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Executives

Christopher Chu – IR

Scott Cramer – Director of Corporate Development and U.S. Representative

Bing Mei – CFO

Analysts

Grant Jonathan – Galehead

Skystar Bio-Pharmaceutical Company (SKBI) Q4 2012 Earnings Call April 2, 2013 7:45 AM ET

Operator

Greetings and welcome to the Skystar Bio-Pharmaceutical Fiscal Year, 2012 Financial Results Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentations. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Christopher Chu with Grayling Investor Relations. Thank you, Mr. Chu, you may begin.

Christopher Chu

Thank you operator. Good morning everyone and welcome to the Skystar Bio-Pharmaceutical fiscal year 2012 financial results call. Joining us on the call today is Skystar’s Chairman and CEO Weibing Lu, Skystar’s CFO Bing Mei and company’s Director of Corporate Development and US Representative Scott Cramer. Scott and Bing will provide an overview of Skystar’s results and then we’ll then open up the call to your questions.

Before we begin, I would like to remind you that certain statements made during today’s call 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 beliefs, expects, may, will, should, project, intend, 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 products 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 risks detailed in reports filed with the SEC.

We caution you to not to place undue reliance on these forward-looking statements which speak only as of the date of the earnings call. All forward-looking statements are qualified in their entirety by these cautionary statements. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information to present further.

With that said, I would now like to turn the call over to Mr. Scott Cramer. Scott?

Scott Cramer

Chris, thank you. And welcome everyone on this very early morning. I will be delivering prepared comments today on behalf of Mr. Lu, our Chairman and CEO of Skystar who will be available for Q&A after the opening remarks.

The company’s audited 10-K was released this yesterday evening and I trust that everybody has had ample time to review the results. Additionally the financial results PR was released earlier this morning, we do not have a copy of the release. Please contact Chris Chu, our External Investor Relations Rep and he will assist you in getting any copies of the two documents.

Skystar is very pleased to share its 2012 financial results with everyone on today’s call. In addition we will be providing some commentary as to the progress of Skystar’s operations. Not counting Skystar’s veterinary medicine manufacturing plant Huxian, whose production line was closed for three quarters of 2012 fiscal year, which was due to the ministry of Agriculture’s mandatory GMP re-certification schedule, Skystar was able to ramp up sales across all of its production lines.

Through the shifting of Skystar’s sales and marketing efforts, you’ll notice that vaccine revenues grew 53%, probiotics 9% and feed additives 57%. We were able not only to maintain sales of these production lines in 2012 but increase them – increase selling in spite of China’s economic slowdown.

Financially, Skystar successfully maintained its historically clean and stable balance sheet in addition to finishing the year with bottom line profitable results. At the end of fiscal year 2012, Skystar generated a net positive cash flow from operations, maintain liquidity, met both long and short term debt obligations in addition to increasing its cash position as compared to the beginning of fiscal 2012 and end of fiscal 2011.

Skystar’s management [turned] [ph] operating expenses in 2012 in accordance with the shutdown of the Huxian facility – Huxian Veterinary Medication Facility, where unfortunately revenues were down 68% for the prior fiscal year again due to the aforementioned closing prior – closing to the GMP mandatory inspection.

Likewise, R&D projects for fiscal 2012 were also strategically reduced in order to maintain profitability without shying away from planned research and from the company’s mission to stay ahead of trends and demands in China’s Animal Husbandry space.

Operationally, Skystar moderately increased customer base to 3,964 customers consisting of independent distributors, franchise distributors and direct customers.

The company currently has 275 products in its line-up and awaits final stage 2 approvals for the Huxian facility’s veterinary medication line. We expect this number to change over the course of fiscal 2013 as the company acquires regulatory approval and licenses to manufacture additional products.

With respect to Skystar’s manufacturing facilities, the company currently has four manufacturing facilities. Two of these facilities are located in Xi’an, the Shaanxi Province of China which one side is located in the town of (inaudible) and the other is located in the town of Huxian. The third manufacturing facility is located in Shanxi, Jingzhou City at Hubei Province and the fourth manufacturing facility is located in Kunshan, Jiangsu province China.

The (inaudible) plant has two facilities, the micro-organism facility which is run in cooperation with experts from the Microbiology Institute of the Shaanxi Province and Northwest Agro-Forestry Sci-tech University. Second facility manufactures feed out of this. Both facilities are operational and we look forward to show the revenue contribution in 2013 with respect to these product lines.

The Huxian plant has two production lines for vaccines and medications. In Q3 of fiscal 2012, China’s Ministry of Agriculture inspected and renewed the GMP certificate for this facility’s medications facility which will be valid for a period of five years. We look forward to the revenue contribution of this production facility and are eager to ramp up sales of this product line.

Additionally the new vaccine facility was also inspected and received stage one GMP approval as well. Under China’s revised inspection process, the vaccine production line is still waiting to undergo stage two of the GMP certification. The management expects GM certification process of the vaccine facility to be completed by Q3 of 2013.

The Jingzhou plant is GMP certified to produce veterinary medicines including agriculture medicines and is now fully operational. Skystar’s probiotics plant in Kunshan was acquired for roughly $8 million and we completed the acquisition in 2011. At the end of 2012 the facility – the renovation for this facility is complete. Inspection was completed and accepted in March 2013. However, the equipment installation, tooling and testing is not fully completed thus this facility is not operational at this point.

With that said, I’d like to turn the call over to Bing Mei, Skystar’s Chief Financial Officer, who would go over Skystar’s financial results. Bing?

Bing Mei

Yeah, thank you Scott. For the year ended September 31, 2012 we have the revenues of $33.6 million as compared to revenues of $53.8 million for the prior fiscal year ended December 31, 2011. This is a decrease of roughly $19.2 million or down 36% from the prior year.

The reason for the decrease in topline revenues was due to the temporary finishing of a production at Huxian veterinary medication plant in the first three quarters of fiscal year 2012, for it’s the GMP (inaudible) examination.

Here is the breakdown of the year’s revenues by production lines. Revenues from sales of veterinary medication which accounts of 32% of sales decreased by $23.1 million from $33.8 million in fiscal 2011 to $10.7 million in fiscal 2012. Revenues from microorganism sales accounted for 46% of total revenue increased to $1.2 million to $15.3 million in fiscal 2012 as compared to $14.1 million in 2011.

Revenue from Feed additives product line accounting for 12% of total revenue increased by $1.5 million to $4 million in 2012 up from $2.5 million in fiscal 2011.

Our vaccine product lines accounted for roughly 10% of the total revenue increased by $1.2 million to $3.5 million in fiscal 2012 up from $2.3 million in fiscal 2011. The gross profits for the year was $18.5 million from 29.5% from fiscal 2011. Gross margin was 55% up from 50% in the same period a year ago.

Revenues, net income and the gross profits unfortunately was principally impacted by likes of the primary veterinary medication plants, incurred the three quarters of fiscal 2012, as a result of the MO8 mid-certification – GMP mid-certification process.

The increase of gross margin was mainly because the majority of all revenues in the year come from high rates profitable microorganisms and the same product lines. While the relatively less profitable veterinary medication product-lines reduced its production and therefore sales in the year.

Operating expense for the year decreased to $1 million to 9.9% or 13% of the total revenue compared to $11 million or 21% of total revenue for fiscal 2011.

R&D costs totaled at $3.3 million or 6% for fiscal 2012, current R&D projects are throughout introducing as the GMP identification tips and the veterinary medication in agriculture, poultry and the livestock lines.

Selling expense totaled $3 million or 9% of revenue. Overall, 7% decrease of $1 million or 75% from fiscal year 2011 mainly due to the decrease in sales commission expense as the Huxian veterinary medication facility was temporarily closed support the first three quarters of 2012 resulting in a significant decrease in veterinary medication sales in 2012.

Shipping and handling costs and the sailing traveling cost also decreased as of that the veterinary medication sales activities during the year.

G&A expense totaled $4.7 million or 40% of the revenue for the year. G&A increased due to stock based compensation expense of $1 million for stock rents May 1, 2012 of which rents will made the facility to returns and the provisions of 2010 stock intentional plant.

Operating income for 2012 was $8.6 million from $6.7 million from the prior year. Operating margin was 26% versus 29% in the year ago period. Net income for the full fiscal year 2012 was $6.3 million or $0.83 for the intermediate period. This compares to net income of $13.7 million or $1.90 until this year of fiscal year 2011.

As of December 31, 2012 (inaudible) approximately $7.3 million in cash, current assets of $7.1 million and current liability of $17.2 million, which in result in net working cash flow to $4.4 million and the current ratio of $4 million.

With that I will turn the call over to Scott. Scott?

Scott Cramer

Yeah, thank you Bing. I’d like to provide management’s concluding remarks. Skystar would like to thank all of our investors at large. Fiscal 2012 was a great year of progress for Skystar logistically. While Skystar’s veterinary medication and manufacturing facility was not in operation because of the recertification for the GMP, the company was able to ship resources from its primary revenue stream and ramp up sales in other deserved supply product lines.

For 2012, the company has completed an integral leg of its expansion strategy by not only completing the renovation of its primary veterinary medication and vaccine facilities, but it has also made solid progress in acquiring the regulatory approvals rendering these facilities fully operational.

On a side-note, Skystar would like to mention that on March 26, 2013 the company did engage the leading provider and consulting, leading for our consulting and internal audit services to extend the committee’s knowledge of US GAAP reporting standards.

The consulting firm is the only one that is represented on the committee of sponsoring organizations of the trade-away commission and advisory board guiding the development of conceptual framework on enterprise risk management, internal control and fraud deterrents.

The consulting firm provides a host of consulting and internal audit solutions to over 35% of both the Fortune 500 and global 1000 Corporations. Skystar believes that (inaudible) illustrate and pursue that the very best reporting standards illustrated by US listed public company.

With this, I’d like to include our management’s remarks by providing our forecast for fiscal 2013. Skystar anticipates delivering a 20% to 35% year over year increase in top line revenue in the revenue range of $40 million to $45 million with gross margin of roughly 50% for 2013.

With that I’d like to turn the call over to the operator. And we will open the call up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Grant Jonathan with Galehead. Please proceed with your question.

Grant Jonathan – Galehead

Yeah, good morning guys or good evening in China. My question is about the balance sheet, it looks like there is some improvements that happened there with cash (inaudible) inventory and prepaid expenses. Can you comment a little bit how that – all that moved around and the money moved around?

Scott Cramer

Yeah, so the question Grant is kind of I’d like to understand – good job on improving the balance sheet; can you tell me why it improved in relation to inventory, prepaid expenses and cash, right?

Grant Jonathan – Galehead

Right.

Scott Cramer

Yeah. Hi Bing, would you like to comment on that or…?

Bing Wei

Yes, yes. Yeah, we made – we made actually significant improvements on our balance sheet, for our accounts receivable. We improved that, the accounts receivable was down from the end of the second quarter. And right now with a very healthy accounts receivable [aging] [ph], our [agent] [ph] 20% and within 90 days. And all the 99% is within the (inaudible).

And we’ve improved the cash position the cash that increased in the last year and also we bring down the prepaid expense with our suppliers. So overall we have a much healthy balance sheet then the end of the third quarter.

Scott Cramer

Yeah. Bing, have we changed our strategy in the way that to whom it is we extend terms or collection of process for the accounts receivables?

Bing Wei

Yes, for the first three quarters due to the closing of the Huxian veterinary medication facility, we introduced the customer the concession and the retentions of program to extend their payment terms. As we resumed the production in Huxian (inaudible), we changed back normal the payment terms. So you received – accounts receivable were gradually released over time.

Scott Cramer

Okay, Grant, did you get that.

Grant Jonathan – Galehead

Yeah, I did. And for the next year or so is it – is the trend going to continue or?

Scott Cramer

What had happened is, I mean, the kind of the short version is that because we were closed down and we wanted to maintain our customer base, I’m sorry, because our Huxian facility was not fully functional we wanted to maintain our customer base, we started extending terms to people and stretching out their payments so we could build some royalty. Now that we’re bringing that online we can go back to our ways of – we can be more discerning who we extend credit to.

And of course we can shorten the collection periods at this time because we do have a fully functional facility, we’re not trying to – we don’t have to do anything extraordinary to maintain our customer base. So, on a go forward basis in reference to your question, we expect our collections and receivables to look a lot closer to it is now to what it was in the recent past.

Grant Jonathan – Galehead

Okay. I got one other question that kind of – you alluded to this, was the GMP certification on the (inaudible) facility that’s – it’s not completed yet, is that correct, is it in the second phase of it (inaudible)?

Scott Cramer

Yes. So at this point we do have on the – Bing, correct me if I’m wrong. We actually have – we have – I’m sorry, we do have certification on the veterinary medicine that is in fact fully functional. However, what’s holding us back at this time is the second part of the recertification is each of our products we have to apply for the permits to produce them.

So, let’s say in round numbers, we had 100 products, at this point in time we’re only able to produce 30 of them and we’re expecting to get an approval for another 50 or 60 here in the near future. So, at that point we could be fully functional. The plant is fine but we don’t have the ability to produce all of our products at this time.

Grant Jonathan – Galehead

So there will be a ramping up in…?

Scott Cramer

Absolutely.

Grant Jonathan – Galehead

Okay, all right, great.

Scott Cramer

Yeah, Grant, if I can add a little bit more color to that. Truly Q3 and Q4 are our – we usually get two thirds to 70% of our revenue in Q3 and Q4. We expect to have everything ramped up by that time and we think we’ll see that this significant revenue contributions in the second half of the year.

Grant Jonathan – Galehead

Great. Okay, thank you for the answers.

Scott Cramer

Thank you.

Operator

Thank you. (Operator Instructions). Mr. Cramer, there are no further questions at this time. I’d like to turn the floor back over to you for any final comments.

Scott Cramer

Okay. Yeah, as mentioned before we really appreciate everybody joining us on the call. Logistically it’s been a tough year for Skystar in so much that we had one of our main facilities closed for the better part of the year. On a go forward basis, we expect to have everything functional by Q3 and we expect significant revenue contributions from all of our facilities in Q3 and Q4.

We hope that you carry Skystar’s wishes with you and hope for a strong and successful 2013. We look forward to sharing our results with investors during our next conference call. We appreciate your participation and support. Thank you very much. And everybody have a good morning or good evening.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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