Skystar Bio-Pharmaceutical Reports 27% Growth in Revenue From Continuing Operations in First Quarter Fiscal Year 2010

XI’AN, CHINA--(Marketwire - May 18, 2010) - 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 first quarter fiscal year 2010 earnings, for the period ended March 31, 2010.

First Quarter 2009 Highlights

• Revenue increases 27% YoY to $4.9 million
  • Veterinary vaccines totaled $0.2 million, up 58% YoY
  • Veterinary medicines totaled $3.2 million, up 23% YoY
  • Feed additives totaled $0.2 million, up 29% YoY
  • Micro-organism products totaled $1.2 million, up 35% YoY
• Gross margin of 53% for the first three months of fiscal 2010 and compared to 49% for the three months ended March 31, 2009
• GAAP net income $1.1 million or $0.15 per fully diluted, compared with $1.1 million or $0.29 per fully diluted share in the year ago period
• Fiscal 2010 top line revenue guidance range increased to $45.5 million to $47.5 million from $44.0 million to $46.0 million

Mr. Weibing Lu, Skystar Bio-Pharmaceutical’s chairman and chief executive officer, commented, “We are pleased to have delivered such a strong start to the fiscal 2010 year with a 27% increase in revenue as compared to the year ago period. Additionally, the Company continues to improve top line growth while generating 53% gross margins in line with the Company’s historical gross margins. We hope to continue with management’s growth strategy in expanding our footprint in China’s animal husbandry space.

“Across Skystar’s product lines we are seeing material revenue growth as a result of increased sales efforts, demand for our products and increased utilization of the Company’s veterinary medicine facility. Additionally, we are pleased to have Michael H. Lan join Skystar as our full time chief financial officer. We expect that Michael’s internal financial control and operational experience will further aid in strengthening Skystar’s financial accountability to the public.

“On the R&D front, we are proceeding with research & development efforts to expand the Company’s product lines as evidenced by the recently announced product testing of two additional product dosage forms: oral solution and injectable soluble powder specifically formulated for Skystar’s veterinary line of medicines. It is Skystar’s goal to launch a comparable number of products in fiscal 2010 as compared to the year prior.

“With regard to Skystar’s construction projects, we expect to complete the construction phase of the new vaccine manufacturing plant in the second fiscal quarter of 2010, whereby GMP testing and certification will commence. Since completing the micro-organism facility in December 2009, we have moved forward in the period with tooling the facility and quality assurance. The Company expects to begin micro-organism production in the new facility at the end of June 2010.

“On the acquisition front, as of March 31, 2010, refundable long term prepayments of $12,308,130 represent refundable deposits made to potential acquisition targets, the completion of which are contingent upon the Company successfully negotiating with the target companies,” concluded Mr. Lu.

Financial Summary
Gross profit for first quarter 2010 was $2.6 million, up 37% from first quarter 2009. Gross margin for the period was 53%, in line with historical year over year comparables.

Operating expenses for first quarter 2009 were $0.8 million, or 17% of total revenue, compared with $0.6 million or 17% of total revenue in the year ago period.

Research and development (R&D) costs were $0.04 million, or less than 1% of revenue in first quarter 2010, down from $0.1 million, or 3% of revenue during first quarter 2009. Most of the current research projects are in the later phases of development focusing on applications and documentation without the significant outlays related to the earlier phases of the projects when large scale testing was required.

Selling expenses totaled $0.2 million, or 3% of revenue, for first quarter 2010, compared with $0.2 million, or 6% of revenue, in first quarter 2009. General and administrative expenses were $0.6 million, or 13% of revenue, in first quarter 2010, compared with $0.3 million, or 8% of revenue, in first quarter 2009.

Operating income increased by 41% year over year to $1.7 million in the first quarter of fiscal year 2010, compared with $1.2 million in the same quarter a year ago, and operating margin increased to 36% from 32% in the same period a year ago.

Net income for the first quarter of 2010 was $1.1 million, or $0.15 per fully diluted share. This compares to a net income of $1.1 million, or $0.29 per fully diluted share in the same quarter of 2009. Skystar’s adjusted net income for the first quarter of 2010 was $1.4 million, or $0.20 per fully diluted share, compared with $1.0 million, or $0.27 per fully diluted share, in the first quarter of 2009 (See “About Non-GAAP Financial Measures” toward the end of this release).

As of March 31, 2010, Skystar had approximately $5.9 million in cash and restricted cash, current assets of $27.1 million and current liabilities of $4.3 million.

Fiscal Year 2010 Guidance Revised
Fiscal year 2010 revenue ranges have been revised to $45.5 million to $47.5 million for the full year reflecting partial revenue contribution from two new product dosage forms coming to market. We anticipate the estimated $5 million in total additional revenue to be fully recognized in fiscal 2011.

CONFERENCE CALL & WEBCAST INFORMATION
Skystar will host a conference call at 8:00 a.m. ET on Tuesday, May 18, 2010 to review the Company’s first quarter financial and operational performance. Mr. Weibing Lu, Skystar Bio-Pharmaceutical 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 the Skystar 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) 407-9210 or internationally by dialing +1 (201) 689-8049.

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 # 350967. An archived replay of the conference webcast will also be available on the 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 170 products. Skystar has formed strategic sales distribution networks covering 29 provinces throughout China. For additional information, please visit http://www.skystarbio-pharmaceutical.com.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for the change in the fair value of the Company’s warrants. The Company believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that our management excludes when it internally evaluates the performance of the Company’s business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of Skystar. Accordingly, management excludes the change in the fair value of the Company’s warrants when making operational decisions. The Company believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand the Company’s financial performance in comparison to historical periods. In addition, it allows investors to evaluate the Company’s performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, our management compensates for these limitations by providing the relevant disclosure of the items excluded.

Financial Tables Follow

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.

SKBI- Adjusted Net Income March 31, 2010 March 31, 2009 -------------- -------------- GAAP Net Income 1,096,247 1,064,644 GAAP Basic Earnings Per Share 0.16 0.29 GAAP Diluted Earnings Per Share 0.15 0.29 Additions Change in fair value of warrants 317,380 (38,328) -------------- -------------- Total additions 317,380 (38,328) Non GAAP Net Income 1,413,627 1,026,316 Non GAAP Basic Earnings Per Share 0.20 0.27 Non GAAP Diluted Earnings Per Share 0.20 0.27 Shares used in computing net income per basic share 7,061,530 3,734,602 Shares used in computing net income per diluted share 7,140,140 3,734,602 Consolidated Statements of Income and Other Comprehensive Income (Unaudited) For Three Months Ended March 31, ------------------------ 2010 2009 ----------- ----------- REVENUE, NET $ 4,869,243 $ 3,823,566 COST OF REVENUE 2,291,219 1,946,358 ----------- ----------- GROSS PROFIT 2,578,024 1,877,208 ----------- ----------- OPERATING EXPENSES: Research and development 43,995 117,352 Selling expenses 171,134 207,395 General and administrative 619,550 314,695 ----------- ----------- Total operating expenses 834,679 639,442 ----------- ----------- INCOME FROM OPERATIONS 1,743,345 1,237,766 ----------- ----------- OTHER INCOME (EXPENSE): Other income (expense), net 417 (232) Interest income (expense), net (4,816) 302 Change in fair value of warrant liability (317,380) 38,328 ----------- ----------- Total other income (expense), net (321,779) 38,398 ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 1,421,566 1,276,164 PROVISION FOR INCOME TAXES 325,319 211,520 ----------- ----------- NET INCOME 1,096,247 1,064,644 OTHER COMPREHENSIVE LOSS: Foreign currency translation adjustment (40,816) (38,448) ----------- ----------- COMPREHENSIVE INCOME $ 1,055,431 $ 1,026,196 =========== =========== EARNINGS PER SHARE: Basic $ 0.16 $ 0.29 =========== =========== Diluted $ 0.15 $ 0.29 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES: Basic 7,061,530 3,734,602 =========== =========== Diluted 7,140,140 3,734,602 =========== =========== Consolidated Balance Sheets ASSETS March 31, December 31, 2010 2009 ------------ ------------ Unaudited ------------ CURRENT ASSETS: Cash $ 5,911,415 $ 11,699,398 Accounts receivable, net of allowance for doubtful accounts of $327,857 and $327,857 as of March 31, 2010 and December 31, 2009, respectively 3,447,078 4,383,187 Inventories 4,996,515 4,074,645 Deposits and prepaid expenses 12,173,047 11,900,314 Other receivables 572,641 490,712 ------------ ------------ Total current assets 27,100,696 32,548,256 ------------ ------------ PLANT AND EQUIPMENT, NET 10,415,008 8,829,058 CONSTRUCTION-IN-PROGRESS 9,741,767 9,389,120 OTHER ASSETS: Long-term prepayments 13,276,071 7,980,307 Intangible assets, net 1,768,771 1,860,172 ------------ ------------ Total other assets 15,044,842 9,840,479 ------------ ------------ Total assets $ 62,302,313 $ 60,606,913 ============ ============ LIABILITIES AND CHANGES IN EQUITY CURRENT LIABILITIES: Accounts payable $ 421,031 $ 297,567 Other payable and accrued expenses 694,400 917,284 Short-term loans - 220,050 Short-term loans from shareholders 110,025 110,025 Deposits from customers 1,850,051 1,275,958 Taxes payable 825,082 722,106 Shares to be issued to related parties 329,397 327,374 Due to related parties 106,743 185,024 ------------ ------------ Total current liabilities 4,336,729 4,055,388 ------------ ------------ OTHER LIABILITIES: Deferred government grant 1,100,250 1,100,250 Warrant liability 510,571 1,538,686 ------------ ------------ Total other liabilities 1,610,821 2,638,936 ------------ ------------ Total liabilities 5,947,550 6,694,324 ------------ ------------ COMMITMENTS AND CONTINGENCIES CHANGES IN EQUITY: Preferred stock, $0.001 par value, Nil Series “A” shares authorized as of March 31, 2010 and December 31, 2009, 48,000,000 Series “B” shares authorized, Nil Series “B” shares issued and outstanding as of March 31, 2010 and December 31, 2009 Common stock, $0.001 par value, 40,000,000 shares authorized, 7,097,708 and 6,989,640 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively 7,097 6,989 Paid-in capital 35,966,731 34,580,096 Statutory reserves 3,879,077 3,879,077 Retained earnings 13,671,153 12,574,906 Accumulated other comprehensive income 2,830,705 2,871,521 ------------ ------------ Total shareholders’ equity 56,354,763 53,912,589 ------------ ------------ Total liabilities and shareholders’ equity $ 62,302,313 $ 60,606,913 ============ ============ Consolidated Statement of Cash Flows Unaudited Three months ended March 31, ---------------------------- 2010 2009 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,096,247 $ 1,064,644 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 123,484 112,930 Amortization 91,370 38,519 Common stock issued for services 16,245 15,052 Common stock to be issued to related parties for compensation 27,025 - Bad debt expense - 21,743 Change in fair value of warrant liability 317,380 (38,328) Change in operating assets and liabilities Accounts receivable 935,790 (994,017) Inventories (921,558) (2,888,742) Deposits and prepaid expenses (272,640) 2,551,310 Other receivables (81,901) (9,823) Accounts payable 123,423 (166,085) Accrued expenses (223,979) (382,703) Deposits from customers 573,897 (131,448) Taxes payable 102,941 900,427 Other payables 1,233 39,916 ------------- ------------- Net cash provided by operating activities 1,908,957 133,395 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments of long-term prepayments - (32,233) Prepayment for potential acquisition (5,499,375) - Loans to third parties - (366,275) Purchases of plant and equipment (1,451,016) (73,255) Payments on construction-in-progress (404,990) (242,507) ------------- ------------- Net cash used in investing activities (7,355,381) (714,270) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease (increase) in restricted cash (200) Proceeds from short-term loans - 219,765 Repayment for short-term loans (219,975) - Repayment to shareholders and directors - (175,812) Proceeds from shareholders and directors - 83,124 Due (from) to related parties (78,269) - ------------- ------------- Net cash provided by financing activities (298,244) 126,877 ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (43,315) 81,264 ------------- ------------- INCREASE (DECREASE) IN CASH (5,787,983) (372,734) CASH, beginning 11,699,398 576,409 ------------- ------------- CASH, ending $ 5,911,415 $ 203,675 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 5,210 $ 19,079 ============= ============= Cash paid for income taxes $ - $ - ============= ============= Non-cash investing and financing activities Long-term prepayment transferred to construction-in-progress $ - $ 309,869 ============= ============= Long-term prepayment transferred to property, plant and equipment 439,777 - ============= ============= Construction-in-progress transferred to property, plant and equipment 52,463 - ============= ============= Cashless exercise of warrants $ 1,345,496 - ============= ============= 

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.