Skystar Bio-Pharmaceutical Reports Second Quarter Fiscal Year 2014 Financial Results

Revenue of $14.2 Million; Net Income $2.8 Million; $0.37 Fully Diluted EPS; Conference Call to Be Held Friday, August 15, 2014 at 7:45 AM ET

XI'AN, CHINA--(Marketwired - Aug 14, 2014) - 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 2014 earnings, for the period ended June 30, 2014.

Second Quarter 2014 Summary

• Revenue increase 25.6% YoY to $14.2 million as follows:
  • Veterinary medicines totaled $8.6 million, up 36.7% YoY
  • Pro-biotic micro-organism products totaled $4.9 million, increasing 20.4% YoY
  • Feed additives totaled $0.8 million, increasing 50.9% YoY
  • Veterinary vaccines totaled $5,142, decreasing 99.0% YoY, primarily due to our transition from small scale lab production to large scale factory manufacturing
• Gross Profit of $6.4 million increased 6.7% for the second quarter of fiscal 2014 YoY
• Gross Margin of 44.7% for the second quarter, compared to 52.6% in the corresponding period in 2013
• Net Income of $2.8 million or $0.37 per fully diluted share, as compared with $3.8 million or $0.49 fully diluted share YoY

Management's Comments
Mr. Weibing Lu, Chairman and Chief Executive Officer of Skystar, commented, "Skystar is pleased to report strong financial results and our operational highlights for the second quarter. Revenues were driven by our veterinary medications line, up 37% year over year, whose average selling price increased 60% due to increased sales in premium priced products. Additionally, Skystar added 48 production permits to its medications line since the year ago period. Demand for Skystar's veterinary medications product line remains promising and continues to grow as we ramp our production line to full capacity now that Skystar has received GMP approval for the Huxian plant and production permits in application are being received on an ongoing basis. As of current, we have production permits for 97 products, including our strongest seller, praziquantel in our veterinary medication category and 50 in the application process. We also have production permits for 5 vaccines in application. Production permits in application for our vaccine line are expected to be received on an ongoing basis as well." 

Mr. Lu continued, "Additionally, Skystar ceased manufacturing its veterinary vaccine line manually within a small lab environment and transitioned production to the modern GMP certified plant in Huxian capable of large scale batch production. For this reason our revenues from our vaccine line decreased; however, Skystar was able to offset this drop in revenues through sales across its other product lines. The transition of our vaccine line to a modernized facility is a crucial step in executing our core mission to grow Skystar's organic business profitably. The need to modernize and standardize our manufacturing processes in accordance with the Ministry of Agriculture's strict GMP standards, ensures that Skystar remains competitively positioned to assist in China's campaign for improving the safety, health and quality standards of its food supply.

"The ability to adapt to the Ministry of Agriculture's regulatory changes and thrive positions Skystar well as a leader in the animal husbandry space in China allowing for predictable rates of future growth. In moving forward with the Company's growth initiatives, we continue to build infrastructure and make improvements to our other production lines including probiotic and feed additive which ultimately provide a complete suite of animal healthcare products that can be sold and marketed across our proprietary franchised based sales channel, and distribution network that spans all 29 farming provinces in China."

Financial Summary

For the quarter ended June 30, 2014, Skystar's revenues were roughly $14.2 million as compared to revenues of $11.3 million for the three months ended June 30, 2013, an increase of $2.9 million or 25.6%. Overall increase in revenue was primarily due to an increase in our veterinary medications sales.

A breakdown of the year's revenue by production line is as follows:

- Revenue from sales of our veterinary medications increased by $2.3 million or 36.7%, from $6.3 million for the three months ended June 30, 2013 to $8.6 million for the three months ended June 30, 2014.

- Revenue from probiotic products increased by $824,000 roughly or 20.4% from $4.0 million for the three months ended June 30, 2013 to $4.9 million for the three months ended June 30, 2014. The increase was due to improved efficacy of our products resulting in increased demand from our customers.

- Revenue from feed additives increased by $262,000 or 50.9% from $514,000 for the three months ended June 30, 2013 to $776,000 for the three months ended June 30, 2014.

- Vaccine revenues decreased by $492,000 or 99.0% from $497,000 for the three months ended June 30, 2013 to $5,000 for the three months ended June 30, 2014, primarily due to the result of our transition from small scale lab production to large scale factory manufacturing. Our new state-of-the-art vaccine facility has been completed and certified by the Chinese GMP standard, and we expect to receive the vaccine production permit from the government in the third quarter, commencing production shortly thereafter.

Gross profit for the quarter was up $0.4 million or 6.7% from $6.0 million for the three months ended June 30, 2013 to $6.4 million for the three months ended June 30, 2014. Gross margin was 44.7%, down from 52.6% in the same period a year ago. The decreased gross margin was due to the fact that revenue for the period mainly came from the less profitable veterinary medications product line.

Operating expenses for the quarter increased 112.0% to $3.0 million or 21% of total revenue, compared with $1.4 million for the same period a year ago.

Research and development costs for the quarter increased significantly as there was no significant R&D effort undertaken during the second quarter 2013, thus costs increased by 759.8% to $0.8 million for the period.

Selling expenses totaled $0.8 million for the three months ended June 30, 2014 up by $o.2 million, as compared to $0.6 million for the three months ended March 31, 2013, an increase of 32.6%.

General and administrative expenses totaled $1.4 million for the three months ended June 30, 2014 as compared to $0.7 million for the three months ended June 30, 2013, an increase of 97.1%.

Operating income for the period was $3.4 million, down $1.2 million or 25.9% year-on-year. Operating margin was 23.7% versus 40.2% in the corresponding period one year ago.

Net income for the quarter was $2.8 million or $0.37 per fully diluted share. This compares to net income of $3.8 million or $0.49 per fully diluted share for the year ago period.

As of June 30, 2014, Skystar had approximately $16.4 million in cash, current assets of $107.1 million and total current liabilities of $42.3 million which resulted in net working capital of $64.8 million.

Operational Highlights Update

• Vaccine facility at the Xi'an Manufacturing facility expected to be operational by third quarter 2014. At normalized capacity the facility is capable of generating up to $12 million - $15 million in vaccine revenues.
• Following revisions to the Jingzhou veterinary medicine production facility in order to be compliant with GMP requirements, the Company expects upgrades to the facility to be completed by the end of the fiscal year.
• The Kunshan probiotic facility continues to move forward with its build out, currently the construction and installation of these facilities were completed. The Company expects equipment installation to be completed by the end of 2014. The Kunshan facility does not require GMP certification by the Ministry of Agriculture and therefore we expect production at this facility to begin by the end of the year.
• In September 2013, a third party consulting firm completed initial field work at our main administrative offices in China, helping to develop a draft of a new accounting policies and procedures manual in accordance to U.S. GAAP. Skystar intend to complete this project by no later than the end of 2014 and will conduct quarterly assessments of the state of the Company's financial reporting measures and systems, as a whole.
• Continued awareness campaign including, direct mailings to major customers, sent sales teams to various rural seminars, symposiums and other promotional events.

"We reiterate our excitement in having a strong production launch of Skystar's veterinary medications line for the fiscal year to date. We also believe that our veterinary vaccine line which is due to begin sales and distribution of products beginning in the second half of the fiscal year will have a similar positive reception. At full capacity Skystar's new veterinary medications and vaccine production facilities represent a revenue opportunity of $45 million in organic growth over the next three to five years. Also, our recent capital raising transaction with a strategic healthcare investor in the U.S. strengthened our balance sheet. The additional capital allows us to expand our product pipeline through the purchase of new product IP in addition to facilities expansion of our Kunshan probiotics plant. These near term goals positions us in our peer group and will sustain our leadership in our space. In moving forward with Skystar's business model, having past the regulatory tailwinds of the past two years we are now on track to maintaining a stable path to profitable growth through the near and medium term," concluded Mr. Lu.

Business Outlook
Skystar currently maintains business outlook and anticipates delivering an 8% to 18% year over year increase in top line revenue for fiscal 2014 as compared to the prior year. The expected revenue range is $46 million to $50 million with gross margin of roughly 50% for fiscal 2014.

Conference Call Information
The Company will host a conference call on Friday, August 15, 2014 to discuss its financial results for the quarter ended June 30, 2014. Skystar's conference call will begin promptly at 7:45 a.m. EDT to review second quarter fiscal 2014 financial and operational performance. Mr. Weibing Lu, Skystar's Chairman and Chief Executive Officer, will host the call, which will be webcast live.

Webcast will be made available on the investor relations section of the Skystar corporate website at http://www.investorcalendar.com/IC/CEPage.asp?ID=173097.

Phone dial-in to the conference call will 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, referencing conference ID # 13589170.

To be added to the Company's email distribution for future news releases, please send your request to [email protected].

About Skystar Bio-Pharmaceutical Company
Skystar is a China-based developer, manufacturer and distributor of veterinary healthcare and medical care products. Skystar has four product lines: veterinary medicines, probiotics, vaccines and feed additives formulated and packaged in house across several modern manufacturing and distributions facilities. Skystar's distribution network includes almost 3,000 distribution agents of which 360 are franchised stores with exclusivity agreements covering 29 provinces throughout China. For additional information, please visit http://www.skystarbio-pharmaceutical.com.

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(Unaudited)
	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2014				2013				2014				2013
REVENUE, NET	$	14,239,605			$	11,335,145			$	21,072,193			$	16,865,886
COST OF REVENUE		7,880,985				5,377,824				11,890,388				8,308,710
GROSS PROFIT		6,358,620				5,957,321				9,181,805				8,557,176
OPERATING EXPENSES:
Research and development		798,980				92,926				803,193				93,387
Selling expenses		834,606				629,337				1,204,814				947,173
General and administrative		1,357,303				688,810				2,633,720				1,900,083
Total operating expenses		2,990,889				1,411,073				4,641,727				2,940,643
INCOME FROM OPERATIONS		3,367,731				4,546,248				4,540,078				5,616,533
OTHER INCOME (EXPENSE):
Other income (expense), net		19,029				(3,662	)			173,948				(3,849	)
Interest income		164,276				124,986				334,941				273,831
Interest (expense)		(136,847	)			(221,068	)			(212,781	)			(410,460	)
Change in fair value of purchase option liability		78,960				1,134				62,440				5,600
Total other (expense), net		125,418				(98,610	)			358,548				(134,878	)
INCOME BEFORE PROVISION FOR INCOME TAXES		3,493,149				4,447,638				4,898,626				5,481,655
PROVISION FOR INCOME TAXES		682,389				696,757				1,112,416				1,018,041
NET INCOME		2,810,760				3,750,881				3,786,210				4,463,614
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		134,925				1,512,244				(832,024	)			2,063,127
COMPREHENSIVE INCOME	$	2,945,685			$	5,263,125			$	2,954,186			$	6,526,741
EARNINGS PER SHARE:
Basic	$	0.37			$	0.49			$	0.49			$	0.59
Diluted	$	0.36			$	0.49			$	0.49			$	0.59
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic		7,699,912				7,615,719				7,688,155				7,614,721
Diluted		7,799,902				7,615,719				7,783,979				7,614,721

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
					June 30, 2014 (Unaudited)			December 31, 2013
ASSETS
CURRENT ASSETS:
	Cash				$	16,420,742		$	8,142,296
	Restricted cash					7,150,000			-
	Accounts receivable, net of allowance for doubtful accounts of $1,389,622 and $602,243 as of June 30, 2014 (Unaudited) and December 31, 2013, respectively					18,952,862			11,009,498
	Inventories					23,825,698			25,903,586
	Deposits, prepaid expenses and other receivables					2,009,639			2,134,163
	Prepayments to suppliers					38,408,346			41,061,144
	Deferred income tax asset					374,804			364,425
		Total current assets				107,142,091			88,615,112
PROPERTY, PLANT AND EQUIPMENT, NET						29,983,910			28,269,155
CONSTRUCTION-IN-PROGRESS						6,516,179			9,284,947
OTHER ASSETS:
	Long-term prepayments					4,598,411			4,633,614
	Long-term prepayments for acquisitions					3,250,000			183,344
	Intangible assets, net					5,074,690			5,237,255
		Total other assets				12,923,101			10,054,213
			Total assets		$	156,565,281		$	136,223,427
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable				$	6,446,936		$	3,303,531
	Other payables and accrued expenses					7,180,530			6,467,605
	Short-term loans					19,175,000			10,640,500
	Deposits from customers					1,894,466			1,877,211
	Taxes payable					4,241,143			1,315,486
	Due to related parties					3,328,564			1,361,548
		Total current liabilities				42,266,639			24,965,881
OTHER LIABILITIES:
	Deferred government grant					796,250			802,130
	Purchase option liability					-			62,440
		Total other liabilities				796,250			864,570
			Total liabilities			43,062,889			25,830,451
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, 7,604,800 shares issued and outstanding as of June 30, 2014 (Unaudited) and December 31, 2013					7,605			7,605
	Paid-in capital					37,786,372			37,631,142
	Statutory reserves					5,952,692			5,952,692
	Retained earnings					58,776,364			54,990,154
	Accumulated other comprehensive income					10,979,359			11,811,383
	Total shareholders' equity					113,502,392			110,392,976
		Total liabilities and shareholders' equity			$	156,565,281		$	136,223,427

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(Unaudited)
					For the six months ended June 30,
					2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	3,786,210			$	4,463,614
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation				871,051				630,522
		Amortization				124,464				122,478
		Provision for doubtful accounts				793,645				297,164
		Change in fair value of purchase option liability				(62,440	)			(5,600	)
		Loss on sale of office equipment				-				1,740
		Common stock to be issued to related parties for compensation				155,230				8,680
		Deferred income tax asset				(149,101	)			-
	Change in operating assets and liabilities
		Accounts receivable				(8,836,478	)			(1,992,249	)
		Inventories				1,892,416				(3,027,946	)
		Deposits, prepaid expenses and other receivables				110,410				332,707
		Prepayments to suppliers				2,357,300				(8,344,799	)
		Accounts payable				3,175,028				(2,675,933	)
		Other payables and accrued expenses				757,960				144,475
		Deposits from customers				31,088				353,886
		Taxes payable				3,035,971				(605,471	)
		Government grants				-				(641,120	)
		Due to related parties				1,974,147				303,328
			Net cash provided by (used in) operating activities			10,016,900				(10,634,524	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Refund of long-term prepayments					183,687				-
	Payments of long-term prepayments					(3,257,622	)			-
	Loan to third parties					(1,050,576	)			-
	Repayment of loans from third parties					1,050,576				897,232
	Placement of restricted cash					(7,166,720	)			(80,140	)
	Purchases of property, plant and equipment					-				(4,008	)
	Proceeds from sale of plant and equipment					-				160
	Payments on construction-in-progress					(90,507	)			(10,931	)
			Net cash (used in) provided by investing activities			(10,331,162	)			802,313
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from short-term loans					17,591,040				8,815,400
	Repayment of short-term loans					(8,958,400	)			(2,885,040	)
	Repayment of long-term loans					-				(1,282,240	)
			Net cash provided by (used in) financing activities			8,632,640				4,648,120
EFFECT OF EXCHANGE RATE CHANGES ON CASH						(39,932	)			174,610
INCREASE IN CASH						8,278,446				(5,009,481	)
CASH, beginning of period						8,142,296				11,321,848
CASH, end of period					$	16,420,742			$	6,312,367
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid for interest				$	303,288			$	304,766
	Cash paid for income taxes				$	618,944			$	328,574
	Non-cash investing and financing activities
	Construction-in-progress transferred to property, plant and equipment				$	2,797,528			$	-

SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2014

(UNAUDITED)

			Common stock								Retained earnings
			Shares		Amount			Paid-in capital			Statutory reserves			Unrestricted			Accumulated Other Comprehensive Income				Total
BALANCE, January 1, 2014			7,604,800		$	7,605		$	37,631,142		$	5,952,692		$	54,990,154		$	11, 811,383			$	110,392,976
	Foreign currency translation		-			-			-			-			-			(832,024	)			(832,024	)
	Share based compensation								155,230													155,230
	Net income		-			-			-			-			3,786,210			-				3,786,210
BALANCE, June 30, 2014			7,604,800		$	7,605		$	37,786,372		$	5,952,692		$	58,776,364		$	10,979,359			$	113,502,392

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 include, without limitation, the Company's financial projections, and revenue guidance, expectations relating to scaling up of the production and the plant production capabilities, statements relating to the timing of various regulatory certifications, 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 Company's ability to achieve the expected rates of growth and sales at its existing and new facilities, its ability to successfully commercialize and maintain sales leadership position, 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. These forward-looking statements are based upon our current expectations and projections about future events and generally relate to our plans, objectives and expectations for the development of our business. Although management believes that the plans and objectives reflected in or suggested by these forward-looking statements are reasonable, all forward-looking statements involve risks and uncertainties and actual future results may be materially different from the plans, objectives and expectations expressed in this press release. Accordingly, investors should not place any reliance on forward-looking statements as a prediction of actual results.