Skystar Bio-Pharmaceutical Reports Second Quarter 2011 Results

XI'AN, CHINA--(Marketwire - Aug 22, 2011) - Skystar Bio-Pharmaceutical Company (NASDAQ: SKBI) ("Skystar" or the "Company"), a China-based manufacturer and distributor of veterinary medicines, vaccines, micro-organisms and feed additives, today reported unaudited second quarter fiscal year 2011 earnings, for the period ended June 30, 2011.

Second Quarter 2011 Highlights

• Revenue increases 10% YoY to $9.1 million
  • Veterinary vaccines totaled $0.4 million, up 1.2% YoY
  • Veterinary medicines totaled $6.3 million, up 15% YoY
  • Feed additives totaled $0.4 million, up 6% YoY
  • Micro-organism products totaled $2.0 million, flat YoY
• Gross margin of 49% for the second quarter of fiscal 2011 as compared to 53% in the year ago period
• Net income of $1.5 million or $0.21 per fully diluted share, compared with net income of $2.4 million or $0.33 per fully diluted share in the year ago period
• 6% increase in the number of distribution agents and direct customers from 1,026 in Q1 to 2,253 in Q2

First Half 2011 Financial Highlights

• First half fiscal 2011 revenue increases 23% YoY to $16.2 million
• Gross margin of 50% for the first half of fiscal 2011 as compared to 53% in the year ago period
• Net income of $3.4 million or $0.48 per fully diluted share, compared with net income of $3.5 million or $0.49 per fully diluted share in the year ago period

Management Comments
Mr. Weibing Lu, Skystar Bio-Pharmaceutical's chairman and chief executive officer, commented, "Skystar is pleased with its second quarter performance in light of adverse market conditions. The Company has successfully funded product development internally and expanded its distribution footprint while still achieving revenue growth for the quarter as compared to the same period a year ago.

"The increase in research and development costs is necessary to remain competitive as the Company believes that it can no longer rely on making significant pre-payments for raw materials to protect its gross margins in the long term. We maintain a long term strategy for achieving sustained growth and profitability by periodically developing new high gross margin products according to demand and expanding manufacturing capability and distribution. In order to preserve market share and expand into new territories, we have not raised our sales prices as we believe our customers would not be able to absorb pricing increases in this environment and such an increase would erode our market share.

"During the second quarter, we made significant investments in R&D, staging initiatives to develop four new specialty high margin veterinary medication projects. We also successfully launched nine new veterinary medicines and six new feed additives and increased direct distribution channels by six percent as compared to the previous quarter. While this action has increased operating expenses for the quarter and reduced net income, we deemed the move necessary for expanding Skystar's diverse high margin product lines. Given current market conditions, we acknowledge that advanced purchases of raw materials has helped offset significantly higher raw material costs. However, in order to preserve our historical gross margins in the long term, we must continue to expand our distribution footprint and remain focused on developing and marketing our higher margin products.

"China has imposed policies to combat the effects of inflation and upwardly spiraling prices of the nation's food supply. As a result, wholesale market prices of meat became flat, negatively affecting the profits of some animal farmers. The diminished profitability has resulted in a reduction of animal farming and subsequently reduced some demand for our products. Wholesale meat prices have recently begun to increase to previous levels, and we expect farming to resume and demand for our products to return.

"Additionally, an ongoing drought in some regions of China has affected animal farming and aquaculture cultivation. The decreased supply of fresh water available for farming has adversely affected net sales of some of Skystar's products lines including pro-biotics and aquaculture.

"China's government has also started to put pressure on the animal husbandry industry to reduce its reliance on veterinary pharmaceuticals used in bringing animals to term for sale. These efforts are a commitment by China's government to increase the relative food safety for its citizens in addition to standardizing protocols of the animal husbandry industry itself.

"Due to several epidemics and concerns over food safety for China's food supply, the Ministry of Agriculture is delaying further inspections of veterinary pharmaceutical facilities. With this in mind, we believe that GMP certification of Skystar's new vaccine facility should be completed by the end of 2011.

"The fundamental challenge for Skystar is to utilize our industry expertise in staying on top of customer needs while maintaining profitability for our shareholders. China's overall market demand for animal based protein and the evolving commercial animal husbandry industry has not diminished and will drive the long term demand for our products, our growth, and our profitability for years to come.

"With this in mind, we believe that Skystar has taken the necessary measures to maintain our position as a market leader while weathering negative near term events. We value our shareholders and believe that we have positioned Skystar for long term growth in spite of a challenging operating environment and look forward to presenting our results and answering any investor questions concerning our operating environment during tomorrow's conference call," concluded Mr. Lu.

Financial Summary
Gross profit for second quarter 2011 was $4.5 million, up 2% from second quarter 2010. Gross margin for the period was 49%, a slight decrease from with historical year over year comparables.

Operating expenses for second quarter 2011 were $2.9 million, or 32% of total revenue, compared with $1.6 million or 20% of total revenue in the year ago period. Decreased G&A expenses were offset by increases in R&D and selling expenses resulting in a substantial increase in total operating expenses. Total operating expense increased 80% year over year, largely attributable to increased R&D costs.

R&D costs was $1.8 million, or less than 20% of revenue in the second quarter 2011, up from $0.2 million, or 2% of revenue during second quarter 2010. Our increased R&D efforts during the period ended June 30, 2011 included continuing to fund existing joint R&D projects with universities and launching four new R&D projects to develop new veterinary medications during the second quarter of 2011.

Selling expenses, which consist of commissions, advertising and promotion expenses, freight charges, and salaries, totaled $0.6 million for the three months ended June 30, 2011 as compared to $0.4 million for the three months ended June 30, 2010, an increase of approximately 41.2%. This increase was primarily due to the increase in our shipping and handling costs related to delivering our products to customers as we continued to expand our market to remote areas, and to inflation pressure in China, which resulted in higher transportation and delivery costs.

Operating income decreased by 44% year over year to $1.5 million in the second quarter of fiscal year 2011, compared with $2.7 million in the same quarter a year ago, and operating margin decreased to 17% from 33% in the same period a year ago.

Net income for the second quarter of 2011 was $1.5 million, or $0.21 per fully diluted share. This compares to net income of $2.4 million or $0.33 per fully diluted share in the same quarter of 2010.

As of June 30, 2011, we had approximately $5.0 million in cash, current assets of $45.6 million and current liabilities of $8.6 million.

Fiscal 2011 Guidance
In light of the current economic environment, we are taking a conservative approach to financial guidance for fiscal year 2011. The Company confidently expects to generate full fiscal revenue in the range of $52.0 million to $55.0 million.

Conference Call & Webcast Information
Skystar will host a conference call at 7:45 a.m. ET on Tuesday, August 23, 2011 to review the Company's second quarter financial and operational performance. Mr. Weibing Lu, Skystar's chairman and chief executive officer, will host the call, which will be webcast live.

The webcast will be made available on the investor relations section of our corporate website at http://www.skystarbio-pharmaceutical.com. Telephone access to the conference call will also be available in North America by dialing +1 (877) 407-8031 or internationally by dialing +1 (201) 689-8031.

An audio replay of the conference call will be available approximately two hours following the conclusion of the call and for the following 30 day period. To access the replay in North America, dial +1 (877) 660-6853 or, when calling internationally, dial +1 (201) 612-7415, using replay account code # 286 and conference ID # 377360. An archived replay of the conference webcast will also be available on investor relations section of the Skystar corporate website at http://www.skystarbio-pharmaceutical.com.

To be added to the Company's email distribution for future news releases, please send your request to skystar@grayling.com.

About Skystar Bio-Pharmaceutical Company
Skystar is a China-based developer and distributor of veterinary healthcare and medical care products. Skystar has four product lines (veterinary medicines, micro-organisms, vaccines and feed additives) and over 250 products. Skystar has formed strategic sales distribution networks covering 29 provinces throughout China. For additional information, please visit http://www.skystarbio-pharmaceutical.com.

Financial Tables Follow

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
					June 30, 2011			December 31, 2010
CURRENT ASSETS:
	Cash				$	5,046,502		$	5,887,831
	Accounts receivable, net of allowance for doubtful accounts of $345,736 and $339,031 as of June 30, 2011 and December 31, 2010, respectively					3,979,063			4,977,850
	Inventories					16,146,631			7,202,223
	Deposits and prepaid expenses					16,770,200			17,074,000
	Loans receivable					2,113,202			8,040,100
	Other receivables					1,563,512			1,558,775
		Total current assets				45,619,110			44,740,779
PLANT AND EQUIPMENT, NET						22,608,122			22,613,113
CONSTRUCTION-IN-PROGRESS						6,249,534			1,590,720
OTHER ASSETS:
	Long-term prepayments					1,222,130			1,454,226
	Long-term prepayments for acquisitions					4,901,402			4,806,352
	Intangible assets, net					5,820,403			6,043,941
		Total other assets				11,943,935			12,304,519
			Total assets		$	86,420,701		$	81,249,131
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable				$	789,758		$	201,850
	Other payable and accrued expenses					1,421,029			1,845,051
	Short-term loans					4,208,846			3,025,884
	Deposits from customers					1,574,905			1,260,030
	Taxes payable					54,482			749,836
	Shares to be issued to related parties					79,575			53,050
	Due to related parties					437,341			217,912
		Total current liabilities				8,565,936			7,353,613
OTHER LIABILITIES:
	Deferred government grant					1,005,550			986,050
	Warrant liability					323,992			1,419,639
		Total other liabilities				1,329,542			2,405,689
			Total liabilities			9,895,478			9,759,302
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
	Preferred stock, $0.001 par value, 50,000,000 shares authorized, No Series "A" shares authorized 48,000,000 Series "B" shares authorized, No Series "B" shares issued and outstanding
	Common stock, $0.001 par value, 40,000,000 shares authorized, 7,161,919 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively					7,162			7,162
	Paid-in capital					35,784,378			35,784,378
	Statutory reserves					5,695,236			5,695,236
	Retained earnings					28,286,512			24,847,290
	Accumulated other comprehensive income					6,751,935			5,155,763
		Total shareholders' equity				76,525,223			71,489,829
			Total liabilities and shareholders' equity		$	86,420,701		$	81,249,131

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
					For Three Months Ended June 30,								For Six Months Ended June 30,
					2011				2010				2011				2010
REVENUE, NET				$	9,096,141			$	8,264,541			$	16,183,095			$	13,133,784
COST OF REVENUE					4,637,007				3,905,063				8,128,353				6,196,282
GROSS PROFIT					4,459,134				4,359,478				8,054,742				6,937,502
OPERATING EXPENSES:
	Research and development				1,801,551				192,088				2,089,023				236,083
	Selling expenses				609,826				431,810				979,230				602,944
	General and administrative				515,293				998,034				1,810,091				1,617,584
		Total operating expenses			2,926,670				1,621,932				4,878,344				2,456,611
INCOME FROM OPERATIONS					1,532,464				2,737,546				3,176,398				4,480,891
OTHER INCOME (EXPENSE):
	Other income (expense), net				(4,549	)			36,257				(4,367	)			36,674
	Interest income (expense), net				(98,973	)			(12,976	)			(69,301	)			(17,792	)
	Change in fair value of derivative liability				360,153				158,054				1,095,647				(159,326	)
		Total other expense, net			256,631				181,335				1,021,979				(140,444	)
INCOME BEFORE PROVISION FOR INCOME TAXES					1,789,095				2,918,881				4,198,377				4,340,447
PROVISION FOR INCOME TAXES					281,705				540,486				759,155				865,805
NET INCOME					1,507,390				2,378,395				3,439,222				3,474,642
OTHER COMPREHENSIVE INCOME :
	Foreign currency translation adjustment				1,130,579				280,998				1,596,172				240,182
COMPREHENSIVE INCOME				$	2,637,969			$	2,659,393			$	5,035,394			$	3,714,824
EARNINGS PER SHARE:
	Basic			$	0.21			$	0.33			$	0.48			$	0.49
	Diluted			$	0.21			$	0.33			$	0.48			$	0.49
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
	Basic				7,169,419				7,104,606				7,168,176				7,083,149
	Diluted				7,169,419				7,140,518				7,174,888				7,119,846

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
							Six months ended June 30,
							2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income					$	3,439,222			$	3,474,642
	Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation				498,760				299,848
			Amortization				385,722				77,133
			Bad debt expense				-				287,561
			Allowance for slow moving inventories				-				63,001
			Common stock issued for services				-				16,245
			Common stock to be issued to related parties for compensation				26,525				70,367
			Change in fair value of warrant liability				(1,095,647	)			159,326
		Change in operating assets and liabilities
			Accounts receivable				1,085,951				(3,584,456	)
			Inventories				(8,711,510	)			(9,252,221	)
			Deposits and prepaid expenses				(56,093	)			7,729,174
			Other receivables				791,371				(56,090	)
			Accounts payable				577,915				253,565
			Other payable and accrued expenses				(449,155	)			(88,372	)
			Deposits from customers				286,977				349,949
			Taxes payable				(702,883	)			753,555
				Net cash (used in) provided by operating activities			(3,922,845	)			553,227
CASH FLOWS FROM INVESTING ACTIVITIES:
	Payments of long-term prepayments						(307,642	)			-
	Prepayment for asset acquisition						-				(5,518,478	)
	Loans to third parties						(2,847,846	)			-
	Collection of loans to third parties						8,871,193				-
	Purchases of intangible assets						(46,186	)			-
	Purchases of plant and equipment						(51,222	)			(2,136,531	)
	Payments on construction-in-progress						(4,013,980	)			(748,449	)
				Net cash provided by (used in) investing activities			1,604,317				(8,403,458	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from short-term loans						1,724,019				-
	Repayment for short-term loans						(612,440	)			(220,035	)
	Repayment to shareholders and directors						-				(110,018	)
	Due (from) to related parties						190,630				(47,874	)
				Net cash provided by (used in) financing activities			1,302,209				(377,927	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH							174,990				11,318
DECREASE IN CASH							(841,329	)			(8,216,840	)
CASH, beginning of period							5,887,831				11,699,398
CASH, end of period						$	5,046,502			$	3,482,558
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid for interest					$	119,128			$	7,435
	Cash paid for income taxes					$	1,262,699			$	578,055
	Non-cash investing and financing activities
		Long-term prepayment transferred to construction-in-progress				$	571,692			$	-
		Long-term prepayment transferred to property, plant and equipment				$	-			$	439,897
		Construction-in-progress transferred to property, plant and equipment				$	-			$	1,396,211
		Cashless exercise of warrants				$	-			$	1,511,604
		Issurance of common stock accrued in previous year				$	-			$	25,002

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
			Common stock								Retained earnings
			Shares		Amount			Paid-in capital			Statutory reserves			Unrestricted			Accumulated other comprehensive income			Total
BALANCE, December 31, 2010			7,161,919		$	7,162		$	35,784,378		$	5,695,236		$	24,847,290		$	5,155,763		$	71,489,829
	Foreign currency translation																	1,596,172			1,596,172
	Net income														3,439,222						3,439,222
BALANCE, June 30, 2011			7,161,919		$	7,162		$	35,784,378		$	5,695,236		$	28,286,512		$	6,751,935		$	76,525,223

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Certain of the statements made in the press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward-looking terminology such as "believe," "expect," "may," "will," "should," "project," "plan," "seek," "intend," or "anticipate" or the negative thereof or comparable terminology. Such statements typically involve risks and uncertainties and may include financial projections or information regarding the progress of new product development. Actual results could differ materially from the expectations reflected in such forward-looking statements as a result of a variety of factors, including the risks associated with the effect of changing economic conditions in The People's Republic of China, variations in cash flow, reliance on collaborative retail partners and on new product development, variations in new product development, risks associated with rapid technological change, and the potential of introduced or undetected flaws and defects in products, and other risk factors detailed in reports filed with the Securities and Exchange Commission from time to time.