CHINA-BIOTICS, INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - CHINA-BIOTICS, INC	v201420_ex32-2.htm
EX-32.1 - CHINA-BIOTICS, INC	v201420_ex32-1.htm
EX-31.1 - CHINA-BIOTICS, INC	v201420_ex31-1.htm
EX-31.2 - CHINA-BIOTICS, INC	v201420_ex31-2.htm

UNITED STATES

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 September 30, 2010

¨ 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	þ
Non-accelerated filer	¨ (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 November 4, 2010, 22,150,200 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.	[REMOVED AND RESERVED.]	27
ITEM 5.	OTHER INFORMATION	27
ITEM 6.	EXHIBITS	28
SIGNATURES		31

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts expressed in US Dollars)

	September 30, 2010			March 31, 2010
ASSETS
Current assets
Cash and cash equivalents	$	158,843,559		$	155,579,371
Accounts receivable, net		26,582,587			21,008,664
Other receivables		303,041			791,907
Inventories		982,751			1,100,707
Amount due from a director		3,877,679			2,367,892
Prepayment		228,816			1,104,149
Total current assets	$	190,818,433		$	181,952,690
Land use right		1,814,629			1,797,082
Property, plant and equipment, net		61,165,010			48,886,077
Deferred tax assets		-			298,833
Total assets	$	253,798,072		$	232,934,682
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	4,579,227		$	5,850,988
Tax payables		30,572,679			28,989,337
Other payables and accruals		2,332,014			1,815,487
Convertible note, net of discount of $1,004,461 and $2,853,094 as of September 30, 2010 and March 31, 2010, respectively		23,995,539			22,146,906
Embedded derivatives		2,847,000			14,797,000
Interest payable		4,266,639			3,156,035
Total current liabilities	$	68,593,098		$	76,755,753
Commitments and contingencies
Stockholders’ equity:
Common stock (par value of $0.0001, 100,000,000 shares authorized, 46,751,004 shares issued and 22,150,200 outstanding as of September 30, 2010 and as of March 31, 2010)	$	4,675		$	4,675
Additional paid-in capital		82,769,074			82,769,074
Retained earnings		95,137,457			65,441,994
Treasury stock at cost (24,600,804 and 24,381,004 shares as of September 30, 2010 and March 31,2010, respectively)		(2,742,072	)		(2,438	)
Accumulated other comprehensive income		7,010,046			4,939,830
Capital and statutory reserves		3,025,794			3,025,794
Total stockholders’ equity	$	185,204,974		$	156,178,929
Total liabilities and stockholders’ equity	$	253,798,072		$	232,934,682

The accompanying notes are an integral part of these financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts expressed in US Dollars)

	Three months ended September 30,						Six months ended September 30,
	2010			2009			2010			2009
Net sales	$	23,588,647		$	17,148,659		$	48,524,366		$	32,561,121
Cost of sales		(8,300,608	)		(4,980,623	)		(16,119,083	)		(9,479,296	)
Gross profit	$	15,288,039		$	12,168,036		$	32,405,283		$	23,081,825
Operating expenses:
Selling expenses	$	(2,559,158	)	$	(2,733,234	)	$	(5,617,536	)	$	(5,080,826	)
General and administrative expenses		(1,477,494	)		(1,223,278	)		(2,680,032	)	$	(2,283,574	)
Research and development costs	$	(1,592,754	)		(713,940	)		(2,675,253	)		(1,388,309	)
Other income/(expenses), net		258,233			32,483			355,087		$	68,931
Total operating expenses	$	(5,371,173	)	$	(4,637,969	)	$	(10,617,734	)	$	(8,683,778	)
	$	9,916,866		$	7,530,067		$	21,787,549		$	14,398,047
Other income and expenses:
Changes in the fair value of embedded derivatives	$	2,742,000		$	(9,430,000	)	$	11,950,000		$	(8,916,000	)
Interest income		97,294			72,781			185,170			139,869
Total other income/(expenses)	$	2,839,294		$	(9,357,219	)	$	12,135,170		$	(8,776,131	)
Income/(loss) before taxes	$	12,756,160		$	(1,827,152	)	$	33,922,719		$	5,621,916
Provision for income taxes		(1,922,233	)		(1,655,914	)		(4,227,256	)		(3,337,233	)
Net income/(loss)	$	10,833,927		$	(3,483,066	)	$	29,695,463		$	2,284,683

Earnings/(loss) per share:
Basic	$	0.48		$	(0.20	)	$	1.33		$	0.13
Diluted	$	0.33		$	0.31		$	0.73		$	0.58

Shares used in computation of earnings per share
Basic		22,308,098			17,080,000			22,338,880			17,080,000
Diluted		24,391,431			19,163,333			24,422,213			19,163,333

The accompanying notes are an integral part of these financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts expressed in US Dollars)

	Common Stock
	Shares		Par value $0.0001		Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Comprehensive Income		Capital & Statutory Reserves		Total
Balance-March 31, 2010		46,751,004		4,675		82,769,074		65,441,994		(2,438	)		4,939,830		3,025,794		156,178,929
Acquisition of Treasury Stock										(2,739,634	)						(2,739,634	)
Comprehensive income:
Net income								29,695,463									29,695,463
Other comprehensive income:
Foreign currency translation adjustments													2,070,216				2,070,216

Balance-September 30, 2010		46,751,004		4,675		82,769,074		95,137,457		(2,742,072	)		7,010,046		3,025,794		185,204,974

The accompanying notes are an integral part of these financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Amounts expressed in US Dollars)

	Six months ended September 30,
	2010			2009
CASH FLOW FROM OPERATING ACTIVITIES
Net income	$	29,695,463		$	2,284,683
Adjustment for:
Changes in the fair value of embedded derivatives		(11,950,000	)		8,916,000
Loss on disposal of plant and equipment		272,308			-
Change in deferred tax		298,894			(133,353	)
Depreciation		1,460,710			937,500
Increase in accounts receivable		(5,050,340	)		(2,632,668	)
Decrease in others receivable		526,552			-
Decrease/(Increase) in inventories		138,451			(339,362	)
Decrease/(Increase) in prepayments		855,167			(67,851	)
(Decrease)/Increase in accounts payable		(1,363,472	)		178,523
Decrease in other payables and accruals		(1,132,038	)		(540,397	)
Increase in tax payables		973,268			1,687,907
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	14,724,963		$	10,290,982
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of fixed assets	$	(8,459,056	)	$	(1,987,755	)
Proceeds from sales of property, plant and equipment		976			-
NET CASH USED IN INVESTING ACTIVITIES	$	(8,458,080	)	$	(1,987,755	)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash advance from a director		1,743,864			3,113,900
Repayment on advance from a director		(3,250,000	)		(2,999,641	)
Treasury Stock acquired		(2,739,634	)		-
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES	$	(4,245,770	)	$	114,259
Effect of exchange rate changes on cash		1,243,075			203,107
NET INCREASE IN CASH AND CASH EQUIVALENTS BALANCES	$	3,264,188		$	8,620,593
CASH AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD		155,579,371			70,824,041
CASH AND CASH EQUIVALENTS BALANCES AT END OF PERIOD	$	158,843,559		$	79,444,634

Supplemental disclosure cash flow information:
Interest paid		500,052			755,833
Income tax paid		2,523,939			2,204,523

The accompanying notes are an integral part of these financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

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 six months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending March 31, 2011.

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, 2010. There has been no material change in the significant accounting policies during the three months ended September 30, 2010.

Reclassification

Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. The reclassifications had no effect on previously reported results or retained earnings.

Recent Accounting Pronouncements

In July 2010, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 amends the existing disclosure guidance, thus requiring an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. ASU 2010-20 is effective for fiscal and interim periods beginning after December 15, 2010. The Company will review the requirements under the standard to determine what impacts, if any, the adoption of the standard would have on our condensed consolidated financial statements.

In January 2010, the FASB issued ASU 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 2010-06 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 2010-06 did not have a material impact on our consolidated financial statements. The Company is currently assessing the impact, if any, of ASU 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.

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.

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 September 30,						Six months ended September 30,
	2010			2009			2010			2009
Earnings/(loss) per share - Basic
Income/(loss) for the period	$	10,833,927		$	(3,483,066	)	$	29,695,463		$	2,284,683
Basic average common stock outstanding		22,308,098			17,080,000			22,338,880			17,080,000
Net earnings/(loss) per share	$	0.49		$	(0.20	)	$	1.33		$	0.13

Earnings/(loss) per share - Diluted
Income/(loss) for the period	$	10,833,927		$	(3,483,066	)	$	29,695,463		$	2,284,683
Change in fair value of embedded derivatives		(2,742,000	)		9,430,000			(11,950,000	)		8,916,000
	$	8,091,927		$	5,946,934		$	17,745,463		$	11,200,683
Basic average common stock outstanding		22,308,098			17,080,000			22,338,880			17,080,000
Diluted effect from embedded derivatives		2,083,333			2,083,333			2,083,333			2,083,333
Diluted average common stock		24,391,431			19,163,333			24,422,213			19,163,333
Net earnings per share	$	0.33		$	0.31		$	0.73		$	0.58

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 (the “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 September 30, 2010 and March 31, 2010, the Group had cash deposits of $158.84 million and $155.58 million, respectively, placed with several banks in the PRC, which includes the Special Administration Region of Hong Kong where there are currently no rules or regulations in place for obligatory insurance of bank accounts.

For the three months and six months ended September 30, 2010 and 2009, all of the Group’s sales arose in the PRC. In addition, all accounts receivable as of September 30, 2010 and March 31, 2010 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 and six months ended September 30, 2010, there were no customers that accounted for more than 10% of our sales revenue. During the three months ended September 30, 2009, there was one customer that accounted for 18% of our sales revenue. During the six months ended September 30, 2009, there was one customer who accounted for 15% of our sales revenue. As of September 30, 2010, there were no customers that accounted for more than 10% of our accounts receivable. As of March 31, 2010, there was one customer that accounted for 15% of our accounts receivable.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

4.	ACCOUNTS RECEIVABLE

Accounts receivable are as follows:

	September 30, 2010		March 31, 2010

Trade receivables	$	26,582,587	$	21,008,664
Less : Allowances for doubtful debt		-		-
	$	26,582,587	$	21,008,664

5.	INVENTORIES

Inventories consisted of the following:

	September 30, 2010		March 31, 2010

Raw materials	$	574,373	$	513,554
Work-in-progress		32,841		22,580
Finished goods		375,537		564,573
	$	982,751	$	1,100,707

6.	AMOUNT DUE FROM A DIRECTOR

On September 17, 2010, Mr. Song Jinan paid back the amount of $2.4 million, which was used for the Company’s overseas business interests. As of September 30, 2010, the amount due from a director, Mr. Song Jinan, represented advances to him for the Company’s domestic business interests related to obtaining intellectual property and attracting research and development talent. The cash advance was unsecured, interest-free and will be paid back no later than March 31, 2011.

7.	LAND USE RIGHT

The land use right consisted of the following:

	September 30, 2010			March 31, 2010

Land use right	$	1,919,678		$	1,881,207
Less: Accumulated amortization		(105,049	)		(84,125	)
	$	1,814,629		$	1,797,082

A subsidiary of the Company operating in Shanghai, the PRC owns factory buildings on certain state-owned land in the PRC and has been assigned the land use right for a period of 50 years commencing on January 15, 2008.

Amortization expense amounted to $9,486 and $9,409 for the three months ended September 30, 2010 and 2009, respectively. Amortization expense amounted to $18,897 and $18,639 for the six months ended September 30, 2010 and 2009, respectively.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

8.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net, consisted of the following:

	September 30, 2010			March 31, 2010

Plant and machinery		38,644,909			16,718,856
Office equipment		4,196,512			3,726,978
Motor vehicles		348,763			341,773
Building		8,969,646			-
Leasehold improvements		1,698,183			2,932,937
		53,858,013			23,720,544
Less: Accumulated depreciation	$	(8,918,299	)	$	(8,324,180	)
		44,939,714			15,396,364
Construction in progress	$	16,225,296		$	33,489,713
	$	61,165,010		$	48,886,077

Depreciation expenses were $844,442 and $ 482,246 for the three months ended September 30, 2010 and 2009, respectively. Depreciation expenses were $1,441,813 and $928,609 for six months ended September 30, 2010 and 2009, respectively.

9.	TAX PAYABLES

Tax payables consisted of the following:

	September 30, 2010		March 31, 2010

Value added tax and other taxes	$	7,236,377	$	6,946,939
Income tax		4,219,682		4,393,520
Surcharge		15,088,160		13,699,611
Dividends withholding tax		4,028,460		3,949,267
	$	30,572,679	$	28,989,337

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 September 30,					Six months ended September 30,
	2010		2009			2010		2009
Income in the United States before income taxes	$	2,727,342	$	(9,847,483	)	$	11,812,913	$	(9,791,475	)
Income in the British Virgin Islands before income taxes		286,042		1,113			80,820		(11,868	)
Income in the PRC before income taxes		9,742,776		8,019,218			22,028,986		15,425,259
	$	12,756,160	$	(1,827,152	)	$	33,922,719	$	5,621,916

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/credits related to the British Virgin Islands tax jurisdiction.

The provisions for income tax relating to the periods as presented in these financial statements are summarized as follows:

	Three months ended September 30,					Six months ended September 30,
	2010		2009			2010		2009

Current	$	1,922,233	$	1,789,267		$	4,227,256	$	3,470,586
Deferred		-		(133,353	)		-		(133,353	)
	$	1,922,233	$	1,655,914		$	4,227,256	$	3,337,233

The Group has its principal operations in the PRC and is subject to a PRC Enterprise Income Tax rate of 25% in calendar years 2010 and 2009.

However, one of the PRC subsidiaries of the Group, Shining, located in the Shanghai Jinqiao special economic zone, was awarded the status of high technology enterprise for the calendar years 2007 to 2010. Hence, Shining enjoys a preferential income tax of 15%, which represents a tax concession of 10% in the year 2010 and 2009.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

10.	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 $570,305 and $967,516 for the quarters ended September 30, 2010 and 2009, respectively.

As of September 30, 2010, the Group was obligated under operating leases requiring minimum rental as follows:

	September 30, 2010
Payable within
the next 12 months	$	117,251
the next 13 to 24 months		3,881
the next 25 to 36 months		-
the next 37 to 48 months		-
the next 49 to 60 months		-
Thereafter		-
	$	121,132

(b)

Capital commitments

GBS entered into agreements with contractors to construct a plant consisting of bulk manufacturing facilities in the Shanghai Qingpu Industrial Park District. The amount of future payment is $3,807,645, which was contracted, but not provided, for as of September 30, 2010.

The Company has entered into an agreement with the Chinese government to set up a subsidiary to construct a new facility of not less than $50 million in the Yangling Agricultural High-tech Industries Demonstration Zone (“Yangling”).

The Group entered into agreements with suppliers to purchase raw materials and packing materials. The amount of future payment is $10,318,666, which was contracted, but not provided, for as of September 30, 2010.

(d) Other obligations

The Group entered into an agreement with a university to perform research and development. The amount of future payment is $3,068,850, which was contracted for as of September 30, 2010.

11.	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 achieved a net income of $60 million in fiscal year 2010. Because our net income in fiscal year 2010 was below $60 million, the mandatory conversion will not be implemented. 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.

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 ASC Topic 820, “Fair Value Measurements and Disclosures” (formerly, SFAS No. 157 “Fair Value Measurements”), 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. In February 2008, the FASB deferred the effective date of ASC 820 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at lease annually). The Company adopted the provisions of ASC 820, except as it applies to those non-financial assets and non-financial liabilities for which the effective date has been delayed by one year.

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; and

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 September 30, 2010, 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 the Note issued in 2007. The fair value of the embedded derivatives was determined using the following inputs in accordance with ASC 820 as of September 30, 2010:

	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 of March 31, 2010	$	14,797,000	$	-	$	-	$	14,797,000
As of September 30, 2010	$	2,847,000	$	-	$	-	$	2,847,000

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, 2010 to September 30, 2010:

	Derivative Liability - Conversion Rights
	2010			2009

Balance on March 31	$	14,797,000		$	2,660,000
Adjustment to fair value included in earnings		(11,950,000	)		8,916,000
Balance on September 30	$	2,847,000		$	11,576,000

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 September 30, 2010 and March 31, 2010 was $2,847,000 and $14,797,000, respectively. The change in the fair value of the embedded derivatives amounted to $2,742,000 for the quarter ended September 30, 2010, and $8,916,000 for the quarter ended September 30, 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:

	September 30, 2010		March 31, 2010

Risk-free rate of return		0.16%		0.33%
Time to expiration	0.25years		0.75years
Volatility rate		80%		68%
Dividend yield		-		-

As of September 30, 2010 and March 31, 2010, the Note interest amounting to $15,188,396 and $11,727,789 was capitalized under construction in progress.

12.	TREASURY STOCK

On July 7, 2010, the Company’s Board of Directors approved a share repurchase program under which the Company may purchase up to $20 million shares of the Company’s outstanding common stock from time-to-time until July 7, 2011. Repurchases will be made pursuant to Rule 10b5-1 or 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and will be made on the open market at prevailing market prices or in block trades, subject to the restrictions relating to volume, price, and timing. The Company plans to fund repurchases from its available cash balance. During the period ended September 30, 2010, the Company repurchased 219,800 shares of its common stock for an aggregate cost of $2,739,634. The repurchased shares will be added to the Company’s Treasury Stock reserve.

13.	LITIGATION

China-Biotics, Inc. and certain of its current and former officers and directors have been named as defendants in two putative shareholder class action lawsuits-one filed in the United States District Court for the Central District of California, and a second filed in the United States District Court for the Southern District of New York (collectively, the "Complaints"). The plaintiff in each case seeks to represent a class of persons or entities that purchased the securities of China-Biotics, Inc. between July 10, 2008 and August 30, 2010. The Complaints name as defendants China-Biotics, Inc., Song Jinan, Li Chi Yuen, Lewis Fan, Yan Yihong, and Travis Cai (collectively, the "Defendants"). The Complaints allege that the Defendants violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, by making material misstatements or failing to disclose certain material information regarding, among other things, China-Biotics, Inc.'s financial condition, operations, and future business prospects, and the quality, nature, and quantity of China-Biotics, Inc.'s retail outlets and stores. The Complaints seek, among other things, unspecified compensatory damages, interest, and costs. The Company believes that the plaintiffs' claims are without merit, and intends to defend these actions vigorously.

14.	SUBSEQUENT EVENTS

On August 12, 2010, Best Design Holdings Ltd., an indirect wholly-owned subsidiary of the Company, entered into a District Entrance Project Agreement with the Governing Committee of the Yangling Agricultural High-tech Industries Demonstration Zone ("Yangling"), pursuant to which the Company will construct a new facility in Yangling to be used for the production of probiotics and related biological products for the animal feed industry. The registered capital of the new entity will be no less than US$50 million, with the full amount to be injected within 24 months of the project commencement date.

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”), Growing State Limited (“GSL”), and King Treasure Group Limited (“KTG”) and KTG’s wholly-owned subsidiary, Best Design Holdings Limited (“BDH”), and SGI’s wholly-owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”), and GSL’s wholly-owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“GBS”), and BDH’s wholly-owned subsidiary, Growing Bio (Yangling) Co. Ltd (“GBY”). 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 primarily sold in the Chinese domestic market.

Our retail products are mainly sold to distributors, who then distribute them to various retail outlets such as drug stores and supermarkets. During the three months ended September 30, 2010, approximately 92% of our retail products sales revenue was comprised of amounts receivable from the distributors for the sale of these products. Typically, 60 to 90 days’ credit is given to the distributors. Our bulk additives products are primarily sold to institutional customers, such as dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies.

We intend to expand our retail products sales to other cities in China through our growing distribution network. Our management believes that as China becomes more affluent, its citizens are becoming more health conscious, which has led to higher demand for health and functional food such as probiotics and yogurt.

In addition, probiotics are increasingly used as additives in a variety of industries, including the dairy and animal feed industries. 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 those industries, our newly built plant enables us to capture the anticipated demand for food additives.

The Company’s construction of its new production facility has been on schedule since the most recent year-end report. The Company commenced commercial production at the new facility in February 2010. Phase 1 of the project involves constructing a facility capable of producing 150 tons of probiotics per year and costs $28 million, $25 million of which has been paid in 2010, and the balance is scheduled to be paid by the end of the calendar year 2010. Phase 2 of this project commenced in December 2009 and is expected to cost $18 million, which is scheduled to be paid in fiscal year 2011. The construction of Phase 1 of the plant is being funded by cash received from the sale of a convertible promissory note to Pope Investments II LLC on December 11, 2007. The construction cost of Phase 2 of the plant is being funded by cash received from the public offering of our common stock 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.

Encouraged by the growing demand for the animal feed market in China, the Company plans to leverage its technology and R&D capability in probiotics-based animal feed applications to build a new facility in the Yangling Agricultural High-tech Industries Demonstration Zone (“Yangling”). The Yangling facility is expected to spend over USD$50 million in two years. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in the design stage, and the plan is subject to government approval prior to implementation.

As of September 30, 2010, we have entered into contracts with 37 customers for the bulk additives business. In this regard, we have created a number of formulations for testing by many potential 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, among others. These growing companies are among the leaders in the dairy, animal feed, baked foods, 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. In late February 2010, we commenced commercial production at our new facility in Qingpu, Shanghai, and we expect the volume of production to ramp up gradually. We expect the production run-rate will reach 75 metric tons/year by the end of 2010 calendar year. 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.

In our continuing effort to shift our focus from retail business to bulk business and to improve operating efficiency, we closed 95 retail outlets during the quarter ended September 30, 2010. At same time, we opened 7 new retail outlets to consolidate the resources of retail outlets. We believe the distribution network for our retail products is more efficient than directly selling through retail outlets, which involves increasing leasing expenses and large staffing cost. During the quarter ended September 30, 2010, we added 2 more distributors. We now have a total of 29 distributors for retail products, and we are operating 15 retail outlets in China (as of September 30, 2009, we had 107 retail outlets). We have been hiring consultants who have many years of experience in the direct selling industry to facilitate the development of the Shining brand outlets. We are also creating a “Community Network” through which we continuously provide training and seminars to educate the public about becoming more health conscious and about the benefits of probiotics and the Shining products.

Results of Operations

Quarter Ended September 30, 2010 Compared with the Quarter Ended September 30, 2009

Our net profit was $10.83 million in the quarter ended September 30, 2010. This included a $2.74 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 $8.09 million, which was 35.96% higher than our net income excluding revaluation surplus of $5.95 million for the quarter ended September 30, 2009.

Our results for the three months and six months ended September 30, 2010 and 2009 are summarized below:

	Three months ended September 30, 2010						Three months ended September 30, 2009
	Amount			% of Net sales			Amount			% of Net sales
Net sales	$	23,588,647			100.00	%	$	17,148,659			100.00	%
Cost of sales		(8,300,608	)		(35.18	)%		(4,980,623	)		(29.04	)%
Gross profit	$	15,288,039			64.82	%	$	12,168,036			70.96	%
Operating expenses:
Selling expenses	$	(2,559,158	)		(10.85	)%	$	(2,733,234	)		(15.94	)%
General and administrative expenses		(1,477,494	)		(6.26	)%		(1,223,278	)		(7.13	)%
Research and development costs		(1,592,754	)		(6.75	)%		(713,940	)		(4.16	)%
Other income/(expense), net		258,233			1.09	%		32,483			0.19	%
Total operating expenses	$	(5,371,173	)		(22.77	)%	$	(4,637,969	)		(27.05	)%
	$	9,916,866			42.04	%	$	7,530,067			43.91	%
Other income and expenses:
Change in the fair value of embedded derivatives	$	2,742,000			11.62	%	$	(9,430,000	)		(54.99	)%
Interest income		97,294			0.41	%		72,781			0.42	%
Total other income/(expenses)	$	2,839,294			12.04	%	$	(9,357,219	)		(54.57	)%
Income before taxes	$	12,756,160			54.08	%	$	(1,827,152	)		(10.65	)%
Provision for income taxes		(1,922,233	)		(8.14	)%		(1,655,914	)		(9.66	)%

Net income/(loss)	$	10,833,927			45.93	%	$	(3,483,066	)		(20.31	)%

	Six months ended September 30, 2010						Six months ended September 30, 2009
	Amount			% of Net sales			Amount			% of Net sales
Net sales	$	48,524,366			100	%	$	32,561,121			100	%
Cost of sales		(16,119,083	)		(33.22	)%		(9,479,296	)		(29.11	)%
Gross profit	$	32,405,283			66.78	%	$	23,081,825			70.89	%
Operating expenses:
Selling expenses	$	(5,617,536	)		(11.58	)%	$	(5,080,826	)		(15.60	)%
General and administrative expenses		(2,680,032	)		(5.52	)%		(2,283,574	)		(7.01	)%
Research and development costs		(2,675,253	)		(5.51	)%		(1,388,309	)		(4.26	)%
Other income/(expense), net		355,087			(0.73	)%		68,931			(0.21	)%
Total operating expenses	$	(10,617,734	)		(21.88	)%	$	(8,683,778	)		(26.67	)%
	$	21,787,549			44.90	%	$	14,398,047			44.22	%
Other income and expenses:
Change in the fair value of embedded derivatives	$	11,950,000			24.63	%	$	(8,916,000	)		(27.38	)%
Interest income		185,170			0.38	%		139,869			0.43	%
Total other (expenses)/ income	$	12,135,170			25.01	%	$	(8,776,131	)		(26.95	)%
Income before taxes	$	33,922,719			69.91	%	$	5,621,916			17.27	%
Provision for income taxes		(4,227,256	)		(8.71	)%		(3,337,233	)		(10.25	)%

Net income	$	29,695,463			61.2	%	$	2,284,683			7.02	%

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 ended September 30, 2010 and 2009 comprised the following:

	Three months ended September 30,						Six months ended September 30,
	2010			2009			2010			2009
Invoiced value on sales	$	24,230,413		$	18,384,299		$	50,488,844		$	34,848,424
Less: sales discount		(467,411	)		(940,627	)		(1,491,393	)		(1,727,696	)
Less : sales tax		(174,355	)		(295,013	)		(473,085	)		(559,607	)
	$	23,588,647		$	17,148,659		$	48,524,366		$	32,561,121

Net sales of $23,588,647 for the quarter ended September 30, 2010 were 38% above the net sales of $17,148,659 for the quarter ended September 30, 2009. The increase was primarily due to the volume increase in both retail sales and bulk additives. Compared with the same period last fiscal year, sales of bulk additives increased 69%, while retail sales increased 14%. It reflects our strategy to shift our focus towards the bulk additives business, which is growing much faster than the retail business.

The contributions of the retail products as a percentage of the total value on sales for the three months ended September 30, 2010 and 2009 were approximately 59% and 68%, respectively. The contributions of the bulk additives products as a percentage of the total value on sales for the three months ended September 30, 2010 and 2009 were approximately 41% and 32%, respectively. The contribution of the retail products as a percentage of the total value on sales for the six months ended September 30, 2010 and 2009 were approximately 59% and 72%, respectively. The contribution of the bulk additives products as a percentage of the total value on sales for the six months ended September 30, 2010 and 2009 were approximately 41% and 28%, respectively.

Cost of sales for the three months ended September 30, 2010 was $8,300,608 compared with $4,980,623 for the three months ended September 30, 2009. The increase in cost of sales was primarily because of the overall sales volume increase in both retail products and bulk additives products.

Gross profit

Gross profit for the three months ended September 30, 2010, was $15,288,039 compared with $12,168,036 for the three months September 30, 2009. Gross profit for the six months ended September 30, 2010 was $32,405,283, compared with $23,081,825 for the six months ended September 30, 2009. 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 six months ended September 30, 2010 and 2009 are summarized below:

	Three months ended September 30,						Six months ended September 30,
	2010			2009			2010			2009

Average for all products		64.8	%		71.0	%		66.9	%		70.9	%

Gross profit margin slightly decreased from 71.0% in the quarter ended September 30, 2009 to 64.8% this quarter, which was primarily due to the Company’s sales promotions related to substantial discounts on certain retail products.

Selling expenses

Selling expenses were $2,559,158 or 10.85% of net sales for the three months ended September 30, 2010, compared with $2,733,234 or 15.94% of net sales for the three months ended September 30, 2009. Selling expenses were $5,617,536 or 11.58% of net sales for the six months ended September 30, 2010, compared with $5,080,826 or 15.60% of net sales for the six months ended September 30, 2009. The operating costs of the retail outlets are included as selling expenses. As of September 30, 2010, we had a total of 15 retail outlets in operation compared with 107 outlets as of September 30, 2009. The closure of retail outlets during this quarter reduced the operating cost, as a result, the selling expenses as percentage of sales declined. For bulk business, our selling expense is relatively low in this quarter, and we expect it will increase in the future as we will have more spending in sales promotion.

General and administrative expenses

General and administrative expenses were $1,477,494 or 6.26% of net sales for the three months ended September 30, 2010, compared with $1,223,278 or 7.13% of net sales for the three months ended September 30, 2009. General and administrative expenses were $2,680,032 or 5.52% of net sales for the six months ended September 30, 2010, compared with $2,283,574 or 7.01% of net sales for the six months ended September 30, 2009. 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 September 30, 2010, we had a total of 447 employees, compared with 415 as of September 30, 2009.

Provision for income taxes

Provision for income taxes was $1.92 million and $1.66 million for the three months ended September 30, 2010 and 2009, respectively. Excluding the $2.74 million surplus on revaluation of the convertible note, income before taxes was $10.02 million for the three month period ended September 30, 2010, compared with a $7.60 million profit for the three month period ended September 30, 2009. 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 ended September 30, 2010 and 2009, we had only one reporting segment—the probiotic products as health supplement. We manufactured and sold the probiotic 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 $158.84 million and working capital of $122.23 million as of September 30, 2010. Cash generated from operations was $14.72 million in the six months ended September 30, 2010.

We had capital expenditures totaling $8.46 million in the six months ended September 30, 2010, mainly in connection with the construction of the new plant.

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 $46 million. Phase 1 of the project involves constructing a facility capable of producing 150 tons of probiotics per annum and cost approximately $28 million, $25 million of which has been paid in 2010, and the balance is scheduled to be paid by the end of the calendar year 2010. Phase 2 of this project commenced in December 2009 and is expected to cost $18 million, which is scheduled to be paid in fiscal year 2011.

At our Pudong plant, the Company plans to expand the retail packaging facility and make technical improvements to the existing fermentation facility, which will cost approximately $3 million in fiscal year 2011.

During the quarter ended September 30, 2010, the Company obtained admission to enter the Yangling Agricultural High-tech Industries Demonstration Zone. The Company will inject the full amount of registered capital, an amount no less than US$50 million, within 24 months of the project commencement date. The Company plans to fund this project with its cash reserves.

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, funding Phase 2 of our bulk manufacturing facility, funding our newly announced Yangling project, 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. On the maturity date, the redemption price will equal a sum of $29.5 million, which can be paid off from the Company’s cash reserve. Net proceeds of the Note are being used to fund the construction of the 150-metric-ton-per-year manufacturing facility in Qingpu and for other capital expenditures.

Inflation

During the quarter ended September 30, 2010, there were small increases in cost of pulp, paper, and other raw materials. We also saw big price increases in the lease market. The closure of a number of retail outlets, however, reduced the leasing costs, and 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 September 30, 2010.

Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Capital Lease Obligations(1)	$	3,807,645	$	3,807,645		-		-		-
Operating Lease Obligations(1)	$	121,132	$	117,251	$	3,881		-		-
Purchase Obligations(2)	$	10,318,666	$	10,318,666		-		-		-
Loan(3)	$	25,000,000		25,000,000	$	-		-		-
Other obligation	$	3,517,950	$	3,517,950	$	-		-		-
Total	$	42,765,393	$	42,761,518	$	3,881		-		-

(1) See Note 10 to our consolidated financial statements in this Quarterly Report.

(2) Estimated contractual purchases with suppliers as of September 30, 2010.

(3) See Note11 to our consolidated financial statements in this Quarterly Report.

The Company has entered into an agreement with the Chinese government to construct a new facility in the Yangling Agricultural High-tech Industries Demonstration Zone ("Yangling"). The Company expects to spend an amount of no less than $50 million in two years on the Yangling facility.

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 $1,592,754 and $713,940 in the three months ended September 30, 2010 and September 30, 2009, respectively. Research and development costs for the six months ended September 30, 2010 and September 30, 2009 were $2,675,253 and $1,388,309, 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, 2010, 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 ended September 30, 2010 and 2009. 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.

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 $26,582,587 as of September 30, 2010. 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.

Recent Accounting Pronouncements

See Note 1 of the September 30, 2010 Interim Financial Statements. Other new pronouncements issued, but not yet effective until after September 30, 2010, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

These changes result in cumulative translation adjustments, which are included in “Accumulated other comprehensive income,” and potentially result in 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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

China-Biotics, Inc. and certain of its current and former officers and directors have been named as defendants in two putative shareholder class action lawsuits—one filed in the United States District Court for the Central District of California, and a second filed in the United States District Court for the Southern District of New York (collectively, the “Complaints”). The plaintiff in each case seeks to represent a class of persons or entities that purchased the securities of China-Biotics, Inc. between July 10, 2008 and August 30, 2010. The Complaints name as defendants China-Biotics, Inc., Song Jinan, Li Chi Yuen, Lewis Fan, Yan Yihong, and Travis Cai (collectively, the “Defendants”). The Complaints allege that the Defendants violated Section 10(b) and/or Section 20(a) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, by making material misstatements or failing to disclose certain material information regarding, among other things, China-Biotics, Inc.’s financial condition, operations, and future business prospects, and the quality, nature, and quantity of China-Biotics, Inc.’s retail outlets and stores. The Complaints seek, among other things, unspecified compensatory damages, interest, and costs. The Company believes that the plaintiffs’ claims are without merit, and intends to defend these actions vigorously.

ITEM 1A. RISK FACTORS

The information set forth in this report should be read in conjunction with the risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2010, 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

The following table sets forth information concerning purchases of the Company’s common stock made by, or on behalf of, the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the Company’s fiscal quarter ended September 30, 2010:

ISSUER PURCHASES OF EQUITY SECURITIES(1)

Period	Total Number of Shares (or Units) Purchased		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
7/1/2010 – 7/31/2010		0	$	N/A		0	20,000,000 shares
8/1/2010 – 8/31/2010		86,600	$	12.50		86,600	19,913,400 shares
9/1/2010 – 9/30/2010		133,200	$	12.41		133,200	19,780,220 shares
Total		219,800	$	12.46		219,800	19,780,200 shares

(1)	On July 7, 2010, the Company’s Board of Directors approved a share repurchase program under which the Company may purchase up to $20 million of the Company’s outstanding common stock from time-to-time until July 7, 2011.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. [REMOVED AND RESERVED.]

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).

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).

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

* * * * *

SIGNATURES

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: November 9, 2010	Song Jinan
	Chief Executive Officer

	/s/ Travis Cai
	Travis Cai
	Chief Financial Officer

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CHINA-BIOTICS, INC Reports

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