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| CHBT > SEC Filings for CHBT > Form 10-K on 14-Jul-2009 | All Recent SEC Filings |
14-Jul-2009
Annual Report
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 15 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 shareholders' 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.
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 mainly 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 year ended March 31, 2009, over 65% of our sales revenue comprised amounts receivable from the distributors for the sale of these products. Typically, 60 to 90 days' credits are given to the distributors.
Our first product, Shining Essence, which was launched in April 2001, remains our best-selling product. Sales of Shining Essence represented approximately 61%, 48% and 40% of our total sales for the years ended March 31, 2007, 2008 and 2009, respectively. In addition to Shining Essence, we have successfully created other new products, such as Shining Probiotics Protein Powder. As we have released new products, the percentage contribution of Shining Essence to our total sales has decreased.
As our 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 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 products. 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.
• 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. Moreover, the Chinese State Food and Drug Administration has also acknowledged that probiotics are beneficial for human health.
• 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.
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 additive business for functional foods through the completion of our 150-ton capacity plant, which is scheduled to commence trial production within the second quarter of fiscal year 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 $27.5 million, $25 million of which is expected to be paid by the third quarter of calendar year 2009 and the balance by the end of calendar year 2009. Phase 2 of this project will only commence when demand for probiotics has exceeded the production capacity of the Phase 1 facility. Phase 2 of this project is expected to cost $18 million. The construction cost of Phase I of the plant will be 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".
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 106 Shining branded outlets in Shanghai and 12 other major Chinese cities at March 31, 2009. 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 that will have a capacity of 150-300 tons. The initial, 150-ton phase of our new plant is scheduled to commence trial production within the second quarter of fiscal year 2010.
• The development of new products. We have introduced several new products which are sold exclusively in our outlets. 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. The new products will strengthen our product pipeline so that we may offer a wider array of products for sale in the Shining outlets.
Our operation is generally not labor-intensive. We employed 378 people as of March 31, 2009. The construction of our new plant and the creation of the new direct sales network will result in significant increases in our number of employees as we expect our staff and employees will increase to 1,000 staff 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, 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 $3.1 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 $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%
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Net sales
Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the 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
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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
Shining Essence Capsules 39.9 % 48.6 %
Shining Signal Capsules 9.2 % 13.2 %
Shining Golden Shield Capsules 13.3 % 13.1 %
Shining Energy Capsules 10.8 % 11.5 %
Shining Essence Stomach Protection Capsules 6.0 % 4.7 %
Shining Probiotics Protein Powder 5.6 % 3.7 %
Other products 6.9 % 4.2 %
91.7 % 99.0 %
Bulk additives 8.3 % 1.0 %
100.0 % 100.0 %
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Unit volume and unit prices comparatives (on the invoiced value of sales) for 2009 and 2008 are summarized below. The increase in selling prices of Golden Shield and Energy capsules primarily reflect a combination of price increase and changes in sales mix with more sales of packages with higher selling prices.
Percentages increase (decrease) from the prior year
Year ended March 31,
2009 2008
Overall Overall
increase / increase /
Unit volume Selling prices (decrease) Unit volume Selling prices (decrease)
Shining Essence Capsules 1 % 0 % 1 % (5 ) 12 % 6 %
Shining Signal Capsules (25 )% 0 % (17) % (6 )% 2 % (4 )%
Shining Golden Shield (4 )% 15 % 10 % 37 % 34 % 84 %
Capsules
Shining Energy Capsules 8 % 3 % 11 % 45 % 16 % 68 %
Shining Essence Stomach 16 % 23 % 43 % 100 % 100 % 100 %
Protection Capsules
Shining Probiotics Protein 153 % (24) % 92 % 100 % 100 % 100 %
Powder
Other products 80 % 8 % 94 % 685 % (51 )% 285 %
Bulk additives 850 % 0 % 85 % 100 % 100 % 100 %
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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.
Percentages increase (decrease) from the prior year
Year ended March 31,
2009 2008
Overall Overall
increase / increase /
Unit volume Unit costs (decrease) Unit volume Unit costs (decrease)
Shining Essence Capsules 1 % 17 % 18 % (5) % 3 % (2) %
Shining Signal Capsules (25 )% 14 % (14 )% (6 )% (2) % (8) %
Shining Golden Shield (4 )% 11 % 6 % 37 % 17 % 60 %
Capsules
Shining Energy Capsules 8 % 22 % 32 % 45 % 25 % 81 %
Shining Essence Stomach 16 % 12 % 30 % 100 % 100 % 100 %
Protection Capsules
Shining Probiotics Protein 153 % 22 % 209 % 100 % 100 % 100 %
Powder
Other products 80 % 25 % 125 % 685 % 0 % 685 %
Bulk additives 850 % (10 )% 785 % 100 % 100 % 100 %
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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 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 $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 $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 third quarter of calendar year 2009 and the balance by the end of calendar year 2009. Subsequent phases of this project will only commence when demands for probiotics have exceeded the production capacity of the Phase 1 facility.
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
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On December 11, 2007, we issued a 4% Senior Convertible Promissory Note in the amount of $25,000,000 (the "Note") with a maturity date of December 11, 2010. The principal amount of the Note is convertible into shares of our common stock at an exercise price of $12.00 per share at any time until the maturity date. If the Note is not converted at maturity, we will redeem the Note at a price that gives a total yield of 10% per annum inclusive of the annual interest. The Note also provides for mandatory conversion into common stock if the Group achieve a net income of $60 million in fiscal year 2010. Net proceeds of the Note are expected to be used to fund the construction of a proposed 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 . . .
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