Skystar Bio-Pharma (NASDAQ:SKBI)

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

GeoTeam® Note: Second Quarter 2011 vs. 2010 Adjusted EPS wsa $0.15 vs. $0.31

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.

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.

GeoTeam® Note:

• 2011 vs. 2010 First Quarter Adjusted EPS was $0.17 vs. $0.20.
• Cash flow from operations turned negative

Fourth Quarter 2010 Highlights

• Revenue increases 45% YoY to $15.8 million
• Gross margin increased from 50% for the three months ending December 31, 2009 to 54% for the three months ended December 31, 2010
• Net income increased 26% to $3.9 million or $0.55 per fully diluted share, compared with $3.1 million or $0.44 per basic share in the fourth quarter of 2009

Mr. Weibing Lu, Skystar Bio-Pharmaceutical's chairman and chief executive officer, commented, "We are pleased to announce strong financial results for the fourth quarter and full fiscal 2010 year. The Company was able to grow top line revenue by over 40% year-over-year to $47.5 million and net income by over 20% year-over-year to $14.0 million. Additionally, Skystar improved net cash from operating activities significantly to $7.7 million as compared $1.3 million in the year ago period.

Presently, Skystar anticipates delivering top line revenue in the range of $60.0 to $63.0 million with a gross margin of 50% to 55% for 2011.

Skystar in 2010 saw significant inflation pressures building in China. However, the Company had been able to secure favorable pricing by prepaying for raw materials to major suppliers. The Company anticipates that inflationary pressures will continue in 2011. As a result, the Company is continuing with its buy-forward strategy to suppliers in order to have better control of costs for raw materials.

Mr. Lu concluded, "We are excited with the momentum that Skystar has built as a leader in China's animal healthcare space and as the only U.S. listed pureplay animal healthcare stock. We fully anticipate our current acquisitions and expanded manufacturing facilities to ramp up, bear fruit and further improve Skystar's profitability.

GeoTeam Note:  Adjusted 2010 vs 2009 EPS for the

• Full Year: $2.11 vs. $1.83
• Fourth Quarter:  $0.67 vs. $0.43

Third Quarter 2010 Highlights

• Revenue increases 45% YoY to record $18.5 million. 

• Net income for the third quarter of 2010 was a record $6.6 million, or $0.93 per fully diluted share. This compares to net income of $5.3 million or $0.76 per fully diluted share in the same quarter of 2009.

• Skystar's adjusted net income for the third quarter of 2010 was $6.5 million or $0.91 per fully diluted share, compared with $4.2 million, or $0.61 per fully diluted share, in the third quarter of 2009.

Mr. Weibing Lu, Skystar Bio-Pharmaceutical's chairman and chief executive officer, commented, "Skystar is pleased to report third quarter fiscal 2010 results in our seasonally stronger half of the fiscal year highlighted by record organic revenues. Skystar continues in refining its strategy to remain as one of the leading players in its niche as a manufacturer and distributor of over 250 animal healthcare products.

"Through consistent market research and close contact with our customers both large and small, we have been able to maximize our sales by smartly timing production and distribution of our products in conjunction with the animal farming cycle. We continue to believe that Skystar is servicing market demand for vaccines, medicines, micro-organisms and feed additives in China.

"Skystar experienced double digit organic revenue growth across Skystar's four product lines in the third quarter of fiscal 1010. Driving these positive results was the improved utilization of the Company's primary manufacturing facility in Huxian. Huxian's upgraded vaccine facility in the same location was completed in the second quarter of the fiscal year. Additional tooling, testing and installation of equipment were finalized in the third quarter of fiscal 2010. As of today, we are waiting for the response from the Ministry of Agriculture regarding our application of GMP certification.

Second Quarter 2010 Highlights

• Revenue increases 33% YoY to $8.3 million
  
  
  • Veterinary vaccines totaled $0.4 million, up 21% YoY
  • Veterinary medicines totaled $5.5 million, up 41% YoY
  • Feed additives totaled $0.4 million, up 31% YoY
  • Micro-organism products totaled $2.0 million, up 14% YoY
    
• Gross margin of 53% for the second quarter of fiscal 2010 as compared to 53% in the year ago period.
  
• GAAP net income of $2.4 million or $0.33 per fully diluted share, compared with a loss of $0.1 million or ($0.03) per fully diluted share in the year ago period.
  
• Adjusted net income of $2.2 million or $0.31 per fully diluted share, compared with a loss of $1.4 million or $0.36 per fully diluted share in the year ago period.

• Fiscal 2010 top line revenue guidance range remains at $45.5 million to $47.5 million.

Mr. Weibing Lu, Skystar Bio-Pharmaceutical's chairman and chief executive officer, commented, "Skystar's performance in the second quarter of fiscal 2010 positions the Company well for the second half of the fiscal year which is seasonally our strongest half. The second quarter's performance can be attributed to improved sales effort and increased utilization of production capacity at our Huxian plant, including the expanded micro-organism facility completed in 2009 and came online in June of this year, as well as increased product variety. We currently produce over 248 products as compared to over 195 products in the first quarter of 2010.

"Overall outlook for the industry remains promising despite severe flood damage in many of the agricultural regions of China. The Company anticipates meeting its financial goals and metrics for the year. During the quarter, the Company filed an S-1 registration which was subsequently withdrawn. The intention was not to raise capital at any price or level of dilution to shareholders but in preparation of strengthening our balance sheet should an opportunistic moment arise. The Company does not intend to raise capital at current price levels and is looking into alternative sources of funding such as low interest debt at the local level. Our current income from operations and cash on hand are at adequate levels to maintain daily operations. 

"We expect our sales and growth trajectory to continue through the remainder of the year as we reiterate fiscal guidance for the full year. The Company is positioning itself to be able to meet anticipated market demand for its products, and have sufficient cash resources on hand to maintain on-going operations. We hope to continue to maximize the Company's performance for our shareholders," concluded Mr. Lu. 

China Floods

On July 21, 2010, Xinhua news agency, reported China's worst flood in over a decade, displacing over 110 million people and affecting over 17 million acres of farmland. Additionally, as reported by Xinhua news agency on August 6, 2010, China's Ministry of Agriculture urged local authorities to resume agricultural production as soon as possible and create favorable conditions for the fall harvest.

To date Skystar's business lines have not been affected by the acts of nature; however, the Company will closely monitor the situation and react accordingly.

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.

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.