UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 2013
¨ 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) 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 þ 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. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | þ |
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 August 9, 2013, 22,150,200 shares of the registrant’s common stock were outstanding.
TABLE OF CONTENTS
Page | ||
PART I - FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS | 3 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 21 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 34 |
ITEM 4. | CONTROLS AND PROCEDURES | 34 |
PART II - OTHER INFORMATION | ||
ITEM 1. | LEGAL PROCEEDINGS | 35 |
ITEM 1A. | RISK FACTORS | 36 |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 37 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 37 |
ITEM 4. | MINE SAFETY DISCLOSURE | 37 |
ITEM 5. | OTHER INFORMATION | 37 |
ITEM 6. | EXHIBITS | 37 |
SIGNATURES | 38 |
2 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012
TABLE OF CONTENTS
Unaudited Condensed Consolidated Financial Statements | 4 |
Condensed Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and March 31, 2013 | 4 |
Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three months ended June 30, 2013 and 2012 | 5 |
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended June 30, 2013 | 6 |
Unaudited Condensed Consolidated Statements of Cash Flow for the three months ended June 30, 2013 and 2012 | 7 |
Notes to the Unaudited Condensed Consolidated Financial Statements | 8 |
3 |
CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in US Dollars)
June 30, 2013 | March 31, 2013 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 78,021,755 | $ | 75,866,328 | ||||
Accounts receivable, net of allowance for doubtful accounts of $4,292,750 and $4,228,769 as of June 30, 2013 and March 31, 2013, respectively | 24,329,442 | 27,071,080 | ||||||
Investment income receivable, net of fees payable | 2,121,428 | 2,877,218 | ||||||
Inventories | 3,340,077 | 2,227,355 | ||||||
Prepayments | 980,604 | 1,203,958 | ||||||
Refundable deposit for terminated acquisition | 24,298,581 | 23,936,425 | ||||||
Loan receivable | 21,241,819 | - | ||||||
Deferred tax asset | 1,547,009 | 1,535,921 | ||||||
Other current assets | 142,030 | 141,428 | ||||||
Total current assets | 156,022,745 | 134,859,713 | ||||||
Loan receivable | - | 20,925,223 | ||||||
Prepayments - long term | 14,964,778 | 20,005,186 | ||||||
Property, plant and equipment, net | 105,167,013 | 97,227,027 | ||||||
Land use rights | 5,043,424 | 4,994,639 | ||||||
Total assets | $ | 281,197,960 | $ | 278,011,788 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,604,967 | $ | 1,374,787 | ||||
Other payables and accruals | 5,240,002 | 6,654,085 | ||||||
Tax payables | 32,143,902 | 32,244,385 | ||||||
Short term loans | 16,199,054 | 15,957,617 | ||||||
Amount due to director | 1,098,847 | 751,791 | ||||||
Total current liabilities | 56,286,772 | 56,982,665 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, par value of $0.01, 10,000,000 shares authorized, none issued | ||||||||
Common stock, par value of $0.0001, 100,000,000 shares authorized,42,370,000 shares issued and 22,150,200 outstanding as of June 30, 2013 and March 31, 2013, respectively | 4,237 | 4,237 | ||||||
Additional paid-in capital | 86,749,293 | 86,243,874 | ||||||
Retained earnings | 120,691,016 | 120,537,096 | ||||||
Treasury stock at cost, 20,219,800 shares as of June 30, 2013 and March 31, 2013, respectively | (2,741,634 | ) | (2,741,634 | ) | ||||
Accumulated other comprehensive income | 17,182,482 | 13,959,756 | ||||||
Capital and statutory reserves | 3,025,794 | 3,025,794 | ||||||
Total stockholders’ equity | 224,911,188 | 221,029,123 | ||||||
Total liabilities and stockholders' equity | $ | 281,197,960 | $ | 278,011,788 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4 |
CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(Amounts expressed in US Dollars)
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Net sales | $ | 13,136,530 | $ | 17,382,483 | ||||
Cost of sales | 6,308,168 | 7,278,378 | ||||||
Gross profit | 6,828,362 | 10,104,105 | ||||||
Operating expenses: | ||||||||
Selling expenses | 2,206,452 | 4,036,365 | ||||||
General and administrative expenses | 2,951,526 | 2,354,571 | ||||||
Research and development expenses | 1,573,637 | 1,304,525 | ||||||
Total operating expenses | 6,731,615 | 7,695,461 | ||||||
Income from operations | 96,747 | 2,408,644 | ||||||
Other income and expenses: | ||||||||
Interest expense | (271,933 | ) | (145,460 | ) | ||||
Interest income | 184,665 | 194,973 | ||||||
Investment income, net of fees | 789,869 | 776,683 | ||||||
Exchange (loss) gain, net | (2,264 | ) | 8,987 | |||||
Miscellaneous | 3,693 | (102,892 | ) | |||||
Total other income | 704,030 | 732,291 | ||||||
Income before taxes | 800,777 | 3,140,935 | ||||||
Income taxes | 646,857 | 1,068,972 | ||||||
Net income | 153,920 | 2,071,963 | ||||||
Other comprehensive income | ||||||||
Foreign currency translation adjustment | 3,222,726 | 298,763 | ||||||
Comprehensive income | $ | 3,376,646 | $ | 2,370,726 | ||||
Weighted average number of shares | ||||||||
Basic | 22,150,200 | 22,150,200 | ||||||
Diluted | 22,150,200 | 22,326,563 | ||||||
Income per common stock | ||||||||
Basic | $ | 0.01 | $ | 0.09 | ||||
Diluted | $ | 0.01 | $ | 0.09 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5 |
CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2013
(Amounts expressed in US Dollars)
Common Stock | Accumulated | |||||||||||||||||||||||||||||||
Shares | Par value $0.0001 | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Other Comprehensive Income | Capital & Statutory Reserves | Total | |||||||||||||||||||||||||
Balance- April 1, 2013 | 42,370,000 | $ | 4,237 | $ | 86,243,874 | $ | 120,537,096 | $ | (2,741,634 | ) | $ | 13,959,756 | $ | 3,025,794 | $ | 221,029,123 | ||||||||||||||||
Fair value of vested options | - | - | 505,419 | - | - | - | - | 505,419 | ||||||||||||||||||||||||
Net income | - | - | - | 153,920 | - | - | - | 153,920 | ||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | - | 3,222,726 | - | 3,222,726 | ||||||||||||||||||||||||
Balance- June 30, 2013 | 42,370,000 | $ | 4,237 | $ | 86,749,293 | $ | 120,691,016 | $ | (2,741,634 | ) | $ | 17,182,482 | $ | 3,025,794 | $ | 224,911,188 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6 |
CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts expressed in US Dollars)
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 153,920 | $ | 2,071,963 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Amortization | 26,656 | 26,206 | ||||||
Depreciation | 1,562,096 | 1,177,403 | ||||||
Fair value of vested options | 505,419 | 336,946 | ||||||
Change in deferred taxes | (11,088 | ) | - | |||||
Change in operating assets and liabilities : | ||||||||
- Accounts receivable | 3,136,335 | 2,836,504 | ||||||
- Interest income receivable, net of fee payable | 795,546 | (1,258,703 | ) | |||||
- Inventories | (1,073,925 | ) | (236,697 | ) | ||||
- Prepayments | 240,429 | (107,363 | ) | |||||
- Other current assets | 1,530 | (34,351 | ) | |||||
- Accounts payable | 208,390 | (1,132,783 | ) | |||||
- Other payables and accruals | (1,476,519 | ) | 494,378 | |||||
- Taxes payable | (579,114 | ) | (1,936,093 | ) | ||||
- Amount due to director | 165,000 | - | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 3,654,675 | 2,237,410 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Prepayments for equipment | (2,647,608 | ) | (12,197,260 | ) | ||||
Purchase of property, plant and equipment | (176,582 | ) | (8,734,151 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES | (2,824,190 | ) | (20,931,411 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Repayment of bank loan | - | (792,670 | ) | |||||
Advance from director | 150,000 | 111,228 | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 150,000 | (681,442 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 1,174,942 | (41,315 | ) | |||||
NET CHANGES IN CASH AND CASH EQUIVALENTS BALANCES | 2,155,427 | (19,416,758 | ) | |||||
CASH AND CASH EQUIVALENTS BALANCES, beginning of period | 75,866,328 | 70,086,074 | ||||||
CASH AND CASH EQUIVALENTS BALANCES, end of period | $ | 78,021,755 | $ | 50,669,316 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Interest paid | $ | 271,933 | $ | 145,460 | ||||
Income taxes paid | $ | 630,657 | $ | 2,622,353 | ||||
Non cash investing and financing activities: | ||||||||
Transfer of prepayments to property, plant and equipment | $ | 7,965,453 | $ | - |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7 |
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
China-Biotics, Inc. (sometimes referred to as “China-Biotics” or the “Company”) is engaged in the research, development, production, marketing, and distribution of probiotics products (which we sometimes refer to simply as “probiotics”), which are products that contain live microbial food supplements that beneficially affect the host by improving its intestinal microbial balance. The Company was incorporated under the name Otish Resources, Inc. in Delaware in February 2003.
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed consolidated financial statements as of and for the three-months ended June 30, 2013 and 2012 have been prepared based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of June 30, 2013 and for all periods presented. Information as of March 31, 2013 was derived from the audited consolidated financial statements of the Company for the year ended March 31, 2013.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-K filed on July 12, 2013 for the year ended March 31, 2013. The results of operations for the three months ended June 30, 2013 are not necessarily indicative of the operating results to be expected for the full year ending March 31, 2014.
The condensed consolidated financial statements and accompanying notes are presented in United States dollars and prepared in conformity with US GAAP which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of consolidation
The unaudited condensed consolidated financial statements for China-Biotics, Inc. and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Sinosmart Group Inc. (“SGI”), Growing State Limited (“GSL”) and King Treasure Group Limited (“KTG”); SGI’s wholly owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”); GSL’s wholly owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“Growing”); KTG’s wholly owned subsidiary, Best Design Holdings Limited (“BDH”); and BDH’s wholly owned subsidiary, Growing Bio (Yangling) Co. Ltd (“Growing Yangling”). Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Those estimates and assumptions include estimates for allowance for doubtful accounts, inventory valuation, impairment consideration, and assumptions used in the valuation of equity instruments.
8 |
Fair value of financial instruments
Fair value measurements are determined using authoritative guidance issued by the FASB, with the exception of the application of the guidance to non-recurring, non-financial assets and liabilities as permitted. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level 3-Unobservable inputs based on the Company’s assumptions
The Company is required to use observable market data if available without undue cost and effort. The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2013 and March 31, 2013:
Fair Value Measurements as at June 30, 2013 | ||||||||||||||||
Balance at June 30, 2013 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Loan receivable | $ | 21,241,819 | $ | - | $ | 21,241,819 | $ | - | ||||||||
Fair Value Measurements as at March 31, 2013 | ||||||||||||||||
Balance at March 31, 2013 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Loan receivable | $ | 20,925,223 | $ | - | $ | 20,925,223 | $ | - | ||||||||
Recent Accounting Pronouncements
In March 2013, the FASB issued ASU 2013-05 Topic 830, “Foreign Currency Matters” (“ASU 2013-05”). ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s unaudited condensed consolidated financial statements.
The FASB has issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s unaudited condensed consolidated financial statements.
9 |
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carrforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s unaudited condensed consolidated financial position and results of operations.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
3. | INCOME PER SHARE |
The following table sets forth the computation of basic and diluted income per share:
Three months ended June 30, | ||||||||
2013 (Unaudited) | 2012 (Unaudited) | |||||||
Income per share – Basic | ||||||||
Income for the period | $ | 153,920 | $ | 2,071,963 | ||||
Basic average common stock outstanding | 22,150,200 | 22,150,200 | ||||||
Net income per share | $ | 0.01 | $ | 0.09 |
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Income per share – Diluted | ||||||||
Income for the period | $ | 153,920 | $ | 2,071,963 | ||||
Basic average common stock outstanding | 22,150,200 | 22,150,200 | ||||||
Diluted effect from vested stock options | - | 176,363 | ||||||
Diluted average common stock outstanding | 22,150,200 | 22,326,563 | ||||||
Net income per share | $ | 0.01 | $ | 0.09 |
Basic income per share is computed by dividing the net income by the weighted average number of outstanding common stock during the period. The diluted income 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 shares of common stock has been outstanding to the total time in that period. The Company had 660,000 common stock equivalents related to the stock options at June 30, 2013 and June 30, 2012, respectively. For the three months ended June 30, 2013 and 2012, 660,000 and 483,637, respectively, of these common stock equivalents have been excluded for the calculation of diluted earnings per share as the effect of these common stock equivalents is anti-dilutive.
10 |
4. | RISKS, UNCERTAINTIES, AND CONCENTRATIONS |
Economic and political risks
The Company’s operations are conducted in the PRC and are subject to various political, economic, and other risks and uncertainties inherent in this country. Among other risks, the Company’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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. As of June 30, 2013 and March 31, 2013, the Company had cash deposits of $78.0 million and $75.8 million placed with several banks in the PRC, which includes the Special Administrative Region of Hong Kong, where there is currently no rule or regulation in place for obligatory insurance of bank accounts. For the three months ended June 30, 2013 and 2012, all of the Company’s sales arose in the PRC. In addition, all accounts receivable as at June 30, 2013 and March 31, 2013 are from customers in the PRC.
Concentration of Customers
The Company had no sales to a single customer that accounted for more than 10% of total gross sales. For the three months ended June 30, 2013 and 2013, there was no customer that accounted for over 5% of our sales revenue. As of June 30, 2013, there was one customer that accounted for 3.3% of our accounts receivable. As of March 31, 2013, there was one customer that accounted for 4.8% of our accounts receivable.
5. | ACCOUNTS RECEIVABLE |
Accounts receivable consisted of the following:
June 30, 2013 (Unaudited) | March 31, 2013 | |||||||
Accounts receivable | $ | 28,622,192 | $ | 31,299,849 | ||||
Less: Allowance for doubtful accounts | (4,292,750 | ) | (4,228,769 | ) | ||||
$ | 24,329,442 | $ | 27,071,080 |
6. | INVENTORIES |
Inventories consisted of the following:
June 30, 2013 (Unaudited) | March 31, 2013 | |||||||
Raw materials | $ | 861,315 | $ | 527,690 | ||||
Work-in-progress | 194,518 | 198,330 | ||||||
Finished goods | 2,284,244 | 1,501,335 | ||||||
$ | 3,340,077 | $ | 2,227,355 |
7. | LOAN RECEIVABLE |
On December 19, 2011, the Company entered into an agreement with Jiangxi International Trust Co., Ltd. (“Jiangxi”) to loan $21,241,819 (RMB 131,100,000) to the Jiangxi International Trust of Yinhe #7 Property, an investment fund sponsored by Jiangxi. The loan principal is due on December 26, 2013, is unsecured, and according to the loan agreement, the Company is to earn 20% interest per annum, less a 5% investment management fee per annum. Investment income is due annually while investment management fee is due quarterly. Jiangxi is a major trust and investment company that is executing different investment projects in the PRC, including real estate projects, listed company restructuring, and other financial services.
11 |
Interest income (net of fees) totaled $789,869 and $776,683 for the three months ended June 30, 2013 and 2012, respectively. Interest income receivable, net of fees payable totaled $2,121,428 and $2,877,218 as of June 30, 2013 and 2012, respectively.
8. | DEPOSITS |
On March 27, 2012, the Company made a deposit of $24,298,581 (RMB 150,000,000) to the government of Yangling for a bid to acquire a probiotics company located in Yangling, Shaanxi Province that is in receivership. According to the relevant regulations, the deposit will be treated as part of the purchase price of the acquisition if the transaction is approved. On June 28, 2013, the Company and the government of Yangling verbally agreed to terminate this potential acquisition. The acquisition deposit will be refunded to the Company within 90 days from the date of the termination, and as such, has been reflected as a current asset in the June 30, 2013 and March 31, 2013 condensed consolidated balance sheets.
9. | LAND USE RIGHTS |
The land use rights consisted of the following:
June 30, 2013 (Unaudited) | March 31, 2013 | |||||||
Land use rights | $ | 5,356,530 | $ | 5,276,695 | ||||
Less: Accumulated amortization | (313,106 | ) | (282,056 | ) | ||||
$ | 5,043,424 | $ | 4,994,639 |
On March 21, 2006, GSL, our subsidiary, entered into an agreement, as amended, with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 36,075 square meters of land in the Shanghai Qingpu Industrial Park District on which we constructed our 300-metric ton capacity production plant for a term of 50 years beginning January 15, 2008. The agreement provides for the payment of leasing fees of approximately $1.8 million. In February 2009, the formal land use right certificate was issued. There are no future lease payments under this land lease. At June 30, 2013 and March 31, 2013, the net book value of the Qingpu land use right was $1,798,297 and $1,781,429, respectively.
In 2012, our Growing Yangling, subsidiary of the Company that operates in Yangling, the PRC, has acquired a land use right for a period of 50 years, beginning January 18, 2012. At June 30, 2013 and March 31, 2013, the net book value of the land use right was $3,245,127 and $3,213,210, respectively.
Amortization expense amounted to $26,656 and $26,206 for the three months ended June 30, 2013, and 2012, respectively.
10. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment, net, consisted of the following:
June 30, 2013 (Unaudited) | March 31, 2013 | |||||||
Building | $ | 73,538,614 | $ | 72,616,957 | ||||
Plant and machinery | 18,416,898 | 17,487,734 | ||||||
Leasehold improvements | 2,149,936 | 2,117,892 | ||||||
Office equipment | 8,259,070 | 7,620,859 | ||||||
Motor vehicles | 824,983 | 812,687 | ||||||
Construction in progress | 25,610,025 | 18,339,357 | ||||||
128,799,526 | 118,995,486 | |||||||
Less: Accumulated depreciation | (23,632,513 | ) | (21,768,459 | ) | ||||
$ | 105,167,013 | $ | 97,227,027 |
12 |
For the three months ended June 30, 2013 and 2012, depreciation expense amounted to $1,562,096 and $1,177,403, respectively.
As of June 30, 2013 and March 31, 2013, the corporate headquarters office building and the Qingpu facilities were pledged to banks as a guarantee for loans of a total of $16,199,054 (RMB 100,000,000) (see Note 12). As of June 30, 2013 and March 31, 2013, the net book value of these properties totaled approximately $56.0 million and $55.7 million, respectively.
As of June 30, 2013 and March 31, 2013, the Company has the following construction projects in process:
· | The Company is currently in the process of improving the two production lines and a research and development center to support the operations of its Qingpu facility. At June 30, 2013 and March 31, 2013, construction in progress related to these improvements included $1,500,675 and $2,485,440, respectively, related to the construction of this facility. |
· | The Company is in construction of a facility in Yangling that is expected to involve investment of over $58 million over two years. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu) (see Note 9). We received the land certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014. As of June 30, 2013 and March 31, 2013, construction in progress included $24,109,350 and $15,853,917, respectively, related to the construction of this facility. The remaining unfunded contribution commitment for the completion of this facility was $24,575,235 as of June 30, 2013. |
As of June 30, 2013 and March 31, 2013, the Company had outstanding deposits and prepayments of $14,964,778 and $20,005,186, respectively, relating to delivery of equipment to be used at these facilities.
11. | AMOUNT DUE TO DIRECTOR |
As of June 30, 2013 and March 31, 2013, the amount due to our director and Chief Executive Officer , Mr. Song Jinan, represented advances to the Company which are unsecured, interest-free and repayable on demand. The advances from such director were made by Mr. Song due to the difficulty the Company faced in paying expenses incurred outside China in non-PRC currency due to the difficulties the Company had in converting currency under foreign exchange controls.
As of June 30, 2013 and March 31, 2013, the amount due to Mr. Song also included certain unpaid compensation due to him.
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12. | LOANS PAYABLE |
On September 24, 2012, the Company obtained a bank loan facility from Bank of Jiangsu for $16,199,054 (RMB 100,000,000) (“Bank Loan Facility”), secured by the assets of Growing, including the corporate headquarters office building and facility buildings in Qingpu of Growing (see Note10). The loan consisted of the following advances:
· | On October 31, 2012, the Company borrowed $8,099,527 (RMB 50,000,000), under the Bank Loan Facility, due October 30, 2013. Interest is 6.60% per annum, based on 110% of the one year’s RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The interest rate will be reset on the first day of each calendar year. As of August 9, 2013, there was no notice for change of the interest rate. |
· | On December 28, 2012, the Company borrowed $2,429,858 (RMB 15,000,000), under the Bank Loan Facility, due December 27, 2013. Interest is 6.60% per annum, based on 110% of the one year’s RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. |
· | On December 31, 2012, the Company borrowed $5,669,669 (RMB 35,000,000), under the Bank Loan Facility, due December 30, 2013. Interest is 6.60% per annum, based on 110% of the one year’s RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. |
13. | INCOME TAXES |
For the three months ended June 30, 2013 and 2012, the components of income (loss) before income taxes were:
Three months ended June 30, | ||||||||
2013 (Unaudited) | 2012 (Unaudited) | |||||||
Income before income taxes generated in the PRC | $ | 1,728,778 | $ | 3,980,519 | ||||
Loss before income taxes generated in the United States of America | (826,594 | ) | (740,526 | ) | ||||
Loss before income taxes generated in the British Virgin Islands | (101,407 | ) | (99,057 | ) | ||||
Loss before income taxes generated in Hong Kong | - | (2 | ) | |||||
$ | 800,777 | $ | 3,140,935 | |||||
For the three months ended June 30, 2013 and 2012, there was no tax provision related to income (loss) generated in the United States of America, the British Virgin Islands, and Hong Kong. For the three months ended June 30, 2013 and 2012, the provision for income taxes relating to income generated in the PRC consists of the following:
Three months ended June 30, | ||||||||
2013 (Unaudited) | 2012 (Unaudited) | |||||||
Current-PRC | $ | 634,765 | $ | 1,068,972 | ||||
Deferred-PRC | 12,092 | - | ||||||
$ | 646,857 | $ | 1,068,972 | |||||
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For the three months ended June 30, 2013 and 2012, the reconciliation between the PRC statutory tax rate and effective tax rate are as follows:
Three months ended June 30, | ||||||||
2013 (Unaudited) | 2012 (Unaudited) | |||||||
Statutory rate | 25.00 | % | 25.00 | % | ||||
Preferential tax rate | 17.70 | % | (22.50 | )% | ||||
Effect of different tax rates in other jurisdictions | (6.12 | )% | 4.60 | % | ||||
Expenses not deductible for tax purpose | 23.30 | % | - | % | ||||
Effect of taxable temporary difference | - | % | 19.70 | % | ||||
Under provision of income tax in prior year | - | % | 4.20 | % | ||||
Change of valuation allowance | 16.25 | % | - | % | ||||
Other | 4.66 | % | 3.00 | % | ||||
Effective tax rate | 80.79 | % | 34.00 | % |
As of June 30, 2013 and March 31, 2013, the Company had incurred tax losses of approximately $17.1 million and $17.1 million, respectively which can be carried forward in various jurisdictions from five to 25 years.
As of June 30, 2013 and March 31, 2013, deferred tax assets consist of the following:
June 30, 2013 | March 31, 2013 | |||||||
Deferred tax assets | ||||||||
Net operating loss carryforwards | ||||||||
- PRC | $ | 20,944 | $ | - | ||||
- United States of America | 5,924,222 | 5,815,023 | ||||||
- Hong Kong | 1,041 | 1,040 | ||||||
Total net operating loss carryforwards | 5,946,207 | 5,816,063 | ||||||
Allowance for doubtful accounts | 1,073,187 | 1,057,193 | ||||||
Acquired production technology | 473,822 | 478,728 | ||||||
7,493,216 | 7,351,984 | |||||||
Less: Valuation allowance | (5,946,207 | ) | (5,816,063 | ) | ||||
Net deferred tax assets | $ | 1,547,009 | $ | 1,535,921 |
The Company is incorporated in Delaware and is subject to U.S. tax law. The daily operations of the Company in the United States principally relate to payment of legal and professional fees. The Company has no taxable income in the United States and does not expect it will be able to realize the U.S. tax losses.
There is no income tax for companies not carrying out business activities in the British Virgin Islands or Hong Kong. Accordingly, the Company's financial statements do not present any income tax provisions related to the British Virgin Islands or Hong Kong tax jurisdictions.
All of the Company’s operations are conducted in the PRC. At June 30, 2013, the Company’s unremitted foreign earnings of its PRC subsidiaries totaled approximately $157.8 million and the Company held approximately $78.0 million of cash and cash equivalents in the PRC. These unremitted earnings are planned to be reinvested indefinitely into the operations of the Company in the PRC. While repatriation of some cash held in the PRC may be restricted by local PRC laws, most of the Company's foreign cash balances could be repatriated to the United States but, under current U.S. income tax laws, could be subject to U.S. federal income taxes less applicable foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability on the unremitted earnings is not practicable because of the complexities associated with this hypothetical calculation, and as the Company does not plan to repatriate any cash in the PRC to the United States, no deferred tax liability has been accrued for cash to be repatriated.
The Company has its principal operations in the PRC and is subject to a PRC Enterprise Income Tax (“EIT”) rate of 25% in calendar years 2012 and 2011, subject to certain rate reductions. The Company’s subsidiary Shining is located in the Shanghai Jinqiao special economic zone and was awarded the status of “high technology” enterprise for the calendar year 2007 until 2011. Therefore, Shining enjoyed a preferential income tax rate of 15% in the calendar years from 2007 to 2011. Beginning January 1, 2012, Shining’s EIT rate is 25%.
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The Company’s subsidiary Growing is located in Qingpu and has similar business operations as Shining, but with a larger production scale. Growing was exempted from PRC Enterprise Income Tax in calendar years 2008 and 2009, followed by 50% tax exemption for the calendar years 2010 to 2012. Beginning January 1, 2013, Growing’s EIT rate is 25%.
The Company’s subsidiary, Growing Yangling, is located in Yangling and as of June 30, 2013 and March 31, 2013, its manufacturing plant was under construction. According to the investment agreement with the local government, Growing Yangling is entitled to have a tax incentive that exempts the local portion of EIT for three calendar years from the commencement of production, followed by 50% tax exemption of local portion for the following year. There is no financial effect from the tax holiday as Growing Yangling did not generate any assessable profit in the three months ended June 30, 2013 and 2012.
At June 30, 2013 and March 31, 2013, taxes payable consisted of the following:
June 30, 2013 | March 31, 2013 | |||||||
Taxes arising prior to 2005: | ||||||||
Value added tax and other taxes | $ | 5,220,091 | $ | 5,142,289 | ||||
Income taxes | 4,133,814 | 4,072,202 | ||||||
Dividends withholding tax | 4,359,201 | 4,294,230 | ||||||
Total taxes prior to 2005 | 13,713,106 | 13,508,721 | ||||||
Value added tax and other taxes | 288,926 | 1,242,419 | ||||||
Income taxes | 634,489 | 246,801 | ||||||
Accrued interest on taxes | 17,507,381 | 17,246,444 | ||||||
$ | 32,143,902 | $ | 32,244,385 |
In addition to the EIT, companies in the PRC that are engaged in the sale of goods are generally required to pay value added taxes (“VAT”) at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.
Our management believes that our operations in China were exempted from EIT and VAT for all years prior to 2005 because we had been recognized by the local government as an advanced technology enterprise. However, the Company never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in China prior to 2005. As a result, there is no way to ascertain the ultimate position which may be taken by the relevant PRC tax authorities in the future and accordingly, full provisions for tax liabilities in the amount of $13,713,106, for all years prior to 2005 have been recorded by the Company. Beginning in January 2006, we made tax payments to the PRC tax authorities for 2005 and we have made regular tax payments to the PRC tax authorities for all subsequent periods.
In addition, in connection with dividends paid to the Shining shareholders between April 2003 to June 2005, Shining did not deduct a withholding tax at the rate of 20% as required by applicable Chinese laws and regulations. The Company has accrued the dividend withholding tax and interest on the dividend withholding tax.
According to PRC tax regulations, the overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to interest at the 0.05% per day, and potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of taxes payable. Through March 31, 2011, the Company accrued the interest that may be potentially payable upon these taxes incurred prior to 2005 and the unpaid dividend withholding tax. Interest related to the unpaid taxes was recognized in the Company’s consolidated statements of operations as a component of its income tax provision.
For the three months ended June 30, 2013 and 2012, management made an assessment of whether it was necessary to provide a further provision for interest and penalties on these unpaid amounts. Management determined that no further provision for interest and penalties was necessary given the unlikelihood of payment of the amount already accrued and provided in the financial statements. This assessment was based upon receipt by the company of a report by an independent tax expert that the amount of taxes prior to 2005 may not be payable, the length of time the amount has been outstanding, and that there have been no requests from PRC tax authorities for payment of the unpaid taxes outstanding amounts. As such, management believes that the previously recorded amounts are sufficient to cover any settlement of this liability.
16 |
The Company’s PRC subsidiaries are deemed “high technology” enterprises subject to preferred tax rates (tax holiday). The table below shows the effect of using the higher rates and earnings per share.
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Income per common share-basic | $ | 0.01 | $ | 0.09 | ||||
Effect of tax holiday | - | 0.01 | ||||||
Pro forma income per common share-basic | $ | 0.01 | $ | 0.10 |
14. | OPTION INCENTIVE PLAN |
On January 16, 2011, the Board adopted the 2010 Equity Incentive Plan (the “2010 Plan”) and reserved 1,500,000 shares of common stock for issuance under the 2010 Plan. On March 9, 2011, the 2010 Plan was approved by the Company’s stockholders at the 2010 Annual Meeting of Stockholders.
On January 16, 2011, the Company granted to the directors and officers an option to purchase 910,000 shares of common stock under the 2010 Plan. The options have exercise price of $14.81 per share, an expiration date of five to ten years from the date of grant, and vest over 48 consecutive months: 20% in the first 12-month period; 20% in the second 12-month period; 30% in the third 12-month period; and 30% in the forth 12-month period. The Company determined the fair value of the options on the date of grant was $9,477,024 using the Black-Scholes-Merton option pricing model with the following assumptions: expected volatility, 76%; risk-free interest rate, 1.95%; expected weighted average life, five to ten years; and expected dividend yield, 0%. As of June 30, 2013 and March 31, 2013, the total vested options were 363,000 shares and 313,500 shares, respectively.
During the three months ended June 30, 2013 and 2012, no vested options were exercised.
At June 30, 2013, outstanding options were as follows:
Number of Shares under Options | Weighted Average Exercise Price | |||||||
Options outstanding at April 1, 2013 | 660,000 | $ | 14.81 | |||||
Options granted | - | - | ||||||
Options expired or forfeited | - | - | ||||||
Options exercised. | - | - | ||||||
Options outstanding at June 30, 2013 | 660,000 | $ | 14.81 |
The following table summarizes information about options outstanding at June 30, 2013:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise price |
Number of shares under Option |
Weighted average remaining contractual life (years) |
Weighted Average Exercise Price |
Number of shares under Option |
Weighted Average Exercise Price |
|||||||||||||||||
$ | 14.81 | 660,000 | 6.90 | $ | 14.81 | 363,000 | $ | 14.81 |
At June 30, 3013, the options outstanding and exercisable had no intrinsic value.
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For the three months ended June 30, 2013 and 2012, the Company has recorded $505,419 and $336,946, respectively, as the fair value of the vested options.
As of June 30, 2013, total compensation cost related to non-vested stock options and restricted stock not yet recognized was approximately $3,032,516, which is expected to be recognized over the next 18 months.
15. | COMMITMENTS AND CONTINGENCIES |
Capital commitments
On August 12, 2010, BDH, a subsidiary of the Company, entered into the agreements with a government agency to establish manufacturing facilities for animal probiotics products in the Yangling Agricultural High-tech Industries Demonstration Zone in Shaanxi Province of China. In furtherance of such agreements, BDH incorporated a wholly foreign owned subsidiary, Growing Yangling, with a registered capital of $50 million. As of June 30, 2013, the Company had injected into Growing Yangling $7.5 million as registered capital. According to the approval from the government agency dated October 12, 2010, the remaining balance of Growing Yangling’s registered capital of $42.5 million must be injected before July 13, 2013. The Company obtained a one-year extension from the government agency which gives the Company until July 13, 2014 to inject the remaining capital.
The cost for constructing the Yangling facility is expected to be over $58 million invested over two years, which would be mainly facilitated by the capital injection from BDH. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in its construction stage. We commenced construction in June 2012 and expect to complete construction by June 2014. As of June 30, 2013, Growing Yangling entered into agreements with contractors related to the construction of the plant and manufacturing facilities and production equipment with remaining future payments of $24,575,235 and $6,398,626, respectively.
Purchase obligations
The Company entered into agreements with suppliers to purchase raw materials and packing materials. As of June 30, 2013, the amount of future payments was $16,613,412.
Other obligations
The Company entered into agreements with a university to perform research and development for an annual aggregate fee of $1,457,915 (RMB 9,000,000). Fee commitment for the remaining terms through October 31, 2014, the end of the term, totaled $1,943,886 (RMB 12,000,000) as of June 30, 2013.
Pending litigation
The Company and certain of its current and former officers and directors have been named as defendants in three 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 “Mohapatra case”), and two 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 “Hill case”, and Casper v. Jinan, et al., No. 12-cv-4202 (S.D.N.Y.), the “Casper case”). After certain shareholders filed motions for appointment as lead plaintiff, the plaintiff in the Mohapatra case voluntarily dismissed its case and the plaintiff in the Hill case, together with another shareholder, were appointed as lead plaintiffs. The lead plaintiffs filed an amended complaint in which they allege that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements or failing to disclose certain material information regarding, among other things, the Company’s financial condition, operations, and future business prospects, and the quality, nature, and quantity of the Company’s retail outlets. The lead plaintiffs seek to represent a class of shareholders who bought the Company’s securities between July 10, 2008 and August 27, 2010.
On August 18, 2011, the Company filed a motion to dismiss the lead plaintiffs’ amended complaint. The court dismissed the lead plaintiffs’ Section 11 claim, but gave them leave to replead. The court did not rule on the motion to dismiss the Section 10(b) claim. On January 9, 2012, the lead plaintiffs filed a second amended complaint that included a new named plaintiff and new allegations for the Section 11 claim. On February 27, 2012, the Company filed a motion to dismiss the amended Section 11 claim. Both that motion and the original motion to dismiss the Section 10(b) and Section 20(a) claims are currently pending before the court. The Company intends to defend this action vigorously.
In the Casper case, the plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements and seeks to represent a class of stockholders who bought the Company’s securities between February 9, 2011 and July 1, 2011. On October 18, 2012, the Hill case and the Casper case were consolidated, but no consolidated amended complaint has yet been filed. The Company intends to defend this action vigorously.
The Company 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. On March 26, 2012, the plaintiff filed an amended complaint in which he added Roth Capital Partners LLC and Maxim Group LLC (the “Underwriters”) as defendants. On September 7, 2012, the Underwriters filed a motion to dismiss. On October 23, 2012, the court approved a stipulation in which the plaintiff voluntarily dismissed the claim against the Underwriters. On November 13, 2012, the clerk entered a default against the director defendants. On December 7, 2012, the parties submitted a stipulation lifting the clerk’s entry of default. The defendants intend to defend this action vigorously.
18 |
With respect to the above-referenced litigation matters, the Company is unable at this time to estimate possible losses, if any, or any other impact of the outcome of the litigation matters on the consolidated financial statements.
Review of decision ordering that the registration of the Company’s securities be revoked
On September 15, 2011, the staff of the SEC informed the Company that it intended to recommend that the SEC institute a public administrative proceeding against the Company for alleged violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 or 13a-16 promulgated thereunder. On October 7, 2011, the SEC issued an Order Instituting Proceedings to determine whether it was necessary and appropriate to suspend or revoke the registration of the Company’s securities. On February 22, 2012, the administrative law judge overseeing the proceedings issued a decision ordering that the registration of the Company’s securities be revoked. On March 26, 2012, the SEC granted the Company’s petition for review of this decision. The SEC had scheduled oral argument for July 10, 2013, but it later adjourned that date and rescheduled the oral argument for October 8, 2013. If the registration of the Company’s securities is revoked, no U.S. registered broker-dealer may execute trades in the Company’s shares and the trading market for our common stock may cease to exist. In such event, investors may not be able to liquidate their investment.
16. | BUSINESS SEGMENTS |
The Company operates two business segments for the three months ended June 30, 2013 and 2012, which are retail probiotics products as a health supplement and bulk additives for institutional customers in the PRC. The following is the summary information by segment as of June 30, 2013 and 2012, and for the three months ended June 30, 2013 and 2012:
Three months ended June 30, 2013 |
Retail products | Bulk additives | Segment Total |
Corporate | Total | |||||||||||||||
Net revenue | $ | 2,271,777 | $ | 10,864,753 | $ | 13,136,530 | $ | $ | 13,136,530 | |||||||||||
Income (loss) from operations | (1,142,904 | ) | 3,153,627 | 2,010,723 | (1,913,976 | ) | 96,747 | |||||||||||||
Income taxes | - | 646,857 | 646,857 | - | 646,857 | |||||||||||||||
Total assets | 150,306,384 | 97,590,957 | 247,897,341 | 33,300,619 | 281,197,960 | |||||||||||||||
Depreciation and amortization | 301,852 | 1,075,633 | 1,377,485 | 211,267 | 1,588,752 |
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Three months ended June 30, 2012 |
Retail products | Bulk additives | Segment Total |
Corporate | Total | |||||||||||||||
Net revenue | $ | 2,504,098 | $ | 14,878,385 | $ | 17,382,483 | $ | - | $ | 17,382,483 | ||||||||||
Income (loss) from operations | (798,110 | ) | 4,177,147 | 3,379,037 | (970,393 | ) | 2,408,644 | |||||||||||||
Income taxes | 232,504 | 836,468 | 1,068,972 | - | 1,068,972 | |||||||||||||||
Total assets | 101,639,937 | 105,876,492 | 207,516,429 | 48,703,716 | 256,220,145 | |||||||||||||||
Depreciation and amortization | 264,545 | 728,440 | 928,985 | 210,624 | 1,203,609 |
Reconciliation is provided for unallocated amounts relating to corporate operations, which is not included in the segment information.
Three months ended June 30, | ||||||||
Reconciliation | 2013 | 2012 | ||||||
Total segment operating income | $ | 2,010,723 | $ | 3,379,037 | ||||
Corporate overhead expenses | (1,913,976 | ) | (970,393 | ) | ||||
Other income, net | 704,030 | 732,291 | ||||||
Income tax expense | (646,857 | ) | (1,068,972 | ) | ||||
Total consolidated net income | $ | 153,920 | $ | 2,071,963 |
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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,” and “our” are to the combined business of China-Biotics, Inc. (the “Company”) and to the Company’s wholly owned direct subsidiaries, Sinosmart Group Inc. (“SGI”), Growing State Limited (“GSL”) and King Treasure Group Limited (“KTG”); SGI’s wholly owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”); GSL’s wholly owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“Growing”); KTG’s wholly owned subsidiary, Best Design Holdings Limited (“BDH”); and BDH’s wholly owned subsidiary, Growing Bio (Yangling) Co. Ltd (“Growing Yangling”). 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 sold primarily 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 to 90 days’ credit is given to the bulk additives products customers.
Because of the increasing cost of rents and sales personnel in recent years, since January 2011 we have expanded our retail product sales in China through our growing distribution network and via internet sales primarily through our distributors’ or their associates’ operating websites. Our management believes that as China becomes more affluent and the number of Chinese internet users increases, Chinese citizens are becoming more health conscious, which has led to higher demand for healthy and functional foods such as probiotics and yogurt.
Our first retail product, Shining Essence, was launched in April 2001 and remains one of our best-selling retail products. Sales of Shining Essence represented approximately 30%, and 26% of our total sales of our retail products for the three months ended June 30, 2013 and 2012, respectively. In addition to Shining Essence, our research and development team has successfully developed other new retail products, such as Shining Probiotics Protein Powder, which represented approximately 40% and 34% of our total sales of our retail products for the three months ended June 30, 2013 and 2012, respectively. As of June 30, 2013, we had a retail product portfolio of 50 products, and we are currently selling 30 of them in the market. The percentage contribution of Shining Essence to our total retail sales has decreased as a result of significant interruptions in our operations resulting from frequent examination of our retail production facilities and products by the China Food and Drug Administration as a result of strict rules and regulations on health care products imposed by the PRC government.
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As our retail products comprise mainly live bacteria, which are reproduced by fermentation, we have historically had a low cost of production of which packaging costs represent the largest cost item. Based on sales invoiced value, our bulk products had a revenue contribution of 77% in fiscal year 2013, an increase from 53% in fiscal year 2012 and contributed 83% of our total net revenue for the three months ended June 30, 2013. The significant increase reflects the stability of the additive market as compared to the retail products market in the current adverse economic environment. In February 2010, our new bulk production facility in Qingpu commenced commercial production. The state of art bulk additives production facility has a full capacity of 300 metric tons. Management believes our new facility will help us to continue to meet the increasing market demand for high quality and low cost products.
We manufacture and sell three major categories of bulk additive products: Yoghurt Culture Starter, Probiotic Powder and Strains, which accounted for approximately 44%, 33% and 23% of our bulk additive sales for the three months ended June 30, 2013, respectively.
Our management believes that the following trends in China will have an important impact on, and present significant opportunities for, our business:
· | Increasing demand for functional food and health supplement products. As the discretionary income and health-consciousness of the average Chinese consumer increase, we expect the demand for functional foods and health supplements to increase. |
· | Curtailment of the use of antibiotics and preservatives and government support for probiotics. China has the highest per capita consumption of antibiotics in the world. To curtail the overuse of antibiotics, the Chinese government has taken steps to limit the use of antibiotic drugs and preservatives for both humans and animals. Moreover, the Chinese State Food and Drug Administration has also acknowledged that probiotics are beneficial for human health. Recently, the Ministry of Health (“MOH”) in China announced an expanded list of probiotics strains allowed to be used in the food industry. The number of probiotics strains on the list has doubled. Management believes that this reflects that the Chinese government is encouraging wider uses of probiotics products in the food industry. Management also believes that it also demonstrates the rapidly expanding probiotics market in China. |
· | Increasing demand for dairy product additives. The demand for functional foods and foods that use probiotics supplements is growing at a significant rate, and our management believes that it will continue to do so. According to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics will be required to be added to baby milk powders produced in China. On October 24, 2011, the MOH published a list of probiotics applicable for baby food for babies aged one year or older. |
Our management expects to capitalize on the opportunities created by these trends to achieve significant growth through:
· | Introduction of bulk additives probiotics products through our Qingpu Facility - We have expanded into the bulk additives business for institutional customers through the completion of our project to build a 300-metric ton capacity plant in Qingpu, which was completed in calendar year 2010. |
· | We currently focus on two fast-growing industries in China: the dairy and animal feed sectors. As of June 30, 2013, we had entered into sales contracts with 140 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 business relationships with a variety of commercial customers located in major cities, including Beijing, Tianjin, Chongqing, and Shanghai, and 16 provinces, including Guangdong, Jiangsu and Jiangxi, among others. These growing companies are among the leaders in the dairy, animal feed, baked foods, and pharmaceutical industries. |
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· | Construction of a new facility in Yangling - Encouraged by the growing demand for the animal feed market in China, the Company has commenced construction of a new facility in the Yangling Zone in the Shaanxi Province of China. The cost for constructing the Yangling facility is expected to be over $58 million invested over two years. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in the construction stage, and the development plan is subject to government approval prior to implementation. During the year ended March 31, 2011, the Company made total payments of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land use right certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014 and trial production is expected to commence in 2015. In the existing market environment, the Company will utilize its available cash and bank facilities to fund such construction. |
· | Closure of retail outlets and expansion to wholesale and e-commerce businesses - In our continuing effort to transition from a retail, business-to-consumer model to a wholesale, business-to-business model (sales to our distributors), and to improve operating efficiency, we have completed the consolidation of our retail outlets. We closed all of our retail outlets by the end of fiscal year 2011, as we believe our distribution network is more efficient for our retail products sales. Comparatively, direct selling through retail outlets involves increasing leasing expenses and staffing costs. By selecting six new distributors, we have expanded our distribution network into the greater 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. We had a total of 29 distributors for retail products as of June 30, 2013. In light of increasing online sales of health food and supplements in China and to maintain our existing retail customer base, “Community Network,” we established an in-house e-commerce department during the quarter ended March 31, 2011, which is dedicated to promoting and selling our retail products online through the Company’s website at http://www.shiningbt.com/Product/ (currently under construction and is temporarily used for information only). Since its establishment, the in-house e-commerce department is working to better access the market and existing and potential customers. We have also been working with two online selling companies to sell our retail products, including www.ule.com.cn and www.yihaodian.com. In addition, we have established a customer service center to reply to inquiries from our end users. |
· | Improvement in research and development of new products and services - We continue to develop new retail products aimed at improving general human health conditions, enhancing the immune system, and reducing health problems. To further improve our competency in the bulk additives market, we continue to improve and provide our value-added service to institutional customers by assisting their lab and production testing and providing customized technical support, among other things. In addition, we are also working with certain universities, including Northeast Agricultural University, to carry out research and development projects in order to seek to increase the probiotics industry’s capability. |
Our operations are generally not labor-intensive. We employed 344 people as of June 30, 2013. With production ramping up in the Phase 1 facility and the construction of Phase 2 in Qingpu, we expect significant increases in our number of employees over the next two years. We have been recruiting senior executives to strengthen our management team. However, as wages in China are relatively inexpensive, we expect that labor costs will remain insignificant.
Results of Operations for the Three Months Ended June 30, 2013 Compared with the Three Months Ended June 30, 2012
Our results for the three months ended June 30, 2013 and 2012 are summarized below:
Three months ended June 30, | ||||||||||||||||
2013 Amount | % of Net sales | 2012 Amount | % of Net sales | |||||||||||||
Net sales | $ | 13,136,530 | 100.00 | % | $ | 17,382,483 | 100.00 | % | ||||||||
Cost of sales | 6,308,168 | 48.02 | % | 7,278,378 | 41.87 | % | ||||||||||
Gross profit | 6,828,362 | 51.98 | % | 10,104,105 | 58.13 | % | ||||||||||
Operating expenses: | ||||||||||||||||
Selling expenses | 2,206,452 | 16.80 | % | 4,036,365 | 23.22 | % | ||||||||||
General and administrative expenses | 2,951,526 | 22.47 | % | 2,354,571 | 13.55 | % | ||||||||||
Research and development | 1,573,637 | 11.97 | % | 1,304,525 | 7.50 | % | ||||||||||
Total operating expenses | 6,731,615 | 51.24 | % | 7,695,461 | 44.27 | % | ||||||||||
Income from operations | 96,747 | 0.74 | % | 2,408,644 | 13.86 | % | ||||||||||
Other income and expense: | ||||||||||||||||
Interest expense | (271,933 | ) | (2.07 | )% | (145,460 | ) | (0.84 | )% | ||||||||
Interest income | 184,665 | 1.41 | % | 194,973 | 1.12 | % | ||||||||||
Investment income, net of fee expenses | 789,869 | 6.01 | % | 776,683 | 4.47 | % | ||||||||||
Exchange (loss) gain, net | (2,264 | ) | (0.02 | )% | 8,987 | 0.05 | % | |||||||||
Miscellaneous | 3,693 | 0.03 | % | (102,892 | ) | (0.59 | )% | |||||||||
Total other income | 704,030 | 5.36 | % | 732,291 | 4.21 | % | ||||||||||
Income before taxes | 800,777 | 6.10 | % | 3,140,935 | 18.07 | % | ||||||||||
Income taxes | 646,857 | 4.93 | % | 1,068,972 | 6.15 | % | ||||||||||
Net income | $ | 153,920 | 1.17 | % | $ | 2,071,963 | 11.92 | % |
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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 June 30, 2013 and 2012 comprised the following:
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Invoiced value of sales | $ | 13,319,066 | $ | 17,779,164 | ||||
Less: Sales discount | (106,489 | ) | (261,896 | ) | ||||
Less: Sales tax | (76,047 | ) | (134,785 | ) | ||||
$ | 13,136,530 | $ | 17,382,483 |
Net sales decreased by $4,245,953 or 24.43% to $13,136,530 for the three months ended June 30, 2013 from $17,382,483 for the three months ended June 30, 2012. The decrease was mainly attributable to the decrease of the sales of both bulk additive products and retail products, most notably bulk additive products. Due to the slow economy and challenging environment for health care products, in order to stay competitive, we did not increase the selling prices for both of our bulk additive products and retail products. Our retail sales continued to decline caused by the strict rules and regulations on health care products imposed by the PRC government. The China Food and Drug Administration performed frequent examinations of our production facility and products which significantly affected our operations.
The contributions of our products as a percentage of invoiced value on sales for the three months ended June 30, 2013 and 2012, respectively, are summarized below.
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Retail products | 17.29 | % | 14.41 | % | ||||
Bulk additives | 82.71 | % | 85.59 | % | ||||
100.00 | % | 100.00 | % |
Based on the invoiced value of sales, the retail products invoiced sales contributions increased to 17.29% in the three months ended June 30, 2013 from 14.41% in the three months ended June 30, 2011. Our retail sales continued to decline as a result of the strict rules and regulations on health care products imposed by the PRC government while our bulk additive products were not directly impacted by these regulations.
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Cost of sales
Cost of sales for the three months ended June 30, 2013 was $6,308,168, a decrease of $970,210, or 13.33% as compared with $7,278,378 for the three months ended June 30, 2012. The decrease in cost of sales was primarily caused by the decrease in sales for the three months ended June 30, 2013.
Gross profit
Gross profit decreased by $3,275,743 or 32.42% to $6,828,362 for the three months ended June 30, 2013 from $10,104,105 for the three months ended June 30, 2012. The decrease was mainly attributable to the decrease in sales volume of both bulk additive products and retail products for the three months ended June 30, 2013. Our gross margin decreased to 51.98% for the three months ended June 30, 2013 from 58.13% during the three months ended June 30, 2012, primarily because the increase in manufacturing costs outpaced the increase in our average selling prices. Due to the slower economy in China and increased competition, our average selling prices remained flat to stay competitive but the manufacturing costs including raw materials and labor costs continued to increase.
Selling expenses
Selling expenses decreased by $1,829,913 or 45.34% to $2,206,452 or 16.80% of net sales for the three months ended June 30, 2013, compared with $4,036,365 or 23.22% of net sales for the three months ended June 30, 2012. The decrease was mainly attributable to lower sales commission to sales staff as a result of lower sales for the three months ended June 30, 2013.
General and administrative expenses
General and administrative expenses increased by $596,955 or 25.35% to $2,951,526 or 22.47% of net sales for the three months ended June 30, 2013, compared with $2,354,571 or 13.55% of net sales for the three months ended June 30, 2012. The increase in general and administrative expenses was mainly attributable to the professional fees incurred to complete our prior unfiled S.E.C. periodical reports during the three months ended June 30, 2013.
Research and development expenses
Our research and development cost increased $269,112 or 20.63% to $1,573,637 for the three months ended June 30, 2013 from $1,304,525 for three months ended June 30, 2012. Our research and development cost fluctuates from time to time depending on the research projects we have in progress.
Income from operations
Income from operations decreased by $2,311,897 to $96,747 for the three months ended June 30, 2013, from $2,408,644 for the three months ended June 30, 2012. The decrease was mainly attributable to the decrease in sales and relatively modest decrease in operating expenses for the three months ended June 30, 2013.
Total other income
Total other income decreased by $28,261 or 3.86% to $704,030 for the three months ended June 30, 2013, from $732,291for the three months ended June 30, 2012. The decrease was mainly attributable to the increase of interest expense as we had higher outstanding loan balance during the three months ended June 30, 2013 compared to the three months ended June 30, 2012.
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Income taxes
Provision for income taxes was $646,857 and $1,068,972 for the three months ended June 30, 2013 and 2012, respectively. The decrease in the provision for income taxes is primarily attributable to the decrease in operating profit.
Net income
Net income decreased by $1,918,043 to $153,920 for the three months ended June 30, 2013 from $2,071,963 for the three months ended June 30, 2012. The decrease of net income is mainly attributable to the decrease of income from operations of $2,311,897.
Segment reporting
We have adopted the “products and services” approach for segment reporting. For fiscal years 2013 and 2012, the management considers there to be two reporting segments: retail products and bulk additive products, as the new bulk production plant commenced operations in February 2010 with a separate production and distribution channel. There are also separate operational management teams and operations and marketing strategies for each segment. Therefore, we have used segment reporting since year 2011.
Retail products
The results of retail products segment for the three months ended June 30, 2013 and 2012 are summarized as below:
Three months ended June 30, | ||||||||||||||||
2013 Amount | % of Net sales | 2012 Amount | % of Net sales | |||||||||||||
Net sales, retail products | $ | 2,271,777 | 100.00 | % | $ | 2,504,098 | 100.00 | % | ||||||||
Cost of sales | 1,480,382 | 65.16 | % | 1,281,644 | 51.18 | % | ||||||||||
Gross profit, retail products | 791,395 | 34.84 | % | 1,222,454 | 48.82 | % | ||||||||||
Operating expenses: | ||||||||||||||||
Selling expenses | 820,575 | 36.12 | % | 905,989 | 36.18 | % | ||||||||||
General and administrative expenses | 322,353 | 14.19 | % | 513,819 | 20.52 | % | ||||||||||
Research and development expenses | 791,371 | 34.84 | % | 600,756 | 23.99 | % | ||||||||||
Total operating expenses | 1,934,299 | 85.15 | % | 2,020,564 | 80.69 | % | ||||||||||
Losses from operations, retail products | $ | (1,142,904 | ) | (50.31 | )% | $ | (798,110 | ) | (31.87 | )% |
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 June 30, 2013 and 2012 comprised the following:
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Invoiced value on sales | $ | 2,387,217 | $ | 2,787,346 | ||||
Less: Sales discount | (106,489 | ) | (261,896 | ) | ||||
Less: Sales tax | (8,951 | ) | (21,352 | ) | ||||
$ | 2,271,777 | $ | 2,504,098 |
Net sales decreased by $232,321 or 9.28% to $2,271,777 for the three months ended June 30, 2013 from $2,504,098 for the three months ended June 30, 2012. Our retail sales continued to decline as a result of the strict rules and regulations on health care products imposed by the PRC government. We also experienced frequent examination by the China Food and Drug Administration on our facility and products, which created significant interruptions on our day to day operations and our growth plan in the near term.
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Cost of sales
Cost of sales increased by $198,738 or 15.51% to $1,480,382 for the three months ended June 30, 2013 from $1,281,644 for the three months ended June 30, 2012. The increase in cost of sales was primarily caused by the increase of certain manufacturing costs. The material, labor and overhead costs continue to increase but we were unable to increase our selling prices for our products as we tried to keep our price competitive under the overall challenging environment of the health care industry.
Gross profit
Gross profit decreased by $431,059 or 35.26% to $791,395 for the three months ended June 30, 2013 from $1,222,454 for the three months ended June 30, 2012. The decrease in gross profit was primarily caused by the decrease of products sold and continuous increase in our manufacturing costs.
Selling expenses
Selling expenses mainly include salary and advertising expenses. Selling expenses were $820,575 or 36.12% of net sales for the three months ended June 30, 2013, compared with $905,989 or 36.18% of net sales for the three months ended June 30, 2012. The decrease in selling expenses was in line with the decrease in our net sales.
General and administrative expenses
General and administrative expenses decreased by $191,466 or 37.26% to $322,353 or 14.19% of net sales for the three months ended June 30, 2013 compared with $513,819 or 20.52% of net sales for the three months ended June 30, 2012. We incurred consultation fees in the amount of $124,000 in regards with developing new products during the three months ended June 30, 2012 whereas we did not incur such expenses during the three months ended June 30, 2013.
Research and development expenses
Our research and development cost increased $190,615 or 34.83% to $791,371 for the three months ended June 30, 2013 as compared to $600,756 for three months ended June 30, 2012. Even though the environment for retail products have been challenging, we continue to invest in research and development which we believe will benefit our long term growth. Our research and development cost fluctuates from time to time depending on the research projects we have in progress.
Losses from operations
Losses from operations increased by $344,794 to $1,142,904 for the three months ended June 30, 2013 from $798,110 for the three months ended June 30, 2012. The increase in losses from operations was mainly attributable to the decrease in sales and overall flat operating expenses for the three months ended June 30, 2013.
Bulk products
The results of bulk additives products segment for the three months ended June 30, 2013 and 2012 are summarized as below:
Three months ended June 30, | ||||||||||||||||
2013 Amount | % of Net sales | 2012 Amount | % of Net sales | |||||||||||||
Net sales, bulk additives products | $ | 10,864,753 | 100.00 | % | $ | 14,878,385 | 100.00 | % | ||||||||
Cost of sales | 4,827,786 | 44.44 | % | 5,996,734 | 40.31 | % | ||||||||||
Gross profit, bulk additives products | 6,036,967 | 55.56 | % | 8,881,651 | 59.69 | % | ||||||||||
Operating expenses: | ||||||||||||||||
Selling expenses | 1,385,877 | 12.76 | % | 3,130,376 | 21.04 | % | ||||||||||
General and administrative expenses | 715,197 | 6.58 | % | 870,358 | 5.85 | % | ||||||||||
Research and development expenses | 782,266 | 7.19 | % | 703,769 | 4.71 | % | ||||||||||
Total operating expenses | 2,883,340 | 26.53 | % | 4,704,503 | 31.61 | % | ||||||||||
Income from operations, bulk additives products | $ | 3,153,627 | 29.03 | % | $ | 4,177,147 | 28.08 | % |
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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 June 30, 2013 and 2012 comprised the following:
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Invoiced value on sales | $ | 10,931,849 | $ | 14,991,818 | ||||
Less: Sales tax | (67,096 | ) | (113,433 | ) | ||||
$ | 10,864,753 | $ | 14,878,385 |
Net sales decreased by $4,013,632 or 26.98% to $10,864,753 for the three months ended June 30, 2013, from $14,878,385 for the three months ended June 30, 2012. The decrease in sales of bulk additive products was primarily attributable to effects of the general economy slowdown.
Cost of sales
Cost of sales decreased by $1,168,948 or 19.49% to $4,827,786 for the three months ended June 30, 2013, from $5,996,734 for the three months ended June 30, 2012. The decrease in cost of sales was primarily caused by the decrease in products sold for the three months ended June 30, 2013.
Gross profit
Gross profit decreased by $2,844,684 or 32.03% to $6,036,967 for the three months ended June 30, 2013, from $8,881,651 for the three months ended June 30, 2012. The decrease of gross profit was primarily caused by the decrease in products sold for the three months ended June 30, 2013. Our average selling prices were not able to keep up with the increases of our manufacturing costs which resulted in a decrease in our gross margin to 55.56% for the three months ended June 30, 2013 from $59.69% for the three months ended June 30, 2012.
Selling expenses
Selling expenses were $1,385,877 or 12.76% of net sales for the three months ended June 30, 2013, compared with $3,130,376 or 21.04% of net sales for the three months ended June 30, 2012. The selling expenses mainly included advertising expenses, promotion expenses, commission and salary. This increase in selling expenses was primarily attributable to decrease of commission expense as a result of decline in sales. In addition, we paid extra commission to the sales team in the three months ended June 30, 2012 as an extra incentive for the sales team to generate sales.
General and administrative expenses
General and administrative expenses were $715,197 or 6.58% of net sales for the three months ended June 30, 2013, compared with $870,358 or 5.85% of net sales for the three months ended June 30, 2012. The decrease in general and administrative expenses was mainly attributable to the decrease in the depreciation expense to $243,000 for the three months ended June 30, 2013 from $284,000 for the three months ended June 30, 2012.
Research and development expenses
Our research and development cost increased $78,497 or 11.15% to $782,266 for the three months ended June 30, 2013 as compared to $703,769 or 4.73% for three months ended June 30, 2012. Our research and development cost fluctuates from time to time depending on the research projects we have in progress.
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Income from operations
Income from operations decreased by $1,023,521 or 24.5% to $3,153,627 for the three months ended June 30, 2013, from $4,177,148 for the three months ended June 30, 2012. The decrease was mainly attributable to the decrease of gross profit of $2,844,684 from the decrease in sales which was partially offset by the decreases in selling expenses and and general and administrative expenses for the three months ended June 30, 2013.
Liquidity and Capital Resources
Liquidity
We had cash of $78.0 million and working capital of $99.7 million as of June 30, 2013 and cash of $75.9 million and working capital of $77.9 million as of March 31, 2013.
Our statements of cash flow for the three months ended June 30, 2013 and 2012 are summarized as below:
Three months ended June 30, | ||||||||
2013 | 2012 | |||||||
Net cash provided by operating activities | $ | 3,654,675 | $ | 2,237,410 | ||||
Net cash used in investing activities | (2,824,190 | ) | (20,931,411 | ) | ||||
Net cash provided by (used in) financing activities | 150,000 | (681,442 | ) | |||||
Effect of exchange rate changes on cash | 1,174,942 | (41,315 | ) | |||||
Net increase (decrease) in cash and cash equivalents balances | 2,155,427 | (19,416,758 | ) | |||||
Cash and cash equivalent balances, beginning of period | 75,866,328 | 70,086,074 | ||||||
Cash and cash equivalent balances, end of period | $ | 78,021,755 | $ | 50,669,316 |
Operating activities
During the three months ended June 30, 2013, we had net cash provided by operating activities of $3,654,675 as compared to $2,237,410 during the three months ended June 30, 2013. Net cash provided by operating activities during three months ended June 30, 2013 consisted primarily of net income of $153,920, depreciation expense of $1,562,096, a decrease in accounts receivable of $3,136,335 primarily due to substantially lower accounts receivable as a result of lower net sales during the quarter, which were partially offset by the increase in inventories of $1,073,925 due to slow sales during the quarter, and decrease in other payables and accruals of $1,476,519 primarily due to lower sales commission incurred in the quarter. Net cash provided by operating activities during the three months ended June 30, 2012 consisted primarily of net income of $2,071,963, depreciation expense of $1,177,403, and a decrease in accounts receivable of $2,836,504, which were partially offset by the increase in interest income receivable, net of fee payable, of $1,258,703, a decrease in accounts payable of $1,132, 783 and a decrease in taxes payable of $1,936,093.
Our business is not capital or labor intensive. Typically, 60% of our sales take place in the second half of the fiscal year. Since our customers have historically been large distributors with whom we have done business for a number of years, our cash flows from our existing business have been, and we expect them to continue to be, fairly reliable.
Investing activities
During the three months ended June 30, 2013 and 2012, we made prepayments of $2.6 million and $12.2 million, respectively, for the capital expenditures with respect to our Yangling and Qingpu facilities to contractors.
We incurred $177,000 and $8.7 million capital expenditure related to the acquisitions of property, plant and equipment and construction in progress related to the Yangling and Qingpu facilities during the three months ended June 30, 2013 and 2012, respectively.
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Financing activities
During the three months ended June 30, 2013 and 2012, we had net cash provided by financing activities of $150,000 and net cash used in financing activities of $681,442, respectively.
During the three months ended June 30, 2013 and 2012, we received advances from Mr. Song Jinan, our Chief Executive Officer and director, totaling $150,000 and $111,228, respectively. As the Company experienced difficult converting RMB into non-PRC currency to pay for expenses incurred outside China due to foreign exchange controls, Mr. Song advanced the expenses in non-PRC currency for the Company. We repaid these advances in RMB.
During the three months ended June 30, 2012, we repaid bank loans of $792,670.
Commitments
Capital commitments
On August 12, 2010, BDH, a subsidiary of the Company, entered into the agreements with a government agency to establish manufacturing facilities for animal probiotics products in the Yangling Agricultural High-tech Industries Demonstration Zone in Shaanxi Province of China. In furtherance of such agreements, BDH incorporated a foreign, wholly owned subsidiary, Growing Yangling, with a registered capital of $50 million. As of June 30, 2013, the Company had injected into Growing Yangling $7.5 million as registered capital. According to the approval from the government agency dated October 12, 2010, the remaining balance of Growing Yangling’s registered capital of $42.5 million must be injected before July 13, 2013. The Company obtained a one-year extension from the government agency which gives the Company until July 13, 2014 to inject the remaining capital.
The cost for constructing the Yangling facility is expected to be over $58 million invested over two years, which would be mainly facilitated by the capital injection from BDH. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in its construction stage. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014. As of June 30, 2013, Growing Yangling entered into agreements with contractors related to the construction of the plant and manufacturing facilities and production equipment with remaining future payments of $24,575,235 and $6,398,626, respectively.
Purchase obligations
The Company entered into agreements with suppliers to purchase raw materials and packing materials. As of June 30, 2013, the amount of future payments was $16,613,412.
Other obligations
The Company entered into agreements with a university to perform research and development for an annual aggregate fee of $1,457,915 (RMB 9,000,000). Fee commitment for the remaining terms through October 31, 2014, the end of the term, totaled $1,943,886 (RMB 12,000,000) as of June 30, 2013.
Pending litigation
The Company and certain of its current and former officers and directors have been named as defendants in three 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 “Mohapatra case”), and two 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 “Hill case”, and Casper v. Jinan, et al., No. 12-cv-4202 (S.D.N.Y.), the “Casper case”). After certain shareholders filed motions for appointment as lead plaintiff, the plaintiff in the Mohapatra case voluntarily dismissed its case and the plaintiff in the Hill case, together with another shareholder, were appointed as lead plaintiffs. The lead plaintiffs filed an amended complaint in which they allege that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements or failing to disclose certain material information regarding, among other things, the Company’s financial condition, operations, and future business prospects, and the quality, nature, and quantity of the Company’s retail outlets. The lead plaintiffs seek to represent a class of shareholders who bought the Company’s securities between July 10, 2008 and August 27, 2010.
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On August 18, 2011, the Company filed a motion to dismiss the lead plaintiffs’ amended complaint. The court dismissed the lead plaintiffs’ Section 11 claim, but gave them leave to replead. The court did not rule on the motion to dismiss the Section 10(b) claim. On January 9, 2012, the lead plaintiffs filed a second amended complaint that included a new named plaintiff and new allegations for the Section 11 claim. On February 27, 2012, the Company filed a motion to dismiss the amended Section 11 claim. Both that motion and the original motion to dismiss the Section 10(b) and Section 20(a) claims are currently pending before the court. The Company intends to defend this action vigorously.
In the Casper case, the plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements and seeks to represent a class of stockholders who bought the Company’s securities between February 9, 2011 and July 1, 2011. On October 18, 2012, the Hill case and the Casper case were consolidated, but no consolidated amended complaint has yet been filed. The Company intends to defend this action vigorously.
The Company 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. On March 26, 2012, the plaintiff filed an amended complaint in which he added Roth Capital Partners LLC and Maxim Group LLC (the “Underwriters”) as defendants. On September 7, 2012, the Underwriters filed a motion to dismiss. On October 23, 2012, the court approved a stipulation in which the plaintiff voluntarily dismissed the claim against the Underwriters. On November 13, 2012, the clerk entered a default against the director defendants. On December 7, 2012, the parties submitted a stipulation lifting the clerk’s entry of default. The defendants intend to defend this action vigorously.
With respect to the above-referenced litigation matters, the Company is unable at this time to estimate possible losses, if any, or any other impact of the outcome of the litigation matters on the consolidated financial statements.
Review of decision ordering that the registration of the Company’s securities be revoked
On September 15, 2011, the staff of the SEC informed the Company that it intended to recommend that the SEC institute a public administrative proceeding against the Company for alleged violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 or 13a-16 promulgated thereunder. On October 7, 2011, the SEC issued an Order Instituting Proceedings to determine whether it was necessary and appropriate to suspend or revoke the registration of the Company’s securities. On February 22, 2012, the administrative law judge overseeing the proceedings issued a decision ordering that the registration of the Company’s securities be revoked. On March 26, 2012, the SEC granted the Company’s petition for review of this decision. The SEC had scheduled oral argument for July 10, 2013, but it later adjourned that date and rescheduled the oral argument for October 8, 2013. If the registration of the Company’s securities is revoked, no U.S. registered broker-dealer may execute trades in the Company’s shares and the trading market for our common stock may cease to exist. In such event, investors may not be able to liquidate their investment.
Inflation
We believe that inflation has not had a material impact on our results of operations for the three months ended June 30, 2013 and 2012.
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Seasonality
Regarding our retail products, many of our customers purchase our products as gifts during the Chinese festivals and holidays, and the seasonal effect is correlated to these holidays during the year. For the first two fiscal quarters, there are no major Chinese festivals or holidays, except for the Dragon Boat Festival (June) and mid-Autumn Festival (September). However, in the last two fiscal quarters, there are some major Chinese festivals and holidays, including National Day (October), Christmas (December), New Year’s Day (January), and Chinese New Year (January to February).
With respect to our bulk additive products, while it is still too early to tell, we expect that our bulk additives sales will not be seasonal in nature because the bulk products are purchased by food manufacturers consistently over the year. Except for the possibility of the PRC government implementing from time to time new or different rules and regulations for the food industry, including with respect to additives and related products, we are not aware of and do not foresee any seasonal effects on our bulk additive products business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
This MD&A discusses our consolidated financial statements for the quarters ended June 30, 2013 and 2012. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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.
Those estimates and assumptions include estimates for allowance for doubtful accounts, inventory valuation, impairment consideration, assumptions used in the valuation of derivative liabilities, and estimates for potential penalties for late payment of taxes.
Revenue Recognition
Revenues of the Company are from the sale of our probiotics products. We recognize revenue from the sale of goods when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. Revenues are presented net of value added tax (“VAT”). In our revenue arrangements, physical delivery is the point in time when customer acceptance occurs since title and risk of loss are transferred to the customer.
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. Since our inception of business, we have never experienced any material unrecoverable receivables. We had trade receivables totaling $28,622,192 and $31,299,849 as of June 30, 2013 and March 31, 2013, respectively, and an allowance for doubtful accounts of $4,292,750 and $4,228,769 as of June 30, 2013 and March 31, 2013, respectively. 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 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.
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Stock based compensation
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board, whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board, whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company’s common stock option grants is estimated using the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.
Income taxes
In the process of preparing consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The Registrant and its subsidiaries, with the exception of Growing and Shining, generated no taxable income. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carry-forwards and credits by applying enacted statutory tax rates applicable to future years.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We conduct this analysis on a quarterly basis.
Use of estimates as applied to potential penalties for the late payment of taxes
In addition to the Enterprise Income Tax (“EIT”), companies in the PRC that are engaged in the sale of goods are generally required to pay value added taxes (“VAT”) at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.
Our management believes that our operations in China were exempted from EIT and VAT for all years prior to 2005 because we had been recognized by the local government as an advanced technology enterprise. However, the Company never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in China prior to 2005. As a result, there is no way to ascertain the ultimate position which may be taken by the relevant PRC tax authorities in the future and accordingly, full provisions for tax liabilities in the amount of $13,713,106, for all years prior to 2005 have been recorded by the Company. Beginning in January 2006, we made tax payments to the PRC tax authorities for 2005 and we have made regular tax payments to the PRC tax authorities for all subsequent periods.
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In addition, in connection with dividends paid to the Shining shareholders between April 2003 to June 2005, Shining did not deduct a withholding tax at the rate of 20% as required by applicable Chinese laws and regulations. The Company has accrued the dividend withholding tax and interest on the dividend withholding tax.
According to PRC tax regulations, the overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to interest at the 0.05% per day, and potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of taxes payable. Through March 31, 2011, the Company accrued the interest that may be potentially payable upon these taxes incurred prior to 2005 and the unpaid dividend withholding tax. Interest related to the unpaid taxes was recognized in the Company’s consolidated statements of operations as a component of its income tax provision.
For the three months ended June 30, 2013 and 2012, management made an assessment of whether it was necessary to provide a further provision for interest and penalties on these unpaid amounts. Management determined that no further provision for interest and penalties was necessary given the unlikelihood of payment of the amount already accrued and provided in the financial statements. This assessment was based upon receipt by the company of a report by an independent tax expert that the amount of taxes prior to 2005 may not be payable, the length of time the amount has been outstanding, and that there have been no requests from PRC tax authorities for payment of the unpaid taxes outstanding amounts. As such, management believes that the previously recorded amounts are sufficient to cover any settlement of this liability.
The Company has no other material uncertain tax positions as of June 30, 2013 or unrecognized tax benefit which would favorably affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters as an income tax expense. As of June 30, 2013, there is no other interest and penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.
Recent Accounting Pronouncements
See Note 2 to the Unaudited Condensed Consolidated Financial Statements for the Three Months Ended June 30, 2013 and 2012.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
ITEM 4. CONTROLS AND PROCEDURES.
A. | Material Weaknesses |
As discussed in Item 9A of our Annual Report on Form 10-K for the year ended March 31, 2013, we identified the material weaknesses in the design and operation of our internal controls including: (i) a lack of senior management personnel who have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP; and (ii) the Company did not maintain an adequate financial reporting organizational structure to support the complexity and operating activities of the Company resulting in a weakness in efficiency and controls related to the financial statement closing process.
To remediate the material weaknesses identified in internal control over financial reporting of the Company, we have implemented or plan to implement the following:
· | hired a Vice President of Finance-China division in December 2012 to oversees the China subsidiaries’ accounting and finance, budgeting, and internal control system in order to improve our efficiency and controls related to the financial statement closing process for our China operating subsidiaries. |
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· | hired an external consultant in April 2013 with extensive experience in US GAAP and SEC reporting who is responsible for assisting the Company with (i) the preparation of its financial statements in accordance with US GAAP, (ii) its periodic SEC reporting process and (iii) providing on-going training to the Company’s accounting staff to enhance their knowledge in US GAAP; |
· | continued our efforts to recruit additional personnel with sufficient knowledge and experience in US GAAP; and |
· | continued our efforts to provide ongoing training courses in US GAAP to existing personnel. |
Management believes that these remediation measures have materially improved the Company’s internal control over financial reporting. However we believed that these material weaknesses remained as of June 30, 2013. We will continue to monitor and assess our remediation initiatives to ensure that the aforementioned material weaknesses stated remediated.
B. | Evaluation of Disclosure Controls and Procedures |
The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s management, with the participation of its principal executive and financial officers, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation and solely due to the unremediated material weaknesses described above, the Company’s principal executive and financial officers have concluded that such disclosure controls and procedures were not effective for the purpose for which they were designed as of the end of such period. As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the unremediated material weaknesses previously disclosed. Accordingly, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented, in accordance with accounting principles generally accepted in the U.S, notwithstanding the unremediated weaknesses.
C. | Changes in Internal Control over Financial Reporting |
There was no change in the Company’s internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and certain of its current and former officers and directors have been named as defendants in three 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 “Mohapatra case”), and two 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 “Hill case”, and Casper v. Jinan, et al., No. 12-cv-4202 (S.D.N.Y.), the “Casper case”). After certain shareholders filed motions for appointment as lead plaintiff, the plaintiff in the Mohapatra case voluntarily dismissed its case and the plaintiff in the Hill case, together with another shareholder, were appointed as lead plaintiffs. The lead plaintiffs filed an amended complaint in which they allege that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements or failing to disclose certain material information regarding, among other things, the Company’s financial condition, operations, and future business prospects, and the quality, nature, and quantity of the Company’s retail outlets. The lead plaintiffs seek to represent a class of shareholders who bought the Company’s securities between July 10, 2008 and August 27, 2010.
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On August 18, 2011, the Company filed a motion to dismiss the lead plaintiffs’ amended complaint. The court dismissed the lead plaintiffs’ Section 11 claim, but gave them leave to replead. The court did not rule on the motion to dismiss the Section 10(b) claim. On January 9, 2012, the lead plaintiffs filed a second amended complaint that included a new named plaintiff and new allegations for the Section 11 claim. On February 27, 2012, the Company filed a motion to dismiss the amended Section 11 claim. Both that motion and the original motion to dismiss the Section 10(b) and Section 20(a) claims are currently pending before the court. The Company intends to defend this action vigorously.
In the Casper case, the plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements and seeks to represent a class of stockholders who bought the Company’s securities between February 9, 2011 and July 1, 2011. On October 18, 2012, the Hill case and the Casper case were consolidated, but no consolidated amended complaint has yet been filed. The Company intends to defend this action vigorously.
The Company 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. On March 26, 2012, the plaintiff filed an amended complaint in which he added Roth Capital Partners LLC and Maxim Group LLC (the “Underwriters”) as defendants. On September 7, 2012, the Underwriters filed a motion to dismiss. On October 23, 2012, the court approved a stipulation in which the plaintiff voluntarily dismissed the claim against the Underwriters. On November 13, 2012, the clerk entered a default against the director defendants. On December 7, 2012, the parties submitted a stipulation lifting the clerk’s entry of default. The defendants intend to defend this action vigorously.
On September 15, 2011, the staff of the SEC informed the Company that it intended to recommend that the SEC institute a public administrative proceeding against the Company for alleged violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 or 13a-16 promulgated thereunder. On October 7, 2011, the SEC issued an Order Instituting Proceedings to determine whether it was necessary and appropriate to suspend or revoke the registration of the Company’s securities. On February 22, 2012, the administrative law judge overseeing the proceedings issued a decision ordering that the registration of the Company’s securities be revoked. On March 26, 2012, the SEC granted the Company’s petition for review of this decision. The SEC had scheduled oral argument for July 10, 2013, but it later adjourned that date and rescheduled the oral argument for October 8, 2013.
ITEM 1A. RISK FACTORS.
Not required for a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
As discussed further in the report of our management included under Item 4. “Controls and Procedures” of Part I of this Quarterly Report on Form 10-Q, after reviewing our Annual Report on Form 10-K for the year ended March 31, 2010 and our Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2010, the SEC concluded in a letter to the Company dated as of January 9, 2012, that the Company’s lack of U.S. GAAP experience is a material weakness in its disclosure controls and procedures and in its internal control over financial reporting. In its letter, the SEC also directed the Company to file an amended Form 10-K for the year ended March 31, 2010 identifying the Company’s lack of U.S. GAAP experience as a material weakness in its disclosure controls and procedures and in its internal control over financial reporting, which the Company intends to file as promptly as is reasonably practicable.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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). | |
31.1 | Certification of CEO pursuant to Rule 13a-14(a)/15(d)-14(a). | |
31.2 | Certification of CFO pursuant to Rule 13a-14(a)/15(d)-14(a). | |
32.1 | Certification of CEO pursuant to Section 1350. | |
32.2 | Certification of CFO pursuant to Section 1350. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
By: | /s/ Mr. Song Jinan | |
Mr. Song Jinan | ||
Chairman of the Board, Chief Executive Officer, | ||
Treasurer and Secretary (Principal Executive | ||
Officer) |
By: | /s/ Yan Yihong | |
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
Date: August 14, 2013
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Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
RULE 15d-14(a) (17 CFR 240.15d-14(a))
(AUTHORIZED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Song Jinan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 of China-Biotics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Song Jinan | |
Song Jinan | |
Chief Executive Officer | |
August 14, 2013 |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
RULE 15d-14(a) (17 CFR 240.15d-14(a))
(AUTHORIZED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Yan Yihong, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 of China-Biotics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
/s/ Yan Yihong | |
Yan Yihong | |
Chief Financial Officer | |
August 14, 2013 |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. § 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
I, Song Jinan, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, based upon a review of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 of China-Biotics, Inc. (the “Report”):
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of China-Biotics, Inc.
A signed original of this written statement required by Section 906 has been provided to China-Biotics, Inc. and will be retained by China-Biotics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Song Jinan | |
Song Jinan | |
Chief Executive Officer | |
August 14, 2013 |
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. § 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
I, Yan Yihong, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, based upon a review of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 of China-Biotics, Inc. (the “Report”):
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of China-Biotics, Inc.
A signed original of this written statement required by Section 906 has been provided to China-Biotics, Inc. and will be retained by China-Biotics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Yan Yihong | |
Yan Yihong | |
Chief Financial Officer | |
August 14, 2013 |
PROPERTY, PLANT AND EQUIPMENT
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property, Plant and Equipment Disclosure [Text Block] |
Property, plant and equipment, net, consisted of the following:
For the three months ended June 30, 2013 and 2012, depreciation expense amounted to $1,562,096 and $1,177,403, respectively. As of June 30, 2013 and March 31, 2013, the corporate headquarters office building and the Qingpu facilities were pledged to banks as a guarantee for loans of a total of $16,199,054 (RMB 100,000,000) (see Note 12). As of June 30, 2013 and March 31, 2013, the net book value of these properties totaled approximately $56.0 million and $55.7 million, respectively. As of June 30, 2013 and March 31, 2013, the Company has the following construction projects in process:
As of June 30, 2013 and March 31, 2013, the Company had outstanding deposits and prepayments of $14,964,778 and $20,005,186, respectively, relating to delivery of equipment to be used at these facilities. |
INCOME TAXES (Details Textual) (USD $)
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3 Months Ended | 3 Months Ended | 60 Months Ended | 3 Months Ended | 36 Months Ended | |||||
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Jun. 30, 2013
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Mar. 31, 2013
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Jun. 30, 2012
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Jun. 30, 2013
Taxes Arising Prior To 2005 [Member]
|
Mar. 31, 2013
Taxes Arising Prior To 2005 [Member]
|
Jun. 30, 2013
Prc [Member]
|
Jun. 30, 2013
Shining [Member]
|
Dec. 31, 2011
Shining [Member]
|
Jun. 30, 2013
Growing [Member]
|
Dec. 31, 2012
Growing [Member]
Prc [Member]
|
|
Operating Loss Carryforwards | $ 17,100,000 | $ 17,100,000 | ||||||||
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent | 25.00% | 25.00% | 25.00% | 25.00% | ||||||
Effective Income Tax Rate Reconciliation, With Preferential Tax Rate | 15.00% | |||||||||
Effective Income Tax Rate Reconciliation, Tax Exempt Income, Percent | 50.00% | 50.00% | ||||||||
Percentage Of Value Added Taxes From Gross Sales | 17.00% | |||||||||
Taxes Payable, Current, Total | 32,143,902 | 32,244,385 | 13,713,106 | 13,508,721 | ||||||
Percentage Of Withholding Tax | 20.00% | |||||||||
Income Tax Examination, Description | According to PRC tax regulations, the overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to interest at the 0.05% per day, and potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of taxes payable. Through March 31, 2011, the Company accrued the interest that may be potentially payable upon these taxes incurred prior to 2005 and the unpaid dividend withholding tax. Interest related to the unpaid taxes was recognized in the Companys consolidated statements of operations as a component of its income tax provision. | |||||||||
Operating Loss Carryforwards Minimum Period | 5 years | 5 years | ||||||||
Operating Loss Carryforwards Maximum Period | 25 years | 25 years | ||||||||
Undistributed Earnings of Foreign Subsidiaries | 157,800,000 | |||||||||
Restricted Cash and Cash Equivalents | $ 78,000,000 |
INCOME PER SHARE
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Text Block] |
The following table sets forth the computation of basic and diluted income per share:
Basic income per share is computed by dividing the net income by the weighted average number of outstanding common stock during the period. The diluted income 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 shares of common stock has been outstanding to the total time in that period. The Company had 660,000 common stock equivalents related to the stock options at June 30, 2013 and June 30, 2012, respectively. For the three months ended June 30, 2013 and 2012, 660,000 and 483,637, respectively, of these common stock equivalents have been excluded for the calculation of diluted earnings per share as the effect of these common stock equivalents is anti-dilutive. |
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Policies)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
|
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Accounting, Policy [Policy Text Block] | Basis of presentation The accompanying unaudited condensed consolidated financial statements as of and for the three-months ended June 30, 2013 and 2012 have been prepared based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of June 30, 2013 and for all periods presented. Information as of March 31, 2013 was derived from the audited consolidated financial statements of the Company for the year ended March 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-K filed on July 12, 2013 for the year ended March 31, 2013. The results of operations for the three months ended June 30, 2013 are not necessarily indicative of the operating results to be expected for the full year ending March 31, 2014. The condensed consolidated financial statements and accompanying notes are presented in United States dollars and prepared in conformity with US GAAP which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
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Consolidation, Policy [Policy Text Block] | Basis of consolidation The unaudited condensed consolidated financial statements for China-Biotics, Inc. and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Sinosmart Group Inc. (“SGI”), Growing State Limited (“GSL”) and King Treasure Group Limited (“KTG”); SGI’s wholly owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”); GSL’s wholly owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“Growing”); KTG’s wholly owned subsidiary, Best Design Holdings Limited (“BDH”); and BDH’s wholly owned subsidiary, Growing Bio (Yangling) Co. Ltd (“Growing Yangling”). Intercompany accounts and transactions have been eliminated in consolidation. |
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Use of Estimates, Policy [Policy Text Block] | Use of Estimates The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Those estimates and assumptions include estimates for allowance for doubtful accounts, inventory valuation, impairment consideration, and assumptions used in the valuation of equity instruments. |
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Fair Value of Financial Instruments, Policy [Policy Text Block] | Fair value of financial instruments Fair value measurements are determined using authoritative guidance issued by the FASB, with the exception of the application of the guidance to non-recurring, non-financial assets and liabilities as permitted. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows: Level 1-Quoted prices in active markets for identical assets or liabilities. Level 2-Inputs, other than the quoted prices in active markets, are observable either directly or indirectly. Level 3-Unobservable inputs based on the Company’s assumptions The Company is required to use observable market data if available without undue cost and effort. The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2013 and March 31, 2013:
|
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New Accounting Pronouncements, Policy [Policy Text Block] | Recent Accounting Pronouncements In March 2013, the FASB issued ASU 2013-05 Topic 830, “Foreign Currency Matters” (“ASU 2013-05”). ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, ConsolidationOverall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s unaudited condensed consolidated financial statements. The FASB has issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405), “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material impact on the Company’s unaudited condensed consolidated financial statements. In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, A Similar Tax Loss, or a Tax Credit Carryforward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carrforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s unaudited condensed consolidated financial position and results of operations. Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements. |
AMOUNT DUE TO DIRECTOR
|
3 Months Ended | |||
---|---|---|---|---|
Jun. 30, 2013
|
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Amount Due From Or To Director Disclosure [Abstract] | ||||
Amount Due From Or To Director Disclosure [Text Block] |
As of June 30, 2013 and March 31, 2013, the amount due to our director and Chief Executive Officer , Mr. Song Jinan, represented advances to the Company which are unsecured, interest-free and repayable on demand. The advances from such director were made by Mr. Song due to the difficulty the Company faced in paying expenses incurred outside China in non-PRC currency due to the difficulties the Company had in converting currency under foreign exchange controls. As of June 30, 2013 and March 31, 2013, the amount due to Mr. Song also included certain unpaid compensation due to him. |
INCOME TAXES (Details 1) (USD $)
|
3 Months Ended | |
---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
|
Current-PRC | $ 634,765 | $ 1,068,972 |
Deferred-PRC | 12,092 | 0 |
Income Tax Expense Benefit | $ 646,857 | $ 1,068,972 |
COMMITMENTS AND CONTINGENCIES (Details Textual)
|
3 Months Ended | |||||
---|---|---|---|---|---|---|
Jun. 30, 2013
USD ($)
|
Jun. 30, 2013
CNY
|
Jun. 30, 2013
Bdh [Member]
USD ($)
|
Jun. 30, 2012
Bdh [Member]
USD ($)
|
Aug. 12, 2010
Bdh [Member]
USD ($)
|
Jun. 30, 2013
Growing [Member]
USD ($)
|
|
Registered Capital Amount | $ 50,000,000 | |||||
Registered Capital Injected | 7,500,000 | |||||
Registered Capital Yet To Be Injected | 42,500,000 | 58,000,000 | ||||
Purchase Obligation | 16,613,412 | |||||
Plant And Manufacturing Facilities | 24,575,235 | |||||
Payment For Production Equipment | 6,398,626 | |||||
Agreement To Perform Research And Development Amount | 1,457,915 | 9,000,000 | ||||
Other Commitment | $ 1,943,886 | 12,000,000 |
ACCOUNTS RECEIVABLE (Details) (USD $)
|
Jun. 30, 2013
|
Mar. 31, 2013
|
---|---|---|
Accounts receivable | $ 28,622,192 | $ 31,299,849 |
Less: Allowance for doubtful accounts | (4,292,750) | (4,228,769) |
Accounts Receivable, Net, Current | $ 24,329,442 | $ 27,071,080 |
ACCOUNTS RECEIVABLE (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
|
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Accounts Receivable [Abstract] | ||||||||||||||||||||||||||||||||||||||||||
Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block] | Accounts receivable consisted of the following:
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INCOME PER SHARE (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
|
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Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] | The following table sets forth the computation of basic and diluted income per share:
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LOANS PAYABLE (Details Textual)
|
3 Months Ended | 3 Months Ended | 3 Months Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2013
USD ($)
|
Mar. 31, 2013
USD ($)
|
Sep. 24, 2012
Bank Of Jiangsu, Bank Loan Facility [Member]
USD ($)
|
Sep. 24, 2012
Bank Of Jiangsu, Bank Loan Facility [Member]
CNY
|
Jun. 30, 2013
Bank Of Jiangsu, Bank Loan Facility One [Member]
|
Oct. 31, 2012
Bank Of Jiangsu, Bank Loan Facility One [Member]
USD ($)
|
Oct. 31, 2012
Bank Of Jiangsu, Bank Loan Facility One [Member]
CNY
|
Jun. 30, 2013
Bank Of Jiangsu, Bank Loan Facility Two [Member]
|
Dec. 28, 2012
Bank Of Jiangsu, Bank Loan Facility Two [Member]
USD ($)
|
Dec. 28, 2012
Bank Of Jiangsu, Bank Loan Facility Two [Member]
CNY
|
Jun. 30, 2013
Bank Of Jiangsu, Bank Loan Facility Three [Member]
|
Dec. 31, 2012
Bank Of Jiangsu, Bank Loan Facility Three [Member]
USD ($)
|
Dec. 31, 2012
Bank Of Jiangsu, Bank Loan Facility Three [Member]
CNY
|
|
Short-Term Debt | $ 16,199,054 | $ 15,957,617 | $ 16,199,054 | 100,000,000 | $ 8,099,527 | 50,000,000 | $ 2,429,858 | 15,000,000 | $ 5,669,669 | 35,000,000 | |||
Debt Instrument, Maturity Date | Oct. 30, 2013 | Dec. 27, 2013 | Dec. 30, 2013 | ||||||||||
Short-term Debt, Percentage Bearing Variable Interest Rate | 6.60% | 6.60% | 6.60% | ||||||||||
Debt Instrument, Interest Rate Terms | Interest is 6.60% per annum, based on 110% of the one years RMB borrowing prime rate established by the Peoples Bank of China at the time of funding | Interest is 6.60% per annum, based on 110% of the one years RMB borrowing prime rate established by the Peoples Bank of China at the time of funding | Interest is 6.60% per annum, based on 110% of the one years RMB borrowing prime rate established by the Peoples Bank of China at the time of funding |
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Details) (USD $)
|
Jun. 30, 2013
|
Mar. 31, 2013
|
---|---|---|
Loan receivable | $ 21,241,819 | $ 20,925,223 |
Fair Value, Inputs, Level 1 [Member]
|
||
Loan receivable | 0 | 0 |
Fair Value, Inputs, Level 2 [Member]
|
||
Loan receivable | 21,241,819 | 20,925,223 |
Fair Value, Inputs, Level 3 [Member]
|
||
Loan receivable | $ 0 | $ 0 |
LOAN RECEIVABLE (Details Textual)
|
3 Months Ended | ||||
---|---|---|---|---|---|
Jun. 30, 2013
USD ($)
|
Jun. 30, 2012
USD ($)
|
Jun. 30, 2013
Jiangxi International Trust Co Ltd [Member]
|
Dec. 31, 2011
Jiangxi International Trust Co Ltd [Member]
USD ($)
|
Dec. 31, 2011
Jiangxi International Trust Co Ltd [Member]
CNY
|
|
Notes, Loans and Financing Receivable, Gross, Current | $ 21,241,819 | $ 21,241,819 | 131,100,000 | ||
Debt Instrument, Maturity Date | Dec. 26, 2013 | ||||
Debt Instrument, Interest Rate During Period | 20.00% | ||||
Property Management Fee, Percent Fee | 5.00% | ||||
Interest and Other Income, Total | 789,869 | 776,683 | |||
Interest Receivable | $ 2,121,428 | $ 2,877,218 |
INCOME TAXES (Details 2)
|
3 Months Ended | |
---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
|
Statutory rate | 25.00% | 25.00% |
Preferential tax rate | 17.70% | (22.50%) |
Effect of different tax rates in other jurisdictions | (6.12%) | 4.60% |
Expenses not deductible for tax purpose | 23.30% | 0.00% |
Effect of taxable temporary difference | 0.00% | 19.70% |
Under provision of income tax in prior year | 0.00% | 4.20% |
Change of valuation allowance | 16.25% | 0.00% |
Other | 4.66% | 3.00% |
Effective tax rate | 80.79% | 34.00% |
INCOME TAXES (Tables)
|
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
|
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Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Income before Income Tax, Domestic and Foreign [Table Text Block] | For the three months ended June 30, 2013 and 2012, the components of income (loss) before income taxes were:
|
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Schedule of Components of Income Tax Expense (Benefit) [Table Text Block] | For the three months ended June 30, 2013 and 2012, there was no tax provision related to income (loss) generated in the United States of America, the British Virgin Islands, and Hong Kong. For the three months ended June 30, 2013 and 2012, the provision for income taxes relating to income generated in the PRC consists of the following:
|
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Schedule of Effective Income Tax Rate Reconciliation [Table Text Block] | For the three months ended June 30, 2013 and 2012, the reconciliation between the PRC statutory tax rate and effective tax rate are as follows:
|
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Schedule of Deferred Tax Assets and Liabilities [Table Text Block] | As of June 30, 2013 and March 31, 2013, deferred tax assets consist of the following:
|
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Schedule of Error Corrections and Prior Period Adjustments [Table Text Block] | At June 30, 2013 and March 31, 2013, taxes payable consisted of the following:
|
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Schedule Of Effect Of Using Higher Rates and Earnings Per Share [Table Text Block] | The Company’s PRC subsidiaries are deemed “high technology” enterprises subject to preferred tax rates (tax holiday). The table below shows the effect of using the higher rates and earnings per share.
|
LAND USE RIGHTS (Details Textual) (USD $)
|
3 Months Ended | ||
---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Mar. 31, 2013
|
|
Land use rights | $ 5,043,424 | $ 4,994,639 | |
Amortization | 26,656 | 26,206 | |
Shanghai Qingpu Industrial Park District Development [Member]
|
|||
Payment For Leasing Fees | 1,800,000 | ||
Land use rights | 1,798,297 | 1,781,429 | |
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life | 50 years | ||
Growing Yangling [Member]
|
|||
Land use rights | $ 3,245,127 | $ 3,213,210 | |
Acquired Finite-lived Intangible Assets, Weighted Average Useful Life | 50 years |
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