounting literature not included in the Codification will become
nonauthoritative. This standard is effective for financial statements for
interim or annual reporting periods ending after September 15, 2009. The
Company will begin to use the new guidelines and numbering system prescribed by
the Codification when referring to GAAP beginning in the period ended
September 30, 2009. As the Codification was not intended to change or alter
existing GAAP, it is not otherwise expected to have any impact on the Company’s
consolidated financial statements.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosures
of subsequent events that occurred after the balance sheet date but prior to the
issuance of financial statements. SFAS 165 is effective for financial statements
issued for interim or fiscal years ending after June 15, 2009. The adoption
of SFAS 165, effective June 2009, did not affect the consolidated financial
position, results of operations or cash flows of the Company.
In April
2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies , to
address some of the application issues under SFAS 141(R). The FSP deals with the
initial recognition and measurement of an asset acquired or a liability assumed
in a business combination that arises from a contingency provided the asset or
liability’s fair value on the date of acquisition can be determined. When the
fair value can’t be determined, the FSP requires using the guidance under SFAS
No. 5, Accounting for Contingencies, and FASB Interpretation (FIN) No. 14,
Reasonable Estimation of the Amount of a Loss . This FSP was effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after January 1, 2009. The adoption of this
FSP has not had a material impact on the Company’s financial position,
results of operations, or cash flows during the first six months ended June 30,
2009.
In April
2008, the FASB issued FASB FSP No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 removed the requirement of
SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), for an entity
to consider, when determining the useful life of an intangible asset, whether
the intangible asset can be renewed without substantial cost or material
modification to the existing terms and conditions associated with the intangible
asset. FSP FAS 142-3 replaces the previous useful life assessment criteria with
a requirement that an entity considers its own experience in renewing similar
arrangements. If the entity has no relevant experience, it would consider market
participant assumptions regarding renewal. This should lead to greater
consistency between the useful life of recognized intangibles under SFAS 142 and
the period of expected cash flows used to measure fair value of such assets
under SFAS No. 141(R), Business Combinations. FSP FAS 142-3 is being applied
prospectively beginning January 1, 2009. The adoption of this Statement has not
had a material impact on the Company’s financial position, results of
operations, or cash flows during the first six months ended June 30,
2009.
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 141R requires earn-outs and other
contingent consideration to be recorded at fair value on acquisition date and
contingencies to be recorded at fair value on acquisition date with subsequent
re-measurement. SFAS 141R requires acquisition costs to be expensed as incurred
and generally requires restructuring costs to be expensed in periods after the
acquisition date. SFAS 141R requires amounts previously called “negative
goodwill” which result from a bargain purchase in which acquisition date fair
value of identifiable net assets acquired exceeds the fair value of
consideration transferred plus any non controlling interest in the acquirer to
be recognized in earnings as a gain attributable to the acquirer. 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 new business acquisition after December 31,
2008.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
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 accounting and reporting standards
for the non-controlling interest in a subsidiary. SFAS 160 also requires that
upon the deconsolidation of a subsidiary, a retained non-controlling interest be
initially measured at its fair value. Upon adoption of SFAS 160, non-controlling
interests shall be reported in the equity section of financial statement and
requires that net earnings include the amounts attributive to both the parent
and to the non-controlling interests with disclosure on the face of the
statement of operations of the net earnings attributable to the parent and to
the non-controlling interests, with any losses attributable to the
non-controlling interests in excess of the non-controlling interests’ equity to
be allocated to the non-controlling interest. Calculation of earnings per share
amounts in the financial statements will continue to be based on amounts
attributable to the parent. SFAS No. 160 is effective for fiscal
years beginning on or after December 15, 2008. SFAS No. 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirement are to be applied
prospectively. The adoption of SFAS No. 160, effective January 1, 2009, did
not have a material impact on the Company’s consolidated financial
statements.
4.
|
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, 2009, the Company held
approximately $2,418,000 of cash balances within the United States of which
was all insured. At June 30, 2009, the Company had approximately $45,815,000, in
China bank deposits, which is not 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 businesses are generated from operations in mainland
China.
Payments
of dividends may be subject to some restrictions due to the Company’s operating
subsidiaries all being located in the PRC.
Major
Customers
For the
six months ended June 30, 2009, Harbin Shiji Baolong and Shanxi Xintai accounted
for 21% and 18% respectively of sales revenues. For the six months ended June
30, 2008, no individual customer accounted for more than 10% of sales
revenues. As of June 30, 2009, Harbin Shiji Baolong and Shanxi
Xintai accounted for 34% and 15% of the Company’s outstanding accounts
receivables, respectively. As of June 30, 2008, Harbin Shiji Baolong
accounted for 15% of the Company’s outstanding accounts
receivables.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
4.
|
Concentrations
of Business and Credit Risk
(Continued)
|
Major
Suppliers
Heilongjiang
Kangda Medicine Co. accounted for approximately 41% of the Company’s inventory
purchases for the six months ended June 30, 2009 and 45% for the six months
ended June 30, 2008.
We have
applied SFAS No. 128, “Earnings Per Share” in our 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 to purchase 750,000 shares of common stock were outstanding and
exercisable as of June 30, 2009. In addition, options to purchase 12,500
shares of common stock were outstanding and exercisable as of June 30, 2009.
Stock warrants and options to purchase 1,151,000 shares of common stock
outstanding during the year ended December 31, 2008, all of which were
exercisable. These common stock equivalents 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.
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 per
share:
|
|
For the three months ended June
30,
|
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
Net
income used in calculation of basic and diluted
earnings per share
|
|
$ |
9,456,993 |
|
|
$ |
8,110,667 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding used in calculation of basic
earnings per share
|
|
|
16,537,066 |
|
|
|
14,971,652 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock
options and equivalents
|
|
|
91,826 |
|
|
|
1,118,559 |
|
Weighted-average
common shares used in calculation of diluted earnings per
share
|
|
|
16,628,892 |
|
|
|
16,090,211 |
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.57 |
|
|
$ |
0.54 |
|
Diluted
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
5.
|
Earnings
per Share (Continued)
|
The
following table sets forth our computation of basic and diluted net income per
share:
|
|
For the six months ended June
30,
|
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
Net
income used in calculation of basic and diluted
earnings per share
|
|
$ |
16,699,831 |
|
|
$ |
11,975,578 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding used in calculation of basic
earnings per share
|
|
|
16,475,833 |
|
|
|
14,253,547 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock
options and equivalents
|
|
|
71,154 |
|
|
|
1,118,559 |
|
Weighted-average
common shares used in calculation of diluted earnings per
share
|
|
|
16,547,037 |
|
|
|
15,372,106 |
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.01 |
|
|
$ |
0.84 |
|
Diluted
|
|
$ |
1.01 |
|
|
$ |
0.78 |
|
6.
|
Equity
and Share-based Compensation
|
Effective
January 1, 2006, the Company 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, the Company
recognizes 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. The Company has
applied the provisions of SAB No. 107 in the adoption of SFAS
No. 123R.
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 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, 2009, non-qualified options to
purchase a total of 113,500 shares have been granted under the 2006 Stock
Incentive Plan. All of these 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 using the Black-Scholes option-pricing model with the
following assumptions: no dividends; risk-free interest rate of 4%; a
contractual life of 5 years and volatility of 39%. All 113,500 options vested
over various periods. As of June 30, 2009, 101,000 options were exercised on a
cashless basis resulting in the issuance of a total of 75,888 shares
of the Company’s common stock. As of June 30, 2009, 12,500 options remained
outstanding.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
6.
|
Equity
and Share-based Compensation
(Continued)
|
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 $2.00 per share (the “Advisor Warrants”) and
options to purchase up to 50,000 shares on or before December 20, 2008 at a
price of $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%; a 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.
In fiscal
2008, the holder of the Advisor Warrants exercised 200,000 of the Advisor
Warrants on a cashless basis, resulting in the issuance of 166,245 shares of the
Company’s common stock. In the six months ended June 30, 2009, the holder of the
Advisor Warrants exercised the remaining 300,000 Advisor Warrants on a cashless
basis, resulting in the issuance of 261,610 shares of the Company’s common
stock.
In
addition, in the six months ended June 30, 2009, a warrant holder exercised
warrants to purchase 8,334 shares of the Company’s common stock, at an exercise
price of $3.50 per share. These warrants were originally issued in a private
placement the Company consummated in October 2006.
7.
|
Securities
Purchase Agreement and Related
Transaction
|
On
January 31, 2008 China Sky One entered into a Securities Purchase Agreement (the
“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 “Unit Purchase Price”), or gross offering proceeds of $25.0 million
(the “2008 Offering”). The Company received net proceeds of approximately $23.5
million in connection with the 2008 offering.
Pursuant
to the Purchase Agreement, among other things, if, and whenever, within twelve
(12) months of the Closing Date, the Company issues or sells, or is deemed to
have issued or sold, any shares of common stock, or securities convertible into
or exercisable for shares of common stock, or modifies any of the foregoing
which may be outstanding (with the exception of certain excluded securities), to
any person or entity at a price per share, or conversion or exercise price per
share less than the Unit Purchase Price, then the Company shall issue, for each
such occasion, additional shares of its common stock to the Investors in such
number so that the average per share purchase price of the shares of common
stock purchased by the Investors in the 2008 Offering shall automatically be
reduced to such other lower price per share.
In
addition, as of the Closing Date, the Company entered into a Make Good Agreement
(the “Make Good Agreement”) with Liu Yan-Qing, its Chairman, Chief Executive
Officer and President, and a principal shareholder of the Company, (the
“Principal Shareholder”) and the Investors (collectively, the “Make Good
Parties”), pursuant to which the Principal Shareholder deposited 3,000,000
shares of his common stock of the Company (the “Escrow Shares”) into escrow, to
be released to the Investors in an amount pro rata pro to their initial
investments in the 2008 Offering, in the event the Company failed to attain
earnings per share, as adjusted, of at least (i) $1.05 per share for the fiscal
year ending December 31, 2007 (based on an aggregate of 13,907,696 shares
outstanding), and/or (ii) $1.63 per share for the fiscal year ending December
31, 2008 (based on 16,907,696 shares outstanding).
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
7.
|
Securities
Purchase Agreement and Related Transaction
(Continued)
|
The
Company deems the Escrow Shares arrangement as analogous to the issuance of a
fixed number of warrants in an equity transaction. Under the Make Good
Agreement these Escrow Shares would have been reallocated on a pro rata
basis to the Investors only if certain earnings targets were not achieved in
years 2007 and 2008. If the earnings targets were met, the Escrow Shares
would automatically be released to the Principal Shareholder. As of January
31, 2008, the date the common shares were placed into escrow, the Company
achieved the 2007 earnings target and, based upon internal forecasts, was
confident the 2008 target would also be met. Based upon certain
assumptions, including the low probability that the Escrow Shares would be
released to the Investors and not be returned to the Principal Shareholder, the
Company considered the fair value of the right held by the Investors through the
Escrow Shares provision under the Make Good Agreement to be immaterial. As
of December 31, 2008, the Company satisfied the earnings per common share
targets for each of fiscal 2007 and 2008 as defined under the Make Good
Agreement and, as such, the Escrow Shares had been released in May
2009.
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 8.
8.
|
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
|
|
(1,204,999)
|
|
|
|
|
(50,000)
|
|
|
-
|
|
Expired
or cancelled
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Outstanding
as of December 31, 2008
|
|
1,058,334
|
|
$
|
9.50
|
|
113,500
|
|
$
|
3.65
|
|
Granted
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Exercised
|
|
(308,334)
|
|
|
|
|
(101,000)
|
|
|
|
|
Expired
or cancelled
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Outstanding
as of June 30, 2009
|
|
750,000
|
|
$
|
12.50
|
|
12,500
|
|
$
|
3.65
|
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
8.
|
Outstanding
Warrants and Options (Continued)
|
The
following table summarizes information about stock warrants outstanding and
exercisable as of June 30, 2009.
Exercise
Price
|
|
Outstanding
June 30,
2009
|
|
|
Weighted
Average
Remaining
Life in
Years
|
|
|
Number
exercisable
|
|
$ |
12.50
|
|
|
750,000 |
|
|
|
2.00 |
|
|
|
750,000 |
|
|
|
|
750,000 |
|
|
|
|
|
|
|
750,000 |
|
Out of
the 750,000 outstanding warrants, all were exercisable as of June 30,
2009. These Class A Warrants represent the right to purchase an
aggregate of 750,000 shares of common stock of the Company granted with the
Purchase Agreement, at an exercise price of $12.50 per share (the “Exercise
Price”), and have the following additional characteristics:
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
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 shares
underlying the Class A Warrants (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 $1.75 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
8.
|
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, 2009.
Exercise
Price
|
|
Outstanding
June 30,
2009
|
|
|
Weighted
Average
Remaining
Life in
Years
|
|
|
Exercisable
Options
|
|
|
Vested
Options
|
|
$ |
3.65
|
|
|
12,500 |
|
|
|
2.50 |
|
|
|
- |
|
|
|
12,500 |
|
|
|
|
12,500 |
|
|
|
|
|
|
|
- |
|
|
|
12,500 |
|
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, 2009 and December 31, 2008, inventories consist of the
following:
|
|
June 30, 2009
|
|
|
December 31,
2008 (Audited)
|
|
Raw
Material
|
|
$ |
809,803 |
|
|
$ |
330,275 |
|
Work-in-Process
|
|
|
138,862 |
|
|
|
76,462 |
|
Finished
Products
|
|
|
622,800 |
|
|
|
55,614 |
|
Total
Inventories
|
|
$ |
1,571,465 |
|
|
$ |
462,351 |
|
As of
June 30, 2009 and December 31, 2008, the Company had no inventory
reserve.
10.
|
Property
and Equipment
|
As
of June 30, 2009 and December 31, 2008, Property and Equipment, net consist of
the following:
|
|
June 30, 2009
|
|
|
December 31,
2008 (Audited)
|
|
Buildings
and improvements
|
|
$ |
9,550,042 |
|
|
$ |
9,961,820 |
|
Machinery
and equipment
|
|
|
5,447,140 |
|
|
|
4,946,247 |
|
Land
use rights
|
|
|
1,919,911 |
|
|
|
1,945,209 |
|
Transportation
equipment
|
|
|
887,102 |
|
|
|
885,880 |
|
Furniture
and equipment
|
|
|
314,994 |
|
|
|
299,467 |
|
Construction
in progress (See Note 14)
|
|
|
14,192,855 |
|
|
|
4,317,265 |
|
Total
Property and Equipment
|
|
|
32,312,044 |
|
|
|
22,355,888 |
|
Less:
Accumulated Depreciation
|
|
|
(1,758,820 |
) |
|
|
(1,297,109 |
) |
Property
and Equipment, Net
|
|
$ |
30,553,224 |
|
|
$ |
21,058,779 |
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
10.
|
Property
and Equipment (Continued)
|
For the
six months ended June 30, 2009 and 2008, depreciation expense totaled $461,711
and $213,935 respectively. Depreciation expense of approximately $268,000
and $137,000 is included as part of cost of goods sold for the six months
ended June 30, 2009 and 2008, respectively.
As of
June 30, 2009 and December 31, 2008, the Company’s net unamortized intangible
assets consist of:
|
|
June
30, 2009
|
|
|
December 31,
2008
(Audited)
|
|
Patents
|
|
$ |
14,433,828 |
|
|
$ |
15,093,718 |
|
Goodwill
|
|
|
759,362 |
|
|
|
758,047 |
|
Total
Intangible Assets, net
|
|
$ |
15,193,190 |
|
|
$ |
15,851,765 |
|
Amortization
expense for the six months ended June 30, 2009 and 2008 was $706,890 and
$138,898 respectively.
Taxes
payable consists of the following:
|
|
June 30,
2009
|
|
|
December
31, 2008
(Audited)
|
|
Value
Added Tax, net
|
|
$ |
1,505,459 |
|
|
$ |
1,179,383 |
|
Enterprise
Income Tax
|
|
|
2,637,189 |
|
|
|
2,106,956 |
|
City
Tax
|
|
|
49,678 |
|
|
|
32,013 |
|
Other
Taxes and additions
|
|
|
72,748 |
|
|
|
44,536 |
|
Total
Taxes Payable
|
|
$ |
4,265,075 |
|
|
$ |
3,362,888 |
|
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%. In 2009, the income tax rate for TDR, TianLong, and
First is 15% based on State Council approval. The income tax rate
for Haina is 25%. The income tax rate for Peng Lai is regulated by local
government at 2% of total revenue commencing January 1, 2009. In 2008, the
income tax rate for TDR and TianLong was 15% and 12%, respectively. The
income tax rate for First, Haina, and Peng Lai was 25%.
We record
a full valuation allowance to reduce our deferred tax assets to the amount that
is more likely than not to be realized. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
13.
|
Income
Taxes (Continued)
|
Pursuant
to Sections 382 and 383 of the Internal Revenue Code of 1986 (“IRC”),
annual use of the Company’s net operating losses and tax credit carryforwards
may be limited because of cumulative changes in ownership of more than 50% that
have occurred.
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.
In 2006,
the FASB issued FIN 48, which clarifies the application of SFAS 109 by defining
a criterion that an individual income tax position must meet for any part of the
benefit of that position to be recognized in an enterprise’s financial
statements and provides guidance on measurement, derecognition, classification,
accounting for interest and penalties, accounting in interim periods, disclosure
and transition. In accordance with the transition provisions, the Company
adopted FIN 48 effective January 1, 2007.
The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the state.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current state officials.
Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of June 30, 2009, is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
June 30, 2009, if recognized, would not have a material effect on its effective
tax rate. The Company further believes that there are no tax positions for which
it is reasonably possible, based on current Chinese tax law and policy, that the
unrecognized tax benefits will significantly increase or decrease over the next
12 months producing, individually or in the aggregate, a material effect on the
Company’s results of operations, financial position or cash flows
14.
|
Land
Use Rights Purchase Agreement and Construction in
Progress
|
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 certain land use rights for 50 years in conjunction with
the Company’s development of a new headquarter and a new biotech engineering lab
at a construction cost of approimately $10.5 million. The cost of the land use
rights amounted to approximately $2.5 million. Terms of the agreement called for
a deposit of 30% 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 a main workshop, R&D center and our principle corporate office
using land area of 30,000 square meters. Construction started in May 2007
and is estimated to be completed by the end of
2009.
|
|
(2)
|
Construction
of Second workshop and show room using land area of 20,000 square meters.
Construction is expected to start in September 2008 and is estimated to be
completed by December 2009.
|
As of
June 30, 2009, the Company remitted deposits totaling $8,525,025 under the
terms of the above agreement. Within this deposit, there are approximately $5.8
million for construction. Upon the completion of the project, this construction
deposits shall be released and returned to the Company.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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 SFDA, 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.
The
Company’s sole rental commitment is office space for the year 2009 is
approximately $25,000. The Company is expecting the corporate headquarters
currently under construction to be completed by 2009. As a result, there is no
rental commitment made by the Company for the year 2010 and
thereafter.
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 the consolidated financial statements of the Company 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, 2008 (“Annual Report”). This quarterly report on Form 10-Q
contains forward-looking statements and is 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 and other documents filed by us with the
Securities and Exchange Commission (“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 have achieved continued growth of our line of products. For the three months ended
June 30, 2009, total revenue was $32,181,590 , a 36% increase over the same period
in 2008, and net income was $9,456,993 , or $0.57 per share compared
to net income of
$8,110,667, or $0.50 per share on a diluted basis in the same period in 2008.
For the six months ended June 30, 2009, total revenue was $57,015,282, a 58%
increase over the same period in 2008, and net income was $16,699,831, or
$1.01 per common share compared to net income of
$11,975,578, or $0.78 per
common share on a diluted
basis in the same period in 2008.
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 with its principal executive office in Harbin City of Heilongjiang
Province, in the People’s Republic of China (“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” or “Harbin Bio Engineering”) as the
surviving subsidiary of TDR.
Year
2008 Business Acquisitions
On April 3, 2008, TDR completed its
acquisition of Heilongjiang TianL ong Pharmaceutical, Inc., a
c orporation with a variety
of medicines approved by China’ s State Food and Drug Administration
(“SFDA”) and new medicine applications, organized
under the laws of the PRC (“TianLong” ), which is in the business of
manufacturing external-use pharmaceuticals. TDR previously acquired the Beijing
sales office of TianL ong in mid-2006. TDR acquired 100% of
the issued and outstanding capital stock of TianL ong from its sole stockholder, 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 our common
stock.
On April 18, 2008, TDR consummated its
acquisition of Heilongjiang Haina Pharmaceutical Inc., a corporation which had been recently organized under the laws of the PRC
(“Haina”), licensed as a wholesaler of TCM, bio-medicines, bio-p roducts, medicinal devices, antibiotics
and chemical medicines. Haina did 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 province offi ce 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, and will enable us to expand
our sales of medicinal products without having to
go through a lengthy license application process. TDR acquired 100% of the
issued and outstanding capital stock of Haina from its three stockholders in
consideration for payment of approximately $437,000. TDR had been overseeing the operations of Haina since January of 2008, as part of our
due diligence prior to closing of this acquisition.
On September 5, 2008, TDR acquired Peng
Lai Jin Chuang Pharmaceutical Company, a corporation organized under the laws
of the PRC (“Peng Lai”), from Peng Lai Jin Chuang Group Corporation. Peng Lai, which received Good Manufacturing Practice
certification from the SFDA, was organized to develop, manufacture and
distribute pharmaceutical, medicinal and diagnostic products in the
PRC . In connection with
the acquisition of Peng Lai, TDR acquired all of Peng Lai’ s assets, including, without
limitation, franchise, production and operating rights to a portfolio of twenty
(20) medicines approved by the SFDA, for an aggregate purchase price of approximately $7.1 million,
consisting of (i) approximately $2.5 million in cash, and (ii) 381,606 shares of
our common stock.
Testing
Kits and Other Products in Production
Our AMI
Diagnostic Kit, Human Urinary Albumin Elisa Kit and Early Pregnancy Diagnostic
Kit each passed the final stages of a 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.
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 believed to be the result of 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 of MI
that can help in reducing these incidences.
We are
continuing our marketing efforts with respect to these testing kits which have
contributed to increase sales of these products in 2009 versus 2008. Sales
generated under these products during the six month periods ended June 30, 2009
and 2008 amounted to approximately $6,789,000 and $3,983,000, respectively.
Summary of Our Resear ch 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, developme nt and laboratory facilities located at
TDR’s principal executive offices.
At present, our ongoing research is
divided into five general areas:
|
|
·
|
the development of an enzyme
linked immune technique to prepare extraneous diagnostic
kits;
|
|
|
·
|
the development of an enzyme
linked gold colloid technique to prepare an extraneous rapid diagnostic test
strip;
|
|
|
·
|
the development of a g ene recombination technique to
prepare a
gene
drug;
|
|
|
·
|
the development of a biology
protein chip for various tumor diagnostic applications;
and
|
|
|
·
|
the development of a cord blood
stem cell bank, as more fully described in our Annual R eport and other reports filed by
us with the SEC.
|
We currently have the following 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. I n
addition, w e are also
working to establish additional sales networks and cell banks covering domestic
and internation al
markets.
Due to cont inued changes in the
industry , Management
cannot guarantee any of the above research and development activities will be
successful or generate future revenues. We incurred research and development costs
of $6,094,694 and $2,042,412 during each of the six month periods
ended June 30, 2009 and 2008, respectively.
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 of America. 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 methodologies and assumptions used to derive
these estimates. Estimates include the reserve allowance for doubtful accounts
and inventories, the salability and recoverability of our products, our
impairment test for tangible and intangible assets, income taxes and
contingencies and the remaining useful lives of our tangible and certain
intangible assets. 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. Our significant estimates
include:
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. To the extent that we establish a valuation allowance or increase
this allowance in a period, we must include a tax provision or reduce our tax
benefit in the statements of operations. We use our judgment to determine our
provision or benefit for income taxes, deferred tax assets and liabilities and
any valuation allowance recorded against our net deferred tax assets. We
believe, based on a number of factors including historical operating losses,
which we will not realize the future benefits of a significant portion of our
net deferred tax assets and we have accordingly provided a full valuation
allowance against our deferred tax assets. However, various factors may cause
those assumptions to change in the near term.
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 – Our intangible assets primarily consists of patents. Patent costs are
amortized over an estimated life of approximately 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. 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 reimbursed under non-refundable research and development contracts 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. Certain assets and high technologies acquired
that has a foreseeable future cash flows are capitalized as intangible assets.
Such intangible assets are amortized starting from the year revenue is generated
and amortized over a period of 10 years. If a capitalized intangible asset is
deemed to have no future benefit, the unamortized carrying value will be
expensed.
For the
three months ended June 30, 2009 and 2008, we incurred $3,681,914 and $1,372,579, respectively,
in research and development expenditures. For the six months ended June 30, 2009
and 2008, we incurred $6,094,694 and $2,042,412,
respectively, in research and development expenditures.
RESULTS
OF OPERATIONS
For
the three months ended June
30, 2009 as compared to June 30, 2008
Our
principal business operations are conducted through our wholly owned subsidiary,
TDR, and TDR’s wholly-owned subsidiaries.
|
For Three Months Ended June
30
|
|
|
2009
|
|
% of Sales
|
|
2008
|
|
% of Sales
|
|
Revenues
|
|
$ |
32,181,590 |
|
|
|
100.0 |
|
|
$ |
23,748,592 |
|
|
|
100.0 |
|
Cost
of goods sold
|
|
|
7,752,371 |
|
|
|
24.1 |
|
|
|
5,522,314 |
|
|
|
23.3 |
|
Gross
Profit
|
|
$ |
24,429,219 |
|
|
|
75.9 |
|
|
$ |
18,226,278 |
|
|
|
76.7 |
|
Total
revenues increased approximately $8.4 million or 36% during the three months
ended June 30, 2009 as compared to 2008. Our revenue increase is primarily
attributable to strong performances from our sales distribution channels due to
our hiring of additional direct territory managers and sales agents to help
market our products and their associated benefits to those individuals making or
influencing purchasing decisions, as well as the results of our several
successful business acquisitions in 2008 as previous discussed.
Revenues
by Product Line
A
break-down of our revenues by product line for each of the three months ended
June 30, 2009 and 2008 is as follows:
|
|
For the Three Months Ended June
30
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
Product
(Number of Products)
|
|
Subsidiary
|
|
Sales (USD)
|
|
|
% of Sales
|
|
Product
(Number of Products)
|
|
Sales (USD)
|
|
|
% of Sales
|
|
Patch (5)
|
|
TDR
|
|
$ |
9,937,203 |
|
|
|
30.9 |
|
Patch (4)
|
|
$ |
8,781,903 |
|
|
|
37.0 |
|
Ointment
(18)
|
|
TDR&TL
|
|
|
7,658,146 |
|
|
|
23.8 |
|
Ointment
(11)
|
|
|
6,486,619 |
|
|
|
27.3 |
|
Spray (15)
|
|
TDR&TL
|
|
|
4,808,652 |
|
|
|
14.9 |
|
Spray (19)
|
|
|
2,840,196 |
|
|
|
12.0 |
|
Bio-Engineering
(3)
|
|
FIRST
|
|
|
3,687,991 |
|
|
|
11.5 |
|
Bio-Engineering
(3)
|
|
|
2,145,355 |
|
|
|
9.0 |
|
Others (48)
|
|
TDR&TL&PL
|
|
|
6,089,598 |
|
|
|
18.9 |
|
Others (31)
|
|
|
3,494,518 |
|
|
|
14.7 |
|
Total (89
products)
|
|
|
|
$ |
32,181,590 |
|
|
|
100 |
|
Total (68
products)
|
|
$ |
23,748,592 |
|
|
|
100 |
|
In 2009 TDR discontinued its contract
revenues as part of its strategic goals.
Contract revenues of $1,861,225 for the three months ended June
30, 2008 have been reallocated to each of
the applicable product to present a m ore appropriate measure of our
revenues by product line.
Overall, our product gross margins were at
approximately 75.9% and 76.7% during each of the three months ended June 30, 2009 and
2008, respectively. Our lower product gross margins in 2009 versus 2008
were principally attributable to the competiveness of our sales prices in the
PRC market.
Operating Expenses
The following table summarizes the
changes in our operating expenses from $8,098,642 to $12,347,556 for each of the three months ended
June 30, 2008 and 2009,
respectively:
|
|
For
the Three Months Ended June 30
|
|
|
|
2009
|
|
|
%
of Sales
|
|
|
2008
|
|
%
of Sales
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
449,294 |
|
|
|
1.4 |
|
|
$ |
139,004 |
|
|
|
0.6 |
|
Research
and development
|
|
|
3,681,914 |
|
|
|
11.4 |
|
|
|
1,372,579 |
|
|
|
5.8 |
|
Selling,
general and administrative
|
|
|
8,216,348 |
|
|
|
25.5 |
|
|
|
6,587,059 |
|
|
|
27.7 |
|
Total
operating expenses
|
|
$ |
12,347,556 |
|
|
|
38.3 |
|
|
$ |
8,098,642 |
|
|
|
34.1 |
|
Depreciation and
amortization for the three months ended June 30,
2009 amounted to approximately $449,000 as compared to $ 139,000 during the same period in
2008. The higher costs in 2009 are
primarily attributable to the additional depreciation and
amortization costs associated with the tangible and intangible assets acquired
under our 2008 strategic business acquisitions.
Research and development expenses were
approximately $3.7 million for the three months ended June 30, 2009 as
compared to $1.4 million for the same period in 2008. The
increased costs in 2009 is primarily associated with the ongoing clinical trials
for proposed products and studies under the patents, licenses
and other technologies acquired from our 2008 strategic business
acquisitions.
Selling, general and administrative
expenses were $8.2 million for the three months ended June 30, 2009
versus $6.6 mil lion for
the same period in 2008. The higher selling, general and administrative expenses
were primarily attributable to increased marketing and selling costs to support
our revenue growth from $23.7 million in 2008 to $32.2 million in
2009.
For
the six months ended June 30, 2009 as compared to June 30, 2008
Our
principal business operations are conducted through our wholly owned subsidiary,
TDR, and TDR’s wholly-owned subsidiaries.
|
For the Six Months Ended June
30
|
|
|
2009
|
|
% of Sales
|
|
2008
|
|
% of Sales
|
|
Revenues
|
|
$ |
57,015,282 |
|
|
|
100.0 |
|
|
$ |
36,162,022 |
|
|
|
100.0 |
|
Cost of goods
sold
|
|
|
13,793,289 |
|
|
|
24.2 |
|
|
|
8,382,742 |
|
|
|
23.2 |
|
Gross
Profit
|
|
$ |
43,221,993 |
|
|
|
75.8 |
|
|
$ |
27,779,280 |
|
|
|
76.8 |
|
Total
revenues increased by 58% during the six months ended June 30, 2009 as compared
to 2008. The $20.9 million increase in revenue is attributable to strong
performances from our sales distribution channels and the results of our several
successful acquisitions.
As part
of our strategic goals, contract sales of non-manufactured products were
discontinued from early 2009.
Revenues
by Product Line
A
break-down of our revenues by product line for each of the six months ended June
30, 2009 and 2008 is as follows:
|
|
For the Six Months Ended June
30
|
|
|
|
|
|
2009
|
|
|
|
2008
|
|
Product
(Number of
Products)
|
|
Subsidiary
|
|
Sales (USD)
|
|
|
% of Sales
|
|
Product
(Number of
Products)
|
|
Sales (USD)
|
|
|
% of Sales
|
|
Patch (5)
|
|
TDR
|
|
$ |
19,059,164 |
|
|
|
33.4 |
|
Patch (4)
|
|
$ |
12,573,362 |
|
|
|
34.7 |
|
Ointment
(18)
|
|
TDR&TL
|
|
|
12,740,124 |
|
|
|
22.3 |
|
Ointment
(11)
|
|
|
8,796,305 |
|
|
|
24.3 |
|
Spray (15)
|
|
TDR&TL
|
|
|
7,710,726 |
|
|
|
13.5 |
|
Spray (19)
|
|
|
4,878,058 |
|
|
|
13.5 |
|
Bio-Engineering
(3)
|
|
FIRST
|
|
|
6,788,766 |
|
|
|
11.9 |
|
Bio-Engineering
(3)
|
|
|
3,982,860 |
|
|
|
11.0 |
|
Others (48)
|
|
TDR&TL&PL
|
|
|
10,716,502 |
|
|
|
18.9 |
|
Others (31)
|
|
|
5,931,437 |
|
|
|
16.5 |
|
Total (89
products)
|
|
|
|
$ |
57,015,282 |
|
|
|
100 |
|
Total (68
products)
|
|
$ |
36,162,022 |
|
|
|
100 |
|
As shown
in the table above, revenues for all products increased as compared to the six
months ended June 30, 2008. Con tract sales of $4,836,072 for
the six months ended June 30, 2008 have been reallocated to each of the
applicable sale products to present a more appropriate measure of our sales by
product line.
In the
six months ended June 30, 2009, we remained focused on expanding our market
coverage. Our sales representatives increased from approximately 1,300 to 1,500,
along with the increase of approximately 1,000 pharmacies newly opened in 2009.
Our total pharmacy coverage number in 2009 reached approximately 5,500 over 24
provinces in China versus 4,500 over 22 provinces in China in 2008.
Overall,
our product gross margins were at 75.8% and 76.8% during the six months ended
June 30, 2009 and 2008, respectively. Our lower product gross margins in 2009
were principally attributable to the competiveness of our sales prices in the
PRC market.
Operating Expenses
The
following table summarizes the changes in our operating expenses from
$12,801,618 to $22,089,177 for each of the six months ended June 30, 2008 and
2009, respectively:
|
|
For
the Six Months Ended June 30
|
|
|
2009
|
|
|
%
of Sales
|
|
|
2008
|
|
%
of Sales
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
900,666 |
|
|
|
1.6 |
|
|
$ |
215,352 |
|
|
|
0.6 |
|
Research
and development
|
|
|
6,094,694 |
|
|
|
10.7 |
|
|
|
2,042,412 |
|
|
|
5.6 |
|
Selling,
general and administrative
|
|
|
15,093,816 |
|
|
|
26.4 |
|
|
|
10,543,854 |
|
|
|
29.2 |
|
Total
operating expenses
|
|
$ |
22,089,176 |
|
|
|
38.7 |
|
|
$ |
12,801,618 |
|
|
|
35.4 |
|
Depreciation and
amortization for the six months ended June 30, 2009
amounted to approximately $900,000 as compared to $215,000 during the same
period in 2008. The higher costs in 2009 are
primarily attributable to the additional depreciation and
amortization costs associated with the tangible and intangible assets acquired
under our 2008 strategic business acquisitions.
Research
and development expenses were approximately $6.1 million for the six months
ended June 30, 2009 compared to $2.0 million for 2008. The increased costs
in 2009 is primarily associated with the ongoing clinical trials and studies
under the patents, licenses and other technologies acquired from our 2008
strategic business acquisitions.
Selling,
general and administrative expenses for the six months ended June 30, 2009
amounted to $15.1 million in 2009 versus $10.5 million over the same period in
2008. The higher selling, general and administrative expenses were primarily
attributable to the increased costs of marketing and sales to support our
product revenues growth from $36.2 million in 2008 to $57.0 million in
2009.
FULL YEAR 2009 OUTLOOK
We are affirming our 2009 annual guidance which was disclosed in our Annual Report.
We estimate our tota l revenue in 2009 versus 2008
will increase by 40%, or approximately $37 million, with growth in all categories of our
product sales. Our gross
profit margin in 2009 is expected to be approximately 75% due to possible increase in prices of raw materials. Operating expenses are expected to increase due to a higher percentage of R&D
investment, as well as the additional costs to
support our expanding distribution channels and sales growth. We estimate our overall 2009
net profit margin to be approximately 30%.
Our new corporate headquarter is currently under
construction and
we plan to occupy the space by the end of fiscal 2009. As a result , we will no longer rent office space.
Another benefit of the
corporate headquarters is
that all organizational departments will be consolidated into one main central place. This should create a more productive and efficient working
environment for management
operations, as well as all other business
activities. Our new
facilities will
feature a dining area , gymnasium, basketball court,
dormitor ies, and guest rooms to provide
accommodation s and services to our staff and to all
our guests visiting us. The
cost outlays for our new corporate headquarter are planned to be entirely funded
without borrowed funds.
LIQUIDITY
AND CAPITAL RESOURCES
Certain
of our liquidity and capital ratios are outlined below for the six month periods
ended June 30, 2009 and 2008:
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Working capital
ratio
|
|
|
8.7 |
|
|
|
6.3 |
|
Quick ratio
|
|
|
7.6 |
|
|
|
6.1 |
|
Average accounts receivable collection (days)
|
|
|
47.6 |
|
|
|
49.2 |
|
Average inventory turnover (days)
|
|
|
14.6 |
|
|
|
18.5 |
|
Outstanding
debt |
|
$ |
-
|
|
|
$ |
- |
|
Stockholders’
equity per common share
|
|
$ |
6.71 |
|
|
$ |
4.79 |
|
|
|
|
|
|
|
|
|
|
The following
table summarizes our cash and cash equivalents position, our
working capital, and our cash flow activity as of June 30, 2009 and 2008
and for each of the six months then ended: |
|
|
|
|
|
|
|
|
As
of June 30:
|
|
|
|
|
|
|
Working
capital
|
|
$ |
66,039,269 |
|
|
$ |
44,861,048 |
|
Inventories
|
|
$ |
1,571,465 |
|
|
$ |
1,424,155 |
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30:
|
|
|
|
|
|
|
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
17,821,557 |
|
|
$ |
17,820,563 |
|
Investing
activities
|
|
$ |
(9,961,517 |
) |
|
$ |
(9,111,946 |
) |
Financing
activities
|
|
$ |
29,169 |
|
|
$ |
24,327,963 |
|
As of Ju ne 30, 2009, cash and cash equivalents
were approximately $48.23 million.
As of June 30, 2009, we have spent
approximately $9.9 million in construction costs related to our corporate headquarters which is planned to be completed by the end of fiscal 2009. We plan to fund our corporate headquarters
construction project using internal funds. The estimated cost under this project
is approximately
$13 million.
Our working capital ratio is 8.7 versus 6.3
and quick ratio is 7.6 versus 6.1 at June 30, 2009 and 2008,
respectively. Management endeavors to ensure that funds are available to
take advantage of new strategic business alliances and that funds are sufficient
to meet future liquidity and capital needs.
At June 30, 2009, there are no
restrictiv e bank deposits
pledged as security.
Cash flows provided by operating
activities was approximately $17.8 million for the six months ended June
30, 2009 and for the same period in 2008.
Our working capital at June 30, 2009 was appr oximately $66.0 million, compared to
$44.9 million at June 30, 2008. Our increased working capital
position in 2009 was principally funded by the cash flows generated from our
operating activities of approximately $17.8 million in the six months ended
June 30, 2009. Management
considers current working capital and borrowing capabilities adequate to cover our current operating and capital
requirements for the full year 2009.
In the first quarter of fiscal 2008 we
received aggregate net proceeds of approxim ately $23.5 million from the
consummation of a private placement of our securities. The net pr oceeds from the private
placement were used to fund
three business acquisitions we completed in fiscal 2008 and other working
capital needs. There was no similar financing in the six month period ended
June 30, 2009.
Currency
Exchange Fluctuations
All of
our revenues and majority of the expenses during the six months ended June 30,
2009 were denominated primarily in Renminbi (“RMB”), the currency of China, and
were converted into U.S. dollars at the exchange rate of 6.84323 RMB to 1 U.S.
Dollar. For the three months ended June 30, 2009, the exchange rate
is 6.83992 RMB to 1 U.S. Dollar. In the third quarter of 2005, the
RMB 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.
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.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 (the “Exchange Act”) and are not required to provide the information
under this item.
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 Exchange Act as of June 30,
2009. 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 interim 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 of fiscal 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
We are
not a party to any material pending legal proceedings.
Item
1A. Risk Factors.
We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
In the
three-month period ended June 30, 2009, and subsequent period through the date
hereof, we did not engage in any
unregistered sales of
equity securities other than as set forth below:
Cashless Exercise of
Warrants
As of
April 29, 2009, warrants to purchase an aggregate of 150,000 shares of our
common stock, which we issued to a consultant in consideration for services
rendered in connection with the share exchange transaction we consummated in May
2006, were exercised on a cashless basis. In connection with the cashless
exercise, the warrant holder was deemed to have paid an amount equal to the
difference between the exercise price ($2.00 per share) and the average closing
price of a share of our common stock during the ten (10) trading days ending on
the date of exercise ($14.75 per share). As a result of such cashless exercise,
we issued an aggregate of 129,661 shares of our common stock to the warrant
holder.
We
believe that this transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2), or Regulation D promulgated
thereunder, as transactions by an issuer not involving a public
offering.
Cashless
Exercise of Stock Options
As of
June 30, 2009, stock options to purchase an aggregate of 101,000 shares of our
common stock, which we issued to pursuant to our 2006 Stock Incentive Plan on
October 25, 2006, were exercised on a cashless basis by 36 optionees. In
connection with the cashless exercises, the optionees were deemed to have paid
an amount equal to the difference between the exercise price ($3.65 per share)
and the fair market value of a share of our common stock on the date of exercise
($14.68 per share). As a result of such cashless exercises, we issued an
aggregate of 75,888 shares of our common stock to the optionees.
We
believe that these transactions are exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2), or Regulation D
promulgated thereunder, as transactions by an issuer not involving a public
offering.
Item
3. Defaults Upon Senior Securities.
In the
three-month period ended June 30, 2009, 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, 2009, 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, 2009, or subsequent period through the date
hereof, which was not so reported.
Item
6. Exhibits
Exhibit No.
|
|
|
Description of Exhibit
|
|
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 14, 2009
|
By:
|
/s/
Liu Yan Qing |
|
|
|
Liu
Yan Qing
Chairman,
Chief Executive Officer and President
|
|
|
|
|
|
|
|
|
|
Dated:
August 14, 2009
|
By:
|
/s/
Stanley Hao |
|
|
|
Stanley
Hao
Chief
Financial Officer and Secretary
|
|