10-Q/A 1 v142316_10qa.htm Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q/A
AMENDMENT NO. 1
 
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2008
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
 
For the Transition Period from _______ to _________
 
001-34123 
(Commission File Number)
 
CHINA-BIOTICS, INC.
(Exact Name of registrant as specified in its charter)

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

No. 999 Ningqiao Road
Jinqiao Export Processing Zone
Pudong, Shanghai 201206
People's Republic of China
 (Address of Principal Executive Offices)

Telephone number: (86 21) 5834 9748
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer ¨
Accelerated filer ¨
 
 
Non-accelerated filer x (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 ¨ Nox

As of March 20, 2009, 17,080,000 shares of the Issuer's common stock were outstanding.
 
Explanatory Note:

China-Biotics, Inc. (the “Company”) filed its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008 on November 10, 2008.
 
 
TABLE OF CONTENTS
 
 
Page
 
Part I - Financial Information
 
 
 
ITEM 1.
 
FINANCIAL STATEMENTS
 
 3
 
 
 
 
 
ITEM 2.
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 17
 
 
 
 
 
ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 26
 
 
 
 
 
ITEM 4T.
 
CONTROLS AND PROCEDURES
 
 26
 
Part II - Other Information
 
 
 
 
 
ITEM 1.
 
LEGAL PROCEEDINGS
 
 26
         
ITEM 1A.   RISK FACTORS  
26
 
 
 
 
 
ITEM 2.
 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 26
 
 
 
 
 
ITEM 3.
 
DEFAULTS UPON SENIOR SECURITIES
 
 26
 
 
 
 
 
ITEM 4.
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 26
 
 
 
 
 
ITEM 5.
 
OTHER INFORMATION
 
 27
 
 
 
 
 
ITEM 6.
 
EXHIBITS
 
 28
 
 
 
SIGNATURES
 
30

2
ITEM 1. FINANCIAL STATEMENTS

CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
  
September 30,
2008
  
March 31,
2008
  
ASSETS
          
Current assets
          
Cash and cash equivalents
  
$
65,633,495
  
$
64,310,448
  
Accounts receivable
    
10,447,251
    
13,214,531
  
Other receivables
    
243,497
    
238,835
  
Inventories
    
765,640
    
408,358
  
Prepayment
    
1,828,612
    
1,806,605
  
Total current assets
  
$
78,918,495
  
$
79,978,777
  
Property, plant and equipment and land use right
    
27,309,641
    
13,812,749
  
Total assets
  
$
106,228,136
  
$
93,791,526
  
LIABILITIES AND STOCKHOLDERS' EQUITY
          
Current liabilities
          
Accounts payable
  
$
3,448,485
  
$
2,786,180
  
Tax payables
    
24,094,685
    
22,317,982
  
Other payables and accruals
    
2,127,050
    
1,792,156
  
Total current liabilities
  
$
29,670,220
  
$
26,896,318
  
Non-current liabilities
          
Convertible note, with embedded derivatives of $5,087,000, net of discount of $7,341,762 as of September 30, 2008
  
$
22,745,238
  
$
22,197,635
  
Interest payable
    
740,628
    
302,306
  
               
Total non-current liabilities
  
$
23,485,866
 
$
22,499,941
  
Commitments and contingencies
          
Stockholders' equity:
          
Common stock (par value of $0.0001, 100,000,000 shares authorized, 41,461,004 shares issued and outstanding as of September 30, 2008)
  
$
4,146
  
$
4,146
  
Additional paid-in capital
    
7,863,031
    
7,863,031
  
Retained earnings
    
37,536,014
   
29,827,144
  
Treasury stock at cost (24,381,004 shares)
    
(2,438
)
  
(2,438
)
Accumulated other comprehensive income
    
4,645,503
   
3,677,590
  
Capital and statutory reserves
    
3,025,794
    
3,025,794
  
Total stockholders' equity
  
$
53,072,050
  
$
44,395,267
  
Total liabilities and stockholders' equity
  
$
106,228,136
  
$
93,791,526
  
 
The accompanying notes are an integral part of these financial statements.

3

CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts expressed in US Dollars)

 
  
Three months ended
September 30,
  
 Six months ended
September 30,
  
 
  
2008
  
 2007
  
 2008
  
 2007
  
Net sales
  
$
11,495,249
  
$
7,820,163
  
$
22,865,906
  
$
17,335,496
  
Cost of sales
    
(3,462,853
)
  
(2,205,623
)
  
(6,721,522
)
  
(4,856,595
)
Gross profit
  
$
8,032,396
  
$
5,614,540
  
$
16,144,384
  
$
12,478,901
  
Operating expenses:
                          
Selling expenses
  
$
(2,813,563
)
$
(1,561,936
)
$
(5,183,422
)
$
(2,878,280
)
General and administrative expenses
    
(1,438,137
)
  
(1,087,053
)
  
(2,864,933
)
  
(1,896,617
)
Total operating expenses
  
$
(4,251,700
)
$
(2,648,989
)
$
(8,048,355
)
$
(4,774,897
)
Income from operations
  
$
3,780,696
  
$
2,965,551
  
$
8,096,029
  
$
7,704,004
  
Other income and expenses:
                          
Changes in the fair value of embedded derivatives
  
$
1,904,000
  
$
-
  
$
665,000
  
$
-
  
Other income
    
157,468
    
282
    
1,862,988
    
71,942
  
Other expenses
    
(50,947
)
  
(13,011
)
  
(217,579
)
  
(19,935
)
Total other income (expenses)
  
$
2,010,521
  
$
(12,729
)
$
2,310,409
  
$
52,007
  
Income before taxes
  
$
5,791,217
  
$
2,952,822
  
$
10,406,438
  
$
7,756,011
  
Provision for income taxes
    
(1,319,097
)
  
(982,689
)
  
(2,697,568
)
  
(2,245,645
)
Net income
  
$
4,472,120
  
$
1,970,133
  
$
7,708,870
  
$
5,510,366
  
 
                          
Earnings per share:
                          
Basic
  
$
0.26
  
$
0.11
  
$
0.45
  
$
0.32
  
Diluted
  
$
0.13
  
$
0.11
  
$
0.37
  
$
0.32
  
 
                      
Weighted average shares outstanding
                      
Basic
   
17,080,000
    
17,080,000
    
17,080,000
    
17,080,000
  
Diluted
    
19,163,333
    
17,080,000
    
19,163,333
    
17,080,000
  
 
The accompanying notes are an integral part of these financial statements.

4

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

 
  
Common Stock  
  
 
  
 
  
 
  
Accumulated
  
Capital &
  
 
  
 
  
Shares  
  
Par value
$0.0001
  
Additional 
Paid-in Capital
  
Retained
Earnings
  
Treasury
Stock
  
Comprehensive
Income
  
Statutory
Reserves
  
Total
  
Balance- March 31, 2008
    
41,461,004
  
$
4,146
  
$
7,863,031
  
$
29,827,144
  
$
(2,438
)
$
3,677,590
  
$
3,025,794
  
$
44,395,267
  
Comprehensive income:
                                                  
Net income
                      
7,708,870
                      
7,708,870
  
Other comprehensive income:
                                              
Foreign currency translation adjustments, net of taxes of $0
                                
967,913
          
967,913
  
Total comprehensive income
                         
  
                          
8,676,783
  
Balance- September 30, 2008
    
41,461,004
  
$
4,146
  
$
7,863,031
  
$
37,536,014
  
$
(2,438
)
$
4,645,503
  
$
3,025,794
  
$
53,072,050
  
 
The accompanying notes are an integral part of these financial statements.

5
 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts expressed in US Dollars)
 
 
  
Six months ended
September 30,
  
 
  
2008
  
2007
  
CASH FLOW FROM OPERATING ACTIVITIES
          
Net income
  
$
7,708,870
  
$
5,510,366
  
Adjustment for:
            
Changes in the fair value of embedded derivatives
    
(665,000
)
  
-
  
Depreciation
    
863,740
    
349,111
  
(Increase)/Decrease in accounts receivable
    
3,044,946
    
5,992,036
  
(Increase)/Decrease in inventories
    
(344,093
)
  
(383,380
)
(Increase)/Decrease in prepayments
    
19,822
    
(1,693,248
)
Increase/(Decrease) in accounts payable
    
586,894
    
239,274
  
Increase/(Decrease) in income tax, surcharge and dividends withholding tax
    
1,249,548
    
828,172
  
Increase/(Decrease) in other payables and accruals, and value added tax payable
    
205,230
    
348,841
  
NET CASH PROVIDED BY OPERATING ACTIVITIES
  
$
12,669,957
  
$
11,191,172
  
CASH FLOWS USED IN INVESTING ACTIVITIES
            
Purchases of fixed assets
  
$
(11,662,222
)
$
(4,027,160
)
Capital expenditure   $
(556,164
 ) $ -  
NET CASH USED IN INVESTING ACTIVITIES     (12,218,386 )   (4,027,160 )
CASH FLOWS USED IN FINANCING ACTIVITIES
            
Effect of exchange rate changes on cash
  
$
871,476
  
$
1,065,937
  
NET INCREASE IN CASH AND CASH EQUIVALENTS BALANCES
  
$
1,323,047
  
$
8,229,949
  
CASH AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD
    
64,310,448
    
26,992,025
  
CASH AND CASH EQUIVALENTS BALANCES AT END OF PERIOD
  
$
65,633,495
  
$
35,221,974
  
 
The accompanying notes are an integral part of these financial statements.

6
 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
1.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying condensed consolidated financial statements do reflect all the adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows for he the interim periods reported. Such adjustments are of a normal, recurring nature. Our operating results for the three and six month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending March 31, 2009.
 
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in our Annual Report on Form 10-KSB for the year ended March 31, 2008. There have been no material changes in the significant accounting policies followed by us during the three and six month periods ended September 30, 2008.

7

CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
 
2.
EARNINGS PER SHARE
 
Basic earnings per share is computed in accordance with SFAS No.128, "Earnings Per Share", by dividing the net income by the weighted average number of outstanding common stock during the period. The diluted earnings per share calculation includes the impact of dilutive convertible securities, if applicable. The weighted average number of outstanding common stock is determined by relating the portion of time within a reporting period that a particular number of common stock has been outstanding to the total time in that period.
 
The following table sets forth the computation of basic and diluted earnings per share:
 
  
Three months ended
September 30,
  
Six months ended
September 30,
  
 
  
2008
  
2007
  
2008
  
2007
  
Earnings per share - Basic
                          
Income for the period
  
$
4,472,120
  
$
1,970,133
  
$
7,708,870
  
$
5,510,366
  
Basic average common stock outstanding
    
17,080,000
    
17,080,000
    
17,080,000
    
17,080,000
  
Net earnings per share
  
$
0.26
  
$
0.11
  
$
0.45
  
$
0.32
  
 
                        
 
                        
Earnings per share - Diluted
                        
Income for the period
  
$
4,472,120
  
$
1,970,133
  
$
7,708,870
  
$
5,510,366
  
Change in fair value of embedded derivatives
    
(1,904,000
)
  
-
    
(665,000
)
  
-
  
 
  
$
2,568,120
  
$
1,970,133
  
$
7,043,870
  
$
5,510,366
  
Basic average common stock outstanding
     17,080,000     17,080,000     17,080,000     17,080,000  
Diluted effect from embedded derivatives
     2,083,333     -     2,083,333     -  
Diluted average common stock 
    
19,163,333
    
17,080,000
    
19,163,333
    
17,080,000
  
Net earnings per share
  
$
0.13
  
$
0.11
  
$
0.37
  
$
0.32
  
 
8
 
 CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
 
3.
RISKS, UNCERTAINTIES, AND CONCENTRATIONS
(a)   Nature of Operations

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

(b)   Concentration of Credit Risk

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

As of September 30, 2008 the Group had cash deposits of $65.6 million placed with several banks in the People's Republic of China (“PRC”), which includes the Special Administrative Region of Hong Kong, where there is currently no rules or regulations in place for obligatory insurance of bank accounts.

For the three months and six months ended September 30, 2007 and 2008, all of the Group's sales arose in the PRC. In addition, all accounts receivable as at September 30, 2008 also arose in the PRC.
 
(c)   Concentration of Customers

For the period ended September 30, 2008, there is a customer that accounted for 12% of our sales revenue. For the period ended September 30, 2007, there is a customer accounted for 17% of our total sales.

9
 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
 
4.
ACCOUNTS RECEIVABLE
 
The Group's accounts receivable as of the balance sheet date as presented in these financial statements are summarized as follows:
 
 
  
September 30,
2008
  
March 31,
2008
  
 
  
 
  
 
  
Trade receivables
  
$
10,447,251
  
$
13,214,531
  
Less : Allowances for doubtful debt
    
-
    
-
  
 
  
$
10,447,251
  
$
13,214,531
  
 
5.
INVENTORIES
 
The Group's inventories as of the balance sheet date as presented in these financial statements are summarized as follows:
 
 
  
September 30,
2008
  
March 31,
2008
  
 
  
 
  
 
  
Raw materials
  
$
264,554
  
$
254,648
  
Work-in-progress
    
169,827
    
9,943
  
Finished goods
    
331,259
    
143,767
  
 
  
$
765,640
  
$
408,358
  

10
 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
 
6.
PROPERTY, PLANT AND EQUIPMENT AND LAND USE RIGHT
 
The Group's property, plant and equipment and land use right as of the balance sheet date as presented in these financial statements are summarized as follows:
 
 
  
September 30,
2008
  
March 31,
2008
  
 
  
 
  
 
  
Land use right
  
$
1,876,078
  
$
1,777,860
  
Plant and machinery
    
7,383,837
    
6,493,190
  
Office equipment
    
3,374,323
    
3,293,598
  
Motor vehicles
    
245,653
    
109,186
  
Leasehold improvements
    
2,394,485
    
1,817,623
  
 
    
15,274,376
    
13,491,457
  
Less: Accumulated depreciation
  
$
(5,566,705
)
  
(4,585,976
)
 
    
9,707,671
    
8,905,481
  
Construction in progress
  
$
17,601,970
  
$
4,907,268
  
 
  
$
27,309,641
  
$
13,812,749
  
 
7.
TAX PAYABLES
 
The Group's tax payables as of the balance sheet date as presented in these financial statements are summarized as follows:
 
 
  
September 30,
2008
  
March 31,
2008
  
 
  
 
  
 
  
Value added tax and other taxes
  
$
5,540,379
  
$
5,436,331
  
Income tax
    
4,181,744
    
3,714,102
  
Surcharge
    
10,434,063
    
9,323,273
  
Dividends withholding tax
    
3,938,499
    
3,844,276
  
 
    
24,094,685
  
$
22,317,982
  
 
Pursuant to the Provisional Regulation of PRC on Value Added Tax, or VAT, and their implementing rules, all entities and individuals that are engaged in the sale of goods are generally required to pay VAT at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.
 
The Group has its principal operations in the People's Republic of China ("PRC"). Business enterprises are subject to income taxes and value added taxes under PRC tax laws and regulations unless they have exemptions. It has been the belief of the Group's management that its PRC operations were exempted from 1999 to 2004 from income taxes and value added taxes as these operations were considered by the local government as an advanced technology. The Group, however, has never received a written confirmation from the appropriate tax authorities for the tax exemption status of its PRC operations. In January 2006, management of the Group took the initiative to make tax payments to the PRC tax authorities for the calendar year 2005 and subsequent years and accrued for all applicable tax liabilities, plus surcharge, which is calculated as 0.05% per day on the overdue tax liabilities in accordance with PRC tax laws and regulations, for all prior fiscal years were reflected in the Group's financial statements.
 
Provision for the PRC enterprise income tax is calculated at the prevailing rate based on the estimated assessable profits. On March 1, 2007, the Fifth Plenary Session of the Tenth National People's Congress passed the Corporate Income Tax Law of the PRC ("new tax law") which will take effect on January 1, 2008.  As a result of the new tax law, the statutory income tax rate will change from 33% to 25% with effect from January 1, 2008.  The preferential tax rate currently enjoyed by the Company will be gradually transitioned to the new standard rate of 25% over a five-year transitional period.  In addition, article 28 of the new tax law stated that the income tax rate of a "high technology" company will remain at 15%, and such "high technology" company could still enjoy the existing tax holiday.  As most of the subsidiaries operating in the PRC are currently recognized as "high technology" companies under the existing Income Tax Law of the PRC, the management reasonably believed that these subsidiaries can transit this status under the new tax law.
 
Dividends withholding tax in the PRC is charged at a rate of 20% on the dividend payable to the shareholders.
 
11

CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
 
8.
TREASURY STOCK
 
The Group treated common stock repurchased but not yet canceled as treasury stock. Treasury stock is reported in the balance sheets and statements of changes in stockholders’ equity with its par value charged to common stock, and with the excess of the purchase price over par, if any, first charged against any available additional paid-in capital and the balance charged to retained earnings.
 
9.
INCOME TAXES
 
The income (loss) generated in the United States, the British Virgin Islands and the People's Republic of China (“PRC”) before income taxes during the periods as presented in these financial statements is summarized as follows:
 
 
  
Three months ended September 30,
  
Six months ended September 30,
  
 
  
2008
  
2007
  
2008
  
2007
  
Income in the United States before income taxes
  
$
1,760,181
  
$
-
  
$
488,302
  
$
-
  
(Loss)/ Income in the British Virgin Islands before income taxes
    
55,987
    
(271,765
)
  
467,918
    
(501,959
)
Income in the PRC before income taxes
    
3,975,049
    
3,224,587
    
9,450,218
    
8,257,970
  
 
  
$
5,791,217
  
$
2,952,822
  
$
10,406,438
  
$
7,756,011
  
 
Our principal operations are carried out in the PRC.  The Company, which is incorporated in the United States, is subject to U.S. tax law.  Other than legal and professional expenses for the daily operations of the Company, the (loss)/income generated from the United States is the change in the fair value of the embedded derivatives of the 4% Senior Convertible Promissory Note issued on December 11, 2007.

Effective April 1, 2007, the Group adopted the Financial Accounting Standards Board (“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”, (“FIN48”) which clarifies the accounting for uncertainty income taxes recognized in an enterprise’s financial statements. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides accounting guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Group classifies interest and/or penalties related to unrecognized tax benefits as a component of income tax provisions. There is no material impact of FIN 48 on the Group’s consolidated financial statements.

12

CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US Dollars)
 
9.
INCOME TAXES (continued)
 
There is no income tax for companies not carrying out business activities in the British Virgin Islands. Accordingly, the Company’s financial statements do not present any income tax provisions or credits related to the British Virgin Islands tax jurisdiction.

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

   
Three months ended September 30,
  
Six months ended September 30,
  
   
2008
  
2007
  
2008
  
2007
  
                       
Current
  
$
1,319,097
  
$
982,689
  
$
2,697,568
  
$
2,245,645
  
Deferred
    
-
    
-
    
-
    
-
  
 
  
$
1,319,097
  
$
982,689
  
$
2,697,568
  
$
2,245,645
  

The Group has its principal operations in the People’s Republic of China (“PRC”) and is subject to a PRC Enterprise Income Tax rate of 33% in 2007 and 25% in 2008.
 
However, one of the PRC subsidiaries of the Group located in the Shanghai Jinqiao special economic zone (“Jinqiao subsidiary”) is awarded the status of “high technology” enterprise for the year 2007 till 2010.  Hence the Jinqiao subsidiary enjoys a preferential income tax of 15%, which represents a tax concession of 18% and 10% in the year 2007 and 2008.  The benefit of the tax concession on net income per share (diluted) was approximately $0.086 and $0.033 for the six months ended September 30, 2007 and 2008.
 
Another newly set up subsidiary of the Group, which is located in Qingpu (“Qingpu subsidiary”), will have the same business and operation as the Jinqiao subsidiary but with a larger production scale, is believed by the management to be qualified for the application for the status of being a “high technology” enterprise once operation is commenced.  If the “high technology” status is awarded, the Qingpu subsidiary would then be fully exempted from PRC Enterprise Income Tax for two years starting from 2008, followed by 50% tax exemption for the next three years, period from 2010 to 2012. There is no financial effect from the tax holiday as the Qingpu subsidiary did not generate any assessable profit in 2007 and 2008.
 
On March 1, 2007, the Fifth Plenary Session of the Tenth National People's Congress passed a new tax law which took effect on January 1, 2008. As a result of the new tax law, the statutory income tax rate changed from 33% to 25%, effective January 1, 2008. The preferential tax rate currently enjoyed by the Company will gradually transition to the new standard rate of 25% over a five-year transitional period. In addition, article 28 of the new tax law states that the income tax rate of a "high technology" company will remain at 15%, and such "high technology" company may continue to use any existing tax holiday. As the subsidiaries operating in the PRC are currently recognized as "high technology" companies under the existing Income Tax Law of the PRC, the management reasonably believes that these subsidiaries may use this status under the new tax law.
 
The principal reconciling items from income tax computed at the statutory rates and at the effective income tax rates are as follows:

 
  
Three months ended September 30,
  
Six months ended September 30,
  
 
  
2008
  
2007
  
2008
  
2007
  
Computed tax at the local PRC statutory rate (2007:33%, 2008:25%)
  
$
1,901,846
  
$
974,432
  
$
2,601,609
  
$
2,559,484
  
Non-deductible items
    
24,456
    
89,682
    
444,667
    
165,646
  
Non-taxable items
    
1,249,372
 
  
(61,221
)
  
(928,620
)
  
(61,227
)
Effect of different tax rate in other jurisdiction
    
316,832
    
-
   
43,947
    
-
 
Valuation allowance
    
74,575
    
17,704
    
74,575
 
  
26,718
  
Tax concession
    
(299,134
)
  
(556,686
)
  
(626,129
)
  
(1,467,612
)
Surcharge at 0.05% per day on accrued taxes
    
549,894
    
518,785
    
1,087,519
    
1,022,636
  
Total provision for income at effective rate
  
$
1,319,097
  
$
982,689
  
$
2,697,568
  
$
2,245,645
  
 
As at September 30, 2008, one of the Company’s PRC subsidiaries has incurred tax losses which can be carried forward to a maximum of 5 years of approximately US$697,142 (2007: US$215,814).
 
 
Three months ended Sep 30,
  
Six months ended Sep 30,
  
 
2008
  
2007
  
2008
  
2007
  
Deferred tax assets:
                  
Net operating loss carryforward
   $ 74,575   $ 17,704   $ 74,575   $ 26,718  
Less: Valuation allowance
     (74,575 )   (17,704 )   (74,575 )   (26,718 )
                           
Net deferred tax assets
   $ -   $ -   $ -   $ -  
 
Deferred tax assets were primarily raised from the tax losses carry forwards, and a valuation allowance has been established for the entire deferred tax assets, as the management believes that the PRC subsidiary may not be fully utilized the deferred tax assets because of the uncertainly regarding the tax deductibility of expenses incurred.
 
The Group has its principal operations in the People's Republic of China (“PRC”). Business enterprises are subject to income taxes and value added taxes under PRC tax laws and regulations unless they have exemptions. It had been the belief of the Group's management that its PRC operations were exempt from income taxes and value added taxes as these operations were recognized by the local government as an advanced technology enterprise. The Group, however, has never received a written confirmation from the appropriate tax authorities regarding the tax exempt status of its PRC operations. In January 2006, management of the Group's PRC operations took initiative to make tax payments to the PRC tax authorities for the Calendar year 2005, and has made accrual for all applicable tax liabilities, plus surcharge, for all prior Calendar years were reflected in the Group's financial statements.
 
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 overdue tax liabilities. This amounts to $4.9 million (if calculated based on 0.5 times the taxes payable) to $49 million (if calculated based on five times the amount of taxes payable) as of September 30, 2007 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, the Group has reserved for the surcharges payable for this reporting period.  We consider it more likely than not that the associated penalty will not need to be paid.
13
 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amount expressed in US Dollars)
 
10.
COMMITMENTS
 
(a)   Operating Leases
 
The Group leases office space, warehouse facilities and retail shops under non-cancelable operating agreements that expire at various dates from 2008 to 2010. As of the balance sheet dates as presented in these financial statements, the amount of future minimum lease payment under the above-mentioned operating leases were as follows:
 
 
  
September 30,
  
March 31,
  
 
  
2008
  
2008
  
 
  
 
  
 
  
Payable within
          
the next twelve months
  
$
540,118
  
$
556,907
  
the next 13th to 24th months
    
24,132
    
111,670
  
the next 25th to 36th months
    
-
    
-
  
the next 37th to 48th months
    
-
    
-
  
the next 49th to 60th months
    
-
    
-
  
Thereafter
    
-
    
-
  
 
  
$
564,250
  
$
668,577
  
 
(b)   Land lease

On March 21, 2006, the Company's wholly-owned subsidiary, GSL, 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 the Company will construct a plant consisting bulk manufacturing facilities that will have an initial capacity of 150 tons per year of bulk product with room for expansion to 300 tons per year.  This agreement contemplates a one-time leasing fee of $2,100,828.  The leasing fee was later reduced to $1,777,860 because the size of the leased land was reduced to 36,075 square meters.  10% of the leasing fee was due and paid on April 5, 2006 as a deposit.  This deposit is to be refunded upon payment in full of the aggregate lease amount, which is due and payable immediately before the issue of the approval documents for the land lease by the Shanghai Qingpu local government authorities.  There are no future lease payments under the land lease.

(c)   Capital commitments

During the period ended of September 30, 2008, GSL entered into the agreements with the contractors to construct a plant consisting bulk manufacturing facilities in the Shanghai Qingpu Industrial Park District. The amount of future payment is $7,928,369 which was contracted, but not provided for as of September 30, 2008.

14
 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amount expressed in US Dollars)
 
11.
CONVERTIBLE NOTES
 
On December 11, 2007, the Company sold a 4% Senior Convertible Promissory Note in the amount of $25,000,000 (the “Note”) with a maturity date of December 11, 2010 to Pope Investments II LLC, an affiliate of Pope Investments, LLC, in a private placement. In connection with the sale, the Company entered into an Investment Agreement and a Registration Rights Agreement. In addition, Mr. Song Jinan, the Company’s Chief Executive Officer, Chairman, and largest stockholder, entered into a Guaranty Agreement and a Pledge Agreement pursuant to which Mr. Song agreed to guaranty the Company’s obligations under the Note and to secure such guaranty with a pledge of 4,000,000 shares of China-Biotics common stock owned by Mr. Song. The principal amount of the Note is convertible into shares of the Company’s common stock at an exercise price of $12.00 per share at any time until the maturity date subject to adjustment for subdivision or combination of the Company’s common stock and similar events. If the Note is not converted at maturity, the Company will redeem the Note to provide Pope Investments II LLC with a total yield of 10% per annum inclusive of the annual interest. The Note also provides for mandatory conversion into the Company’s common stock if the Group achieves a net income of $60 million in fiscal year 2010. Pope Investments II LLC may declare the outstanding principal amount and any accrued but unpaid interest, calculated at a rate of 10% per annum, to be immediately due and payable upon an event of default, including non-payment of obligations under the Note, bankruptcy or insolvency, or failure to perform any covenant set forth in the Note or Investment Agreement. Pursuant to the Investment Agreement the Company has secured payment of obligations under the Note with a pledge of 100% of the stock of  SGI to Pope Investments II LLC.
 
Net proceeds of the Note are expected to be used to fund the construction of a proposed 150-metric-ton-per-year manufacturing facility and for other capital expenditures.

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

On January 1, 2008, the Company adopted SFAS No.157, “Fair Value Measurements”, (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted the provisions of SFAS 157, except as it applies to those non-financial assets and non-financial liabilities for which the effective date has been delayed by one year.
 
SFAS 157 establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

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

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

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

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

As of June 30, 2008, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis, including its derivative instruments related to its 2007 Notes. The fair value of these assets and liabilities was determined using the following inputs in accordance with SFAS 157 at September 30, 2008:
 
 
Fair Value Measurements as at September 30, 2008
  
 
Balance at
September 30, 2008
  
Quoted Prices in Active Markets
(Level 1)
  
Significant Other Observable Inputs (Level 2)
  
Significant Unobservable Inputs (Level 3)
  
Derivative liability - conversion rights (1)
   $ 5,087,000     $ -     $ -     $ 5,087,000  
 
(1)  
Represents the conversion rights included in the Company’s 2007 Notes. Included in non-current liabilities on the accompanying condensed consolidated balance sheet.

The following table presents a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2008 to September 30, 2008:

   
Derivative Liability - Conversion Rights
  
Balance at January 1, 2008
   $ 9,118,000  
Adjustment to fair value included in earnings (1)
     (4,031,000 )
Balance at September 30, 2008
   $ 5,087,000  

  (1)  
 The derivative conversion option is revalued at the end of each reporting period and the resulting difference is included in the results of operations. For the period ended September 30, 2008, the net adjustment to fair value resulted in a gain of $4.03 million and is included in “Changes in the fair value of embedded derivatives” on the accompanying condensed consolidated statement of operations.
 
15
 
CHINA-BIOTICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amount expressed in US Dollars)
 
The estimated fair value of the embedded derivatives as of March 31, 2008 and September 30, 2008 was $5,752,000 and $5,087,000 respectively. The change in the fair value of the embedded derivatives amounted to $665,000 was charged to the consolidated statement of operations.

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

 
  
March 31, 2008
  
September 30, 2008
  
 
  
   
  
   
  
Risk-free rate of return
    
1.70
%
  
2.29
%
Time to expiration
    
2.66
years 
  
2.17
years 
Volatility rate
    
65
%
  
53
%
Dividend yield
    
-
   
-
 

At as September 30, 2008, the Note interest amounted to $3,325,085 was capitalized under construction in progress.

16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

Overview

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

The products are mainly sold to distributors, which then distribute them to various retail outlets such as drug stores and supermarkets. During the three months and six months ended September 30, 2008, approximately 80% of our sales revenue comprises amounts receivable from the distributors for the sale of these products. Typically, 60 to 90 days' credits are given to the distributors.

We intend to expand our sales to other cities in China through a combination of distributors and our outlets (training and logistics centers). Our management believes that as China becomes more affluent, its citizens are becoming more health conscious. This has led to higher demand for health and functional food such as probiotics and yogurt.
 
In addition, probiotics are increasingly used as additives in the production of infant formula. According to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics will be added to baby milk powders produced in China. Currently, the probiotics used in China for such purposes are imported. To capitalize on what we believe is a significant opportunity in this area, we are constructing a new plant that will enable us to capture the anticipated demand for food additives.
 
In recent months, milk samples (including samples of infant formula) from several Chinese dairy companies, including the three largest producers, were found to have been tainted with melamine, an industrial chemical. In September 2008, China’s State Council, officiated by Premier Wen Jiabao, elected to take steps to conduct comprehensive testing of dairy products and carry out other industry reforms. Although sales of Chinese dairy products have fallen significantly as a result of the melamine scandal, there has not been a significant impact on our business to date as our current sales to the dairy industry are minimal. We believe that the strengthening of product quality and testing standards in the dairy industry are a positive development for domestic suppliers that operate to high international standards. We are engaged in discussion and qualification processes with several large global suppliers of infant formula and dairy products to the China market, and believe that we are well-positioned to benefit as more stringent requirements are implemented in the industry. We are also in discussions with a number of suppliers of bakery, dairy and pharmaceutical products in preparation for the opening of our new plant. Therefore, although the full scope of the melamine problem remains unknown, we do not foresee that it will have a material negative effect on our business and results of operations.

We expect our new plant will commence production in the fourth quarter of calendar year 2008 and start to make contribution to our earnings in fiscal year 2009. The cost of the new plant, which is expected to be approximately $27.5 million for the first phase, will be funded by cash received from the convertible promissory notes issued in December 2007 and internal sources of funds. In this regard, we have leased 36,075 square meters of land in the Shanghai Qingpu Industrial Park District, on which we will construct the new bulk manufacturing facilities. The new plant will have an initial capacity of 150 tons per year with room for expansion to 300 tons per year.
 
17
 
In preparation for the new plant commencing operations later this year, we have been in discussions with a large number of potential customers for our food additive products. As at September 30, 2008, we have already signed up 5 customers for this business. During the last quarter, we have accelerated the pace of customer acquisition efforts. We have created formulations for testing by many potential customers. The need to create a large number of new products for potential customers is pushing the capacity of our current production facility. In this regard, we have been carefully managing the use of our production capacity and selectively increasing the price of our products to make sure that we strike a balance between achieving current and future sales.

In connection with the expansion of our retail business, we originally intended to open 300 outlets by the end of fiscal year 2009. As at September 30, 2008, we have opened 110 outlets in Shanghai and 12 other cities in China (as of September 30, 2007, we had 22 retail outlets in Shanghai and Changchun). In the last two quarters, we have accelerated customer acquisition efforts and dedicated a significant amount of management efforts and production capacity for this purpose. With the limited production capacity that we have in our existing production facility, management believes that it is prudent to slow the pace of opening new retail outlets so that we can focus on completing the new plant on time and signing on customers to take up the capacity of our new plant when it is up and running. We now intend to open 300 outlets during fiscal year 2010.

18

Results of Operations

Quarter Ended September 30, 2007 Compared with the Quarter Ended September 30, 2008

Our net income was $4.47 million in the quarter ended September 30, 2008. This included $1.90 million surplus arising from the revaluation of the conversion feature embedded in the convertible notes issued in December 2007 as required by FAS133. Excluding this revaluation surplus, our net income was $2.57 million, which was 30.5% higher than our net income of $1.97 million for the quarter ended September 30, 2007. The increase of net income before the revaluation surplus, resulted from a combination of volume and price increases. Shining Essence continued to be our best selling product, accounting for 38% of our sales revenue in the quarter ended September 30, 2008 (63% in the quarter ended September 30, 2007).
 
Our results for the three months and six months ended September 30, 2007 and 2008 are summarized below:
 
 
  
Three months ended
September 30, 2008
  
Three months ended
September 30, 2007
  
 
  
Amount
  
% of Net sales
  
Amount
  
% of Net sales
  
Net sales
  
$
11,495,249
    
100.00
%
$
7,820,163
    
100.00
%
Cost of sales
    
(3,462,853
)
  
(30.12
)%
  
(2,205,623
)
  
(28.20
)%
Gross profit
  
$
8,032,396
    
69.88
%
$
5,614,540
    
71.80
%
Operating expenses:
                          
Selling expenses
  
$
(2,813,563
)
  
(24,48
)%
$
(1,561,936
)
  
(19.97
)%
General and administrative expenses
    
(1,438,137
)
  
(12.51
)%
  
(1,087,053
)
  
(13.90
)%
Total operating expenses
  
$
(4,251,700
)
  
(36.99
)%
$
(2,648,989
)
  
(33.87
)%
Income from operations
  
$
3,780,696
    
32.89
%
$
2,965,551
    
37.93
%
Other income and expenses:
                          
Change in the fair value of embedded derivatives
  
$
1,904,000
    
16.56
%
$
-
    
-
%
Other income
    
157,468
   
1.37
%
  
282
    
0
%
Other expenses
    
(50,947
)
  
(0.44
)%
  
(13,011
)
  
(0.17
)%
Total other income (expenses)
  
$
2,010,521
    
17.49
%
$
(12,729
)
  
(0.17
)%
Income before taxes
  
$
5,791,217
    
50.38
%
$
2,952,822
    
37.76
%
Provision for income taxes
    
(1,319,097
)
  
(11.48
)%
  
(982,689
)
  
(12.57
)%
                           
Net income
  
$
4,472,120
    
38.90
%
$
1,970,133
    
25.19
%

 
  
Six months ended
September 30, 2008
  
Six months ended
September 30, 2007
  
 
  
Amount
  
% of Net sales
  
Amount
  
% of Net sales
  
Net sales
  
$
22,865,906
    
100.00
%
$
17,335,496
    
100.00
%
Cost of sales
    
(6,721,522
)
  
(29.40
)%
  
(4,856,595
)
  
(28.02
)%
Gross profit
  
$
16,144,384
    
70.60
%
$
12,478,901
    
71.98
%
Operating expenses:
                          
Selling expenses
  
$
(5,183,422
)
  
(22.67
)%
$
(2,878,280
)
  
(16.60
)%
General and administrative expenses
    
(2,864,933
)
  
(12.53
)%
  
(1,896,617
)
  
(10.94
)%
Total operating expenses
  
$
(8,048,355
)
  
(35.20
)%
$
(4,774,897
)
  
(27.54
)%
Income from operations
  
$
8,096,029
    
35.40
%
$
7,704,004
    
44.44
%
Other income and expenses:
                          
Change in the fair value of embedded derivatives
  
$
665,000
    
2.91
%
$
-
    
-
%
Other income
    
1,862,988
    
8.15
%
  
71,942
    
0.41
%
Other expenses
    
(217,579
)
  
(0.95
)%
  
(19,935
)
  
(0.11
)%
Total other income (expenses)
  
$
2,310,409
    
10.11
%
$
52,007
    
0.30
%
Income before taxes
  
$
10,406,438
    
45.51
%
$
7,756,011
    
44,74
%
Provision for income taxes
    
(2,697,568
)
  
(11.80
)%
  
(2,245,645
)
  
(12.95
)%
                           
Net income
  
$
7,708,870
    
33.71
%
$
5,510,366
    
31.79
%
 
19
 
Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the three months and six months ended September 30, 2007 and 2008 comprised the following:

 
  
Three months ended September 30,
  
Six months ended September 30,
  
 
  
2008
  
 2007
  
2008
  
2007
  
Invoiced value on sales
  
$
11,963,213
  
$
8,235,126
  
$
23,774,115
  
$
17,811,850
  
Less: sales discount
    
(393,086
)
  
(364,820
)
  
(758,576
)
  
(360,820
)
Less : sales tax
    
(74,878
)
  
(50,143
)
  
(149,633
)
  
(111,534
)
 
  
$
11,495,249
  
$
7,820,163
  
$
22,865,906
  
$
17,335,496
  

Net sales of $11,495,249 for the quarter ended September 30, 2008 were 47.0% above the net sales of $7,820,163 for the quarter ended September 30, 2007. Net sales of $22,865,906 for the six months ended September 30, 2008 were 31.9% above the net sales of $17,335,496 for the six months ended September 30, 2007. The increase was mainly because of an increase in overall sales volume arising from new product sales (offsetting decrease in sales volume of existing products) and increases in the sales price of selected products.

The contributions of each product as a percentage of the total value on sales for the three months and six months ended September 30, 2007 and 2008 are summarized below:

 
  
Three months ended September 30,
  
Six months ended September 30,
  
 
  
2008
  
2007
  
2008
  
2007
  
Shining Essence Capsules
    
38.29
%
  
46.96
%
  
38.99
%
  
50.95
%
Shining Signal Capsules
    
9.14
%
  
14.49
%
  
9.74
%
  
14.41
%
Shining Golden Shield Capsules
    
13.60
%
  
14.37
%
  
13.82
%
  
14.16
%
Shining Energy Capsules
    
10.51
%
  
11.82
%
  
11.03
%
  
11.98
%
Shining Essence Stomach Protection Capsules
    
5.96
%
  
6.13
%
  
5.91
%
  
4.86
%
Shining Probiotics Protein Powder
    
3.52
%
  
2.67
%
  
3.66
%
  
1.22
%
Other products
    
6.80
%
  
3.54
%
  
6.35
%
  
2.42
%
     
87.82
%
  
100.00
%
  
89.50
%
  
100.00
%
Bulk additives
    
12.18
%
  
-
%
  
10.50
%
  
-
%
 
    
100.00
%
  
100.00
%
  
100.00
%
  
100.00
%

Certain comparative figures have been reclassified to conform with current year’s presentation.
 
20
 
Unit volume and unit prices comparatives (on the invoiced value of sales) for the three months and six months ended September 30, 2007 and 2008 are summarized below:  

   
 Percentage increase (decrease) from the prior year
  
   
 Three months ended September 30,
  
   
 2008
  
 2007
  
   
 Unit
volume
  
 Selling
prices
  
 Overall
increase /
(decrease)
  
 Unit
volume
  
 Selling
prices
  
 Overall
increase /
(decrease)
  
Shining Essence Capsules
    
8
%
  
(1
)%
  
7
%
  
44
%
  
4
%
  
50
%
Shining Signal Capsules
    
(27
)%
  
14
%
  
(17
)%
  
23
%
  
(16
)%
  
3
%
Shining Golden Shield Capsules
    
21
%
  
3
%
  
24
%
  
109
%
  
(23
)%
  
61
%
Shining Energy Capsules
    
19
%
  
(2
)%
  
17
%
  
63
%
  
(16
)%
  
37
%
Shining Essence Stomach Protection Capsules
    
82
%
  
(30
)%
  
28
%
  
N/A
%
  
N/A
%
  
N/A
%
Shining Probiotics Protein Powder
    
72
%
  
1
%
  
73
%
  
N/A
%
  
N/A
%
  
N/A
%
Other products
    
172
%
  
(7
)%
  
153
%
  
100
%
  
N/A
%
  
100
%
Bulk additives
    
100
%
  
100
%
  
100
%
  
N/A
%
  
N/A
%
  
N/A
%

   
 Percentage increase (decrease) from the prior year
  
   
 Six months ended September 30,
  
   
 2008
  
 2007
  
   
 Unit
volume
  
 Selling
prices
  
 Overall
increase /
(decrease)
  
 Unit
volume
  
 Selling
prices
  
 Overall
increase /
(decrease)
  
Shining Essence Capsules
    
(10
)%
  
3
%
  
(7
)%
  
18
%
  
1
%
  
19
%
Shining Signal Capsules
    
(27
)%
  
11
%
  
(19
)%
  
1
%
  
(10
)%
  
(9
)%
Shining Golden Shield Capsules
    
2
%
  
15
%
  
17
%
  
81
%
  
(6
)%
  
70
%
Shining Energy Capsules
    
-
%
  
11
%
  
11
%
  
56
%
  
(3
)%
  
51
%
Shining Essence Stomach Protection Capsules
    
98
%
  
(26
)%
  
47
%
  
N/A
%
  
N/A
%
  
N/A
%
Shining Probiotics Protein Powder
    
261
%
  
-
%
  
261
%
  
N/A
%
  
N/A
%
  
N/A
%
Other products
    
236
%
  
(6
)%
  
216
%
  
2205
%
  
15
    
2551
%
                                       
Bulk additives
    
100
%
  
100
%
  
100
%
  
N/A
%
  
N/A
%
  
N/A
%

21
 
Cost of sales

Cost of sales for the three months ended September 30, 2008 was $3,462,853 compared with $2,205,623 for the three months ended September 30, 2007. Cost of sales for the six months ended September 30, 2008 was $6,721,522 compared with $4,856,595 for the six months ended September 30, 2007. The increase in cost of sales was primarily because of increases in the cost of packaging materials and the overall sales volume.
 
Unit volume and unit costs comparatives for the three months and six months ended September 30, 2007 and 2008 are summarized below: 

   
 Percentage increase (decrease) from the prior year
  
   
 Three months ended September 30,
  
   
 2008
  
 2007
  
   
 Unit
volume
  
 Unit
costs
  
 Overall
increase /
(decrease)
  
 Unit
volume
  
 Unit
costs
  
 Overall
increase /
(decrease)
  
Shining Essence Capsules
    
8
%
  
19
%
  
28
%
  
44
%
  
4
%
  
50
%
Shining Signal Capsules
    
(27
)%
  
15
%
  
(16
)%
  
23
%
  
(27
)%
  
(10
)%
Shining Golden Shield Capsules
    
21
%
  
(2
)%
  
18
%
  
109
%
  
(40
)%
  
25
%
Shining Energy Capsules
    
19
%
  
13
%
  
34
%
  
63
%
  
(25
)%
  
22
%
Shining Essence Stomach Protection Capsules
    
82
%
  
(35
)%
  
18
%
  
N/A
%
  
N/A
%
  
N/A
%
Shining Probiotics Protein Powder
    
72
%
  
49
%
  
156
%
  
N/A
%
  
N/A
%
  
N/A
%
Other products
    
172
%
  
19
%
  
224
%
  
100
%
  
N/A
%
  
100
%
Bulk additives
    
100
%
  
100
%
  
100
%
  
N/A
%
  
N/A
%
  
N/A
%

   
 Percentage increase (decrease) from the prior year
  
   
 Six months ended September 30,
  
   
 2008
  
 2007
  
   
 Unit
volume
  
 Unit
costs
  
 Overall
increase /
(decrease)
  
 Unit
volume
  
 Unit
costs
  
 Overall
increase /
(decrease)
  
Shining Essence Capsules
    
(10
)%
  
19
%
  
7
%
  
18
%
  
(2
)%
  
15
%
Shining Signal Capsules
    
(27
)%
  
13
%
  
(17
)%
  
1
%
  
(17
)%
  
(16
)%
Shining Golden Shield Capsules
    
2
%
  
5
%
  
7
%
  
81
%
  
(20
)%
  
45
%
Shining Energy Capsules
    
-
%
  
27
%
  
27
%
  
56
%
  
(4
)%
  
50
%
Shining Essence Stomach Protection Capsules
    
98
%
  
(31
)%
  
37
%
  
N/A
%
  
N/A
%
  
N/A
%
Shining Probiotics Protein Powder
    
261
%
  
35
%
  
387
%
  
N/A
%
  
N/A
%
  
N/A
%
Other products
    
236
%
  
3
%
  
246
%
  
2205
%
  
101
%
  
2228
%
Bulk additives
    
100
%
  
100
%
  
100
%
  
N/A
%
  
N/A
%
  
N/A
%

Gross profit

Gross profit for the three months ended September 30, 2008 was $8,032,396 compared with $5,614,540 for the three months ended September 30, 2007.Gross profit for the six months ended September 30, 2008 was $16,144,384 compared with $12,478,901 for the six months ended September 30, 2007. The increase in gross profit was primarily due to an increase in overall sales volume.
 
The average gross profit percentage for all of our products for the three months and six months ended September 30, 2007 and 2008 are summarized below:
 
22

   
Three months ended September 30,
  
Six months ended September 30,
  
   
2008
  
2007
  
2008
  
2007
  
 
  
 
  
  
  
 
  
 
  
Average for all products
    
70
%
  
72
%
  
71
%
  
72
%
 
Gross profit margin slightly decreased from 72% in the quarter ended September 30, 2007 to 70% this quarter as a result of increases in cost of packaging materials and electricity largely offset by increase in sales prices.

Selling expenses

Selling expenses were $2,813,563 or 24.48% of net sales for the three months ended September 30, 2008 compared with $1,561,936 or 19.97% of net sales for the three months ended September 30, 2007. The operating costs of the retail outlets are included as selling expenses. The increase in selling expenses was primarily caused by the roll out of retail outlets. As of September 30, 2008, we had a total of 110 retail outlets in operation compared with 22 outlets as of September 30, 2007.

General and administrative expenses

General and administrative expenses were $1,438,137 or 12.51% of net sales for the three months ended September 30, 2008 compared with $1,087,053 or 13.90% of net sales for the three months ended September 30, 2007. The increase of $351,084 was primarily due to the additional research cost of $272,410 related to the development and launching of new products, and staff and administrative costs incurred in connection with the construction of the new plant. As of September 30, 2008, we had a total of 339 employees, compared with 266 as of September 30, 2007.

Provision for income taxes

Provision for income taxes was $1.32 million and $0.98 million for the quarters ended September 30, 2008 and 2007, respectively. Excluding the $1.90 million surplus on revaluation of the convertible note, income before taxes was $3.89 million for the second quarter of fiscal year 2009 compared with $2.95 million for 2008. The increase in income tax payable is attributable to an increase in operating profit.
  
Segment reporting

We have adopted the “products” approach for segment reporting. For the three and six months ended September 30, 2007 and 2008, we had only one reporting segment--the probiotic products as health supplement. We manufactured and sold the probiotic products solely in China and delivered all shipments to destinations within China, and all of our long-lived assets were physically located in China. We made all sales to external customers.

Liquidity and Capital Resources
 
We had cash of $65.63 million and working capital of $49.25 million as of September 30, 2008. Cash generated from operations was $12.67 million in the six months ended September 30, 2008 and $11.19 million in the six months ended September 30, 2007. The cash generated from operations of $12.67 million was higher than the net income of $7.71 million due to the non-cash surplus of revaluation of convertible notes of $0.66 million and lower working capital needs resulting from better working capital management.

We had capital expenditures totaling $11.66 million in the six months ended September 30, 2008, mainly in connection with the construction of the new plant. We spent $4.0 million on fixed assets in the six months ended September 30, 2007.

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 $45.5 million. Phase 1 of the project involves constructing a facility capable of producing 150 tons of probiotics per annum and is estimated to cost $27.50 million, $25 million of which is expected to be paid in the fourth quarter of calendar year 2008 and the balance by the end of second quarter of calendar year 2009. Subsequent phases of this project will only commence when expected demands for probiotics exceed the production capacity of the Phase 1 facility.

We did not have any changes related to financing activities for the six months ended September 30, 2007 and 2008.
 
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, including payments required in the next twelve months to settle our contractual obligations, for the construction of our new plant and for our opening of new outlets. No assurance, however, can be given that our business plan will succeed. Should we need to raise external financing for whatever reason, 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.
 
23
Inflation

In the fourth quarter of 2008 fiscal year, there had been significant increases in pulp and paper costs. As a result, our cost of production increased which led to a decrease in our gross profit margin in the quarter ended March 31, 2008. There had also been significant increases in steel costs which led to increases in the cost of construction of our new plant. These costs appear to have stabilized.

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

Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Contractual Obligations
 
The following table summarizes our principal contractual obligations and commercial commitments over various future periods as of September 30, 2008.
 
Contractual
  
Payment due by period (as of September 30, 2008)
   
Obligations
   
Total
      
Less than 1 year
      
1-3 years
      
3-5 years
      
More than 5 years
  
Capital Lease Obligations
  
$
7,928,369
 
  
$
7,928,369
 
    
-
      
-
      
-
  
Operating Lease Obligations
  
$
564,250
  
$
540,118
 
    
24,132
      
-
      
-
  
Total
  
$
8,492,619
 
  
$
8,468,487
 
    
24,132
      
-
      
-
  
 
 Research and Development Expenditures

We have a strong research and development team supported by a technical advisory board of experts. In addition to having advanced technology in bacteria culturing and protection, we also conduct research to develop products that address specific health problems using our core technology and Chinese medicine to create genetically engineered drugs and drug delivery solutions and expand our product line. We incurred research and development costs of approximately $765,816 and $493,406 in the three months ended September 30, 2008 and September 30, 2007, respectively.
 
Critical Accounting Policies

Our critical accounting policies are described in the Notes to the Financial Statements included in our Annual Report filed with the SEC on Form 10-KSB for the fiscal year ended March 31, 2008, and this Form 10-Q should be read in conjunction with that Annual Report. This MD&A discusses our consolidated financial statements for the three months and six months ended September 30, 2007 and 2008. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States. In preparing these financial statements, we are required to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We consider accounting policies related to (a) allowance for doubtful accounts, and (b) use of estimates as applied to potential penalties for the late payment of taxes, to be critical accounting policies due to the estimation process involved in each.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical experience and the current and projected financial condition of specific customers. Since our inception of business, we have never experienced any unrecoverable receivables. We have not experienced situations causing us to cast doubt on the ability of our customers to make required payments. The balance of our allowance for doubtful account has always been zero. We had trade receivables totaling $10,447,251 as of September 30, 2008, 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 Form 10-Q and we believe these customers are able to make required payments. We, however, cannot give assurance that these factors, including the financial conditions of these customers, will not change adversely in the future. We will continue to evaluate the ability of all our customers to make required payments. Were the financial condition of a customer to deteriorate, resulting in an impairment of its ability to make payments, allowances may be required.

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

Our principal operations are in the PRC. Business enterprises established in the PRC are subject to income taxes and value added taxes under PRC tax laws and regulations unless they have exemptions. We have made tax payments to the PRC tax authorities since 2005. We believe that our operations in the PRC were exempted from income taxes and value added taxes for all prior years because we had been recognized by the local government as an advanced technology enterprise. However, we have never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in the PRC. As a result, there is no way to ascertain the position which may be taken by the relevant PRC tax authorities in the future. Accordingly, our financial statements contain full provisions for all applicable tax liabilities for all prior calendar years. Such provisions for tax liabilities will be reversed out of the financial statements at the appropriate point in the future.
 
24
 
According to PRC tax regulations, our overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of overdue tax liabilities, which amounts to $4.9 million (if calculated based on 0.5 times of taxes payable) to $49 million (if calculated based on five times of the amount of taxes payable) as of September 30, 2007 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, the Group has reserved for the surcharges payable for this reporting period. We consider it is more likely than not that the associated penalty will not need to be paid.

Recent Accounting Pronouncements

In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” This FSP clarifies the application of SFAS No. 157 in a market for that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective for the Company upon issuance, including prior periods for which financial statements have nt been issued; and, therefore was effective for the Company’s financial statements as of and for the three and six month periods ended September 30, 2008. Adoption of FSP No. FAS 157-3 did not have a significant impact on the Company’s financial position, results of operations or cash flows.
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Management does not anticipate that the provisions of SFAS No. 162 will have an impact on the Company’s consolidated results of operations or consolidated financial position.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities to improve the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for periods beginning after November 15, 2008. SFAS No. 161 is effective for the Company’s fiscal quarter that begins on January 1, 2009. Management is currently evaluating the potential impact, if any, on the Company’s disclosures in its consolidated financial statements.
 
25
 
On February 15, 2007 the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities to elect to measure many financial instruments and certain other items at fair value with changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted. The Company does not anticipate that the adoption of this statement will have a material effect on the Company’s financial condition and result of operations. The Company does not believe that any of the other recently issued and adopted, but yet effective, accounting standards would have a material effect on the accompanying financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to various market risks, including changes in foreign currency exchange rates and fair value. We do not enter into derivatives or other financial instruments for trading or speculative purposes in the normal course of business.

Foreign Currency Exchange Rate Risk
 
Our operations are conducted mainly in the 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.

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 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls over Financial Reporting
 
The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Securities Exchange Act of 1934 that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the Company have been detected.
 
ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

The information set forth in this report should be read in conjunction with the risk factors discussed in Item 1 of our Annual Report on Form 10-KSB for the year ended March 31, 2008, which could materially impact our business, financial condition or future results. The risks described in the Annual Report on Form 10-KSB are not the only risks facing the company. Additional risks and uncertainties not currently known by the company or that are currently deemed to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On September 12, 2008, an Annual Meeting of Stockholders was held.

Proxies for the election of directors were solicited. There was no solicitation in opposition to management’s nominees, and all such nominees were elected. The entire board as previously reported to the SEC was re-elected in its entirety.

There were 17,080,000 shares of common stock eligible to vote at the Annual Meeting, of which 12,164,017 shares were present at the Annual Meeting in person or by proxy, which constituted a quorum. The following is a summary of the results of the voting.
 
26

   
Number of Votes
  
Nominees for 1-year terms
ending in 2009
  
For
  
Against
  
Withheld
  
Abstain
  
Broker
Non-Votes
  
Mr. Song Jinan
    
12,164,017
    
-
    
-
    
-
    
-
  
Dr. Chin Ji Wei
    
12,164,017
    
-
    
-
    
-
    
-
  
Dr. Du Wen Min
    
12,164,017
    
-
    
-
    
-
    
-
  
Mr. Simon Yick
    
12,164,017
    
-
    
-
    
-
    
-
  
                                 
Ratified the appointment of BDO McCabe Lo Limited as independent auditors for the fiscal year ending March 31, 2009
    
12,164,017
    
-
    
-
    
-
    
-
  
ITEM 5. OTHER INFORMATION

None.

27
ITEM 6. EXHIBITS
 
Number
  
Exhibit
3.1
  
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
3.2
  
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to China-Biotics, Inc.’s Form 10-Q filed on November 10, 2008).
     
 10.1
  
Securities Exchange Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
10.2
  
Form of Lockup Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
10.3
  
Put Agreement dated March 22, 20066 (incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
10.4
  
Registration Rights Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.4 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
10.5
  
Investors’ Rights Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
10.6
  
Stan Ford Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.6 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
10.7
  
Summary of English translation of Investment Agreement for lease of land dated March 21, 2006 (incorporated by reference to Exhibit 10.7 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).
     
10.8
  
Escrow Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.8 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).
     
10.9
  
Stock Purchase Agreement with Fred Cooper dated February 6, 2006 (incorporated by reference to Exhibit 10.9 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).
     
10.10
  
Loan agreement dated as of September 22, 2005 (incorporated by reference to Exhibit 10.10 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).
     
10.11
  
Convertible Bond dated as of September 22, 2005 (incorporated by reference to Exhibit 10.11 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).
     
10.12
  
Subscription Agreement dated as of September 22, 2005 (incorporated by reference to Exhibit 10.12 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).
     
10.13
  
English Translation of Equity Transfer Agreement dated August 11, 2005 (incorporated by reference to Exhibit 10.13 to China-Biotics, Inc.’s Amendment No. 2 to Form SB-2 filed on November 13, 2006).
     
10.14
  
English Translation of Subscription Agreement dated August 11, 2005 (incorporated by reference to Exhibit 10.14 to China-Biotics, Inc.’s Amendment No. 2 to Form SB-2 filed on November 13, 2006).
     
10.15
  
Investment Agreement dated December 11, 2007 (incorporated by reference to Exhibit 10.1 to China-Biotics, Inc’s Form 8-K filed on December 12, 2007).
 
10.16
  
Registration Rights Agreement dated December 11, 2007 (incorporation by reference to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K on December 12, 2007).
     
10.17
  
4% Senior Convertible Promissory Note dated December 11, 2007 (incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form 8-K filed on December 12, 2007).
     
10.18
  
Guaranty by Song Jinan in favor of Pope Investments II LLC dated December 11, 2007 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on December 12, 2007).
     
10.19
  
Pledge Agreement between Song Jinan and Pope Investments II LLC dated December 11, 2007 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on December 12, 2007).
     
10.20
  
 Form of Purchase Agreement dated January 21, 2009 (incorporated by reference to Exhibit 10.15 to China-Biotics, Inc.’s Form 10-Q filed on February 13, 2009).
     
14.1
  
Code of Ethics (incorporated by reference to Exhibit 14.1 to China-Biotics, Inc.’s Form 10-KSB for the year ended March 31, 2006).
     
16.1
  
Letter dated April 13, 2006 from Malone & Bailey PC to the United States Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 to China-Biotics, Inc.’s Form 8-K filed on May 31, 2006).
     
21.1
  
List of subsidiaries (incorporated by reference to Exhibit 21.1 to China-Biotics, Inc.’s Form SB-2 filed on March 24, 2006).
 
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31.1
  
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
31.2
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
32.1
  
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
     
32.2
  
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

* Filed herewith
** Furnished herewith
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CHINA-BIOTICS, INC.
 
(Registrant)
   
 
/s/ Song Jinan
Date: March 20, 2009
Song Jinan
 
Chief Executive Officer
 
30