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 December 31, 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.
26, Orient Global Headquarter
Lane
118, Yonghe Road
Zhabei
District, Shanghai 200072
People’s
Republic of China
(Address
of Principal Executive Offices)
Telephone
number: (86 21) 3653 0033
(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 February 10, 2011,
22,150,200
shares
of the registrant’s common stock were outstanding.
TABLE
OF CONTENTS
|
|
|
Page
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
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,
2010
|
|
|
March 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
132,290,582
|
|
|
$
|
155,579,371
|
|
|
|
|
39,371,765
|
|
|
|
21,008,664
|
|
|
|
|
1,108,497
|
|
|
|
791,907
|
|
|
|
|
1,524,039
|
|
|
|
1,100,707
|
|
Amount
due from a director
|
|
|
157,276
|
|
|
|
2,367,892
|
|
|
|
|
1,531,851
|
|
|
|
1,104,149
|
|
|
|
$
|
175,984,010
|
|
|
$
|
181,952,690
|
|
|
|
|
3,839,374
|
|
|
|
1,797,082
|
|
Property,
plant and equipment, net
|
|
|
63,198,061
|
|
|
|
48,886,077
|
|
|
|
|
-
|
|
|
|
298,833
|
|
|
|
$
|
243,021,445
|
|
|
$
|
232,934,682
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,771,585
|
|
|
$
|
5,850,988
|
|
|
|
|
32,910,778
|
|
|
|
28,989,337
|
|
Other
payables and accruals
|
|
|
3,033,732
|
|
|
|
1,815,487
|
|
Convertible
note, net of discount of $0 and $2,853,094 as of
December 31, 2010 and March 31, 2010,
respectively
|
|
|
-
|
|
|
|
22,146,906
|
|
|
|
|
-
|
|
|
|
14,797,000
|
|
|
|
|
-
|
|
|
|
3,156,035
|
|
Total
current liabilities
|
|
$
|
42,716,095
|
|
|
$
|
76,755,753
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (par value of $0.0001, 100,000,000 shares authorized, 46,751,004
shares issued and 22,150,200 outstanding as of December 31, 2010
and 46,751,004 shares issued and 22,370,000 outstanding as of March 31,
2010)
|
|
$
|
4,675
|
|
|
$
|
4,675
|
|
Additional
paid-in capital
|
|
|
82,769,074
|
|
|
|
82,769,074
|
|
|
|
|
108,400,687
|
|
|
|
65,441,994
|
|
Treasury
stock at cost (24,600,804 and 24,381,004 shares as of December 31, 2010
and March 31, 2010, respectively)
|
|
|
(2,742,072
|
)
|
|
|
(2,438
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
8,847,192
|
|
|
|
4,939,830
|
|
Capital
and statutory reserves
|
|
|
3,025,794
|
|
|
|
3,025,794
|
|
Total
stockholders’ equity
|
|
$
|
200,305,350
|
|
|
$
|
156,178,929
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
243,021,445
|
|
|
$
|
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
December 31,
|
|
|
Nine months ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
32,384,645
|
|
|
$
|
23,294,321
|
|
|
$
|
80,909,011
|
|
|
$
|
55,855,442
|
|
|
|
|
(11,198,703
|
)
|
|
|
(6,780,161
|
)
|
|
|
(27,317,786
|
)
|
|
|
(16,259,457
|
)
|
|
|
$
|
21,185,942
|
|
|
$
|
16,514,160
|
|
|
$
|
53,591,225
|
|
|
$
|
39,595,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,861,261
|
)
|
|
$
|
(4,140,738
|
)
|
|
$
|
(9,478,797
|
)
|
|
$
|
(9,221,564
|
)
|
General
and administrative expenses
|
|
|
(3,190,506
|
)
|
|
|
(1,366,243
|
)
|
|
|
(5,870,538
|
)
|
|
$
|
(3,649,818
|
)
|
Research
and development costs
|
|
$
|
(1,884,119
|
)
|
|
|
(894,101
|
)
|
|
|
(4,559,372
|
)
|
|
|
(2,282,409
|
)
|
|
|
|
539,451
|
|
|
|
3,179
|
|
|
|
894,538
|
|
|
$
|
72,110
|
|
|
|
$
|
(8,396,435
|
)
|
|
$
|
(6,397,903
|
)
|
|
$
|
(19,014,169
|
)
|
|
$
|
(15,081,681
|
)
|
|
|
$
|
12,789,507
|
|
|
$
|
10,116,257
|
|
|
$
|
34,577,056
|
|
|
$
|
24,514,304
|
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in the fair value of embedded derivatives
|
|
$
|
2,847,000
|
|
|
$
|
2,668,000
|
|
|
$
|
14,797,000
|
|
|
$
|
(6,248,000
|
)
|
|
|
|
103,495
|
|
|
|
74,438
|
|
|
|
288,665
|
|
|
|
214,307
|
|
Total
other income/(expenses)
|
|
$
|
2,950,495
|
|
|
$
|
2,742,438
|
|
|
$
|
15,085,665
|
|
|
$
|
(6,033,693
|
)
|
|
|
$
|
15,740,002
|
|
|
$
|
12,858,695
|
|
|
$
|
49,662,721
|
|
|
$
|
18,480,611
|
|
Provision
for income taxes
|
|
|
(2,476,772
|
)
|
|
|
(2,379,613
|
)
|
|
|
(6,704,028
|
)
|
|
|
(5,716,846
|
)
|
|
|
$
|
13,263,230
|
|
|
$
|
10,479,082
|
|
|
$
|
42,958,693
|
|
|
$
|
12,763,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
$
|
0.48
|
|
|
$
|
1.93
|
|
|
$
|
0.68
|
|
|
|
$
|
0.44
|
|
|
$
|
0.32
|
|
|
$
|
1.16
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computation of earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,150,200
|
|
|
|
21,978,242
|
|
|
|
22,275,758
|
|
|
|
18,706,788
|
|
|
|
|
23,712,700
|
|
|
|
24,061,575
|
|
|
|
24,184,848
|
|
|
|
18,706,788
|
|
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
|
|
|
|
|
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
|
|
|
(24,600,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,739,634
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,739,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,958,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,958,693
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,907,362
|
|
|
|
|
|
|
|
3,907,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-December
31, 2010
|
|
|
22,150,200
|
|
|
|
4,675
|
|
|
|
82,769,074
|
|
|
|
108,400,687
|
|
|
|
(2,742,072
|
)
|
|
|
8,847,192
|
|
|
|
3,025,794
|
|
|
|
200,305,350
|
|
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)
|
|
Nine
months ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
CASH
FLOW FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
$
|
42,958,693
|
|
|
$
|
12,763,702
|
|
|
|
|
|
|
|
|
|
|
Changes
in the fair value of embedded derivatives
|
|
|
(14,797,000
|
)
|
|
|
6,248,000
|
|
Loss
on disposal of plant and equipment
|
|
|
272,745
|
|
|
|
-
|
|
|
|
|
298,894
|
|
|
|
55,849
|
|
|
|
|
2,683,757
|
|
|
|
1,423,239
|
|
Increase
in accounts receivable
|
|
|
(17,176,185
|
)
|
|
|
(8,298,996
|
)
|
(Increase)/Decrease
in others receivable
|
|
|
(260,616
|
)
|
|
|
267,246
|
|
|
|
|
(376,618
|
)
|
|
|
(630,946
|
)
|
|
|
|
(412,593
|
)
|
|
|
(4,489,544
|
)
|
Increase
in accounts payable
|
|
|
714,883
|
|
|
|
3,069,677
|
|
Decrease
in other payables and accruals
|
|
|
(424,120
|
)
|
|
|
(716,386
|
)
|
|
|
|
2,854,776
|
|
|
|
3,430,453
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
$
|
16,336,616
|
|
|
$
|
13,122,357
|
|
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
$
|
(14,402,923
|
)
|
|
$
|
(3,183,483
|
)
|
Proceeds
from sales of property, plant and equipment
|
|
|
976
|
|
|
|
-
|
|
Purchase
of land use right
|
|
|
(1,960,406
|
)
|
|
|
-
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
$
|
(16,362,353
|
)
|
|
$
|
(3,183,483
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash
advance/Repayment from a director
|
|
|
5,409,787
|
|
|
|
3,113,900
|
|
Cash
advance/Repayment to a director
|
|
|
(3,250,000
|
)
|
|
|
(7,908,948
|
)
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
74,906,572
|
|
Redemption
of convertible note
|
|
|
(25,000,000
|
)
|
|
|
-
|
|
|
|
|
(2,739,634
|
)
|
|
|
-
|
|
NET
CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
|
|
$
|
(25,579,847
|
)
|
|
$
|
70,111,524
|
|
Effect
of exchange rate changes on cash
|
|
|
2,316,795
|
|
|
|
204,165
|
|
NET
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
BALANCES
|
|
$
|
(23,288,789
|
)
|
|
$
|
80,254,563
|
|
CASH
AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD
|
|
|
155,579,371
|
|
|
|
70,824,041
|
|
CASH
AND CASH EQUIVALENTS BALANCES AT END OF PERIOD
|
|
$
|
132,290,582
|
|
|
|
151,078,604
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure cash flow information:
|
|
|
|
|
|
|
|
|
|
|
$
|
5,148,983
|
|
|
|
1,005,859
|
|
|
|
|
7,549,505
|
|
|
|
3,539,063
|
|
The
accompanying notes are an integral part of these financial
statements.
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, 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 December
31, 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.
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.
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three months ended
December 31,
|
|
|
Nine months ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Earnings
per share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,263,230
|
|
|
$
|
10,479,082
|
|
|
$
|
42,958,693
|
|
|
$
|
12,763,765
|
|
Basic
average common stock outstanding
|
|
|
22,150,200
|
|
|
|
21,978,242
|
|
|
|
22,275,758
|
|
|
|
18,706,788
|
|
|
|
$
|
0.60
|
|
|
$
|
0.48
|
|
|
$
|
1.93
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,263,230
|
|
|
$
|
10,479,082
|
|
|
$
|
42,958,693
|
|
|
$
|
12,763,765
|
|
Change
in fair value of embedded derivatives
|
|
|
(2,847,000
|
)
|
|
|
(2,668,000
|
)
|
|
|
(14,797,000
|
)
|
|
|
-
|
|
|
|
$
|
10,416,230
|
|
|
$
|
7,811,019
|
|
|
$
|
28,161,693
|
|
|
$
|
12,763,765
|
|
Basic
average common stock outstanding
|
|
|
22,150,200
|
|
|
|
21,978,242
|
|
|
|
22,275,758
|
|
|
|
18,706,788
|
|
Diluted
effect from embedded derivatives
|
|
|
1,562,500
|
|
|
|
2,083,333
|
|
|
|
1,909,090
|
|
|
|
-
|
|
Diluted
average common stock
|
|
|
23,712,700
|
|
|
|
24,061,575
|
|
|
|
24,184,848
|
|
|
|
18,706,788
|
|
|
|
$
|
0.44
|
|
|
$
|
0.32
|
|
|
$
|
1.16
|
|
|
$
|
*0.68
|
|
* The
effect of embedded derivatives was not included for the computation of diluted
earnings per share for the
9-month
period end, as its inclusion would be anti-dilutive.
3.
|
RISKS,
UNCERTAINTIES, AND CONCENTRATIONS
|
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
December 31, 2010 and March 31, 2010, the Group had cash deposits of $132.29
million and $155.58 million, respectively, placed with several banks 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, 2010 and 2009, all of the
Group’s sales arose in the PRC. In addition, all accounts receivable
as of December 31, 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 nine months ended December
31, 2010, there were no customers that accounted for more than 10% of our
sales revenue. During the three months ended December 31, 2009, there
was one customer that accounted for 12% of our sales revenue. During
the nine months ended December 31, 2009, there was one customer who accounted
for 14% of our sales revenue. As of December 31, 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.
Accounts
receivable are as follows:
|
|
December 31,
2010
|
|
|
March 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
: Allowances for doubtful debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
consisted of the following:
|
|
December 31,
2010
|
|
|
March 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
AMOUNT
DUE FROM A DIRECTOR
|
During
this quarter, Mr. Song Jinan repaid to the Company an aggregate amount of $3.7
million, the sum of which represented advances made to Mr. Song to be used for
the Company’s domestic business interests related to obtaining intellectual
property and attracting research and development talent.
The
Company successfully recruited one of the top research and development talents
in the probiotics industry and has the opportunity to acquire intellectual
property owned by such person. The Company is currently in the process of
evaluating the value of the intellectual property, which is expected to greatly
enhance the Company’s research and development capability.
The
land use right consisted of the following:
|
|
December
31, 2010
|
|
|
March
31,2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
During
this quarter, the Company made its first payment in the aggregate amount of
RMB13,251,355 (or approximately $2 million) to acquire the land use right of
118.54 mu land (or approximately 79,029.3 square meters). We expect to receive
the land certificate by the end of June 2011.
Amortization
expense amounted to $9,488 and $9,409 for the three months ended December 31,
2010 and 2009, respectively. Amortization expense amounted to $28,385
and $28,048 for the nine months ended December 31, 2010 and 2009,
respectively.
8.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment, net, consisted of the following:
|
|
December 31,
2010
|
|
|
March 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expenses were $1,211,360 and $476,429 for the three months ended
December 31, 2010 and 2009, respectively. Depreciation expenses
were $2,653,173 and $1,405,039 for nine months ended December 31, 2010
and 2009, respectively.
Tax
payables consisted of the following:
|
|
December 31,
2010
|
|
|
March 31,
2010
|
|
|
|
|
|
|
|
|
Value
added tax and other taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
withholding tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Income
in the United States before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
)
|
Income
in the British Virgin Islands before income taxes
|
|
|
|
|
|
|
|
)
|
|
|
|
|
|
|
|
)
|
Income
in the PRC before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company, which is incorporated in the United States, is subject to U.S. tax
law. Before the Company paid off the 4% Senior Convertible Promissory
Note on December 9, 2010, other than legal and professional expenses for
the daily operations of the Company, the income generated from the United States
was 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 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% for the
years 2010 and 2009.
Moreover,
another PRC subsidiary of the Group, GBS, located in Qingpu, Shanghai, enjoys an
income tax privilege of ‘two years exempt, three years half’ for Foreign
Invested Companies located in PRC, which was granted in 2009 by the local tax
authority and was effective as of January 1, 2008. Given that the
current period is within the third year of the award of the tax privilege, the
effective tax rate for GBS is 12.5%, which contributes to the concession of the
effective tax rate for the Company as a whole, compared to December 31,
2009.
The
provisions for income tax relating to the periods as presented in these
financial statements are summarized as follows:
|
Three months ended December
31,
|
|
Nine months ended December
31,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHINA-BIOTICS,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
expressed in US Dollars)
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 222,967 and
955,377 for the quarters ended December 31, 2010 and 2009,
respectively.
As of
December 31, 2010, the Group was obligated under operating leases requiring
minimum rental as follows:
|
|
December 31,
2010
|
|
Payable
within
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company entered into an agreement with a government agency to establish a
company for the manufacture of animal pro-biotic products. The
initial investment cost is no less than $50 million. During the
quarter, the Company injected $7.5 million as capital.
As of
December 31, 2010, the Group has a total capital commitment on manufacturing
facilities of $5,234,381.
(c)
Purchase obligations
The Group
entered into agreements with suppliers to purchase raw materials and packing
materials. The amount of future payment is $8,168,154.
(d) Other
obligations
The Group
entered into an agreement with an university to perform research and
development. The amount of future payment is $1,920,808 as of December 31,
2010.
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.
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 $9,118,000 from the net proceeds received from
the issuance of the Note. This resulted in a $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.
On
December 9, 2010, the Company repaid in full its obligations under the
Note. As of December 31, 2010, the Company had no assets or
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 December 31, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2010:
|
|
Derivative Liability -
Conversion Rights
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to fair value included in earnings
|
|
|
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010 and March 31,
2010 was Nil and $14,797,000, respectively. The change in the fair value of the
embedded derivatives amounted to $2,847,000 for the quarter ended December 31,
2010, and $2,668,000 for the quarter ended December 31, 2009 were charged to the
consolidated statement of operation.
The fair
value of the embedded derivatives was determined using the Binomial Model based
on the following assumptions:
|
|
December 31,
2010
|
|
|
March 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
On
December 9, 2010, the Company repaid in full its obligations under the Note,
which was due December 11, 2010, in the original aggregate principal amount of
$25,000,000. The payoff amount of $29,684,932, consisting of
$25,000,000 of outstanding principal and $4,684,932 of accrued interest, was
paid to Pope Investments II LLC, an affiliate of Pope Investments, LLC, and all
security interests and liens held by Pope Investments II LLC were terminated and
released, including (1) a guaranty by Mr. Song Jinan of the Company’s
obligations under the Note backed by a pledge of 4,000,000 shares of
China-Biotics’ common stock owned by Mr. Song; and (2) a pledge by the Company
of 100% of the stock of SGI to Pope Investments II LLC.
As of
December 31, 2010 and March 31, 2010, the Note interest amounting to
$16,613,259 and $11,727,789, respectively, was capitalized under construction in
progress.
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 quarter ended December 31, 2010, the Company did not
repurchase any shares of its common stock.
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
in the United States District Court for the Central District of
California
(Mohapatra v. China-Biotics, Inc.,
et al.
No. 10-cv-6954 (C.D. Cal.), the “California Action”) and
the other in the United States District Court for the Southern District of
New York (
Hill v.
China-Biotics, Inc., et al.
No. 10-cv-7838 (S.D.N.Y.), the “New
York Action”). After certain shareholders filed motions for
appointment as lead plaintiff in both lawsuits, the plaintiff in the California
Action voluntarily dismissed its case. The plaintiff in the New York
Action, who seeks to represent a class of those who
bought China-Biotics securities between July 10, 2008 and August 30,
2010, alleges that the defendants violated Section 10(b)
and Section 20(a) of the Exchange Act, and the rules and regulations
promulgated thereunder, by making material misstatements or failing to disclose
certain material information regarding, among other things, China-Biotics’
financial condition, operations, and future business prospects, and the quality,
nature, and quantity of China-Biotics’ retail outlets and stores. The
complaint seeks unspecified damages. China-Biotics intends to
defend this action vigorously.
China-Biotics,
Inc. and its directors have been named as defendants in a derivative lawsuit
filed in the United States District Court for the District of Columbia (
Marteney v. Song Jinan, et
al
., No. 10-cv-1983 (D.D.C.)). The complaint alleges
that the directors breached their fiduciary duties by disseminating false
and misleading financial statements and seeks unspecified damages.
The defendants intend to defend this action vigorously.
On
January 16, 2011, the Board of Directors of the Company, on the recommendation
of the Company’s Compensation Committee, authorized and approved the 2010 equity
incentive plan (the “Plan”). The purpose of the Plan is to retain the services
of eligible recipients, to secure and retain the services of new eligible
recipients, and to provide incentives for eligible recipients to exert maximum
efforts for the success of the Company.
Awards
under the Plan may be in the form of (i) incentive stock options; (ii)
nonstatutory stock options; (iii) restricted stock grants; (iv) restricted stock
unit grants; and (v) stock appreciation rights.
A total
of 1,500,000 shares of common stock are available for issuance under the
Plan. The Company intends to seek stockholder approval of the Plan at
the 2010 Annual Meeting of Stockholders, which is to be held on
March 9, 2011.
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 or sell directly to
enterprise accounts. 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.
Typically,
60 days’ credit is given to the bulk customers.
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 and animal feed
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 Phase 1 facility in February 2010. Phase 1 of the
project involves constructing a facility with a capacity of 150 tons of
probiotics per year and costs $36 million in total, the sum of which was
paid off in calendar year 2010. Phase 2 of this project commenced in
September 2010 and is expected to cost $18 million, $11 million of which
was paid in calendar year 2010 and $7 million of which is scheduled to be paid
by the end of June 2011, the date when Phase 2 is expected to be
completed. The construction of Phase 1 of the plant was funded by
cash received from the sale of a convertible promissory note to Pope Investments
II LLC on December 11, 2007 and the proceeds of the public offering of our
common stock in October 2009. 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 acquired the land use
right of 36,075 square meters of land in the Shanghai Qingpu Industrial Park
District on which the new bulk manufacturing facilities are located. The plant
has 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 $58 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. During this quarter, the
Company made its first payment of RMB13,251,355 (or approximately $ 2 million)
to acquire the land use right of 118.54 mu land (or approximately
79,029.3 square meters).We expect to received the land certificate by the end of
June 2011.
As of
December 31, 2010, we have entered into contracts with 49 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, Tianjin, and Shanghai, and 14 provinces including
Jiangsu and Jiangxi, among others. These growing companies are among
the leaders in the dairy, animal feed, baked foods, and pharmaceutical
industries. The Company’s Pudong manufacturing and packaging facility is used to
produce retail products. 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 have reached the production run-rate of 75
metric tons/year as of the end of 2010. 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 to bulk business and to improve
operating efficiency, we plan to consolidate our retail outlets. We
currently have a total of 15 retail outlets. On the retail business front, we
believe the distribution network for our retail products is more efficient than
directly selling through retail outlets, which involves increased leasing
expenses and large staffing cost. By selecting four new distributors,
we have expanded our distribution network into the Pan-Beijing area to sell the
Company's retail products. The local distributors sell the Company’s
retail probiotics products through established distribution networks, including
malls, supermarkets, and functional food stores adding approximately 30 new
points of sale. During the quarter ended December 31, 2010, we added 5
more distributors. We now have a total of 34 distributors for retail
products. In light of increasing online sales of health food in
China, we have started to work with two on-line selling companies to sell our
retail products. Further more, the Company established an e-commerce
department this quarter, which will be dedicated to selling our retail products
online. We plan to build our own online selling platform, which will
be launched by the end of fiscal year 2011 to promote our retail products
sales.
On the
bulk business front, we signed 12 new customers for bulk additives
probiotics products in this quarter. Among the 12 small to medium sized new
customers, one is an animal feed manufacturer, five are functional food,
nutritional products, and pharmaceutical producers, and the remaining six
are dairy companies.
Results
of Operations
Quarter
Ended December 31, 2010 Compared with the Quarter Ended December 31,
2009
Our net
profit was $13.3 million in the quarter ended December 31, 2010. This
includes a $2.85 million surplus arising from the change in the value of
derivatives. Excluding the value change of the derivatives and fair
value change of the Note, our net income was $10.45 million, which is 33.4%
higher than our net income for the quarter ended December 31, 2009.
Our
results for the three months and nine months ended December 31, 2010 and 2009
are summarized below:
|
|
Three
months
ended
December
31,
2010
|
|
|
Three
months
ended
December
31,
2009
|
|
|
|
Amount
|
|
|
%
of
Net
sales
|
|
|
Amount
|
|
|
%
of
Net
sales
|
|
Net
sales
|
|
$
|
32,384,645
|
|
|
|
100
|
%
|
|
$
|
23,294,321
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
(11,198,703
|
)
|
|
|
(34.58
|
)
%
|
|
|
(6,780,161
|
)
|
|
|
(29.11
|
)
%
|
Gross
profit
|
|
$
|
21,185,942
|
|
|
|
65.42
|
%
|
|
$
|
16,514,160
|
|
|
|
70.89
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
$
|
(3,861,261
|
)
|
|
|
(11.92
|
)%
|
|
$
|
(4,140,738
|
)
|
|
|
(17.78
|
)%
|
General
and administrative expenses
|
|
|
(3,190,506
|
)
|
|
|
(9.85
|
)%
|
|
|
(1,366,243
|
)
|
|
|
(5.86
|
)%
|
Research
and development costs
|
|
|
(1,884,119
|
)
|
|
|
(5.82
|
)%
|
|
|
(894,101
|
)
|
|
|
(3.84
|
)%
|
Other
income/(expense), net
|
|
|
539,451
|
|
|
|
1.66
|
%
|
|
|
3,179
|
|
|
|
0.01
|
%
|
Total
operating expenses
|
|
$
|
(8,396,435
|
)
|
|
|
(25.93
|
)
%
|
|
$
|
(6,397,903
|
)
|
|
|
(27.47
|
)
%
|
Income
from operations
|
|
$
|
12,789,507
|
|
|
|
39.49
|
%
|
|
$
|
10,116,257
|
|
|
|
43.43
|
%
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in the fair value of embedded derivatives
|
|
$
|
2,847,000
|
|
|
|
8.79
|
%
|
|
$
|
2,668,000
|
|
|
|
11.45
|
%
|
Interest
income
|
|
|
103,495
|
|
|
|
0.32
|
%
|
|
|
74,438
|
|
|
|
0.32
|
%
|
Total
other income
|
|
$
|
2,950,495
|
|
|
|
9.11
|
%
|
|
$
|
2,742,438
|
|
|
|
11.77
|
%
|
Income
before taxes
|
|
$
|
15,740,002
|
|
|
|
48.61
|
%
|
|
$
|
12,858,695
|
|
|
|
55.20
|
%
|
Provision
for income taxes
|
|
|
(2,476,772
|
)
|
|
|
(7.65
|
)
%
|
|
|
(2,379,613
|
)
|
|
|
(10.22
|
)
%
|
Net
income
|
|
$
|
13,263,230
|
|
|
|
40.96
|
%
|
|
$
|
10,479,082
|
|
|
|
44.99
|
%
|
|
|
Nine
months
ended
December
31,
2010
|
|
|
Nine
months
ended
December
31,
2009
|
|
|
|
Amount
|
|
|
%
of
Net
sales
|
|
|
Amount
|
|
|
%
of
Net
sales
|
|
Net
sales
|
|
$
|
80,909,011
|
|
|
|
100
|
%
|
|
$
|
55,855,442
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
(27,317,786
|
)
|
|
|
(33.77
|
)
%
|
|
|
(16,259,457
|
)
|
|
|
(29.11
|
)
%
|
Gross
profit
|
|
$
|
53,591,225
|
|
|
|
66.23
|
%
|
|
$
|
39,595,985
|
|
|
|
70.89
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
$
|
(9,478,797
|
)
|
|
|
(11.72
|
)%
|
|
$
|
(9,221,564
|
)
|
|
|
(16.51
|
)%
|
General
and administrative expenses
|
|
|
(5,870,538
|
)
|
|
|
(7.26
|
)%
|
|
|
(3,649,818
|
)
|
|
|
(6.53
|
)%
|
Research
and development costs
|
|
|
(4,559,372
|
)
|
|
|
(5.64
|
)%
|
|
|
(2,282,409
|
)
|
|
|
(4.09
|
)%
|
Other
income/(expense), net
|
|
|
894,538
|
|
|
|
1.10
|
%
|
|
|
72,110
|
|
|
|
0.13
|
%
|
Total
operating expenses
|
|
$
|
(19,014,169
|
)
|
|
|
(23.50
|
)
%
|
|
$
|
(15,081,681
|
)
|
|
|
(27.00
|
)
%
|
Income
from operations
|
|
$
|
34,577,056
|
|
|
|
42.74
|
%
|
|
$
|
24,514,304
|
|
|
|
43.89
|
%
|
Other
income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in the fair value of embedded derivatives
|
|
$
|
14,797,000
|
|
|
|
18.29
|
%
|
|
$
|
(6,248,000
|
)
|
|
|
(11.19
|
)%
|
Interest
income
|
|
$
|
288,665
|
|
|
|
0.36
|
%
|
|
|
214,307
|
|
|
|
0.38
|
%
|
Total
other (expenses)/ income
|
|
$
|
15,085,665
|
|
|
|
18.65
|
%
|
|
$
|
(6,033,693
|
)
|
|
|
(10.81
|
)
%
|
Income
before taxes
|
|
$
|
49,662,721
|
|
|
|
61.38
|
%
|
|
$
|
18,480,611
|
|
|
|
33.08
|
%
|
Provision
for income taxes
|
|
|
(6,704,028
|
)
|
|
|
(8.29
|
)
%
|
|
|
(5,716,846
|
)
|
|
|
(10.24
|
)
%
|
Net
income
|
|
$
|
42,958,693
|
|
|
|
53.10
|
%
|
|
$
|
12,763,763
|
|
|
|
22.84
|
%
|
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 December 31, 2010 and 2009
comprised the following:
|
|
Three months ended December
31,
|
|
|
Nine months ended December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
33,446,875
|
|
|
$
|
24,668,040
|
|
|
$
|
83,935,719
|
|
|
$
|
59,340,475
|
|
|
|
|
(870,128
|
)
|
|
|
(1,216,044
|
)
|
|
|
2,361,521
|
|
|
|
(2,943,740
|
)
|
|
|
|
(192,102
|
)
|
|
|
(157,675
|
)
|
|
|
(665,187
|
)
|
|
|
(541,293
|
)
|
|
|
$
|
32,384,645
|
|
|
$
|
23,294,321
|
|
|
$
|
80,909,011
|
|
|
$
|
55,855,442
|
|
Net sales
of $32,384,645 for the quarter ended December 31, 2010 were 39.0% above the net
sales of $23,294,321 for the quarter ended December 31, 2009. The increase was
primarily due to the increase in the sales of bulk additive products, which was
133.1% compared with the same period last fiscal year, while the increase in
retail net sales was 1.8%. The increase in sales of bulk addictives
products is a result of increasing demand from both existing customers and newly
developed customers. On the one hand, sales of human-used bulk products
accounted for approximately 75.3% of sales of bulk additives, including culture
products sold to dairy manufacturers to produce yogurt, which caused the sale of
bulk additive products to ramp up significantly during this quarter. Sales
of animal-used bulk products, on the other hand, maintained a steady growth pace
during this quarter.
The
contributions of the retail products as a percentage of the total value on sales
were approximately 55.8% and 74.3% for the three months ended December 31, 2010
and 2009, respectively, and were approximately 58.0% and 73% for the nine months
ended December 31, 2010 and 2009, respectively. The contributions of the bulk
additives products as a percentage of the total value on sales were
approximately 44.2% and 25.7% for the three months ended December 31, 2010 and
2009, respectively, and were approximately 42.0% and 27% for the nine
months ended December 31, 2010 and 2009, respectively. The percentage
weight increase of bulk additives in total sales over the nine month period of
fiscal year 2011 represented the Company’s strategic shift from retail products
to bulk additive products. We expect the trend will continue in both the
short-term and long-term.
Cost
of Sales
Cost of
sales for the three months ended December 31, 2010 was $11,198,703 compared with
$6,780,161 for the three months ended December 31, 2009. The increase in
cost of sales was primarily due to the increase in the production of bulk
additive products.
Gross
profit
Gross
profit for the three months ended December 31, 2010 was $21,185,942 compared
with $16,514,160 for the three months ended December 31, 2009. Gross profit for
the nine months ended December 31, 2010 was $53,591,225, compared with
$39,595,985 for the nine months ended December 31, 2009. The increase in
gross profit was primarily due to the increase in the sales of bulk additives
products.
The
average gross profit percentage for all of our products for the three months and
nine months ended December 31, 2010 and 2009 are summarized below:
|
|
Three months ended December
31,
|
|
|
Nine months ended December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
%
|
|
|
71
|
%
|
|
|
66
|
%
|
|
|
71
|
%
|
Gross
profit margin decreased from 71% in the quarter ended December 31, 2009 to 65%
this quarter, which was primarily due to a change of product mix, increasing
production labor cost in the Shanghai area, and increasing raw material cost. On
the retail products front, sales volume of one of our lower margin retail
products increased significantly while gross margin of other products remained
flat over the year. On the bulk products front, we added 20 production workers
during this quarter and reached a total of 176 workers, compared with a total of
109 workers a year ago. We are experiencing steadily increasing wages of
our skilled workers in the Shanghai area. We also introduced some new
ingredients, which increased the production cost, to improve the quality of the
bulk products. We expect the overall gross margin will remain stable at this
level in near term.
Selling
expenses
Selling
expenses were $3,861,261 or 11.92% of net sales for the three months ended
December 31, 2010, compared with $4,140,738 or 17.78% of net sales for the
three months ended December 31, 2009. Selling expenses were $9,478,796 or
11.78% of net sales for the nine months ended December 31, 2010, compared
with $9,221,564 or 16.51% of net sales for the nine months ended December
31, 2009. The decrease of selling expenses as a percentage of total sales
was primarily due to the decrease of operating costs of retail outlets. As of
December 31, 2010, we had a total of 15 retail outlets in operation compared
with 111 outlets as of December 31, 2009. The Company had 59 employees working
for retail outlet operations as of December 31, 2010, compared with 222
employees in retail outlet operations as of December 31, 2009. The
operating costs of the retail outlets, including both rental and hiring
expenses, dropped significantly when the Company closed the majority of its
retail outlets in 2010. For the bulk business, our selling expense is
slightly lower this quarter, but we expect it will increase slightly in the
future as we will have more spending in sales promotion.
General
and administrative expenses
General
and administrative expenses were $3,190,506 or 9.85% of net sales for the three
months ended December 31, 2010, compared with $1,366,243 or 5.86% of net sales
for the three months ended December 31, 2009. General and administrative
expenses were $5,870,538 or 7.26% of net sales for the nine months ended
December 31, 2010, compared with $3,649,818 or 6.53% of net sales for the nine
months ended December 31, 2009. The increase of general and administrative
expenses was primarily due to the increased operating costs of our newly
established bulk addictives products business, combined with an increase of
general and administrative expenses at the holding company level, such as the
legal and consulting expenses. As of December 31, 2010, although the total
number of employees was decreased, this did not result in the decrease in
relative general and administrative expenses because the decrease in the number
of employees resulted from a combined effect of a decrease in the number of
employees for retail outlets, the expenses of which were included in selling
expenses, and an increase in the number of employees for our bulk addictives
business.
Provision
for income taxes
Provision
for income taxes was $2.48 million and $2.38 million for the three
months ended December 31, 2010 and 2009, respectively.
Income before taxes was $12.89 million for the three month period ended
December 31, 2010, compared with a $10.42 million profit, excluding the
$2.85 million surplus on revaluation of the Note, for the three month period
ended December 31, 2009. The increase in income tax payable is
attributable to an increase in operating profit. (See Note 9)
Segment
reporting
We have
adopted the “products and services” approach for segment reporting. For the
three months ended December 31, 2010 and 2009, the Company had only
one category of products and services, the probiotics products as a health
supplement, which is manufactured, delivered, and sold in one geographic area,
the PRC. Moreover, all of our long-lived assets are physically located in
China.
Liquidity
and Capital Resources
We had
cash of $132.29 million and working capital of $133.27 million as of
December 31, 2010. Cash generated from operations was $18.17 million in the nine
months ended December 31, 2010.
We had
capital expenditures totaling $16.36 million in the nine months ended December
31, 2010, mainly in connection with the construction of the new
plant.
Our
Pudong facility commenced operations in 2000. With the increases in sales
volume in the last couple of years, the Pudong facility is reaching its full
production capacity. We are constructing a new Phase 2 plant with an overall
project size of $54 million. (See Overview)
At our
Pudong plant, the Company plans to expand the retail product packaging facility
and make technical improvements to the existing fermentation facility, which
will cost approximately $3 million.
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 $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 the Note to Pope Investments II LLC, an affiliate
of Pope Investments, LLC, with a maturity date of December 11, 2010. The
principal amount of the Note was convertible into shares of our common stock at
an exercise price of $12.00 per share at any time until the maturity date.
Net proceeds of the Note were used to fund the construction of the
150-metric-ton-per-year manufacturing facility in Qingpu and other capital
expenditures.
On
December 9, 2010, the Company repaid in full its obligations under the Note in
the original aggregate principal amount of $25,000,000. The payoff amount
of $29,684,932, consisting of $25,000,000 of outstanding principal and
$4,684,932 of accrued interest, was paid to Pope Investments II LLC, and all
security interests and liens held by Pope Investments II LLC were terminated and
released, including (1) a guaranty by Mr. Song Jinan of the Company’s
obligations under the Note backed by a pledge of 4,000,000 shares of
China-Biotics’ common stock owned by Mr. Song; and (2) a pledge by the Company
of 100% of the stock of SGI to Pope Investments II LLC.
Inflation
During
the quarter ended December 31, 2010, there were small increases in cost of pulp,
paper, other raw materials. We also saw price increases in the lease
market. The closure of a number of retail outlets, however, reduced the
leasing costs, and staff cost 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 retail 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, 2010.
Contractual
Obligations
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Total
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Less than 1
year
|
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1-3 years
|
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3-5 years
|
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More than
5 years
|
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Capital
Lease Obligations(2)
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Operating
Lease Obligations(1)
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(1) See
Note 10(a) to our consolidated financial statements in this Quarterly
Report.
(2) See
Note 10(b) to our consolidated financial statements in the Quarterly
Report.
(3)
Estimated contractual purchases with suppliers as of December 31,
2010.
(4) See
Note11 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 $1,884,119 and
$894,101 in the three months ended December 31, 2010 and December 31, 2009,
respectively. Research and development costs for the nine months ended
December 31, 2010 and December 31, 2009 were $4,559,372 and $2,282,409,
respectively. The significant increase in expenditures was primarily due
to the newly established production facilities, combined with increased research
on markets, demands and customer consumption habits, various inspections of the
new products, and relevant general and administrative expenses.
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 December 31, 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 $39,371,765 as of December 31,
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 the Note, which was 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 December 31, 2010 Interim Financial Statements. Other new
pronouncements issued, but not yet effective until after December 31, 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
Exchange Act) 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 Exchange Act 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
in the United States District Court for the Central District of California
(Mohapatra v. China-Biotics,
Inc., et al.
No. 10-cv-6954 (C.D. Cal.), the "California Action") and
the other in the United States District Court for the Southern District of
New York (
Hill v.
China-Biotics, Inc., et al.
No. 10-cv-7838 (S.D.N.Y.), the "New
York Action"). After certain shareholders filed motions for
appointment as lead plaintiff in both lawsuits, the plaintiff in the California
Action voluntarily dismissed its case. The plaintiff in the New York
Action, who seeks to represent a class of those who
bought China-Biotics securities between July 10, 2008 and August 30,
2010, alleges that the defendants violated Section 10(b)
and Section 20(a) of the Securities Exchange Act of 1934, and the rules and
regulations promulgated thereunder, by making material misstatements or failing
to disclose certain material information regarding, among other things,
China-Biotics' financial condition, operations, and future business prospects,
and the quality, nature, and quantity of China-Biotics' retail outlets and
stores. The complaint seeks unspecified damages. China-Biotics
intends to defend this action vigorously.
China-Biotics,
Inc. and its directors have been named as defendants in a derivative lawsuit
filed in the United States District Court for the District of Columbia (
Marteney v. Song Jinan, et
al
., No. 10-cv-1983 (D.D.C.)). The complaint alleges
that the directors breached their fiduciary duties by disseminating false
and misleading financial statements and seeks unspecified damages.
The defendants intend to defend this action 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
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. During the
quarter ended December 31, 2010, the Company did not repurchase any of its
shares.
ITEM 3.
DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4.
[REMOVED AND
RESERVED.]
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
Number
|
|
Exhibit
|
|
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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).
|
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
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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).
|
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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).
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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).
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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).
|
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District
Entrance Project Agreement dated August 12,
2010*
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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).
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List
of subsidiaries (incorporated by reference to Exhibit 21.1 to
China-Biotics, Inc.’s Form SB-2 filed on March 24,
2006).
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Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*
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Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*
|
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Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002**
|
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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.
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|
(Registrant)
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/s/
Song Jinan
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Date: February
14, 2011
|
Song
Jinan
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|
Chief Executive
Officer
|
|
|
|
/s/
Travis Cai
|
|
Travis
Cai
|
|
Chief
Financial Officer
|
|
|
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