10-K 1 v187643_10k.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended March 31, 2010
 
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from _______ to _________
 
333-110733  
(Commission File Number)
 
CHINA-BIOTICS, INC.
(Exact name of registrant as specified in its charter)

Delaware
98-0393071
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

No. 999 Ningqiao Road
Jinqiao Export Processing Zone
Pudong, Shanghai 201206
People's Republic of China
  (Address of principal executive offices)

Telephone number: (86 21) 5834 9748
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:  

 
Name of each exchange on which registered
     
Common stock, par value $0.0001 per share
 
The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:  None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨ No þ

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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

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

 
Large accelerated filer ¨
Accelerated filer þ
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold was approximately $101,090,896 as of the last business day of the registrant’s most recently completed second fiscal quarter.

As of June 7, 2010, 22,370,000 shares of the registrant's common stock were outstanding.

 
 

 

TABLE OF CONTENTS

   
Page
 
Part I
 
     
ITEM 1.
BUSINESS
3
     
ITEM 1A.
RISK FACTORS
17
     
ITEM 1B.
UNRESOLVED STAFF COMMENTS
25
     
ITEM 2.
PROPERTIES
25
     
ITEM 3.
LEGAL PROCEEDINGS
26
     
 
Part II
 
     
ITEM 4.
[REMOVED AND RESERVED]
26
     
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
27
     
ITEM 6.
SELECTED FINANCIAL DATA
28
     
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29
     
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
42
     
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
43
     
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
80
     
ITEM 9A.
CONTROLS AND PROCEDURES
80
     
ITEM 9B.
OTHER INFORMATION
83
     
 
Part III
 
     
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
84
     
ITEM 11.
EXECUTIVE COMPENSATION
85
     
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
89
     
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
90
     
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
91
     
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
91
     
EX-31.1 (Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)  
 
   
 
EX-31.2 (Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)
 
   
 
EX-32.1 (Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)  
 
   
 
EX-32.2 (Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)  
 

 
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PART I
 
The information in this document 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 “Item 1A. Risk Factors” beginning on page 17 and elsewhere in this Form 10-K. 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 document, except as required by applicable law.
 
ITEM 1.   BUSINESS
 
In this document, references to the “company,” “we,” “us” and “our” refer to China-Biotics, Inc. and our predecessors and subsidiaries, unless the context otherwise requires.
 
History
 
We were incorporated under the name Otish Resources, Inc. in Delaware in February 2003.  Prior to March 2006 we were a mineral exploration stage company specializing in acquiring and consolidating mineral properties with potential for commercial ore bodies. Although we conducted some preliminary exploration work with respect to our mineral properties, we never achieved full operations with respect to our mineral properties. We had never generated any revenue from our mineral exploration operations.
 
On March 22, 2006, we entered into and completed a securities exchange agreement with Sinosmart Group Inc., or SGI, and the SGI shareholders pursuant to which the SGI shareholders transferred all of the equity securities of SGI to us in exchange for the issuance of shares of our common stock. We refer to this transaction in this document as the share exchange. At the closing of the share exchange, we issued to the SGI shareholders an aggregate of 15,980,000 shares of our common stock in exchange for their shares of SGI, and SGI became our wholly-owned subsidiary. SGI owns all of the equity securities of Shanghai Shining Biotechnology Co. Ltd., or Shining. As a result of the share exchange, we are no longer a mineral exploration stage company, and SGI’s business operations become our primary operations. We are currently engaged in the research, development, production, marketing and distribution of probiotics products. These products contain live microbial food supplements that beneficially affect the host by improving its intestinal microbial balance.

 SGI was incorporated in the British Virgin Islands on February 13, 2004.  On December 9, 2005, SGI incorporated a wholly-owned subsidiary, Growing State Limited, in accordance with the laws of the British Virgin Islands. On September 22, 2006, Growing State Limited established a wholly-foreign owned enterprise, Growing Bioengineering (Shanghai) Company Limited, in China.

 
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On December 11, 2007, we sold a 4% Senior Convertible Promissory Note in the amount of $25,000,000 (the “Note”) with a maturity date of December 11, 2010, to Pope Investments II LLC, an affiliate of Pope Investments, LLC, in a private placement. In connection with the sale, we entered into an Investment Agreement and a Registration Rights Agreement. In addition, Mr. Song Jinan, the company’s Chief Executive Officer, Chairman, and largest shareholder, entered into a Guaranty Agreement and a Pledge Agreement, pursuant to which Mr. Song agreed to guaranty the company’s obligations under the Note and to secure such guaranty with a pledge of 4,000,000 shares of China-Biotics common stock owned by Mr. Song. The principal amount of the Note is convertible into shares of our common stock at an exercise price of $12.00 per share at any time until the maturity date subject to adjustment for subdivision or combination of our common stock and similar events. If the Note is not converted at maturity, we will redeem the Note to provide Pope with a total yield of 10% per annum inclusive of the annual interest. The Note also provides for mandatory conversion into common stock if we achieve a net income of $60 million in fiscal year 2010. Since our net income in fiscal year 2010 is below $60 million, the mandatory conversion will not be implemented. Pope Investments II LLC may declare the outstanding principal amount and any accrued but unpaid interest calculated at a rate of 10% per annum, to be immediately due and payable upon an event of default, including non-payment of obligations under the Note, bankruptcy or insolvency, or failure to perform any covenant set forth in the Note or Investment Agreement. Pursuant to the Investment Agreement we have secured payment of our obligations under the Note with a pledge of 100% of the stock of our subsidiary, SGI, to Pope Investments II LLC. Net proceeds of the Note are being used to fund the construction of the 150-metric-ton-per-year manufacturing facility and for other capital expenditures.

On October 5, 2009, the Company closed an underwritten public offering of 4,600,000 shares of its common stock at a price of $15.00 per share. On October 26, 2009, an additional 690,000 shares were sold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering, including the over-allotment, after deducting underwriting discounts, but excluding estimated offering expenses, were approximately $74.9 million. The Company expects to use the net proceeds from the offering for general corporate purposes and may also use a portion of the net proceeds to acquire or invest in businesses and products that are complementary to our own.
 
Current Operations
 
Overview
 
We are engaged in the research, development, production, marketing, and distribution of probiotics products, which are products that contain live microbial food supplements that beneficially affect the host by improving its intestinal microbial balance.

Our first product, Shining Essence, was approved by the Chinese Ministry of Health for production and to market as a health product in August 2000. We launched Shining Essence in Shanghai in April 2001, and it currently our best-selling product.  Sales of Shining Essence represent approximately 29% of our total sales for the year ended March 31, 2010, 40% for the year ended March 31, 2009, and 48% for the year ended March 31, 2008.  The Health Food Association of China named Shining Essence as the best selling liver health product in 2001.
 
We currently have three patents for our production process, packaging design, and packing equipment design. We have applied those technologies in the manufacturing process of all products under the “Shining” brand. We also have a patent for the production of one of our products, a blood cholesterol reduction agent.
 
We obtained the certifications below from TÜV Rheinland/Berlin-Brandenburg Group of Companies. Management believes that our Shanghai production plant was the first and the only production plant in China for probiotics that obtained all four certifications.
 
 
·
ISO 9001. We obtained ISO 9001:2008 certification from TÜV Anlagentechnik GmbH in respect of our production process for its leading product, Shining Essence, which expires in January 2015. According to the American National Standards Institute, ISO 9001:2008 specifies requirements for a quality management system where an organization needs to demonstrate its ability to consistently provide product that meets customer and applicable regulatory requirements, and aims to enhance customer satisfaction through the effective application of the system, including processes for continual improvement of the system and the assurance of conformity to customer and applicable regulatory requirements. All requirements of this international standard are generic and are intended to be applicable to all organizations, regardless of type, size and product provided.

 
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·
ISO 14001. We obtained ISO 14001:2004 certification from TÜV Anlagentechnik GmbH in respect of our production process for our Shining Essence product, which expires in February 2013. According to the American National Standards Institute, ISO 14001:2004 specifies requirements for an environmental management system to enable an organization to develop and implement a policy and objectives which take into account legal requirements and other requirements to which the organization subscribes, and information about significant environmental aspects. It applies to those environmental aspects that the organization identifies as those which it can control and influence. It does not itself state specific environmental performance criteria.
 
 
·
OHSAS 18001. We obtained OHSAS 18001:1999 certification from TÜV Hong Kong Ltd in respect of our production process for our Shining Essence product, which expires in June 2012. According to BSI Management Systems - Asia, Occupational Health and Safety Assessment Series specification relates to an entity’s occupational health and safety management systems that enable organizations to control its occupational health and safety risks and improve its performance. It does not state specific occupational health and safety performance criteria, nor does it give detailed specifications for the design of a management system. OHSAS 18001 is an assessment specification developed in response to the need for companies to meet their health and safety obligations in an efficient manner.
 
 
·
HACCP. We obtained HACCP DS 3027 E: 1997 certification from TÜV Anlagentechnik GmbH in respect of our production process for our Shining Essence product, which expires in July 2012. The term “HACCP” stands for Hazard Analysis Critical Control Point. The HACCP DS 3027 E:1997 standard was developed to ensure food safety among food manufacturers and their suppliers in Denmark.
 
 
·
GMP.  We obtained the Good Manufacturing Process (GMP) certification from the Shanghai Food and Drug Administration (SHFDA) for our new production facility in Qingpu Industrial Park, which expires on March 28, 2013.  GMP is a global quality assurance system that covers the testing and manufacturing of food, pharmaceutical products, and medical devices.  GMP stipulates stringent approval guidelines on various aspects of production based on evaluations of the factory and equipment, materials, hygiene certificates, waste and recycling, and after sales, among other things.
 
Products
 
We manufacture and sell several health supplements under the “Shining” brand in China as set forth below. All of these products have been approved by the Ministry of Health in China and their content has been tested by the Shanghai Preventative Medicine Research Institute, which found that our products contain the quantities of bacteria specified by us. While management believes these products to be effective, their effectiveness has not been conclusively established.
 
Our four major retail products are:
 
 
Shining Essence - Composed of lactobacillus acidophilus and bifidobacterium bifidum, aimed at balancing the microecology of the digestive system, enhancing intestinal health and protecting and strengthening liver function;

 
Shining Signal - Composed of monascus rice and lactobacillus acidophilus, focused on reducing high blood pressure, high blood sugar level and hyperlipidemia;

 
Shining Golden Shield - Composed of bifidobacterium adolescentis and lentinusedodes, focused on enhancing the body’s immune system; and

 
Shining Energy - Composed of Vitamin C, L. Arginine, and other amino acids, aimed at promoting the development of brain cells and enhancing alertness and energy.

 
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In addition, in March 2006, we opened our first retail outlet in Shanghai and launched the following products in the market:

 
Shining Beauty Essence - Composed of soy bean isoflavones and pueraria lobata p extracts, aimed at increasing bone mineral density of elderly people and reducing negative health effects associated with the aging process;

 
Shining Companion Bifidus Factor Granule - Composed of bifidus, focused on enhancing the growth of bifidus in the human body and enhancing intestinal health;

 
Shining Stomach Protection Capsules - Composed of lactobacillus acidophilus, aimed at protecting stomach walls and improving the digestive system;

 
Shining Sicanel Capsules - Composed of lactobacillus acidophilus, focused on reducing hyperlipidemia, or excess levels of fats in the blood; and

 
Shining Golden Shield (kids version) - Composed of bifido bacterium adolescentis and lentinusedodes, focused on enhancing the body’s immune system.
 
In February 2010, we commenced production at our new facility in Qingpu and began producing bulk additives products, which are sold to institutional customers, such as dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies.  We intend to continue to develop new products to strengthen our product pipeline so that we may offer an array of products for sale in the market.
  
Business prospects
 
Leveraging on what our management believes is our technical competence, cost efficiencies, and highly recognized brand, our management expects to achieve significant growth through:
 
the introduction of bulk additives products  - We are expanding into the bulk additives business for institutional customers through our 150-ton capacity plant, which commenced production in February 2010. We are focusing on two fast growing industries: dairy and animal food in China.  Management believes our new facility will meet the industry requirements of quality and scalability. Management estimates that Phase 1 of the project, which involves constructing a facility capable of producing 150 tons of probiotics per annum, will cost $28 million. Phase 2 of this project, which commenced in December 2009, is expected to cost $18 million. The construction cost of Phase 1 of the plant is being funded by cash received from the sale of a convertible promissory note to Pope Investments II LLC on December 11, 2007 as disclosed in “Business-History.” The construction cost of Phase 2 of the plant is being funded by cash received from the public offering of our common stock in October 2009 as disclosed in “Business — History”;

 
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the geographical expansion of its retail sales through direct sales and traditional sales channels  - We intend to expand the sale of our retail products to the other metropolitan cities in China through a combination of traditional distribution channels and dedicated Shining outlets. We have a total of 111 outlets as of March 31, 2010. About three quarters of these outlets are located in Shanghai, and the rest are located in 12 other cities in China. With respect to our bulk additives business, we have secured 31 bulk additives probiotics customers nationwide in tier-one urban areas such as Beijing and Shanghai, as well as inland provinces such as Qinghai and Inner Mongolia; and

the improvement in research and development of new products and services  - We plan to continue to develop new products aimed at improving the general health conditions of humans, enhancing their immune system, and reducing health problems. We are also in the process of developing new products to strengthen our product pipeline so that we may offer an array of products for sale in the Shining outlets. To further improve our competency in the bulk additives market, we continue to improve our services to our institutional clients by facilitating their lab testing and production testing and providing customized technical support, among other things.
 
Industry overview and market condition
 
Probiotics
 
We manufacture and sell probiotics. Most probiotics are bacteria-based and naturally exist in the human body in the lower intestinal tract. The introduction of “helpful” bacteria and other organisms may aid in preventative fights against infection and improve digestion, especially with respect to dairy products.
 
Probiotics generally have a very short life-span. Water, acid, and oxygen are harmful to probiotics and most die or cease to function after a short period of time after extraction from the source. A reduction of these naturally-occurring organisms due to poor eating habits, stress, or the use of antibiotic drugs or other factors may disrupt the natural equilibrium of the body and could lead to a variety of abdominal ailments and an overall decrease in the function of the immune system.  Based on information available on the website www.usprobiotics.org , a non-profit research and education website sponsored by the California Dairy Research Foundation and Dairy & Food Culture Technologies, researchers are also studying potential links between low probiotics microbial levels and hypertension, certain types of cancer, high cholesterol, and allergies (to access this information, click on the Section “Probiotics Basics,” and then click on the Section “Health Effects of Probiotics”).  Subsections of “Health Effects of Probiotics” include “hypertension,” “cancer,” “elevated blood cholesterol” and “allergy.”
 
China market
 
China has very limited capacity to produce probiotics. We believe that demand for probiotics and functional foods in China will continue to increase in the foreseeable future. We believe that China lacks manufacturing capabilities of bulk additives in a scale necessary to support the functional foods industry. This has forced processed food producers to either import most of their probiotics or produce finished products abroad and re-import the final product. We believe this creates significant inefficiencies in both cost and probiotics efficacy, as some bacteria die during transport.
 
Demand for functional food products is expected to grow significantly. As the discretionary income and health-consciousness of the average Chinese consumer increase, we expect the demand for functional foods and dietary supplements to increase. We believe that the demand for functional foods and dietary supplements will be bolstered by the stated commitment of the Chinese government to reduce the use of antibiotics and promote the use of probiotics and other preventative measures.

 
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Curtailment of the use of antibiotics may stimulate demand for probiotics.  According to two Chinese newspaper articles entitled “80,000 people in China die from inappropriate use of antibiotics each year, children suffer the most,” published in Xin Kuai Bao, dated December 12, 2003, available in Chinese at http://info.china.alibaba.com/news/detail/v8-d5779326.html under “News/Detail,” and “How many people die from inappropriate use of antibiotics in China each year?,” published on July 19, 2005 by Bio Information Net (available in Chinese at www.bio168.com/news/200507/46448F8BBO5D.html under “Homepage/News/Main Text of the News”) china has the highest per capita consumption of antibiotics in the world. In 2000, the World Health Organization cautioned that “superdiseases” are being created by the overuse of antibiotics.  In order to stem the tide of these drug resistant strains, many nations have taken steps to limit the use of antibiotic drugs.  In July 2004, the Chinese government took an active role in the fight against the overuse of antibiotics by requiring prescriptions for these drugs. To further reduce the use of antibiotics, the Chinese government has slashed the retail price of antibiotics by 60%, so that it is no longer profitable for a large number of antibiotics manufacturers to continue to manufacture such products. This resulted in a marked increase in the use of other products to not only treat existing infections but prevent infections from occurring. In addition, on May 20, 2005 (effective July 1, 2005) the State Food and Drug Administration (reference no. Guo Shi Yao Jian Zhu (2005) no. 202) issued a notice acknowledging that probiotics are beneficial for human health and also introduced guidelines for regulating manufacturers of probiotics products and registration of probiotics products with the State Food and Drug Administration.

Demand for dairy product additives is expected to increase significantly. The demand for functional foods and foods that use probiotic supplements is growing at a significant rate. According to AC Nielsen (article available at http://cn.en.acnielsen.com/news/20050916.shtml), yogurt and yogurt drinks are the fastest growing products in the food products segment in China, with sales increasing by 38% in 2004 alone. Sales of infant formula grew 23% in the same year. Moreover, according to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics will be added to baby milk powders produced in China. The relevant regulations are expected to be announced at a later date. These factors translate into significant growth in demands in China for live bacteria as food addictives.

More use of probiotics in animal feed industry. Antibiotics have been widely used in animal feed by Chinese farmers. Human health has been indirectly impacted negatively by drinking milk and eating meat produced by the farms using antibiotics added feed. With the increasing public awareness of those issues, the government is encouraged to set up stricter regulations to monitor the non-therapeutic use of antibiotics in livestock feed to ensure food safety.  (Please see the article, “Call to keep antibiotics out of the food chain” in China Daily at http://www.chinadaily.com.cn/china/2010-04/13/content_9719351.htm). At the same time, organic food is getting more attention in Chinese daily life.  This creates a favorable trend of using more probiotics in animal feed.
 
Business strategies
 
Leveraging on what management believes are our technical competence, cost efficiencies, and highly recognized brand, our management expects to achieve significant growth through:
 
 
the introduction of bulk additives products, with a focus on fast growing industries, including dairy and animal feed;

 
the geographic expansion of our retail sales through direct sales and traditional sales channels; and

 
enhancement in R&D to develop new products and provide value-added services.
 
Bulk market
 
Most probiotics used for the manufacture of yogurt, milk powder products, and food preservatives are currently imported. However, we believe imported probiotics are generally more expensive and are of lower quality, as most bacteria die during transport. In addition, according to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, on April 1, 2007, probiotics must be added to baby milk powders and other products produced in China. The relevant regulations will be implemented at a later date. We are expanding into the bulk additives business for functional foods through the completion of our 150-ton capacity plant, which commenced commercial production in February 2010.  Management estimates that Phase 1 of the project, which involves constructing a facility capable of producing 150 tons of probiotics per year, will cost $28 million. Phase 2 of this project is expected to cost $18 million. The construction cost of Phase 1 of the plant is being funded by cash received from the sale of a convertible promissory note to Pope Investments II LLC on December 11, 2007, as disclosed in “Business-History.” The construction cost of Phase 2 of the plant is being funded by cash received from the public offering of our common stock in October 2009 as disclosed in “Business — History.”

 
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Geographic expansion and direct sales
 
We sell our retail products mainly in greater Shanghai through distributors. Over the past five years, we believe we have firmly established ourselves in Shanghai as the leading supplier and manufacturer of probiotics products. We are now expanding the sale of our retail products to other metropolitan cities in China through a combination of traditional distribution channels and dedicated Shining outlets.
 
We opened the first Shining retail outlet in Shanghai in March 2006. We have also repackaged our products for sale in our outlets, and have introduced several new products, which are sold exclusively in our outlets. As at March 31, 2010, we have opened 111 outlets in Shanghai and 12 other cities in China.  

In preparation for the opening of additional retail outlets, we have also been actively recruiting and training retail sales staff. We have already successfully recruited a number of very experienced sales professionals and have trained a pool of sales staff. We have also designed and implemented control systems to manage this new business.
 
Currently, we have a network of 111 outlets in China. We continue to survey cities in China to assess and select suitable locations for new outlets. As part of our strategy, we will also consider licensing franchisees to operate retail outlets in due course. We intend to finance the costs of our business expansion by our internal working capital.
 
Introduction of new retail products
 
In connection with the opening of our first Shining outlet, we launched several new retail products under the Shining brand. We currently have regulatory approval to produce 41 retail products that can be marketed under the Shining brand. We plan to develop new products to strengthen our product pipeline so that we may offer an array of retail products for sale in the Shining outlets.
 
Our Business Prospects
 
Growth potential from geographic expansion leveraging on the Shining brand.
 
We have experienced rapid sales growth of our retail products that are sold through retail sales in the greater Shanghai area under our “Shining” brand. Management believes that the “Shining” brand is one of the most recognized health supplement brands in Shanghai. We are expanding the sales of our retail products to the other major metropolitan cities in China, such as Changchun and Jilin. Given our high gross margin and low overhead structure, management anticipates that distribution in these areas could be profitable, assuming there is sufficient demand. Expansion of retail sales is also a key component of the marketing of our food additives. We intend to co-brand with food producers allowing consumers to identify food products that use our additives as high quality and beneficial. We require our “Shining” logo to be incorporated in the packaging of products manufactured by food producers, which contain probiotics additives supplied by us. We have already entered into agreements with 29 producers for use of our products as food additives.
 
Significant potential from the new bulk business (yogurt).
 
Live bacteria are essential to the formulation of yogurt and yogurt-based drinks. Yogurt and yogurt drinks were the fastest growing food product segments in China in 2004 according to AC Nielsen. As a result, yogurt producers in China currently import most of their probiotics additives. We believe that importation of probiotics is costly and a portion of the effective ingredient (bacteria) dies during transportation. Our new plant is intended for bulk manufacturing of probiotics for use as food additives for foods such as yogurt and yogurt drinks.

 
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Significant potential from the new bulk business (milk powder).
 
Manufacturers have begun to add probiotics to infant formula and milk powders to facilitate and improve digestion and absorption, as well as strengthen the immune system of infants. Currently, infant formula made in China by some multinational companies such as Nestle and Mead Johnson already use imported probiotics produced by Rodia SA and Chr. Hansen and other producers in their products. According to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics are required to be added to baby milk powders produced in China. Relevant regulations are expected to be announced at a later date. Currently, management believes there is no other manufacturing facility in China that can meet the demand for probiotics if this requirement was imposed. We believe we are well positioned to capture this significant new demand for probiotics.

Advanced technology provides product quality advantages.
 
We believe our proprietary production technology gives the following competitive advantages:

 
·
Product shelf life - Our proprietary technology helps to protect the live bacteria in probiotics and allows a survival rate of 70% two years after manufacture.
 
 
·
Concentration - The concentration of active ingredients we produce is over 100 times that of the minimum governmental standards in China.
 
 
·
Human compatibility - The probiotics we produce originate from organisms cultured from human sources, reducing the risk that the active ingredients will be rejected by the human body.
 
Strong revenue and profit growth.
 
Our probiotics products have generated strong sales and profit growth during the past two years, and have generated sufficient cash flow to finance our operations. Sales of our probiotics products increased 50% to $81.3 million in fiscal year 2010 from $54.2 million in fiscal year 2009, which was a 28% increase from $42.3 million in fiscal year 2008. Income before taxes increased from $22.5 million in fiscal year 2008 to $25.1 million in fiscal year 2009, and decreased to $23.4 million in fiscal year 2010.
 
Production
 
We use microecology technologies to produce the live bacteria which are the active ingredients of our probiotics. We use a multi-stage fermentation process under a strictly controlled environment using our proprietary technology. Solid bacteria are then extracted and stored using controlled freeze drying methods. Prior to sale to our customers, we transform the solid bacteria into capsule form and place it in sealed double aluminum packaging using our patented equipment.
 
We have registered the following patents in China:

 
·
High Quality Microecologics and Microencapsulation Technology (patent registration number ZL 01 1 09063.4), which increases the vitality rate, maintaining large quantities of active bacterium;
 
 
·
Nutrition Gas Injection Capability and Double Aluminum Packaging Machine (patent registration number ZL 01 2 04515.2), which enables the probiotics bacterium to retain their vitality for two years and better resist gastric acid;
 
 
·
Packaging for Shining Essence (patent registration number ZL 01 3 01526.5); and
 
 
·
Blood Cholesterol Reduction Agent (patent registration number ZL 2004 1 0025139.8). 

 
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In 2008 and 2009, we submitted eight applications for registration of patents regarding the production of our products to the Intellectual Property Bureau of China. The applications are all pending final approval and the issuance of formal certificates.

Our management believes that we enjoy the following competitive advantages in utilizing such microecologics technology in our production process:
 
 
·
We use advanced fermentation, bacteria extraction and micro-encapsulation technology to produce our products, which increases our output and reduces our costs.
 
 
·
Since probiotics are phobic to water, acid and oxygen, their life span is extremely short.  We use technology that significantly extends the survival rate of the bacteria and, as a result, our products have a survival rate of two years from manufacturing at room temperature.
 
 
·
According to rules governing live bacteria products in China which took effect in 2001, such products need to maintain out concentrations of live bacteria at a level of 10 6 /g within their stated effective period. Our products maintain a 10 8 /g concentration of live bacteria during their stated effective period. This concentration level is also over 200 times higher than the current commonly accepted international standard.
 
 
·
Most probiotic producers extract their bacteria base from animals. The probiotics we produce originate from organisms cultured from human sources to reduce the risk that the active ingredients will be rejected by the human body.
 
 Distribution
 
We sell our retail products primarily in the greater Shanghai area, mainly to large distributors who then sell them through their networks to supermarkets, hypermarkets, such as Wal-Mart, and drug stores. As of March 31, 2010, we had 27 distributors located in Shanghai, Jiangxu, Zhejiang, and Hong Kong. As of March 31, 2010, we had 111 Shining branded outlets in Shanghai and 12 other major cities in China. We have been hiring consultants who have many years of experience in the direct selling industry to facilitate the development of new Shining brand outlets. We also are creating a “Community Network” through which we continuously provide training and seminars to educate the public about becoming more health conscious and about the benefits of probiotics and the Shining products. We believe that this approach has many advantages:
 
 
·
The promotion and sale of probiotics products has historically been most effective through word-of-mouth marketing. We believe that the use of Community Network will provide an additional channel to educate the public about the benefits of probiotics and to provide advice on health related matters.
 
 
·
We believe that the use of Community Network to market and sell our products will be cost effective compared with the traditional advertising and selling through distributors, and that it should increase our profit margin.
 
 
·
We believe that Community Network will attract a group of health conscious individuals in the community who can share health and product related experiences. This is expected to enhance customer loyalty and encourage recurring sales.
 
 
·
We expect that each Shining outlet will employ a combination of employees and agents. The agents are remunerated mainly on a commission basis, which will minimize our fixed overhead costs.
 
 
·
We believe that the Shining brand outlets and Community Network will increase brand awareness within the community, which will facilitate the marketing of bulk additives products using the Shining brand.

 
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Customers
 
We have two different types of customers: individual consumers and institutional customers. Institutional customers include dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies. Individual consumers are primarily located in major metropolitan areas and they are middle-aged or above having middle to higher income levels. We believe that these individuals are becoming increasingly health-conscious and as their income levels increase, they spend more on health related products such as probiotic products. We have historically reached consumers by selling our products to large distributors, who then sell them through their networks to supermarkets, hypermarkets, such as Wal-Mart, and drug stores, where they are purchased by consumers.  As of March 31, 2010, we had 111 Shining branded outlets in Shanghai and 12 other major cities in China where we sell our products directly to the end users. We believe owning distribution channels and having direct access to the end users will become a significant entry barrier in the future. For the fiscal year ended March 31, 2010, we had one customer, Beijing DBN Technology Group Co. Ltd, that accounted for 13.0% of our sales revenue.  For the fiscal year ended March 31, 2009, we had one customer, Shanghai Lian Hua Quik Convenience Store Limited, that accounted for 11.5% of our sales revenue. For the fiscal year ended March 31, 2008, two of our customers, Shanghai Lian Hua Quik Convenience Store Limited and Shanghai Sunrise Trading Limited, accounted for 15.5% and 10.5% of our sales revenue. These three customers are independent third parties.

Backlog

We do not have any material backlog. Due to our limited capacity, we sell our products on a spot-basis as orders are made. We currently do not have any long-term sales orders with our customers.

Seasonality

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

Marketing and Advertising
 
We promote our products through the media by placing advertisements in newspapers and magazines and on television in China. From time to time, we also sponsor charitable events to increase public awareness of the benefits of our health products.
 
Competition
 
We believe that we are well-positioned to compete in the Chinese pharmaceutical and nutraceutical market with our proprietary technology, strong brand, diverse product portfolio, research and development capabilities, established sales and service network, and favorable cost structure. Other factors affecting competitive conditions in the Chinese pharmaceutical and nutraceutical market are managerial and technological expertise, the ability to identify and exploit commercially viable products, time to market, patent position, product efficacy, safety, convenience, reliability, availability and pricing.
 
Our primary competitors in the Chinese domestic probiotics market are two Chinese companies, Shanghai Jiaoda Onlly Co. Ltd. and Shanghai Pharmaceutical Group Co. Ltd. – SINE Pharmaceutical Co. Ltd. and one Japanese company, Morishita Jintan Co. Ltd. These competitors produce similar probiotics products and have similar market share to ours in the Chinese domestic market. In addition to these primary competitors, there are approximately four other domestic competitors that compete with us in the Chinese market.
 
With respect to the bulk additives market, we believe that our competition will come mainly from large overseas producers and food importers that produce their own supplements. Our management believes that we are well-positioned to compete in the bulk additives market based on the high quality of our products, our favorable cost structure, our time-to-market in the domestic market and our established sales and service network. We are directing efforts toward encouraging customers to switch from imported bacteria to our products as additives for the production of yogurt, sour milk and other food products.

 
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Research and Development
 
We have a strong research and development team supported by a technical advisory board of experts. At March 31, 2010, we have approximately 35 staff members with Masters degrees or PhDs. In addition to having advanced technology in bacteria culturing and protection, we also conduct research and development into complimentary technology, including genetically engineered drugs, drug delivery solutions and Chinese medicine, in an effort to formulate solutions to address specific health problems and expand our product line. We incurred research and development costs of approximately $3,665,380, $3,229,788 and $2,194,474 for the fiscal years ended March 31, 2010, 2009 and 2008, respectively.  Such research and development costs are mainly comprised of raw material costs, laboratory expenses and staff salaries in the research and development division, which were included as part of the production costs in our financial statements for such periods.
 
Government Regulation
 
Food Business
 
Laws and regulations governing our business include the following: the Law on the Food Conditions of the PRC promulgated and enforced on October 30, 1995, the Administrative Rules for Healthy Food promulgated by the Ministry of Health, or MOH, on March 15, 1996 and enforced on June 1, 1996, the Notice of Circulating the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food and its appendixes-Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food, and List of Good-Live-Bacteria Applicable for Healthy Food, which are promulgated by the MOH and enforced on March 23, 2001, and the Administration Rules for the Registration of Healthy Food (experimental) promulgated by the State Food and Drug Administration, or SFDA, on April 30, 2005 and enforced on July 1, 2005.

The previous governing authority of healthy food was the MOH. Since the General Office of the State Council of the PRC promulgated the Regulations on the Internal Organizations and Staff Schedule of the State Food and Drug Administration on April 25, 2003, the responsibility of approving healthy food of MOH has been assigned to the SFDA. The SFDA is a direct subordinate authority under the State Council and its responsibilities are generally supervising the safety control of food, healthy food and cosmetics, and supervising drugs.
 
Pursuant to the Law on the Food Conditions of the PRC, a food manufacturing or other food-related enterprise may not engage in any food manufacturing or other food-related business until it obtains a Health License issued by the competent health administration. While using a new resource in manufacturing food, before the formal production, the company must apply for an approval in accordance with applicable standard food condition application procedures, and obtain a New Food and Food-used Products Health Approval.
 
Pursuant to the Administrative Rules for Healthy Food, the MOH applied an approval system for healthy food. Any food claiming to have health care functions was required to be inspected and confirmed by the MOH, which would issue a Certificate of Healthy Food upon a successful inspection. After the Administration Rules for the Registration of Healthy Food were enacted, SFDA will make an integral appraisal and inspection of the safety, effectiveness, quality control and the label and introduction of the healthy food. If permitted, the SFDA will issue an Approval Certificate of Native Healthy Food, which is valid for five years.
 
Pursuant to the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food, an enterprise using good-live-bacteria in manufacturing healthy food must satisfy the following requirements:  form a Good Manufacturing Practice (GMP) and a step-by-step Hazard Analysis Critical Control Point (HACCP) quality control system; possess a pilot scale experiment manufacturing scale (at least 500 cubic liters), and submit its pilot scale experiment products for approval; have special plants or workshop, specific manufacturing equipment and devices, a good-live-bacteria lab, special staffs looking after the bacteria under the supervision of experts with at least middle level expert title, and specific technical rules and procedures. In addition, these Rules require that good-live-bacterial healthy food must maintain its active bacteria population at more than 10 6 cfu/ml during its storage term.

 
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Pursuant to the List of Good-Live-Bacteria Applicable for Healthy Food, nine good-live-bacteria can be used in healthy food, including Bifidobacterium bifidum, B.infantis, B.longum, B.breve, B.adolescentis, Lactobacillus.bulgaricus, L.acidophilus, L.Casei subsp.casei, and Streptococcus thermophilus.
 
Intellectual Property
 
The tables below set forth the trademarks and patents that we have registered in China. The trademarks were granted by the Trademark Office of State Administration of Industry and Commerce of the People’s Republic of China and the patents were granted by the State Intellectual Property Administration Office of the People’s Republic of China. Each of these trademarks and patents is enforceable only within China.
 
Trademarks

 
Registration No.
 
Class
 
Term
Logo of Shanghai Shining Biotechnology Co. Ltd. and device
 
1610780
 
30
 
July 28, 2001 to July 27, 2011
Shining
 
1675162
 
30
 
November 28, 2001 to November 27, 2011
“Shining Essence”
 
1675163
 
30
 
November 28, 2001 to November 27, 2011
Device containing 2 cartoon figures
 
3304485
 
30
 
January 21, 2004 to January 20, 2014
Four Chinese characters “益生有益
(translation: “Pro-biotics are beneficial”)
 
5227367
 
30
 
March 28, 2009 to March 27, 2019
Five Chinese characters “双金有益菌
(translation: “Shining beneficial bacteria”)
 
4095567
 
30
 
October 14, 2006 to October 13, 2016

Patents
 
Type
 
Patent No
 
Term
High Quality Microecologics and Microencapsulation Technology
 
ZL 01 1 09063.4
 
February 28, 2001 to February 27, 2011
Nutrition Gas Injection Capability and Double Aluminum Packaging Machine
 
ZL 01 2 04515.2
 
February 28, 2001 to February 27, 2011
Packaging for Shining Essence
 
ZL 01 3 01526.5
 
February 28, 2001 to February 27, 2011
Blood Cholesterol Reduction Agent
 
ZL 2004 1 0025139.8
 
June 11, 2004 to June 10, 2014

Pursuant to the Patent Law of the PRC and its implementation rules amended on August 25, 2000, Chinese laws protect the following three kinds of patents: patent for invention, patent for utility model and patent for design. The State Bureau of Intellectual Property is responsible for the management of patents in China, accepting and reviewing patent applications and granting patents pursuant to laws and regulations. Any invention or utility model for which patent right may be granted must possess novelty, inventiveness and practical applicability. Any design for which patent right may be granted must neither be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, nor conflict with legal rights of any third party obtained before. The protection period of patent for invention is 20 years and the protection period of patent for utility model or design is 10 years, both calculating from the application date.

 
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Under the Patent Law of the PRC, we may enforce our rights attached to the registered patents against the infringer by applying to the relevant governing authorities for an injunction. We may also apply to the People’s Court for an order of specific performance which prohibits any third parties from using the registered patents. The relevant governing authorities may also impose a fine up to three times the profits made by the infringer from the unauthorized use of the registered patents or a fixed fine up to RMB50,000 for cases which the infringer has not earned any profits from such unauthorized uses.
 
Pursuant to the Trademark Law of PRC and its implementation rules amended on October 27, 2001, a registered capital may refer to a trademark registered with the Trademark Bureau, including products, service trademark and collective trademark, attest trademark; the trademark owner shall have exclusive rights of using the trademark, under the protection of laws. The exclusive rights of using the trademark is limited within the registered trademark and the registered products on which the trademark can be used. The Trademark Bureau of the State Administration for Industry and Commerce is responsible for managing the trademark registration and administration throughout the PRC. The protection period of registered trademark is ten years from the registration date.
 
Taxation and Local Governmental Support
 
Income tax of a foreign-invested enterprise in China is principally governed by the Law on the Income Tax of Foreign-invested Enterprises and Foreign Enterprises of the PRC and its implementation rules promulgated and enforced on July 1, 1991. Pursuant to those law and regulations, the corporate income tax rate of a foreign-invested enterprise is 30%, and the local income tax rate is 3%. However, foreign-invested enterprises which are located in certain areas or satisfy certain qualifications are entitled to a corporate income tax exemption or deduction. For instance, a manufacturing foreign-invested enterprise established in Pudong District, Shanghai, is entitled to pay its corporate income tax at a reduced tax rate of 15%. In addition, a manufacturing foreign-invested enterprise, with a business term in excess of 10 years, is entitled to a two-year corporate income tax exemption calculating from its first profitable year, and for the following three years, such foreign-invested enterprise is entitled to a half deduction of its applicable corporate income tax rate. From January 1, 2008, the income tax rate is expected to gradually increase to the standard rate of 25% over a five-year transition period.  The five-year transitional rates for former tax rate that was 15% will be 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011, and 25% in 2012. Pursuant to PRC laws and regulations, if an enterprise is qualified as “hi-tech” enterprise, it would be entitled to the 15% preferential rate under the new CIT regime.
 
Foreign Exchange
 
Foreign exchange in China is principally governed by the PRC Foreign Exchange Control Regulations promulgated by the State Council and enforced on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment promulgated by the State Council and enforced on July 1, 1996. Under these regulations, upon payment of the applicable taxes, foreign-invested enterprises may convert the dividends they received in Renminbi into foreign currencies and remit such amounts outside China through their foreign exchange bank accounts.

If a foreign-invested enterprise needs foreign exchange transaction services in relation to the current account item, it may make such payment through its foreign exchange account or make an exchange and payment at one of the designated foreign exchange banks by providing applicable receipts and certificates, and with an approval from the State Administration of Foreign Exchange, or SAFE. If a foreign-invested enterprise distributes dividends to its shareholders, it will be deemed as foreign exchange transaction services in relation to the current account item, therefore, as long as it provides the board resolutions and other documents authorizing the distribution of dividends, it may make such payment through its foreign exchange account or make an exchange and payment at one of the designated foreign exchange banks.

 
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Notwithstanding the above, foreign exchange conversion matters under the capital account item are still subject to regulatory restrictions, and a prior approval from SAFE or its relevant branches is required before conversion between Renminbi and other foreign currencies.
 
Facilities
 
We do not own any real estate. We conduct our operations from a leased facility in Pudong, Shanghai. Pursuant to our lease for this facility, which expires on October 19, 2011, we pay annual rent of RMB507,532, payable in monthly installments of RMB42,294. This facility, which includes a level 100,000 clean room and a level 10,000 clean room, houses our office space manufacturing facilities and warehouse. The maximum current production capacity at this location is approximately 3.5 million capsules per month. We have received ISO 9001, ISO 14001, OHSAS 18001 and HACCP certifications for this facility.   See “Business—Current Operations—Overview” for further information with respect to these certifications.

We are expanding into the bulk additives business for functional foods through the completion of our 150-ton capacity plant, which commenced production in February 2010. Management estimates that Phase 1 of the project, which involves constructing a facility capable of producing 150 tons of probiotics per annum, will cost $28 million. Phase 2 of this project, which commenced in December 2009, is expected to cost $18 million. The construction cost of Phase 1 of the plant is being funded by cash received from the sale of convertible promissory notes to Pope Investments II LLC on December 11, 2007 as disclosed in “Business-History.” The construction cost of Phase 2 of the plant is being funded by cash received from the public offering of our common stock in October 2009 as disclosed in “Business — History.”

On March 21, 2006, Growing State, our subsidiary, entered into an agreement with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu Industrial Park District on which we are constructing this plant. The agreement provides for the payment of leasing fees of approximately $2.1 million, 10% of which we paid on April 11, 2006 as a deposit, to be refunded upon payment in full of the aggregate lease amount. The Qingpu People’s Republic Government issued its formal confirmation of the land use right necessary for the plant construction on November 30, 2007 and confirmed the leasing fee of $1,777,680 (reduced from $2.1 million because the size of the leased land was reduced to 36,075 square meters) and a refundable land deposit of $210,083. We paid the leasing fee on December 28, 2007.  In February 2009, the refundable land deposit was fully refunded the formal land use right certificate was issued. There are no future lease payments under this land lease.

Employees
 
As of March 31, 2010, we had 513 staff and employees. The following table summarizes the functional distribution of our employees:

Department
 
Headcount
 
Management and Administrative
   
27
 
Sales and Marketing
   
73
 
Retail Outlet
   
232
 
Research and Development
   
35
 
Production
   
124
 
Finance and Accounting
   
10
 
Engineering
   
12
 
Total
   
513
 
 
All of these employees were full-time. We do not have any payment obligations for any retirees and are not currently retaining any contractors.

 
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According to Article 10, Trade Union Law of the People’s Republic of China an enterprise, public institution or government organ with 25 or more members must establish a basic-level trade union committee. However, a union is established only if it is voluntarily formed by the employees. We currently do not have a trade union.

Available Information

We file periodic reports with the SEC, including annual reports, on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports. All of our periodic reports may be inspected without charge at the Public Reference Room maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549. You may obtain copies of the registration statement, including the exhibits thereto, and all of our periodic reports after payment of the fees prescribed by the SEC. For additional information regarding the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. The SEC also maintains a website which provides on-line access to reports and other information regarding registrants that file electronically with the SEC at the address: http://www.sec.gov.

We maintain an internet website at http://www.chn-biotics.com. Our website contains a link to the SEC’s website at http://www.sec.gov, which provides free online access to our periodic reports.  We will also provide electronic or paper copies of our filings free of charge upon request.

ITEM 1A. RISK FACTORS.
 
Risks Related to Our Business
 
We depend on the services of our directors and key employees, the loss of which could harm our business.
 
We believe our success relies on the strategies, vision, efforts and technical expertise of our directors and key management personnel, including Mr. Song Jinan. The resignation or departure of any of these key people could have a material adverse impact on our operations and future prospects. In addition, if any of these key people join a competitor or form a competing company, we could lose customers and incur additional expenses to recruit replacements and train personnel. We have entered into standard form confidentiality agreements with our technical employees with the exception of our directors and our key executives, which contain non-competition clauses. We do not maintain key-man life insurance for any of our key executives.
 
Failure to attract and retain qualified employees may adversely affect our business.
 
Our continued success depends largely on our ability to attract and retain highly skilled executive, managerial and technical employees. We may face difficulties in recruiting skilled personnel in our industry due to its specialized nature. If we are unable to attract and retain a sufficient number of suitably skilled and qualified personnel, our business would be materially and adversely affected. We may also have to pay substantial wages to attract sufficient numbers of skilled employees and professionals, which may adversely affect our operating margins.
 
We are not insured against potential losses and could be seriously harmed by natural disasters, catastrophes or acts of war.
 
Our facilities and inventories could be materially damaged by hurricanes, floods and other natural disasters, catastrophes, acts of war or other catastrophic circumstances. We do not maintain insurance covering such events. If any of these events occur, we could incur material losses and liabilities, which could negatively affect our operating results.

 
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We may incur material product liability claims, which could increase our costs and adversely affect our reputation, revenues and operating income.
 
As a manufacturer of products designed for human consumption, we are subject to product liability claims that the use of our products has resulted in injury. Our products contain three types of live bacteria, lactobacillus acidophilus, bifidobacterium bifidum and bifidobacterium adolescentis, which fall within the nine types of “good” live bacteria that are approved for direct sale to the public in China as health food. We obtain our bacteria from human sources. Although we believe this reduces the risk that it will be rejected by the human body, there can be no assurance that consumption of such bacteria could not result in adverse health effects. We do not maintain any product liability insurance. A product liability claim against us could result in costly litigation and could adversely affect our reputation with our customers, which in turn could adversely affect our revenues and operating income.
 
Our revenues primarily depend on sales of one product and a decline in sales of this product could cause our revenues to decrease.
 
We have most of our revenue from the sale of our Shining Essence product. Sales of this product represented approximately 29%, 40% and 48% of our total sales for the year ended March 31, 2010, 2009, and 2008 respectively. We expect that Shining Essence will continue to account for a large portion of our revenues for the foreseeable future. Any factors adversely affecting the pricing of, demand for, or market acceptance of Shining Essence, including increased competition, could cause our revenues to decline and our business and future operating results to suffer.

We are subject to concentrations of credit risk that could adversely affect our operations.

Our principal operations are in China and all of our sales during fiscal years 2010, 2009 and 2008 arose in China. A significant number of our financial instruments, principally cash and accounts receivable, are located in China. These financial instruments include:
 
 
·
cash deposits in China, 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; and
 
 
·
accounts receivable.
 
The concentration of these financial instruments in China subjects us to concentrations of credit risk that could adversely affect our operating results.

If our products fail to keep pace with advances in the industry, they may be displaced by competitors’ newly developed products.
 
Other companies in our industry may gain significant competitive advantages by introducing new products to the market, delivering constant innovation in products and techniques and offering competitive prices. Our future growth partially depends on our ability to develop products that are more effective in meeting consumer needs. In addition, we must be able to manufacture and effectively market those products. The sales of our existing products may decline if a competing product is introduced by other companies.
 
We may have difficulty competing with larger and better financed companies in our industry, which could require us, among other things, to lower our prices and could result in the loss of our customers.
 
Some of our existing and future competitors may have greater technical and financial resources than we do and may use these resources to pursue a competitive position that threatens our products. Our products could be rendered obsolete or uneconomical by the development of new products to treat conditions addressed by our products, as a result of technological advances affecting the cost of production, or as a result of marketing or pricing action by one or more of our competitors.
 
Additionally, with China’s accession to the World Trade Organization, the Chinese government has undertaken to open up the Chinese market to foreign companies. China reduced its average import tariff rate overall to 11.50% in 2003 and has further reduced it to 9.90% in 2005. As a result, foreign competitors may form alliances with or acquire companies in our industry in China. Intensified competition from these foreign competitors may lead to lower profit margins due to price competition, loss of customers and slower than anticipated growth.

 
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Unfavorable publicity or research reports casting a negative light on our industry or our products could change consumer perceptions and have an adverse affect on our ability to market and sell our products.
 
We believe that our industry is affected by media attention. Future research reports or publicity about the quality of products in our industry generally, or our products in particular, could have a material adverse effect on our business. Scientific research to date is preliminary and there can be no assurance that future scientific research or publicity will be favorable to our industry or any particular product or consistent with earlier favorable research or publicity. Adverse publicity could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately. Given our dependence upon consumer perceptions, adverse publicity, whether or not accurate, associated with illness or other adverse effects resulting from the consumption of our products or any similar products distributed by other companies could have a material adverse effect on our business.
 
Our planned expansion into the bulk additives business may not generate sufficient revenues and the construction of our new facility to accommodate this business may result in increased costs and losses.
 
We intend to expand our operations into the bulk additives business through the supply of high quality probiotics to be used as additives in dairy products to manufacturers in China. We are constructing a new production plant with a 150-ton capacity which can accommodate our new bulk additives business. This will expose us to many risks, including the following:
 
 
·
there may not be sufficient market demand for bulk probiotics additives or our products in particular;
 
 
·
we may experience delays and cost overruns during construction of our new facility which may result in losses; and
 
 
·
we may experience substantial start up losses when the plant is first commissioned.

Our plans to geographically expand our marketing and sales efforts and directly sell our products directly to retail consumers may fail.
 
To date, we have sold our products in the greater Shanghai area, Changchun, Longyan, Jiaxing, Zhengzhou, Jilin and Hong Kong. We currently intend to expand our marketing and sales efforts to the rest of China. There is no assurance that we will receive the same level of public demand for our products in other parts of China.
 
In addition, we have been selling through distributors since our first product, Shining Essence, was launched in the market in April 2001. We opened our first retail outlet in March 2006. We intend to expand our operations by opening additional new retail outlets to facilitate direct sales of our products to customers. There is no assurance that we can successfully implement our direct selling model.
 
As we increase the geographic area of our selling efforts and implement a direct selling model, there is a risk that our current systems may not be able to accommodate the increased volume or the complexity of the future business. Our short term operating results may be adversely affected as additional capital investments will have to be made for system upgrades, replacements or improvements.
 
We face potential tax exposure.
 
Our principal operations are in China. Business enterprises established in China are subject to income taxes and value added taxes under Chinese tax laws and regulations unless they have exemptions. In January 2006, we made tax payments to the Chinese tax authorities for 2005 and we have made regular tax payments to the Chinese tax authorities for subsequent periods. Our management believes that our operations in China were exempted from income taxes and value added taxes for all prior years because we had been recognized by the local government as an advanced technology enterprise. However, we have never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in China. As a result, there is no way to ascertain the position which may be taken by the relevant Chinese tax authorities in the future.  Accordingly, our financial statements contain full provisions for all applicable tax liabilities (other than potential tax penalties), plus surcharge, for all prior calendar years for such taxes. Such provisions for tax liabilities and surcharge will be reversed out of the financial statements at the appropriate point in the future.

 
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According to PRC tax regulations, overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of taxes payable, which amounts to from $4.9 million (if calculated based on 0.5 times of taxes payable) to $49 million (if calculated based on five times of the amount of taxes payable) as of March 31, 2010, 2009 and 2008. The Group has reserved for the payment of taxes that may be owed for calendar years prior to 2005 and any associated interest surcharges (which are calculated at 0.05% per day on the accrued tax liabilities) in its financial statements until the matter is fully resolved. Following the adoption of FIN48 (now known as ASC 740), the Group has reserved for the surcharges payable for fiscal year 2010 and 2009. We consider it more likely than not that the associated penalty will not need to be paid.
 
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. No provision for the potential tax penalties with respect to this matter has been made in our financial statements as our management believes that the possibility of having to pay the penalties is unlikely. The Group has reserved for associated surcharges for the fiscal year 2010, 2009, and 2008.
 
We may not be able to protect our intellectual property against claims by other parties or enforce our rights with respect to our intellectual property.
 
We have not purchased or applied for any patents other than three registered Chinese patents in respect of the packaging processes and technologies we use in our production process and a one patent regarding the production of one of our products, as we are of the view that it would not be cost-effective to do so at this time. Without patents, we may have no legal recourse in the event that our processes and technologies are replicated by other parties. If our competitors are able to replicate our processes, technologies and systems at lower costs, we may lose our competitive advantage and our profitability will be adversely affected.
 
 
From time to time, we may have to resort to litigation to enforce our rights with respect to our intellectual property. This type of litigation could result in substantial costs and diversion of our resources, which would adversely affect our results of operations.
 
Management by a small team of officers may create conflicts of interests and impede the successful implementation of our growth plans.
 
Mr. Song and Mr. Cai, our only executive officers, are responsible for all managerial functions of our company. We have been hiring additional employees to complete our management team, but we cannot assure you that we can assemble a management team that can tackle the expansion plans that we have. The concentration of management could be disadvantageous to stockholders with interests different from those of Mr. Song or Mr. Cai.

 
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Risks Related to Government Regulations
 
We are subject to government regulation in China, and changes in Chinese regulations may substantially increase the cost of manufacturing and selling our products.
 
The manufacturing and marketing of our products are subject to various governmental regulations in China. Government regulation includes inspection of and controls over manufacturing, safety and environmental controls, efficacy, labeling and the sale and distribution of wellness products.
 
As a company which produces probiotics supplements, we are subject to the Law on the Food Conditions of the PRC which became effective on October 30, 1995, the Administrative Rules for Healthy Food promulgated by the Ministry of Health on March 15, 1996 which became effective on June 1, 1996, the Notice of Circulating the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food and its appendixes-Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food, and List of Good-Live-Bacteria Applicable for Healthy Food, promulgated by the Ministry of Health which became effective on March 23, 2001, the Administration Rules for the Registration of Healthy Food (experimental) promulgated by the State Food and Drug Administration on April 30, 2005, which became effective on July 1, 2005, and other relevant rules and regulations issued by the Ministry of Health and the State Food and Drug Administration. In addition, Shining is a Chinese corporation and therefore is subject to the Company Law of China and more specifically to the Foreign Company provisions of the Company Law and the Law on Foreign Capital Enterprises of China.
 
Our industry is relatively new in China, and the manner and extent to which it is regulated is evolving. Changes in existing laws or new interpretations of such laws may have a significant impact on our methods and costs of doing business. For example, new legislative proposals that affect our product pricing, reimbursement levels, approval criteria and manufacturing requirements may be proposed and adopted.
 
The costs of compliance with current or future legislation or regulatory requirements may be significant, and could force us to curtail our operations or otherwise have a material adverse effect on our financial condition, results of operations or cash flows. For example, we have obtained three licenses and permits which are required for us to operate our business in China. If the regulations regarding these licenses and permits are changed, it may be materially burdensome for us to obtain or renew these licenses and permits or they may be otherwise unavailable.
 
Government regulation of our retail prices and advertising methods may adversely affect our results of operations.
 
We are subject to government regulations with respect to the prices we charge, the rebates we may offer to customers and our marketing methods. In addition, we are required to obtain approval from Chinese government authorities regarding the contents of advertisements related to our products before they can be published. If the Chinese government requires that we set our retail prices at undesirable prices or significantly limits our ability to advertise our products, it could have a material adverse effect on our results of operations. 
 
We may not be able to obtain regulatory approvals for our products or reimbursement from the sale of our products.
 
The manufacture and sale of our products in China is highly regulated by a number of state, regional and local authorities. These regulations significantly increase the difficulty and costs involved in obtaining and maintaining regulatory approval for marketing new and existing products. In addition, our future growth and profitability are, to a significant extent, dependent upon our ability to obtain timely regulatory approvals from the relevant authorities.
 
Risks Related to Doing Business in China
 
Adverse changes in China’s economic, political and social conditions and government policies could have a material adverse effect on the overall economic growth of China, which could adversely affect our results of operations and financial condition.
 
We currently conduct our business solely in China. Changes in the economic and political situation in China and the economic, financial, fiscal and other policies adopted by the Chinese government may affect our operations, performance and profitability. The economy of China differs from the economies of most developed countries in many respects, including:

 
- 21 -

 
 
 
·
structure;
 
 
·
extent of government involvement;
 
 
·
level of development;
 
 
·
growth rate;
 
 
·
control of foreign exchange; and
 
 
·
allocation of resources.
 
China’s economy has traditionally been subject to central planning, with a series of economic plans promulgated and implemented by the Chinese government. Over the past 25 years, the Chinese government has been reforming the economic and political systems in China in an attempt to achieve economic and social advancements. Many of these reforms were unprecedented and are expected to continue while political, economic and social factors may also lead to further adjustments to China’s reform measures. These reforms and adjustments may not always have a positive effect on our operations. Accordingly, we cannot assure you that our performance and profitability will not be adversely affected from these measures. In addition, there is no assurance that the Chinese government will continue to pursue economic liberalization and other reforms.
 
Macroeconomic measures taken by the Chinese government may cause the Chinese economy to slow down.
 
In response to concerns relating to China’s high rate of growth in industrial production, bank credit, fixed investment and money supply and growing inflationary pressures, the Chinese government has taken measures to slow economic growth to a more manageable level. Among the measures that the Chinese government has taken are restrictions on bank loans in certain sectors and the increase of interest rates. We cannot assure you that those measures will not result in a slowdown in economic growth and hence a reduction in demand for consumer products in China. These measures and any additional measures could contribute to a slowdown in the Chinese economy and could potentially cause the economy to enter a recession, which could have an adverse impact on demand for a wide range of products in China, including our products.
 
There are uncertainties regarding interpretation and enforcement of Chinese laws and regulations.
 
China’s legal system is a civil law system based on statutory law. Prior legal decisions and judgments have little precedential value. China is still in the process of developing a comprehensive statutory framework and its legal system is still considered to be underdeveloped in comparison with the legal systems in some western countries. Since 1979, the Chinese government has formulated and enacted a large number of laws and regulations governing economic matters, securities activities and foreign investments.  
 
Despite significant development in its legal system, China does not have a comprehensive system of laws. The interpretation of Chinese law by courts and tribunals may be inconsistent and influenced by government policies and other considerations. In addition, the enforcement of existing laws and regulations can be uncertain and unpredictable. Judgments and arbitration rulings may be unenforceable. The promulgation of new laws, changes to existing laws and inconsistent interpretation of laws could have a negative impact on our business.
 
All of our officers and directors, and substantially all of our assets, are located in China, thus it may be extremely difficult to acquire jurisdiction and enforce liabilities against our management and our assets.
 
Because our executive officers and directors are Chinese citizens, it may be difficult, if not impossible, to acquire jurisdiction over them in the event a lawsuit is initiated against us or our management by a stockholder or group of stockholders in the United States. We anticipate that future members of our management will also be Chinese citizens. Because the majority of our assets are located in China, it would also be extremely difficult to access those assets to satisfy an award entered against us in U.S. court.

 
- 22 -

 
 
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
 
Since almost all of our future revenues may be in the form of Renminbi, any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. There are significant restrictions on convertibility of the Renminbi for current account transactions, including primarily the restriction that foreign invested enterprises may only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

As our ultimate holding company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with our company, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Because our funds are held in banks in the PRC that do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

Any outbreak of the Swine Flu (H1N1), severe acute respiratory syndrome, or SARS, the Avian Flu, or another widespread public health problem in the PRC could adversely affect our operations.

There have been recent outbreaks of the highly pathogenic Swine Flu, caused by the H1N1 virus, in certain regions of the world, including parts of China, where all of our manufacturing facilities are located and where all of our sales occur. Our business is dependent upon our ability to continue to manufacture and distribute our products, and an outbreak of the Swine Flu, or a renewed outbreak of SARS, the Avian Flu, or another widespread public health problem in China, could have a negative effect on our operations. Any such outbreak could have an impact on our operations as a result of:

 
·
quarantines or closures of our manufacturing or distribution facilities or the retail outlets, which would severely disrupt our operations,
 
 
·
the sickness or death of our key officers and employees, and
 
 
·
a general slowdown in the Chinese economy.

 
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Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
 
Risks Related to our Common Stock
 
Shares of our common stock which are eligible for immediate sale by our stockholders may decrease the market price of our common stock.
 
We had 22,370,000 shares outstanding as of March 31, 2010, including approximately 12,581,600 shares which are free trading and may be sold immediately by our stockholders. An additional 2,083,333 shares, subject to adjustment for subdivision or combination of our stock and similar events, may be issued upon conversion of a 4% convertible promissory note issued to Pope Investments II LLC in the amount of $25 million, as further described in “Business-History.” If our stockholders sell substantial amounts of our common stock, or there is a perception in the market that such sales may occur, then the market price of our common stock could decrease.
 
Concentration of our ownership by our President and Chief Executive Officer and a director and his family may dissuade new investors from purchasing our securities, which could result in a lower trading price for our securities than if our ownership was less concentrated.
 
As of June 7, 2010, Mr. Song, our President and Chief Executive Officer and a director, owned, directly and indirectly through his family, approximately 37.1% of our issued and outstanding common stock on a fully diluted basis. As a result, Mr. Song has the ability to exert substantial influence or absolute control over all matters requiring approval by our stockholders, including the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of control could be disadvantageous to other stockholders with interests different from those of Mr. Song. For example, Mr. Song could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders. In addition, this concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with a significant concentration of ownership among a limited number of stockholders.
 
Our common stock price has been volatile, and you may not be able to sell your shares at or above the price that you pay for the shares.
 
The price of our common stock has historically been volatile and our investors experience wide fluctuations in the market price of our securities. Although our common stock is currently traded on the Nasdaq Global Market, it was previously quoted on the OTC Bulletin Board. Securities quoted on the OTC Bulletin Board tend to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make markets in particular stocks.

The volatility in the price of our common stock may be caused by a variety of factors including:
 
 
·
lower trading volume;
 
 
·
market conditions;
 
 
·
the lack of readily available price quotations; and
 
 
·
the absence of consistent administrative supervision of “bid” and “ask” quotations.
 
The fluctuations in the price of our common stock may have an extremely negative effect on the market price of our securities and may prevent you from obtaining a market price equal to your purchase price when you attempt to sell our securities in the open market. In these situations, you may be required to either sell our securities at a market price which is lower than your purchase price, or to hold our securities for a longer period of time than you planned.

 
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Volatility in the price of our common stock may cause it to be classified as penny stock which will result in limits on trading and our stock price could decline.

Because our common stock is volatile, it may in the future fall under the SEC definition of “penny stock”, if our common stock is classified as “penny stock” we expect trading in our common stock, if any, to be limited because broker-dealers are required to provide their customers with disclosure documents prior to allowing them to participate in transactions involving our common stock. These disclosure requirements are burdensome to broker-dealers and may discourage them from allowing their customers to participate in transactions involving our common stock.

Rules promulgated by the SEC under Section 15(g) of the U.S. Securities Exchange Act of 1934, or Exchange Act, require broker-dealers engaging in transactions in penny stocks, to first provide to their customers a series of disclosures and documents, including:
 
 
·
a standardized risk disclosure document identifying the risks inherent in investment in penny stocks;
 
 
·
all compensation received by the broker-dealer in connection with the transaction;
 
 
·
current quotation prices and other relevant market data; and
 
 
·
monthly account statements reflecting the fair market value of the securities.
 
In addition, these rules require that a broker-dealer obtain financial and other information from a customer, determine that transactions in penny stocks are suitable for such customer and deliver a written statement to such customer setting forth the basis for this determination.

Our preferred stock may make a third-party acquisition of our company more difficult which in turn would make a purchase of our shares less desirable, thereby potentially reducing our stock price or the liquidity of our shares.

Our certificate of incorporation authorizes our board of directors to issue up to 10,000,000 shares of preferred stock having such rights as may be designated by our board of directors, without stockholder approval. The issuance of preferred stock could inhibit a change in our control by making it more difficult to acquire the majority of our voting stock and thereby making the purchase of our shares by new investors less likely. A lesser interest in the purchase of our shares could reduce our market price or make it more difficult for stockholders to sell their shares. No shares of preferred stock are currently outstanding.

We do not anticipate paying dividends.

We do not anticipate paying dividends in the foreseeable future. Any dividends which we may pay in the future will be at the discretion of our board of directors and will depend on our future earnings, any applicable regulatory considerations, our financial requirements and other similarly unpredictable factors. For the foreseeable future, we anticipate that we will retain any earnings which we may generate from our operations to finance and develop our growth.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.  PROPERTIES.

 We do not own any real estate. We conduct our operations from a leased facility in Pudong, Shanghai. Pursuant to our lease for this facility, which expires on October 19, 2011, we pay annual rent of RMB507,532, payable in monthly installments of RMB42,294. This facility, which includes a level 100,000 clean room and a level 10,000 clean room, houses our office space manufacturing facilities and warehouse. The maximum current production capacity at this location is approximately 3.5 million capsules per month. We have received ISO 9001, ISO 14001, OHSAS 18001 and HACCP certifications for this facility. See “Business—Current Operations—Overview” for further information with respect to these certifications.

 
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We are constructing a bulk manufacturing facility that will have an initial capacity of 150 tons per year of bulk product with room for expansion to 300 tons per year based on market demand. Management estimates that Phase 1 of the project, which involves constructing a facility capable of producing 150 ton probiotics per annum, will cost $28 million. Phase 2 of this project, which commenced in December 2009, is expected to cost $18 million. The construction cost of Phase 1 of the plant is being funded by cash received from the sale of convertible promissory notes to Pope Investments II LLC on December 11, 2007 as disclosed in “Business-History.” The construction cost of Phase 2 of the plant is being funded by cash received from the public offering of our common stock in October 2009 as disclosed in “Business — History.”

On March 21, 2006, Growing State, our subsidiary, entered into an agreement with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu Industrial Park District on which we are constructing this plant. The agreement provides for the payment of leasing fees of approximately $2.1 million, 10% of which we paid on April 11, 2006, as a deposit, to be refunded upon payment in full of the aggregate lease amount. The Qingpu People’s Republic Government issued its formal confirmation of the land use right necessary for the plant construction on November 30, 2007, and confirmed the leasing fee of $1,777,680 (reduced from $2.1 million because the size of the leased land was reduced to 36,075 square meters) and a refundable land deposit of $210,083. We paid the leasing fee on December 28, 2007. In February 2009, the refundable land deposit was fully refunded and the formal land use right certificate was issued. There are no future lease payments under this land lease.

ITEM 3. LEGAL PROCEEDINGS

We have not been involved in any material litigation or claims arising from our ordinary course of business. We are not aware of any material potential litigation or claims against us which would have a material adverse effect upon our results of operations or financial condition.

ITEM 4. [REMOVED AND RESERVED]

 
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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been traded on the Nasdaq Global Market since October 23, 2008, under the symbol “CHBT.” Prior to listing on the Nasdaq Global Market, our common stock was quoted on the OTC Bulletin Board. We have generally had very low trading volume for our common stock. Set forth below is information with respect to the high and low sales prices of our common stock for the periods indicated.
 
Period
 
High
   
Low
 
Quarter Ended September 30, 2007
  $ 11.80     $ 8.25  
Quarter Ended December 31, 2007
  $ 14.20     $ 8.15  
Quarter Ended March 31, 2008
  $ 14.25     $ 9.15  
Quarter Ended June 30, 2008
  $ 12.90     $ 9.12  
Quarter Ended September 30, 2008
  $ 13.00     $ 9.63  
Quarter Ended December 31, 2008
  $ 11.50     $ 6.25  
Quarter Ended March 31, 2009
  $ 11.20     $ 5.42  
Quarter Ended June 30, 2009
  $ 16.35     $ 7.97  
Quarter Ended September 30, 2009
  $ 19.00     $ 9.25  
Quarter Ended December 31, 2009
  $ 18.69     $ 11.50  
Quarter Ended March 31, 2010
  $ 19.74     $ 12.16  
Quarter Ended June 30, 2010 (through June 7, 2010)  
  $ 18.69     $ 13.93  

Security Holders

As of June 7, 2010 there were 22,370,000 shares our common stock outstanding held by approximately 23 stockholders of record.  An additional 2,083,333 shares, subject to adjustment for subdivision or combination of our stock and similar events, may be issued upon conversion of a 4% convertible promissory note issued to Pope Investments II LLC in the amount of $25 million, as further described in “Business – History.”

Dividend Policy

We have not historically paid any cash dividends and do not intend to pay any dividends in the foreseeable future. We plan to use retained earnings, if any, to finance our growth. The declaration and payment of dividends in the future will be determined by our board of directors in light of conditions then existing, including our financial condition, capital requirements and restrictions in our financing agreements.

Equity Compensation Plans

We do not currently have an equity compensation plan. As of June 7, 2010, we have not granted any stock options or other equity awards since our inception. Management expects to implement an equity incentive plan at or before its next regularly scheduled meeting of its board of directors and to seek stockholder approval of the equity incentive plan at the 2010 Annual Meeting of Stockholders.

Performance Graph

The following graph compares the cumulative 17-month total return of holders of China-Biotics, Inc.'s common stock with the cumulative total returns of the NASDAQ Composite index, and a customized peer group index consisting of companies reporting under the Standard Industrial Classification Code 2833 (Medicinal Chemicals and Botanical Products), which are listed in footnote 1 below. The graph tracks the performance of a $100 investment in our common stock, in the SIC Code Index, and the index (with the reinvestment of all dividends) from 10/23/2008 to 3/31/2010.

(1) There are twenty-four companies included in the SIC 2833 customized peer group which are: Biodel Inc, Bond Laboratories Inc, Cambrex Corp., China Health Resource Inc, China Holdings Inc, Cobalis Corp., Cyanotech Corp., Cybermesh International Corp., Cytrx Corp., Entropin Inc, Four Star Holdings Inc, Geopharma Inc, Huifeng Bio-Pharmaceutical Technology, Immunobiotics Inc, Life Nutrition Products Inc, Nutraceutical International Corp., Optigenex Inc, Pacifichealth Laboratories Inc, Rockwell Medical Technologies Inc, Soligenix Inc, Sunwin International Neutraceuticals Inc, Synovics Pharmaceuticals Inc, Versatech Inc and Xelr8 Holdings Inc.
 
 
- 27 -

 
  
 
   
Oct-08
   
Dec-08
   
Mar-09
   
Jun-09
   
Sep-09
   
Dec-09
   
Mar-10
 
                                           
China-Biotics, Inc.
    100.00       82.46       73.98       93.99       139.25       134.64       155.87  
NASDAQ Composite
    100.00       76.89       74.38       89.23       103.39       110.84       117.32  
SIC Code Index
    100.00       112.09       93.46       136.32       169.00       154.88       156.82  

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

ITEM 6.  SELECTED FINANCIAL DATA

The tables below present our summary selected consolidated financial data (in thousands, except for per share data) prepared in accordance with accounting principles generally accepted in the United States of America. This information should be read in conjunction with our audited consolidated financial statements and related notes thereto, which are included in this Form 10-K, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 29 of this Form 10-K.

The summary statement of operations data for each of the fiscal years ended March 31, 2010, 2009 and 2008, and the summary balance sheet data as of March 31, 2010, 2009 and 2008, are derived from our audited financial statements, which are included in this Form 10-K.
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
                               
Statement of Operations Data
                             
Net Sales
    81,364       54,197       42,321       30,610       21,862  
Cost of goods sold
    24,070       16,197       12,310       8,911       6,445  
Gross profit
    57,294       38,000       30,011       21,699       15,417  
Income from operations
    35,281       21,783       18,315       14,931       12,185  
Net income
    15,648       19,967       17,542       10,905       8,354  
Earnings per share
                                       
Basic and diluted
    0.80       1.17       1.03       0.64       4.90  
                                         
Balance Sheet Data
                                       
Current assets
    181,953       87,370       79,979       41,897       31,833  
Total assets
    232,935       120,804       93,791       44,580       33,427  
Working Capital
    145,297       55,034       53,083       21,227       10,743  
Non-current liabilities
    40,100       23,072       22,500       -       -  
Total Stockholder’s equity
    156,179       65,396       44,395       23,910       12,337  
 
 
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements reflecting our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You are also urged to carefully review and consider our discussions regarding the various factors which affect our business, including the information provided in the risk factors discussion beginning on page 17 of this Form 10-K. See the cautionary note regarding forward-looking statements at the beginning of Part I of this Form 10-K.

General

We were incorporated under the name Otish Resources, Inc. in Delaware in February 2003. Until March 2006, we were a mineral exploration stage company specializing in acquiring and consolidating mineral properties with potential for commercial ore bodies. Although we conducted some preliminary exploration work with respect to our mineral properties, we never achieved full operations with respect to our mineral properties. We had never generated any revenue from our mineral exploration operations. We incurred a total of expenses of $257,914 from inception to February 28, 2006.

On March 22, 2006, we entered into and completed a securities exchange transaction with SGI and the shareholders of SGI, pursuant to which the SGI shareholders transferred all of the equity securities of SGI to us in exchange for an aggregate of 15,980,000 shares of our common stock. At the closing of the share exchange, SGI became our wholly-owned subsidiary. Immediately after the share exchange and related transactions described elsewhere in this document, the former SGI shareholders and their designees collectively owned 98.7% of our common stock. As a result of the share exchange, we are no longer a mineral exploration stage company, and SGI’s business operations become our primary operations. We are currently engaged in the research, development, production, marketing and distribution of probiotics products. These products contain live microbial food supplements which beneficially affect the host by improving its intestinal microbial balance. See “Business – History.”

We accounted for the share exchange as a recapitalization whereby the historical financial statements and operations of the SGI become our historical financial statements, with no adjustment to the carrying value of the assets and liabilities. Our issued and outstanding common stock immediate prior to the share exchange is accounted for at the net book value at the time of the transaction.

Upon consummation of the share exchange, we changed our fiscal year end from August 31 to March 31 to conform to the year end date of SGI. We filed a quarterly report on Form 10-QSB on April 14, 2006, for quarter ended February 28, 2006. This quarterly report was our last filing under our previous fiscal year end date of August 31, and as a mineral exploration stage company. In our future filings with the SEC, we will report our business activities as a manufacturer and distributor of probiotics products based on our new fiscal year end date of March 31. SGI’s historical financial statements will become our historical financial statements.

The results of operations related to Otish Resources, Inc., as a mineral exploration stage company, are not material and are therefore not included in the discussion below. Unless otherwise noted, all references to the “company,” “we,” “us” and “our” hereafter in this section refer to the current business of China-Biotics, Inc. or the historical business of SGI and its subsidiaries, as applicable.

In this document, we use the “Current Rate Method” to translate the financial statements of SGI from HKD into U.S. Dollars, and to translate the financial statements of Shining from RMB into U.S. Dollars, as required under the Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation” issued by the Financial Accounting Standards Board. The assets and liabilities of SGI and Shining, except for the paid-up capital, are translated into U.S. Dollars using the rate of exchange prevailing at the balance sheet date. The paid-up capital is translated at the historical rate. Adjustments resulting from the translation of SGI’s and Shining’s balance sheets from HKD and RMB into U.S. Dollars are recorded in stockholders’ equity as part of accumulated comprehensive income. The statement of operations is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are reflected in the statement of operations for the reporting periods. The statement of cash flows is translated at average rates during the reporting period, with the exception of issue of share and payment of dividends which are translated at the historical rates. Due to the use of different rates for translation, the figures in the statement of changes in cash flows may not agree with the differences between the year end balances as shown in the balance sheets.

 
- 29 -

 

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, which then distribute them to various retail outlets such as drug stores and supermarkets. During the year ended March 31, 2010, over 84% of our sales revenue comprised amounts receivable from the distributors for the sale of these products. Typically, 60 to 90 days’ credit is given to the distributors. Our bulk additives products are mainly sold to institutional customers, such as dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies.

Our first retail product, Shining Essence, which was launched in April 2001, remains our best-selling product. Sales of Shining Essence represented approximately 29%, 40% and 48% of our total sales for the years ended March 31, 2010, 2009 and 2008, respectively. In addition to Shining Essence, our research and development team has successfully developed other new retail products, such as Shining Probiotics Protein Powder. As of March 31, 2010, we have a retail product portfolio of 41 products, and we are currently selling 11 of them in the market. As we have released new products, the percentage contribution of Shining Essence to our total retail sales has decreased.

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.

Our bulk products have a revenue contribution of 26.8% in fiscal year 2010 increased from 8.3% in fiscal year 2009. The significant increase reflects an increased focus by management on the rapidly growing bulk additives business. In February 2010, our new bulk production facility was ready for commercial production. The state of art bulk additives production facility has a full capacity of 150 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.

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 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. It reflects Chinese government is encouraging wider uses of probiotics products in the food industry, and 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 probiotic 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 added to baby milk powders produced in China.
 
 
- 30 -

 
 
Our management expects to capitalize on the opportunities created by these trends to achieve significant growth through:
 
·
The introduction of bulk additives products.   We are expanding into the bulk additives business through our 150-ton capacity plant, which commenced production in February 2010. Government approval for the plant was received on November 30, 2007. Management estimates that Phase 1 of the project, which involves constructing a facility capable of producing 150-tons of probiotics per annum, will cost $28 million. Phase 2 of this project, which commenced in December 2009, is expected to cost $18 million. The construction cost of Phase 1 of the plant is being funded by cash received from the sale of a convertible promissory note to Pope Investments II LLC on December 11, 2007 as disclosed in “Business — History.” The construction cost of Phase 2 of the plant is being funded by cash received from the public offering of our common stock in October 2009 as disclosed in “Business — History.” On March 21, 2006, Growing State, our subsidiary, entered into an agreement with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 73,157 square meters of land in the Shanghai Qingpu Industrial Park District on which we are constructing this plant. The agreement provides for the payment of leasing fees of approximately $1.89 million.  The Qingpu People’s Republic Government issued its formal confirmation of the land use right necessary for the plant construction on November 30, 2007 and confirmed the leasing fee of $1,777,680 (reduced from $2.1 million because the size of the leased land was reduced to 36,075 square meters) and a refundable land deposit of $210,083. We paid the leasing fee on December 28, 2007.  In February 2009, the refundable land deposit was fully refunded and the formal land use right certificate was issued. There are no future lease payments under this land lease.
 
 
·
The geographical expansion of retail sales through direct sales and traditional sales channels. We intend to expand our sales to other cities in China through a combination of distributors and our own outlets. In this regard, we had 111 Shining branded outlets in Shanghai and 12 other major Chinese cities as of March 31, 2010. We expect that the additional demands from opening new outlets will be met initially by increasing production from our existing plant, which currently has the necessary capacity, and in the future from our new plant, which will have a capacity of 150-300 tons.
 
 
·
The development of new products.   With respect to our retail products, we plan to continue to research and develop new products aimed at improving the general health conditions of humans, enhancing their immune system, and reducing health problems. The new products will strengthen our product pipeline so that we may offer a wider array of products to the market. With respect to our bulk additives products, we will leverage our rich bacteria strain library, the largest in China, to provide customized products to meet the needs of our institutional clients.
 
Our operation is generally not labor-intensive. We employed 513 people as of March 31, 2010. With production ramp up in the Phase 1 facility and the construction of Phase 2, 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 Fiscal Year Ended March 31, 2010 Compared with the Fiscal Year Ended March 31, 2009

Our net income was $15.6 million for the fiscal year ended March 31, 2010. This included a $12.1 million deficit arising from the revaluation of the conversion feature embedded in the convertible note issued in December 2007 as required by FAS133 (now known as ASC 815). The convertible note will expire in December 2010, and will not have an impact on our net income after that date. Excluding this revaluation deficit, our net income was $27.7 million, which was 63.9% above our net income of $16.9 million (excluded $3.1 million revaluation surplus) for the fiscal year ended March 31, 2009. Our growth in net income primarily resulted from growth in our sales volume of in both our retail products and bulk additives products. Shining Essence continued to be our best selling retail product. We have enjoyed strong growth in demand for many products such as Shining Essence Stomach Protection and Shining Probiotics Protein Powder, which outpaced that of Shining Essence. In addition, bulk additives product sales now account for 26.8% of our sales revenue during the year ended March 31, 2010 (8.31% in the year ended March 31, 2009), the increase of which is a result of the rapid growth in shipments to dairy and animal feed customers.
 
- 31 -

   
Our results for 2010 and 2009 are summarized below:

   
Year ended March 31, 2010
   
Year ended March 31, 2009
 
   
Amount
   
% of Net sales
   
Amount
   
% of Net sales
 
Net sales
  $ 81,363,973       100.00 %   $ 54,197,082       100.00 %
Cost of sales
    (24,070,203 )     29.58 %     (16,197,267 )     29.89 %
Gross profit
  $ 57,293,770       70.42 %   $ 37,999,815       70.11 %
Operating expenses:
                               
Selling expenses
  $ (13,535,225 )     16.64 %   $ (11,563,012 )     21.34 %
General and administrative expenses
    (8,538,058 )     10.49 %     (6,246,482 )     11.53 %
Other income
    60,178       0.07 %     1,592,773       2.94 %
Total operating expenses
  $ (22,013,105 )     27.06 %   $ (16,216,721 )     29.92 %
Income from operations
  $ 35,280,665       43.36 %   $ 21,783,094       40.19 %
Other income and expenses:
                               
Changes in fair value of embedded derivatives 
  $ (12,137,000 )     14.92 %   $ 3,092,000       5.71 %
Interest income
  $ 292,644       0.36 %   $ 254,183       0.47 %
Total other income (expenses)
  $ (11,844,356 )     14.56 %   $ 3,346,183       6.17 %
Income before taxes
  $ 23,436,309       28.80 %   $ 25,129,277       46.37 %
Provision for income taxes
    (7,788,348 )     9.57 %     (5,162,388 )     9.52 %
Net income
  $ 15,647,961       19.23 %   $ 19,966,889       36.84 %

 Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the fiscal years 2010 and 2009 comprised the following:
 
   
Year ended March 31,
 
   
2010
   
2009
 
Invoiced value on sales
  $ 86,056,225     $ 56,405,974  
Less: sales discount
    (4,150,256 )     (1,623,313 )
Less: sales tax
    (541,996 )     (585,579 )
    $ 81,363,973     $ 54,197,082  

Net sales of $81,363,973 for the fiscal year ended March 31, 2010 were 50.1% above the net sales of $54,197,082 for the fiscal year ended March 31, 2009. The increase was mainly attributable to increased sales volume in both retail products and bulk additives products, and increases in average selling prices due to changes in sales mix. Bulk additives products resulted in a revenue contribution of 26.8% in the fiscal year ended March 31, 2010, increased from 8.3% in the fiscal year ended March 31, 2009. The significant increase reflects an increased focus by management on the rapidly growing bulk additives business.
 
- 32 -

 
The contributions of our products as a percentage of invoiced value on sales for the year ended March 31, 2010 and 2009 respectively are summarized below. 
 
   
Year ended March 31,
   
   
2010
   
2009
Retail
    73.2 %     91.7 %
Bulk additives
    26.8 %     8.3 %
      100.0 %     100.0 %

Unit volume and unit prices comparatives (on the invoiced value of sales) for 2010 and 2009 are summarized below.

   
Percentage increase (decrease) from the prior year
 
   
Year ended March 31,
 
   
2010
   
2009
 
   
Unit
volume
   
Selling
prices
   
Overall
increase /
(decrease)
   
Unit
volume
   
Selling
prices
   
Overall
increase /
(decrease)
 
Retail
    18 %     4 %     23 %     7 %     3 %     10 %
Bulk additives
    641 %     (33 ) %     382 %     850 %     - %     850 %
 
 
- 33 -

 

 Cost of sales

Cost of sales for the year ended March 31, 2010 was $24,070,203 compared with $16,197,267 for the year ended March 31, 2009. The increase in cost of sales was primarily caused by increased packaging cost during the fiscal year 2010.

Unit volume and unit costs comparatives for the year ended March 31, 2010 and 2009 are summarized below.
 
   
Percentage increase (decrease) from the prior year
 
   
Year ended March 31,
 
   
2010
   
2009
 
   
Unit
volume
   
Unit
costs
   
Overall
increase /
(decrease)
   
Unit
volume
   
Unit
costs
   
Overall
increase /
(decrease)
 
Retail
    18 %     5 %     24 %     7 %     3 %     10 %
Bulk additives
    641 %     (61 ) %     250 %     850 %     (10 ) %     765 %

Gross profit

Gross profit increased by $19,293,955 from $37,999,815 for the 2009 fiscal year to $57,293,770 for the 2010 fiscal year. This represents a 50.8% increase, which primarily reflects increases in overall sales volume. Our gross profit margin remained the same as last year at 70%.

Selling expenses

Selling expenses were $13,535,225 or 16.6% of net sales for the fiscal year ended March 31, 2010, compared with $11,563,012 or 21.3% of net sales for the fiscal year ended March 31, 2009. The operating costs of the retail outlets are included as selling expenses. This increase in selling expenses was primarily caused by increase of overall sales. As bulk additives products account for a larger share of revenue and selling expense associated with bulk additives products are smaller than that of retail products in this fiscal year, the selling expenses as a percentage of revenue decreased.

General and administrative expenses

General and administrative expenses were $8,538,058 or 10.5% of net sales for the year ended March 31, 2010 compared with 6,246,482 or 11.5% of net sales for the year ended March 31, 2009. The increase in general and administrative expenses was due to increasing research costs of $3,665,379 related to the development and launch of new products, and staff and administrative costs incurred in connection with the construction of the new plant.

Other Income

Other income mainly comprised exchange gain of $60,178 for the fiscal year ended March 31, 2010. For the fiscal year ended March 31, 2009, other income consisted of exchange gain of $1.51 million.

Provision for income taxes

Provision for income taxes was $7.79 million and $5.16 million for the fiscal years ended March 31, 2010 and 2009, respectively. The increase in income tax payable is attributable to an increase in operating profit.

 
- 34 -

 

Segment reporting

We have adopted the “products and services” approach for segment reporting. For fiscal years 2010 and 2009, we had only one reporting segment—the probiotic products. We manufactured and sold the probiotic products solely in China and delivered all shipments to destinations within China, and all of our long-lived assets were physically located in China. We made all sales to external customers.
 
Results of Operations for Fiscal Year Ended March 31, 2009, Compared with the Fiscal Year Ended March 31, 2008

Our net income was $20 million for the fiscal year ended March 31, 2009. This included a $3.1 million surplus arising from the revaluation of the conversion feature embedded in the convertible note issued in December 2007, as required by FAS133 (now known as ASC 815). Excluding this revaluation surplus, our net income was $16.9 million, which was 19.9% above our net income of $14.1 million (excluded $3.4 million revaluation surplus) for the fiscal year ended March 31, 2008. Our growth in net income primarily resulted from growth in our sales volume of our products. Shining Essence continued to be our best selling product. We have enjoyed strong growth in demand for many products such as Shining Essence Stomach Protection and Shining Probiotics Protein Powder, which outpaced that of Shining Essence. In addition, new product sales now account for 18.5% of our sales revenue during the year ended March 31, 2009 (15.6% in the year ended March 31, 2008). As a result, the percentage of sales revenue attributable to Shining Essence has been diluted to only 40% of our total sales revenue in the year ended March 31, 2009 (49% in the year ended March 31, 2008).
 
Our results for 2009 and 2008 are summarized below:

   
Year ended March 31, 2009
   
Year ended March 31, 2008
 
   
Amount
   
% of Net sales
   
Amount
   
% of Net sales
 
Net sales
  $ 54,197,082       100.00 %   $ 42,321,111       100.00 %
Cost of sales
    (16,197,267 )     29.89 %     (12,310,092 )     29.09 %
Gross profit
  $ 37,999,815       70.11 %   $ 30,011,019       70.91 %
Operating expenses:
                               
Selling expenses
  $ (11,563,012 )     21.34 %   $ (6,869,109 )     16.23 %
General and administrative expenses
    (6,246,482 )     11.53 %     (4,826,473 )     11.40 %
Other income
    1,592,773       2.94 %     431,844       1.02 %
Total operating expenses
  $ (16,216,721 )     29.92 %   $ (11,263,738 )     26.61 %
Income from operations
  $ 21,783,094       40.19 %   $ 18,747,281       44.30 %
Other income and expenses:
                               
Changes in fair value of embedded derivatives 
  $ 3,092,000       5.71 %   $ 3,366,000       7.95 %
Interest income
  $ 254,183       0.47 %   $ 365,594       0.86 %
Total other income (expenses)
  $ 3,346,183       6.17 %   $ 3,731,594       8.82 %
Income before taxes
  $ 25,129,277       46.37 %   $ 22,478,875       53.12 %
Provision for income taxes
    (5,162,388 )     9.52 %     (4,936,631 )     11.66 %
Net income
  $ 19,966,889       36.84 %   $ 17,542,244       41.45 %
  
- 35 -

  
Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the fiscal years 2009 and 2008 comprised the following:
 
   
Year ended March 31,
 
   
2009
   
2008
 
Invoiced value on sales
  $ 56,405,974     $ 43,775,529  
Less: sales discount
    (1,623,313 )     (1,171,096 )
Less: sales tax
    (585,579 )     (283,322 )
    $ 54,197,082     $ 42,321,111  

Net sales of $54,197,082 for the fiscal year ended March 31, 2009, were 28.1% above the net sales of $42,321,111 for the fiscal year ended March 31, 2008. The increase was mainly attributable to increased sales volume and increases in average selling prices due to changes in sales mix.

The contributions of each product as a percentage of invoiced value on sales for the year ended March 31, 2009, and 2008, respectively, are summarized below. New product sales (including Stomach Protection, Protein Powder, and others) now account for 18.5% of our sales revenue for the year ended March 31, 2009. While the sales revenues of Essence and Signal capsules have remained stable, their percentage contributions to our sales revenue have been diluted by increases in new product sales.
 
   
Year ended March 31,
 
   
2009
   
2008
 
Retail 
    91.7 %     99.0 %
Bulk additives
    8.3 %     1.0 %
      100.0 %     100.0 %

Unit volume and unit prices comparatives (on the invoiced value of sales) for 2009 and 2008 are summarized below.
 
   
Percentages increase (decrease) from the prior year
 
   
Year ended March 31,
 
   
2009
   
2008
 
   
Unit volume
   
Selling prices
   
Overall
increase /
(decrease)
   
Unit volume
   
Selling prices
   
Overall
increase /
(decrease)
 
Retail
    7 %     3 %     10 %     9 %     21 %     32 %
Bulk additives
    850 %     - %     850 %     100 %     100 %     100 %

Cost of sales

Cost of sales for the year ended March 31, 2009, was $16,197,267 compared with $12,310,092 for the year ended March 31, 2008. The increase in cost of sales was primarily caused by increased packaging cost during the fiscal year 2009.

Unit volume and unit costs comparatives for the year ended March 31, 2009, and 2008, are summarized below.
 
 
- 36 -

 

   
 
Percentages increase (decrease) from the prior year
 
   
 
Year ended March 31,
 
   
 
2009
   
2008
 
   
 
Unit volume
   
Unit costs
   
Overall
increase /
(decrease)
   
Unit volume
   
Unit costs
   
Overall
increase /
(decrease)
 
Retail
    7 %     3 %     10 %     9 %     17 %     28 %
Bulk additives
    850 %     (10 )%     765 %     100 %     100 %     100 %

Gross profit

Gross profit increased by $7,988,796 from $30,011,019 for the 2008 fiscal year to $37,999,815 for the 2009 fiscal year. This represents a 26.6% increase, which reflects primarily increases in sales volume. Our gross profit margin remained the same as last year at 70%.

Selling expenses

Selling expenses were $11,563,012 or 21.3% of net sales for the fiscal year ended March 31, 2009 compared with $6,869,109 or 16.2% of net sales for the fiscal year ended March 31, 2008. The operating costs of the retail outlets are included as selling expenses. This increase in selling expenses was primarily caused by the roll out of retail outlets. As of March 31, 2009, we had a total of 106 retail outlets in operation (as of March 31, 2008, we had 60 retail outlets).

General and administrative expenses

General and administrative expenses were $6,246,482 or 11.5% of net sales for the year ended March 31, 2009, compared with 4,826,473 or 11.4% of net sales for the year ended March 31, 2008. The increase in general and administrative expenses was due to additional research costs of $1,035,314 related to the development and launching of new products, and staff and administrative costs incurred in connection with the construction of the new plant. 
 
Other Income

Other income mainly comprised exchange gain of $1.51 million for the fiscal year ended March 31, 2009. For the fiscal year ended March 31, 2008, other income consisted of exchange gain of $0.4 million.

Provision for income taxes

Provision for income taxes was $5.16 million and $4.94 million for the fiscal years ended March 31, 2009, and 2008, respectively. The increase in income tax payable is attributable to an increase in operating profit.

Segment reporting

We have adopted the “products and services” approach for segment reporting. For fiscal years 2009 and 2008, we had only one reporting segment—the probiotic products as a health supplement. We manufactured and sold the probiotic products solely in China and delivered all shipments to destinations within China, and all of our long-lived assets were physically located in China. We made all sales to external customers.
 
- 37 -

 
Liquidity and Capital Resources

We had cash of $155.6 million and working capital of $145.3 million as of March 31, 2010, and cash of $70.8 million and working capital of $55.0 million as of March 31, 2009. Cash generated from operations was $28.2 million for the fiscal year ended March 31, 2010, and $23.1 million for the fiscal year ended March 31, 2009.

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.

We had capital expenditures totaling $13.8 million for the year ended March 31, 2010, primarily on building the new plant.  We spent $17.5 million on fixed assets in fiscal year 2009.
 
Our current primary facility commenced operations in 2000 in Pudong, Shanghai. With the increases in sales volume in the last couple of years, we are reaching our production capacity. We are constructing a new plant with an overall project size of $46 million in Qingpu, Shanghai. Phase 1 of the project involves constructing a facility capable of producing 150 tons of probiotics per annum and will cost approximately $28 million, $23 million of which was paid by 2010, and the balance is scheduled to be paid by the end of calendar year 2010. All equipment for production of Phase 1 is in place. The Phase 1 facility started commercial production in February 2010. In Phase 1, there is research and development equipment to be purchased, and some unfinished construction will be done in calendar year 2010. Phase 1 is expected to be complete by December 2010. Phase 2 commenced in December 2009 and is expected to cost $18 million, which is scheduled to be paid in fiscal year 2011.
 
We had net cash of $70 million generated from financing activities in fiscal year 2010. We did not have cash generated from financing activities in fiscal year 2009.  Details on our financing activities for the two fiscal years are as follows:
 
   
Years ended March 31,
 
   
2010
   
2009
 
         
CASH FLOWS FROM FINANCING ACTIVITIES
           
Cash advance to director
  $ 3,113,900       -  
Proceeds from issue of common stock
  $ 74,906,572       -  
 Repayment from a director
  $ (7,908,948 )     -  
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
  $ 70,111,524       -  
 
On December 11, 2007, we issued a 4% Senior Convertible Promissory Note in the amount of $25,000,000 (the “Note”) with a maturity date of December 11, 2010. The principal amount of the Note is convertible into shares of our common stock at an exercise price of $12.00 per share at any time until the maturity date. If the Note is not converted at maturity, we will redeem the Note at a price that gives a total yield of 10% per annum inclusive of the annual interest. The Note also provides for mandatory conversion into common stock if the Group achieves a net income of $60 million in fiscal year 2010. Since our net income in fiscal year 2010 is below $60 million, the mandatory conversion will not be implemented. Net proceeds of the Note are being used to fund the 150-metric-ton-per-year manufacturing facility.
 
On October 5, 2009, the Company closed an underwritten public offering of 4,600,000 shares of its common stock at a price of $15.00 per share. On October 26, 2009, an additional 690,000 shares were sold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering, including the over-allotment, after deducting underwriting discounts, and offering expenses, were approximately $74.9 million. The Company expects to use the net proceeds from the offering for general corporate purposes, and may also use a portion of the net proceeds to acquire or invest in businesses and products that are complementary to our own. Currently, the company keeps the net proceeds in the form of cash or cash equivalents.
 
 
- 38 -

 

Taking into account our current cash position and our anticipated cash flows from operations, we expect we will be able to meet all our funding needs in the next twelve months, including payments required to settle our contractual obligations and for our construction of our new plant. No assurance, however, can be given that our business plan will succeed. In the event that our business plan does not materialize as predicted, we may need to seek external financing to fund our expansion plan. There can be no assurance that we will be able to raise needed capital on favorable terms, if at all. In addition, there is no assurance that our estimate of our liquidity needs is accurate or that new business development or other unforeseen events will not occur, resulting in the need to raise additional funds.
  
 
- 39 -

 
 
Liquidity and Capital Resources

We had cash of $70.8 million and working capital of $55.0 million as of March 31, 2009, and cash of $64.3 million and working capital of $53.1 million as of March 31, 2008. Cash generated from operations was $23.1 million for the fiscal year ended March 31, 2009 and $19.4 million for the fiscal year ended March 31, 2008.

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 which 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.

We had capital expenditures totaling $17.5 million for the year ended March 31, 2009, primarily on building the new plant.  We spent $10.3 million on fixed assets in fiscal year 2008.

Our current facility commenced operations in 2000. With the increases in sales volume in the last couple of years, we are reaching our production capacity. We have started to construct a new plant with an overall project size of $46 million. Phase 1 of the project involves constructing a facility capable of producing 150 tons of probiotics per annum and is estimated to cost $28 million, $23 million of which was paid by fiscal year 2010, and the balance is scheduled to be paid by the end of calendar year 2010.
 
All equipment for production of Phase 1 is in place. The Phase 1 facility started commercial production in February 2010. In Phase 1, there is research and development equipment to be purchased, and some unfinished construction will be done in calander year 2010. Phase 1 is expected to be complete by December 2010. Phase 2 commenced in December 2009 and is expected to cost $18 million, which is scheduled to be paid in fiscal year 2011.
 
We did not have cash generated from financing activities in fiscal year 2009. We had net cash of $25 million generated from financing activities in fiscal year 2008.  Details on our financing activities for the two fiscal years are as follows:
 
   
Years ended March 31,
 
   
2009
   
2008
 
   
$Million
   
$Million
 
CASH FLOWS FROM FINANCING ACTIVITIES
           
Proceeds from issue of convertible bond
    -       25  
      -       -  
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
    -       25  

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

 
Taking into account our current cash position and our anticipated cash flows from operations, we expect we will be able to meet all our funding needs in the next twelve months, including payments required to settle our contractual obligations and for our construction of our new plant. No assurance, however, can be given that our business plan will succeed. In the event that our business plan does not materialize as predicted, we may need to seek for external financing to fund our expansion plan. There can be no assurance that we will be able to raise needed capital on favorable terms, if at all. In addition, there is no assurance that our estimate of our liquidity needs is accurate or that new business development or other unforeseen events will not occur, resulting in the need to raise additional funds.

Inflation

We believe that inflation has not had a material impact on our results of operations for the fiscal years ended March 31, 2010 and 2009.
 
 
 
- 40 -

 

Seasonality

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our principal contractual obligations and commercial commitments over various future periods as of March 31, 2010.
 
Contractual
 
Payment due by period (as of March 31, 2010)
 
Obligations
 
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
Capital Lease Obligations (1)
  $ 2,938,266     $ 2,938,266     $ -       -       -  
Operating Lease Obligations (1)
    439,026       397,869       41,157       -       -  
Purchase Obligation (2)   
    20,629,531       20,629,531       -       -       -  
Other Obligation
    645,480       616,140       29,340       -          
Long-term Loan (3)
    25,000,000       25,000,000       -       -       -  
Total
  $ 49,652,203     $ 49,581,806     $ 70,497       -       -  
 

(1) See note 15 to our consolidated financial statements in this Annual Report.
(2) Estimated contractual purchases with suppliers as of March 31, 2010.
(3) See note 17 to our consolidated financial statement in this Annual Report.

Critical Accounting Policies

This MD&A discusses our consolidated financial statements for the fiscal years ended March 31, 2010, and 2009. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States. In preparing these financial statements, we are required to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical experience and the current and projected financial condition of specific customers. Since our inception of business, we have never experienced any unrecoverable receivables. We also have never experienced situations causing us to cast doubt on the ability of our customers to make required payments. The balance of our allowance for doubtful accounts has always been zero. We had trade receivables totaling $21,008,664 as of March 31, 2010, and $14,428,382 as of March 31, 2009, and a zero balance for allowance for doubtful accounts. We have considered all relevant factors, including the financial conditions, affecting the payment abilities of customers comprising these receivables up to the date of this 10-K, 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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Use of estimates as applied to potential penalties for the late payment of taxes

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

According to PRC tax regulations, our overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to potential penalties for the late payment of taxes, which is calculated on the basis of 0.5 times to five times the amount of taxes payable, which amounts to from $4.9 million (if calculated based on 0.5 times of taxes payable) to $49 million (if calculated based on five times of the amount of taxes payable) as of March 31, 2010, 2009, and 2008. The Group has reserved for the payment of taxes that may be owed for calendar years prior to 2005 and any associated surcharges (which are calculated at 0.05% per day on the accrued tax liabilities) in its financial statements until the matter is fully resolved. Following the adoption of FIN48 (now known as ASC 740), the Group has reserved for the surcharges payable for the fiscal years 2010 and 2009. We consider it is more likely than not that the associated penalty will not need to be paid.

Recent Accounting Pronouncements
 
See Note 3 of the March 31, 2010 Consolidated Financial Statements. Other new pronouncements issued, but not yet effective until after March 31, 2010, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including changes in foreign currency exchange rates and fair value. We do not enter into derivatives or other financial instruments for trading or speculative purposes in the normal course of business.

Foreign Currency Exchange Rate Risk

Our operations are conducted mainly in the People’s Republic of China. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in RMB, which is our functional currency.

Therefore, changes in the rate of exchange between the U.S. dollar and the RMB, in which the financial statements of our operations are maintained, affect our results of operations and financial position as reported in our consolidated financial statements. We have consolidated the balance sheets of our RMB-denominated operations into U.S. dollars at the exchange rates prevailing at the balance sheet date. Revenues and expenses are translated at the average exchange rates for the period.

These changes result in cumulative translation adjustments, which are included in “Accumulated other comprehensive income,” and potentially result in transaction gains or losses, which are included in our earnings.

 
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Fair Value Risk

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CHINA-BIOTICS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2010, 2009, AND 2008

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm
 
43
     
Audited Consolidated Financial Statements
 
 
     
Consolidated Balance Sheets as of March 31, 2010 and 2009
 
45
     
Consolidated Statements of Operations for the years ended March 31, 2010, 2009, and 2008
 
46
     
Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31, 2010, 2009, and 2008
 
47
     
Consolidated Statements of Cash Flow for the years ended March 31, 2010, 2009, and 2008
 
48
     
Notes to the Consolidated Financial Statements
 
49
     
Schedule I - Condensed Parent Company Financial Statements as of March 31, 2010, 2009, and 2008
 
76

Report of Independent Registered Public Accounting Firm

To the Board of Directors and stockholders of
China-Biotics, Inc.

We have audited the accompanying consolidated balance sheets of China-Biotics, Inc. as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2010. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 
- 43 -

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China-Biotics, Inc. as of March 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
 
Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public company Accounting Oversight Board (United States), China-Biotics, Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 14, 2010 expressed an unqualified opinion thereon.

BDO Limited

Hong Kong, June 14, 2010

 
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CHINA-BIOTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in US Dollars)
 
   
Note
   
March 31, 2010
   
March 31, 2009
 
ASSETS
                 
Current assets  
                 
Cash and cash equivalents
        $ 155,579,371     $ 70,824,041  
Accounts receivable, net
   
     
      21,008,664       14,428,382  
Other receivables  
   
  
      791,907       6,493  
Inventories  
   
6
      1,100,707       563,853  
Amount due from a director
   
7
      2,367,892       -  
Prepayments  
              1,104,149       1,547,582  
Total current assets
          $ 181,952,690     $ 87,370,351  
Land use right    
8
    $ 1,797,082     $ 1,832,216  
Property, plant and equipment, net
   
9
    $ 48,886,077     $ 31,247,623  
Deferred tax assets
          $ 298,833     $ 354,157  
Total assets  
          $ 232,934,682     $ 120,804,347  
LIABILITIES AND STOCKHOLDERS' EQUITY
                       
Current liabilities:  
                       
Accounts payable  
          $ 5,850,988     $ 2,909,898  
Tax payables
   
10
      28,989,337       25,528,447  
Amount due to a director
   
7
      -       2,380,007  
Other payables and accruals
            1,815,487       1,517,753  
Convertible note, net of discount of $2,853,094 as of March 31, 2010    
17
    $ 22,146,906       -  
Embedded derivatives    
17
    $ 14,797,000       -  
Interest payable             $ 3,156,035       -  
Total current liabilities
            $ 76,755,753     $ 32,336,105  
Non-current liabilities  
                       
Convertible note, net of discount of $6,000,054 as of March 31, 2009
   
17
    $ -     $ 18,999,946  
Embedded derivatives
   
17
      -       2,660,000  
Interest payable  
            -       1,411,942  
Total non-current liabilities
          $ -     $ 23,071,888  
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, 41,461,004 shares issued and 17,080,000 outstanding as of March 31, 2009 and 46,751,004 shares issued and 22,370,000 outstanding as of March 31, 2010) 
              4,675       4,146  
Additional paid-in capital
            82,769,074       7,863,031  
Retained earnings  
            65,441,994       49,794,033  
Treasury stock at cost (24,381,004 shares)
   
11
      (2,438 )     (2,438 )
Accumulated other comprehensive income
            4,939,830       4,711,788  
Capital and statutory reserves
   
12
      3,025,794       3,025,794  
Total stockholders' equity
          $ 156,178,929     $ 65,396,354  
Total liabilities and stockholders' equity
          $ 232,934,682     $ 120,804,347  

The accompanying notes are an integral part of these financial statements.
 
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CHINA-BIOTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts expressed in US Dollars)
 
         
Years ended March 31,
 
   
Note
   
2010
   
2009
   
2008
 
Net sales
        $ 81,363,973     $ 54,197,082     $ 42,321,111  
Cost of sales
          (24,070,203 )     (16,197,267 )     (12,310,092 )
Gross profit
        $ 57,293,770     $ 37,999,815     $ 30,011,019  
Operating expenses:
                             
Selling expenses
        $ (13,535,225 )   $ (11,563,012 )   $ (6,869,109 )
General and administrative expenses
          (4,872,678 )     (3,016,694 )     (2,631,999 )
Research and development costs         $ (3,665,380 )   $ (3,229,788 )   $ (2,194,474 )
Other income
          60,178       1,592,773       431,844  
Total operating expenses
        $ (22,013,105 )   $ (16,216,721 )   $ (11,263,738 )
           $ 35,280,665     $ 21,783,094     $ 18,747,281  
Other income and expenses:
                             
Changes in the fair value of embedded derivatives
        $ (12,137,000 )   $ 3,092,000     $ 3,366,000  
Interest income
          292,644       254,183       365,594  
Total other (expenses) income
        $ (11,844,356 )   $ 3,346,183     $ 3,731,594  
Income before taxes
        $ 23,436,309     $ 25,129,277     $ 22,478,875  
Provision for income taxes
   
10
      (7,788,348 )     (5,162,388 )     (4,936,631 )
Net income
          $ 15,647,961     $ 19,966,889     $ 17,542,244  
                                 
Earnings per share:
                               
Basic and diluted
   
4
    $ 0.80     $ 1.17     $ $1.03  
Shares used in the computation of earnings per share:
                               
Basic and diluted
   
4
      19,605,589       17,080,000       17,080,000  

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

 
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CHINA-BIOTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts expressed in US Dollars)

   
Common Stock
                                     
   
Shares
   
Par
value
$0.0001
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income
   
Capital &
Statutory
Reserves
   
Total