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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2009

¨  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

For the Transition Period from _______ to _________

001-34123
(Commission File Number)

CHINA-BIOTICS, INC.
(Exact Name of registrant as specified in its charter)

Delaware
98-0393071
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)

No. 999 Ningqiao Road
Jinqiao Export Processing Zone
Pudong, Shanghai 201206
People’s Republic of China
(Address of Principal Executive Offices)
 
Telephone number: (86 21) 5834 9748
 
(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  ¨
 
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  ¨   No  ¨
 
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.
 
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
þ (Do not check if a smaller
reporting company)
Smaller reporting company
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨ No þ

As of February 11, 2010, 22,370,000 shares of the registrant’s common stock were outstanding.
 

 
TABLE OF CONTENTS

     
Page
PART I - FINANCIAL INFORMATION
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
1
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
14
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
25
ITEM 4.
CONTROLS AND PROCEDURES
 
26
PART II - OTHER INFORMATION
   
ITEM 1.
LEGAL PROCEEDINGS
 
27
ITEM 1A.
RISK FACTORS
 
27
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
27
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
27
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
27
ITEM 5.
OTHER INFORMATION
 
27
ITEM 6.
EXHIBITS
 
27
SIGNATURES
 
30

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in US Dollars)
 
   
December 31,
2009
   
March 31,
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
 
$
151,078,604
   
$
70,824,041
 
Accounts receivable
   
22,779,039
     
14,428,382
 
Other receivables
   
766,385
     
6,493
 
Inventories
   
1,204,149
     
563,853
 
Amount due from a director
   
2,374,172
     
-
 
Prepayment
   
5,169,721
     
1,547,582
 
Total current assets
 
$
183,372,070
   
$
87,370,351
 
Property, plant and equipment and land use right
   
39,021,467
     
33,079,839
 
Deferred tax assets
   
298,833
     
354,157
 
Total assets
 
$
222,692,370
   
$
120,804,347
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
 
$
6,004,849
   
$
2,909,898
 
Tax payables
   
29,006,801
     
25,528,447
 
Other payables and accruals
   
1,555,535
     
1,517,753
 
Amount due to a director
   
-
     
2,380,007
 
Total current liabilities
 
$
36,567,185
   
$
32,336,105
 
Non-current liabilities
               
Convertible note, net of discount of $3,704,118 and $6,000,054 as of December 31, 2009 and March 31, 2009 respectively
 
$
21,295,882
   
$
18,999,946
 
Embedded derivatives
   
8,908,000
     
2,660,000
 
Interest payable
   
2,660,533
     
1,411,942
 
Total non-current liabilities
 
$
32,864,415
   
$
23,071,888
 
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock (par value of $0.0001, 100,000,000 shares authorized, 41,461,004 shares issued and 17,080,000 outstanding as of March 31, 2009 and 46,751,004 shares issued and 22,370,000 outstanding as of December 31, 2009)
 
$
4,675
   
$
4,146
 
Additional paid-in capital
   
82,769,074
     
7,863,031
 
Retained earnings
   
62,557,798
     
49,794,033
 
Treasury stock at cost (24,381,004 shares)
   
(2,438
)
   
(2,438
)
Accumulated other comprehensive income
   
4,905,867
     
4,711,788
 
Capital and statutory reserves
   
3,025,794
     
3,025,794
 
Total stockholders’ equity
 
$
153,260,770
   
$
65,396,354
 
Total liabilities and stockholders’ equity
 
$
222,692,370
   
$
120,804,347
 
 
The accompanying notes are an integral part of these financial statements.
 
1

CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts expressed in US Dollars)
 
   
Three months ended
December 31,
   
Nine months ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
Net sales
 
$
23,294,321
   
$
15,810,111
   
$
55,855,442
   
$
38,676,017
 
Cost of sales
   
(6,780,161
)
   
(4,583,371
)
   
(16,259,457
)
   
(11,304,893
)
Gross profit
 
$
16,514,160
   
$
11,226,740
   
$
39,595,985
   
$
27,371,124
 
Operating expenses:
                               
Selling expenses
 
$
(4,140,738
)
 
$
(3,330,668
)
 
$
(9,221,564
)
 
$
(8,514,090
)
General and administrative expenses
   
(2,260,344
)
   
(1,353,561
)
   
(5,932,227
)
   
(4,218,494
)
Other income
   
3,179
     
-
     
72,110
     
1,492,361
 
Other expense
   
-
     
(42,719
)
   
-
     
(42,719
)
Total operating expenses
 
$
(6,397,903
)
 
$
(4,726,948
)
 
$
(15,081,681
)
 
$
(11,282,942
)
Income from operations
 
$
10,116,257
   
$
6,499,792
   
$
24,514,304
   
$
16,088,182
 
Other income and expenses:
                               
Changes in the fair value of embedded derivatives
 
$
2,668,000
   
$
1,408,000
   
$
(6,248,000
)
 
$
2,073,000
 
Interest income
   
74,438
     
60,442
     
214,307
     
213,490
 
                                 
Total other  income / (expense)
 
$
2,742,438
   
$
1,468,442
   
$
(6,033,693
)
 
$
2,286,490
 
Income before taxes
 
$
12,858,695
   
$
7,968,235
   
$
18,480,611
   
$
18,374,673
 
Provision for income taxes
   
(2,379,613
)
   
(2,299,348
)
   
(5,716,846
)
   
(4,996,916
)
Net income
 
$
10,479,082
   
$
5,668,887
   
$
12,763,765
   
$
13,377,757
 
                                 
Earnings per share:
                               
Basic
 
$
0.48
   
$
0.33
   
$
0.68
   
$
0.78
 
Diluted
 
$
0.32
   
$
0.22
   
$
0.68
   
$
0.59
 
                                 
Weighted average shares outstanding
                               
Basic
   
21,978,242
     
17,080,000
     
18,706,788
     
17,080,000
 
Diluted
   
24,061,575
     
19,163,333
     
18,706,788
     
19,163,333
 
 
The accompanying notes are an integral part of these financial statements.
 
2

CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts expressed in US Dollars)
 
   
Common Stock
                     
Accumulated
   
Capital &
       
   
Shares
   
Par value
$0.0001
   
Additional
Paid-in Capital
   
Retained
Earnings
   
Treasury
Stock
   
Comprehensive
Income
   
Statutory
Reserves
   
Total
 
Balance-March 31, 2009
    41,461,004       4,146       7,863,031       49,794,033       (2,438 )     4,711,788       3,025,794       65,396,354  
Issuance of share capital
    5,290,000       529       74,906,043                                       74,906,572  
Comprehensive income:
                                                               
Net income
                            12,763,765                               12,763,765  
Other comprehensive income:
                                                               
Foreign currency translation adjustments, net of taxes of $0
                                            194,079               194,079  
Total comprehensive income
                                                               
Balance- December 31, 2009
    46,751,004       4,675       82,769,074       62,557,798       (2,438 )     4,905,867       3,025,794       153,260,770  
 
The accompanying notes are an integral part of these financial statements.
 
3

CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts expressed in US Dollars)
 
   
Nine months ended
December 31,
 
   
2009
   
2008
 
CASH FLOW FROM OPERATING ACTIVITIES
           
Net income
 
$
12,763,702
   
$
13,377,757
 
Adjustment for:
               
Changes in the fair value of embedded derivatives
   
6,248,000
     
(2,073,000
)
Loss on disposal of plant and equipment
   
-
     
30,022
 
Change in deferred tax
   
55,849
     
500,000
 
Depreciation
   
1,423,239
     
1,298,953
 
(Increase) in accounts receivable
   
(8,298,996
)
   
(792,146
)
Decrease in others receivable
   
267,246
     
214,989
 
(Increase) in inventories
   
(630,946
)
   
(841,095
)
(Increase)/Decrease in prepayments
   
(4,489,544
)
   
1,080
 
Increase in accounts payable
   
3,069,677
     
1,926,337
 
(Decrease)/Increase in other payables and accruals
   
(716,386
)
   
957,512
 
Increase in tax payables
   
3,430,453
     
2,486,572
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
$
13,122,357
   
$
17,086,981
 
CASH FLOWS USED IN INVESTING ACTIVITIES
               
Purchases of fixed assets
 
$
(3,183,483
)
 
$
(15,953,064
)
NET CASH USED IN INVESTING ACTIVITIES
 
$
(3,183,483
)
 
$
(15,953,064
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Cash advance to a director
   
3,113,900
     
-
 
Repayment on advance from a director
   
(7,908,948
)
   
-
 
Proceed from issuance of share capital
   
74,906,572
     
-
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
 
$
70,111,524
   
$
-
 
Effect of exchange rate changes on cash
   
204,165
     
979,753
 
NET INCREASE IN CASH AND CASH EQUIVALENTS BALANCES
 
$
80,254,563
   
$
2,113,670
 
CASH AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD
   
70,824,041
     
64,310,448
 
CASH AND CASH EQUIVALENTS BALANCES AT END OF PERIOD
 
$
151,078,604
   
$
66,424,118
 
                 
Supplemental disclosure cash flow information:
               
Interest paid
   
1,005,859
     
808,219
 
Income tax paid
   
3,539,063
     
2,010,345
 
 
The accompanying notes are an integral part of these financial statements.
 
4

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

1. 
BASIS OF PRESENTATION AND PRINCIPALS OF CONSOLIDATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying condensed consolidated financial statements do reflect all the adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. Our operating results for the three and nine months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the year ending March 31, 2010.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2009. There have been no material changes in the significant accounting policies followed by us during the three and nine months ended December 31, 2009.
 
Recent Accounting Pronouncements

In January 2010, the FASB issued Codification Accounting Standards Update No. 2010-06 (ASU No. 2010-06), Improving Disclosure about Fair Value Measurements, under Topic 820, Fair value Measurements and Disclosures, to improve and provide new disclosures for recurring and nonrecurring fair value measurements under the three-level hierarchy of inputs for transfers in and out of Levels 1 and 2, and activity in Level 3.  This update also clarifies existing disclosures of the level of disaggregation for the classes of assets and liabilities and the disclosure about inputs and valuation techniques. ASU No. 2010-06 new disclosures and clarification of existing disclosure is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for financial statements issued for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The adoption of ASU No. 2010-06 new disclosures and clarification of existing disclosure did not have a material impact on our consolidated financial statements. The Company is currently accessing the impact, if any, of ASU No. 2010-06 disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements on our consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value”, which is codified as ASC 820, “Fair Value Measurements and Disclosures”. This Update provides amendments to ASC 820-10, Fair Value Measurements and Disclosures –Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of ASC 820. The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents transfer of the liability. The amendments in this Update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the assets are required are Level 1 fair value measurements. The guidance provided in this Update is effective for the first reporting period (including interim periods) beginning after August 28, 2009. The adoption of this Update did not have a significant impact to the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards Codification’ and the Hierarchy of Generally Accepted Accounting Principles”, which is codified as ASC 105 (“ASC 105”) ASC 105 establishes the “FASB Accounting Standards Codification ” ( “Codification”), which officially launched July 1, 2009, to become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification is not expected to change U.S. GAAP. All other accounting literature excluded from the Codification will be considered nonauthoritative.  ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has adopted ASC 105 for the quarter ending September 30, 2009. The adoption of this Statement will not impact the results of operations or financial position, as it only required disclosures. Beginning with this Quarterly Report on Form 10-Q for September 30, 2009 and in all filings thereafter, references to Financial Accounting Standards that have been codified in the FASB Accounting Standards Codification have been replaced with references to the appropriate guidance in the Codification.
 
In May 2009, the FASB issued ASC 855-10, Subsequent Events (“ASC 855-10”). ASC 855-10 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10 is applicable for interim or annual periods after June 15, 2009.  The Company adopted this amended topic effective July 1, 2009.
 
2. 
EARNINGS PER SHARE

Basic earnings per share is computed in accordance with SFAS No.128 (now known as ASC 260), “Earnings Per Share”, by dividing the net income by the weighted average number of outstanding common stock during the period. The diluted earnings per share calculation includes the impact of dilutive convertible securities, if applicable. The weighted average number of outstanding common stock is determined by relating the portion of time within a reporting period that a particular number of common stock has been outstanding to the total time in that period.
 
5

CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
 
The following table sets forth the computation of basic and diluted earnings per share:
 
   
Three months ended
December 31,
   
Nine months ended
December 31,
 
   
2009
   
2008
   
2009
   
2008
 
Earnings per share - Basic
                       
Income for the period
 
$
10,479,082
   
$
5,668,887
   
$
12,763,765
   
$
13,377,757
 
Basic average common stock outstanding
   
21,978,242
     
17,080,000
     
18,706,788
     
17,080,000
 
Earnings per share
 
$
0.48
   
$
0.33
   
$
0.68
   
$
0.78
 
                                 
Earnings per share - Diluted
                               
Income for the period
 
$
10,479,082
   
$
5,668,887
   
$
12,763,765
   
$
13,377,757
 
Change in fair value of embedded derivatives
   
(2,668,000
)
   
(1,408,000
)
   
-
     
(2,073,000
)
   
$
7,811,019
   
$
4,260,887
   
$
12,763,765
   
$
11,304,757
 
Basic average common stock outstanding
   
21,978,242
     
17,080,000
     
18,706,788
     
17,080,000
 
Diluted effect from embedded derivatives
   
2,083,333
     
2,083,333
     
-
     
2,083,333
 
Diluted average common stock 
   
24,061,575
     
19,163,333
     
18,706,788
     
19,163,333
 
Net earnings per share
 
$
0.32
   
$
0.22
   
$
*0.68
   
$
0.59
 
 
*  the effect of embedded derivatives was not included for the computation of diluted earnings per share for the 9-month period end as the inclusion would be anti-dilutive.
 
3. 
RISKS, UNCERTAINTIES, AND CONCENTRATIONS

(a)           Nature of Operations

Substantially all of the Group’s operations are conducted in the People’s Republic of China (“PRC”) and are subject to various political, economic, and other risks and uncertainties inherent in this country. Among other risks, the Group’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

(b)           Concentration of Credit Risk

Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and accounts receivable.

As of December 31, 2009 and March 31, 2009, the Group had cash deposits of $81.8 million out of $151.1 million and $61.3 million out of $70.8 million respectively placed in one bank in the PRC where there are currently no rules or regulations in place for obligatory insurance of bank accounts.

For the three months and nine months ended December 31, 2009 and 2008, all of the Group’s sales arose in the PRC. In addition, all accounts receivable as at December 31, 2009 also arose in the PRC.

(c)           Concentration of Customers

A substantial percentage of the Group's sales are made to a small number of customers. During the three months ended December 31, 2009 and 2008, the following customers accounted for more than 10% of total gross sales:

   
Percentage of Gross Sales
Three Months ended
December 31,
   
Percentage of Gross Sales
Nine Months ended
December 31,
   
Percentage of
Accounts Receivable
as at
 
   
2009
   
2008
   
2009
   
2008
   
December 31,
2009
   
March 31,
2009
 
                                     
Customer A
    12 %     -       14 %     -       16 %     *-  
Customer B
    *       10 %     *       12 %     *       *  
* less than 10%

4. 
ACCOUNTS RECEIVABLE

The Group’s accounts receivable as of the balance sheet date as presented in these financial statements are summarized as follows:
 
6

 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

 
December 31,
2009
 
March 31,
2009
 
         
Trade receivables
 
$
22,896,981
   
$
14,428,382
 
Less : Allowances for doubtful debt
   
(117,942)
     
-
 
   
$
22,779,039
   
$
14,428,382
 

5. 
INVENTORIES

The Group’s inventories as of the balance sheet date as presented in these financial statements are summarized as follows:

   
December 31,
2009
   
March 31,
2009
 
             
Raw materials
  $ 713,303     $ 343,011  
Work-in-progress
    131,665       143,966  
Finished goods
    359,181       76,876  
    $ 1,204,149     $ 563,853  

6.
AMOUNT DUE FROM/TO A DIRECTOR
 
As of December 31, 2009, the amount due from a director, Mr. Song Jinan, represented advances to him for the business interest of the Company. The amount was unsecured, interest-free and will be returned to the Company on the expiration of the business interest or in no case later than March 31, 2010.
 
As of March 31, 2009, the amount due to a director, Mr. Song Jinan, represented temporary advances to the Company which was unsecured, interest-free and repayable on demand.
 
7

 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

7. 
PROPERTY, PLANT AND EQUIPMENT AND LAND USE RIGHT

The Group’s property, plant and equipment and land use right as of the balance sheet date as presented in these financial statements are summarized as follows:
 
   
December 31,
2009
   
March 31,
2009
 
             
Land use right
 
$
1,881,208
   
$
1,878,643
 
Plant and machinery
   
7,521,660
     
7,510,635
 
Office equipment
   
3,578,447
     
3,565,390
 
Motor vehicles
   
246,325
     
245,989
 
Leasehold improvements
   
2,932,937
     
2,422,575
 
     
16,160,577
     
15,623,232
 
Less: Accumulated depreciation
 
$
(7,901,641
)
 
$
(6,460,354
)
     
8,258,936
     
9,162,878
 
Construction in progress
 
$
30,762,531
   
$
23,916,961
 
   
$
39,021,467
   
$
33,079,839
 
 
Depreciation and amortization expenses were $485,838 and $435,916 for three months ended December 31, 2009 and 2008 respectively, and $1,433,087 and $1,303,414 for nine months ended December 31, 2009 and 2008 respectively.
 
8. 
TAX PAYABLES

The Group’s tax payables as of the balance sheet date as presented in these financial statements are summarized as follows:
 
   
December 31,
2009
   
March 31, 2009
 
             
Value added tax and other taxes
 
$
7,271,497
   
$
5,949,853
 
Income tax
   
4,618,606
     
4,120,961
 
Surcharge
   
13,167,431
     
11,513,750
 
Dividends withholding tax
   
3,949,267
     
3,943,883
 
   
$
29,006,801
   
$
25,528,447
 
8

 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

The income/(loss) generated in the United States, the British Virgin Islands and the PRC before income taxes during the periods as presented in these financial statements is summarized as follows:
 
   
Three months ended December 31,
   
Nine months ended December 31,
 
   
2009
   
2008
   
2009
   
2008
 
Income/ (loss) in the United States before income taxes
 
$
2,392,661
   
$
1,248,530
   
$
(7,398,814
)
 
$
1,736,831
 
(Loss)/income in the British Virgin Islands before income taxes
   
(33,794
)
   
(16,536)
     
(45,662
)
   
451,382
 
Income in the PRC before income taxes
   
10,499,828
     
6,736,241
     
25,925,087
     
16,186,460
 
   
$
12,858,695
   
$
7,968,235
   
$
18,480,611
   
$
18,374,673
 
 
The Company, which is incorporated in the United States, is subject to U.S. tax law.  Other than legal and professional expenses for the daily operations of the Company, the income generated from the United States is the change in the fair value of the embedded derivatives of the 4% Senior Convertible Promissory Note issued on December 11, 2007.

There is no income tax for companies not carrying out business activities in the British Virgin Islands. Accordingly, the Company’s financial statements do not present any income tax provisions or credits related to the British Virgin Islands tax jurisdiction.

The provision for income tax for the periods as presented in these financial statements are summarized as follows:
   
Three months ended December 31,
   
Nine months ended December 31,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Current
  $ 2,190,412     $ 1,799,348     $ 5,660,998     $ 4,496,916  
Deferred
    189,201       500,000       55,848       500,000  
    $ 2,379,613     $ 2,299,348     $ 5,716,846     $ 4,996,916  

The Group has its principal operations in the PRC and is subject to a PRC Enterprise Income Tax rate of 25% in calendar years 2009 and 2008.

However, Shining, one of the PRC subsidiaries of the Group located in the Shanghai Jinqiao special economic zone, is obtained the high technology status enterprise for the calendar year 2007 till 2011. Hence Shining is entitled to a preferential income tax of 15%, which represents a tax concession of 10% in the year 2009 and 2008.
 
9

CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

Another newly set up PRC subsidiary of the Group, GBS, is located in Qingpu, will have the same business and operation as Shining but with a larger production scale, obtained the formal approval in which GBS is entitled to fully exempted from PRC Enterprise Income Tax for two years starting from calendar year 2008, followed by 50% tax exemption for the next three calendar years, period from 2010 to 2012. There is no financial effect from the tax holiday as GBS did not generate any assessable profit in 2009 and 2008.

The principal reconciling items from income tax computed at the statutory rates and at the effective income tax rates are as follows:
   
Three months ended December 31,
   
Nine months ended December 31,
 
   
2009
   
2008
   
2009
   
2008
 
Computed tax at the local PRC statutory rate (25%)
  $ 3,214,674     $ 1,992,058     $ 4,620,153     $ 4,593,667  
Non-deductible items
    102,064       41,976       3,539,667       486,643  
Non-taxable items
    (907,119 )     (462,342 )     (1,087,929 )     (1,390,962 )
Effect of different tax rate in other jurisdiction
    215,339       112,368       (665,894 )     156,315  
Valuation allowance
    -       64,185       90,434       138,760  
Tax concession
    (1,093,810 )     (489,509 )     (2,689,187 )     (1,115,638 )
Surcharge at 0.05% per day on accrued taxes
    549,696       540,612       1,627,227       1,628,131  
Under-provision in respect of prior periods
    298,770       -       298,770       -  
Total provision for income at effective rate
    2,379,613       1,799,348       5,716,846       4,496,916  
Temporary difference associated with investments in subsidiary
    -       500,000       -       500,000  
    $ 2,379,613     $ 2,299,348     $ 5,716,846     $ 4,996,916  
 
Deferred tax assets arose primarily from the tax losses carry forwards. As at December 31, 2009, one of the Company's PRC subsidiaries has incurred tax losses which can be carried forward to a maximum of 5 years of approximately US$2,305,784 (December 31, 2008: US$953,881).
 
10

CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

9. 
COMMITMENTS

(a)   Operating Leases

The Group leases office space, warehouse facilities and retail outlets under various operating leases, certain of which contain escalation clauses. Rental expenses under operating leases included in the statement of income were $955,377 and $996,617 for the quarters ended December 31, 2009 and 2008, respectively.
 
At December 31, 2009, the Group was obligated under operating leases requiring minimum rental as follows:
 
   
December 31,
2009
 
Payable within
     
1 year
 
$
397,019
 
2 to 5 years
   
59,644
 
Thereafter
   
-
 
   
$
456,663
 

(b)   Capital commitments

During the period ended December 31, 2009, GSL entered into the agreements with the contractors to construct a plant consisting bulk manufacturing facilities in the Shanghai Qingpu Industrial Park District. The amount of future payment is $8,465,032 which was contracted, but not provided for as of December 31, 2009.

(c) Purchase obligations

During the period ended December 31, 2009, Shining entered into the agreements with the suppliers to purchase raw materials and packing materials. The amount of future payment is $10,306,651 which was contracted, but not provided for as of December 31, 2009.

(d) Other obligations

During the period ended December 31, 2009, Shining entered into an agreement with an university to perform research and development. The amount of future payment is $938,880 which was contracted, but not provided for as of December 31, 2009.

10. 
CONVERTIBLE NOTES

On December 11, 2007, the Company sold a 4% Senior Convertible Promissory Note in the amount of $25,000,000 (the “Note”) with a maturity date of December 11, 2010 to Pope Investments II LLC, an affiliate of Pope Investments, LLC, in a private placement. In connection with the sale, the Company entered into an Investment Agreement and a Registration Rights Agreement. In addition, Mr. Song Jinan, the Company’s Chief Executive Officer, Chairman, and largest stockholder, entered into a Guaranty Agreement and a Pledge Agreement pursuant to which Mr. Song agreed to guaranty the Company’s obligations under the Note and to secure such guaranty with a pledge of 4,000,000 shares of China-Biotics common stock owned by Mr. Song. The principal amount of the Note is convertible into shares of the Company’s common stock at an exercise price of $12.00 per share at any time until the maturity date subject to adjustment for subdivision or combination of the Company’s common stock and similar events. If the Note is not converted at maturity, the Company will redeem the Note to provide Pope Investments II LLC with a total yield of 10% per annum inclusive of the annual interest. The Note also provides for mandatory conversion into the Company’s common stock if the Group achieves a net income of $60 million in fiscal year 2010. Pope Investments II LLC may declare the outstanding principal amount and any accrued but unpaid interest, calculated at a rate of 10% per annum, to be immediately due and payable upon an event of default, including non-payment of obligations under the Note, bankruptcy or insolvency, or failure to perform any covenant set forth in the Note or Investment Agreement. Pursuant to the Investment Agreement the Company has secured payment of obligations under the Note with a pledge of 100% of the stock of SGI to Pope Investments II LLC.
 
11

 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

Net proceeds of the Note are being used to fund the construction of a 150-metric-ton-per-year manufacturing facility and for other capital expenditures.

The Company accounted for the net proceeds from the issuance of the Note as two separate components; an embedded derivative component (conversion option with mandatory conversion feature) and a debt component. The Company determined the initial carrying value of the debt component by subtracting the fair value of embedded derivatives amounted to US$9,118,000 from the net proceeds received from the issuance of the Note. This resulted in US$15,882,000 initial carrying amount of the debt component.

On April 1, 2008, the Company adopted SFAS No.157, “Fair Value Measurements” (now known as ASC 820), (“ASC 820”) which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. On July 1, 2009, the Company implemented the previously-deferred provisions of ASC 820 for nonfinancial assets and liabilities recorded at fair value as required. The implementation did not have a material effect on the Company’s consolidated financial position or results of operations.

ASC 820 establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

As of December 31, 2009, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis, including its derivative instruments related to its 2007 Notes. The fair value of the embedded derivatives was determined using the following inputs in accordance with ASC 820 at December 31, 2009:
   
Fair Value Measurements
 
   
Balance
   
Quoted
Prices in
Active
Markets
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
                         
Embedded derivatives - conversion right
                       
As at December 31, 2009
  $ 8,908,000     $ -     $ -     $ 8,908,000  
As at March 31, 2009
  $ 2,660,000     $ -     $ -     $ 2,660,000  
 
12

CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)

The following table presents a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from March 31, 2009 to December 31, 2009:
 
   
Derivative Liability -
Conversion Rights
 
   
2009
   
2008
 
             
Balance at March 31
  $ 2,660,000     $ 5,752,000  
Adjustment to fair value included in earnings
    6,248,000       (2,073,000 )
Balance at December 31
  $ 8,908,000     $ 3,679,000  

The embedded derivatives are revalued at the end of each reporting period and the resulting difference is included in the results of operations. The estimated fair value of the embedded derivatives as of December 31, 2009 and March 31, 2009 was $8,908,000 and $2,660,000, respectively. The change in the fair value of the embedded derivatives amounted to $2,668,000 for the quarter ended December 31, 2009 and $3,092,000 for the year ended March 31, 2009 were charged to the consolidated statement of operation.

The fair value of the embedded derivatives was determined using the Binomal Model based on the following assumptions:
   
December 31,
2009
   
March 31,
2009
 
             
Risk-free rate of return
    0.47 %     0.54 %
Time to expiration
 
0.95 years
   
1.67 years
 
Volatility rate
    91.35 %     69.08 %
Dividend yield
    -       -  

As at December 31, 2009 and March 31, 2009, the Note interest amounting to $4,720,805 and $2,718,791 was capitalized under construction in progress.
 
The capitalized debt discount under construction in progress was $5,413,882 and $3,117,946 as at December 31, 2009 and March 31, 2009 respectively.

11. 
PUBLIC OFFERING
 
On October 5, 2009, the Company closed an underwritten public offering of 4,600,000 shares of its common stock at a price of $15.00 per share. On October, 26, 2009, an additional 690,000 shares were sold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering, including the over-allotment, after deducting underwriting discounts, and offering expenses, were approximately $74.9 million. The Company expects to use the net proceeds from the offering for general corporate purposes, including expanding its retail operations, expanding its products, acquiring additional retail outlets, funding Phase 2 of our bulk manufacturing facility, and for general working capital purposes.
 
The offering was made pursuant to an underwriting agreement, dated September 29, 2009, by and between the Company and Roth Capital Partners, LLC, as sole manager and representative of the underwriters named therein. The offering of the Shares was registered under the Securities Act of 1933, as amended, pursuant to the Company’s shelf registration statement on Form S-3, as amended by Amendment No. 1 and Amendment No. 2 to Form S-3 (File No. 333-160519).
 
12.
SUBSEQUENT EVENTS

The Company has evaluated events subsequent to the balance sheet date (December 31, 2009) through the issue date of this Form 10-Q (February  11 , 2010) and concluded that no subsequent events have occurred that require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
 
13

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements which involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “will,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “forecast,” “project” or “continue,” the negative of such terms or other comparable terminology.

You should not rely on forward-looking statements as predictions of future events or results. Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions, risks and uncertainties and other factors which could cause actual events or results to be materially different from those expressed or implied in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks described in this Form 10-Q under “Risk Factors” and elsewhere. These factors may cause our actual results to differ materially from any forward-looking statement. In addition, new factors emerge from time to time and it is not possible for us to predict all factors that may cause actual results to differ materially from those contained in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date of this report, except as required by applicable law.

Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us,” or “our” are to the combined business of China-Biotics, Inc. (the “Company”) and its wholly-owned direct subsidiaries, Sinosmart Group Inc. (“SGI”) and Growing State Limited (“GSL”), and SGI’s wholly-owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”), and GSL’s wholly-owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“GBS”). References to “China” or to the “PRC” are references to the People’s Republic of China. All references to “dollars” or “$” refers to United States dollars.

Overview

We manufacture and sell probiotics products. Probiotics comprise mainly live bacteria, which we produce using advanced proprietary fermentation technology. Currently, our products are mainly sold in the Greater Shanghai region.

The products are mainly sold to distributors, which then distribute them to various retail outlets such as drug stores and supermarkets. During the three months and nine months ended December 31, 2009, approximately 84% and 84% respectively of our sales revenue comprises amounts receivable for the sale of these products. Typically, 60 to 90 days’ credits are given to the distributors.

We intend to expand our sales to other cities in China through a combination of distributors and our outlets (training and logistics centers). Our management believes that as China becomes more affluent, its citizens are becoming more health conscious. This has led to higher demand for health and functional food such as probiotics and yogurt.

In addition, probiotics are increasingly used as additives in the production of infant formula. According to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics will be added to baby milk powders produced in China. Currently, the probiotics used in China for such purposes are imported. To capitalize on what we believe is a significant opportunity in this area, we are constructing a new plant that will enable us to capture the anticipated demand for food additives.
 
14

In 2008, milk samples (including samples of infant formula) from several Chinese dairy companies, including the three largest producers, were found to have been tainted with melamine, an industrial chemical. In September 2008, China’s State Council, officiated by Premier Wen Jiabao, elected to take steps to conduct comprehensive testing of dairy products and carry out other industry reforms. Although sales of Chinese dairy products have fallen significantly as a result of the melamine scandal, there has not been a significant impact on our business to date as our current sales to the dairy industry are minimal. We believe that the strengthening of product quality and testing standards in the dairy industry are a positive development for domestic suppliers that operate to high international standards. We are engaged in discussion and qualification processes with several large global suppliers of infant formula and dairy products to the China market, and believe that we are well-positioned to benefit as more stringent requirements are implemented in the industry. We are also in discussions with a number of suppliers of bakery, dairy and pharmaceutical products in preparation for the opening of our new plant. Therefore, although the full scope of the melamine problem remains unknown, we do not foresee that it will have a material negative effect on our business and results of operations.

The Company’s construction of its new production facility has been on schedule since the most recent year-end report. The company commenced trial production in October 2009. The cost of the new plant, which was approximately $27.5 million for the first phase, is being funded by cash received from the convertible promissory notes issued in December 2007 and internal sources of funds. Phase 2 of this project, which commenced in December 2009, is expected to cost $18 million and is being funded by the proceeds of our underwritten public offering in October 2009. In this regard, we have leased 36,075 square meters of land in the Shanghai Qingpu Industrial Park District, on which we are constructing the new bulk manufacturing facilities. The plant will have an initial capacity of 150 tons per year with room for expansion to 300 tons per year.

As at December 31, 2009, we have entered into contracts with 24 customers for the food additives business. In this regard, we have created a number of formulations for testing by many potential future customers. We have established an array of business relationships with commercial customers located in some major cities including Beijing and Shanghai, and several provinces including Jiangsu, Jiangxi and so on. These growing companies are among the leaders in the baked foods, dairy and pharmaceutical industries. The Company’s existing manufacturing facility, with current annual manufacturing capacity of 12 metric tons of probiotics for use as bulk additives and capsules, will supply the initial orders for these customers. The need to create a large number of new products for potential customers is pushing the capacity of our current production facility. With the delay in the commissioning of the new plant from our earlier projections, we have been carefully managing the use of our production capacity and adjusting our products mix to make sure that we strike a balance between achieving current and future sales.

As at December 31, 2009, we have opened 111 outlets in Shanghai and 12 other cities in China (as of December 31, 2008, we had 107 retail outlets). During the quarter ended on December 31, 2009, we put emphasis on the development of our new bulk additives line, in preparation for the commencement of the new plant. With the limited production capacity that we have in our existing production facility, management believes that it is prudent to slow the pace of opening new retail outlets so that we can focus on completing the new plant on time and signing on customers to take up the capacity of our new plant when it is up and running.
 
15

 

Quarter Ended December 31, 2008 Compared with the Quarter Ended December 31, 2009

Our net profit was $10.48 million in the quarter ended December 31, 2009. This included $2.67 million surplus arising from the revaluation of the conversion feature embedded in the convertible notes issued in December 2007 as required by FAS133 (now known as ASC 816). Excluding this revaluation surplus, our net income was $7.81 million, which was 83.3% higher than our net income excluding revaluation surplus of $4.26 million for the quarter ended December 31, 2008. The increase of net income before the revaluation surplus, resulted from a combination of volume and price increases. Shining Essence continued to be our best selling product, accounting for 31.2% of our sales revenue in the quarter ended December 31, 2009 (41.6% in the quarter ended December 31, 2008).

Our results for the three months and nine months ended December 31, 2009 and 2008 are summarized below:
 
   
Three months ended
December 31, 2009
   
Three months ended
December 31, 2008
 
   
Amount
   
% of Net sales
   
Amount
   
% of Net sales
 
Net sales
  $ 23,294,321       100.00 %   $ 15,810,111       100.00 %
Cost of sales
    (6,780,161 )     (29.11 )%     (4,583,371 )     (28.99 )%
Gross profit
  $ 16,514,160       70 .89 %   $ 11,226,740       71.01 %
Operating expenses:
                               
Selling expenses
  $ (4,140,738 )     (17.78 )%   $ (3,330,668 )     (21.07 )%
General and administrative expenses
    (2,260,344 )     (9.70 )%     (1,353,561 )     (8.56 )%
Other income
    3,179       0.01 %     -       0.00 %
Other expense
    -       0.00 %     (42,719 )     (0.27 )%
Total operating expenses
  $ (6,397,903 )     (27.47 )%   $ (4,726,948 )     (29.90 )%
Income from operations
  $ 10,116,257       43.43 %   $ 6,499,792       41.11 %
Other income and expenses:
                               
Change in the fair value of embedded derivatives
  $ 2,668,000       11.45 %   $ 1,408,000       8.91 %
Interest income
    74,438       0.32 %     60,442       0.38 %
Total other  (expenses)/ income
  $ 2,742,438       11.77 %   $ 1,468,442       9.29 %
Income before taxes
  $ 12,858,695       55.20 %   $ 7,968,235       50.40 %
Provision for income taxes
    (2,379,613 )     (10.22 )%     (2,299,348 )     (14.54 )%
                                 
Net (Loss)/ income
  $ 10,479,082       44.99 %   $ 5,668,887       35.86 %

   
Nine months ended
December 31, 2009
   
Nine months ended
December 31, 2008
 
   
Amount
   
% of Net sales
   
Amount
   
% of Net sales
 
Net sales
  $ 55,855,442       100.00 %   $ 38,676,017       100.00 %
Cost of sales
    (16,259,457 )     (29.11 )%     (11,304,893 )     (29.23 )%
Gross profit
  $ 39,595,985       70.89 %   $ 27,371,124       70.77 %
Operating expenses:
                               
Selling expenses
  $ (9,221,564 )     (16.51 )%   $ (8,514,090 )     (22.01 )%
General and administrative expenses
    (5,932,227 )     (10.62 )%     (4,218,494 )     (10.91 )%
Other income
    72,110       0.13 %     1,492,362       3.86 %
Other expense
    -       0.00 %     (42,719 )     (0.11 )%
Total operating expenses
  $ (15,081,681 )     (27.00 )%   $ (11,282,942 )     (29.17 )%
Income from operations
  $ 24,514,304       43.89 %   $ 16,088,182       41.60 %
Other income and expenses:
                               
Change in the fair value of embedded derivatives
  $ (6,248,000 )     (11.19 )%   $ 2,073,000       5.36 %
Interest income
    214,307       0.38 %     213,490       0.55 %
Total other  (expenses)/ income
  $ (6,033,693 )     (10.81 )%   $ 2,286,490       5.91 %
Income before taxes
  $ 18,480,611       33.08 %   $ 18,374,673       47.51 %
Provision for income taxes
    (5,716,846 )     (10.24 )%     (4,996,916 )     (12.92 )%
                                 
Net income
  $ 12,763,763       22.84 %   $ 13,377,757       34.59 %
 
16


Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the three months and nine months ended December 31, 2009 and 2008 comprised the following:
 
   
Three months ended December 31,
   
Nine months ended December 31,
 
    
2009
   
2008
   
2009
   
2008
 
Invoiced value on sales
  $ 24,668,040     $ 16,444,448     $ 59,340,475     $ 40,218,563  
Less: sales discount
    (1,216,044 )     (539,424 )     (2,943,740 )     (1,298,000 )
Less : sales tax
    (157,675 )     (94,913 )     (541,293 )     (244,546 )
    $ 23,294,321     $ 15,810,111     $ 55,855,442     $ 38,676,017  
 
Net sales of $23,294,321 for the quarter ended December 31, 2009 were 47.34% above the net sales of $15,810,111 for the quarter ended December 31, 2008. The increase was mainly because of an increase in overall sales volume arising from new product sales, particularly, bulk additives (offsetting decrease in sales volume of existing products), and adjustment of product mix.

The contributions of each product as a percentage of the total value on sales for the three months and nine months ended December 31, 2009 and 2008 are summarized below:

   
Three months ended December 31,
     
Nine months ended December 31,
  
   
2009
   
2008
   
2009
   
2008
 
Retails 
   
74.5
%
   
92.9
%
   
73.2
%
   
90.9
%
Bulk additives
   
25.5
%
   
7.1
%
   
26.8
%
   
9.1
%
     
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%

Certain comparative figures have been reclassified to conform to the current year’s presentation.
 
 
17

 

Unit volume and unit prices comparatives (on the invoiced value of sales) for the three months and nine months ended December 31, 2009 and 2008 are summarized below:

   
Percentage increase (decrease) from the prior year
  
     
Three months ended December 31,
  
     
2009
     
2008
  
     
Unit
volume 
     
Selling
prices 
     
Overall
increase /
(decrease) 
     
Unit
volume
     
Selling
prices
     
Overall
increase /
(decrease) 
  
Retails
     
18
%
    
12
%
   
32
%
   
2
%
   
13
%
   
15
%
Bulk additives
   
713
%
   
(66
)%
   
176
%
   
620
%
   
0
%
   
620
%

   
Percentage increase (decrease) from the prior year
  
     
Nine months ended December 31,
  
     
2009
     
2008
  
     
Unit
volume
     
Selling
prices
     
Overall
increase /
(decrease)
     
Unit
volume
     
Selling
prices
     
Overall
increase /
(decrease)
  
Retails 
     
12
 %
     
5
     
35
    
(4
) %
   
15
   
11 
Bulk additives
   
583
%
   
(70
)%
   
105
%
   
2174
%
   
0
%
   
2174
%

Cost of sales

Cost of sales for the three months ended December 31, 2009 was $6,780,161 compared with $4,583,371 for the three months ended December 31, 2008. Cost of sales for the nine months ended December 31, 2009 was $16,259,457 compared with $11,304,893 for the nine months ended December 31, 2008. The increase in cost of sales was primarily because of the overall sales volume increase.

Unit volume and unit costs comparatives for the three months and nine months ended December 31, 2009 and 2008 are summarized below:

 
18

 

   
Percentage increase (decrease) from the prior year
  
     
Three months ended December 31,
  
     
2009
     
2008
  
     
Unit
volume
     
Unit
costs
     
Overall
increase /
(decrease)
     
Unit
volume
     
Unit
costs
     
Overall
increase /
(decrease)
  
Retails
    
18
%
   
(1
)%
   
16
%
   
2
%
   
17
%
   
20
%
Bulk additives
   
713
%
   
(68
)%
   
160
%
   
620
%
   
21
%
   
771
%

   
Percentage increase (decrease) from the prior year
  
     
Nine months ended December 31,
  
&#