CHINA-BIOTICS, INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - CHINA-BIOTICS, INC	v173923_ex32-2.htm
EX-31.1 - CHINA-BIOTICS, INC	v173923_ex31-1.htm
EX-31.2 - CHINA-BIOTICS, INC	v173923_ex31-2.htm
EX-32.1 - CHINA-BIOTICS, INC	v173923_ex32-1.htm

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, 2009

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

EXCHANGE ACT

For the Transition Period from _______ to _________

001-34123

(Commission File Number)

CHINA-BIOTICS, INC.

(Exact Name of registrant as specified in its charter)

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

No. 999 Ningqiao Road

Jinqiao Export Processing Zone

Pudong, Shanghai 201206

People’s Republic of China

(Address of Principal Executive Offices)

Telephone number: (86 21) 5834 9748

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	þ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

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

TABLE OF CONTENTS

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

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts expressed in US Dollars)

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

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts expressed in US Dollars)

	Three months ended December 31,						Nine months ended December 31,
	2009			2008			2009			2008
Net sales	$	23,294,321		$	15,810,111		$	55,855,442		$	38,676,017
Cost of sales		(6,780,161	)		(4,583,371	)		(16,259,457	)		(11,304,893	)
Gross profit	$	16,514,160		$	11,226,740		$	39,595,985		$	27,371,124
Operating expenses:
Selling expenses	$	(4,140,738	)	$	(3,330,668	)	$	(9,221,564	)	$	(8,514,090	)
General and administrative expenses		(2,260,344	)		(1,353,561	)		(5,932,227	)		(4,218,494	)
Other income		3,179			-			72,110			1,492,361
Other expense		-			(42,719	)		-			(42,719	)
Total operating expenses	$	(6,397,903	)	$	(4,726,948	)	$	(15,081,681	)	$	(11,282,942	)
Income from operations	$	10,116,257		$	6,499,792		$	24,514,304		$	16,088,182
Other income and expenses:
Changes in the fair value of embedded derivatives	$	2,668,000		$	1,408,000		$	(6,248,000	)	$	2,073,000
Interest income		74,438			60,442			214,307			213,490

Total other income / (expense)	$	2,742,438		$	1,468,442		$	(6,033,693	)	$	2,286,490
Income before taxes	$	12,858,695		$	7,968,235		$	18,480,611		$	18,374,673
Provision for income taxes		(2,379,613	)		(2,299,348	)		(5,716,846	)		(4,996,916	)
Net income	$	10,479,082		$	5,668,887		$	12,763,765		$	13,377,757

Earnings per share:
Basic	$	0.48		$	0.33		$	0.68		$	0.78
Diluted	$	0.32		$	0.22		$	0.68		$	0.59

Weighted average shares outstanding
Basic		21,978,242			17,080,000			18,706,788			17,080,000
Diluted		24,061,575			19,163,333			18,706,788			19,163,333

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts expressed in US Dollars)

	Common Stock											Accumulated		Capital &
	Shares		Par value $0.0001		Additional Paid-in Capital		Retained Earnings		Treasury Stock			Comprehensive Income		Statutory Reserves		Total
Balance-March 31, 2009		41,461,004		4,146		7,863,031		49,794,033		(2,438	)		4,711,788		3,025,794		65,396,354
Issuance of share capital		5,290,000		529		74,906,043											74,906,572
Comprehensive income:
Net income								12,763,765									12,763,765
Other comprehensive income:
Foreign currency translation adjustments, net of taxes of $0													194,079				194,079
Total comprehensive income
Balance- December 31, 2009		46,751,004		4,675		82,769,074		62,557,798		(2,438	)		4,905,867		3,025,794		153,260,770

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Amounts expressed in US Dollars)

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

Supplemental disclosure cash flow information:
Interest paid		1,005,859			808,219
Income tax paid		3,539,063			2,010,345

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

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 nine months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the year ending March 31, 2010.

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

Recent Accounting Pronouncements

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

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

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

In May 2009, the FASB issued ASC 855-10, Subsequent Events (“ASC 855-10”). ASC 855-10 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10 is applicable for interim or annual periods after June 15, 2009. The Company adopted this amended topic effective July 1, 2009.

2.	EARNINGS PER SHARE

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

The following table sets forth the computation of basic and diluted earnings per share:

	Three months ended December 31,						Nine months ended December 31,
	2009			2008			2009		2008
Earnings per share - Basic
Income for the period	$	10,479,082		$	5,668,887		$	12,763,765	$	13,377,757
Basic average common stock outstanding		21,978,242			17,080,000			18,706,788		17,080,000
Earnings per share	$	0.48		$	0.33		$	0.68	$	0.78

Earnings per share - Diluted
Income for the period	$	10,479,082		$	5,668,887		$	12,763,765	$	13,377,757
Change in fair value of embedded derivatives		(2,668,000	)		(1,408,000	)		-		(2,073,000	)
	$	7,811,019		$	4,260,887		$	12,763,765	$	11,304,757
Basic average common stock outstanding		21,978,242			17,080,000			18,706,788		17,080,000
Diluted effect from embedded derivatives		2,083,333			2,083,333			-		2,083,333
Diluted average common stock		24,061,575			19,163,333			18,706,788		19,163,333
Net earnings per share	$	0.32		$	0.22		$	*0.68	$	0.59

* the effect of embedded derivatives was not included for the computation of diluted earnings per share for the 9-month period end as the inclusion would be anti-dilutive.

3.	RISKS, UNCERTAINTIES, AND CONCENTRATIONS

(a) Nature of Operations

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

(b) Concentration of Credit Risk

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

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

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

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

	Percentage of Gross Sales Three Months ended December 31,						Percentage of Gross Sales Nine Months ended December 31,						Percentage of Accounts Receivable as at
	2009			2008			2009			2008			December 31, 2009			March 31, 2009

Customer A		12	%		-			14	%		-			16	%		*-
Customer B		*			10	%		*			12	%		*			*

* less than 10%

4.	ACCOUNTS RECEIVABLE

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

	December 31, 2009			March 31, 2009

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

5.	INVENTORIES

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

	December 31, 2009		March 31, 2009

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

6.	AMOUNT DUE FROM/TO A DIRECTOR

As of December 31, 2009, the amount due from a director, Mr. Song Jinan, represented advances to him for the business interest of the Company. The amount was unsecured, interest-free and will be returned to the Company on the expiration of the business interest or in no case later than March 31, 2010.

As of March 31, 2009, the amount due to a director, Mr. Song Jinan, represented temporary advances to the Company which was unsecured, interest-free and repayable on demand.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

7.	PROPERTY, PLANT AND EQUIPMENT AND LAND USE RIGHT

The Group’s property, plant and equipment and land use right as of the balance sheet date as presented in these financial statements are summarized as follows:

	December 31, 2009			March 31, 2009

Land use right	$	1,881,208		$	1,878,643
Plant and machinery		7,521,660			7,510,635
Office equipment		3,578,447			3,565,390
Motor vehicles		246,325			245,989
Leasehold improvements		2,932,937			2,422,575
		16,160,577			15,623,232
Less: Accumulated depreciation	$	(7,901,641	)	$	(6,460,354	)
		8,258,936			9,162,878
Construction in progress	$	30,762,531		$	23,916,961
	$	39,021,467		$	33,079,839

Depreciation and amortization expenses were $485,838 and $435,916 for three months ended December 31, 2009 and 2008 respectively, and $1,433,087 and $1,303,414 for nine months ended December 31, 2009 and 2008 respectively.

8.	TAX PAYABLES

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

	December 31, 2009		March 31, 2009

Value added tax and other taxes	$	7,271,497	$	5,949,853
Income tax		4,618,606		4,120,961
Surcharge		13,167,431		11,513,750
Dividends withholding tax		3,949,267		3,943,883
	$	29,006,801	$	25,528,447

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

The income/(loss) generated in the United States, the British Virgin Islands and the PRC before income taxes during the periods as presented in these financial statements is summarized as follows:

	Three months ended December 31,					Nine months ended December 31,
	2009			2008		2009			2008
Income/ (loss) in the United States before income taxes	$	2,392,661		$	1,248,530	$	(7,398,814	)	$	1,736,831
(Loss)/income in the British Virgin Islands before income taxes		(33,794	)		(16,536)		(45,662	)		451,382
Income in the PRC before income taxes		10,499,828			6,736,241		25,925,087			16,186,460
	$	12,858,695		$	7,968,235	$	18,480,611		$	18,374,673

The Company, which is incorporated in the United States, is subject to U.S. tax law. Other than legal and professional expenses for the daily operations of the Company, the income generated from the United States is the change in the fair value of the embedded derivatives of the 4% Senior Convertible Promissory Note issued on December 11, 2007.

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

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

	Three months ended December 31,				Nine months ended December 31,
	2009		2008		2009		2008

Current	$	2,190,412	$	1,799,348	$	5,660,998	$	4,496,916
Deferred		189,201		500,000		55,848		500,000
	$	2,379,613	$	2,299,348	$	5,716,846	$	4,996,916

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

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

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

The principal reconciling items from income tax computed at the statutory rates and at the effective income tax rates are as follows:

	Three months ended December 31,						Nine months ended December 31,
	2009			2008			2009			2008
Computed tax at the local PRC statutory rate (25%)	$	3,214,674		$	1,992,058		$	4,620,153		$	4,593,667
Non-deductible items		102,064			41,976			3,539,667			486,643
Non-taxable items		(907,119	)		(462,342	)		(1,087,929	)		(1,390,962	)
Effect of different tax rate in other jurisdiction		215,339			112,368			(665,894	)		156,315
Valuation allowance		-			64,185			90,434			138,760
Tax concession		(1,093,810	)		(489,509	)		(2,689,187	)		(1,115,638	)
Surcharge at 0.05% per day on accrued taxes		549,696			540,612			1,627,227			1,628,131
Under-provision in respect of prior periods		298,770			-			298,770			-
Total provision for income at effective rate		2,379,613			1,799,348			5,716,846			4,496,916
Temporary difference associated with investments in subsidiary		-			500,000			-			500,000
	$	2,379,613		$	2,299,348		$	5,716,846		$	4,996,916

Deferred tax assets arose primarily from the tax losses carry forwards. As at December 31, 2009, one of the Company's PRC subsidiaries has incurred tax losses which can be carried forward to a maximum of 5 years of approximately US$2,305,784 (December 31, 2008: US$953,881).

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

9.	COMMITMENTS

(a) Operating Leases

The Group leases office space, warehouse facilities and retail outlets under various operating leases, certain of which contain escalation clauses. Rental expenses under operating leases included in the statement of income were $955,377 and $996,617 for the quarters ended December 31, 2009 and 2008, respectively.

At December 31, 2009, the Group was obligated under operating leases requiring minimum rental as follows:

	December 31, 2009
Payable within
1 year	$	397,019
2 to 5 years		59,644
Thereafter		-
	$	456,663

(b) Capital commitments

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

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

(d) Other obligations

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

10.	CONVERTIBLE NOTES

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

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

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

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

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

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

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

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

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

As of December 31, 2009, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis, including its derivative instruments related to its 2007 Notes. The fair value of the embedded derivatives was determined using the following inputs in accordance with ASC 820 at December 31, 2009:

	Fair Value Measurements
	Balance		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Embedded derivatives - conversion right
As at December 31, 2009	$	8,908,000	$	-	$	-	$	8,908,000
As at March 31, 2009	$	2,660,000	$	-	$	-	$	2,660,000

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in US Dollars)

The following table presents a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from March 31, 2009 to December 31, 2009:

	Derivative Liability - Conversion Rights
	2009		2008

Balance at March 31	$	2,660,000	$	5,752,000
Adjustment to fair value included in earnings		6,248,000		(2,073,000	)
Balance at December 31	$	8,908,000	$	3,679,000

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

The fair value of the embedded derivatives was determined using the Binomal Model based on the following assumptions:

	December 31, 2009			March 31, 2009

Risk-free rate of return		0.47	%		0.54	%
Time to expiration	0.95 years			1.67 years
Volatility rate		91.35	%		69.08	%
Dividend yield		-			-

As at December 31, 2009 and March 31, 2009, the Note interest amounting to $4,720,805 and $2,718,791 was capitalized under construction in progress.

The capitalized debt discount under construction in progress was $5,413,882 and $3,117,946 as at December 31, 2009 and March 31, 2009 respectively.

11.	PUBLIC OFFERING

On October 5, 2009, the Company closed an underwritten public offering of 4,600,000 shares of its common stock at a price of $15.00 per share. On October, 26, 2009, an additional 690,000 shares were sold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering, including the over-allotment, after deducting underwriting discounts, and offering expenses, were approximately $74.9 million. The Company expects to use the net proceeds from the offering for general corporate purposes, including expanding its retail operations, expanding its products, acquiring additional retail outlets, funding Phase 2 of our bulk manufacturing facility, and for general working capital purposes.

The offering was made pursuant to an underwriting agreement, dated September 29, 2009, by and between the Company and Roth Capital Partners, LLC, as sole manager and representative of the underwriters named therein. The offering of the Shares was registered under the Securities Act of 1933, as amended, pursuant to the Company’s shelf registration statement on Form S-3, as amended by Amendment No. 1 and Amendment No. 2 to Form S-3 (File No. 333-160519).

12.	SUBSEQUENT EVENTS

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

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

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

Overview

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

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

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

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

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

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

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

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

Results of Operations

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

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

Our results for the three months and nine months ended December 31, 2009 and 2008 are summarized below:

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

Net (Loss)/ income	$	10,479,082			44.99	%	$	5,668,887			35.86	%

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

Net income	$	12,763,763			22.84	%	$	13,377,757			34.59	%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the three months and nine months ended December 31, 2009 and 2008 comprised the following:

	Three months ended December 31,						Nine months ended December 31,
	2009			2008			2009			2008
Invoiced value on sales	$	24,668,040		$	16,444,448		$	59,340,475		$	40,218,563
Less: sales discount		(1,216,044	)		(539,424	)		(2,943,740	)		(1,298,000	)
Less : sales tax		(157,675	)		(94,913	)		(541,293	)		(244,546	)
	$	23,294,321		$	15,810,111		$	55,855,442		$	38,676,017

Net sales of $23,294,321 for the quarter ended December 31, 2009 were 47.34% above the net sales of $15,810,111 for the quarter ended December 31, 2008. The increase was mainly because of an increase in overall sales volume arising from new product sales, particularly, bulk additives (offsetting decrease in sales volume of existing products), and adjustment of product mix.

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

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

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

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

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

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

Cost of sales

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

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

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

	Percentage increase (decrease) from the prior year
	Nine months ended December 31,
	2009									2008
	Unit volume			Unit costs			Overall increase / (decrease)			Unit volume			Unit costs			Overall increase / (decrease)
Retails		12	%		(7	)%		19	%		(4	)%		18	%		14	%
Bulk additives		583	%		(67	)%		125	%		2174	%		2	%		2219	%

Gross profit

Gross profit for the three months ended December 31, 2009 was $16,514,160 compared with $11,226,740 for the three months ended December 31, 2008. Gross profit for the nine months ended December 31, 2009 was $39,595,985 compared with $27,371,124 for the nine months ended December 31, 2008. The increase in gross profit was primarily due to an increase in overall sales volume.

The average gross profit percentage for all of our products for the three months and nine months ended December 31, 2009 and 2008 are summarized below:

	Three months ended December 31,						Nine months ended December 31,
	2009			2008			2009			2008

Average for all products		71	%		71	%		71	%		71	%

The 71 % gross profit margin remains solidly above our full year projection of 70%.

Selling expenses

Selling expenses were $4,140,738 or 17.62% of net sales for the three months ended December 31, 2009 compared with $3,330,668 or 21.1% of net sales for the three months ended December 31, 2008. Selling expenses for the nine months ended December 31, 2009 were $9,221,564 or 16.45% of net sales compared with $8,514,090 or 22.01% for the nine months ended December 31, 2008. The operating costs of the retail outlets are included as selling expenses. With the opening of four retail outlets during the quarter, selling expenses increased. As of December 31, 2009, we had a total of 111 retail outlets in operation compared with 107 outlets as of December 31, 2008.

General and administrative expenses

General and administrative expenses were $2,260,344 or 9.70% of net sales for the three months ended December 31, 2009 compared with $1,353,561 or 8.56% of net sales for the three months ended December 31, 2008. General and administrative expenses for the nine months ended December 31, 2009 were $5,932,227 or 10.62% of net sales compared with $4,218,494 or 10.91% for the nine months ended December 31, 2008. The increase of general and administrative expenses was primarily due to the increase of legal and professional fees, research fee and staff costs. As of December 31, 2009, we had a total of 497 employees, compared with 339 as of December 31, 2008. Research and development expenses were $894,101 or 3.84% of net sales for the three months ended December 31, 2009 compared with $740,175 or 4.68% of net sales for the three months ended December 31, 2008. Research and development expenses for the nine months ended December 31, 2009 were $2,282,410 or 4.09% of net sales compared with $2,215,909 or 5.73% of net sales for the nine months ended December 31, 2008. The increase of research and development expenses was primarily due to develop the products of bulk additives in difference sectors.

Provision for income taxes

Provision for income taxes was $2.4 million and $2.3 million for the three months ended December 31, 2009 and 2008, respectively. Excluding the $2.67 million surplus on revaluation of the convertible note, income before taxes was $7.8 million for the three months ended December 31, 2009 compared with $4.3 million for the three months ended December 31, 2008. The increase in income tax payable is attributable to an increase in operating profit.

Segment reporting

We have adopted the “products” approach for segment reporting. For the three months and nine months ended December 31, 2009 and 2008, we had only one reporting segment—the probiotic s products as health supplement. We manufactured and sold the probiotic s products solely in China and delivered all shipments to destinations within China, and all of our long-lived assets were physically located in China. We made all sales to external customers.

Liquidity and Capital Resources

We had cash of $151.1 million and working capital of $146.8 million as of December 31, 2009. Cash generated from operations was $13.1 million in the nine months ended December 31, 2009 and $17.1million in the nine months ended December 31, 2008.

We had capital expenditures totaling $3.2 million in the nine months ended December 31, 2009, mainly in connection with the construction of the new plant. We spent $16.0 million on fixed assets in the nine months ended December 31, 2008.

Our current primary facility commenced operations in 2000. With the increases in sales volume in the last couple of years, we are reaching our production capacity. We are constructing a new plant with an overall project size of $45.5 million. Phase 1 of the project involves constructing a facility capable of producing 150 tons of probiotics per annum and cost approximately $27.50 million, $26 million of which is expected to be paid by the end of first quarter of calendar year 2010 and the balance by the end of second quarter of calendar year 2010. The second phase of this project commenced in December 2009.

On October 5, 2009, the Company closed an underwritten public offering of 4,600,000 shares of its common stock at a price of $15.00 per share. On October 26, 2009, an additional 690,000 shares were sold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering, including the over-allotment, after deducting underwriting discounts, and offering expenses, were approximately $74.9 million. The Company expects to use the net proceeds from the offering for general corporate purposes, including expanding its retail operations, expanding its products, acquiring additional retail outlets, funding Phase 2 of our bulk manufacturing facility, and for general working capital purposes.

On December 11, 2007, we issued a 4% Senior Convertible Promissory Note in the amount of $25,000,000 (the “Note”) with a maturity date of December 11, 2010. The principal amount of the Note is convertible into shares of our common stock at an exercise price of $12.00 per share at any time until the maturity date. If the Note is not converted at maturity, we will redeem the Note at a price that gives a total yield of 10% per annum inclusive of the annual interest. The Note also provides for mandatory conversion into common stock if the Group achieve a net income of $60 million in fiscal year 2010. Net proceeds of the Note are being used to fund the construction of a proposed 150-metric-ton-per-year manufacturing facility and for other capital expenditures.

Inflation

During the quarter ended December 31, 2009, there were small increases in pulp and paper costs. However, overall we believe that inflation did not have a significant impact on our results of operations for the quarter.

Seasonality

Typically, 60% of our sales take place in the second half of the fiscal year because many of our customers purchase our products to give as gifts during the Chinese festivals that occur during this time of the year. While it is still too early to tell, we expect that our bulk additive sales will not be seasonal in nature because the bulk products are purchased by food manufacturers consistently over the year.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our principal contractual obligations and commercial commitments over various future periods as of December 31, 2009.

Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Capital Lease Obligations(1)	$	8,465,032	$	8,465,032		-		-		-
Operating Lease Obligations(1)	$	456,663	$	397,019		59,644		-		-
Purchase Obligations(2)	$	10,306,651	$	10,306,651		-		-		-
Long-term loan(3)	$	25,000,000		-	$	25,000,000		-		-
Others	$	938,880	$	616,140	$	322,740		-		-
Total	$	45,167,226	$	19,784,842	$	25,382,384		-		-

(1) See Note 8 to our consolidated financial statements in this Quarterly Report.

(2) Estimated contractual purchases with suppliers as of December 31, 2009.

(3) See Note 9 to our consolidated financial statements in this Quarterly Report.

Research and Development Expenditures

We have a strong research and development team supported by a technical advisory board of experts. In addition to having advanced technology in bacteria culturing and protection, we also conduct research to develop products that address specific health problems using our core technology and Chinese medicine to create genetically engineered drugs and drug delivery solutions and expand our product line. We incurred research and development costs of approximately $894,101 and $740,175 in the three months ended December 31, 2009 and December 31, 2008, respectively.

Critical Accounting Policies

Our critical accounting policies are described in the Notes to the Financial Statements included in our Annual Report filed with the SEC on Form 10-K for the fiscal year ended March 31, 2009, and this Form 10-Q should be read in conjunction with that Annual Report. This MD&A discusses our consolidated financial statements for the three months and nine months ended December 31, 2009 and 2008. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States. In preparing these financial statements, we are required to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We consider accounting policies related to (a) allowance for doubtful accounts, and (b) use of estimates as applied to potential penalties for the late payment of taxes, to be critical accounting policies due to the estimation process involved in each.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical experience and the current and projected financial condition of specific customers. We had trade receivables totaling $22,896,981 as of December 31, 2009, and a $117,942 for allowance for doubtful accounts. We have considered all relevant factors, including the financial conditions, affecting the payment abilities of customers comprising these receivables up to the date of this Form 10-Q and we believe these customers are able to make required payments. We, however, cannot give assurance that these factors, including the financial conditions of these customers, will not change adversely in the future. We will continue to evaluate the ability of all our customers to make required payments. Were the financial condition of a customer to deteriorate, resulting in an impairment of its ability to make payments, allowances may be required.

Use of estimates as applied to potential penalties for the late payment of taxes

Our principal operations are in the PRC. Business enterprises established in the PRC are subject to income taxes and value added taxes under PRC tax laws and regulations unless they have exemptions. We have made tax payments to the PRC tax authorities since 2005. We believe that our operations in the PRC were exempted from income taxes and value added taxes for all prior years because we had been recognized by the local government as an advanced technology enterprise. However, we have never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in the PRC. As a result, there is no way to ascertain the position which may be taken by the relevant PRC tax authorities in the future. Accordingly, our financial statements contain full provisions for all applicable tax liabilities for all prior calendar years. Such provisions for tax liabilities will be reversed out of the financial statements at the appropriate point in the future.

According to PRC tax regulations, our overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of overdue tax liabilities, which amounts to $4.9 million (if calculated based on 0.5 times of taxes payable) to $49 million (if calculated based on five times of the amount of taxes payable) as of December 31, 2008 and 2009. The Group has reserved for the payment of taxes that may be owed for calendar years prior to 2005 and any associated interest surcharges (which are calculated at 0.05% per day on the accrued tax liabilities) in its financial statements until the matter is fully resolved. Following the adoption of FIN48 (now known as ASC 740), the Group has reserved for the surcharges payable for this reporting period. We consider it is more likely than not that the associated penalty will not need to be paid.

Embedded derivatives

On December 11, 2007, the Company issued a 4% Senior Convertible Promissory Note in an amount of $25,000,000 (the “Note”) which is due on December 11, 2010. Pursuant to SFAS No. 133 (now known as ASC 816) “Accounting For Derivatives Instruments And Hedging Activities” and EITF Issue No. 00-19 (now known as ASC 815) “Accounting For Derivatives Financial Instruments Indexed To And Potentially Settled In A Company’s Own Stock”, the Company bifurcates the conversion options with a mandatory conversion feature (“embedded derivatives”) from the Note as the embedded derivatives are determined to be not clearly and closely related to the host contract. The embedded derivatives are recorded at fair value, mark-to-market at each reporting period, and are carried on a separate line in the balance sheet.

Recent Accounting Pronouncements

See Note 1 of the December 31, 2009 Interim Financial Statements. Other new pronouncements issued but not yet effective until after December 31, 2009 are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

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 transaction gains or losses, which are included in our earnings.

Fair Value Risk

We record an adjustment on our convertible notes adjusting the fair value of the embedded conversion options. The change in the value of these instruments is primarily impacted by the price of our stock at the end of each reporting period. This adjustment creates a non-cash effect on our statement of operations which may have a significant impact.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information that is required to be timely disclosed is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Securities Exchange Act of 1934 that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the Company have been detected.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

The information set forth in this report should be read in conjunction with the risk factors discussed in Item 1 of our Annual Report on Form 10-K for the year ended March 31, 2009, which could materially impact our business, financial condition or future results. The risks described in the Annual Report on Form 10-K are not the only risks facing the company. Additional risks and uncertainties not currently known by the company or that are currently deemed to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Number		Exhibit
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006) as amended by the Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to China-Biotics, Inc.’s Form 10-Q filed on November 10, 2008).

10.1		Securities Exchange Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.2		Form of Lockup Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.3		Put Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.4		Registration Rights Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.4 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

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: February 11, 2010	Song Jinan
	Chief Executive Officer

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