Weikang Bio-Technology (WKBT) harsh weather conditions had impact on Q2 results

Weikang Bio-Technology Group Co., Inc. (WKBT), a leading developer, manufacturer and marketer of Traditional Chinese Medicine (TCM), Western prescription and OTC pharmaceuticals and other health and nutritional products in China, yesterday announced its fiscal 2010 second quarter results for period ended June 30, 2010.

Second Quarter Highlights -- Revenue was $10.5 million -- Gross profit was $6.1 million with gross margin of 58.3% -- Net Income was $1.9 million with fully diluted earnings per share of $0.07 -- Adjusting for non-cash, stock-based compensation of $0.9 million, non- GAAP net income was $2.8 million and non-GAAP fully diluted earnings per share was $0.10

"During the second quarter we experienced severely harsh weather which disrupted business operations and impacted our sales. In early May, 2010, the southern and central region of China experienced an unusual amount of heavy rainfall resulting in extreme flooding and high humidity. This extreme weather caused disruption to transportation in the region which in turn prompted a portion of our sales to be postponed," commented Dr. Ying Wang, Chairman & CEO of Weikang Bio-Technology Group Co., Inc. "However, we are pleased to note that the majority of the problems caused by the extreme weather have been resolved and with our strong product offering as well as new therapeutics to be launched this year, we are looking forward to return to healthy revenue and net income growth for the rest of 2010."

Revenue for the second quarter of 2010 was $10.5 million, down 20.5% from revenue of $13.2 million in the second quarter of 2009. Revenue from Tianfang was $7.0 million, or 66% of total sales, and revenue from WeiKang was $3.5 million, or 34% of total sales. Revenue for the quarter was adversely impacted due to the harsh rainfall in southern and central China which caused extreme flooding as well as an unusually high level of humidity in Harbin which impacted distribution as well as operations. Both conditions have improved considerably and operations have resumed to their regular production level.

Gross profit for the quarter decreased 13.7% to $6.1 million from 7.1 million in the same period of 2009. Gross margin for the second quarter of 2010 was 58.3% compared to 53.7% in the second quarter of 2009. The increase in gross margin over the previous year period is the result of an increase of the percent of total sales of the Company's higher margin products.

Operating expenses were $3.3 million or 31.1% of sales, compared to $3.0 million or 22.5% of sales in the second quarter of 2009. The increase in operating expenses was attributable to an increase in transportation expense due to the disruption in transportation as a result of the harsh weather conditions. The Company also recognized $900,485 in non-cash, stock-based compensation expenses that it did not incurred in the comparable period a year ago. Adjusting for the non-cash, stock-based compensation, operating expenses were $2.4 million or 22.5% of total sales. The non-cash, stock-based compensation relates to the private placement done on January 20, 2010 and associated investor relation expense as well as compensation to four Directors and a key employee. The Company has recorded $2.6 million as total deferred compensation.

Operating income for the second quarter was $2.9 million, down 30.8% from $4.1 million in the second quarter of 2009. Operating margin was 27.2% compared to 31.3% in the same period a year ago. Adjusting for the previously mentioned non-cash, stock-based compensation, non-GAAP operating income was $3.8 million in the second quarter of 2010 and operating margin was 35.8%.

Net income was $1.9 million in the second quarter of 2010, down 42.5% from $3.3 million in net income from the same period a year ago. Fully diluted earnings per share were $0.07 compared to fully diluted earnings per share of $0.13 in the second quarter of 2009. Excluding the non-cash, stock-based compensation, non-GAAP net income and fully diluted earnings per share for the second quarter of 2010 was $2.8 million and $0.10, respectively.

As of June 30, 2010, Weikang Bio-Technology Group Co., Inc. had $20.5 million in cash and cash equivalents, $20.3 million in working capital and $13.4 million in total liabilities. Net cash provided by operating activities for the first six months of 2010 was $7.2 million. Shareholders' equity stood at $34.2 million, up from $23.4 million at year end 2009.

Revenue for the first six months of fiscal 2010 was $24.5 million, up 5% from $23.3 million in the same period a year ago. Gross profit was $14.4 million, up 13.3% from gross profit of $12.7 million for the first six months of fiscal 2009. Gross margin was 59.0% compared to 54.7% for the comparable period a year ago. Operating income was $9.2 million, up slightly from $9.1 million in the first six months of fiscal 2009. Adjusting for $1.9 million in non-cash, stock-based compensation, non-GAAP operating income was $11.1 million. Net income was $6.5 million, down 10.0% from $7.2 million in the same period a year ago. Fully diluted earnings per share were $0.23 compared to $0.28 in the first six months of fiscal 2009. Excluding the non-cash, stock-based compensation, non-GAAP net income and fully diluted earnings per share for the first six months of 2010 was $8.3 million and $0.30.

Weikang Bio-Technology intends to increase its sales by expanding its product offering as well as offering consumers value packages by bundling its therapeutics. At the end of August, 2010, the Company intends to launch a new value-add bundled package of its Rongrun Kidney Boost Tonic combined with newly launched therapeutics: Perilla Seed Soft Capsule, Forest Frog Oil Soft Capsule and Yangshen Pill. In the fourth quarter of 2010, Weikang Bio-Technology plans to launch two additional therapeutics, Sha Bai Shuanghuai Soft Capsules and Gouqi Xi Pu Soft Capsules which have the potential to add up to approximately $5.7 million in revenue and up to approximately $2.2 million in net income combined on an annual basis when it reaches full production.

"While the second quarter of 2010 was off due to events outside of managements' control, we are very positive about our outlook for the rest of 2010 as we have several exciting new products that we plan to launch by the end of the year," Mr. Wang continued. "Moreover, we believe our long-term growth opportunities are strong as we remain committed to expanding our distribution network and developing new high quality therapeutics. For example, a project that we believe has an exciting commercial potential is the development of licorice flavonoids for use in therapeutics which we anticipate has the possibility to contribute to over $13 million in annual sales when it reaches full production."

The company is part of our China Investor King Portfolio and the recent drop in price was overdone. Net Earnings per share for Q3 and Q4 can easily run to $0.12 and $0.15, which leaves us with an EPS 2010 of $ 0.50.

POSITION:LONG