Attached files
file | filename |
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EX-32.2 - CHINA-BIOTICS, INC | v173923_ex32-2.htm |
EX-31.1 - CHINA-BIOTICS, INC | v173923_ex31-1.htm |
EX-31.2 - CHINA-BIOTICS, INC | v173923_ex31-2.htm |
EX-32.1 - CHINA-BIOTICS, INC | v173923_ex32-1.htm |
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,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Unit
volume
|
Unit
costs
|
Overall
increase /
(decrease)
|
Unit
volume
|
Unit
costs
|
Overall
increase /
(decrease)
|
|||||||||||||||||||
Retails
|
12
|
%
|
(7
|
)%
|
19
|
%
|
(4
|
)%
|
18
|
%
|
14
|
%
|
||||||||||||
Bulk
additives
|
583
|
%
|
(67
|
)%
|
125
|
%
|
2174
|
%
|
2
|
%
|
2219
|
%
|
19
Gross
profit
Gross
profit for the three months ended December 31, 2009 was $16,514,160 compared
with $11,226,740 for the three months ended December 31, 2008. Gross profit for
the nine months ended December 31, 2009 was $39,595,985 compared with
$27,371,124 for the nine months ended December 31, 2008. The increase in gross
profit was primarily due to an increase in overall sales volume.
The
average gross profit percentage for all of our products 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
|
|||||||||||||
Average
for all products
|
71
|
%
|
71
|
%
|
71
|
%
|
71
|
%
|
The
71 % gross profit margin remains solidly above our full year projection of
70%.
Selling
expenses
Selling
expenses were $4,140,738 or 17.62% of net sales for the three months ended
December 31, 2009 compared with $3,330,668 or 21.1% of net sales for the
three months ended December 31, 2008. Selling expenses for the nine months ended
December 31, 2009 were $9,221,564 or 16.45% of net sales compared with
$8,514,090 or 22.01% for the nine months ended December 31, 2008. The operating
costs of the retail outlets are included as selling expenses. With the opening
of four retail outlets during the quarter, selling expenses increased. As of
December 31, 2009, we had a total of 111 retail outlets in operation compared
with 107 outlets as of December 31, 2008.
General
and administrative expenses
General
and administrative expenses were $2,260,344 or 9.70% of net sales for the three
months ended December 31, 2009 compared with $1,353,561 or 8.56% of net sales
for the three months ended December 31, 2008. General and administrative
expenses for the nine months ended December 31, 2009 were $5,932,227 or 10.62%
of net sales compared with $4,218,494 or 10.91% for the nine months ended
December 31, 2008. The increase of general and administrative expenses was
primarily due to the increase of legal and professional fees, research fee and
staff costs. As of December 31, 2009, we had a total of 497 employees, compared
with 339 as of December 31, 2008. Research and development expenses were
$894,101 or 3.84% of net sales for the three months ended December 31, 2009
compared with $740,175 or 4.68% of net sales for the three months ended December
31, 2008. Research and development expenses for the nine months ended December
31, 2009 were $2,282,410 or 4.09% of net sales compared with $2,215,909 or 5.73%
of net sales for the nine months ended December 31, 2008. The increase of
research and development expenses was primarily due to develop the products of
bulk additives in difference sectors.
20
Provision
for income taxes
Provision
for income taxes was $2.4 million and $2.3 million for the three
months ended December 31, 2009 and 2008, respectively. Excluding the $2.67
million surplus on revaluation of the convertible note, income before taxes was
$7.8 million for the three months ended December 31, 2009 compared
with $4.3 million for the three months ended December 31, 2008. The increase in
income tax payable is attributable to an increase in operating
profit.
Segment
reporting
We have
adopted the “products” approach for segment reporting. For the three months and
nine months ended December 31, 2009 and 2008, we had only one reporting
segment—the probiotic s products as health supplement. We manufactured and
sold the probiotic s products solely in China and delivered all shipments
to destinations within China, and all of our long-lived assets were physically
located in China. We made all sales to external customers.
Liquidity
and Capital Resources
We had
cash of $151.1 million and working capital of $146.8 million as of
December 31, 2009. Cash generated from operations was $13.1 million in the nine
months ended December 31, 2009 and $17.1million in the nine months
ended December 31, 2008.
We had
capital expenditures totaling $3.2 million in the nine months ended December 31,
2009, mainly in connection with the construction of the new plant. We spent
$16.0 million on fixed assets in the nine months ended December 31,
2008.
Our
current primary facility commenced operations in 2000. With the increases in
sales volume in the last couple of years, we are reaching our production
capacity. We are constructing a new plant with an overall project size of $45.5
million. Phase 1 of the project involves constructing a facility capable of
producing 150 tons of probiotics per annum and cost approximately $27.50
million, $26 million of which is expected to be paid by the end of first quarter
of calendar year 2010 and the balance by the end of second quarter of calendar
year 2010. The second phase of this project commenced in December
2009.
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).
On
December 11, 2007, we issued a 4% Senior Convertible Promissory Note in the
amount of $25,000,000 (the “Note”) with a maturity date of December 11,
2010. The principal amount of the Note is convertible into shares of our common
stock at an exercise price of $12.00 per share at any time until the maturity
date. If the Note is not converted at maturity, we will redeem the Note at a
price that gives a total yield of 10% per annum inclusive of the annual
interest. The Note also provides for mandatory conversion into common stock
if the Group achieve a net income of $60 million in fiscal year 2010. Net
proceeds of the Note are being used to fund the construction of a proposed
150-metric-ton-per-year manufacturing facility and for other capital
expenditures.
21
Inflation
During
the quarter ended December 31, 2009, there were small increases in pulp and
paper costs. However, overall we believe that inflation did not have a
significant impact on our results of operations for the quarter.
Seasonality
Typically,
60% of our sales take place in the second half of the fiscal year because many
of our customers purchase our products to give as gifts during the Chinese
festivals that occur during this time of the year. While it is still too early
to tell, we expect that our bulk additive sales will not be seasonal
in nature because the bulk products are purchased by food manufacturers
consistently over the year.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Contractual
Obligations
The
following table summarizes our principal contractual obligations and commercial
commitments over various future periods as of December 31, 2009.
Contractual
Obligations
|
Total
|
Less than 1 year
|
1-3 years
|
3-5 years
|
More than 5 years
|
|||||||||||||||
Capital
Lease Obligations(1)
|
$
|
8,465,032
|
$
|
8,465,032
|
-
|
-
|
-
|
|||||||||||||
Operating
Lease Obligations(1)
|
$
|
456,663
|
$
|
397,019
|
59,644
|
-
|
-
|
|||||||||||||
Purchase
Obligations(2)
|
$
|
10,306,651
|
$
|
10,306,651
|
-
|
-
|
-
|
|||||||||||||
Long-term
loan(3)
|
$
|
25,000,000
|
-
|
$
|
25,000,000
|
-
|
-
|
|||||||||||||
Others
|
$
|
938,880
|
$
|
616,140
|
$
|
322,740
|
-
|
-
|
||||||||||||
Total
|
$
|
45,167,226
|
$
|
19,784,842
|
$
|
25,382,384
|
-
|
-
|
(1) See
Note 8 to our consolidated financial statements in this Quarterly
Report.
(2)
Estimated contractual purchases with suppliers as of December 31,
2009.
(3) See
Note 9 to our consolidated financial statements in this Quarterly
Report.
Research
and Development Expenditures
We have a
strong research and development team supported by a technical advisory board of
experts. In addition to having advanced technology in bacteria culturing and
protection, we also conduct research to develop products that address specific
health problems using our core technology and Chinese medicine to create
genetically engineered drugs and drug delivery solutions and expand our product
line. We incurred research and development costs of approximately $894,101 and
$740,175 in the three months ended December 31, 2009 and December 31, 2008,
respectively.
Critical
Accounting Policies
Our
critical accounting policies are described in the Notes to the Financial
Statements included in our Annual Report filed with the SEC on Form 10-K for the
fiscal year ended March 31, 2009, and this Form 10-Q should be read in
conjunction with that Annual Report. This MD&A discusses our consolidated
financial statements for the three months and nine months ended December 31,
2009 and 2008. These financial statements have been prepared in accordance with
generally accepted accounting principles in the United States. In preparing
these financial statements, we are required to make estimates and assumptions
affecting the reported amounts of assets and liabilities and the 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. On an
ongoing basis, we evaluate our estimates and judgments. We base our estimates
and judgments on historical experience and on various other factors we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
22
We
consider accounting policies related to (a) allowance for doubtful accounts, and
(b) use of estimates as applied to potential penalties for the late payment of
taxes, to be critical accounting policies due to the estimation process involved
in each.
Allowance
for doubtful accounts
We
maintain an allowance for doubtful accounts for estimated losses that may result
from the inability of our customers to make required payments. Such allowances
are based upon several factors including, but not limited to, historical
experience and the current and projected financial condition of specific
customers. We had trade receivables totaling $22,896,981 as of December 31,
2009, and a $117,942 for allowance for doubtful accounts. We have considered all
relevant factors, including the financial conditions, affecting the payment
abilities of customers comprising these receivables up to the date of this Form
10-Q and we believe these customers are able to make required payments. We,
however, cannot give assurance that these factors, including the financial
conditions of these customers, will not change adversely in the future. We will
continue to evaluate the ability of all our customers to make required payments.
Were the financial condition of a customer to deteriorate, resulting in an
impairment of its ability to make payments, allowances may be
required.
Use
of estimates as applied to potential penalties for the late payment of
taxes
Our
principal operations are in the PRC. Business enterprises established
in the PRC are subject to income taxes and value added taxes
under PRC tax laws and regulations unless they have exemptions. We have
made tax payments to the PRC tax authorities since 2005. We believe that
our operations in the PRC were exempted from income taxes and value added taxes
for all prior years because we had been recognized by the local government as an
advanced technology enterprise. However, we have never received a written
confirmation from the appropriate tax authorities for the tax exemption status
of our operations in the PRC. As a result, there is no way to ascertain the
position which may be taken by the relevant PRC tax authorities in the
future. Accordingly, our financial statements contain full provisions for all
applicable tax liabilities for all prior calendar years. Such provisions for tax
liabilities will be reversed out of the financial statements at the appropriate
point in the future.
According
to PRC tax regulations, our overdue tax liabilities in the PRC
for the calendar years prior to 2005 may be subject to potential penalties for
the late payment of taxes which is calculated on the basis of 0.5 times to five
times the amount of overdue tax liabilities, which amounts to $4.9 million (if
calculated based on 0.5 times of taxes payable) to $49 million (if calculated
based on five times of the amount of taxes payable) as of December 31, 2008
and 2009. The Group has reserved for the payment of taxes that may be owed for
calendar years prior to 2005 and any associated interest surcharges (which are
calculated at 0.05% per day on the accrued tax liabilities) in its financial
statements until the matter is fully resolved. Following the adoption of FIN48
(now known as ASC 740), the Group has reserved for the surcharges payable for
this reporting period. We consider it is more likely than not that the
associated penalty will not need to be paid.
Embedded
derivatives
On
December 11, 2007, the Company issued a 4% Senior Convertible Promissory Note in
an amount of $25,000,000 (the “Note”) which is due on December 11, 2010.
Pursuant to SFAS No. 133 (now known as ASC 816) “Accounting For Derivatives
Instruments And Hedging Activities” and EITF Issue No. 00-19 (now known as ASC
815) “Accounting For Derivatives Financial Instruments Indexed To And
Potentially Settled In A Company’s Own Stock”, the Company bifurcates the
conversion options with a mandatory conversion feature (“embedded derivatives”)
from the Note as the embedded derivatives are determined to be not clearly and
closely related to the host contract. The embedded derivatives are recorded at
fair value, mark-to-market at each reporting period, and are carried on a
separate line in the balance sheet.
23
Recent
Accounting Pronouncements
See Note
1 of the December 31, 2009 Interim Financial Statements. Other new
pronouncements issued but not yet effective until after December 31, 2009 are
not expected to have a significant effect on the Company’s consolidated
financial position or results of operations.
24
We are
exposed to various market risks, including changes in foreign currency exchange
rates and fair value. We do not enter into derivatives or other financial
instruments for trading or speculative purposes in the normal course of
business.
Foreign
Currency Exchange Rate Risk
Our
operations are conducted mainly in the PRC. As such, our earnings are subject to
movements in foreign currency exchange rates when transactions are denominated
in RMB, which is our functional currency.
Therefore,
changes in the rate of exchange between the U.S. dollar and the RMB, in which
the financial statements of our operations are maintained, affect our results of
operations and financial position as reported in our consolidated financial
statements. We have consolidated the balance sheets of our RMB-denominated
operations into U.S. dollars at the exchange rates prevailing at the balance
sheet date. Revenues and expenses are translated at the average exchange rates
for the period.
25
These
changes result in cumulative translation adjustments, which are included in
“Accumulated other comprehensive income”, and potentially result in transaction
gains or losses, which are included in our earnings.
Fair
Value Risk
We record
an adjustment on our convertible notes adjusting the fair value of the embedded
conversion options. The change in the value of these instruments is primarily
impacted by the price of our stock at the end of each reporting period. This
adjustment creates a non-cash effect on our statement of operations which may
have a significant impact.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains a system of disclosure controls and procedures that are
designed to provide reasonable assurance that information that is required to be
timely disclosed is accumulated and communicated to management in a timely
fashion. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control systems are met. An evaluation was performed under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, our management,
including our principal executive officer and principal financial officer,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms and such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.
Changes
in Internal Controls over Financial Reporting
The
Company’s internal control over financial reporting is designed to provide
reasonable assurances regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. There have been no changes in the
Company’s internal control over financial reporting identified in
connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under
the Securities Exchange Act of 1934 that occurred during the Company’s most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting. However, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues within the Company have been detected.
26
PART
II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The
information set forth in this report should be read in conjunction with the risk
factors discussed in Item 1 of our Annual Report on Form 10-K for the year ended
March 31, 2009, which could materially impact our business, financial
condition or future results. The risks described in the Annual Report on Form
10-K are not the only risks facing the company. Additional risks and
uncertainties not currently known by the company or that are currently deemed to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
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.
ITEM 6. EXHIBITS
Number
|
Exhibit
|
|
3.1
|
Amended
and Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
|
3.2
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
China-Biotics, Inc.’s Form 8-K filed on March 23, 2006) as amended by the
Amendment to the Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to China-Biotics, Inc.’s Form 10-Q filed on November 10,
2008).
|
|
10.1
|
Securities
Exchange Agreement dated March 22, 2006 (incorporated by reference to
Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
|
10.2
|
Form
of Lockup Agreement dated March 22, 2006 (incorporated by reference
to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
|
10.3
|
Put
Agreement dated March 22, 2006 (incorporated by reference to Exhibit
10.3 to China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
|
10.4
|
Registration
Rights Agreement dated March 22, 2006 (incorporated by reference to
Exhibit 10.4 to China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
27
Number
|
Exhibit
|
|
10.5
|
Investors’
Rights Agreement dated March 22, 2006 (incorporated by reference to
Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
|
10.6
|
Stan
Ford Agreement dated March 22, 2006 (incorporated by reference to
Exhibit 10.6 to China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
|
10.7
|
Summary
of English translation of Investment Agreement for lease of land dated
March 21, 2006 (incorporated by reference to Exhibit 10.7 to
China-Biotics, Inc.’s Form 8-K filed on March 23,
2006).
|
|
10.8
|
Escrow
Agreement dated March 22, 2006 (incorporated by reference to Exhibit
10.8 to China-Biotics, Inc.’s Form 10-KSB filed on June 30,
2006).
|
|
10.9
|
Stock
Purchase Agreement with Fred Cooper dated February 6, 2006
(incorporated by reference to Exhibit 10.9 to China-Biotics, Inc.’s Form
10-KSB filed on June 30, 2006).
|
|
10.10
|
Loan
agreement dated as of September 22, 2005 (incorporated by reference
to Exhibit 10.10 to China-Biotics, Inc.’s Form 10-KSB filed on
June 30, 2006).
|
|
10.11
|
Convertible
Bond dated as of September 22, 2005 (incorporated by reference to
Exhibit 10.11 to China-Biotics, Inc.’s Form 10-KSB filed on June 30,
2006).
|
|
10.12
|
Subscription
Agreement dated as of September 22, 2005 (incorporated by reference
to Exhibit 10.12 to China-Biotics, Inc.’s Form 10-KSB filed on
June 30, 2006).
|
|
10.13
|
English
Translation of Equity Transfer Agreement dated August 11, 2005
(incorporated by reference to Exhibit 10.13 to China-Biotics, Inc.’s
Amendment No. 2 to Form SB-2 filed on November 13,
2006).
|
|
10.14
|
English
Translation of Subscription Agreement dated August 11, 2005
(incorporated by reference to Exhibit 10.14 to China-Biotics, Inc.’s
Amendment No. 2 to Form SB-2 filed on November 13,
2006).
|
|
10.15
|
Investment
Agreement dated December 11, 2007 (incorporated by reference to
Exhibit 10.1 to China-Biotics, Inc’s Form 8-K filed on December 12,
2007).
|
|
10.16
|
Registration
Rights Agreement dated December 11, 2007 (incorporation by reference
to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K on December 12,
2007).
|
|
10.17
|
4%
Senior Convertible Promissory Note dated December 11, 2007
(incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form
8-K filed on December 12, 2007).
|
|
10.18
|
Guaranty
by Song Jinan in favor of Pope Investments II LLC dated December 11,
2007 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s
Form 8-K filed on December 12, 2007).
|
|
10.19
|
Pledge
Agreement between Song Jinan and Pope Investments II LLC dated
December 11, 2007 (incorporated by reference to Exhibit 10.5 to
China-Biotics, Inc.’s Form 8-K filed on December 12,
2007).
|
|
10.20
|
Form
of Purchase Agreement dated January 21, 2009 (incorporated by
reference to Exhibit 10.15 to China-Biotics, Inc.’s Form 10-Q filed on
February 13, 2009).
|
|
10.21
|
Form
of Purchase Agreement dated May 19, 2009 (incorporated by reference
to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on May 20,
2009).
|
|
10.22
|
Share
Charge dated September 21, 2009 (effective as of January 24, 2008)
(incorporated by reference to Exhibit 10.1 to China-Biotics, Inc.’s Form
10-Q filed on November 16, 2009).
|
|
10.23
|
Underwriting
Agreement dated September 29, 2009 (incorporated by reference to Exhibit
1.1 to China-Biotics, Inc.’s Form 8-K filed on September 30,
2009).
|
28
Number
|
Exhibit
|
|
14.1
|
Code
of Ethics (incorporated by reference to Exhibit 14.1 to China-Biotics,
Inc.’s Form 10-KSB for the year ended March 31,
2006).
|
|
21.1
|
List
of subsidiaries (incorporated by reference to Exhibit 21.1 to
China-Biotics, Inc.’s Form SB-2 filed on March 24,
2006).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002**
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002**
|
* Filed
herewith
**
Furnished herewith
* * * *
*
29
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHINA-BIOTICS,
INC.
|
|
(Registrant)
|
|
/s/ Song Jinan
|
|
Date: February
11, 2010
|
Song
Jinan
|
Chief Executive
Officer
|
30