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| CHBT > SEC Filings for CHBT > Form 10-Q on 16-Nov-2009 | All Recent SEC Filings |
16-Nov-2009
Quarterly Report
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, 2009, approximately 78% 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 2008, milk samples (including samples of infant formula) from several Chinese dairy companies, including the three largest producers, were found to have been tainted with melamine, an industrial chemical. In September 2008, China's State Council, officiated by Premier Wen Jiabao, elected to take steps to conduct comprehensive testing of dairy products and carry out other industry reforms. Although sales of Chinese dairy products have fallen significantly as a result of the melamine scandal, there has not been a significant impact on our business to date as our current sales to the dairy industry are minimal. We believe that the strengthening of product quality and testing standards in the dairy industry are a positive development for domestic suppliers that operate to high international standards. We are engaged in discussion and qualification processes with several large global suppliers of infant formula and dairy products to the China market, and believe that we are well-positioned to benefit as more stringent requirements are implemented in the industry. We are also in discussions with a number of suppliers of bakery, dairy and pharmaceutical products in preparation for the opening of our new plant. Therefore, although the full scope of the melamine problem remains unknown, we do not foresee that it will have a material negative effect on our business and results of operations.
The Company's construction of its new production facility has been on schedule since the most recent year-end report. The company commenced trial production in October 2009. The trial phase should be completed in approximately three months, before the regular production starts. 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 are constructing 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.
As at September 30, 2009, we have entered into contracts with 20 customers for the food additives business. In this regard, we have created a number of formulations for testing by many potential future customers. We have established an array of business relationships with commercial customers located in Beijing, Qinghai, Shanghai cities, Jiangsu, Jiangxi, Shaanxi, Shandong and Zhejiang provinces. These growing companies are among the leaders in the baked foods, dairy and pharmaceutical industries. The Company's existing manufacturing facility, with current annual manufacturing capacity of 12 metric tons of probiotics for use as bulk additives and capsules, will supply the initial orders for these customers. The need to create a large number of new products for potential customers is pushing the capacity of our current production facility. With the delay in the commissioning of the new plant from our earlier projections, we have been carefully managing the use of our production capacity and selectively increasing the price of our products to make sure that we strike a balance between achieving current and future sales.
As at September 30, 2009, we have opened 107 outlets in Shanghai and 12 other cities in China (as of September 30, 2008, we had 110 retail outlets). During the quarter ended on September 30, 2009, we put emphasis on the development of our new bulk additives line, in preparation for the commencement of the new plant. With the limited production capacity that we have in our existing production facility, management believes that it is prudent to slow the pace of opening new retail outlets so that we can focus on completing the new plant on time and signing on customers to take up the capacity of our new plant when it is up and running.
Results of Operations
Quarter Ended September 30, 2008 Compared with the Quarter Ended September 30, 2009
Our net loss was $3.48 million in the quarter ended September 30, 2009. This included $9.43 million deficit arising from the revaluation of the conversion feature embedded in the convertible notes issued in December 2007 as required by FAS133 (now known as ASC 816). Excluding this revaluation deficit, our net income was $5.95 million, which was 131.52% higher than our net income excluding revaluation surplus of $2.57 million for the quarter ended September 30, 2008. The increase of net income before the revaluation deficit, resulted from a combination of volume and price increases. Shining Essence continued to be our best selling product, accounting for 25.64% of our sales revenue in the quarter ended September 30, 2009 (38% in the quarter ended September 30, 2008).
Our results for the three months and six months ended September 30, 2009 and 2008 are summarized below:
Three months ended Three months ended
September 30, 2009 September 30, 2008
Amount % of Net sales Amount % of Net sales
Net sales $ 17,148,659 100.00 % $ 11,495,249 100.00 %
Cost of sales (4,980,623 ) (29.04 )% (3,462,853 ) (30.12 )%
Gross profit $ 12,168,036 70.96 % $ 8,032,396 69.88 %
Operating expenses:
Selling expenses $ (2,733,234 ) (15.94 )% $ (2,813,563 ) (24,48 )%
General and administrative expenses (1,937,218 ) (11.30 )% (1,438,137 ) (12.51 )%
Other income 32,483 0.19 % 39,859 0.35 %
Total operating expenses $ (4,637,969 ) (27.05 )% $ (4,211,841 ) (36.64 )%
Income from operations $ 7,530,067 43.91 % $ 3,820,555 33.24 %
Other income and expenses:
Change in the fair value of embedded
derivatives $ (9,430,000 ) (54.99 )% $ 1,904,000 16.56 %
Interest income 72,781 0.42 % 66,662 0.58 %
Total other (expenses)/ income $ (9,357,219 ) (54.57 )% $ 1,970,662 17.14 %
(Loss)/ income before taxes $ (1,827,152 ) (10.65 )% $ 5,791,217 50.38 %
Provision for income taxes (1,655,914 ) (9.66 )% (1,319,097 ) (11.48 )%
Net (Loss)/ income $ (3,483,066 ) (20.31 )% $ 4,472,120 38.90 %
Six months ended Six months ended
September 30, 2009 September 30, 2008
Amount % of Net sales Amount % of Net sales
Net sales $ 32,561,121 100.00 % $ 22,865,906 100.00 %
Cost of sales (9,479,296 ) (29.11 )% (6,721,522 ) (29.40 )%
Gross profit $ 23,081,825 70.89 % $ 16,144,384 70.60 %
Operating expenses:
Selling expenses $ (5,080,826 ) (15.60 )% $ (5,183,422 ) (22.67 )%
General and administrative expenses (3,671,883 ) (11.28 )% (2,864,934 ) (12.53 )%
Other income 68,931 0.21 % 1,492,362 6.53 %
Total operating expenses $ (8,683,778 ) (26.67 )% $ (6,555,994 ) (28.67 )%
Income from operations $ 14,398,047 44.22 % $ 9,588,390 41.93 %
Other income and expenses:
Change in the fair value of embedded
derivatives $ (8,916,000 ) (27.38 )% $ 665,000 2.91 %
Interest income 139,869 0.43 % 153,048 0.67 %
Total other (expenses)/ income $ (8,776,131 ) (26.95 )% $ 818,048 3.58 %
Income before taxes $ 5,621,916 17.27 % $ 10,406,438 45.51 %
Provision for income taxes (3,337,233 ) (10.25 )% (2,697,568 ) (11.80 )%
Net income $ 2,284,683 7.02 % $ 7,708,870 33.71 %
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Net sales
Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the three months and six months ended September 30, 2009 and 2008 comprised the following:
Three months ended September 30, Six months ended September 30,
2009 2008 2009 2008
Invoiced value on sales $ 18,208,310 $ 11,963,213 $ 34,672,435 $ 23,774,115
Less: sales discount (940,627 ) (393,086 ) (1,727,696 ) (758,576 )
Less : sales tax (119,024 ) (74,878 ) (383,618 ) (149,633 )
$ 17,148,659 $ 11,495,249 $ 32,561,121 $ 22,865,906
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Net sales of $17,148,659 for the quarter ended September 30, 2009 were 49.18% above the net sales of $11,495,249 for the quarter ended September 30, 2008. The increase was mainly because of an increase in overall sales volume arising from new product sales, particularly, bulk additives (offsetting decrease in sales volume of existing products), and 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, 2009 and 2008 are summarized below:
Three months ended September 30, Six months ended September 30,
2009 2008 2009 2008
Shining Essence Capsules 25.64 % 38.29 % 26,26 % 38.99 %
Shining Signal Capsules 6.29 % 9.14 % 6,73 % 9.74 %
Shining Golden Shield Capsules 9.97 % 13.60 % 11.42 % 13.82 %
Shining Energy Capsules 7.90 % 10.51 % 8.39 % 11.03 %
Shining Essence Stomach Protection Capsules 4.81 % 5.96 % 5.24 % 5.91 %
Shining Probiotics Protein Powder 6.47 % 3.52 % 7.16 % 3.66 %
Other products 6.89 % 6.80 % 6.99 % 6.35 %
67.97 % 87.82 % 72.19 % 89.50 %
Bulk additives 32.03 % 12.18 % 27.81 % 10.50 %
100.00 % 100.00 % 100.00 % 100.00 %
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Certain comparative figures have been reclassified to conform to the current year's presentation.
Unit volume and unit prices comparatives (on the invoiced value of sales) for the three months and six months ended September 30, 2009 and 2008 are summarized below:
Percentage increase (decrease) from the prior year
Three months ended September 30,
2009 2008
Overall Overall
Unit Selling increase / Unit Selling increase /
volume prices (decrease) volume prices (decrease)
Shining Essence
Capsules 5 % (2 )% 3 % 8 % (1 )% 7 %
Shining Signal Capsules 9 % (3 )% 6 % (27 )% 14 % (17 )%
Shining Golden Shield
Capsules 14 % (1 )% 13 % 21 % 3 % 24 %
Shining Energy Capsules 15 % 0 % 15 % 19 % (2 )% 17 %
Shining Essence Stomach
Protection Capsules 10 % 12 % 23 % 82 % (30 )% 28 %
Shining Probiotics
Protein Powder 324 % (33 )% 184 % 72 % 1 % 73 %
Other products 56 % 0 % 56 % 172 % (7 )% 153 %
Bulk additives 25 % 43 % 79 % 100 % 100 % 100 %
Percentage increase (decrease) from the prior year
Six months ended September 30,
2009 2008
Overall Overall
Unit Selling increase / Unit Selling increase /
volume prices (decrease) volume prices (decrease)
Shining Essence
Capsules 1 % (2 )% (1 )% (10 )% 3 % (7 )%
Shining Signal Capsules 1 % 0 % 1 % (27 )% 11 % (19 )%
Shining Golden Shield
Capsules 16 % 4 % 21 % 2 % 15 % 17 %
Shining Energy Capsules 9 % 2 % 11 % - % 11 % 11 %
Shining Essence Stomach
Protection Capsules 13 % 14 % 29 % 98 % (26 )% 47 %
Shining Probiotics
Protein Powder 327 % (33 )% 186 % 261 % - % 261 %
Other products 61 % 0 % 61 % 236 % (6 )% 216 %
Bulk additives 26 % 39 % 75 % 100 % 100 % 100 %
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Cost of sales
Cost of sales for the three months ended September 30, 2009 was $4,980,623 compared with $3,462,853 for the three months ended September 30, 2008. Cost of sales for the six months ended September 30, 2009 was $9,479,296 compared with $6,721,522 for the six months ended September 30, 2008. The increase in cost of sales was primarily because of the overall sales volume increase.
Unit volume and unit costs comparatives for the three months and six months ended September 30, 2009 and 2008 are summarized below:
Percentage increase (decrease) from the prior year
Three months ended September 30,
2009 2008
Overal Overall
Unit Unit increase / Unit Unit increase /
volume costs (decrease) volume costs (decrease)
Shining Essence
Capsules 5 % 0 % 5 % 8 % 19 % 28 %
Shining Signal
Capsules 9 % 3 % 12 % (27 )% 15 % (16 )%
Shining Golden Shield
Capsules 14 % 0 % 14 % 21 % (2 )% 18 %
Shining Energy
Capsules 15 % 0 % 15 % 19 % 13 % 34 %
Shining Essence
Stomach Protection
Capsules 10 % (1 )% 9 % 82 % (35 )% 18 %
Shining Probiotics
Protein Powder 324 % (18 )% 248 % 72 % 49 % 156 %
Other products 56 % 20 % 87 % 172 % 19 % 224 %
Bulk additives 25 % 50 % 87 % 100 % 100 % 100 %
Percentage increase (decrease) from the prior year
Six months ended September 30,
2009 2008
Overall Overall
Unit Unit increase / Unit Unit increase /
volume costs (decrease) volume costs (decrease)
Shining Essence
Capsules 1 % 4 % 5 % (10 )% 19 % 7 %
Shining Signal
Capsules 1 % 5 % 6 % (27 )% 13 % (17 )%
Shining Golden Shield
Capsules 16 % 2 % 18 % 2 % 5 % 7 %
Shining Energy
Capsules 9 % 3 % 12 % - % 27 % 27 %
Shining Essence
Stomach Protection
Capsules 13 % 3 % 16 % 98 % (31 )% 37 %
Shining Probiotics
Protein Powder 327 % (10 )% 284 % 261 % 35 % 387 %
Other products 61 % 29 % 108 % 236 % 3 % 246 %
Bulk additives 26 % 64 % 107 % 100 % 100 % 100 %
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Gross profit
Gross profit for the three months ended September 30, 2009 was $12,168,036 compared with $8,032,396 for the three months ended September 30, 2008. Gross profit for the six months ended September 30, 2009 was $23,081,825 compared with $16,144,384 for the six months ended September 30, 2008. The increase in gross profit was primarily due to an increase in overall sales volume.
The average gross profit percentage for all of our products for the three months and six months ended September 30, 2009 and 2008 are summarized below:
Three months ended September 30, Six months ended September 30, 2009 2008 2009 2008
Average for all products 71 % 70 % 71 % 71 %
Gross profit margin slightly increased from 69.88% in the quarter ended September 30, 2008 to 70.96% this quarter as a result of increase in sales prices. The 70.96% gross profit margin remains solidly above our full year projection of 70%.
Selling expenses
Selling expenses were $2,733,234 or 15.94% of net sales for the three months ended September 30, 2009 compared with $2,813,563 or 24.48% of net sales for the three months ended September 30, 2008. Selling expenses for the six months ended September 30, 2009 were $5,080,826 or 15.60% of net sales compared with $5,183,422 or 22.67% for the six months ended September 30, 2008. The operating costs of the retail outlets are included as selling expenses. With the closing of three retail outlet during the quarter, selling expenses slightly decreased. As of September 30, 2009, we had a total of 107 retail outlets in operation compared with 110 outlets as of September 30, 2008.
General and administrative expenses
General and administrative expenses were $1,937,218 or 11.30% of net sales for the three months ended September 30, 2009 compared with $1,438,137 or 12.51% of net sales for the three months ended September 30, 2008. General and administrative expenses for the six months ended September 30, 2009 were $3,671,883 or 11.28% of net sales compared with $2,864,934 or 12.53% for the six months ended September 30, 2008.The increase of general and administrative expenses was primarily due to the increase of legal and professional fees for preparation of underwritten offering. As of September 30, 2009, we had a total of 415 employees, compared with 339 as of September 30, 2008.
Provision for income taxes
Provision for income taxes was $1.66 million and $1.32 million for the three months ended September 30, 2009 and 2008, respectively. Excluding the $9.43 million deficits on revaluation of the convertible note, income before taxes was $7.60 million for the three months ended September 30, 2009 compared with $3.89 million for the three months ended September 30, 2008. The increase in income tax payable is attributable to an increase in operating profit.
Segment reporting
We have adopted the "products" approach for segment reporting. For the three months and six months ended September 30, 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 . . .
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