UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM
10-Q





þ
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended September 30,
2010





orTransition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934o
            For
      the transition period from ______ to
  ______.




Commission
File Number 001-34394











SKYSTAR
BIO-PHARMACEUTICAL COMPANY


(Exact
name of small business issuer as specified in its charter)





Nevada
              33-0901534(State
      or other jurisdiction of
              (I.R.S.
      employerincorporation
      or organization)
              identification
      number)





Room
10601, Jiezuo Plaza, No.4, Fenghui Road South,


Gaoxin
District, Xian Province, P.R. China


(Address
of principal executive offices and zip code)





(8629)
8819-3188


(Registrant’s
telephone number, including area code)





Indicate by
check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ     No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes o   No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act (Check one):




Large Accelerated Filer  o
            Accelerated Filer  oNon-accelerated filer  o
            Smaller Reporting Company  þ





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).      Yes o   No þ





APPLICABLE
ONLY TO CORPORATE ISSUERS:





As of
November 2, 2010, the Registrant had 7,161,919 shares of Common Stock
outstanding.





SKYSTAR
BIO-PHARMACEUTICAL COMPANY




FORM 10-Q




INDEX




Page
                  NumberSPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTSPART
      I.  FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                
                4Consolidated
      Balance Sheets as of September 30, 2010 (unaudited) and December 31,
      2009
                
                4Consolidated
      Statements of Operations and Other Comprehensive Income (Loss) for the
      Three Months and Nine Months Ended September 30, 2010 and 2009
      (unaudited)
                
                5Consolidated
      Statements of Shareholders’ Equity (unaudited)
                
                6Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
      2009 (unaudited)
                
                7Notes
      to the Consolidated Financial Statements as of September 30, 2010
      (unaudited)
                
                8Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                33Item
      4.
                Controls
      and Procedures
                
                42PART
      II.  OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                
                42Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                42Item
      3.
                Defaults
      Upon Senior Securities
                
                43Item
      5.
                Other
      Information
                
                43Item
      6.
                Exhibits
                
                43SIGNATURES
                
                45


2


SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
report contains forward-looking statements. All forward-looking statements are
inherently uncertain as they are based on current expectations and
assumptions concerning future events or future performance of the Company.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date
hereof. Forward-looking statements usually contain the words
“estimate,” “anticipate,” “believe,” “expect,” or similar
expressions, and are subject to numerous known and unknown risks and
uncertainties. In evaluating such statements, prospective investors should
carefully review various risks and uncertainties identified in this Report,
including the matters set forth under the captions “Risk Factors” and in
our other SEC filings. These risks and uncertainties could cause our actual
results to differ materially from those indicated in the forward-looking
statements. We undertake no obligation to update or publicly announce revisions
to any forward-looking statements to reflect future events or
developments.





Although
forward-looking statements in this Quarterly Report on Form 10-Q reflect the
good faith judgment of our management, such statements can only be based on
facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual
results and outcomes may differ materially from the results and outcomes
discussed in or anticipated by the forward-looking statements. Factors that
could cause or contribute to such differences in results and
outcomes include, without limitation, those specifically addressed under
the heading “Risks Relating to Our Business” below, as well as those
discussed elsewhere in this Quarterly Report. Readers are urged not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Quarterly Report. We file reports with the SEC. You can read and
copy any materials we file with the SEC at the SEC’s Public Reference Room, 100
F. Street, NE, Washington, D.C. 20549 on official business days during the hours
of 10 a.m. to 3 p.m. You can obtain additional information about the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy
and information statements, and other information regarding issuers that
file electronically with the SEC, including the Company.




We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of
this Quarterly Report. Readers are urged to carefully review and consider the
various disclosures made throughout the entirety of this Quarterly Report, which
attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.


3


PART
I.  FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 
 September
      30,
                            
                            
                            December
      31,2010
                            
                            
                            2009UnauditedASSETSCURRENT
      ASSETS:Cash
                            
                            $
                            2,032,484
                            
                            
                            $
                            11,699,398Accounts
      receivable, net of allowance for doubtful accounts of $334,562 and
      $327,857 as of September 30, 2010 and December 31, 2009,
      respectively
                            
                            
                            5,943,592
                            
                            
                            
                            4,383,187Inventories,
      net of allowance of $267,833 and $199,460 as of September 30, 2010 and
      December 31, 2009, respectively
                            
                            
                            14,982,786
                            
                            
                            
                            4,074,645Deposits
      and prepaid expenses
                            
                            
                            16,022,324
                            
                            
                            
                            11,900,314Other
      receivables
                            
                            
                            2,143,236
                            
                            
                            
                            490,712Total
      current assets
                            
                            
                            41,124,422
                            
                            
                            
                            32,548,256PLANT
      AND EQUIPMENT, NET
                            
                            
                            13,381,951
                            
                            
                            
                            8,829,058CONSTRUCTION-IN-PROGRESS
                            
                            
                            10,631,246
                            
                            
                            
                            9,389,120OTHER
      ASSETS:Long-term
      prepayments
                            
                            
                            851,135
                            
                            
                            
                            1,173,427Long-term
      prepayments for acquistions
                            
                            
                            7,944,579
                            
                            
                            
                            6,806,880Intangible
      assets, net
                            
                            
                            3,317,821
                            
                            
                            
                            1,860,172Total
      other assets
                            
                            
                            12,113,535
                            
                            
                            
                            9,840,479Total
      assets
                            
                            $
                            77,251,154
                            
                            
                            $
                            60,606,913LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                            
                            $
                            531,241
                            
                            
                            $
                            297,567Other
      payables and accrued expenses
                            
                            
                            2,274,163
                            
                            
                            
                            917,284Short-term
      loans
                            
                            
                            1,719,155
                            
                            
                            
                            220,050Short-term
      loans from shareholders
                            
                            
                            -
                            
                            
                            
                            110,025Deposits
      from customers
                            
                            
                            925,216
                            
                            
                            
                            1,275,958Taxes
      payable
                            
                            
                            3,238,326
                            
                            
                            
                            722,106Shares
      to be issued to related parties
                            
                            
                            302,372
                            
                            
                            
                            327,374Due
      to related parties
                            
                            
                            151,715
                            
                            
                            
                            185,024Total
      current liabilities
                            
                            
                            9,142,188
                            
                            
                            
                            4,055,388OTHER
      LIABILITIES:Deferred
      government grant
                            
                            
                            1,122,750
                            
                            
                            
                            1,100,250Derivative
      liability
                            
                            
                            825,025
                            
                            
                            
                            1,538,686Total
      other liabilities
                            
                            
                            1,947,775
                            
                            
                            
                            2,638,936Total
      liabilities
                            
                            
                            11,089,963
                            
                            
                            
                            6,694,324COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 shares authorized, Nil Series "A"
      shares authorized as of September 30, 2010 and December 31, 2009
      48,000,000 Series "B" shares authorized, Nil Series "B" shares issued and
      outstanding as of September 30, 2010 and December 31, 2009,
      respectively
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $0.001 par value, 40,000,000 shares authorized, 7,106,705 and
      6,989,640 shares issued and outstanding as of September 30, 2010 and
      December 31, 2009, respectively
                            
                            
                            7,105
                            
                            
                            
                            6,989Paid-in
      capital
                            
                            
                            35,450,048
                            
                            
                            
                            34,580,096Statutory
      reserves
                            
                            
                            3,879,077
                            
                            
                            
                            3,879,077Retained
      earnings
                            
                            
                            22,697,347
                            
                            
                            
                            12,574,906Accumulated
      other comprehensive income
                            
                            
                            4,127,614
                            
                            
                            
                            2,871,521Total
      shareholders' equity
                            
                            
                            66,161,191
                            
                            
                            
                            53,912,589Total
      liabilities and shareholders' equity
                            
                            $
                            77,251,154
                            
                            
                            $
                            60,606,913
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
 
 SKYSTAR BIO-PHARMACEUTICAL COMPANY AND
SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATION AND OTHER COMPREHENSIVE INCOME (LOSS)
 (UNAUDITED)
 
 For Three Months Ended September
      30,
                  
                  
                  For Nine Months Ended September
      30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009REVENUE,
      NET
                  
                  $
                  18,569,747
                  
                  
                  $
                  12,777,095
                  
                  
                  $
                  31,703,531
                  
                  
                  $
                  22,844,099COST
      OF REVENUE
                  
                  
                  8,506,137
                  
                  
                  
                  6,107,477
                  
                  
                  
                  14,702,419
                  
                  
                  
                  11,012,672GROSS
      PROFIT
                  
                  
                  10,063,610
                  
                  
                  
                  6,669,618
                  
                  
                  
                  17,001,112
                  
                  
                  
                  11,831,427OPERATING
      EXPENSES:Research
      and development
                  
                  
                  208,197
                  
                  
                  
                  398,685
                  
                  
                  
                  444,280
                  
                  
                  
                  882,732Selling
      expenses
                  
                  
                  709,188
                  
                  
                  
                  412,051
                  
                  
                  
                  1,312,132
                  
                  
                  
                  1,204,653General
      and administrative
                  
                  
                  1,281,731
                  
                  
                  
                  878,866
                  
                  
                  
                  2,899,315
                  
                  
                  
                  1,818,920Total
      operating expenses
                  
                  
                  2,199,116
                  
                  
                  
                  1,689,602
                  
                  
                  
                  4,655,727
                  
                  
                  
                  3,906,305INCOME
      FROM OPERATIONS
                  
                  
                  7,864,494
                  
                  
                  
                  4,980,016
                  
                  
                  
                  12,345,385
                  
                  
                  
                  7,925,122OTHER
      INCOME (EXPENSE):Other
      income (expense), net
                  
                  
                  (28,265
                  )
                  
                  
                  79,068
                  
                  
                  
                  8,409
                  
                  
                  
                  78,526Interest
      income (expense), net
                  
                  
                  5,356
                  
                  
                  
                  9,148
                  
                  
                  
                  (12,436
                  )
                  
                  
                  8,662Change
      in fair value of derivative liability
                  
                  
                  141,057
                  
                  
                  
                  1,092,824
                  
                  
                  
                  (18,269
                  )
                  
                  
                  (349,332
                  )Total
      other income (expense), net
                  
                  
                  118,148
                  
                  
                  
                  1,181,040
                  
                  
                  
                  (22,296
                  )
                  
                  
                  (262,144
                  )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  7,982,642
                  
                  
                  
                  6,161,056
                  
                  
                  
                  12,323,089
                  
                  
                  
                  7,662,978PROVISION
      FOR INCOME TAXES
                  
                  
                  1,334,843
                  
                  
                  
                  813,722
                  
                  
                  
                  2,200,648
                  
                  
                  
                  1,367,797NET
      INCOME
                  
                  
                  6,647,799
                  
                  
                  
                  5,347,334
                  
                  
                  
                  10,122,441
                  
                  
                  
                  6,295,181OTHER
      COMPREHENSIVE INCOME (LOSS):Foreign
      currency translation adjustment
                  
                  
                  1,015,911
                  
                  
                  
                  (8,037
                  )
                  
                  
                  1,256,093
                  
                  
                  
                  (62,718
                  )COMPREHENSIVE
      INCOME
                  
                  $
                  7,663,710
                  
                  
                  $
                  5,339,297
                  
                  
                  $
                  11,378,534
                  
                  
                  $
                  6,232,463EARNINGS
      PER SHARE:Basic
                  
                  $
                  0.93
                  
                  
                  $
                  0.77
                  
                  
                  $
                  1.43
                  
                  
                  $
                  1.30Diluted
                  
                  $
                  0.93
                  
                  
                  $
                  0.76
                  
                  
                  $
                  1.42
                  
                  
                  $
                  1.29WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES:Basic
                  
                  
                  7,119,585
                  
                  
                  
                  6,960,028
                  
                  
                  
                  7,103,365
                  
                  
                  
                  4,824,306Diluted
                  
                  
                  7,147,124
                  
                  
                  
                  7,025,343
                  
                  
                  
                  7,116,520
                  
                  
                  
                  4,890,712
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
 
 SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 AccumulatedRetained
      earnings
                          
                          
                          otherPreferred
      stock
                          
                          
                          Common
      stock
                          
                          
                          Paid-in
                          
                          
                          Statutory
                          
                          
                          
                          
                          
                          comprehensiveShares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          capital
                          
                          
                          reserves
                          
                          
                          Unrestricted
                          
                          
                          income
                          
                          
                          TotalBALANCE,
      January 1, 2009, as adjusted
                          
                          
                          2,000,000
                          
                          
                          $
                          2,000
                          
                          
                          
                          3,733,038
                          
                          
                          $
                          3,733
                          
                          
                          $
                          15,237,267
                          
                          
                          $
                          2,952,710
                          
                          
                          $
                          4,649,341
                          
                          
                          $
                          2,857,607
                          
                          
                          $
                          25,702,658Shares
      issued for services
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          8,828
                          
                          
                          
                          8
                          
                          
                          
                          46,757
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          46,765Fractional
      shares due to the ten-for-one reverse split
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,772
                          
                          
                          
                          2
                          
                          
                          
                          (2
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Shares
      issued for cash
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,220,000
                          
                          
                          
                          3,220
                          
                          
                          
                          19,070,461
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          19,073,681Foreign
      currency translation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (62,718
                          )
                          
                          
                          (62,718
                          )Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          6,295,181
                          
                          
                          
                          
                          
                          
                          
                          6,295,181Appropriation
      to statutory reserves
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          802,405
                          
                          
                          
                          (802,405
                          )
                          
                          
                          
                          
                          
                          
                          -BALANCE,
      September 30, 2009 (unaudited)
                          
                          
                          2,000,000
                          
                          
                          
                          2,000
                          
                          
                          
                          6,963,638
                          
                          
                          
                          6,963
                          
                          
                          
                          34,354,483
                          
                          
                          
                          3,755,115
                          
                          
                          
                          10,142,117
                          
                          
                          
                          2,794,889
                          
                          
                          
                          51,055,567Shares
      issued for services
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,610
                          
                          
                          
                          4
                          
                          
                          
                          16,245
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          16,249Cancellation
      of preferred stock
                          
                          
                          (2,000,000
                          )
                          
                          
                          (2,000
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Cash
      receipts of shares issued
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Cashless
      exercise of warrants
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          22,392
                          
                          
                          
                          22
                          
                          
                          
                          207,368
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          207,390Foreign
      currency translation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          76,632
                          
                          
                          
                          76,632Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,556,751
                          
                          
                          
                          
                          
                          
                          
                          2,556,751Appropriation
      to statutory reserves
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          123,962
                          
                          
                          
                          (123,962
                          )
                          
                          
                          
                          
                          
                          
                          --BALANCE,
      December 31, 2009
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,989,640
                          
                          
                          
                          6,989
                          
                          
                          
                          34,580,096
                          
                          
                          
                          3,879,077
                          
                          
                          
                          12,574,906
                          
                          
                          
                          2,871,521
                          
                          
                          
                          53,912,589Shares
      issued for services
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          9,166
                          
                          
                          
                          9
                          
                          
                          
                          41,238
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          41,247Cashless
      exercise of warrants
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          107,899
                          
                          
                          
                          107
                          
                          
                          
                          1,511,496
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,511,603Reclassification
      of purchase option to derivative liability
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (779,674
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (779,674
                          )Stock
      compensation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          96,892
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          96,892Foreign
      currency translation
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,256,093
                          
                          
                          
                          1,256,093Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          10,122,441
                          
                          
                          
                          
                          
                          
                          
                          10,122,441Appropriation
      to statutory reserves
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -BALANCE,
      September 30, 2010 (unaudited)
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          7,106,705
                          
                          
                          $
                          7,105
                          
                          
                          $
                          35,450,048
                          
                          
                          $
                          3,879,077
                          
                          
                          $
                          22,697,347
                          
                          
                          $
                          4,127,614
                          
                          
                          $
                          66,161,191
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  6
 
 SKYSTAR BIO-PHARMACEUTICAL COMPANY AND
SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (UNAUDITED)
 
 Nine
      months ended September 30,2010
                                
                                
                                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                
                                $
                                10,122,441
                                
                                
                                $
                                6,295,181Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
                                
                                
                                515,178
                                
                                
                                
                                384,465Amortization
                                
                                
                                125,591
                                
                                
                                
                                115,621Allowance
      for slow moving inventories
                                
                                
                                63,177
                                
                                
                                
                                -Common
      stock issued for services
                                
                                
                                16,245
                                
                                
                                
                                46,765Common
      stock to be issued to related parties for compensation
                                
                                
                                96,892
                                
                                
                                
                                125,041Change
      in fair value of derivative liability
                                
                                
                                18,269
                                
                                
                                
                                349,332Change
      in operating assets and liabilitiesAccounts
      receivable
                                
                                
                                (1,445,225
                                )
                                
                                
                                (3,673,207
                                )Inventories
                                
                                
                                (10,699,989
                                )
                                
                                
                                (4,534,194
                                )Deposits
      and prepaid expenses
                                
                                
                                (3,674,364
                                )
                                
                                
                                (232,333
                                )Other
      receivables
                                
                                
                                (583,082
                                )
                                
                                
                                (33,819
                                )Accounts
      payable
                                
                                
                                69,181
                                
                                
                                
                                (268,295
                                )Other
      payables and accrued expenses
                                
                                
                                726,855
                                
                                
                                
                                (166,351
                                )Deposits
      from customers
                                
                                
                                (370,290
                                )
                                
                                
                                101,562Taxes
      payable
                                
                                
                                2,458,008
                                
                                
                                
                                1,483,034Net
      cash used in operating activities
                                
                                
                                (2,561,113
                                )
                                
                                
                                (7,198
                                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Refunds
      of prepayments for potentital acquistions
                                
                                
                                -
                                
                                
                                
                                2,711,182Proceeds
      from loan receivable
                                
                                
                                -
                                
                                
                                
                                2,288,490Addition
      to loan receivable
                                
                                
                                -
                                
                                
                                
                                (2,579,984
                                )Prepayment
      for acquisitions
                                
                                
                                (4,673,367
                                )
                                
                                
                                -Loans
      to third parties
                                
                                
                                (441,300
                                )
                                
                                
                                (1,832,563
                                )Purchases
      of plant and equipment
                                
                                
                                (2,527,188
                                )
                                
                                
                                (1,742,284
                                )Purchases
      of intangible assets
                                
                                
                                (1,883
                                )
                                
                                
                                (1,172,720
                                )Payments
      on construction-in-progress
                                
                                
                                (788,797
                                )
                                
                                
                                (1,237,802
                                )Net
      cash used in investing activities
                                
                                
                                (8,432,535
                                )
                                
                                
                                (3,565,681
                                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      in restricted cash
                                
                                
                                -
                                
                                
                                
                                80,673Proceeds
      from short-term loans
                                
                                
                                1,799,621
                                
                                
                                
                                219,885Repayment
      of short-term loans
                                
                                
                                (330,975
                                )
                                
                                
                                (747,609
                                )Proceeds
      from equity offering
                                
                                
                                -
                                
                                
                                
                                18,411,496Proceeds
      from short term investment
                                
                                
                                -
                                
                                
                                
                                351,816Repayment
      of shareholder and directors
                                
                                
                                (110,325
                                )
                                
                                
                                (307,839
                                )Proceeds
      from shareholder and directors
                                
                                
                                -
                                
                                
                                
                                109,943Due
      (from) to related parties
                                
                                
                                (34,859
                                )
                                
                                
                                (254,236
                                )Net
      cash provided byfinancing activities
                                
                                
                                1,323,462
                                
                                
                                
                                17,864,129EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                
                                
                                3,272
                                
                                
                                
                                (70,669
                                )DECREASE
      IN CASH
                                
                                
                                (9,666,914
                                )
                                
                                
                                14,220,581CASH,
      beginning  of period
                                
                                
                                11,699,398
                                
                                
                                
                                576,409CASH,
      end of period
                                
                                $
                                2,032,484
                                
                                
                                $
                                14,796,990SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                                
                                $
                                11,368
                                
                                
                                $
                                51,993Cash
      paid for income taxes
                                
                                $
                                579,670
                                
                                
                                $
                                794,660Non-cash
      investing and financing activitiesLong-term
      prepayment transferred to construction-in-progress
                                
                                $
                                -
                                
                                
                                $
                                2,492,030Long-term
      prepayment transferred to intangible assets
                                
                                $
                                1,518,660
                                
                                
                                $
                                -Long-term
      prepayment transferred to plant and equipment
                                
                                $
                                1,931,720
                                
                                
                                $Construction-in-progress
      transferred to plant and equipment
                                
                                $
                                1,347,489
                                
                                
                                $
                                -Interest
      expense capitalized as construction-in-progress
                                
                                $
                                -
                                
                                
                                $
                                51,596Cashless
      exercise of warrants
                                
                                $
                                1,511,603
                                
                                
                                $
                                -Issuance
      of common stock accrued in privous year
                                
                                $
                                25,002
                                
                                
                                $
                                -Expense
      paid through Long-term prepayment
                                
                                $
                                294,200
                                
                                
                                $
                                -Expense
      paid through contribution receivable
                                
                                $
                                -
                                
                                
                                $
                                662,185
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  7
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Note
1 – ORGANIZATION
 
 Organization and description
of business
 
 Skystar
Bio-Pharmaceutical Company (“Skystar” or the “Company”), was incorporated in
Nevada on September 24, 1998. Since its acquisition on November 7, 2005 of
Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd.  (“Skystar Cayman”),
a Cayman Islands company, the Company has been engaged in research, development,
production, marketing and sales of veterinary healthcare and medical care
products. All current operations of the Company are in the People’s
Republic of China (“China” or the “PRC”).
 
 All of
the Company’s operations are carried out by Xian Tianxing Bio-Pharmaceutical
Co., Limited (“Xian Tianxing”), a PRC joint stock company that the Company
controls through contractual arrangements originally between Skystar Cayman and
Xian Tianxing. On March 10, 2008, the Company entered into a series of
agreements transferring all of the rights and obligations of Skystar Cayman
under the contractual arrangements to Sida Biotechnology (Xian) Co., Ltd.
(“Sida”), a PRC company that is wholly owned by Fortunate Time International
Limited (“Fortunate Time”), a Hong Kong company and wholly owned subsidiary of
Skystar Cayman. Xian Tianxing also has a wholly owned subsidiary, Shanghai
Siqiang Biotechnological Co., Ltd. (“Shanghai Siqiang”), a PRC
company.
 
 As a
result of these contractual arrangements, which obligates Sida to absorb all of
the risk of loss from Xian Tianxing’s activities and enable Sida to receive all
of its expected residual returns, the Company accounts for Xian Tianxing as a
variable interest entity (“VIE”) under the Financial Accounting Standards
Board’s (“FASB”) interpretation on consolidation of variable interest
entities.  Accordingly, the Company consolidates Xian Tianxing’s
results, assets, and liabilities.
 
 Sida was
established by Fortunate Time on July 10, 2007 with registered capital of
$5,000,000. Fortunate Time invested $2,000,000 into Sida on July 20, 2007, which
amount is payable to Skystar Cayman. On July 9, 2009, Fortunate Time
invested the remaining $3,000,000 into Sida. Xi’an High Technology District
approved Sida’s application to increase its registered capital to
$15,000,000 on July 13, 2009. On July 15, 2009, Sida received $10,000,000
additional registered capital from Fortunate Time. The funds from
Fortunate Time for $13,000,000 were from the cash proceeds of the equity
offering that is further discussed in Note 14.
 
 Current
developments
 
 On
September 18, 2009, Skystar Bio-Pharmaceutical Inc. (“Skystar California”) was
incorporated in California and became a wholly-owned subsidiary of
Skystar.
 
 On May 7,
2010, Fortunate Time formed Skystar Biotechnology (Kunshan) Co., Limited
(“Skystar Kunshan”) in Kunshan, Jiangsu province, China with registered capital
of $15,000,000, of which $2,250,000 has been paid by Fortunate Time in cash, and
the remaining $12,750,000 is due by May 7, 2012. Kushan was formed in connection
with a potential acquisition of assets (see Note 10).
 
 On
Augusts 11, 2010, Sida became the parent company of Skystar Biotechnology
(Jingzhou) Co., Limited (“Skystar Jingzhou”), a company established in Jingzhou,
Hubei Province, China on February 5, 2010, with registered capital of
approximately $3.8 million, of which $3.5 million has been paid.  The
remaining $0.3 million is required to be invested by April 6, 2012.
 
 Hereinafter,
Skystar, Skystar California, Skystar Cayman, Fortunate Time, Sida, Xian
Tianxing, Shanghai Siqiang, Skystar Kunshan, and Skystar Jingzhou are
sometimes collectively referred to as the “Company.”
  8
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of
consolidation
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiaries, and its VIEs.  All significant
inter-company transactions and balances between the Company, its subsidiaries,
and its VIEs have been eliminated in consolidation.
 
 Certain
information and footnote disclosures normally present in annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such
rules and regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company’s Annual Report on Form 10-K. The results for the three
and nine months ended September 30, 2010 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2010.
 
 Use of
estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. For example, the Company estimates its
allowance for doubtful accounts and useful lives of plant and equipment. Because
of the use of estimates inherent in the financial reporting process, actual
results could materially differ from those estimates upon which the carrying
values were based.
  Foreign currency
translation
 
 The
Company uses the United States dollar (“U.S. dollar”) for financial reporting
purposes and the Chinese Renminbi (“RMB”) as its functional currency. The
Company’s subsidiaries and VIE maintain their books and records in their
functional currency, being the primary currency of the economic environment in
which their operations are conducted.
 
 The
Company translates the subsidiaries’ and VIEs’ assets and liabilities into U.S.
dollars using the applicable exchange rates prevailing at the balance sheet
dates, and the statements of operations and cash flows are translated at average
exchange rates during the reporting period. As a result, amounts related to
assets and liabilities reported on the consolidated statements of cash flows
will not necessarily agree with changes in the corresponding balances on the
consolidated balance sheets. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the subsidiaries’ and VIEs’
financial statements are recorded as accumulated other comprehensive
income.
 
 The
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People's Bank of
China. The rates of exchange quoted by the People’s Bank of China on
September 30, 2010 and December 31, 2009 were RMB 6.68 and RMB 6.82 to
US $1.00, respectively.  The average translation rates of RMB
6.80 and RMB 6.84 to US $1.00 was applied to the income statement accounts
for the nine months ended September 30, 2010 and 2009, respectively. For
the three months ended September 30, 2010 and 2009, the average translation
rates were RMB 6.76 and RMB 6.84 to US $1.00, respectively.
  9
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Approval
of foreign currency payments by the People’s Bank of China or other institutions
requires submitting a payment application form together with invoices, shipping
documents, and signed contracts. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as
incurred.
 
 Fair values of financial
instruments
 
 The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines financial instruments and requires fair value
disclosures of those financial instruments.  This accounting standard
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures.  Current assets and current liabilities qualify
as financial instruments and management believes their carrying amounts are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and, if
applicable, their current interest rates are equivalent to interest rates
currently available.  The three levels of valuation hierarchy are defined
as follows:
 
 •
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 •
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 
 •
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 Effective
January 1, 2009, the Company adopted the provisions of an accounting
standard regarding whether an instrument (or embedded feature) is indexed to an
entity’s own stock. This accounting standard specifies that a contract that
would otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument.  It provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the scope exception within
the standards.
  As a
result of the foregoing adoption, 309,100 common stock purchase warrants
previously treated as equity instruments pursuant to the derivative liability
treatment exemption are no longer afforded equity treatment because the exercise
price of the warrants is denominated in U.S. dollars, a currency other than the
Company’s functional currency, the RMB. As a result, the warrants are not
considered indexed to the Company’s own stock, and as such, all future changes
in the fair value of these warrants are recognized currently in earnings until
such time as the warrants are exercised or expired.
 
 As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in February 2007. On
January 1, 2009, the Company reclassified from additional paid-in capital,
as a cumulative effect adjustment, $230,877 to beginning retained earnings and
$877,631 to warrant liability to recognize the fair value of such warrants.
On June 30, 2009, the Company and Rodman & Renshaw,
LLC, as representative of underwriters (the "Underwriters") entered
into an Underwriting Agreement in connection with a public offering of the
Company’s common stock. In connection with this offering, the Company agreed to
grant 140,000 common stock purchase options to five designees of
the Underwriters. All those options were provided for services performed,
and in accordance with the terms of the option agreement, the holders were
entitled to exercise the options starting on June 30, 2010. Therefore, as of
June 30, 2010, the purchase options were reclassified from equity to warrants
liabilities, and the Company reclassified $779,674 from additional paid in
capital to derivative liability.
  10
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 As
required by the FASB’s accounting standards, financial assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. Depending on the product and the
terms of the transaction, the fair values warrant liability were modeled using a
series of techniques, including closed-form analytic formula, such as the
Black-Scholes Model, which does not entail material subjectivity because the
methodology employed does not necessitate significant judgment, and the pricing
inputs are observed from actively quoted markets.
 
 These
warrants and options do not trade in an active securities market, and, as such,
the Company estimates the fair value of these instruments using the
Black-Scholes Option Pricing Model (“Black-Scholes Model”) using the following
assumptions:
  Warrants (1)
                          
                          
                          Warrants (2)December
                            31, 2009
                          
                          
                          September
                            30, 2010
                          
                          
                          December
                            31, 2009
                          
                          
                          Purchase options (3)
                            September 30, 2010(Unaudited)
                          
                          
                          
                          
                          
                          (Unaudited)Stock
      price
                          
                          $
                          10.10
                          
                          
                          $
                          6.37
                          
                          
                          $
                          10.10
                          
                          
                          $
                          6.37Exercise
      price
                          
                          $
                          6.00
                          
                          
                          $
                          5.00
                          
                          
                          $
                          5.00
                          
                          
                          $
                          8.11Annual
      dividend yield
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Expected
      term (years)
                          
                          
                          0.17
                          
                          
                          
                          1.42
                          
                          
                          
                          2.17
                          
                          
                          
                          3.75Risk-free
      interest rate
                          
                          
                          0.04
                          %
                          
                          
                          0.35
                          %
                          
                          
                          1.14
                          %
                          
                          
                          0.96
                          %Expected
      volatility
                          
                          
                          34
                          %
                          
                          
                          80
                          %
                          
                          
                          178
                          %
                          
                          
                          143
                          %
  (1)
              As
      of December 31, 2009, 145,000 warrants with an exercise price of $6.00
      were outstanding. As of September 30, 2010, all of these warrants were
      exercised on a “cashless” basis.
  (2)
              As
      of December, 31, 2009, 107,254 warrants with an exercise price of $5.00
      were outstanding. As of September 30, 2010, 34,230 warrants were
      outstanding.
  (3)
              As
      of September 30, 2010, 140,000 options with an exercise of $8.11 were
      outstanding.
 
 Expected
volatility is based on historical volatility. Historical volatility was
computed using daily pricing observations for recent periods that correspond to
the term of the warrants and options. The Company believes this method produces
an estimate that is representative of future volatility over the expected term
of these warrants and options. The Company has no reason to believe future
volatility over the expected remaining life of these warrants and options is
likely to differ materially from historical volatility. The expected life is
based on the remaining term of the warrants and options. The risk-free interest
rate is based on U.S. Treasury securities according to the remaining term of the
warrants and options.
 
 The fair
value of the 174,230 warrants and options outstanding as of September 30, 2010
was determined using the Black-Scholes Model, defined in the FASB’s accounting
standard of fair value measurement as level 2 inputs, and we recorded the change
in earnings. As a result, the warrant liability is carried on the consolidated
balance sheets at fair value.
  11
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 The
following table sets forth by level within the fair value hierarchy our
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of September 30, 2010:
 
 Carrying Value at
                                    September 30, 2010
                                  
                                  
                                  Fair Value Measurement at
                                    September 30, 2010Level 1
                                  
                                  Level 2
                                  
                                  
                                  Level 3Derivative
      liability (unaudited)
                                  
                                  $
                                  825,025
                                  
                                  
                                  $
                                  —
                                  
                                  $
                                  825,025
                                  
                                  
                                  $
                                  —
 
 The
Company recognized a gain of $141,057 and $1,092,824 from the change in fair
value of derivative liability for the three months ended September 30, 2010 and
2009, respectively, and a loss of $18,269 and $349,332 for the nine months ended
September 30, 2010 and 2009, respectively.
 
 In
addition to assets and liabilities that are recorded at fair value on a
recurring basis, the Company is required to record assets and liabilities at
fair value on a non-recurring basis.  Generally, assets are recorded
at fair value on a non-recurring basis as a result of impairment
charges.  For the three and nine months ended September 30, 2010,
there were no impairment charges.
 
 Revenue
recognition
 
 Revenue
of the Company is primarily from the sales of veterinary healthcare and medical
care products in China. Sales are recognized when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable, and collectability is
reasonably assured. Sales are presented net of value added tax (“VAT”). No
estimated allowance for sales returns is reflected on these consolidated
financial statements as sales returns are de minimis based on
historical experience.
  There are
two types of sales upon which revenue is recognized:
 
 a.
              Credit
      sales: revenue is recognized when the products have been delivered to the
      customers.
 
 b.
              Full
      payment before delivering: revenue is recognized when the products have
      been delivered to the customers.
 
 Shipping
and handling costs related to goods sold are included in selling expenses,
which totaled $393,344 and $296,170 for the three months ended September
30, 2010 and 2009, respectively, and $678,224 and $605,911 for the nine months
ended September 30, 2010 and 2009, respectively.
 
 The
Company’s revenue and cost of revenue by product line for the three and nine
months ended September 30, 2010 and 2009 were as follows:
  12
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Three months ended September 30,
                  
                  
                  Nine months ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Revenue:Micro-organism
                  
                  $
                  4,700,623
                  
                  
                  $
                  3,186,453
                  
                  
                  $
                  7,892,296
                  
                  
                  $
                  5,815,280Veterinary
      Medications
                  
                  
                  12,366,426
                  
                  
                  
                  8,483,233
                  
                  
                  
                  21,095,705
                  
                  
                  
                  14,999,173Feed
      Additives
                  
                  
                  737,077
                  
                  
                  
                  539,856
                  
                  
                  
                  1,341,654
                  
                  
                  
                  1,003,628Vaccines
                  
                  
                  765,621
                  
                  
                  
                  567,553
                  
                  
                  
                  1,373,876
                  
                  
                  
                  1,026,018Total
      Revenue
                  
                  
                  18,569,747
                  
                  
                  
                  12,777,095
                  
                  
                  
                  31,703,531
                  
                  
                  
                  22,844,099Cost
      of RevenueMicro-organism
                  
                  
                  1,186,977
                  
                  
                  
                  786,741
                  
                  
                  
                  2,050,907
                  
                  
                  
                  1,560,588Veterinary
      Medications
                  
                  
                  6,950,838
                  
                  
                  
                  5,069,745
                  
                  
                  
                  11,970,865
                  
                  
                  
                  8,938,770Feed
      Additives
                  
                  
                  289,262
                  
                  
                  
                  205,543
                  
                  
                  
                  536,292
                  
                  
                  
                  404,349Vaccines
                  
                  
                  79,060
                  
                  
                  
                  45,448
                  
                  
                  
                  144,355
                  
                  
                  
                  108,965Total
      Cost of Revenue
                  
                  
                  8,506,137
                  
                  
                  
                  6,107,477
                  
                  
                  
                  14,702,419
                  
                  
                  
                  11,012,672Gross
      Profit
                  
                  $
                  10,063,610
                  
                  
                  $
                  6,669,618
                  
                  
                  $
                  17,001,112
                  
                  
                  $
                  11,831,427
 
 Cash
 
 Cash
includes cash on hand, demand deposits with banks, and liquid investments with
an original maturity of three months or less.
 
 Restricted
cash
 
 Restricted
cash is comprised of amounts received from the PRC government as subsidies and
set aside for specific uses (see Note 13).Restricted cash is
maintained as bank deposits and reflected as current assets based on the
expected period when such funds will be put into their specific
uses.
 
 Accounts receivable and
other receivables
 
 Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts, as needed. The Company uses
the aging method to estimate the allowance for anticipated uncollectible
receivable balances. Under the aging method, bad debt percentages determined by
management, based on historical experience and current economic climate,
are applied to customers’ balances categorized by the number of months the
underlying invoices have remained outstanding. At each reporting period, the
allowance balance is adjusted to reflect the amount computed as a result of the
aging method. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, a corresponding adjustment is made to
the allowance account as a change in estimate. The ultimate collection of
the Company’s accounts receivable may take one year. Delinquent account balances
are reserved after management determines that the likelihood of collection is
not probable, and known bad debts are written-off against allowance for doubtful
accounts when identified.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market, as determined on a moving
weighted-average basis. Inventories include purchases and related costs incurred
in bringing the inventories to their present location and
condition. Management reviews inventories for obsolescence and cost in
excess of net realizable value at least annually and records a reserve against
the inventory and additional cost of goods sold when the carrying value exceeds
net realizable value.
  Plant and
equipment
 
 Plant and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs that do not improve or extend
the useful lives of the assets are charged to operations as incurred, while
renewals and betterments are capitalized. Gains and losses on disposals are
included in the results of operations. Estimated useful lives of the assets are
as follows:
  13
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Estimated Useful LifeBuildings
              
              20-40
      yearsMachinery
      and equipment
              
              10
      yearsComputer,
      office equipment and furniture
              
              5
      yearsVehicles
              
              5-10
      years
 
 Management
assesses the carrying value of plant and equipment annually, more often when
factors indicating impairment are present, and reduces the carrying value of
such assets by the amount of the impairment. The Company determines the
existence of such impairment by measuring the expected future cash flows
(undiscounted and without interest charges) and comparing such amount to the net
asset carrying value. An impairment loss, if it exists, is measured as the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. Based on its review, management believes that, as of September 30,
2010 and December 31, 2009, there was no impairment for its plant and
equipment.
 
 Construction-in-progress
 
 Construction-in-progress
includes direct costs of construction of a factory building. Interest incurred
during the period of construction, if significant, is capitalized. All
other interest is expensed as incurred. Construction-in-progress is not
depreciated until such time as the asset is completed and put into
service.
  Intangible
assets
 
 Land Use
Rights — Land use rights represent the amounts paid to acquire a long-term
interest to utilize the land underlying the Company’s facilities. This type of
arrangement is common for the use of land in the PRC. Land use rights are
amortized on a straight-line basis over its 50-year term.
 
 Technological Know-How — Purchased
technological know-how includes confidential formulas, manufacturing processes,
and technical and procedural manuals, and is amortized using the straight-line
method over the weighted average useful life of nine years, which reflects the
period over which such confidential formulas, manufacturing processes, and
technical and procedural manuals are kept confidential by the Company as agreed
between the Company and the selling parties.
  Impairment
of Intangible Assets —The Company evaluates
the carrying value of intangible assets annually or more often when factors
indicating impairment are present. The Company determines the existence of such
impairment by measuring the estimated future cash flows (undiscounted) and
comparing such amount to the net asset carrying value. If the undiscounted cash
flow estimated to be generated by any such intangible asset is less than its
carrying amount, a loss is recognized based on the amount by which the carrying
amount exceeds the intangible asset’s fair market value. Loss on intangible
assets to be disposed of is determined in a similar manner, except that fair
market values are reduced by the cost of disposal. Based on its review, the
Company believes that, as of September 30, 2010, there was no impairment of its
intangible assets.
  Comprehensive
income
 
 The
FASB’s accounting standard of reporting comprehensive income requires disclosure
of all components of comprehensive income and loss on an annual and interim
basis. Comprehensive income and loss is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The accompanying consolidated financial
statements include the provisions of GAAP. Accumulated other comprehensive
income is comprised of the changes in foreign currency exchange
rates.
  14
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Research and development
costs
 
 Research
and development costs are charged to operations as incurred and include
salaries, professional fees, and technical support fees related to such
efforts.
 
 Advertising
costs
 
 Advertising
costs are charged to operations currently. Advertising costs for the three
months ended September 30, 2010 and 2009 were $8,383 and $28,583, respectively,
and for the nine months ended September 30, 2010 and 2009 were $14,852 and
$104,450, respectively.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with the FASB’s accounting
standard for income taxes.  Under the asset and liability method as
required by this accounting standard,  deferred income taxes are
recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recognized if it is more likely than not that some portion, or all
of, a deferred tax asset will not be realized.
 
 Further,
in accordance with this accounting standard, a tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The standard also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition. The adoption
had no effect on the Company’s consolidated financial
statements.  Penalties and interest incurred related to underpayment
of income tax are classified as income tax expense in the year incurred. 
No significant penalties or interest relating to income taxes were incurred
during the nine months ended September 30, 2010 and
2009.
 
 The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
 
 The
Company does not anticipate any events that could cause a change to these
uncertainties.
 
 Stock-based
compensation
 
 The
Company records and reports stock-based compensation by measuring the cost of
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost is recognized over the period
during which services are received. Stock compensation for stock granted to
non-employees is determined as the fair value of the consideration received or
the fair value of equity instruments issued, whichever is more reliably
measured.
  15
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Earnings per
share
 
 The
Company reports earnings per share and present both basic and diluted earnings
per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share is based
upon the weighted-average number of common shares outstanding. Diluted earnings
per share is based on the assumption that all dilutive convertible shares,
including convertible preferred shares, warrants and stock options were
converted or exercised. Further, the method requires that stock dividends or
stock splits be accounted for retroactively if the stock dividends or stock
splits occur during the period, or retroactively if the stock dividends or stock
splits occur after the end of the period but before the release of the financial
statements, by considering it outstanding of the entirety of each period
presented. Dilution is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if funds
obtained thereby were used to purchase common stock at the average market price
during the period.
 
 All share
and per share amounts used in the Company's consolidated financial statements
and notes thereto have been retroactively restated to reflect the 1-for-10
reverse stock split effectuated on May 12, 2009 and the 2-for-1 forward stock
split effectuated on November 16, 2009.
 
 Related
parties
 
 Parties
are considered to be related to the Company if the parties, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of such principal owners and management, and other parties with which
the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate
interests.
 
 Reclassifications
 
 Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications had no impact on previously reported net
income or cash flows.
 
 Business
combinations
 
 Effective
January 1, 2009, the Company adopted the accounting standard regarding
business combinations. This standard retains the fundamental requirements that
the acquisition method of accounting (which this standard called the purchase
method) be used for all business combinations and for an acquirer to be
identified for each business combination. This standard requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions. This replaces the old accounting
standard’s cost-allocation process, which required the cost of an acquisition to
be allocated to the individual assets acquired and liabilities assumed based on
their estimated fair values.
  16
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
  Recently issued accounting
pronouncements
 
 In
December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company adopted this standard, and the standard did
not have a material effect on the Company’s consolidated financial
statements.
  In
January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company adopted this standard, and the standard did not
have material effect on the Company’s consolidated financial
statements.
 
 In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary.  Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary.  Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value.  In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction.  This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets.  This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009.  The
adoption of this ASU did not  have a material impact on the Company’s
consolidated financial statements.
 
 In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements.  Further, this update
clarifies existing disclosures on level of disaggregation and disclosures about
inputs and valuation techniques.  A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3.  The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years.  The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.
  17
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-09
primarily rescinds the requirement that, for listed companies, financial
statements clearly disclose the date through which subsequent events have been
evaluated. Subsequent events must still be evaluated through the date of
financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
  In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial porting of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010.  The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.
  In April
2010, the FASB issued Accounting Standard Update 2010-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” orASU 2010-17.This Update
provides guidance on the recognition of revenue under the milestone method,
which allows a vendor to adopt an accounting policy to recognize all of the
arrangement consideration that is contingent on the achievement of a substantive
milestone (milestone consideration) in the period the milestone is achieved. The
pronouncement is effective on a prospective basis for milestones achieved in
fiscal years and interim periods within those years, beginning on or after
June 15, 2010. The adoption of this ASU did not have a material impact
on the Company’s consolidated financial statements.
  Note
3 - CONCENTRATIONS AND CREDIT RISK
 
 The
Company’s operations are all carried out in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, and by the general
state of the PRC’s economy. The Company’s operations in the PRC are subject
to specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated
with, among others, the political, economic, and legal environments and foreign
currency exchange. The Company’s results may be adversely affected by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
 
 Financial
instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial
institutions that, from time to time, may exceed federally insured limits for
the banks located in the United States. Balances at financial institutions or
state-owned banks within the PRC are not covered by insurance. As of
September 30, 2010 and December 31, 2009, the Company had deposits in excess of
federally insured limits (including restricted cash) of $1,363,281 and
$11,504,970, respectively. The Company has not experienced any losses in such
accounts.
  18
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 For the
three and nine months ended September 30, 2010 and 2009, all of the
Company’s sales occurred in the PRC. No major customers accounted for more
than 10% of the Company’s total revenue. In addition, all accounts
receivable at September 30, 2010 and December 31, 2009 also arose in the
PRC.
 
 The
Company’s four largest vendors accounted for approximately 46% of total purchase
for the three months ended September 30, 2010, while the Company’s two largest
vendors accounted for approximately 42% of the Company’s total purchase for the
three months ended September 30, 2009. The Company’s four largest vendors
accounted for approximately 44% of total purchase for the nine months ended
September 30, 2010, while the Company’s two largest vendors accounted for
approximately 37% of total purchase for the nine months ended September 30,
2009. As of September 30, 2010 and 2009, there were no amounts due to those
vendors.
 
 The
Company had one product that accounted for 27% and 25% of the Company’s total
revenue for the three and nine months ended September 30, 2010, respectively,
while the same product accounted for 20% and 26% of the Company’s total revenue
for the three and nine months ended September 30, 2009,
respectively.
  Note 4
- ACCOUNTS RECEIVABLE, NET
 
 Accounts
receivable consisted of the following:
 
 September 30,
                                                2010
                                              
                                              
                                              December 31,
                                                2009(Unaudited)Account
      receivable
                                              
                                              $
                                              6,278,154
                                              
                                              
                                              $
                                              4,711,044Allowance
      for bad debts
                                              
                                              
                                              (334,562
                                              )
                                              
                                              
                                              (327,857
                                              )Account receivable,
      net
                                              
                                              $
                                              5,943,592
                                              
                                              
                                              $
                                              4,383,187
 
 The
following table presents the movement of allowance for doubtful
accounts:
 
 Allowance for bad debt, January
      1, 2009
                        
                        $
                        327,857Addition
                        
                        
                        —Recovery
                        
                        
                        —Translation
      adjustment
                        
                        
                        —Allowance
      for bad debt, December 31, 2009
                        
                        
                        327,857Addition
                        
                        
                        288,757Recovery
                        
                        
                        (287,581
                        )Translation
      adjustment
                        
                        
                        5,529Allowance
      for bad debt, September 30, 2010 (unaudited)
                        
                        $
                        334,562
 
 Note 5 –
INVENTORIES
 
 Inventories
consisted of the following:
 September 30, 2010
                        
                        
                        December 31, 2009(Unaudited)Raw
      materials
                        
                        $
                        10,025,393
                        
                        
                        $
                        2,997,481Packing
      materials
                        
                        
                        1,176,618
                        
                        
                        
                        159,620Work-in-process
                        
                        
                        8,007
                        
                        
                        
                        886Finished
      goods
                        
                        
                        4,013,313
                        
                        
                        
                        1,096,547Other
                        
                        
                        27,288
                        
                        
                        
                        19,571Total
                        
                        
                        15,250,619
                        
                        
                        
                        4,274,105Less:
      Allowance for slow moving raw materials
                        
                        
                        (267,833
                        )
                        
                        
                        (199,460
                        )Total
                        
                        $
                        14,982,786
                        
                        
                        $
                        4,074,645
  19
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 The
Company periodically reviews its reserves for slow-moving and obsolete
inventories. As of September 30, 2010 and December 31, 2009, the Company
recorded slow moving allowance for raw materials of $267,833 and $199,460,
respectively.
 
 Note
6 - DEPOSITS AND PREPAID EXPENSES
 
 Deposits
and prepaid expenses were comprised of the following:
 
 September 30, 2010
                      
                      
                      December 31, 2009(Unaudited)Prepayment
      for raw materials purchasing
                      
                      $
                      15,203,882
                      
                      
                      $
                      10,990,913Prepayment
      for packaging materials purchasing
                      
                      
                      490,422
                      
                      
                      
                      489,392Other
                      
                      
                      328,020
                      
                      
                      
                      420,009Total
                      
                      $
                      16,022,324
                      
                      
                      $
                      11,900,314
 
 Note
7 - PLANT AND EQUIPMENT, NET
 
 Plant and
equipment consisted of the following:
 
 September 30, 2010
                      
                      
                      December 31, 2009(Unaudited)Building
      and improvements
                      
                      $
                      11,317,831
                      
                      
                      $
                      6,798,616Machinery
      and equipment
                      
                      
                      3,588,696
                      
                      
                      
                      3,035,814Office
      equipment and furniture
                      
                      
                      205,861
                      
                      
                      
                      191,424Vehicles
                      
                      
                      510,195
                      
                      
                      
                      485,156Total
                      
                      
                      15,622,583
                      
                      
                      
                      10,511,010Less:
      accumulated depreciation
                      
                      
                      (2,240,632
                      )
                      
                      
                      (1,681,952
                      )Plant
      and equipment, net
                      
                      $
                      13,381,951
                      
                      
                      $
                      8,829,058
 
 As of
December 31, 2009, the Company made a deposit of $439,927 on a new office
building.  In January 2010, the purchase was completed, and the total
purchase cost of $1,604,709 was transferred to fixed asset in March 2010. The
Company transferred $1,347,489 from construction-in-progress to buildings after
the construction of its new micro-organism facility was completed in the second
quarter of 2010.
 
 Depreciation
expense was $215,330 and $158,512 for the three months ended September 30, 2010
and 2009, respectively. For the nine months ended September 30, 2010 and 2009,
depreciation expense was $515,178 and $384,465, respectively.
  20
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Note
8 - CONSTRUCTION-IN-PROGRESS
 
 Construction-in-progress
(“CIP”) relates to a plant being built in accordance with the PRC’s Good
Manufacturing Practices (“GMP”) Standard. Construction on this
plant commenced in 2005. The veterinary medicine facility and the building
that houses quality control, research and development, and administration were
completed during 2007, and, during the nine months ended September 30, 2010, the
micro-organism facility and some general facility improvements were completed
and placed in service, which resulted in a transfer from CIP to property, plant
and equipment of $1,347,489. No depreciation is provided for
construction-in-progress until such time as the assets are completed and placed
into service.
  The
construction projects the Company was in the progress of completing are as
follows:
 
 Total in CIP
                          as of
                        
                        
                        Estimate cost to
                        
                        
                        Estimated
                        
                        EstimatedProject
                        
                        9/30/2010
                        
                        
                        Complete
                        
                        
                        Total Cost
                        
                        Completion DateVaccine
      facility
                        
                        $
                        10,557,608
                        
                        
                        
                        -
                        
                        
                        $
                        10,557,608
                        
                        December
      2010Skystar
      Kunshan facility
                        
                        
                        73,638
                        
                        
                        $
                        1,471,000
                        
                        
                        $
                        1,544,638
                        
                        December
      2011TOTAL
      CIP Balance
                        
                        $
                        10,631,246
                        
                        
                        $
                        1,471,000
                        
                        
                        $
                        12,102,246
 
 The
construction of the vaccine facility was completed in June 2010.  The
Company also finished installing, tooling, and testing the equipment and
submitted an application for GMP certification to the Ministry of Agriculture.
The Company is currently waiting for a response from the Ministry of
Agriculture.
  The
construction of the facility in Kunshan for Skystar Kunshan will begin after the
title of land use right is transferred (see Note 10). The Company expects that
50% of the construction will be completed by June 2011, and the remaining
construction will be completed by December 2011.
  As of
September 30, 2010 and December 31, 2009, the Company had CIP amounting to
$10,631,246 and $9,389,120, respectively. No interest expense had been
capitalized for construction for CIP for the three and nine months ended
September 30, 2010. For the three and nine months ended September 30, 2009,
$11,546 and $51,596, respectively, was capitalized for CIP.
  Note
9 - LONG-TERM PREPAYMENTS
 
 Long-term
prepayments consisted of the following:
 
 September 30,
                      2010
                    
                    
                    December 31, 2009(Unaudited)R&D
      project
                    
                    $
                    -
                    
                    
                    $
                    293,400Construction
      deposit
                    
                    
                    851,135
                    
                    
                    $
                    440,100Deposit
      for building and equipment purchase
                    
                    
                    -
                    
                    
                    
                    439,927Total
                    
                    $
                    851,135
                    
                    
                    $
                    1,173,427
 
 In 2009,
the Company prepaid $293,400 (RMB 2,000,000) to a vendor for equipment and raw
materials related to a research and development project on nano-technology in
the prevention of milk cow disease. As of September 30, 2010, the entire
prepayment was used for expenses incurred for this project, and the project
started its trial phase in the third quarter of 2010 (see Note
19).
  21
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
  As of
December 31, 2009, deposits totaling $439,927 (RMB 2,998,820) were made for the
purchase of a new office building.  The purchase was completed and the
deposit transferred to fixed asset in March 2010.  Additional
prepayments made in 2010 were transferred to fixed assets as of September 30,
2010.
 
 Note
10 - LONG-TERM PREPAYMENTS FOR ACQUISITIONS
 
 On August
11, 2010, the Hubei acquisition was completed.  The Company paid
$3,682,620 (RMB 24,600,000) to acquire the assets of the Hubei-based veterinary
manufacturer through its bankruptcy proceedings. The purchase price was prepaid
in 2009.  In connection with the acquisition, an independent third
party appraiser, who is a certified public appraiser under the laws of PRC,
was engaged by the Company to perform an appraisal of the assets
acquired.  The purchase price was allocated to fixed assets of $1.5
million (RMB 10,160,000), land use rights of $1.2 million (RMB 8,324,000), and
patents of $299,400 (RMB 2.0 million). Approximately $3.0 million (RMB
20,484,000) was transferred as investment on Skystar Jingzhou, and approximately
$0.6 million (RMB 4,116,000) was expensed.
 
 The
Company had paid $7,944,579 (RMB 53,070,000) in an attempt to acquire a
Jiangsu-based micro-organism manufacturer, and the Jiangsu acquisition is
projected to be completed in the fourth quarter of 2010. The Company received
the title of land use right in October 2010.
 
 Deposits
made for potential acquisitions amounted to $7,944,579 and $6,806,880 at
September 30, 2010 and December 31, 2009, respectively, of which $796,404 and
$6,806,880, respectively, were held by an unrelated third party engaged to
identify and facilitate acquisition targets for the Company. All potential
acquisitions are contingent upon the Company successfully negotiating with the
selling parties, the ultimate date of which cannot be readily determined.
Deposits are refundable if negotiations are not successful.
 
 Note
11 – INTANGIBLE ASSETS
 
 Intangible
assets consisted of the following:
 September 30, 2010
                          
                          
                          December 31, 2009(Unaudited)Land
      use rights
                          
                          $
                          1,634,620
                          
                          
                          $
                          378,853Technological
      know-how
                          
                          
                          2,095,800
                          
                          
                          
                          2,053,800Patent
                          
                          
                          299,400
                          
                          
                          
                          -Total
                          
                          
                          4,029,820
                          
                          
                          
                          2,432,653Less:
      accumulated amortization
                          
                          
                          (711,999
                          )
                          
                          
                          (572,481
                          )Intangible
      assets, net
                          
                          $
                          3,317,821
                          
                          
                          $
                          1,860,172
 
 In 2009,
the Company paid $1,197,600 (RMB 8,000,000) for the transfer of a fish disease
vaccine technology for an eleven-year term from September 2009 through September
2020, and this amount was included in technological know-how at September 30,
2010 and December 31, 2010. The technology was transferred to the Company on
June 17, 2010, and the Company began using such technology since that date and
recorded the amortization expense based on the remaining term.
 
 For the
three months ended September 30, 2010 and 2009, the amortization expense for
intangible assets amounted to $48,458 and $38,551, respectively. For the nine
months ended September 30, 2010 and 2009, the amortization expense for
intangible assets amounted to $125,591 and $115,621, respectively.
 
 Amortization
expense for the future five years and thereafter is as follows:
  22
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Years ending December 31,
                    
                    Amount(Unaudited)2010
                    
                    $
                    139,5022011
                    
                    
                    376,2192012
                    
                    
                    351,2692013
                    
                    
                    226,5192014
                    
                    
                    226,519thereafter
                    
                    
                    1,997,793Total
                    
                    $
                    3,317,821
 
 Note
12 – SHORT-TERM LOANS
 
 On
January 14, 2009, the Company signed a one year short-term loan contract with
Shaanxi Agricultural Yanta Credit Union for $220,050 (RMB 1,500,000) at an
annual interest rate of 8.66% for operating purposes secured by the personal
property of Weibing Lu, the Company’s Chief Executive Officer. This amount was
paid off on January 15, 2010.  On August 24, 2010, the Company
borrowed a one year short-term loan with the same bank for $748,500 (RMB
5,000,000) at an annual interest rate of 7.22% for operating purpose. This loan
was secured by the Company’s office buildings located in Xi’an City with fair
market value of approximately $1.2 million.
 
 The
Company entered into line of credit agreement with Bank of East-Asia that allows
the Company to borrow up to $3,000,000 (RMB 20,000,000). This line of credit
agreement expires within two years starting with the first withdrawal. The
Company withdrew $462,573 (RMB 3,090,000) and $508,082 (RMB 3,394,000) on July
9, 2010 and September 9, 2010, respectively, at an annual interest rate of
6.372% and maturity three months after each withdrawal. This line of credit is
secured by the Company’s land use right and manufacturing plant located in
Huxian County.
 
 Interest
expense incurred and associated with the short-term loans amounted to $9,806 and
$11,171 for the three and nine months ended September 30, 2010, respectively,
none of which has been capitalized as part of CIP in 2010. Interest expense
incurred and associated with the short-term loan amounted to $11,546 and $51,596
for the three and nine months ended September 30, 2009, respectively, all of
which has been capitalized as part of CIP.
 
 Note
13 - DEFERRED GOVERNMENT GRANT
 
 Deferred
government grant represents subsidies for GMP projects granted by the PRC
government.  To date, the Company received government subsidies
totaling $1,122,750.
 
 According
to PRC government regulations, the funds granted may be treated as capital
contributed by a company appointed by the PRC government or as a loan from such
company, which the Company will be required to repay. As of September 30, 2010,
the Company has not reached a final agreement with the PRC government regarding
the treatment of these subsidies as either a loan or capital contribution, and
the Company does not expect to reach final agreement by the end of its current
fiscal year. Therefore, these amounts are reflected as non-current liabilities
in the accompanying consolidated financial statements.
  23
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Note
14 - CAPITAL TRANSACTIONS
 
 On May
12, 2009, the Company effectuated a 1-for-10 reverse stock split of its issued
and outstanding shares of common stock and a proportional reduction of its
authorized shares of common stock. On November 16, 2009, the Company effectuated
a 2-for-1 forward split of its issued and outstanding common stock and a
proportional increase of its authorized shares of common stock. The amounts of
common stock, warrants, and options disclosed in the Company’s consolidated
financial statements and the footnotes thereto that were issued subsequent to
such stock splits, including the financial statements for the three and nine
months ended September 30, 2010 and these footnotes, have been retroactively
restated to reflect both the reverse stock split and the forward stock
split.
 
 Preferred
stock
 
 On June
25, 2009, the Company’s board of directors concluded that 2,000,000 shares of
series “A” preferred stock issued in 2001 were not valid because no certificate
of designation was filed prior to their issuance as required under Nevada
corporate law. On December 21, 2009, the Company instructed its transfer agent
to remove these preferred shares officially from its shareholder records. As of
September 30, 2010 and December 31, 2009, no share of series “A” preferred stock
was authorized or outstanding, respectively.
 
 Stock-based
compensation
 
 On March
30, 2010, the Company agreed to issue 2,500 shares of common stock to a
non-executive director in exchange for services unrelated to his
directorship.  On April 16, 2010, the Company entered into an
agreement with this director, agreeing to issue 10,000 shares of common stock to
that director for one-year's service beginning April 1,
2010.  The common stock compensation would vest in four equal
installments of 2,500 each quarter. The trading value of the Company’s common
stock on March 30, 2010 and April 16, 2010 was $11.74 and $10.61 per share,
respectively, and a corresponding amount of $26,525 and $80,075 was charged to
general and administrative expense for the three and nine months ended September
30, 2010, respectively.
 
 The
Company accrued $382,447 and $302,372 under shares to be issued as of September
30, 2010 and December 31, 2009, respectively, which represented 54,834 and
47,334 common shares to be issued to that non-executive director for his service
provided for the period from May 2008 to September 30, 2010 and for the
period from May 2008 to December 2009, respectively. Based on the 2010
agreement, restricted stock is treated as an equity award and recorded as contra
equity instead of shares to be issued.  As of September 30, 2010,
these shares have not been issued. The Company issued 52,334 common shares to
the director on October 25, 2010.
 
 On May
26, 2009, the Company renewed a one-year service agreement with the former CFO
and agreed to issue 14,440 shares of common stock, which would vest in four
equal installments of 3,610 shares every quarter starting August 5,
2009. Compensation expense is recognized on a straight-line basis over the
vesting period.  In February 2010, 10,830 shares were issued. 
Effective April 16, 2010, the former CFO resigned from his position and the last
installment of 3,610 shares was prorated to 2,880 shares, which shares were not
issued as of September 30, 2010. The Company issued 2,880 common shares to the
former CFO on October 25, 2010.  Total compensation expense of $29,205
and $24,751 were charged to general and administrative expenses for
the nine months ended September 30, 2010 and 2009,
respectively.
 
 On May
26, 2009, the Company agreed to issue 5,556 shares of common stock to a director
at the beginning of each term of his directorship. The trading value of the
common stock on May 26, 2009 was $4.50 per share. The total value of $0 and
$25,002 was charged to general and administrative expenses for the three and
nine months ended September 30, 2009, respectively. As of December 31, 2009, the
balance was included in shares to be issued. The Company issued 5,556 shares on
February 26, 2010.  In accordance with the agreement between the
Company and this director, this director must continue to serve as a member of
the Board until his successor is duly elected and qualified in order to receive
the shares. Since the Company has not yet held its annual shareholder meeting
and no such successor has been elected, this director has continued in his
position and is entitled to the compensation for the next calendar term
commencing May 26, 2010, prorated for any partial time periods. The trading
value of the Company’s common stock on May 26, 2010 was $8.33 per share. For the
three and nine months ended September 30, 2010, $3,857 was charged to general
and administrative expense.
  24
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Warrants and purchase
options
 
 On
February 28, 2007, the Company issued 195,000 warrants to four investors in
connection with a financing with an exercise price of $6.00 per share for a term
of three years.  On the same date, the Company also issued warrants to
the placement agent, exercisable for 114,100 shares of the Company’s common
stock at a price of $5.00 per share for a five-year term.  For the
three months ended September 30, 2010, no warrants were exercised.  For the
nine months ended September 30, 2010, 218,024 warrants were exercised. The
Company valued the conversion on the respective dates and recorded $0 and a loss
of $159,326 from changes in fair value of warrants in the three and nine months
ended September 30, 2010, respectively.
 
 In
connection with the 2009 equity offering discussed below, the Company
agreed to grant 140,000 common stock purchase options to five designees of
the Underwriters. The options are exercisable from June 30, 2010 to June
30, 2014, and each option is exercisable for one share of the Company’s common
stock at an exercise price at $8.11 per share. All those options were provided
for services performed. As of June 30, 2010, the purchase options were
reclassified from equity to warrants liabilities, and the Company reclassified
$779,674 from additional paid in capital to derivative liability.
 
 Following
is a summary of the status of warrants and purchase options outstanding at
September 30, 2010:
 
 Outstanding
                        
                        Average
                          Remainingwarrants/purchase
                          options
                        
                        Contractual
                          Life (year)
                        
                        
                        Average
                          Exercise Price34,230
                        
                        
                        1.42
                        
                        
                        $
                        5.00140,000
                        
                        
                        3.75
                        
                        
                        $
                        8.11
 
 Following
is an activity summary of the Company’s outstanding warrants and purchase
options:
   Outstanding
      as of December 31, 2008
                          
                          
                          309,100Granted
                          
                          
                          140,000Forfeited
                          
                          
                          —Exercised
                          
                          
                          —Outstanding
      as of  September 30, 2009 (unaudited)
                          
                          
                          449,100Granted
                          
                          
                          —Forfeited
                          
                          
                          —Exercised
                          
                          
                          56,846Outstanding
      as of December 31, 2009
                          
                          
                          392,254Granted
                          
                          
                          —Forfeited
                          
                          
                          —Exercised
                          
                          
                          218,024Outstanding
      as of September 30, 2010 (unaudited)
                          
                          
                          174,230
  25
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 2009 Equity
offering
 
 On June
30, 2009, the Company and Rodman & Renshaw, LLC, as representative
of underwriters (the "Underwriters") entered into an Underwriting Agreement.
Pursuant to the Underwriting Agreement, the Company agreed to issue and sell an
aggregate 3,220,000 shares (including 420,000 over-allotment shares) of its
common stock at a price of $6.49 per share in a public offering. The closing
date of this offering was on the third business day following the
effective date of the registration statement registering the shares offered, or
July 3, 2009.
 
 Incremental
costs incurred of this offering, including underwriting commission, legal fees,
and printing costs, were $1,730,477, and were directly deducted from the
proceeds. The gross proceeds of this offering were $20,897,800. The
Company received cash proceeds of $18,411,496 on July 6, 2009.
 
 Equity Compensation
Plan
 
 On
December 8, 2009, the Company’s board of directors approved a stock incentive
plan for officers, directors, employees and consultants entitled the “Skystar
Bio-Pharmaceutical Company 2010 Stock Incentive Plan” (the “2010 Plan”). The
maximum number of shares that may be issued under the 2010 Plan is 700,000
shares of the Company’s common stock. The 2010 Plan was approved by the
Company’s stockholders on December 31, 2009, and awards may be granted
thereunder until December 7, 2019. As of September 30, 2010, there are 690,000
shares of the Company’s common stock remaining available for future issuance
under the 2010 Plan.
  Note
15 - STATUTORY RESERVES
 
 Statutory
reserves represent restricted retained earnings. Based on the legal formation of
the entities, all PRC entities are required to set aside 10% of its net income
as reported in its statutory accounts on an annual basis to the statutory
surplus reserve fund. Once the total statutory surplus reserve reaches 50% of
the entity’s registered capital, further appropriations are discretionary. The
statutory surplus reserve can be used to increase the entity’s registered
capital (upon approval by relevant government authorities) and eliminate its
future losses under PRC GAAP (upon a resolution by the board of directors). The
statutory surplus reserve is not distributable to shareholders except in the
event of liquidation. As of September 30, 2010, Xian Tianxing has met the
statutory surplus reserve requirement, and approximately $16,941,000 still needs
to be transferred to the statutory surplus reserve from other Chinese
subsidiaries.
  The
reserve fund can be used to increase the registered capital upon approval by
relevant government authorities and eliminate future losses of the respective
companies upon a resolution by the board of directors.
 
 Appropriations
to the above statutory reserves are accounted for as a transfer from
unrestricted earnings to statutory reserves. There are no legal
requirements in the PRC to fund these statutory reserves by the transfer of cash
to any restricted accounts, and as such, the Company has not transferred any
cash to these accounts. These reserves are not distributable as cash
dividends.
 
 Note
16 – TAXES
  Skystar
and Skystar California are subject to United States federal income tax
provisions. Skystar Cayman is a tax-exempt company incorporated in the Cayman
Islands and conducts all of its business through its subsidiaries, Fortunate
Time, Sida, and Sida’s PRC VIEs, Xian Tianxing and Shanghai
Siqiang.
 
 Sida,
Xian Tianxing, and Shanghai Siqiang are subject to the PRC’s Enterprise Income
Tax. Pursuant to the PRC Income Tax Laws, Enterprise Income Tax is generally
imposed at a statutory rate of 25% beginning on January 1, 2008. Xian Tianxing
has been approved as a new technology enterprise, and under PRC Income Tax Laws
is entitled to a preferential tax rate of 15%.
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the three and nine months ended September 30, 2010 and
2009:
  26
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 For the three months ended
                                          September 30,
                                        
                                        
                                        For the nine months ended
                                          September 30,2010
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        
                                        2009(Unaudited)
                                        
                                        
                                        (Unaudited)
                                        
                                        
                                        (Unaudited)
                                        
                                        
                                        (Unaudited)U.S.
      Statutory rate
                                        
                                        
                                        34.0
                                        %
                                        
                                        
                                        34.0
                                        %
                                        
                                        
                                        34.0
                                        %
                                        
                                        
                                        34.0
                                        %Foreign
      income not recognized in the U.S.
                                        
                                        
                                        (34.0
                                        )
                                        
                                        
                                        (34.0
                                        )
                                        
                                        
                                        (34.0
                                        )
                                        
                                        
                                        (34.0
                                        )China
      income tax rate
                                        
                                        
                                        25.0
                                        
                                        
                                        
                                        25.0
                                        
                                        
                                        
                                        25.0
                                        
                                        
                                        
                                        25.0China
      income tax exemption
                                        
                                        
                                        (10.0
                                        )
                                        
                                        
                                        (10.0
                                        )
                                        
                                        
                                        (10.0
                                        )
                                        
                                        
                                        (10.0
                                        )Other
      item (1)
                                        
                                        
                                        1.7
                                        
                                        
                                        
                                        (1.8
                                        )
                                        
                                        
                                        2.9
                                        
                                        
                                        
                                        2.9Total
      provision for income taxes
                                        
                                        
                                        16.7
                                        %
                                        
                                        
                                        13.2
                                        %
                                        
                                        
                                        17.9
                                        %
                                        
                                        
                                        17.9
                                        %
 
 (1)
              Other
      item is for operating expenses incurred by Skystar that are not deductible
      in the PRC and expenses incurred by other subsidiaries that are not
      deductible on the consolidated level, which resulted in an increase in
      effective tax rate of 1.7% and (1.8)% for the three months ended September
      30, 2010 and 2009, respectively, and 2.9% and 2.9% for the nine months
      ended September 30, 2010 and 2009,
respectively.
 
 Taxes
payable consisted of the following:
 September 30, 2010
                                  
                                  
                                  December 31, 2009(Unaudited)Income
      taxes payable
                                  
                                  $
                                  1,756,074
                                  
                                  
                                  $
                                  104,261Value
      added tax
                                  
                                  
                                  1,342,142
                                  
                                  
                                  
                                  561,646Other
      taxes
                                  
                                  
                                  140,110
                                  
                                  
                                  
                                  56,199Total
                                  
                                  $
                                  3,238,326
                                  
                                  
                                  $
                                  722,106
  The
estimated tax savings due to the reduced tax rate for the three months ended
September 30, 2010 and 2009 amounted to $882,464 and $640,813,
respectively. If the statutory income tax had been applied, the Company
would have decreased basic earnings per share from $0.93 to $0.80 and decreased
diluted earnings per share from $0.92 to $0.80 for the three months ended
September 30, 2010. For the three months ended September 30, 2009, the
basic earnings per share would have decreased from $0.77 to $0.68, and the
diluted earnings per share would have decreased from $0.76 to $0.67, if the
statutory income tax had been applied.
 
 The
estimated tax savings due to the reduced tax rate for the nine months ended
September 30, 2010 and 2009 amounted to $1,459,668 and $985,532,
respectively. If the statutory income tax had been applied, the Company
would have decreased basic earnings per share from $1.43 to $1.22 for the nine
months ended September 30, 2010, and diluted earnings per share from $1.42 to
$1.22. For the nine months ended September 30, 2009, the basic earnings per
share would have decreased from $1.30 to $1.10, and the diluted earnings per
share would have decreased from $1.29 to $1.09, if the statutory income tax had
been applied.
 
 Skystar
was incorporated in the U.S. and has incurred a net operating loss for income
tax purposes for the three and nine months ended September 30, 2010. As of
September 30, 2010, the estimated net operating loss carryforwards for U.S.
income tax purposes amounted to $4,370,119, which may be available to reduce
future years’ taxable income. These carryforwards will expire, if not utilized,
beginning in 2026 and through 2030. Management believes that the realization of
the benefits arising from this loss appears to be uncertain due to the Company’s
limited operating history and continuing losses for U.S. income tax purposes.
Accordingly, the Company has provided a 100% valuation allowance at September
30, 2010 and December 31, 2009. The valuation allowance at September 30, 2010
and December 31, 2009 was $1,485,840 and $1,553,677, respectively. The
Company’s management reviews this valuation allowance periodically and makes
adjustments as necessary.
  27
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $37 million as of September 30, 2010, which were included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations.  Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 Note
17 - EARNINGS PER SHARE
 
 The
following is the calculation of earnings per share:
 
 For the three months ended
                    September 30,
                  
                  
                  For the nine months ended
                    September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      income
                  
                  $
                  6,647,799
                  
                  
                  $
                  5,347,334
                  
                  
                  $
                  10,122,441
                  
                  
                  $
                  6,295,181Weighted
      average shares used in basic computation
                  
                  
                  7,119,585
                  
                  
                  
                  6,960,028
                  
                  
                  
                  7,103,365
                  
                  
                  
                  4,824,306Diluted
      effect of stock warrants
                  
                  
                  27,539
                  
                  
                  
                  65,315
                  
                  
                  
                  13,155
                  
                  
                  
                  66,406Weighted
      average shares used in diluted computation
                  
                  
                  7,147,124
                  
                  
                  
                  7,025,343
                  
                  
                  
                  7,116,520
                  
                  
                  
                  4,890,712Earnings
      per share:Basic
                  
                  $
                  0.93
                  
                  
                  $
                  0.77
                  
                  
                  $
                  1.43
                  
                  
                  $
                  1.30Diluted
                  
                  $
                  0.93
                  
                  
                  $
                  0.76
                  
                  
                  $
                  1.42
                  
                  
                  $
                  1.29
 
 For the
three months ended September 30, 2010 and 2009, the average stock price was
greater than the exercise prices of warrants, which resulted in additional
weighted-average common stock equivalents of 27,539 and 65,315,
respectively.
 
 For the
nine months ended September 30, 2010 and 2009, the average stock price was
greater than the exercise prices of warrants, which resulted in additional
weighted-average common stock equivalents of 13,155 and 66,406,
respectively.  140,000 outstanding purchase options were excluded from
the diluted earnings per share calculation as they are
anti-dilutive.
 
 For the
three and nine months ended September 30, 2009, the average stock price was
greater than the exercise prices of warrants, which resulted in additional
weighted-average common stock equivalents of 4,266,406 and 8,192, respectively.
140,000 outstanding purchase options were excluded from the diluted earnings per
share calculation as they are anti-dilutive.
  28
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Note
18 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
 Amounts
receivable from and payable to related parties are summarized as
follows:
 
 September 30, 2010
                                    
                                    
                                    December 31, 2009(Unaudited)Short-term loans from
      shareholdersMr.
      Weibing Lu – officer and shareholder (1)
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    36,675Mr.
      Wei Wen – officer and shareholder (1)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    36,675Ms.
      Aixia Wang – shareholder (1)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    36,675Total
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    110,025Shares to be issued to related
      partyScott
      Cramer – non-executive director (2)
                                    
                                    $
                                    302,372
                                    
                                    
                                    $
                                    302,372Mark
      D. Chen – non-executive director(2)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    25,002Bennet
      Tchaikovsky(2)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
                                    
                                    $
                                    302,372
                                    
                                    
                                    $
                                    327,374Amounts due (from) to related
      partiesScott
      Cramer – non-executive director and shareholder (3)
                                    
                                    
                                    68,957
                                    
                                    
                                    
                                    143,556Shaanxi
      Xingji Electronics Co. - owned by a director's wife (3)
                                    
                                    
                                    50,600
                                    
                                    
                                    
                                    -Officer
      and shareholder
                                    
                                    
                                    32,158
                                    
                                    
                                    
                                    41,468Total
                                    
                                    $
                                    151,715
                                    
                                    
                                    $
                                    185,024
  (1)
On June 2, 2009, Weibing Lu, Wei Wen, and Aixia Wang obtained personal loans
from Yanta Credit Union and advanced cash to Xian Tianxing in the total amount
of $110,025. These loans were due on June 1, 2010 with 10.1% interest per annum,
were guaranteed by Xian Tianxing, and were paid in full in June 2010. For the
three and nine months ended September 30, 2010, Xian Tianxing paid interest of
$0 and $6,070, respectively, for these loans directly. For the three and nine
months ended September 30, 2009, Xian Tianxing paid interest of $2,748 and
$5,630, respectively, for these loans.
 
 (2) As
of September 30, 2010 and December 31, 2009, the Company had the obligation
under an agreement to issue 54,834 and 47,334 shares of common stock,
respectively, to Scott Cramer as compensation valued at $382,447 and
$302,372, respectively, for being a representative of the Company in the
United States for the periods from May 2008 to September 30,
2010.  These shares have not been issued as of September 30, 2010, but
52,334 shares were subsequently issued on October 25, 2010, and the
corresponding amount of $80,075 was charged to general and administration
expense and recorded as a contra equity account.
 
 In
addition, as of December 31, 2009, the Company had the obligation under an
agreement to issue 5,556 shares of common stock, respectively, to Mark D. Chen
as compensation valued at $25,002 at the beginning of each term of his
directorship.  The Company issued 5,556 shares on February 26,
2010.
 
 Effective
April 16, 2010, Bennet Tchaikovsky resigned as our chief financial officer, and
the last installment of 3,610 shares of common stock owed to him was prorated to
2,880 shares.  These shares have not been issued as of September 30,
2010, but were subsequently issued on October 25, 2010, and the corresponding
amount of $12,960 was charged to general and administration expense and recorded
as a contra equity account.
 
 (3)
Shaanxi Xinji Electronics Co., Ltd. is owned by the wife of Weibing Lu. The
amounts due to Shaanxi Xinji Electronics as of September 30, 2010 and December
31, 2009 were short-term cash transfers for business operations, non-interest
bearing, unsecured, and payable upon demand. As of September 30, 2010 and
December 31, 2009, the Company also had unpaid reimbursement due to
Scott Cramer.
  29
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 Note
19 - COMMITMENTS AND CONTINGENCIES
 
 (a) Lease
commitments
 
 The
Company recognizes lease expense on a straight-line basis over the term of the
lease in accordance to the FASB’s accounting standard of accounting for leases.
The Company entered into a tenancy agreement for the lease of factory premises
for a period of ten years from October 1, 2004 to December 31, 2014, with annual
rent of $14,162 (RMB 94,600), which is subject to a 10% increase every four
subsequent years.
  The
Company leases office space from Weibing Lu, the Company’s chief executive
officer, for a period of five years from January 1, 2007 to December 31, 2011,
with annual rent of approximately $24,790 (RMB 165,600). The Company also
entered into a tenancy agreement with Mr. Lu for the lease of Shanghai Siqiang’s
office for a period of ten years from August 1, 2007 to August 1, 2017, with
annual rent of approximately $21,560 (RMB 144,000).
 
 The
Company entered into a tenancy agreement for the lease of an office space in
California for a period of three years from July 1, 2009 to July 1, 2012 with
monthly rent of $1,100.
 
 The
Company entered into a one-year tenancy agreement for leasing Tianxing’s sales
office space in Tianjin from April 21, 2010 to April 20, 2011 with annual rent
of approximately $3,600 (RMB 24,000).
 
 The
minimum future lease payments for the next five years and thereafter are as
follows:
 
 Period
                    
                    Amount(Unaudited)Three
      months ending December 31, 2010
                    
                    $
                    19,325Year
      ending December 31, 2011
                    
                    
                    74,607Year
      ending December 31, 2012
                    
                    
                    42,318Year
      ending December 31, 2013
                    
                    
                    35,718Year
      ending December 31, 2014
                    
                    
                    35,718Year
      ending December 31, 2015 and thereafter
                    
                    
                    55,690Total
                    
                    $
                    263,376
 
 Rental
expense for the three months ended September 30, 2010 and 2009 amounted to
$19,553 and $14,813, respectively. Rental expense for the nine months ended
September 30, 2010 and 2009 amounted to $55,964 and $44,439,
respectively.
 
 (b) Legal
proceedings
  From time
to time, the Companyis involved in legal
matters arising in the ordinary course of business. Management
currentlyis not
aware of any legal matters or pending litigation which would have a significant
effect on the Company’s consolidated financial statements as of September 30,
2010.
  30
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 In May
2007, Andrew Chien filed suit against the Company, Scott Cramer, Steve Lowe,
David Wassung and Weibing Lu in United States District Court for the District of
Connecticut, alleging causes of action for violation of Sections 10(b) and 20(a)
of the Exchange Act. On July 17, 2008, in a decision that is now published, the
Court granted defendants' motion to dismiss and subsequently dismissed the
lawsuit, entering judgment on behalf of the defendants. Mr. Chien filed a notice
of appeal of the Court's dismissal of his lawsuit, opposed by the defendants,
which remains pending. Additionally, on February 5, 2009, the Court issued a
ruling on defendants' motion for sanctions, finding the action filed by Mr.
Chien to have been entirely frivolous, and to have constituted a "substantial"
violation of Federal Rule of Civil Procedure Rule 11, and imposed significant
monetary sanctions on both Mr. Chien and his former attorney. As part of the
basis for imposing sanctions on Mr. Chien personally, the Court specifically
found that Mr. Chien had knowledge of facts directly contradicting the
allegations of his complaint, as evident in internet postings he made on online
message boards. Mr. Chien subsequently filed motions seeking to "re-open" this
case, and to recuse the judge, but both motions were denied. A Notice of Appeal
concerning the ruling awarding sanctions against him was also filed by Mr.
Chien.  All appeals, including the one referenced below concerning Mr.
Chien's second lawsuit, were subsequently consolidated. On May 26, 2010, the
court of appeals for the Second Circuit upheld Judge Kravtiz’s ruling against
Mr. Chien.
 
 Subsequently,
Mr. Chien, proceeding pro se, filed another lawsuit against the Company, Scott
Cramer, Steve Lowe, David Wassung, and Weibing Lu in Connecticut Superior Court,
alleging causes of action similar to those alleged in his federal complaint
described above as well as state law causes of action. The case was removed to
the U.S. District Court, District of Connecticut, and assigned to the same Judge
who dismissed Mr. Chien’s related federal action. On June 8, 2009, the Court
granted defendants’ motion to dismiss this action in its entirety, and denied
Mr. Chien’s motion to further amend his complaint. Mr. Chien filed a Notice of
Appeal concerning the ruling dismissing this lawsuit, which has been
consolidated with Mr. Chien’s appeal of his other lawsuit. On May 26, 2010, the
court of appeals for the Second Circuit upheld Judge Kravtiz’s ruling against
Mr. Chien.
 
 Other
than the above described legal proceedings, the Company is not aware of any
other legal matters in which purchasers, any director, officer, or any owner of
record or beneficial owner of more than five percent of any class of voting
securities of the Company, or any affiliate of purchaser, or of any such
director, officer, affiliate of the Company, or security holder, is a party
adverse to the Company or has a material adverse interest to the Company. No
provision has been made in the consolidated financial statements for the above
contingencies.
  (c)Ownership of leasehold
property
 
 In 2005,
a shareholder contributed a leasehold office building as additional capital of
Xian Tianxing. However, as of September 30, 2010, title to this leasehold
property has not passed to the Company. The Company does not believe there are
any legal barriers for the shareholder to transfer the ownership to the Company.
However, in the event that the Company fails to obtain the ownership certificate
for the leasehold property, there is a risk that we may be required to vacate
the building. Management believes that this possibility is remote, and, as such,
no provision has been made in the consolidated financial statements for this
potential occurrence.
 
 (d) R&D project
  During
the first quarter of 2008, Xian Tianxing contracted with Northwestern
Agricultural Technology University to jointly work on an R&D project
concerning the application of nano-technology in the prevention of milk cow
diseases. The total projected budget for this project is approximately $574,000
(RMB 4,000,000), of which, approximately $147,000 (RMB 1,000,000) was
expensed when incurred in previous years, and approximately $293,000 (RMB
2,000,000) was prepaid in 2008. During the nine months ended September 30, 2010,
the Company incurred $369,750 (RMB 2,500,000) of expenses relating to this
project. The project is still in the trial stage, and we expect to obtain a
veterinary permit for the new product from the PRC government in June
2011.
 
 During
the year ended December 31, 2009, Xian Tianxing contracted with the Fourth
Military Medical University to jointly work on an R&D project with a
contracted amount of approximated $880,200 (RMB 6,000,000). The project is
expected to be complete in September 2014. The Company paid $411,880 (RMB
2,800,000) in the fourth quarter of 2009. The remaining RMB 3,200,000 will be
paid from 2012 to 2014.
  31
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2010
 (Unaudited)
 
 (e)
Registered capital of subsidiaries
 
 Skystar
Kunshan’s remaining registered capital of $12,750,000 is required to be invested
by May 7, 2012, and Skystar Jingzhou has remaining registered capital of
$377,000 (RMB 2,520,000). The prepayments the Company made in relation to the
Kunshan acquisition will be used to satisfy the registered capital requirement
upon completion of the Kunshan acquisition.
 
 Note
20 - Subsequent Events
  The
Company performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions in the consolidated financial statements as of September 30,
2010.
  32


ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.





The
following discussion and analysis of our financial condition and results of
operations for the three and nine months ended September 30, 2010 should be read
in conjunction with our consolidated financial statements and the notes
thereto and the other financial information appearing elsewhere in this item. In
addition to historical information, the following discussion contains certain
forward-looking statements within the “safe harbor” provisions of the
Private Securities Litigation Reform Act of 1995. These statements relate to our
future plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as “may”, “will”, “could”, “expect”,
“anticipate”, “intend”, “believe”, “estimate”, “plan”, “predict”, and similar
terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the
bounds of our knowledge of our business, our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to such differences include, but are not limited to, those discussed
in the “Risk Factors “section of this Quarterly Report on Form 10-Q. We
undertake no obligation to update publicly any forward-looking statements for
any reason even if new information becomes available or other events occur in
the future.





Our
financial statements are prepared in U.S. dollars and in accordance with
accounting principles generally accepted in the United States of America. See
“Exchange Rates” below for information concerning the exchanges rates at
which Renminbi were translated into U.S. dollars at various pertinent dates and
for pertinent periods.




Overview





Skystar
Bio-Pharmaceutical Company (“Skystar” or the “Company”), formerly known as
The Cyber Group Network Corporation, was incorporated in Nevada on September 24,
1998. The Company is a holding company that, through its variable interest
entity (“VIE”) Xian Tianxing Bio-Pharmaceutical Co., Ltd. (“Xian Tianxing”),
researches, develops, manufactures and distributes veterinary health care and
medical care products in the People’s Republic of China (“PRC”).





As of
September 30, 2010, substantially all of our operations were carried out by Xian
Tianxing, a PRC company, which the Company controls through contractual
arrangements originally between Xian Tianxing and Skystar Bio-Pharmaceutical
(Cayman) Holdings Co., Ltd. (“Skystar Cayman”), a Cayman Islands company that
became our wholly owned subsidiary subsequent to a share exchange transaction on
November 7, 2005.  On March 10, 2008, all of the rights and
obligations of Skystar Cayman under the contractual arrangements were
transferred to Sida Biotechnology (Xian) Co., Ltd. (“Sida”), a PRC company and
wholly owned subsidiary of Fortunate Time International Limited (“Fortunate
Time), a Hong Kong company and wholly owned subsidiary of Skystar Cayman.
Fortunate Time has another subsidiary, Skystar Biotechnology (Kunshan) Co.,
Limited (“Skystar Kunshan”) that was set up in May 2010.  Skystar
Kunshan was formed in connection with the prepayments we have been making in an
attempt to acquire the assets of a micro-organism manufacturing facility in
Kunshan.  On August 11, 2010, our Sida subsidiary completed the
acquisition of assets of a veterinary manufacturing facility in Jingzhou, Hubei
Province, China and formed Skystar Bio-Technology (Jingzhou) Co., Limited
(“Skystar Jingzhou).  Skystar Jingzhou engages in the manufacturing
and distribution of veterinary medicines, aquaculture medicines, and
antiseptics.  Production started subsequent to June 30,
2010.  Xian Tianxing also has a wholly owned subsidiary, Shanghai
Siqiang Biotechnological Co., Ltd., a PRC company.





The
contractual arrangements are necessary to comply with Chinese laws limiting
foreign ownership of certain companies. Through these contractual arrangements,
we have the ability to substantially influence Xian Tianxing’s daily
operations and financial affairs, appoint its senior executives and approve all
matters requiring shareholder approval. As a result of these contractual
arrangements, which enable us to control Xian Tianxing, we are considered
the primary beneficiary of Xian Tianxing. Please see Note 1 to our consolidated
financial statements for the nine months ended September 30, 2010 for the impact
of the contractual arrangements on our consolidated financial
statements.




Currently,
we have four major product lines:




·
            Our
      bio-pharmaceutical veterinary vaccine line currently includes over 10
      products;


33





·
            Our
      veterinary medicine line for poultry and livestock currently includes over
      215 products;





·
            Our
      feed additives line currently includes over 10 products;
    and





·
            Our
      micro-organism products line currently includes over 16
      products.





All of
our revenue is derived from the sale of veterinary healthcare and medical
care products in China, which are distributed throughout 29
provinces. As of September 30, 2010, we
had over 1,894 distributors and 715 direct
customers.





Critical
Accounting Policies and Estimates





In
preparing the consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, we make estimates
and assumptions about the effect of matters that are inherently uncertain and
may change in subsequent periods. The resulting accounting estimates will, by
definition, vary from the related actual results. We consider the following to
be the most critical accounting policies:




•
            Revenue
      recognition: Our revenues include sales of bio-pharmaceutical and
      veterinary products in China. Sales are recognized when the following four
      revenue criteria are met: persuasive evidence of an arrangement exists,
      delivery has occurred, the selling price is fixed or determinable, and
      collectability is reasonably assured. Sales are recorded net of value
      added tax (“VAT”). No return allowance is made as product returns are
      insignificant based on historical
experience.





(a)
            Credit
      sales: Revenue is recognized when the products have been
      delivered to the customers.





(b)
            Full payment before
      delivering:Revenue is recognized when the products have been
      delivered to customers.





•
            Accounts
      receivable: We perform ongoing credit evaluations of our customers and
      adjust credit limits based upon payment history and the customers’ current
      credit worthiness, as determined by a review of their current credit
      information. We continuously monitor collections and payments from our
      customers and maintain a provision for estimated credit losses based upon
      historical experience and any specific customer collection issues that
      have been identified. While such credit losses have historically been
      within our expectations and the provisions established, we cannot
      guarantee that we will continue to experience the same credit loss rates
      that have been experienced in the
past.





Our
accounts receivable aging was as follows for the periods below:




From Date of Invoice to Customer:
                              
                              September 30,
                                2010
                              
                              
                              December 31,
                                2009
                              
                              
                              September 30,
                                20090-90
      days
                              
                              $
                              5,319,888
                              
                              
                              $
                              4,401,071
                              
                              
                              $
                              6,242,18891 – 180
      days
                              
                              
                              306,332
                              
                              
                              
                              177,416
                              
                              
                              
                              60,652181 – 270
      days
                              
                              
                              229,866
                              
                              
                              
                              21,868
                              
                              
                              
                              29,780271 – 360
      days
                              
                              
                              251,791
                              
                              
                              
                              23,865
                              
                              
                              
                              24,625360
      days and above
                              
                              
                              170,277
                              
                              
                              
                              86,824
                              
                              
                              
                              70,676Allowance
      for bad debts
                              
                              
                              (334,562
                              )
                              
                              
                              (327,857
                              )
                              
                              
                              (327,857
                              )Total
                              
                              $
                              5,943,592
                              
                              
                              $
                              4,383,187
                              
                              
                              $
                              6,100,064


34


On
average, we collect our receivables within 90 days. For the quarter ended
September 30, 2010, accounts receivable decreased compared to the same quarter
last year due in part to improved collections. We increased collection efforts
after significant increases in accounts receivable balances in the second
quarter of this year. As a result, the accounts receivable balance declined from
$8,329,674 on June 30, 2010, to $6,278,154 on September 30, 2010, even as sales
have increased significantly. The ratio of outstanding accounts receivable
balance compared to total sales decreased significantly for the quarter. The
quality of aging accounts receivable also improved slightly compared to the
prior quarter of this year, as evidenced by the higher percentage of total
accounts receivable at September 30, 2010 being comprised of 0-90 day old
accounts (85%) as compared to end of Q2 (84%), though still lower than a year
ago (97%). We do not foresee a return to the 97% rate in the near future where
97% of the open accounts receivable are within 90 days, mainly because the
Company has decided to extend credit to certain customers to expand market
share, and the Company has grown and now has a more complex customer base. We
increased our bad debt reserve in the second quarter in response to the higher
accounts receivable balance relative to sales and deterioration of the aging
quality. Given the success we had in collecting most of our open sales in the
third quarter and the reduction of our accounts receivable balance, our bad debt
reserve decreased to the same level as in the first quarter. Historically, we
have collected all of our accounts receivable and have had no write offs. If we
are having difficulty collecting from a customer, we take the following steps:
cease existing shipments to the customer, our sales force actively calls and
goes to the customer’s site reminding the customer of their past due invoice and
requesting payment, and if those methods are unsuccessful we use our outside
legal counsel. If, in the future, those steps are unsuccessful, management
would determine whether or not the receivable should be written
off.





•
            Warrants:
      We have adopted the accounting standards of accounting for stock purchase
      warrants and other related derivative accounting standards for valuation
      and accounting treatment of our outstanding
  warrants.





Recent
Issued Accounting Pronouncements




In
December 2009, the FASB issued ASU No. 2009-17, Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities. This
Accounting Standards Update amends the FASB Accounting Standards Codification
for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company adopted this standard, and the standard did
not have a material effect on the Company’s consolidated financial
statements.





In
January 2010, the FASB issued ASU No. 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company adopted this standard, and the standard did not
have material effect on the Company’s consolidated financial
statements.





In
January 2010, the FASB issued ASU No. 2010-02 regarding accounting and reporting
for decreases in ownership of a subsidiary.  Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary.  Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value.  In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction.  This ASU
clarifies the scope of the decrease in ownership provisions, and expands the
disclosures about the deconsolidation of a subsidiary or de-recognition of a
group of assets.  This ASU is effective beginning in the first interim
or annual reporting period ending on or after December 31, 2009.  The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.





35


In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure to include transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements.  Further, this update
clarifies existing disclosures on level of disaggregation and Disclosures about
inputs and valuation techniques.  A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities and
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3.  The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years.  The Company is currently evaluating the impact of this ASU;
however, the Company does not expect the adoption of this ASU to have a material
impact on its consolidated financial statements.





In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09.
ASU 2010-09 primarily rescinds the requirement that, for listed companies,
financial statements clearly disclose the date through which subsequent events
have been evaluated. Subsequent events must still be evaluated through the date
of financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.





In April
2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock
Compensation (Topic 718): Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to
Topic 718 to clarify that an employee share-based payment award with an exercise
price denominated in currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. The Company is currently evaluating the impact of this ASU; however, the
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.





In April
2010, the FASB issued Accounting Standard Update 20-10-17, “Revenue
Recognition—Milestone Method (Topic 605): Milestone Method of Revenue
Recognition” orASU 2010-17.This Update
provides guidance on the recognition of revenue under the milestone method,
which allows a vendor to adopt an accounting policy to recognize all of the
arrangement consideration that is contingent on the achievement of a substantive
milestone (milestone consideration) in the period the milestone is achieved. The
pronouncement is effective on a prospective basis for milestones achieved in
fiscal years and interim periods within those years, beginning on or after
June 15, 2010. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.





Results
of Operations – Three Months Period ended September 30, 2010 and
2009




The
following table summarizes our results of operations for the three months ended
September 30, 2010 and 2009.





Three Months Ended September
      30,2010
                
                
                2009Amount
                
                
                Percentage of
                  total revenue
                
                
                Amount
                
                
                Percentage of
                  total revenueRevenue
                
                $
                18,569,747
                
                
                
                100.0
                %
                
                $
                12,777,095
                
                
                
                100.0
                %Gross
      Profit
                
                $
                10,063,610
                
                
                
                54.2
                %
                
                $
                6,669,618
                
                
                
                52.2
                %Operating
      Expenses
                
                $
                2,199,116
                
                
                
                11.8
                %
                
                $
                1,689,602
                
                
                
                13.2
                %Income
      from Operations
                
                $
                7,864,494
                
                
                
                42.4
                %
                
                $
                4,980,016
                
                
                
                39.0
                %Other
      Income
                
                $
                118,148
                
                
                
                0.6
                %
                
                $
                1,181,040
                
                
                
                9.2
                %Income
      Tax Expenses
                
                $
                1,334,843
                
                
                
                7.2
                %
                
                $
                813,722
                
                
                
                6.4
                %Net
      Income
                
                $
                6,647,799
                
                
                
                35.8
                %
                
                $
                5,347,334
                
                
                
                41.9
                %


36





Revenue.  All of
our revenue is derived from the sale of veterinary healthcare and medical care
products in the PRC. For the three months ended September 30, 2010, we had
revenue of $18,569,747 as compared to revenue of $12,777,095 for the three
months ended September 30, 2009, an increase of approximately 45.3%. We generate
revenue from sales of four product lines: veterinary medications,
micro-organism, feed additives, and vaccines.





Veterinary
Medications.  Revenue from sales of our veterinary medications
increased by $3,883,193 or 45.8% from $8,483,233 for the three months ended
September 30, 2009 to $12,366,426 for the three months ended September 30,
2010.  The increase was primarily due to improved utilization of our
Huxian plant capacity and improved product mix that meets the demand of the
market. Of total revenues from veterinary medications during the three months
ended September 30, 2010, approximately $5,104,961 or 41% resulted from the
sale of Praziquantel tablets which treats schistosomiasis.





Micro-Organism.  Revenue
from sales of our micro-organism products increased by $1,514,170 or 47.5% from
$3,186,453 for the three months ended September 30, 2009 to $4,700,623
during the three months ended September 30, 2010. The increase was the result of
increased utilization of the micro-organism production capacity completed at our
Huxian plant in 2009 which commenced production in June 2010. We expect the
micro-organism line to contribute more to our revenue mix as we continue to ramp
up production in the coming months.




Feed
Additives.  Revenue from sales of our feed additives product
line increased by $197,221 or 36.5% from $539,856 for the three months
ended September 30, 2009 to $737,077 for the three months ended September 30,
2010. The increase was the result of increased sales efforts of our multi-enzyme
feed additive products during the three months ended September 30,
2010.





Vaccines.  Revenue
from sales of our vaccines increased by $198,068 or 34.9% from $567,553 for
the three months ended September 30, 2009 to $765,621 for the three months ended
September 30, 2010. This increase was the result of increased demands for our
vaccine products and added production shifts during the three months ended
September 30, 2010. We are presently operating at full production capacity for
our vaccine product line and therefore cannot significantly increase sales until
we expand our production capabilities. The construction of the vaccine facility
was completed in June 2010. We have submitted an application for Good
Manufacturing Practices (GMP) certification to the Ministry of Agriculture, and,
as of the date of this report, we are waiting for a response from the Ministry.
We expect the new vaccine facility to receive GMP certification by the end of
the year or early next year to commence production shortly
thereafter.





Cost of
Revenue.  Cost of revenue, which consists of raw materials,
direct labor, and manufacturing overhead for our four product lines, was
$8,506,137 for the three months ended September 30, 2010, as compared to
$6,107,477 for the three months ended September 30, 2009, an increase of
approximately 39.3%, as a result of increased sales and production.




Veterinary
Medications.  Cost of revenue for our veterinary medications
increased by $1,881,093 or approximately 37.1% from $5,069,745 for the
three months ended September 30, 2009 to $6,950,838 for the three months ended
September 30, 2010. This increase was mainly due to the corresponding
increase in veterinary medication sales. Cost increased less in percentage terms
compared to the increase in sales mainly due to increased utilization rate and
lower packaging costs.





Micro-Organism.  Cost
of revenue for our micro-organism products increased by $400,326 or 50.9%, from
$786,741 for the three months ended September 30, 2009 to $1,186,977 for
the three months ended September 30, 2010. This increase was mainly due to
increased sales.




Feed
Additives.  Cost of revenue for our feed additives increased by
$83,719 or 40.7% from $205,543 for the three months ended September 30, 2009 to
$289,262 for the three months ended September 30, 2010. The increase was
primarily due to increased sales and production.





Vaccines.  Cost of
revenue for our vaccines products increased by $33,612 or 74.0% from
$45,448 for the three months ended September 30, 2009 to $79,060 for the
three months ended September 30, 2010. This increase was a result
of increased labor costs from overtime.


37





Operating
Expenses




Three Months Ended September
      30,2010
                
                
                2009Amount
                
                
                Percentage of
                  total revenue
                
                
                Amount
                
                
                Percentage of
                  total revenueGross
      Profit
                
                $
                10,063,610
                
                
                
                54.2
                %
                
                $
                6,669,618
                
                
                
                52.2
                %Operating
      Expenses
                
                $
                2,199,116
                
                
                
                11.8
                %
                
                $
                1,689,602
                
                
                
                13.2
                %Selling
      Expenses
                
                $
                709,188
                
                
                
                3.8
                %
                
                $
                412,051
                
                
                
                3.2
                %General
      and Administrative Expenses
                
                $
                1,281,731
                
                
                
                6.9
                %
                
                $
                878,866
                
                
                
                6.9
                %Research
      and Development Costs
                
                $
                208,197
                
                
                
                1.1
                %
                
                $
                398,685
                
                
                
                3.1
                %Income
      from Operations
                
                $
                7,864,494
                
                
                
                42.4
                %
                
                $
                4,980,016
                
                
                
                39.0
                %





Selling
Expenses.  Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$412,051 for the three months ended September 30, 2009 as compared to $709,188
for the three months ended September 30, 2010, an increase of approximately
72.1%. This increase is a result of increased sales between the two
periods.




General and Administrative
Expenses.  General and administrative expenses totaled $878,866
for the three months ended September 30, 2009, as compared to $1,281,731 for the
three months ended September 30, 2010, an increase of approximately 45.8%.
General and administrative expenses for our Chinese operating entities increased
due to expanded operations and asset acquisitions related to our Kunshan
and Jingzhou subsidiaries, with the Jingzhou-related acquisition closing in
August 2010.





Research and Development
Costs.  Research and development costs, which consist of
salaries, professional fees, and technical support fees, totaled $398,685 for
the three months ended September 30, 2009, as compared to $208,197 for the three
months ended September 30, 2010, a decrease of approximately 47.8%. During the
three months ended September 30, 2010, a significant portion of our current
research projects were in stages that required less cash outlays, compared to
the research and development projects in the same period last year where we had
costly testing and clinical trials. One notable project we have been working on
is a joint research project with Northwestern Agricultural University to use
nano-technology in the prevention of major milk cow disease. As of September 30,
2010, the project was in the trial stage with a targeted completion date of June
2011.




Results
of Operations – Nine Month Periods ended September 30, 2010 and
2009




The
following table summarizes out results of operations for the nine months ended
September 30, 2010 and 2009.





Nine Months Ended September
    30,2010
                
                
                2009Amount
                
                
                Percentage of
                  total revenue
                
                
                Amount
                
                
                Percentage of
                  total revenueRevenue
                
                $
                31,703,531
                
                
                
                100.0
                %
                
                $
                22,844,099
                
                
                
                100.0
                %Gross
      Profit
                
                $
                17,001,112
                
                
                
                53.6
                %
                
                $
                11,831,427
                
                
                
                51.8
                %Operating
      Expenses
                
                $
                4,655,727
                
                
                
                14.7
                %
                
                $
                3,906,305
                
                
                
                17.1
                %Income
      from Operations
                
                $
                12,345,385
                
                
                
                38.9
                %
                
                $
                7,925,122
                
                
                
                34.7
                %Other
      Expenses
                
                $
                (22,296
                )
                
                
                (0.1
                )%
                
                $
                (262,144
                )
                
                
                (1.1
                )%Income
      Tax Expenses
                
                $
                2,200,648
                
                
                
                6.9
                %
                
                $
                1,367,797
                
                
                
                6.0
                %Net
      Income
                
                $
                10,122,441
                
                
                
                31.9
                %
                
                $
                6,295,181
                
                
                
                27.6
                %





Revenue.  For the
nine months ended September 30, 2010, we had revenue of $31,703,531 as compared
to $22,844,099 for the nine months ended September 30, 2009, an increase of
approximately 38.8%. We generate revenue from sales of four product lines:
veterinary medications, micro-organism, feed additives, and
vaccines.


38


Veterinary
Medications.  Revenue from sales of our veterinary medications
increased by $6,096,532 or 40.6% from $14,999,173 for the nine months ended
September 30, 2009 to $21,095,705 for the nine months ended September 30,
2010.  The increase was primarily due to increased sales efforts and
better utilization of our production capacity. Approximately $7,799,691 or 37%
of total revenue from veterinary medications resulted from the sale of
Praziquantel tablets which treats schistosomiasis during the nine months ended
September 30, 2010, as compared to $4,600,000 or 20% for the same period of
2009.





Micro-Organism.  Revenue
from sales of our micro-organism products increased by $2,077,016 or 35.7% from
$5,815,280 for the nine months ended September 30, 2009 to $7,892,296 during the
nine months ended September 30, 2010. The increase was the result of increased
sales efforts and newly added production capacity at our Huxian plant that
commenced production in June 2010.




Feed
Additives.  Revenue from sales of our feed additives increased
by $338,026 or 33.7% from $1,003,628 for the nine months ended September
30, 2009 to $1,341,654 for the nine months ended September 30, 2010. The
increase was the result of increased sales efforts.





Vaccines.  Revenue
from sales of our vaccines increased by $347,858 or 33.9% from
$1,026,018 for the nine months ended September 30, 2009 to $1,373,876 for
the nine months ended September 30, 2010. This increase was a result of
increased demand for our products and added production from extra shifts during
the third quarter. We are presently operating at full production capacity for
our vaccine product line. The construction of the new vaccine facility was
completed in June 2010. We have submitted an application for GMP certification
to the Ministry of Agriculture, and, as of the date of this report, we are
waiting a response from the Ministry. We expect the new vaccine facility to
receive GMP certification by the end of the year and to commence production
early next year.





Cost of
Revenue.  For the nine months ended September 30, 2010, cost of
revenues, which consists of raw materials, direct labor, and manufacturing
overhead for our four product lines, was $14,702,419 as compared to $11,012,672
for the nine months ended September 30, 2009, an increase of approximately 33.5%
as a result of increased sales and production.





Veterinary
Medications.  Cost of sales for our veterinary medications
increased by $3,032,095 or approximately 33.9% from $8,938,770 for the nine
months ended September 30, 2009 to $11,970,865 for the nine months ended
September 30, 2010. This increase was mainly due to the corresponding
increase in veterinary medication sales. Cost for Veterinary Medications
increased less in percentage terms than the increase in sales, resulting in
higher margins for the Veterinary Medications line, mainly because lower
overhead allocation per unit due to higher utilization rate and lower packaging
costs.





Micro-Organism.  Cost
of revenue for our micro-organism products increased by $490,319 or
approximately 31.4% from $1,560,588 for the nine months ended September 30,
2009 to $2,050,907 for the nine months ended September 30, 2010. This increase
was mainly due to a corresponding increase in micro-organism
sales.





Feed
Additives.  Cost of revenue for our feed additives products
increased from $404,349 for the nine months ended September 30, 2009 to $536,292
for the nine months ended September 30, 2010, an increase of $131,943 or 32.6%.
The increase was primarily due to increased sales and production





Vaccines.  Cost of
revenue for our vaccines increased from $108,965 for the nine months ended
September 30, 2009 to $144,355 for the nine months ended September 30, 2010, an
increase of $35,390 or 32.5%. This increase was the result of an
increase of vaccine product sales and added overtime costs incurred in the third
quarter of this year. Our vaccine facility is presently running at full
capacity.




39




Operating
Expenses





Nine Months Ended September
    30,2010
                
                
                2009Amount
                
                
                Percentage of
                  total revenue
                
                
                Amount
                
                
                Percentage of
                  total revenueGross
      Profit
                
                $
                17,001,112
                
                
                
                53.6
                %
                
                $
                11,831,427
                
                
                
                51.8
                %Operating
      Expenses
                
                $
                4,655,727
                
                
                
                14.7
                %
                
                $
                3,906,305
                
                
                
                17.1
                %Selling
      Expenses
                
                $
                1,312,132
                
                
                
                4.1
                %
                
                $
                1,204,653
                
                
                
                5.3
                %General
      and Administrative Expenses
                
                $
                2,899,315
                
                
                
                9.1
                %
                
                $
                1,818,920
                
                
                
                8.0
                %Research
      and Development Costs
                
                $
                444,280
                
                
                
                1.4
                %
                
                $
                882,732
                
                
                
                3.9
                %Income
      from Operations
                
                $
                12,345,385
                
                
                
                38.9
                %
                
                $
                7,925,122
                
                
                
                34.7
                %





Selling
Expenses.  Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$1,312,132 for the nine months ended September 30, 2010 as compared to
$1,204,653 for the nine months ended September 30, 2009, an increase of
approximately 8.9%. This increase is the result of increased sales between the
two periods.





General and Administrative
Expenses.  General and administrative expenses totaled
$1,818,920 for the nine months ended September 30, 2009, as compared to
$2,899,315 for the nine months ended September 30, 2010, an increase of
approximately 59.4%. Increases in general and administrative expenses were
mainly related to asset acquisitions related to our Kunshan and Jingzhou
subsidiaries, with the Jingzhou-related acquisition closing in August
2010.





Research and Development
Costs.  Research and development costs, which consist of
salaries, professional fees, and technical support fees, totaled $882,732 for
the nine months ended September 30, 2009, as compared to $444,280 for the nine
months ended September 30, 2010, a decrease of approximately 49.7%. During the
nine months ended September 30, 2010, a significant portion of our current
research projects were in stages that required less cash outlays, compared to
the research and development projects in the same period last year where we had
costly testing and clinical trials. One notable project we have been working on
is a joint research project with Northwestern Agricultural University to use
nano-technology in the prevention of major milk cow disease. As of September 30,
2010, the project is in the trial stage with a targeted completion date of June
2011.




Liquidity




For the
nine months ended September 30, 2009, cash used in operating activities was
$7,198 compared to cash used by operations of $2,561,113 for the same period in
2010.  Higher net income and higher tax payable balance for the nine
months ended September 30, 2010 was offset by increases in inventory prepayments
and accounts receivable, decreases in customer deposit, along with changes in
other operating activities and assets and liabilities, resulting in a decrease
of $2,553,915. As of September 30, 2010, we had approximately 23 suppliers that
we made advances to in order to secure our raw material needs and to obtain
favorable pricing. We increased our prepayments to suppliers to secure
lower-than-market pricing for our raw materials and meet market demand during
the high seasons of the year. We expect the balance will decline toward year-end
as we continue to receive the prepaid raw materials in the fourth quarter. We
will continue to closely manage these advances to balance the need for lower
materials cost and sufficient cash flow.





We used
$3,565,681 in investing activities for the nine months ended September 30, 2009,
as compared to using $8,432,535 in investing activities for the nine months
ended September 30, 2010. Cash used in investing activities for the nine months
ended September 30, 2010 was the result of prepayments made for asset
acquisitions totaling $4,673,367, purchases of plant and equipment totaling
$2,527,188, and payments for ongoing construction projects totaling $788,797.
The prepayments were made to two acquisition targets. As of September 30, 2010,
the aggregate prepayments we made for these two acquisitions were $11,572,357.
One of the acquisitions closed on August 11, 2010 resulting in the formation of
Skystar Bio-technology Jingzhou Co., and the corresponding prepayments were
moved out of prepayments to plant and equipment and other rightful
accounts.




Cash
generated by financing activities was $17,864,129 for the nine months ended
September 30, 2009 as compared to cash generated in financing activities of
$1,323,462 for the nine months ended September 30, 2010. Cash generated by
financing activities for the nine months ended September 30, 2009 was primarily
the result of the financing that we completed on June 30, 2009. Cash generated
in financing activities for the nine months ended September 30, 2010 was the
result of short-term bank loans totaling $1,799,621 that we took out in the
third quarter. Cash used in financing activities in the nine months ended
September 30, 2010 include repayment of short-term bank loans and repayment of
loans from officers and directors.


40





As of
September 30, 2010, we had cash of $2,032,484. Our total current assets were
$41,124,422, and our total current liabilities were $9,142,188, which resulted
in a net working capital of $31,982,234.




Capital
Resources




During
the nine months ended September 30, 2010, we made additional deposits of
$4,673,367 for potential acquisitions. We also repaid $330,053 in short-term
loans. We have sufficient capital to support our ongoing
operations.  However, if we are to acquire another business or further
expand our operations, we may need additional capital.





Payments Due by PeriodContractual Obligations
                  
                  Total
                  
                  
                  Less than
                    1 year
                  
                  
                  1 – 3 years
                  
                  
                  3 – 5 years
                  
                  
                  More than
                    5 yearsR&D
      Project Obligation
                  
                  $
                  470,720
                  
                  
                  $
                  -
                  
                  
                  $
                  205,940
                  
                  
                  $
                  264,780
                  
                  
                  $Operating
      Lease Obligations
                  
                  
                  263,376
                  
                  
                  
                  75,280
                  
                  
                  
                  87,760
                  
                  
                  
                  86,415
                  
                  
                  
                  13,921Total
                  
                  $
                  734,096
                  
                  
                  $
                  75,280
                  
                  
                  $
                  293,700
                  
                  
                  $
                  351,195
                  
                  
                  $
                  13,921





In
addition to the contractual obligations listed above, we have a future
registered capital commitment related to our newly created subsidiary Skystar
Kunshan, located in Kunshan, Jiangsu province, China. The Skystar Kunshan
subsidiary has a registered capital of $15,000,000, of which we invested
$2,250,000 in cash. The remaining $12,750,000 of capital must be invested prior
to May 7, 2012. We have also been making prepayments in an effort to acquire
assets in a micro-organism manufacturing facility in Kunshan. Upon completion of
such an acquisition, the assets purchased will be transferred to Skystar Kunshan
to satisfy some of our registered capital commitment. If such an acquisition
does not close, we may request a reduction or cancellation of the registered
capital requirement. As of the date of this report, we have not completed any
such acquisition.





Off-Balance Sheet
Arrangements




We do not
have any outstanding financial guarantees or commitments to guarantee the
payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as
stockholders’ equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity, or market risk support to such entity. We do not have any
variable interest in any unconsolidated entity that provides financing,
liquidity, market risk, or credit support to us or engages in leasing,
hedging, or research and development services with us.





Exchange
Rate





Xian
Tianxing maintains its books and records in Renminbi (“RMB”), the currency of
China. In general, for consolidation purposes, we translate Xian Tianxing’s
assets and liabilities into US$ using the applicable exchange rates
prevailing at the balance sheet date, and the statement of income is translated
at average exchange rates during the reporting period. Adjustments resulting
from the translation of Xian Tianxing’s financial statements are recorded as
accumulated other comprehensive income.





The
exchange rates used to translate amounts in RMB into US$ for the purposes of
preparing the consolidated financial statements or otherwise stated in this
MD&A were as follows:




September 30,
                  2009
                
                December 31, 2009
                
                September 30,
                  2010Assets
      and liabilities
                
                
                USD0.14670:
                  RMB1
                
                
                USD0.14670:
                  RMB1
                
                
                USD0.14970:
                  RMB1Statements
      of operations and cash flows for the period/year ended
                
                
                USD0.14659:
                  RMB1
                
                
                USD0.14661:
                  RMB1
                
                
                USD0.14710:
                  RMB1




41




Inflation





We
believe that inflation has not had a material effect on our operations to
date.





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures




As of
September 30, 2010, we carried out an evaluation, under the supervision and with
the participation of our management, including our chief executive officer
(principal executive officer) and our chief financial officer (principal
financial officer), of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) were not effective.





In
September of 2009, we engaged Union Strength Business Consulting Co. (“Union
Strength”) to analyze our business processes and develop internal control
procedures to improve our internal control.  Union Strength provided
detailed recommendations and prescribed operational procedures to enhance our
control procedures.  We implemented some of the recommended control
procedures especially surrounding the area of cash transactions in the last few
quarters. As a result, there have been significant improvement in reducing
cash transactions both in sales and purchases.  We continue
to evaluate ways to improve internal controls in other areas of
operations.





Changes
in Internal Controls over Financial Reporting





There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the nine months ended September 30, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





PART
II. OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





There
have been no material developments during the quarter ended September 30, 2010
in any material pending legal proceedings to which we or any of our subsidiaries
is a party or of which any of our property is the subject.





ITEM
2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





On April
16, 2010, we entered into a restricted stock award agreement with Scott Cramer,
pursuant to which we granted Mr. Cramer 10,000 shares of our restricted common
stock under our 2010 Incentive Stock Plan, to vest in four installments of 2,500
shares at the end of each quarter commencing June 30, 2010. The shares were
issued as compensation for Mr. Cramer’s services as a member of our Board of
Directors, and valued at $106,100 based on the closing price on the day of the
grant. We relied upon the exemption from registration as set forth in
Section 4(2) of the Securities Act of 1933, as amended, for the issuance of
these shares.





On April
22, 2010, we issued 8,997 shares of common stock to an affiliate of the
placement agent for our February 2007 private financing who exercised his
warrant issued from that financing on a cashless basis. We relied upon the
exemption from registration as set forth in Section 4(2) of the Securities
Act of 1933, as amended, for the issuance of these shares.




42




ITEM
3.   DEFAULTS UPON SENIOR SECURITIES





None





ITEM
5.   OTHER INFORMATION





(a)  None.





(b)  There
were no changes to the procedures by which security holders may recommend
nominees to our board of directors.





ITEM
6. EXHIBITS





EXHIBIT
INDEX




Exhibit
                Number
              
              Description3.1
              
              Articles
      of Incorporation, as amended *3.2
              
              Bylaws,
      as amended (6)10.1
              
              Consulting
      Services Agreement between Skystar Bio-Pharmaceutical (Cayman) Holdings
      Co., Ltd. (“Skystar Cayman”) and Xian Tianxing Bio-Pharmaceutical Co.,
      Ltd. (“Xian Tianxing”) dated October 28, 2005 (1)10.2
              
              Operating
      Agreement among Skystar Cayman, Xian Tianxing and  the majority
      stockholders of Xian Tianxing (“Xian Tianxing Majority Stockholders”)
      dated October 28, 2005 (1)10.3
              
              Equity
      Pledge Agreement among Skystar Cayman, Xian Tianxing and the Xian Tianxing
      Majority Stockholders dated October 28, 2005 (1)10.4
              
              Proxy
      Agreement Skystar Cayman, Xian Tianxing and the Xian Tianxing Majority
      Stockholders dated October 28, 2005 (14)10.5
              
              Option
      Agreement Skystar Cayman, Xian Tianxing and the Xian Tianxing Majority
      Stockholders dated October 28, 2005 (1)10.6
              
              Amendment
      to Consulting Services Agreement among Skystar Cayman, Xian Tianxing and
      Sida Biotechnology (Xian) Co., Ltd. (“Sida”) dated March 10, 2008
      (2)10.7
              
              Agreement
      to Transfer of Operating Agreement among Skystar Cayman, Xian Tianxing,
      Xian Tianxing’s Majority Stockholders, Weibing Lu and Sida dated March 10,
      2008 (2)10.8
              
              Amendment
      to Equity Pledge Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing’s Majority Stockholders, and Sida dated March 10, 2008
      (2)10.9
              
              Designation
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
      Stockholders, Weibing Lu and Sida dated March 10, 2008
  (2)10.10
              
              Agreement
      to Transfer of Option Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing Majority Stockholders, Weibing Lu and Sida dated March 10, 2008
      (2)10.11
              
              Employment
      Agreement with Weibing Lu dated May 5, 2008 (3)10.12
              
              Loanout
      Agreement with Worldwide Officers, Inc. with respect to the services of
      Bennet Tchaikovsky, our Chief Financial Officer, dated May 5, 2008
      (3)10.13
              
              Form
      of Director Offer Letter with Mr. Qiang Fan and Mr. Winston Yen
      (5)10.14
              
              Form
      of Director Offer Letter with Chengtun Qu and Shouguo Zhao
    (6)10.15
              
              Form
      of Amendment to Loanout Agreement with Worldwide Officers, Inc.
      (7)10.16
              
              Form
      of Director Offer Letter with Mark D. Chen (7)10.17
              
              Agreement
      with R. Scott Cramer dated March 30, 2010 (8)10.18
              
              Employment
      Agreement with Michael Hongjie Lan dated April 16, 2010
  (9)10.19
              
              Services
      Agreement with R. Scott Cramer dated April 16, 2010 (9)10.20
              
              Restricted
      Stock Award Agreement with R. Scott Cramer dated April 16, 2010
      (9)31.1
              
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended *31.2
              
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended *32.1
              
              Certifications
      pursuant to 18 U.S.C. Section 1350 *32.2
              
              Certifications
      pursuant to 18 U.S.C. Section 1350
*


43




99.1
            
            Legal
      Opinion from Allbright Law Offices regarding, among other things, the
      contractual arrangements Skystar Cayman entered into with Xian Tianxing
      and its stockholders, dated November 3, 2005 (4)99.2
            
            Legal
      Opinion from Allbright Law Offices regarding the transfer of the
      contractual arrangements from Skystar Cayman to Sida, dated April 29, 2008
      (4)99.3
            
            Lease
      Agreement between Xian Tianxing and Weibing Lu dated June 1, 2007
      (3)99.4
            
            Lease
      Agreement between Shanghai Siqiang Biotechnological Co., Ltd. and Weibing
      Lu dated June 17, 2007 (4)99.5
            
            Summary
      of Research Arrangement between Shanghai Poultry Verminosis Institute and
      Xian Tianxing (4)99.6
            
            Cooperation
      Agreement between Shaanxi Microbial Institute and Xian Tianxing
      (4)99.7
            
            Technology
      Cooperation Agreement with Fourth Military Medical University
      (8)







* Filed
herewith.





(1)
            Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on November 14,
      2005.


(2)
            Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on March 11,
      2008.


(3)
            Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on May 5,
      2008.


(4)
            Incorporated by reference from
      the Registrant’s Registration Statement on Form S-1/A filed on June 26,
      2008.


(5)
            Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on July 14,
      2008.


(6)
            Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on July 15,
      2008.


(7)
            Incorporated by reference from
      the Registrant’s Current Report on Form 8-K filed on May 27,
      2009.


(8)
            Incorporate by reference from the
      Registrant’s Annual Report on Form 10-K filed on March 31,
      2010.


(9)
            Incorporated by reference
      from the Registrant’s Current Report on Form 8-K filed on April 19,
      2010.


44


SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





November 15, 2010
              SKYSTAR BIO-PHARMACEUTICAL COMPANYBy:
              /s/ Weibing LuWeibing Lu
                Chief Executive Officer
                (Principal Executive Officer)By:
              /s/ Michael H. LanMichael H. Lan
                Chief Financial Officer
                (Principal Financial and Accounting Officer)




45