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
      1934


For
      the quarterly period ended June 30,
2009





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 000-28153











Skystar
Bio-Pharmaceutical Company


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





Nevada
              (State
      or other jurisdiction of
              incorporation
      or organization)
            33-0901534
              (I.R.S.
      employer
              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
August
10,
2009,
the Registrant had 3,480,014 shares of Common Stock outstanding.









SKYSTAR
BIO-PHARMACEUTICAL COMPANY




FORM 10-Q




INDEX




Page
      NumberSPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS
                  
                  3PART
      I.  FINANCIAL INFORMATION
                  
                  4Item
      1.
                  Financial
      Statements (unaudited)
                  
                  4Consolidated
      Balance Sheets as of June 30, 2009 and December 31, 2008
                  
                  4Consolidated
      Statements of Operations and Other Comprehensive Income (Loss) for the
      Three Months and Six Months Ended June 30, 2009 and 2008
                  
                  5Consolidated
      Statements of Shareholders’ Equity
                  
                  6Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2009 and
      2008
                  
                  7Notes
      to the Consolidated Financial Statements as of June 30,
    2009
                  
                  8Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  31Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk.
                  
                  40Item
      4.
                  Controls
      and Procedures
                  
                  40PART
      II.  OTHER INFORMATION
                  
                  42Item
      1.
                  Legal
      Proceedings
                  
                  42Item
      1A.
                  Risk
      Factors
                  
                  42Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  55Item
      3.
                  Defaults
      Upon Senior Securities
                  
                  55Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  
                  55Item
      5.
                  Other
      Information
                  
                  55Item
      6.
                  Exhibits
                  
                  56SIGNATURES
                  
                  59




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
the Company’s other SEC filings. These risks and uncertainties could cause the
Company’s actual results to differ materially from those indicated in the
forward-looking statements. The Company undertakes 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




SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS OF
JUNE 30, 2009 AND DECEMBER 31, 2008
 
 ASSETS
 
 June
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)CURRENT
      ASSETS:Cash
                
                $
                410,554
                
                
                $
                576,409Restricted
      cash
                
                
                151
                
                
                
                80,885Short-term
      investments
                
                
                307,650
                
                
                
                352,080Accounts
      receivable, net of allowance for doubtful accounts of
    $327,410and
      $327,857 as of June 30, 2009 and December 31, 2008,
      respectively
                
                
                3,832,627
                
                
                
                2,424,102Inventories
                
                
                8,244,383
                
                
                
                3,086,060Deposits
      and prepaid expenses
                
                
                2,714,259
                
                
                
                4,878,851Loans
      receivable
                
                
                1,979,435
                
                
                
                295,087Other
      receivables
                
                
                127,102
                
                
                
                85,099Total
      current assets
                
                
                17,616,161
                
                
                
                11,778,573PLANT
      AND EQUIPMENT, NET
                
                
                7,177,736
                
                
                
                7,413,689CONSTRUCTION-IN-PROGRESS
                
                
                9,324,597
                
                
                
                6,516,630OTHER
      ASSETS:Long-term
      prepayments
                
                
                1,465,000
                
                
                
                5,207,117Intangible
      assets, net
                
                
                821,270
                
                
                
                899,529Total
      other assets
                
                
                2,286,270
                
                
                
                6,106,646Total
      assets
                
                $
                36,404,764
                
                
                $
                31,815,538LIABILITIES AND
      SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                
                $
                349,706
                
                
                $
                547,430Accrued
      expenses
                
                
                1,280,547
                
                
                
                1,488,575Short-term
      loans
                
                
                952,250
                
                
                
                748,170Short-term
      loans from shareholders
                
                
                109,875
                
                
                
                308,070Deposits
      from customers
                
                
                258,970
                
                
                
                424,266Taxes
      payable
                
                
                2,597,886
                
                
                
                212,661Other
      payables
                
                
                86,525
                
                
                
                68,398Shares
      to be issued to related parties
                
                
                173,228
                
                
                
                95,204Due
      to related parties
                
                
                550,895
                
                
                
                242,225Total
      current liabilities
                
                
                6,359,882
                
                
                
                4,134,999OTHER
      LIABILITIES:Deferred
      government grant
                
                
                1,098,750
                
                
                
                1,100,250Warrant
      liability
                
                
                2,319,787
                
                
                
                —Total
      other liabilities
                
                
                3,418,537
                
                
                
                1,100,250Total
      liabilities
                
                
                9,778,419
                
                
                
                5,235,249COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 50,000,000 Series "A" shares authorized
      and2,000,000
      shares issued and outstanding as of  June 30, 2009 and December
      31, 200848,000,000
      Series "B" shares authorized, Nil Series "B" sharesissued
      and outstanding as of June 30, 2009 and December 31, 2008
                
                
                2,000
                
                
                
                2,000Common
      stock, $0.001 par value, 20,000,000 shares authorized, 3,480,014 and
      1,866,519 sharesissued
      and outstanding as of June 30, 2009 and December 31, 2008,
      respectively
                
                
                3,480
                
                
                
                1,867Paid-in
      capital
                
                
                34,435,364
                
                
                
                16,347,641Contribution
      receivable
                
                
                (19,167,323
                )
                
                
                —Statutory
      reserves
                
                
                3,311,013
                
                
                
                2,952,710Retained
      earnings
                
                
                5,238,885
                
                
                
                4,418,464Accumulated
      other comprehensive income
                
                
                2,802,926
                
                
                
                2,857,607Total
      shareholders' equity
                
                
                26,626,345
                
                
                
                26,580,289Total
      liabilities and shareholders' equity
                
                $
                36,404,764
                
                
                $
                31,815,538
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
 FOR THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2009 and 2008
 (Unaudited)
 
 Three
      months ended
                  June
      30,
                
                
                Six
      months ended
                  June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008REVENUE,
      NET
                
                $
                6,243,438
                
                
                $
                4,478,194
                
                
                $
                10,067,004
                
                
                $
                7,164,548COST
      OF REVENUE
                
                
                2,958,837
                
                
                
                2,166,484
                
                
                
                4,905,195
                
                
                
                3,463,903GROSS
      PROFIT
                
                
                3,284,601
                
                
                
                2,311,710
                
                
                
                5,161,809
                
                
                
                3,700,645OPERATING
      EXPENSES:Research
      and development
                
                
                366,695
                
                
                
                119,399
                
                
                
                484,047
                
                
                
                166,698Selling
      expenses
                
                
                585,207
                
                
                
                302,843
                
                
                
                792,602
                
                
                
                492,687General
      and administrative
                
                
                625,359
                
                
                
                648,591
                
                
                
                940,054
                
                
                
                902,326Total
      operating expenses
                
                
                1,577,261
                
                
                
                1,070,833
                
                
                
                2,216,703
                
                
                
                1,561,711INCOME
      FROM OPERATIONS
                
                
                1,707,340
                
                
                
                1,240,877
                
                
                
                2,945,106
                
                
                
                2,138,934OTHER
      EXPENSE:Other
      expense, net
                
                
                (310
                )
                
                
                (492,895
                )
                
                
                (542
                )
                
                
                (493,258
                )Interest
      expense, net
                
                
                (788
                )
                
                
                (355,039
                )
                
                
                (486
                )
                
                
                (483,175
                )Inducement
      cost for debentures converted
                
                
                —
                
                
                
                (257,775
                )
                
                
                —
                
                
                
                (257,775
                )Change
      in fair value of warrants
                
                
                (1,480,484
                )
                
                
                —
                
                
                
                (1,442,156
                )
                
                
                —Total
      other expense, net
                
                
                (1,481,582
                )
                
                
                (1,105,709
                )
                
                
                (1,443,184
                )
                
                
                (1,234,208
                )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                
                
                225,758
                
                
                
                135,168
                
                
                
                1,501,922
                
                
                
                904,726PROVISION
      FOR INCOME TAXES
                
                
                342,555
                
                
                
                261,233
                
                
                
                554,075
                
                
                
                414,440NET
      INCOME (LOSS)
                
                
                (116,797
                )
                
                
                (126,065
                )
                
                
                947,847
                
                
                
                490,286OTHER
      COMPREHENSIVE (LOSS) INCOME:Foreign
      currency translation adjustment
                
                
                (16,233
                )
                
                
                456,967
                
                
                
                (54,681
                )
                
                
                1,226,980COMPREHENSIVE
      INCOME
                
                $
                (133,030
                )
                
                $
                330,902
                
                
                $
                893,166
                
                
                $
                1,717,266EARNINGS
      (LOSS) PER SHARE:Basic
                
                $
                (0.06
                )
                
                $
                (0.07
                )
                
                $
                0.51
                
                
                $
                0.28Diluted
                
                $
                (0.06
                )
                
                $
                (0.07
                )
                
                $
                0.50
                
                
                $
                0.27WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES:Basic
                
                
                1,869,512
                
                
                
                1,836,932
                
                
                
                1,868,854
                
                
                
                1,780,149Diluted
                
                
                1,869,512
                
                
                
                1,836,932
                
                
                
                1,912,216
                
                
                
                1,787,032
 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
                
                
                Contribution
                
                
                Statutory
                
                
                
                
                
                comprehensiveShares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                capital
                
                
                Receivable
                
                
                reserves
                
                
                Unrestricted
                
                
                income
                
                
                TotalBALANCE,
      December 31, 2007
                
                
                2,000,000
                
                
                $
                2,000
                
                
                
                1,711,120
                
                
                $
                1,711
                
                
                $
                14,693,920
                
                
                $
                —
                
                
                $
                1,652,720
                
                
                $
                122,271
                
                
                $
                1,442,602
                
                
                $
                17,915,224Stock-based
      compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                62,758
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                62,758Shares
      issued for services
                
                
                
                
                
                
                
                
                
                
                9,000
                
                
                
                9
                
                
                
                99,891
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                99,900Shares
      issued for debt settlement
                
                
                
                
                
                
                
                
                
                
                21,040
                
                
                
                21
                
                
                
                220,899
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                220,920Debentures
      converted to common stock
                
                
                
                
                
                
                
                
                
                
                122,750
                
                
                
                123
                
                
                
                1,239,655
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,239,778Foreign
      currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,226,980
                
                
                
                1,226,980Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                490,286
                
                
                
                
                
                
                
                490,286Appropriation
      to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                243,256
                
                
                
                (243,256
                )
                
                
                
                
                
                
                —BALANCE,
      June 30, 2008, (Unaudited)
                
                
                2,000,000
                
                
                
                2,000
                
                
                
                1,863,910
                
                
                
                1,864
                
                
                
                16,317,123
                
                
                
                —
                
                
                
                1,895,976
                
                
                
                369,301
                
                
                
                2,669,582
                
                
                
                21,255,846Shares
      issued for services
                
                
                
                
                
                
                
                
                
                
                2,609
                
                
                
                3
                
                
                
                30,518
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                30,521Shares
      issued for debt settlement
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —Debentures
      converted to common stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —Foreign
      currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                188,025
                
                
                
                188,025Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,105,897
                
                
                
                
                
                
                
                5,105,897Appropriation
      to statutory reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,056,734
                
                
                
                (1,056,734
                )
                
                
                
                
                
                
                —BALANCE,
      December 31, 2008, as previously reported
                
                
                2,000,000
                
                
                
                2,000
                
                
                
                1,866,519
                
                
                
                1,867
                
                
                
                16,347,641
                
                
                
                —
                
                
                
                2,952,710
                
                
                
                4,418,464
                
                
                
                2,857,607
                
                
                
                26,580,289Cumulative
      effect of reclassification of warrants
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,108,508
                )
                
                
                
                
                
                
                
                
                
                
                230,877
                
                
                
                
                
                
                
                (877,631
                )BALANCE,
      January 1, 2009, as adjusted, (Unaudited)
                
                
                2,000,000
                
                
                
                2,000
                
                
                
                1,866,519
                
                
                
                1,867
                
                
                
                15,239,133
                
                
                
                —
                
                
                
                2,952,710
                
                
                
                4,649,341
                
                
                
                2,857,607
                
                
                
                25,702,658Shares
      issued for services
                
                
                
                
                
                
                
                
                
                
                2,609
                
                
                
                2
                
                
                
                30,519
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                30,521Fractional
      shares due to the ten-for-one reverse split
                
                
                
                
                
                
                
                
                
                
                886
                
                
                
                1
                
                
                
                (1
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —Shares
      issued for cash
                
                
                
                
                
                
                
                
                
                
                1,610,000
                
                
                
                1,610
                
                
                
                19,165,713
                
                
                
                (19,167,323
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —Foreign
      currency translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (54,681
                )
                
                
                (54,681
                )Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                947,847
                
                
                
                
                
                
                
                947,847Appropriation
      to statutory reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                358,303
                
                
                
                (358,303
                )
                
                
                
                
                
                
                —BALANCE,
      June 30, 2009, (Unaudited)
                
                
                2,000,000
                
                
                $
                2,000
                
                
                
                3,480,014
                
                
                $
                3,480
                
                
                $
                34,435,364
                
                
                $
                (19,167,323
                )
                
                $
                3,311,013
                
                
                $
                5,238,885
                
                
                $
                2,802,926
                
                
                $
                26,626,345
   6
  SKYSTAR BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (Unaudited)
 
 Six
      months ended
                June
      30,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              947,847
              
              
              $
              490,286Adjustments
      to reconcile net income to net cashprovided
      by (used in) operating activities:Depreciation
              
              
              225,953
              
              
              
              217,378Amortization
              
              
              77,070
              
              
              
              74,583Amortization
      of deferred financing costs
              
              
              —
              
              
              
              101,815Amortization
      of discount on debentures
              
              
              —
              
              
              
              406,538Amortization
      of deferred compensation
              
              
              —
              
              
              
              62,758Inducement
      cost for debentures converted
              
              
              —
              
              
              
              257,775Default
      premium on debentures
              
              
              —
              
              
              
              490,713Common
      stock issued for services
              
              
              30,521
              
              
              
              99,900Common
      stock to be issued to related parties for compensation
              
              
              78,024
              
              
              
              —Inducement
      cost for debt settlement
              
              
              —
              
              
              
              42,081Change
      in fair value of warrant liability
              
              
              1,442,156
              
              
              
              —Change
      in operating assets and liabilitiesAccounts
      receivable
              
              
              (1,412,505
              )
              
              
              (1,405,631
              )Inventories
              
              
              (5,164,998
              )
              
              
              (2,197,924
              )Deposits
      and prepaid expenses
              
              
              2,158,970
              
              
              
              (2,163,863
              )Other
      receivables
              
              
              (43,532
              )
              
              
              (33,447
              )Accounts
      payable
              
              
              (197,071
              )
              
              
              174,345Accrued
      expenses
              
              
              (207,294
              )
              
              
              436,050Deposits
      from customers
              
              
              (164,796
              )
              
              
              90,686Taxes
      payable
              
              
              2,386,654
              
              
              
              1,339,210Other
      payables
              
              
              18,229
              
              
              
              (4,206
              )Net
      cash provided by (used in) operating activities
              
              
              175,228
              
              
              
              (1,520,953
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Refund
      of long-term prepayments
              
              
              2,711,545
              
              
              
              —Proceeds
      from short-term investments
              
              
              43,971
              
              
              
              —Additions
      to loans receivable
              
              
              (1,685,555
              )
              
              
              —Proceeds
      from loans receivable
              
              
              —
              
              
              
              671,364Purchases
      of plant and equipment
              
              
              —
              
              
              
              (76,775
              )Payments
      on construction-in-progress
              
              
              (1,792,941
              )
              
              
              —Net
      cash (used in) provided by investing activities
              
              
              (722,980
              )
              
              
              594,589CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      (increase) in restricted cash
              
              
              80,662
              
              
              
              (500
              )Principal
      payments on short-term loans from shareholders
              
              
              (307,798
              )
              
              
              (425,911
              )Due
      to related parties
              
              
              420,038
              
              
              
              487,428Repayments
      to related companies
              
              
              —
              
              
              
              (47,453
              )Proceeds
      from shareholders loans
              
              
              —
              
              
              
              297,864Proceeds
      from short-term loans
              
              
              205,198
              
              
              
              —Net
      cash provided by financing activities
              
              
              398,100
              
              
              
              311,428EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
              
              
              (16,203
              )
              
              
              26,887DECREASE
      IN CASH
              
              
              (165,855
              )
              
              
              (588,049
              )CASH,
      beginning of period
              
              
              576,409
              
              
              
              771,492CASH,
      end of period
              
              $
              410,554
              
              
              $
              183,443SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
              
              $
              40,448
              
              
              $
              —Cash
      paid for income taxes
              
              $
              —
              
              
              $
              2,645Non-cash
      investing and financing activitiesLong-term
      prepayment transferred to construction-in-progress
              
              $
              1,025,257
              
              
              $
              —Issuance
      of common stock for debt settlement
              
              $
              —
              
              
              $
              178,839Debentures
      converted to common stock
              
              $
              —
              
              
              $
              982,003Interest
      expense capitalized as construction-in-progress
              
              $
              40,050
              
              
              $
              —
  The
accompanying notes are an integral part of these consolidated financial
statements.
  7
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
  Note
1 - ORGANIZATION
 Organizationand 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. Sida is the wholly-owned subsidiary of 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 Financial Accounting Standards Board
(“FASB”) Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51.” 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 the
$10,000,000 additional registered capital from Fortunate Time.
Funds from Fortunate Time for $13,000,000 was from the cash proceeds of the
equity offering which is further discussed in Note 15.
 
 Hereinafter,
Skystar, Skystar Cayman, Fortunate Time, Sida, Xian Tianxing and Shanghai
Siqiang are sometimes collectively referred to as the
“Company.”
 
 Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 The
unaudited consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission.  The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly present the operating results
for the respective periods.  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 six months ended June 30, 2009, are not necessarily indicative of the
results to be expected for the full year ending December 31, 2009.
 
 Basis ofpresentation
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
have been consistently applied.
  8
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 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.
  Principles of
consolidation
 
 The
accompanying consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, Skystar Cayman, Fortunate
Time, and Sida, and its VIEs, Xian Tianxing and Shanghai Siqiang. All
significant inter-company transactions and balances among the Company, its
subsidiaries and VIEs have been eliminated in consolidation.
 
 Foreign currency
translation
 
 The
Company uses the United States dollar (“U.S. dollar”) for financial reporting
purposes and the Chinese Renminbi (“RMB”) as their function currency. The
Company’s subsidiaries and VIEs 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 June
30, 2009 and December 31, 2008 were US $1.00 to RMB 6.83 and
RMB 6.82, respectively. The average translation rates of US $1.00 to
RMB 6.25 and RMB 6.97 was applied to the income statement accounts for the
six-month periods ended June 30, 2009 and 2008, respectively. For the
three-month period ended June 30, 2009 and 2008, the average translation rates
were $1.00 to RMB 6.82 and RMB 7.05, respectively.
 
 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.
  9
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Fair values of financial
instruments
 
 Statement
of Financial Accounting Standards (“SFAS”) 107, “Disclosure about Fair Value of
Financial Instruments,” defines financial instruments and requires fair value
disclosure of applicable financial instruments. SFAS 157, “Fair Value
Measurements,” adopted January 1, 2008, defines fair value, establishes a
three-level valuation hierarchy for disclosures of fair value measurement and
enhances disclosure requirements for fair value measures. Short-term
investments, receivables, payables, short-term loans, and warrant liability
qualify as financial instruments. Management concluded the carrying values of
these financial instruments 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 stated interest rate approximates
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.
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities,” and Emerging Issues Task Force
(“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock.”
 
 Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock,” which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF 01-6. Paragraph 11(a) of SFAS 133 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. EITF 07-5 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 SFAS 133
paragraph 11(a) scope exception.
 
 As a
result of adopting EITF 07-5, 154,550 warrants previously treated as equity
pursuant to the derivative treatment exemption are no longer afforded equity
treatment because the strike price of the warrants is denominated in U.S.
dollars, a currency other than the Company’s functional currency, the Chinese
Renminbi. 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 will be 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.
The Company recognized losses of $1,480,484 and $1,442,156 from the change in
fair value of the warrant liability for the three months and six months
ended June 30, 2009, respectively.
  10
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 These
common stock purchase warrants do not trade in an active securities market, and
as such, the Company estimates the fair value of these warrants using the
Black-Scholes Option Pricing Model (“Black-Scholes Model”) using the following
assumptions:
  Warrants
      - 97,500
                
                
                Warrants
      - 57,050June
      30, 2009
                
                
                January
      1, 2009
                
                
                June
      30, 2009
                
                
                January
      1, 2009(Unaudited)
                
                
                (Unaudited)Stock
      price
                
                $
                17.94
                
                
                $
                9.50
                
                
                $
                17.94
                
                
                $
                9.50Exercise
      price
                
                $
                12.00
                
                
                $
                12.00
                
                
                $
                10.00
                
                
                $
                10.00Annual
      dividend yield
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Expected
      term (years)
                
                
                0.67
                
                
                
                1.20
                
                
                
                2.67
                
                
                
                3.20Risk-free
      interest rate
                
                
                0.000
                %
                
                
                0.875
                %
                
                
                1.375
                %
                
                
                1.125
                %Expected
      volatility
                
                
                292
                %
                
                
                140
                %
                
                
                170
                %
                
                
                130
                %
 
 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. The Company believes this method produces an estimate
that is representative of future volatility over the expected term of these
warrants. The Company has no reason to believe future volatility over the
expected remaining life of these warrants is likely to differ materially from
historical volatility. The expected life is based on the remaining term of the
warrants. The risk-free interest rate is based on U.S. Treasury securities
according to the remaining term of the warrants.
 
 As
required by SFAS 157, 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 of notes payable and 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.
 
 The fair
value of the 154,550 warrants was determined using the Black-Scholes Model,
defined in SFAS 157 as level 2 inputs, and recorded the change in earnings. As a
result, the warrant liability is carried on the consolidated balance sheets at
fair value.
 
 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 June 30, 2009:
 
 Carrying
      Value at June 30, 2009
                
                
                Fair
      Value Measurement at
                  June
      30, 2009Level
      1
                
                
                Level
      2
                
                
                Level
      3Short-term
      investments
                
                $
                307,650
                
                
                $
                307,650
                
                
                $
                —
                
                
                $
                —Warrant
      liability
                
                $
                2,319,787
                
                
                $
                —
                
                
                $
                2,319,787
                
                
                $
                —
 
 Other
than the short-term investments and warrant liability carried at fair value, the
Company did not identify any other assets and liabilities that are required to
be presented on the balance sheet at fair value in accordance with SFAS
157.
  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
allowance for sales returns is made on these consolidated financial statements
as sales returns are de minimis based on historical
experience.
  11
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 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 customers.
 
 Shipping
and handling costs related to costs of goods sold are included in selling
expenses, which totaled $218,734 and $85,084 for the three months ended
June 30, 2009 and 2008, respectively and $309,741 and $123,888 for the six
months ended June 30, 2009 and 2008, respectively.
 
 The
Company’s revenues and cost of revenues by product line were as follows for the
three and six months ended June 30, 2009 and 2008:
 
 Three
      months ended June 30,
                
                
                Six
      months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)RevenuesMicro-organism
                
                $
                1,735,534
                
                
                $
                1,151,600
                
                
                $
                2,628,827
                
                
                $
                1,941,255Veterinary
      Medications
                
                
                3,913,444
                
                
                
                2,934,247
                
                
                
                6,515,940
                
                
                
                4,604,001Feed
      Additives
                
                
                281,461
                
                
                
                176,627
                
                
                
                463,772
                
                
                
                270,181Vaccines
                
                
                312,999
                
                
                
                215,720
                
                
                
                458,465
                
                
                
                349,111Total
      Revenues
                
                
                6,243,438
                
                
                
                4,478,194
                
                
                
                10,067,004
                
                
                
                7,164,548Cost
      of RevenuesMicro-organism
                
                
                513,310
                
                
                
                349,299
                
                
                
                773,847
                
                
                
                585,126Veterinary
      Medications
                
                
                2,276,216
                
                
                
                1,713,460
                
                
                
                3,869,025
                
                
                
                2,712,944Feed
      Additives
                
                
                121,367
                
                
                
                79,927
                
                
                
                198,806
                
                
                
                126,640Vaccines
                
                
                47,944
                
                
                
                23,798
                
                
                
                63,517
                
                
                
                39,193Total
      Cost of Revenues
                
                
                2,958,837
                
                
                
                2,166,484
                
                
                
                4,905,195
                
                
                
                3,463,903Gross
      Profit
                
                $
                3,284,601
                
                
                $
                2,311,710
                
                
                $
                5,161,809
                
                
                $
                3,700,645
 
 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 14).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.
 
 Short-terminvestments
 
 Short-term
investments are comprised of securities classified as available-for-sale,
held by a private investment trust company for investing activities with a fixed
rate of return on investment. Available-for-sale securities are carried at
fair value, with unrealized gains or losses reported in other comprehensive
income, net of tax. Realized gains or losses are included in the results of
operations. There was no unrealized gain or loss relating to short-term
investments for the three and six months ended June 30, 2009 and 2008, and as
such, no such amounts were included in other comprehensive income for such
periods.
 
 The
Company entered into an investment agreement with an unrelated party in 2007 to
invest certain funds in the Chinese stock market. The nature of the investment
is available-for-sale with certain guaranteed returns such as 7.2% interest
through August 1, 2008 and 5.0% interest after August 1, 2008 for one
year. There are no restrictions or penalties for early withdrawals prior to
maturity. The investment matured on July 31, 2009 and the investment
principal of $307,650 and accrued interest of $22,660 was received by the
Company on August 3, 2009.
  12
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Accountsreceivableand 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, as well as 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 which 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:
 
 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 June 30, 2009
and December 31, 2008, 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 the assets are completed and put into
service.
  13
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Intangibleassets
 
 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,
technical and procedural manuals, and is amortized using the straight-line
method over the expected useful life of five 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 June 30, 2009, there was no impairment of its
intangible assets.
  Comprehensive
income
 
 SFAS 130,
“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 SFAS 130. Accumulated other comprehensive income is comprised
of the changes in foreign currency exchange rates.
 
 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 totaled to $36,921
and $10,931 for the three months ended June 30, 2009 and 2008, respectively, and
$75,857 and $25,068 for the six months ended June 30, 2009 and 2008,
respectively.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with the SFAS 109, “Accounting
for Income Taxes,” and FIN 48, “Accounting for Uncertainty in Income
Taxes.” SFAS 109 requires a company to use the asset and liability method
of accounting for income taxes. Under the asset and liability method, 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. Under SFAS 109, 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.
There was no deferred tax amount as of June 30, 2009 and December 31,
2008.
  14
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 In
accordance with FIN 48, 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. FIN 48 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.
 
 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 which could cause a change to these
uncertainties.
 
 Stock-based
compensation
 
 The
Company records stock-based compensation in accordance with SFAS 123R,
“Share-Based Payment.” SFAS 123R requires companies to measure compensation cost
of stock-based employee compensation at fair value at the grant date and
recognize the expense over the employee’s requisite service period. Under SFAS
123R, the Company’s volatility is based on the historical volatility of the
Company’s stock or the expected volatility of similar companies. The expected
life assumption is primarily based on historical exercise patterns and employee
post-vesting termination behavior. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect
at the time of grant. SFAS 123R allows the “simplified” method to determine
the term of employee options when certain information is not available. Because
the Company does not have a history of employee stock options, the Company used
the “simplified” method to estimate the expected life of the
options.
 
 Stock-based
compensation granted to non-employees is determined in accordance with EITF
96-18, “Accounting for Equity Instruments that are issued to Other
than Employees for Acquiring, or in Conjunction with Selling Goods or
Services,” which incorporates the fair value of the consideration received
or the fair value of equity instruments issued, whichever is more reliably
measured.
 
 The
Company uses the Black-Scholes Model which was developed for use in estimating
the fair value of options. This models requires the input of highly complex and
subjective variables including the expected life of options granted and the
Company’s expected stock price volatility over a period equal to or greater than
the expected life of the options. Because changes in the subjective assumptions
can materially affect the estimated value of the Company’s employee stock
options, it is management’s opinion that the Black-Scholes Model may not provide
an accurate measure of the fair value of the Company’s employee stock options.
Although the fair value of employee stock options is determined in accordance
with SFAS 123R using an option-pricing model, that value may not be indicative
of the fair value observed in a willing buyer/willing seller market
transaction.
 
 Earnings per
share
 
 Earnings
per share is calculated in accordance with the SFAS 128, “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, and stock options were converted or exercised. Further, SFAS
128 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.
  15
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 All share
and per share amounts used in the Company's consolidated financial statements
and notes thereto have been retroactively restated to reflect the 10-for-1
reverse stock split effectuated on May 12, 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.
 
 Recently issued accounting
pronouncements
  SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities – An Amendment
of SFAS No. 133,” became effective for the Company on January 1,
2009.  SFAS 161 seeks to improve financial reporting for derivative
instruments and hedging activities by requiring enhanced disclosures regarding
the impact on financial position, financial performance, and cash flows. To
achieve this increased transparency, SFAS 161 requires (1) the disclosure
of the fair value of derivative instruments and gains and losses in a tabular
format; (2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the footnotes. The adoption
of SFAS 161 did not have a material impact on the Company’s consolidated
financial statements.
 
 In
June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” The FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and therefore
need to be included in the earnings allocation in calculating earnings per share
under the two-class method described in SFAS 128, “Earnings per Share.” The FSP
requires companies to treat unvested share-based payment awards that have
non-forfeitable rights to dividend or dividend equivalents as a separate class
of securities in calculating earnings per share. The FSP is effective for fiscal
years beginning after December 15, 2008; earlier application is not
permitted. The adoption of EITF 03-6-1 did not have a material impact on the
Company’s consolidated financial statements.
 
 In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP
FAS 157-3 clarifies the application of SFAS 157 in an inactive market,
without changing its existing principles. The FSP was effective immediately upon
issuance. The adoption of FSP FAS 157-3 did not have an effect on the
Company’s consolidated financial statements.
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets.”
FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be
more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1 achieves
this by amending the impairment model in EITF 99-20 to remove its exclusive
reliance on “market participant” estimates of future cash flows used in
determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1
did not have a material impact on the Company’s consolidated financial
statements.
  16
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
is to be applied prospectively with retrospective application not permitted.
This FSP is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting this FSP must also early adopt FSP FAS 115-2 and
FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”
Additionally, if an entity elects to early adopt either FSP FAS 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments,” or FSP
FAS 115-2 and FAS 124-2, it must also elect to early adopt this FSP. Management
is currently evaluating this new FSP but does not believe that it will have a
significant impact on the Company’s consolidated financial
statements.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments not measured on the balance sheet at
fair value in interim financial statements as well as in annual financial
statements. Prior to this FSP, fair values for these assets and liabilities were
only disclosed annually. This FSP applies to all financial instruments within
the scope of SFAS 107 and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This FSP is effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
Company adopted the provisions of this FSP.
 
 In May
2009, the FASB issued SFAS 165, “Subsequent Events,” which provides guidance to
establish general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS 165 also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for why
that date was selected. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009, and accordingly, the Company adopted this Standard
during the second quarter of 2009. SFAS 165 requires that public entities
evaluate subsequent events through the date that the financial statements are
issued. We have evaluated subsequent events through the time of filing these
financial statements with the SEC.
 
 In June
2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets –
an amendment of FASB No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” SFAS 166 amends the
criteria for a transfer of a financial asset to be accounted for as a sale,
redefines a participating interest for transfers of portions of financial
assets, eliminates the qualifying special-purpose entity concept and provides
for new disclosures. SFAS 166 is effective for the Company beginning in
2010.
 
 In June
2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R),”
which modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. SFAS 167 clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. SFAS
167 requires an ongoing reassessment of whether a company is the primary
beneficiary of a variable interest entity. SFAS 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS 167 is
effective for fiscal years beginning after November 15, 2009, and the Company is
currently assessing the impact of adopting SFAS 167.
  17
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 In June
2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles - A Replacement of
FASB Statement No. 162.” SFAS 168 establishes the FASB Accounting Standards
CodificationTM (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with U.S. GAAP. The
Codification does not change current U.S. GAAP, but is intended to simplify user
access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company in the third quarter
of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter
ending September 30, 2009 and all subsequent public filings will reference the
Codification as the sole source of authoritative literature.
  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 which, 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 June
30, 2009 and December 31, 2008, the Company had deposits in excess of
federally-insured limits (including restricted cash) of $8,902 and $448,082
respectively. The Company has not experienced any losses in such
accounts.
 
 For the
three months and six months ended June 30, 2009 and 2008, all of the
Company’s sales occurred in the PRC. No major customers accounted for more
than 10% of the Company’s total revenues. In addition, all accounts
receivable at June 30, 2009 and December 31, 2008 also arose in the
PRC.
 
 The
Company’s two largest vendors accounted for approximately 44.9% of the
Company’s total purchases for the three months ended June 30, 2009, while the
Company’s three largest vendors accounted for 51.6% of the Company’s total
purchases for the three months ended June 30, 2008. The Company’s
two largest vendors accounted for approximately 34.4% of the Company’s
total purchases for the six months ended June 30, 2009, while the Company’s
three largest vendors accounted for 55.9% of the Company’s total
purchases for the six months ended June 30, 2008.  As of June 30,
2009, there were no amounts due to those two largest vendors.
 
 The
Company had one product that accounted for 15.5% and 13.1% of the Company’s
total revenues for the three months and six months ended June 30, 2009,
respectively. Revenue from sales of this product accounted for 6.3%
and  10.0 % of the total revenue for the three months and six months
ended June 30, 2008, respectively.
  18
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Note 4
- ACCOUNTS RECEIVABLE, NET
 
 Accounts
receivable consisted of the following:
 
 June
      30, 2009
                
                
                December
      31, 2008(Unaudited)Account
      receivable
                
                $
                4,160,037
                
                
                $
                2,751,959Allowance
      for bad debts
                
                
                (327,410
                )
                
                
                (327,857
                )Account receivable,
      net
                
                $
                3,832,627
                
                
                $
                2,424,102
 
 The
following table presents the movement of allowance for doubtful accounts as of
June 30, 2009 and December 31, 2008:
 
 Allowance
      for bad debt, December 31, 2007
                
                $
                199,639Addition
                
                
                114,239Recovery
                
                
                —Translation
      adjustment
                
                
                13,979Allowance
      for bad debt, December 31, 2008
                
                
                327,857Addition
                
                
                —Recovery
                
                
                —Translation
      adjustment
                
                
                (447
                )Allowance
      for bad debt, June 30, 2009
                
                $
                327,410
 
 Note 5 -
INVENTORIES
 
 Inventories
consist of the following:
 June
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Raw
      materials
                
                $
                5,154,154
                
                
                $
                2,087,428Packing
      materials
                
                
                490,733
                
                
                
                165,077Work-in-process
                
                
                42,607
                
                
                
                2,446Finished
      goods
                
                
                2,537,345
                
                
                
                811,538Other
                
                
                19,544
                
                
                
                19,571Total
                
                $
                8,244,383
                
                
                $
                3,086,060
  The
Company periodically reviews its reserves for slow moving and obsolete
inventories. As of June 30, 2009 and December 31, 2008, the Company
believes that no such reserves were necessary.
 
 Note
6 - DEPOSITS AND PREPAID EXPENSES
 
 Deposits
and prepaid expenses are comprised of the following:
 
 June
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Prepayment
      for raw materials purchasing
                
                $
                2,383,783
                
                
                $
                4,210,618Prepayment
      for packaging materials purchasing
                
                
                295,277
                
                
                
                499,755Prepayment
      for advertisement fee
                
                
                —
                
                
                
                89,436Prepayment
      for due diligence fee
                
                
                —
                
                
                
                73,350Other
                
                
                35,199
                
                
                
                5,692Total
                
                $
                2,714,259
                
                
                $
                4,878,851
  19
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Note
7 – LOANS RECEIVABLE
 
 Loans
receivable consist of the following:
 
 June
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Shaanxi
      Xinbangdike Technology Developing Company (1)
                
                $
                660,935
                
                
                $
                295,087Other
      loans receivable (2)
                
                
                1,318,500
                
                
                
                —Total
      loans receivables
                
                $
                1,979,435
                
                
                $
                295,087
 
 (1) Loan
to Shaanxi Xinbangdike Technology Development Company is non-interest bearing,
unsecured and due on demand.
 
 (2) Loans
to five vendors are non-interest bearing and unsecured, and due on September 30,
2009.
 
 Note
8 - PLANT AND EQUIPMENT, NET
 
 Plant and
equipment consist of the following:
 
 June
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Building
      and improvements
                
                $
                4,970,868
                
                
                $
                4,977,654Machinery
      and equipment
                
                
                3,029,797
                
                
                
                3,035,376Office
      equipment and furniture
                
                
                187,888
                
                
                
                186,702Vehicles
                
                
                328,882
                
                
                
                329,331Total
                
                
                8,517,435
                
                
                
                8,529,063Less:
      accumulated depreciation
                
                
                (1,339,699
                )
                
                
                (1,115,374
                )Plant
      and equipment, net
                
                $
                7,177,736
                
                
                $
                7,413,689
 
 Depreciation
expense amounted to $113,031 and $110,496 for the three
months ended June 30, 2009 and 2008, respectively. For the six months
ended June 30, 2009 and 2008, depreciation expense amounted to
$225,953 and $217,378, respectively.
 
 Note
9 - CONSTURCTION-IN-PROGRESS
 
 Construction-in-progress
is related 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 the remaining plant facilities are expected to be
completed by the end of 2009, at an estimated cost of $1,251,000. No
depreciation is provided for construction-in-progress until such time the assets
are completed and placed into service.
 
 For the
three months and six months ended June 30, 2009, $20,972 and $40,050 had been
capitalized for construction-in- progress for the three months and six months
ended June 30, 2009, respectively. For the three months and six months ended
June 30, 2008, the Company did not capitalize interest expense as
construction-in-progress as the amounts were de minimis.
  20
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Note
10 - LONG-TERM PREPAYMENTS
 
 Long-term
prepayments consist of the following as of June 30, 2009 and December 31,
2008:
 
 June
      30, 2009
                
                
                December
      31, 2008(Unaudited)Construction
      deposit
                
                $
                1,465,000
                
                
                $
                2,493,167Deposit
      for potential acquisitions
                
                
                —
                
                
                
                2,713,950Total
                
                $
                1,465,000
                
                
                $
                5,207,117
 
 As of
June 30, 2009 and December 31, 2008, the Company has determined that these
prepayments are noncurrent because: (1) these amounts relate to noncurrent
assets, and (2) the Company’s ability to complete the projects underlying the
construction deposit and any potential acquisitions is contingent upon the
Company identifying target companies.
 
 Deposits
for potential acquisitions represent deposits made to four separate
potential acquisition targets: one that produces veterinary medicines, one that
produces micro-organisms and feed additives, one that produces veterinary
medicines for domestic pets, and one with buildings for the Company’s own future
expansion. In April 2009, all deposits made by the Company for potential
acquisitions in the amount of $2,711,545 (RMB 18,500,000) were returned to the
Company.
 
 Note
11 – INTANGIBLE ASSETS
 
 June
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Land
      use rights
                
                $
                378,337
                
                
                $
                378,853Technological
      know-how
                
                
                879,000
                
                
                
                880,200Total
                
                
                1,257,337
                
                
                
                1,259,053Less:
      accumulated amortization
                
                
                (436,067
                )
                
                
                (359,524
                )Intangible
      assets, net
                
                $
                821,270
                
                
                $
                899,529
 
 During
2007, the Company paid $658,350 for the exclusive rights to the use of a strain
of micro-bio organisms for a five-year term from November 1, 2007 through
October 31, 2012. The Company began using the strain in its veterinary medicines
in 2008.
 
 For the
three months ended June 30, 2009 and 2008, the amortization expense amounted to
$38,551 and $37,836, respectively. The amortization expense for intangibles was
$77,070 and $74,583 for the six months ended June 30, 2009 and 2008,
respectively.
 
 Amortization
expense for the future five years and thereafter is as follows:
 
 Years ending December
      31,
                
                Amount2009
                
                $
                77,0392010
                
                
                154,0762011
                
                
                154,0762012
                
                
                123,9742013
                
                
                1,8912014
      and thereafter
                
                
                310,214Total
                
                $
                821,270
 
 Note
12 – SHORT-TERM LOANS
 
 On
September 3, 2008, the Company signed a one year short-term agreement with
the Bank of East Asia to borrow up to $1.9 million (RMB 13 million) for
operating purposes secured by the Company’s land use rights and buildings. On
September 17, 2008, the Company received proceeds of $733,500 (RMB 5
million) from the bank. This amount will become due on September 16, 2009.
The balance of $1.1 million (RMB 8 million) can be borrowed once the
Company has a deposit balance in the amount of $4 million with the bank and uses
the bank as the Company’s primary transaction bank. As of June 30, 2009, the net
values of the land use rights and properties pledged for the loan
were $334,828 and $3,287,019, respectively. The applicable interest
rate of the loan is the Bank of China’s standard short-term rate, 6.93% at
inception of the loan, which is subject to change with the government policy,
plus an additional 20% interest rate float. Pursuant to these terms, the
interest rates were approximately 8.42% and 8.32% as of June
30, 2009 and December 31, 2008, respectively. Interest payments to the Bank of
East Asia are due every six months.
  21
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Pursuant
to the short-term loan agreement, the Company is required to comply with certain
covenants, such as maintaining sufficient environmental controls with respect to
the Company’s manufacturing processes, providing written notification to the
bank for any changes in the organizational structure or executive officers,
among others. As of June 30, 2009, the Company determined that it was in
compliance with these covenants.
 
 On
January 14, 2009, the Company signed a one year short-term loan contract with
Shaanxi Agricultural Yanta Credit Union for $219,750 (RMB 1.5 million) 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 will
become due on January 13, 2010.
 
 Interest
expense incurred and associated with the short-term loans amounted to $20,972
and $40,050 for the three months and six months ended June 30, 2009,
respectively, which has been capitalized as part of
construction-in-progress.
 
 Note
13 - DEFERRED GOVERNMENT GRANT
 
 Deferred
government grant represents subsidies for GMP projects granted by the PRC
government. A subsidy in the amount of $641,000 was approved by the PRC
government for the Company to construct a new factory in which operations will
meet the GMP Standard. In 2003, $516,500 was received by the Company and the
remaining $124,500 was received in the first quarter of 2006. In 2006, the
Company expended $186,644 for the construction of its new factory (Note
10).
 
 Also in
2003, the Company received a second subsidy in the amount of $256,400 to finance
the Company’s research and development activities. In 2005, the Company received
a third subsidy of $64,100 for the Company’s research and development
activities, which was expended during that year.
 
 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 June 30, 2009, the
Company has not reached a final agreement with the PRC government regarding the
treatment of these three subsidies as either a loan or capital contribution, and
the Company does not expect that the final agreement will be completed within
the next year. Therefore, these amounts are reflected as non-current liabilities
in the accompanying consolidated financial statements.
 
 Note
14 - CAPITAL TRANSACTIONS
 
 On May
12, 2009, the Company effectuated a 10-for-1 reverse stock split of its issued
and outstanding shares of common stock and a proportional reduction of its
authorized shares of common stock. Number of common stock, warrants, options
disclosed in the footnotes has been retroactively restated to reflect the
10-for-1 reverse stock split.
 
 Stock-based
compensation
 
 On
February 12, 2008, the Company issued 9,000 shares of common stock as salary to
a non-executive director. The trading value of the Company's common stock on
February 12, 2008, was $11.10 per share and a corresponding amount of $99,900
was charged to general and administrative expenses. The Company also had a
$148,226 and $95,204 balance under shares to be issued as of June 30, 2009 and
December 31, 2008, which represented 17,500 and 11,000 common shares to be
issued to the non-executive director for his service provided for the period
from May 2008 to June 2009, and for the period from May 2008 to December
2008, respectively. The amounts were included in general and administrative
expenses based on the weighted-average trading price of the Company’s
common stock for the said period.
  22
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 On
February 29, 2008, the Company issued 21,040 shares of common stock to its legal
counsel as partial payment for services rendered. The trading value of the
Company's common stock on February 29, 2008, was $10.50 per share and additional
inducement cost of $42,081 between the fair value of the shares at $220,920 and
the partial payment of $178,839 was charged to general and administrative
expenses.
 
 On April
21, 2008, two of the Company’s convertible debenture holders converted
$982,003 of debentures into 122,750 shares of common stock.
 
 On May 5,
2008, the Company agreed to issue 5,217 shares of common stock to its chief
financial officer (“CFO”) during the term of the one-year agreement.
The shares vest in four equal installments of 1,304 shares each quarter. The
trading value of the common stock on May 5, 2008 was $11.70 per share for a
total value of $61,042. On May 5, 2009, the Company renewed the one-year
service agreement with the CFO and agreed to issue 7,220 restricted shares of
the Company’s common stock, which will vest in four equal installments of 1,805
shares every quarter starting August 5, 2009. Compensation expense is
recognized on a straight-line basis over the vesting period. Compensation
expense of $15,469 and $30,521 was charged to general and administrative
expenses for the three months and six months ended June 30, 2009,
respectively. No such expense was incurred during the same periods in
2008.
 
 On May
26, 2009, the Company agreed to issue 2,778 shares of common stock to its
director at the beginning of each term of his directorship. The trading value of
the common stock on May 26, 2009 was $9.00 per share for the total value of
$25,002, and was charged to general and administrative expenses for the three
months and six months ended June 30, 2009.
 
 Warrants
 
 On
February 28, 2007, the Company issued 97,500 warrants to four investors with an
exercisable price of $12.00 per share for a term of three years.  On
the same date, the Company also issued warrants to the private placement agent,
exercisable for 57,050 shares of the Company’s common stock at a price of $10.00
per share for a five-year term. As of June 30, 2009, there was no warrant
exercised. Following is a summary of the status of warrants outstanding at June
30, 2009:
 
 
 Number
      of
                
                Average
      Remaining
                
                AverageWarrants
                
                Contractual
      Life
                
                Exercise
      Price97,500
                
                0.66
      years
                
                $
                12.0057,050
                
                2.66
      years
                
                $
                10.00154,550
                
                
                
                $
                11.26
 
 Following
is an activity summary of the Company’s outstanding warrants:
  Outstanding
      as of December 31, 2007
                
                
                154,500Granted
                
                
                —Forfeited
                
                
                —Exercised
                
                
                —Outstanding
      as of June 30, 2008 (unaudited)
                
                
                154,550Granted
                
                
                —Forfeited
                
                
                —Exercised
                
                
                —Outstanding
      as of December 31, 2008
                
                
                154,550Granted
                
                
                —Forfeited
                
                
                —Exercised
                
                
                —Outstanding
      as of June 30, 2009 (unaudited)
                
                
                154,550
  23
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 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, Skystar agreed to issue and sell an
aggregate of 1,610,000 shares (including 210,000 over-allotment shares) of the
Company’s common stock, at a price of $12.98 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.
 
 In
connection with this offering, the Company agreed to grant 70,000 common
stock purchase options to five individuals from the Underwriters. The
options are exercisable from June 30, 2010 to June 30, 2014, and each option is
exercisable for one share of common stock of the Company, with exercise price at
$16.225 per share. The Company used the Black-Scholes Model to value
the options granted, which amounted to $1,065,842. The value of options granted
to these individuals was included as part of the offering costs, and had no net
effect on the Company’s equity.
 
 The
following are the assumptions used by the Company in the Black-Scholes
Model:
 
 Number
      of options
                
                
                Stock
      price
                
                
                Exercise
      price
                
                Expected
      term
                
                Dividend
      yield
                
                
                Volatility
                
                
                Risk-free
      interest rate70,000
                
                
                $
                17.94
                
                
                $
                16.225
                
                3.0
      years
                
                
                —
                
                
                
                161
                %
                
                
                1.67
                %
 
 The
following is a summary of the status of options outstanding at June 30,
2009:
 
 Outstanding
      Options
                
                
                Exercisable OptionsNumber
                
                
                Average
      Remaining
                
                
                Average
                
                
                Number
                
                
                Average
      Remaining
                
                Averageof
      Options
                
                
                Contractual
      Life
                
                
                Exercise
      Price
                
                
                of
      Options
                
                
                Contractual
      Life
                
                
                Exercise
      Price70,000
                
                
                
                5.00
                
                
                $
                16.225
                
                
                
                —
                
                
                
                —
                
                
                $
                —
 
 Following
is an activity summary of the Company’s outstanding options:
 
 Number
      of Options Outstanding
                
                
                Weighted-Average
      Exercise Price
                
                
                Aggregate
      Intrinsic ValueOutstanding
      as of December 31, 2008
                
                
                —
                
                
                
                —
                
                
                
                —Granted
                
                
                70,000
                
                
                $
                16.225
                
                
                
                —Forfeited
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Outstanding
      as of June 30, 2009
                
                
                70,000
                
                
                $
                16.225
                
                
                $
                120,050
 
 Incremental
costs incurred of this offering, including underwriting commission, legal fees,
and printing costs were $1,730,477, and directly deducted from the
proceeds. The gross proceeds of this offering were $20,897,800. The
Company received cash proceeds of $19,167,323 on July 6, 2009.
  24
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Note
15 - CONVERTIBLE DEBENTURES
 
 In
February 2007, the Company sold an aggregate of $4.075 million of its 8%
convertible debentures (the “Debentures”) and issued warrants to purchase
407,500 shares of common stock to several institutional and accredited
investors. On April 21, 2008, the Company entered into an Amendment and Waiver
Agreement (the “Amendment”) with two institutional and accredited investors who
acquired two remaining unconverted Debentures in a private transaction from the
original holders of these Debentures. A summary of the Amendment is as
follows:
  •
                The
      Amendment amends the terms of these Debentures by: (a) changing the
      conversion price from $10.00 per share to $8.00 per share; (b) deleting
      the trading conditions for mandatory conversion; (c) granting the Company
      the right to mandatory conversion at any time, and (d) allowing the
      Company to designate the date for the mandatory
  conversion.
  •
                The
      Amendment is deemed to be the Company’s notice to require conversion of
      the entire outstanding principal of these Debentures and all accrued but
      unpaid interest thereon.
 
 The
difference between the value of the conversion option at the previous prices and
their value at the modified prices are deemed costs for the Company and are
charged to operations. The inducement cost for the two Debentures converted was
$257,775 for six months ended June 30, 2008. The inducement cost for the
converted Debentures was based on the market value of the additional 24,550
shares obtained by these two investors at $10.50 per share on April 21,
2008.
 
 122,750
shares of common stock were issued upon conversion of the two Debentures with a
carrying value of $982,003 (including $490,713 of default premium) at a reduced
conversion price of $8.00.
 
 In
accordance with EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” all unamortized discount amounting to $291,548 at the
time of the conversion was recognized as interest expense for the three months
and six months ended June 30, 2008. The unamortized deferred financing costs of
$79,998 on conversion of the Debentures were also recorded as interest expense
for the three months and six months ended June 30, 2008.
  Note
16 - 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 registered capital of the respective subsidiaries, further appropriations
are discretionary. The statutory surplus reserve can be used to increase the
registered capital and eliminate future losses of the respective companies under
PRC GAAP. The Company’s statutory surplus reserve is not distributable to
shareholders except in the event of liquidation. As of June 30, 2009, Xian
Tianxing has not met the statutory surplus reserve requirement, and
approximately $2,405,000 still needs to be transferred to the statutory surplus
reserve from Shanghai Siqiang and Sida.
 
 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.
  25
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Note
17 - TAXES
  Skystar
is registered in the State of Nevada whereas its subsidiary, 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 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 as of June 30:
  2009
                
                
                2008(Unaudited)U.S.
      Statutory rate
                
                
                34.0
                %
                
                
                34.0
                %Foreign
      income not recognized in the U.S.
                
                
                (34.0
                )
                
                
                (34.0
                )China
      income tax rate
                
                
                25.0
                
                
                
                25.0China
      income tax exemption
                
                
                (10.0
                )
                
                
                (10.0
                )Other
      item (1)
                
                
                21.9
                
                
                
                30.8Total
      provision for income taxes
                
                
                36.9
                %
                
                
                45.8
                %
 
 (1)
                The
      other item is operating expenses incurred by Skystar that are not
      deductible in the PRC which resulted in an increase in effective tax rate
      of 21.9% and 30.8% for the six months ended June 30, 2009 and 2008,
      respectively.
 
 The
estimated tax savings due to the reduced tax rate for the three months ended
June 30, 2009 and 2008 amounted to $193,525 and $178,122,
respectively. If the statutory income tax had been applied, the Company
would have basic and diluted losses per share of $0.17 for the three months
ended June 30, 2009, and the Company would have basic and diluted earnings
per share of $0.01 for the three months ended June 30, 2008.
 
 The
estimated tax savings due to the reduced tax rate for the six months ended June
30, 2009 and 2008 amounted to $344,672 and $283,126, respectively. The
net effect on earnings per share if the statutory income tax had been applied
would decrease basic earnings per share for the six months ended June
30, 2009 and 2008 to $0.32 and $0.10, respectively, and would decrease
diluted earnings per share to $0.32 and $0.10, respectively.
 
 Skystar
is incorporated in the U.S. and has incurred a net operating loss for income tax
purposes for 2009. As of June 30, 2009, the estimated net operating loss
carryforwards for U.S. income tax purposes amounted to $3,482,585 which may be
available to reduce future years’ taxable income. These carryforwards will
expire, if not utilized, beginning in 2026 and continue through 2029. 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 June 30, 2009 and December 31, 2008. The valuation
allowance at June 30, 2009 and December 31, 2008 was $1,184,079 and
$967,424, respectively. The Company’s management reviews this valuation
allowance periodically and makes adjustments as necessary.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $ 17,093,000 as of June 30, 2009, which are 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.
  26
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Note
18 - EARNINGS PER SHARE
 
 The
following is the calculation of earnings per share:
  For
      the three months ended
                  June
      30,
                
                
                For
      the six months ended
                  June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income (loss)
                
                $
                (116,797
                )
                
                $
                (126,065
                )
                
                $
                947,847
                
                
                $
                490,286Weighted
      average shares used in basic computation
                
                
                1,869,512
                
                
                
                1,836,932
                
                
                
                1,868,854
                
                
                
                1,780,149Diluted
      effect of stock warrants
                
                
                —
                
                
                
                —
                
                
                
                43,362
                
                
                
                6,883Weighted
      average shares used in diluted computation
                
                
                1,869,512
                
                
                
                1,836,932
                
                
                
                1,912,216
                
                
                
                1,787,032Earnings
      (Loss) per share:
  Basic
                
                $
                (0.06
                )
                
                $
                (0.07
                )
                
                $
                0.51
                
                
                $
                0.28Diluted
                
                $
                (0.06
                )
                
                $
                (0.07
                )
                
                $
                0.50
                
                
                $
                0.27
 
 At June
30, 2009 and 2008, the Company had 154,550 warrants outstanding. For the six
months ended June 30, 2009 and 2008, the average stock price was greater than
the exercise prices of warrants which resulted in additional weighted-average
common stock equivalents of 43,362 and 6,883, respectively. For the three months
ended June 30, 2009 and 2008, these warrants were considered anti-dilutive
due to the net loss incurred.
 
 70,000
outstanding options were excluded from the diluted earnings per share
calculation as they are anti-dilutive.
  27
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 Note
19 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
 Amounts
receivable from and payable to related parties are summarized as
follows:
 
 June
      30,
                  2009
                
                
                December
      31,
                  2008(Unaudited)Short-term loans from
      shareholdersMr.
      Weibing Lu – officer and shareholder (1)
      (2)
                
                $
                36,625
                
                
                $
                220,050Mr.
      Wei Wen – officer and shareholder (2)
                
                
                36,625
                
                
                
                44,010Ms.
      Aixia Wang – shareholder (2)
                
                
                36,625
                
                
                
                44,010Total
                
                $
                109,875
                
                
                $
                308,070Shares to be issued to
      related partyScott
      Cramer – non-executive director (3)
                
                $
                148,226
                
                
                $
                95,204Mark
      D Chen – non-executive director(3)
                
                
                25,002
                
                
                
                —Total
                
                $
                173,228
                
                
                $
                95,204Amounts due to related
      partiesBennet
      P. Tchaikovsky – CFO (4)
                
                
                13,168
                
                
                
                13,168Scott
      Cramer – non-executive director and shareholder (4)
                
                
                447,171
                
                
                
                224,684Shaanxi
      Xingji Electronics Co. - owned by a director's wife (4)
                
                
                34,399
                
                
                
                4,373Mr.
      Weibing Lu – officer and shareholder (4)
                
                
                56,157
                
                
                
                —Total
                
                $
                550,895
                
                
                $
                242,225
  (1) In
2008, Weibing Lu obtained an unsecured personal loan in the amount of $176,040
(RMB 1,500,000) from Huaxia Bank with annual interest rate of 7.47% and
advanced to Xian Tianxing to facilitate operations. Xian Tianxing
guaranteed the loan. The loan principal and related interest was due on December
30, 2008. On January 4, 2009, Xian Tianxing paid the full principal amount
to the bank, with related interest of $15,741.
 
 (2) On May
29, 2008, 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
$132,030 to facilitate operations. These
loans, which were due on May 29, 2009 with 8.436% interest per annum and
guaranteed by Xian Tianxing, were paid in full on May 29, 2009. On June 2,
2009, Mr. Lu, Mr. Wen and Ms. Wang again obtained loans from the same bank and
advanced cash to Xian Tianxing in the total amount of $109,875. These loans are
due on June 1, 2010, with 10.11% interest per annum and are also guaranteed by
Xian Tianxing. For the three months and six months ended June 30, 2009, Xian
Tianxing paid interest of $2,748 and $5,630, respectively, for these
loans.
 
 (3) As
of June 30, 2009 and December 31, 2008, the Company had $148,226 (representing
17,500 common shares) and $95,204 balances (representing 11,000 common
shares), respectively, under agreement to issue shares to Scott
Cramer, respectively, as compensation for being a representative of the Company
in the United States for the periods from May 2008 to June 30, 2009, and
December 31, 2008, respectively. In addition, as of June 30, 2009, the
Company had $25,002 balance (representing 2,778 common shares) under agreement
to issue shares to Mr. Mark D Chen as compensation at the beginning of each term
of his directorship.
 
 (4)
Shaanxi Xinji Electronics Co., Ltd. is owned by the wife of Weibing Lu. The
amounts due to Shaanxi Xinji Electronics as of June 30, 2009 and December 31,
2008 were short-term cash transfers for business operations, non-interest
bearing, unsecured, and payable upon demand. As of June 30, 2009, the Company
also had $56,157 payable to Mr. Lu for advance from Mr. Lu for
short-term financing purposes. As of June 30, 2009 and December 31, 2008,
the Company also had amounts due to Scott Cramer and Bennet P. Tchaikovsky for
the expenses paid by them on behalf of the Company.
 
 Note
20 - 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 SFAS 13, “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 $13,563 (or
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 $24,000 (or RMB 165,600). The Company also
entered into a tenancy agreement with Weibing 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 $21,000 (or RMB 144,000).
  28
 
 The
minimum future lease payments for the next five years and thereafter are as
follows:
 
 Period
                
                AmountSix
      months ending December 31, 2009
                
                $
                29,608Year
      ending December 31, 2010
                
                
                59,215Year
      ending December 31, 2011
                
                
                59,215Year
      ending December 31, 2012
                
                
                34,955Year
      ending December 31, 2013
                
                
                34,955Year
      ending December 31, 2014 and thereafter
                
                
                89,453Total
                
                $
                307,401
 
 Rental
expense for the three months ended June 30, 2009 and 2008 amounted to $14,811
and $4,778, respectively. Rental expense for the six months ended June 30,
2009 and 2008 amounted to $29,622 and $9,555, 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 June 30,
2009.
 
 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.
 
 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.
 
 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.
  29
  SKYSTAR
BIO-PHARMACEUTICAL COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (Unaudited)
 (c)Ownership of leasehold
property
 
 In 2005,
a shareholder contributed a leasehold office building as additional capital of
Xian Tianxing. However, the title of the 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 the building will need to be vacated due to
unofficial ownership. 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 major milk
cow disease. The total projected budget for this project is approximately
$574,000 (RMB 4 million) which is to be paid according to the completed
stages of the project. The Company expects this project to be completed in 2010.
As of June 30, 2009, the Company incurred approximately $87,900 (RMB 600,000) of
expenses relating to this project, and also prepaid approximately $366,000
(RMB2, 500,000) for specific raw materials and equipment for this project. The
project reached trial stage in June 2009 and the Company expects to obtain
veterinary permit for the new product from government on 2010.
 
 During
2008, Xian Tianxing contracted with Shanxi Shenzhou Bio-pharmaceuticals
Technology Company to jointly work on a R&D project with a contracted amount
of approximately $308,000.  As of June 30, 2009, the Company incurred
approximately $234,000 (RMB1.6million) expenses relating to this project. This
project is estimated to be completed in 2009.
  Note
21 - SUBSEQUENT EVENTS
 
 The
Company has performed an evaluation of subsequent events through the date the
financial statements were issued.
  30






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 months ended June 30, 2009 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”).





All of
the Company’s operations are 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 the Company’s 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, a Hong Kong company and wholly-owned
subsidiary of Skystar Cayman. Xian Tianxing also has a wholly-owned subsidiary,
Shanghai Siqiang Biotechnological Co., Ltd., a PRC company.





Such
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 three months ended June 30, 2009, 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 140
      products;·
            Our
      veterinary medicine line for poultry and livestock currently includes over
      10 products;·
            Our
      feed additives line currently includes over 10 products;
    and·
            Our
      micro-organism products line currently includes over 10
      products.




All of
our revenue is derived from the sale of veterinary healthcare and medical
care products in China, which are distributed through a
distribution channel covering 29 provinces. As of June 30, 2009, we had over
1,178 distributors and 434 direct customers.





Reverse
Stock Split





On May
12, 2009, we effected a 10-for-1 stock split of our issued and outstanding
shares of common stock as well as a corresponding reduction in the number of
shares of our authorized common stock on an identical 10-for-1 reverse basis.
The reverse stock split was approved by our board of directors on April 27,
2009, and effected by filing a Certificate of Change with the Nevada Secretary
of State pursuant to Nevada Revised Statutes Section 78.207.




31




Completion
of Public Offering





On July
7, 2009, we completed a registered public offering of 1.61 million shares of
common stock at a price of $12.98 per share, resulting in gross proceeds to the
Company, prior to deducting underwriting discounts, commissions and offering
expenses, of approximately $21 million.





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: Revenues of the Company 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 collectibility 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:
                                                                          
                                                                          June
      30,
                                                                            2009
                                                                          
                                                                          
                                                                          December
      31,
                                                                            20080 – 30
      days
                                                                          
                                                                          $
                                                                          2,173,301
                                                                          
                                                                          
                                                                          $
                                                                          1,311,69231 – 60
      days
                                                                          
                                                                          
                                                                          1,193,149
                                                                          
                                                                          
                                                                          
                                                                          543,15361 – 90
      days
                                                                          
                                                                          
                                                                          249,859
                                                                          
                                                                          
                                                                          
                                                                          156,15391 – 120
      days
                                                                          
                                                                          
                                                                          56,545
                                                                          
                                                                          
                                                                          
                                                                          299,828121 – 150
      days
                                                                          
                                                                          
                                                                          159,773
                                                                          
                                                                          
                                                                          
                                                                          113,276Total
                                                                          
                                                                          $
                                                                          3,832,627
                                                                          
                                                                          
                                                                          $
                                                                          2,424,102





On
average, we collect our receivables within 90 days. Historically, we have
collected all of our accounts receivable and have had no write offs. This is
attributed to the steps that we take prior to extending credit to our customers
as discussed above. 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.





•
            Convertible
      debentures and warrants: We have adopted APB No. 14, “Accounting for
      Convertible Debt and Debt Issued with Stock Purchase Warrants”, SFAS 133,
      EITF 98-5, and EITF 00-27, for valuation and accounting treatment of our
      outstanding convertible debentures and
warrants.




32




•
            Liquidated
      damages: We have adopted SFAS No. 5, “Accounting for Contingencies” and
      EITF 00-19-2, “Accounting for Derivative Financial Instruments Indexed to,
      and Potentially Settled in, a Company’s own Stock,” in connection with the
      liquidated damages we accrued pursuant to the terms of our Registration
      Rights Agreement with certain investors dated February 27,
      2007.





Recent
Accounting Pronouncements





SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities – An Amendment
of SFAS No. 133,” became effective for the Company on January 1,
2009.  SFAS 161 seeks to improve financial reporting for derivative
instruments and hedging activities by requiring enhanced disclosures regarding
the impact on financial position, financial performance, and cash flows. To
achieve this increased transparency, SFAS 161 requires (1) the disclosure
of the fair value of derivative instruments and gains and losses in a tabular
format; (2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the footnotes. The adoption
of SFAS 161 did not have a material impact on the Company’s consolidated
financial statements.





In
June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” The FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and therefore
need to be included in the earnings allocation in calculating earnings per share
under the two-class method described in SFAS 128, “Earnings per Share.” The FSP
requires companies to treat unvested share-based payment awards that have
non-forfeitable rights to dividend or dividend equivalents as a separate class
of securities in calculating earnings per share. The FSP is effective for fiscal
years beginning after December 15, 2008; earlier application is not
permitted. The adoption of EITF 03-6-1 did not have a material impact on the
Company’s consolidated financial statements.





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP
FAS 157-3 clarifies the application of SFAS 157 in an inactive market,
without changing its existing principles. The FSP was effective immediately upon
issuance. The adoption of FSP FAS 157-3 did not have an effect on the
Company’s consolidated financial statements.





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, Recognition of Interest Income and Impairment
on Purchased and Retained Beneficial Interests in Securitized Financial Assets.”
FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be
more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1 achieves
this by amending the impairment model in EITF 99-20 to remove its exclusive
reliance on “market participant” estimates of future cash flows used in
determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1
did not have a material impact on the Company’s consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
is to be applied prospectively with retrospective application not permitted.
This FSP is effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting this FSP must also early adopt FSP FAS 115-2 and
FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”
Additionally, if an entity elects to early adopt either FSP FAS 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments,” or FSP
FAS 115-2 and FAS 124-2, it must also elect to early adopt this FSP. Management
is currently evaluating this new FSP but does not believe that it will have a
significant impact on the Company’s consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS 107,
“Disclosures about Fair Value of Financial Instruments,” to require disclosures
about fair value of financial instruments not measured on the balance sheet at
fair value in interim financial statements as well as in annual financial
statements. Prior to this FSP, fair values for these assets and liabilities were
only disclosed annually. This FSP applies to all financial instruments within
the scope of SFAS 107 and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This FSP is effective for interim periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. The
Company adopted the provisions of this FSP.




33




In May
2009, the FASB issued SFAS 165, “Subsequent Events,” which provides guidance to
establish general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS 165 also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for why
that date was selected. SFAS 165 is effective for interim and annual periods
ending after June 15, 2009, and accordingly, the Company adopted this Standard
during the second quarter of 2009. SFAS 165 requires that public entities
evaluate subsequent events through the date that the financial statements are
issued. We have evaluated subsequent events through the time of filing these
financial statements with the SEC.





In June
2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets –
an amendment of FASB No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” SFAS 166 amends the
criteria for a transfer of a financial asset to be accounted for as a sale,
redefines a participating interest for transfers of portions of financial
assets, eliminates the qualifying special-purpose entity concept and provides
for new disclosures. SFAS 166 is effective for the Company beginning in
2010.





In June
2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R),”
which modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. SFAS 167 clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. SFAS
167 requires an ongoing reassessment of whether a company is the primary
beneficiary of a variable interest entity. SFAS 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS 167 is
effective for fiscal years beginning after November 15, 2009, and the Company is
currently assessing the impact of adopting SFAS 167.





In June
2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles - A Replacement of
FASB Statement No. 162.” SFAS 168 establishes the FASB Accounting Standards
CodificationTM (the “Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with U.S. GAAP. The
Codification does not change current U.S. GAAP, but is intended to simplify user
access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company in the third quarter
of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter
ending September 30, 2009 and all subsequent public filings will reference the
Codification as the sole source of authoritative literature.





Results
of Operations – Three Month Periods ended June 30, 2009 and 2008





The
following table summarizes our results of operations for the three months ended
June 30, 2009 and 2008.





Three
      Months Ended June 30,2009
              
              
              2008Amount
              
              
              Percentage
      of
                total
      revenue
              
              
              Amount
              
              
              Percentage
      of
                total
      revenueRevenues
              
              $
              6,243,438
              
              
              
              100.0
              %
              
              $
              4,478,194
              
              
              
              100.0
              %Gross
      Profit
              
              $
              3,284,601
              
              
              
              52.6
              %
              
              $
              2,311,710
              
              
              
              51.6
              %Operating
      Expense
              
              $
              1,577,261
              
              
              
              25.3
              %
              
              $
              1,070,833
              
              
              
              23.9
              %Income
      from Operations
              
              $
              1,707,340
              
              
              
              27.3
              %
              
              $
              1,240,877
              
              
              
              27.7
              %Other
      Expenses
              
              $
              1,481,582
              
              
              
              23.7
              %
              
              $
              1,105,709
              
              
              
              24.7
              %Income
      Tax Expenses
              
              $
              342,555
              
              
              
              5.5
              %
              
              $
              261,233
              
              
              
              5.8
              %Net
      Loss
              
              $
              (116,797
              )
              
              
              (1.9
              )%
              
              $
              (126,065
              )
              
              
              (2.8
              )%





Revenues.  All of
our revenues are derived from the sale of veterinary healthcare and medical care
products in the PRC. For the three months ended June 30, 2009, we had revenues
of $6,243,438 as compared to revenues of $4,478,194 for the three months ended
June 30, 2008, an increase of approximately 39.4%. Our revenues consist of four
product lines: veterinary medications, micro-organism, feed additives, and
vaccines.




34




Revenues — Veterinary
Medications.  Revenues from sales of our veterinary medications
product line increased from $2,934,247 for the three months ended June 30, 2008
to $3,913,444 for the three months ended June 30, 2009 for an increase of
$979,197 or 33.4%.  The increase in veterinary medication sales was
primarily due to our increased utilization of our 2007 veterinary medicine
facility expansion of 200% and increased sales efforts. We were able to utilize
this capacity expansion as our customers increased the use of products for the
treatment of livestock and poultry diseases during the three months ended June
30, 2009. $600,134 of this increase was the result of the sales of new products
during the three months ended June 30, 2009. Of total revenues from veterinary
medications during the three months ended June 30, 2009, approximately $943,137
or 15.52% of total revenue resulted from the sale of Praziquantel
tablets which treats schistosomiasis.





Revenues — Micro-Organism.  Revenues
from sales of our micro-organism product line increased from $1,151,600 for
the three months ended June 30, 2008 to $1,735,534 during the three months
ended June 30, 2009 for an increase of $583,934 or 50.7%. The increase was the
result of increased sales efforts of our probiotics micro-organism products
during the three months ended June 30, 2009.





Revenues — Feed
Additives.  Revenues from sales of our feed additives product
line increased from $176,627 for the three months ended June 30, 2008 to
$281,461 for the three months ended June 30, 2009, for an increase of
$104,834 or 59.4%. The increase of $104,834 was the result of increased
sales efforts of our multi-enzyme feed additive products during the three months
ended June 30, 2009.





Revenues — Vaccines.  Revenues
from sales of our vaccines product line increased from $215,720 for the
three months ended June 30, 2008 to $312,999 for the three months ended
June 30, 2009, for an increase of $97,279 or 45.1%. This increase was the result
of an increase in customer demand of our vaccine products during the three
months ended June 30, 2009. 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.





Cost
of Sales





Cost of Sales.  For
the three months ended June 30, 2009, we had cost of sales, which consists of
raw materials, direct labor, and manufacturing overhead, of $2,958,837 as
compared to cost of sales of $2,166,414 the three months ended June 30, 2008, an
increase of approximately 36.6% as a result of our overall sales increase of
39.4%. Our cost of sales consists of four product lines: veterinary medications,
micro-organism, feed additives, and vaccines.





Cost of Sales — Veterinary
Medications.  Cost of sales of our veterinary medications
product line increased from $1,713,460 for the three months ended June 30, 2008
to $2,276,216 for the three months ended June 30, 2009, for an increase of
$562,756 or approximately 32.8%. This increase was mainly due to the
corresponding increase in veterinary medication sales.





Cost of
Sales — Micro-Organism.  Cost of sales of our
micro-organism product line increased from $349,229 for the three months
ended June 30, 2008 to $513,310 for the three months ended June 30, 2009, for an
increase of $164,011 or approximately 47.0%. This increase was mainly due
to a corresponding increase in micro-organism sales.





Cost of Sales — Feed
Additives.  Cost of sales of our feed additives product
line increased from $79,927 for the three months ended June 30, 2008 to
$121,367 for the three months ended June 30, 2009, for an increase of $41,440 or
51.8%. The increase was primarily due to an increase in feed additive sales
during the three months ended June 30, 2009.





Cost of
Sales — Vaccines.  Cost of sales of our vaccines
product line increased from $23,798 for the three months ended June 30,
2008 to $47,944 for the three months ended June 30, 2009, for an increase
of $24,146 or 101.5%. This increase was a result of an increase of
vaccine product sales during the three months ended June 30, 2009. Our vaccine
facility is presently running at full capacity.




35




Operating
Expenses





The
      three Months Ended June 30,2009
                      
                      
                      2008Amount
                      
                      
                      Percentage
      of
                        total
      revenue
                      
                      
                      Amount
                      
                      
                      Percentage
      of
                        total
      revenueGross
      Profit
                      
                      $
                      3,284,601
                      
                      
                      
                      52.6
                      %
                      
                      $
                      2,311,710
                      
                      
                      
                      51.6
                      %Operating
      Expenses
                      
                      $
                      1,577,261
                      
                      
                      
                      25.3
                      %
                      
                      $
                      1,070,833
                      
                      
                      
                      23.9
                      %Selling
      Expenses
                      
                      $
                      585,207
                      
                      
                      
                      9.4
                      %
                      
                      $
                      302,843
                      
                      
                      
                      6.8
                      %General
      and Administrative Expenses
                      
                      $
                      625,359
                      
                      
                      
                      10.0
                      %
                      
                      $
                      648,591
                      
                      
                      
                      14.5
                      %Research
      and Development Costs
                      
                      $
                      366,695
                      
                      
                      
                      5.9
                      %
                      
                      $
                      119,399
                      
                      
                      
                      2.7
                      %Income
      from Operations
                      
                      $
                      1,707,340
                      
                      
                      
                      27.3
                      %
                      
                      $
                      1,240,877
                      
                      
                      
                      27.7
                      %





Selling
Expenses.  Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$302,843 for the three months ended June 30, 2008 as compared to $585,207 for
the three months ended June 30, 2009, an increase of approximately 93.2%. This
increase is a result of our increased sales during the three months ended June
30, 2009.





General and Administrative
Expenses.  General and administrative expenses totaled $648,591
for the three months ended June 30, 2008, as compared to $625,359 for the three
months ended June 30, 2009, a decrease of approximately 3.6%. General and
administrative expenses are primarily legal, accounting and other professional
fees that we incurred as a U.S. public company. Our general and administrative
expenses remained relatively constant when comparing the three months ended June
30, 2008 to the three months ended June 30, 2009. However, we anticipate that
our general and administrative expenses will increase due to the increasing
costs of being a U.S. public company, including, but not limited to, our annual
NASDAQ Capital Market fees, fees related to investor relations and costs of
complying with Sarbanes-Oxley.





Research and Development
Costs.  Research and development costs, which consist of
salaries, professional fees, and technical support fees, totaled $366,695 for
the three months ended June 30, 2009, as compared to $119,399 for the three
months ended June 30, 2008, an increase of approximately 207.1%. This increase
is primarily attributable to increased research and development activities from
developing veterinary vaccines. We anticipate that our research and development
costs will continue to increase as we continue improve existing products and
develop new products.





Results of Operations – Six Month Periods ended June
30, 2009 and 2008





The
following table summarizes out results of operations for the six months ended
June 30, 2009 and 2008.





Six
      Months Ended June 30,2009
                
                
                2008Amount
                
                
                Percentage
      of
                  total
      revenue
                
                
                Amount
                
                
                Percentage
      of
                  total
      revenueRevenues
                
                $
                10,067,004
                
                
                
                100.0
                %
                
                $
                7,164,548
                
                
                
                100.0
                %Gross
      Profit
                
                $
                5,161,809
                
                
                
                51.3
                %
                
                $
                3,700,645
                
                
                
                51.7
                %Operating
      Expense
                
                $
                2,216,703
                
                
                
                22.0
                %
                
                $
                1,561,711
                
                
                
                21.8
                %Income
      from Operations
                
                $
                2,945,106
                
                
                
                29.3
                %
                
                $
                2,138,934
                
                
                
                29.9
                %Other
      Expenses
                
                $
                1,443,184
                
                
                
                14.3
                %
                
                $
                1,234,208
                
                
                
                17.2
                %Income
      Tax Expenses
                
                $
                554,075
                
                
                
                5.5
                %
                
                $
                414,440
                
                
                
                5.8
                %Net
      Income (loss)
                
                $
                947,847
                
                
                
                9.4
                %
                
                $
                490,286
                
                
                
                6.8
                %





Revenues.  For the
six months ended June 30, 2009, we had revenues of $10,067,004 as compared to
revenues of $7,164,548 for the six months ended June 30, 2008, an increase of
approximately 40.5%.





Revenues — Veterinary
Medications.  Revenues from sales of our veterinary medications
product line increased from $4,604,001 for the six months ended June 30, 2008 to
$6,515,940 for the six months ended June 30, 2009, for an increase of $1,911,939
or 41.5%.  The increase in veterinary medication sales was primarily
due to our increased utilization of our 2007 veterinary medicine facility
expansion of 200% and increased sales efforts. We were able to utilize this
capacity expansion as our customers increased the use of products for the
treatment of livestock and poultry diseases during the six months ended June 30,
2009. $1,247,330 of this increase was a result of the sales of new products
during the six months ended June 30, 2009. Approximately $1,297,725 or 13.11%
and $719,321 or 10.04% of total revenue resulted from the sale of
Praziquantel tablets which treats schistosomiasis during the six months ended
June 30, 2009 and 2008, respectively.





Revenues — Micro-Organism.  Revenues
from sales of our micro-organism product line increased from $1,941,255 for
the six months ended June 30, 2008 to $2,628,827 during the six months
ended June 30, 2009, for an increase of $687,572 or 35.4%. The increase
of $687,572 was the result of increased sales efforts of our probiotics
micro-organism products during the six months ended June 30, 2009.




36




Revenues — Feed
Additives.  Revenues from sales of our feed additives product
line increased from $270,181 for the six months ended June 30, 2008 to
$463,772 for the six months ended June 30, 2009, for an increase of
$193,591 or 71.7%. The increase of $193,591 was the result of increased
sales efforts of our multi-enzyme feed additive products during the six months
ended June 30, 2009.





Revenues — Vaccines.  Revenues
from sales of our vaccines product line increased from $349,111 for the six
months ended June 30, 2008 to $ 458,465 for the six months ended June 30,
2009, for an increase of $109,354 or 31.3%. This increase was a result of an
increase in customer demand of our vaccine products during the six months ended
June 30, 2009. 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.





Cost
of Sales





Cost of Sales.  For
the six months ended June 30, 2009, we had cost of sales, which consists of raw
materials, direct labor, and manufacturing overhead, of $4,905,195 as compared
to cost of sales of $3,463,903 the six months ended June 30, 2008, an increase
of approximately 41.6% as a result of our overall sales increase of
40.5%.





Cost of Sales — Veterinary
Medications.  Cost of sales of our veterinary medications
product line increased from $2,712,944 for the six months ended June 30, 2008 to
$3,869,025 for the six months ended June 30, 2009, for an increase of
$1,156,081 or approximately 42.6%. This increase was mainly due to the
corresponding increase in veterinary medication sales.





Cost of
Sales — Micro-Organism.  Cost of sales of our
micro-organism product line increased from $585,126 for the six months
ended June 30, 2008 to $773,847 for the six months ended June 30, 2009, for an
increase of $188,721 or approximately 32.3%. This increase was mainly due
to a corresponding increase in micro-organism sales.





Cost of Sales — Feed
Additives.  Cost of sales of our feed additives product
line increased from $126,640 for the six months ended June 30, 2008 to
$198,806 for the six months ended June 30, 2009, for an increase of $72,166 or
57.0%. The increase was primarily due to an increase in feed additive sales
during the six months ended June 30, 2009.





Cost of
Sales — Vaccines.  Cost of sales of our vaccines
product line increased from $39,193 for the six months ended June 30, 2008
to $63,517 for the six months ended June 30, 2009, for an increase of
$24,324 or 62.1%. This increase was the result of an increase of
vaccine product sales during the six months ended June 30, 2009. Our vaccine
facility is presently running at full capacity.




Operating
Expenses





The
      six Months Ended June 30,2009
                      
                      
                      2008Amount
                      
                      
                      Percentage
      of
                        total
      revenue
                      
                      
                      Amount
                      
                      
                      Percentage
      of
                        total
      revenueGross
      Profit
                      
                      $
                      5,161,809
                      
                      
                      
                      51.3
                      %
                      
                      $
                      3,700,645
                      
                      
                      
                      51.7
                      %Operating
      Expenses
                      
                      $
                      2,216,703
                      
                      
                      
                      22.0
                      %
                      
                      $
                      1,561,711
                      
                      
                      
                      21.8
                      %Selling
      Expenses
                      
                      $
                      792,602
                      
                      
                      
                      8.0
                      %
                      
                      $
                      492,687
                      
                      
                      
                      6.9
                      %General
      and Administrative Expenses
                      
                      $
                      940,054
                      
                      
                      
                      9.3
                      %
                      
                      $
                      902,326
                      
                      
                      
                      12.6
                      %Research
      and Development Costs
                      
                      $
                      484,047
                      
                      
                      
                      4.9
                      %
                      
                      $
                      166,698
                      
                      
                      
                      2.3
                      %Income
      from Operations
                      
                      $
                      2,945,106
                      
                      
                      
                      29.3
                      %
                      
                      $
                      2,138,934
                      
                      
                      
                      29.9
                      %





Selling
Expenses.  Selling expenses, which consist of commissions,
advertising and promotion expenses, freight charges, and salaries, totaled
$492,687 for the six months ended June 30, 2008 as compared to $792,602 for the
six months ended June 30, 2009, an increase of approximately 60.9%. This
increase is the result of our increased sales during the six months ended June
30, 2009.





General and Administrative
Expenses.  General and administrative expenses totaled $940,054
for the six months ended June 30, 2009, as compared to $902,326 for the six
months ended June 30, 2008, an increase of approximately 4.2%. General and
administrative expenses are primarily legal, accounting and other professional
fees that we incurred as a U.S. public company. Our general and administrative
expenses remained relatively constant from the six months ended June 30, 2009
from the six months ended June 30, 2008. However, we anticipate that our general
and administrative expenses will increase due to the increasing costs of being a
U.S. public company, including, but not limited to, our annual NASDAQ Capital
Market fees, fees related to investor relations and costs of complying with
Sarbanes-Oxley.




37




Research and Development
Costs.  Research and development costs, which consist of
salaries, professional fees, and technical support fees, totaled $484,047 for
the six months ended June 30, 2009, as compared to $166,698 for the six months
ended June 30, 2008, an increase of approximately 190.4%. This increase is
primarily attributable to increased research and development activities from
developing veterinary vaccines. We anticipate that our research and development
costs will continue to increase as we continue improve existing products and
develop new products.





Liquidity




For the
six months ended June 30, 2009, cash provided by operating activities was
$175,228 compared to cash used of $1,520,953 for the same period in
2008.  This increase is attributable to the increase in net income of
$457,561 from $490,286 for the six months ended June 30, 2008 to $947,847 for
the six months ended June 30, 2009, as a result of increased sales of our
veterinary medicines and micro-organism products. For the six months ended June
30, 2009, net cash provided by operating activities other than net income was
mainly due to a decrease of $4,322,833 in deposits and prepaid expenses and an
increase of $1,047,444 in taxes payable. However, this increase was offset by an
increase of $2,967,074 in inventories, and a decrease in accrued expenses of
$643,344, which collectively decreased cash provided by operating activities by
$1,696,181 for the six months ended June 30, 2009 as compared to the six months
ended June 30, 2008. For the six months ended June 30, 2009, inventories
increased by $2,967,074 as a result of the company liquidating its deposits and
prepaid expenses related to inventory. We are carrying additional raw materials
inventory to produce finished goods in the upcoming quarters. Taxes payable
increased from $212,661 as of December 31, 2008 to $2,597,886 as of June 30,
2009 as a result of the enterprise income tax, value added taxes, and other
miscellaneous taxes for the six months ended June 30, 2009 that were unpaid as
of June 30, 2009. For the six months ended June 30, 2008, the decrease in cash
used in operating activities was a result of (a) bulk purchases of certain raw
materials for anticipated production of both existing and new products in the
second and third quarter of fiscal 2008, and (b) increased prepayments to
certain suppliers to ensure low purchase price of certain raw
materials.





We used
$722,980 in cash flows for investing activities for the six months ended June
30, 2009, as compared to generating $594,589 from investing activities for
the six months ended June 30, 2008. The net cash used in investing activities
for the six months ended June 30, 2009 was a result of payments made towards
ongoing construction projects of $1,792,941 and loans made of $1,685,555 to raw
materials suppliers offset by refunds of long term prepayments of $2,711,545
previously made by the Company. The cash provided by investing activities for
the six months ended June 30, 2008 was the result of a collection of a loan of
$671,364 that was offset by equipment expenditures of $76,775.





Cash
generated by financing activities was $398,100 for the six months ended June 30,
2009 as compared to $311,428 for the six months ended June 30, 2008. Cash
generated by financing activities for the six months ended June 30, 2009 was
primarily the result short term loans and advances from related parties offset
by principal payments on short term loans from shareholders. Cash provided by
financing activities for the six months ended June 30, 2008 was the result of
advances from shareholders and shareholder loans.





As of
June 30, 2009, we had cash of $410,554. Our total current assets were
$17,616,161, and our total current liabilities were $6,359,882, which resulted
in a net working capital of $11,256,279. Management believes that we have the
ability to meet cash requirements for our operations in order to continue as a
going concern, including sufficient cash flows to meet our obligations on a
timely basis in the foreseeable future, provided that we can continue to
maintain profitable operations and our net working capital remains
liquid.





Capital
Resources





During
the six months ended June 30, 2009 we borrowed $329,783 on a short term basis
and repaid the bank $307,798. During April 2009, we collected $2,711,545 (RMB
18,500,000) as a result of the full return of deposits that we previously made
for potential acquisitions. On July 7, 2009, we completed a public offering of
1,610,000 shares of our common stock at a price of $12.98 per share. The
aggregate amount we raised in this offering, excluding underwriting discounts,
commissions and offering expenses, was approximately $21 million. However, if we
are to acquire another business or further expand our operations, we may need
additional capital.





Plan of
Operations





Over the
next 12 months, we plan to continue to market and sell our current products and
to develop new products.




38





In 2003,
we received approval from the State Council of China to expand our production
facilities and construct a new GMP standard plant. We have invested $10,501,000
(RMB 82,000,000) into this project, which is our Huxian plant, including
approximately $9,700,000 for the facilities and $800,000 for working capital.
The construction work commenced in 2005, and we completed the veterinary
medicine facility and the building that houses quality control, research and
development and administration during 2007, both of which are fully operational.
The remaining facilities of the Huxian plant are expected to be completed by the
latter part of 2009. We anticipate that the new plant will generate
sufficient cash flows; thus, management has concluded that there is no
impairment loss on the construction-in-progress.





We
believe that Xian Tianxing will be developing new products including animal
immunization products, non-pathogenic micro-organisms for the cure and
prevention of livestock disease, complex enzyme preparations as animal feed
additives, and several new veterinary medicine products within the next 12
months.





Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations




Payments
      Due by PeriodContractual
      Obligations
                      
                      Total
                      
                      
                      Less
      than
                        1
      year
                      
                      
                      1
      – 3 years
                      
                      3
      – 5 years
                      
                      
                      More
      than
                        5
      yearsR&D
      Project Obligation
                      
                      $
                      253,017
                      
                      
                      $
                      253,017
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —Operating
      Lease Obligations
                      
                      
                      307,401
                      
                      
                      
                      59,215
                      
                      
                      
                      106,300
                      
                      
                      
                      69,910
                      
                      
                      
                      71,976Total
                      
                      $
                      560,418
                      
                      
                      $
                      312,232
                      
                      
                      $
                      106,300
                      
                      
                      $
                      69,910
                      
                      
                      $
                      71,976





During
the first quarter of 2008, Xian Tianxing entered into an agreement with
Northwestern Agricultural Technology University to jointly work on a research
and development project regarding the application of nano-technology in the
prevention of a major milk cow disease. The total projected budget for this
project is approximately $586,000 (RMB 4 million), which we would pay in
installments as the stages of the project are completed. We expect this project
to be completed in one year. The research and development expense for this
project was approximately $87,900 (RMB 0.6 million) as of June 30,
2009.  We also made $410,396 (RMB 2.8 million) of prepayments for the
purchase of specific raw materials for the project. We anticipate that the
remaining $163,604 (RMB 1.2 million) will be spent during the remainder of
2009.





Exchange
Rate





Xian
Tianxing maintains its books and records in Renminbi (“RMB”), the lawful
currency of China. In general, for consolidation purposes, we translate Xian
Tianxing’s assets and liabilities into US Dollars 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 Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in
this Quarterly Report were as follows:





June
      30, 2009
                        
                        December
      31, 2008
                        
                        June
      30, 2008Assets
      and liabilities
                        
                        
                        USD0.14650:
                          RMB1
                        
                        
                        USD0.1467:
                          RMB1
                        
                        
                        USD0.1459:
                          RMB1Statements
      of operations and cash flows for the period/year ended
                        
                        
                        USD0.14657:
                          RMB1
                        
                        
                        USD0.14415:
                          RMB1
                        
                        
                        USD0.14184
                          :RMB1





No
representation is made that RMB amounts have been, or would be, converted into
US$ at the above rates.





Off-Balance
Sheet Arrangements





As of the
date of this Quarterly Report, 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 stockholder’s 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.




39




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
Applicable





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





As of
June 30, 2009, we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and our
chief 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.





Remediation of Material Weaknesses in
Internal Control over Financial Reporting





In our
annual report on Form 10-K for the year ended December 31, 2008, we reported
certain material weaknesses involving control activities,
specifically:





1.
            Accounting and Finance
      Personnel Weaknesses - The current accounting staffs are
      relatively inexperienced, and require substantial training so as to meet
      with the higher demands necessary to fulfill the requirements of U.S.
      GAAP-based reporting and SEC rules and
  regulations.





2.
            Lack of Internal Audit
      Function - The Company lacks qualified resources to perform the
      internal audit functions properly. The Company lacked an internal
      audit department, which rendered the Company ineffective in preventing and
      detecting control lapses and errors in the accounting of certain key areas
      like revenue recognition, purchase approvals, inter-company transactions,
      cash receipt and cash disbursement authorizations, inventory safeguard and
      proper accumulation for cost of products, in accordance with the
      appropriate costing method used by the
Company.




The
Company’s management has identified the steps necessary to address the material
weaknesses described above, as follows:





1.
            Hiring
      additional accounting and operations personnel and engaging outside
      contractors with technical accounting expertise, as needed, and
      reorganizing the accounting and finance department to ensure that
      accounting personnel with adequate experience, skills and knowledge
      relating to complex, non-routine transactions are directly involved in the
      review and accounting evaluation of our complex, non-routine
      transactions





2.
            Involving
      both internal accounting and operations personnel and outside contractors
      with technical accounting expertise, as needed, early in the evaluation of
      a complex, non-routine transaction to obtain additional guidance as to the
      application of generally accepted accounting principles to such a proposed
      transaction;





3.
            Documenting
      to standards established by senior accounting personnel and the principal
      accounting officer the review, analysis and related conclusions with
      respect to complex, non-routine
transactions;





4.
            Requiring
      senior accounting personnel and the principal accounting officer to review
      complex, non-routine transactions to evaluate and approve the accounting
      treatment for such transactions;
and




5.
            Evaluating
      the internal audit function in relation to the Company’s financial
      resources and requirements.





We expect
that we will satisfactorily address the control deficiencies and material
weaknesses relating to these matters by the end of our fiscal year ending
December 31, 2009, although there can be no assurance that compliance will be
achieved in this time frame.





Management,
including our chief executive officer and our chief financial officer, does not
expect that our disclosure controls and internal controls will prevent errors
and omissions, even as the same are improved to address any deficiencies and/or
weaknesses. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of compliance with policies
or procedures. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and errors and omissions, if any, within the Company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control.




40





Our
financial reporting process includes extensive procedures we undertake in order
to obtain assurance regarding the reliability of our published financial
statements, notwithstanding the material weaknesses in internal control. We
expanded our review of accounting for business combinations to help compensate
for our material weaknesses in order to provide assurance that the financial
statements are free of material inaccuracies or omissions of material fact. As a
result, management, to the best of its knowledge, believes that (i) this report
does not contain any untrue statements of a material fact or omits any material
fact and (ii) the financial statements and other financial information included
in this report have been prepared in conformity with U.S. GAAP and fairly
present in all material aspects our financial condition, results of operations,
and cash flows.





Changes
in Internal Control over Financial Reporting





Except
for the remedial actions taken as described above, there were no changes in our
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Securities Exchange Act of 1934) during the quarter ended June 30, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.




41





PART
II. OTHER INFORMATION





ITEM
1. LEGAL PROCEEDINGS





The
following discussion discusses all known or anticipated material legal
proceedings commenced by or against us.  Occasionally we may be named
as a party in claims and legal proceedings arising out of the normal course of
our business. These claims and legal proceedings may relate to contractual
rights and obligations, employment matters, or to other matters relating to our
business and operations.





Other
than the matter discussed below, we are not aware of any material pending legal
proceedings involving us.





Andrew Chien v. Skystar
Bio-Pharmaceutical Company, et. al. (US District Court, District of
Connecticut, Case No. 3:2007cv00781). Andrew Chien filed suit against the
Company, R. 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.  Additionally, on February 5, 2009, the Court ruled in
favor of 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 in the case, but both motions
were denied.





Andrew Chien v. Skystar
Bio-Pharmaceutical Company, et. al. (formerly Superior Court, State of
Connecticut, Case No. NNH-CV-09-5025938-S, now U.S. District Court, District of
Connecticut, Case No. 3:09-CV-00149 (MRK)). Andrew 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 in the related federal
case already dismissed. 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.





ITEM
1A. RISK FACTORS





You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.





Risks
Relating to Our Business





Our
relatively limited operating history makes it difficult to evaluate our future
prospects and results of operations.




We have a
relatively limited operating history. Xian Tianxing, the variable interest
entity through which we operate our business, commenced operations in 1997 and
first achieved profitability in the quarter ended September 30, 1999.
Accordingly, you should consider our future prospects in light of the risks and
uncertainties typically experienced by companies such as ours in evolving
industries such as the bio-pharmaceutical industry in China. Some of these risks
and uncertainties relate to our ability to:




·
            offer
      new and innovative products to attract and retain a larger customer
      base;·
            attract
      additional customers and increase spending per
customer;·
            increase
      awareness of our brand and continue to develop user and customer
      loyalty;·
            raise
      sufficient capital to sustain and expand our business;·
            maintain
      effective control of our costs and
expenses;           42
  ·
            respond
      to changes in our regulatory environment;·
            respond
      to competitive market conditions;













·
            manage
      risks associated with intellectual property rights;·
            attract,
      retain and motivate qualified personnel;·
            upgrade
      our technology to support additional research and development of new
      products; and·
            maintain
      or improve our position as one of the market leaders in
    China.




If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.





If
we fail to obtain additional financing we will be unable to execute our business
plan.




Despite
our recent financing, we may need additional funds to build new production
facilities; pursue further research and development; obtain regulatory
approvals; file, prosecute, defend and enforce our intellectual property rights;
and market our products. Should such needs arise, we intend to seek additional
funds through public or private equity or debt financing, strategic transactions
and/or from other sources.





There are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer or
cancel development programs, planned initiatives or overhead expenditures, to
the extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.




Our
business will be materially and adversely affected if our collaborative
partners, licensees and other third parties over whom we are very dependent fail
to perform as expected.





Due to
the complexity of the process of developing bio-pharmaceuticals, our core
business depends on arrangements with bio-pharmaceutical institutes, corporate
and academic collaborators, licensors, licensees and others for the research,
development, clinical testing, technology rights, manufacturing, marketing and
commercialization of our products. We have various research collaborations and
outsource other business functions. Our license agreements could obligate us to
diligently bring potential products to market, make substantial milestone
payments and royalties and incur the costs of filing and prosecuting patent
applications. There are no assurances that we will be able to establish or
maintain collaborations that are important to our business on favorable terms,
or at all. We could enter into collaborative arrangements for the development of
particular products that may lead to our relinquishing some or all rights to the
related technology or products. A number of risks arise from our dependence on
collaborative agreements with third parties. Product development and
commercialization efforts could be adversely affected if any collaborative
partner:




·
            terminates
      or suspends its agreement with us;·
            causes
      delays;·
            fails
      to timely develop or manufacture in adequate quantities a substance needed
      in order to conduct clinical trials;·
            fails
      to adequately perform clinical trials;·
            determines
      not to develop, manufacture or commercialize a product to which it has
      rights; or·
            otherwise
      fails to meet its contractual
obligations.





Our
collaborative partners could pursue other technologies or develop alternative
products that could compete with the products we are developing.




Our
products will be adversely affected if we are unable to protect proprietary
rights or operate without infringing the proprietary rights of
others.




43




The
profitability of our products will depend in part on our ability to obtain and
maintain patents and licenses and preserve trade secrets, and the period our
intellectual property remains exclusive. We must also operate without infringing
the proprietary rights of third parties and without third parties circumventing
our rights. The patent positions of bio-pharmaceutical and biotechnology
enterprises, including ours, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved. For
example, no consistent policy has emerged regarding the breadth of biotechnology
patent claims that are granted by the U.S. Patent and Trademark Office or
enforced by the U.S. federal courts. In addition, the scope of the originally
claimed subject matter in a patent application can be significantly reduced
before a patent is issued. The biotechnology patent situation outside the U.S.
is even more uncertain, is currently undergoing review and revision in many
countries, and may not protect our intellectual property rights to the same
extent as the laws of the U.S. Because patent applications are maintained in
secrecy in some cases, we cannot be certain that we or our licensors are the
first creators of inventions described in our pending patent applications or
patents or the first to file patent applications for such
inventions.




Other
companies may independently develop similar products and design around any
patented products we develop. We cannot assure you that:




·
                        any
      of our patent applications will result in the issuance of
      patents;·
                        we
      will develop additional patentable products;·
                        the
      patents we have been issued will provide us with any competitive
      advantages;·
                        the
      patents of others will not impede our ability to do business;
  or·
                        third
      parties will not be able to circumvent our
  patents.


A number
of pharmaceutical, biotechnology, research and academic companies and
institutions have developed technologies, filed patent applications or received
patents on technologies that may relate to our business. If these technologies,
applications or patents conflict with ours, the scope of our current or future
patents could be limited or our patent applications could be denied. Our
business may be adversely affected if competitors independently develop
competing technologies, especially if we do not obtain, or obtain only narrow,
patent protection. If patents that cover our activities are issued to other
companies, we may not be able to obtain licenses at a reasonable cost, or at
all; develop our technology; or introduce, manufacture or sell the products we
have planned.




Patent
litigation is becoming widespread in the biotechnology industry. Such litigation
may affect our efforts to form collaborations, to conduct research or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would be
held valid or enforceable by a court or that a competitor’s technology or
product would be found to infringe our patents in the event of patent
litigation. Our business could be materially affected by an adverse outcome to
such litigation. Similarly, we may need to participate in interference
proceedings declared by the U.S. Patent and Trademark Office or equivalent
international authorities to determine priority of invention. We could incur
substantial costs and devote significant management resources to defend our
patent position or to seek a declaration that another company’s patents are
invalid.




Much of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership of
proprietary rights to our technology, for example by asserting that they
developed the technology independently.




Difficulties
in manufacturing our products could have a material adverse effect on our
profitability.




Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including China’s Good Manufacturing Practice (GMP), production
and quality control regulations. If we cannot arrange for or maintain
commercial-scale manufacturing on acceptable terms, or if there are delays or
difficulties in the manufacturing process, we may not be able to conduct
clinical trials, obtain regulatory approval or meet demand for our
products.





Failure
or delays in obtaining an adequate amount of raw material or other supplies
would materially and adversely affect our revenue




44




Production
of our products could require raw materials which are scarce or which can be
obtained only from a limited number of sources. If we are unable to obtain
adequate supplies of such raw materials, the development, regulatory approval
and marketing of our products could be delayed.




Our ability to
generate more revenue would be adversely affected if we need more clinical
trials or take more time to complete our clinical trials than we have
planned.





Clinical
trials vary in design by factors including dosage, end points, length, and
controls. We may need to conduct a series of trials to demonstrate the safety
and efficacy of our products. The results of these trials may not demonstrate
safety or efficacy sufficiently for regulatory authorities to approve our
products. Further, the actual schedules for our clinical trials could vary
dramatically from the forecasted schedules due to factors including changes in
trial design, conflicts with the schedules of participating clinicians and
clinical institutions, and changes affecting product supplies for clinical
trials.




We rely
on collaborators, including academic institutions, governmental agencies and
clinical research organizations, to conduct, supervise, monitor and design some
or all aspects of clinical trials involving our products. Since these trials
depend on governmental participation and funding, we have less control over
their timing and design than trials we sponsor. Delays in or failure to commence
or complete any planned clinical trials could delay the ultimate timelines for
our product releases. Such delays could reduce investors’ confidence in our
ability to develop products, likely causing the price of our common stock to
decrease.





If
we are unable to obtain the regulatory approvals or clearances that are
necessary to commercialize our products, we will have less revenue than
expected.




China and
other countries impose significant statutory and regulatory obligations upon the
manufacture and sale of bio-pharmaceutical products. Each regulatory authority
typically has a lengthy approval process in which it examines pre-clinical and
clinical data and the facilities in which the product is manufactured.
Regulatory submissions must meet complex criteria to demonstrate the safety and
efficacy of the ultimate products. Addressing these criteria requires
considerable data collection, verification and analysis. We may spend time and
money preparing regulatory submissions or applications without assurances as to
whether they will be approved on a timely basis or at all.




Our
product candidates, some of which are currently in the early stages of
development, will require significant additional development and pre-clinical
and clinical testing prior to their commercialization. These steps and the
process of obtaining required approvals and clearances can be costly and
time-consuming. If our potential products are not successfully developed, cannot
be proven to be safe and effective through clinical trials, or do not receive
applicable regulatory approvals and clearances, or if there are delays in the
process:





·
            the
      commercialization of our products could be adversely
    affected;·
            any
      competitive advantages of the products could be diminished;
      and·
            revenues
      or collaborative milestones from the products could be reduced or
      delayed.




Governmental
and regulatory authorities may approve a product candidate for fewer indications
or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a product
receives regulatory approval and clearance, it may later exhibit adverse side
effects that limit or prevent its widespread use or that force us to withdraw
the product from the market.




Any
marketed product and its manufacturer, including us, will continue to be subject
to strict regulation after approval. Results of post-marketing programs may
limit or expand the further marketing of products. Unforeseen problems with an
approved product or any violation of regulations could result in restrictions on
the product, including its withdrawal from the market and possible civil
actions.




In
manufacturing our products we will be required to comply with applicable good
manufacturing practices regulations, which include requirements relating to
quality control and quality assurance, as well as the maintenance of records and
documentation. We cannot comply with regulatory requirements, including
applicable good manufacturing practice requirements, we may not be allowed to
develop or market the product candidates. If we or our manufacturers fail to
comply with applicable regulatory requirements at any stage during the
regulatory process, we may be subject to sanctions, including fines, product
recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve applications,
total or partial suspension of production, civil penalties, withdrawals of
previously approved marketing applications and criminal
prosecution.




45




Competitors
may develop and market bio-pharmaceutical products that are less expensive, more
effective or safer, making our products obsolete or uncompetitive.




Some of
our competitors and potential competitors have greater product development
capabilities and financial, scientific, marketing and human resources than we
do. Technological competition from biopharmaceutical companies and biotechnology
companies is intense and is expected to increase. Other companies have developed
technologies that could be the basis for competitive products. Some of these
products have an entirely different approach or means of accomplishing the
desired curative effect than products we are developing. Alternative products
may be developed that are more effective, work faster and are less costly than
our products. Competitors may succeed in developing products earlier than us,
obtaining approvals and clearances for such products more rapidly than us, or
developing products that are more effective than ours. In addition, other forms
of treatment may be competitive with our products. Over time, our technology or
products may become obsolete or uncompetitive.





Our
revenue will be materially and adversely affected if our products are unable to
gain market acceptance.




Our
products may not gain market acceptance in the agricultural community. The
degree of market acceptance of any product depends on a number of factors,
including establishment and demonstration of clinical efficacy and safety,
cost-effectiveness, clinical advantages over alternative products, and marketing
and distribution support for the products. Limited information regarding these
factors is available in connection with our products or products that may
compete with ours.




To
directly market and distribute our bio-pharmaceutical products, we or our
collaborators require a marketing and sales force with appropriate technical
expertise and supporting distribution capabilities. We may not be able to
further establish sales, marketing and distribution capabilities or enter into
arrangements with third parties on acceptable terms. If we or our partners
cannot successfully market and sell our products, our ability to generate
revenue will be limited.





Our
operations and the use of our products could subject us to damages relating to
injuries or accidental contamination and thus reduce our earnings or increase
our losses.




Our
research and development processes involve the controlled use of hazardous
materials. We are subject to federal, provincial and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and waste products. The risk of accidental contamination or injury from handling
and disposing of such materials cannot be completely eliminated. In the event of
an accident involving hazardous materials, we could be held liable for resulting
damages. We are not insured with respect to this liability. Such liability could
exceed our resources. In the future we could incur significant costs to comply
with environmental laws and regulations.





If
we were sued for product liability, we could face substantial liabilities that
may exceed our resources.




We may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks are inherent in the
development of agricultural and bio-pharmaceutical products. We currently do not
have product liability insurance. If we cannot obtain sufficient insurance
coverage at an acceptable cost or otherwise protect against potential product
liability claims, the commercialization of products that we develop may be
prevented or inhibited. If we are sued for any injury caused by our products,
our liability could exceed our total assets, whether or not we are
successful.





We
have no business liability or disruption insurance coverage and therefore we are
susceptible to catastrophic or other events that may disrupt our
business.





The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.





We
will be unsuccessful if we fail to attract and retain qualified
personnel.




We depend
on a core management and scientific team. The loss of any of these individuals
could prevent us from achieving our business objective of commercializing our
product candidates. Our future success will depend in large part on our
continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in
clinical testing and government regulation. We face competition for personnel
from other companies, universities, public and private research institutions,
government entities and other organizations. If our recruitment and retention
efforts are unsuccessful, our business operations could suffer.




46




Downturn
in the global economy may slow domestic growth in China, which in turn may
affect our business.





Due to
the global downturn in the financial markets, China may not be able to maintain
its recent growth rates mainly due to the lack of demand of exports to countries
that are in recessions. Although we do not presently export any of our products,
our earnings may become unstable if China’s domestic growth slows significantly
and the demand for meats and poultry declines.





Risks
Related to Our Corporate Structure




Chinese
laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we
could be subject to sanctions. In addition, changes in such Chinese laws and
regulations may materially and adversely affect our business.




There are
substantial uncertainties regarding the interpretation and application of
Chinese laws and regulations, including, but not limited to, the laws and
regulations governing our business, or the enforcement and performance of our
contractual arrangements with our affiliated Chinese entity, Xian Tianxing, and
its stockholders. We are considered a foreign person or foreign invested
enterprise under Chinese law. As a result, we are subject to Chinese law
limitations on foreign ownership of Chinese companies. These laws and
regulations are relatively new and may be subject to change, and their official
interpretation and enforcement may involve substantial uncertainty. The
effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be applied
retroactively.




The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.





We
may be adversely affected by complexity, uncertainties and changes in Chinese
regulation of bio-pharmaceutical business and companies, including limitations
on our ability to own key assets.




The
Chinese government regulates the bio-pharmaceutical industry including foreign
ownership of, and the licensing and permit requirements pertaining to, companies
in the bio-pharmaceutical industry. These laws and regulations are relatively
new and evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to
Chinese government regulation of the bio-pharmaceutical industry include the
following:





·
            we
      only have contractual control over Xian Tianxing. We do not own it due to
      the restriction of foreign investment in Chinese businesses;
      and·
            uncertainties
      relating to the regulation of the bio-pharmaceutical business in China,
      including evolving licensing practices, means that permits, licenses or
      operations at our company may be subject to challenge. This may disrupt
      our business, or subject us to sanctions, requirements to increase capital
      or other conditions or enforcement, or compromise enforceability of
      related contractual arrangements, or have other harmful effects on
      us.





The
interpretation and application of existing Chinese laws, regulations and
policies and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, bio-pharmaceutical businesses in
China, including our business.




In
order to comply with Chinese laws limiting foreign ownership of Chinese
companies, we conduct our bio-pharmaceutical business through Xian Tianxing by
means of contractual arrangements. If the Chinese government determines that
these contractual arrangements do not comply with applicable regulations, our
business could be adversely affected.




47




The
Chinese government restricts foreign investment in bio-pharmaceutical businesses
in China. Accordingly, we operate our business in China through Xian Tianxing, a
Chinese joint stock company. Xian Tianxing holds the licenses and approvals
necessary to operate our bio-pharmaceutical business in China. We have
contractual arrangements with Xian Tianxing and its stockholders that allow us
to substantially control Xian Tianxing. We cannot assure you, however, that we
will be able to enforce these contracts.




Although we believe we comply with current Chinese regulations,
we cannot assure you that the Chinese government would agree that these
operating arrangements comply with Chinese licensing, registration or other
regulatory requirements, with existing policies or with requirements or policies
that may be adopted in the future. If the Chinese government determines that we
do not comply with applicable law, it could revoke our business and operating
licenses, require us to discontinue or restrict our operations, restrict our
right to collect revenues, require us to restructure our operations, impose
additional conditions or requirements with which we may not be able to comply,
impose restrictions on our business operations or on our customers, or take
other regulatory or enforcement actions against us that could be harmful to our
business.




Our
contractual arrangements with Xian Tianxing and its stockholders may not be as
effective in providing control over these entities as direct
ownership.




Since
Chinese law limits foreign equity ownership in bio-pharmaceutical companies in
China, we operate our business through Xian Tianxing. We have no equity
ownership interest in Xian Tianxing and rely on contractual arrangements to
control and operate such businesses. These contractual arrangements may not be
as effective in providing control over Xian Tianxing as direct ownership. For
example, Xian Tianxing could fail to take actions required for our business
despite its contractual obligation to do so. If Xian Tianxing fails to perform
under their agreements with us, we may have to rely on legal remedies under
Chinese law, which may not be effective. In addition, we cannot assure you that
either of Xian Tianxing’s stockholders will act in our best
interests.





Because
we rely on the consulting services agreement with Xian Tianxing for our revenue,
the termination of this agreement will severely and detrimentally affect our
continuing business viability under our current corporate
structure.





We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Sida and Xian Tianxing. As a
result, we currently rely entirely for our revenues on dividends payments from
Sida after it receives payments from Xian Tianxing pursuant to the consulting
services agreement which forms a part of the contractual arrangements between
Sida and Xian Tianxing. The consulting services agreement may be terminated by
written notice of Sida or Xian Tianxing in the event that: (a) one party causes
a material breach of the agreement, provided that if the breach does not relate
to a financial obligation of the breaching party, that party may attempt to
remedy the breach within 14 days following the receipt of the written notice;
(b) one party becomes bankrupt, insolvent, is the subject of proceedings or
arrangements for liquidation or dissolution, ceases to carry on business, or
becomes unable to pay its debts as they become due; (c) Sida terminates its
operations; (d) Xian Tianxing’s business license or any other license or
approval for its business operations is terminated, cancelled or revoked; or (e)
circumstances arise which would materially and adversely affect the performance
or the objectives of the agreement. Additionally, Sida may terminate the
consulting services agreement without cause.




Because
neither we nor our direct and indirect subsidiaries own equity interests of Xian
Tianxing, the termination of the consulting services agreement would sever our
ability to continue receiving payments from Xian Tianxing under our current
holding company structure. While we are currently not aware of any event or
reason that may cause the consulting services agreement to terminate, we cannot
assure you that such an event or reason will not occur in the future. In the
event that the consulting services agreement is terminated, this may have a
severe and detrimental effect on our continuing business viability under our
current corporate structure, which in turn may affect the value of your
investment.





Members
of Xian Tianxing’s management have potential conflicts of interest with us,
which may adversely affect our business and your ability for
recourse.





Weibing
Lu, our Chief Executive Officer, is also the Chief Financial Officer and
Chairman of the Board of Directors of Xian Tianxing. Mr. Wei Wen, who is Xian
Tianxing’s Vice-General Manager and Director, is a member of Skystar’s board of
directors. Conflicts of interests between their respective duties to our company
and Xian Tianxing may arise. As our directors and executive officer (in the case
of Mr. Lu), they have a duty of loyalty and care to us under U.S. and Cayman
Islands law when there are any potential conflicts of interests between our
company and Xian Tianxing. We cannot assure you, however, that when conflicts of
interest arise, every one of them will act completely in our interests or that
conflicts of interests will be resolved in our favor. For example, they may
determine that it is in Xian Tianxing’s interests to sever the contractual
arrangements with Sida, irrespective of the effect such action may have on us.
In addition, any one of them could violate his or her legal duties by diverting
business opportunities from us to others, thereby affecting the amount of
payment Xian Tianxing is obligated to remit to us under the consulting services
agreement.




48




Our board
of directors is comprised of a majority of independent directors (including two
based in the United States). These independent directors may be in a position to
deter and counteract the actions of our officers or non-independent directors
that are against our interests, as the independent directors do not have any
position with, or interests in, our affiliate entities, and should therefore not
have any conflicts of interests such as those potentially of our officers and
directors who are management members of Xian Tianxing. Additionally, the
independent directors have fiduciary duties to act in our best interests, and
failure on their part to do so may subject them to personal liabilities for
breach of such duties. We cannot, however, give any assurance as to how the
independent directors will act. Further, if we or the independent directors
cannot resolve any conflicts of interest between us and those of our officers
and directors who are management members of Xian Tianxing, we would have to rely
on legal proceedings, which could result in the disruption of our
business.





In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against Xian
Tianxing or our officers or directors who are members of its management, the
majority of whom reside within China. Even if you are successful in bringing an
action, the laws of China may render you unable to enforce a judgment against
the assets of Xian Tianxing and its management, all of which are located in
China.





Risks
Related to Doing Business in China




Adverse
changes in economic and political policies of the Chinese government could have
a material adverse effect on the overall economic growth of China, which could
adversely affect our business.





Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China’s economy
differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the Chinese economy has experienced significant growth in the
past 20 years, growth has been uneven across different regions and among various
economic sectors of China. The Chinese government has implemented various
measures to encourage economic development and guide the allocation of
resources. Some of these measures benefit the overall Chinese economy, but may
also have a negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government control over
capital investments or changes in tax regulations that are applicable to us.
Since early 2004, the Chinese government has implemented certain measures to
control the pace of economic growth. Such measures may cause a decrease in the
level of economic activity in China, which in turn could adversely affect our
results of operations and financial condition.





If
Chinese law were to phase out the preferential tax benefits currently being
extended to foreign invested enterprises and “new or high-technology
enterprises” located in a high-tech zone, we would have to pay more taxes, which
could have a material and adverse effect on our financial condition and results
of operations.




Under
Chinese laws and regulations, a foreign invested enterprise may enjoy
preferential tax benefits if it is registered in a high-tech zone and also
qualifies as “new or high-technology enterprise”. As a foreign invested
enterprise as well as a certified “new or high-technology enterprise” located in
a high-tech zone in Xian, the Company has been approved as a new technology
enterprise and under Chinese Income Tax Laws, it is entitled to a preferential
tax rate of 15%. If the Chinese law were to phase out preferential tax benefits
currently granted to “new or high-technology enterprises” and technology
consulting services, we would be subject to the standard statutory tax rate,
which currently is 33%, and we would be unable to obtain business tax refunds
for our provision of technology consulting services. Loss of these preferential
tax treatments could have a material and adverse effect on our financial
condition and results of operations.




Xian
Tianxing is subject to restrictions on making payments to us.




We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than our indirect investments in our affiliated entity
in China, Xian Tianxing. As a result of our holding company structure, we rely
entirely on payments from Xian Tianxing under our contractual arrangements. The
Chinese government also imposes controls on the conversion of the Chinese
currency, Renminbi (RMB), into foreign currencies and the remittance of
currencies out of China. We may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency. See
“Government control of currency conversion may affect the value of your
investment.” Furthermore, if our affiliated entity in China incurs debt on their
own in the future, the instruments governing the debt may restrict their ability
to make payments. If we are unable to receive all of the revenues from our
operations through these contractual or dividend arrangements, we may be unable
to pay dividends on our ordinary shares.




49




Uncertainties
with respect to the Chinese legal system could adversely affect us.




We
conduct our business primarily through our affiliated Chinese entity, Xian
Tianxing. Our operations in China are governed by Chinese laws and regulations.
We are generally subject to laws and regulations applicable to foreign
investments in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The Chinese legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential
value.




Since
1979, Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the Chinese legal system is
based in part on government policies and internal rules (some of which are not
published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.





You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in the
prospectus.




We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, all of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon our
senior executive officers, including with respect to matters arising under U.S.
federal securities laws or applicable state securities laws. Moreover, our
Chinese counsel has advised us that China does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts.





Governmental
control of currency conversion may affect the value of your
investment.




The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current structure,
our income is primarily derived from payments from Xian Tianxing. Shortages in
the availability of foreign currency may restrict the ability of our Chinese
subsidiaries and our affiliated entity to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing Chinese foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from China State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The Chinese government may also at its discretion restrict access in the future
to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our stockholders.




Fluctuation
in the value of RMB may have a material adverse effect on your
investment.




The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our affiliated entity in China. Any significant
fluctuation in the value of RMB may materially and adversely affect our cash
flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our stock in U.S. dollars. For example, an appreciation of
RMB against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.




We
face risks related to health epidemics and other outbreaks.




50




Our
business could be adversely affected by the effects of an epidemic outbreak,
such as the SARS epidemic in April 2004. Any prolonged recurrence of such
adverse public health developments in China may have a material adverse effect
on our business operations. For instance, health or other government regulations
adopted in response may require temporary closure of our production facilities
or of our offices. Such closures would severely disrupt our business operations
and adversely affect our results of operations. We have not adopted any written
preventive measures or contingency plans to combat any future outbreak of SARS
or any other epidemic.





Risks
Related to an Investment in Our Securities




To
date, we have not paid any cash dividends and no cash dividends are expected to
be paid in the foreseeable future.





We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings for our
operations.




The
NASDAQ Capital Market may delist our common stock from trading on its exchange,
which could limit investors’ ability to effect transactions in our common stock
and subject us to additional trading restrictions.




Our
common stock is listed on the NASDAQ Capital Market. We cannot assure you that
our common stock will continue to be listed on the NASDAQ Capital Market in the
future.  If the NASDAQ Capital Market delists our common stock from
trading on its exchange, we could face significant material adverse consequences
including:




·
            a
      limited availability of market quotations for our common
      stock;




·
            a
      limited amount of news and analyst coverage for our company;
      and




·
            a
      decreased ability to issue additional securities or obtain additional
      financing in the future.





Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you desire to liquidate your shares.





We cannot
predict the extent to which an active public market for our common stock will
develop or be sustained.





Although
our common shares commenced trading on the NASDAQ Capital Market on June 26,
2009, our common shares have historically been sporadically or “thinly-traded”,
meaning that the number of persons interested in purchasing our common shares at
or near bid prices at any given time may be relatively small or non-existent.
This situation is attributable to a number of factors, including the fact that
we are a small company which is relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment community that
generate or influence sales volume, and that even if we came to the attention of
such persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that current trading levels will be
sustained.




51




The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” that could lead
to wide fluctuations in our share price. The price at which you purchase our
common stock may not be indicative of the price that will prevail in the trading
market. You may be unable to sell your common stock at or above your purchase
price if at all, which may result in substantial losses to you.





The market for our common shares is characterized by significant
price volatility when compared to seasoned issuers, and we expect that our share
price will continue to be more volatile than a seasoned issuer for the
indefinite future. The volatility in our share price is attributable to a number
of factors. First, as noted above, our common shares are sporadically and/or
thinly traded. As a consequence of this lack of liquidity, the trading of
relatively small quantities of shares by our stockholders may disproportionately
influence the price of those shares in either direction. The price for our
shares could, for example, decline precipitously in the event that a large
number of our common shares are sold on the market without commensurate demand,
as compared to a seasoned issuer which could better absorb those sales without
adverse impact on its share price. Secondly, we are a speculative or “risky”
investment due to our fluctuating level of revenues or profits to date and
uncertainty of future market acceptance for our current and potential products.
As a consequence of this enhanced risk, more risk-averse investors may, under
the fear of losing all or most of their investment in the event of negative news
or lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. The following factors may add to the volatility in the price of
our common shares: actual or anticipated variations in our quarterly or annual
operating results; adverse outcomes; the termination of our contractual
agreements with Xian Tianxing; and additions or departures of our key personnel,
as well as other items discussed under this “Risk Factors” section, as well as
elsewhere in this report. Many of these factors are beyond our control and may
decrease the market price of our common shares, regardless of our operating
performance. We cannot make any predictions or projections as to what the
prevailing market price for our common shares will be at any time, including as
to whether our common shares will sustain their current market prices, or as to
what effect that the sale of shares or the availability of common shares for
sale at any time will have on the prevailing market price.





Volatility
in our common share price may subject us to securities litigation.





The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management’s attention and resources.





Our
corporate actions are substantially controlled by our management stockholders
and affiliated entities.




As of
August 10, 2009, our management and their affiliated entities own approximately
16.49% of our outstanding common shares, representing approximately 16.49% of
our voting power. These stockholders, acting individually or as a group, could
exert substantial influence over matters such as electing directors and
approving mergers or other business combination transactions. In addition,
because of the percentage of ownership and voting concentration in these
principal stockholders and their affiliated entities, elections of our board of
directors will generally be within the control of these stockholders and their
affiliated entities. While all of our stockholders are entitled to vote on
matters submitted to our stockholders for approval, the concentration of shares
and voting control presently lies with these principal stockholders and their
affiliated entities. As such, it would be difficult for stockholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as stockholders will be viewed favorably by all stockholders of the
company.





The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company and
may discourage lawsuits against our directors, officers and
employees.





Our
articles of incorporation do not contain any specific provisions that eliminate
the liability of our directors for monetary damages to our company and
stockholders, however we are prepared to give such indemnification to our
directors and officers to the extent provided by Nevada law. We also have
contractual indemnification obligations under our employment agreements with our
chief executive officer, chief financial officer and certain of our directors.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
stockholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and stockholders.




52




Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.





There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are
likely to increase general and administrative costs and expenses. Additionally,
we currently maintain directors’ and officers insurance (“D&O Insurance”) as
we are contractually obligated to do so. In light of the high claims rates in
recent years, we expect that the premium for such insurance will increase.
Further, there could be changes in certain accounting rules. These and other
potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.





Past
company activities prior to the reverse merger may lead to future liability for
the company.





Prior to
our acquisition of Skystar Cayman in November 2005, we were engaged in
businesses unrelated to our current operations. Although the prior business
owners provided certain indemnifications against any loss, liability, claim,
damage or expense arising out of or based on any breach of or inaccuracy in any
of their representations and warranties made regarding such acquisition, any
liabilities relating to such prior business against which Skystar is not
completely indemnified may have a material adverse effect on
Skystar.




The
market price for our stock may be volatile.




The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:





·
                    actual
      or anticipated fluctuations in our quarterly operating
      results;·
                    changes
      in financial estimates by securities research analysts;·
                    conditions
      in bio-pharmaceutical and agricultural markets;·
                    changes
      in the economic performance or market valuations of other
      bio-pharmaceutical companies;·
                    announcements
      by us or our competitors of new products, acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;





·
                    addition
      or departure of key personnel;·
                    fluctuations
      of exchange rates between RMB and the U.S. dollar;·
                    intellectual
      property litigation; and·
                    general
      economic or political conditions in China.


In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.




We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our stockholders.




We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from our recent financing will be sufficient to
meet our anticipated cash needs for the foreseeable future. We may, however,
require additional cash resources due to changed business conditions or other
future developments, including any investments or acquisitions we may decide to
pursue. If our resources are insufficient to satisfy our cash requirements, we
may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities could result in additional
dilution to our stockholders. The incurrence of indebtedness would result in
increased debt service obligations and could result in operating and financing
covenants that would restrict our operations. We cannot assure you that
financing will be available in amounts or on terms acceptable to us, if at
all.





If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.




53




We are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, an independent registered public accounting
firm must attest to and report on management’s assessment of the effectiveness
of our internal controls over financial reporting. Our management may conclude
that our internal controls over our financial reporting are not effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management’s assessment or may issue a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us. Our reporting
obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.





Shares
eligible for future sale may adversely affect the market.





From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates may sell
after six months subject to the Rule 144 volume, manner of sale (for equity
securities), current public information and notice requirements. Of the
approximately 3.48 million shares of our common stock outstanding as of August
10, 2009, approximately 1.94 million shares are, or will be, freely tradable
without restriction, as of August 10, 2009. Any substantial sale of our common
stock pursuant to Rule 144 may have a material adverse effect on the market
price of our common stock.





The
issuance of our series “A” preferred stock may subject us to certain claims by
the holder of series “A” preferred shares as well as indemnification obligations
to the directors who authorized the issuance.





In 2001,
2,000,000 shares of our series “A” preferred stock were issued to a corporation
wholly-owned by our then Chief Executive Officer and director for services
purportedly rendered by him. The resolutions of the board of directors approving
such issuance stated that the series “A” preferred shares carries a “super
voting power of five.” No certificate of designation was ever filed with the
Nevada Secretary of State for these shares and we do not believe any certificate
evidencing such shares was issued by any transfer agent. As a result, the board
of directors believes that the issuance was not valid under Nevada law and thus
has adopted resolutions that resolve voiding all outstanding shares of the
series “A” preferred stock and barring any re-issuance or authorization of our
series “A” preferred stock unless such matter was submitted to a vote of our
shareholders and approved by a disinterested vote of a majority of each class of
our outstanding stock. We therefore intend to omit all reference to the status
of having issued 2,000,000 series “A” preferred shares in future filings with
the Securities and Exchange Commission as soon as the resolutions as adopted by
the board of directors are implemented.





Notwithstanding
our position on this matter, our former Chief Executive Officer may potentially
assert claims against us or the directors who authorized the issuance, in law or
equity, for the proper issuance or reissuance of those shares. In a lawsuit, he
may assert any number of legal or equitable theories in a forum with proper
jurisdiction over the matter, but the substance would likely rest on whether he
is entitled to the shares or, alternatively, whether he should be entitled to
some form of damage payment from the Company for the services that he
purportedly rendered to our company. In the event of any legal action, adequate
insurance coverage may not be available to us to cover the cost of litigation,
indemnification of any of our officers or directors named in such action or of
any award or other resolution. If a court were to order the issuance of any
shares of series “A” preferred stock, such shares could increase the total
number of our shares outstanding and thereby dilute the interests of our other
shareholders in our company, could control a significant voting interest in our
company and possess other rights determined by a court which we are unable to
predict.





The
eventual development, outcome and cost of legal proceedings are by their nature
uncertain and subject to many factors, including but not limited to, the
discovery of facts not presently known to us or determinations by judges, juries
or other finders of fact which do not accord with our evaluation of the merits
or facts of the case. As a result, we can provide no assurance that we will
succeed against any such challenge or as to the results if it were ever
made.




54





Should we
fail to prevail in our defense of such a claim, we may be subject to restitution
or other forms of monetary damages, the amount of which is difficult to
determine but may take into consideration the then and current fair market value
of the series “A” preferred shares. Additionally, although the directors who
authorized the issuance of the series “A” preferred shares are no longer members
of our board of directors, we may nevertheless be obligated in certain
circumstances to indemnify and defend these directors.





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





None





ITEM
3.   DEFAULTS UPON SENIOR SECURITIES





None





ITEM 4.   SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS




None





ITEM
5.   OTHER INFORMATION





None




55





ITEM
6. EXHIBITS





EXHIBIT
INDEX




Exhibit
      Number
              
              Description2.1
              
              Share
      Purchase Agreement by and between The Cyber Group Network, Inc. and Howard
      L. Allen and Donald G. Jackson (stockholders of Hollywood Entertainment
      Network, Inc.) dated May 12, 2000(1)2.2
              
              Plan
      of Merger Agreement between The Cyber Group Network Corp. and CGN
      Acquisitions Corporation dated December 7, 2000(2)2.3
              
              Share
      Exchange Agreement between The Cyber Group Network Corporation, R. Scott
      Cramer, Steve Lowe, David Wassung and Skystar Bio-Pharmaceutical, and the
      Skystar Stockholders dated September 20, 2005(3)3.1
              
              Charter
      of The Cyber Group Network Corporation as filed with the State of
      Nevada(4)3.2
              
              Certificate
      of Amendment and Certificate of Change(5)3.3
              
              Certificate
      of Amendment to Increase Number of Authorized Shares of Common Stock(13)3.4
              
              Amended
      and Restated Bylaws of Skystar Bio-Pharmaceutical Company(14)3.5
              
              Certificate
      of Designation of Series B Convertible Preferred Stock(4)3.6
              
              Certificate
      of Change(16)4.1
              
              Form
      of Common Stock Certificate(19)4.2
              
              Form
      of Class A Convertible Debenture(6)4.3
              
              Form
      of Class B Convertible Debenture(6)4.4
              
              Form
      of Class A Warrant(6)4.5
              
              Form
      of Class B Warrant(6)4.6
              
              Form
      of Common Stock Purchase Option granted to the representative of the
      underwriters(19)10.1
              
              Form
      of Securities Purchase Agreement, dated as of February 26, 2007 by and
      among the Company and the Purchasers(6)10.2
              
              Form
      of Registration Rights Agreement, dated as of February 26, 2007 by and
      among the Company and the Purchasers(6)10.3
              
              Form
      of Company Principal Lockup Agreement in connection with the Securities
      Purchase Agreement dated as of February 26, 2007(6)10.4
              
              Form
      of the Amendment, Exchange and Waiver Agreement between Skystar
      Bio-Pharmaceutical Company and the Participating Purchasers dated November
      9, 2007(7)10.5
              
              Form
      of the Amendment and Waiver Agreement between Skystar Bio-Pharmaceutical
      Company and two institutional and accredited investors dated March 31,
      2008(10)10.6
              
              Form
      of 6-month Lock-up Agreement(15)10.7
              
              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(4)10.8
              
              Equity
      Pledge Agreement among Skystar Cayman, Xian Tianxing and Xian Tianxing’s
      Majority Stockholders dated October 28, 2005(4)10.9
              
              Operating
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
      Stockholders, and Weibing Lu dated October 28, 2005(4)10.10
              
              Proxy
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
      Stockholders and Weibing Lu dated October 28, 2005(4)
  56
  10.11
              
              Option
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing Majority
      Stockholders and Weibing Lu dated October 28, 2005(4)10.12
              
              Amendment
      to Consulting Services Agreement among Skystar Cayman, Xian Tianxing and
      Sida Biotechnology (Xian) Co., Ltd. (“Sida”) dated March 10, 2008(8)10.13
              
              Amendment
      to Equity Pledge Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing’s Majority Stockholders, and Sida dated March 10, 2008(8)10.14
              
              Agreement
      to Transfer of Operating Agreement among Skystar Cayman, Xian Tianxing,
      Xian Tianxing’s Majority Stockholders, Weibing Lu and Sida dated March 10,
      2008(8)10.15
              
              Designation
      Agreement among Skystar Cayman, Xian Tianxing, Xian Tianxing’s Majority
      Stockholders, Weibing Lu and Sida dated March 10, 2008(8)10.16
              
              Agreement
      to Transfer of Option Agreement among Skystar Cayman, Xian Tianxing, Xian
      Tianxing Majority Stockholders, Weibing Lu and Sida dated March 10,
      2008(8)10.17
              
              Employment
      Agreement with Weibing Lu dated May 5, 2008(11)10.18
              
              Loanout
      Agreement with Worldwide Officers, Inc. with respect to the services of
      Bennet Tchaikovsky, our Chief Financial Officer, dated May 5, 2008(18)10.19
              
              Form
      of Director Offer Letter with Mr. Qiang Fan and Mr. Winston Yen(14)10.20
              
              Form
      of Director Offer Letter with Mr. Chengtun Qu and Mr. Shouguo Zhao(14)10.21
              
              Form
      of Amendment to Loanout Agreement with Wordwide Officers, Inc(17)10.22
              
              Form
      of Director Offer Letter with Mr. Mark D. Chen(17)31.1
              
              Section
      302 Certification by the Corporation’s Chief Executive
      Officer*31.2
              
              Section
      302 Certification by the Corporation’s Chief Financial
      Officer*32.1
              
              Section
      906 Certification by the Corporation's Chief Executive
      Officer*32.2
              
              Section
      906 Certification by the Corporation's Chief Financial
      Officer*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(12)99.2
              
              Legal
      Opinion from Allbright Law Offices regarding the transfer of the
      contractual arrangements from Skystar Cayman to Sida, dated April 29,
      2008(12)99.3
              
              Lease
      Agreement between Xian Tianxing and Weibing Lu dated June 1, 2007(9)99.4
              
              Lease
      Agreement between Shanghai Siqiang Biotechnological Co., Ltd. and Weibing
      Lu dated June 17, 2007(12)99.5
              
              Summary
      of Research Arrangement between Shanghai Poultry Verminosis Institute and
      Xian Tianxing(12)99.6
              
              Cooperation
      Agreement between Shaanxi Microbial Institute and Xian Tianxing(12)





*
            Filed
      herewith.





(1)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      June 1, 2000.





(2)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K/A filed on
      January 12, 2001.





(3)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      September 26, 2005.





(4)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      November 14, 2005.





(5)
            Incorporated
      by reference from the Registrant’s Annual Report on Form 10-KSB filed on
      April 17, 2006.





(6)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      March 5, 2007.





(7)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      December 11, 2007.




57




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





(9)
            Incorporated
      by reference from the Registrant’s Annual Report on Form 10-K filed on
      April 2, 2008.





(10)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      April 23, 2008.





(11)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on May
      7, 2008.





(12)
            Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1/A
      filed on June 26, 2008.





(13)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      July 14, 2008.





(14)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on
      July 15, 2008.





(15)
            Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1/A
      filed on November 28, 2008.





(16)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on May
      18, 2009.





(17)
            Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on May
      27, 2009.





(18)
              Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1/A
      filed on June 2, 2009.(19)
              Incorporated
      by reference from the Registrant’s Registration Statement on Form S-1/A
      filed on June 26, 2009.




58





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.











August 14,
      2009
            SKYSTAR
      BIO-PHARMACEUTICAL COMPANYBy:
            /s/ Weibing
      LuWeibing
      Lu
              Chief
      Executive Officer
              (Principal
      Executive Officer)By:
            /s/ Bennet P.
      TchaikovskyBennet
      P. Tchaikovsky
              Chief
      Financial Officer
              (Principal
      Financial and Accounting Officer)





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