UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





þ QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended September 30, 2009





 ̈  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  þ   No 
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes 
 ̈
  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
                  þ (Do not
      check if a smaller
                    reporting
      company)
                  Smaller
      reporting company
                   ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes 
 ̈ No þ





As
of November 16, 2009, 22,370,000 shares of the registrant’s common stock
were outstanding.








TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
                  FINANCIAL
      STATEMENTS
                  
                  
                  1ITEM
      2.
                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                  
                  
                  14ITEM
      3.
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                  
                  
                  25ITEM
      4.
                  CONTROLS
      AND PROCEDURES
                  
                  
                  26PART
      II - OTHER INFORMATIONITEM
      1.
                  LEGAL
      PROCEEDINGS
                  
                  
                  27ITEM
      1A.
                  RISK
      FACTORS
                  
                  
                  27ITEM
      2.
                  UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                  
                  
                  27ITEM
      3.
                  DEFAULTS
      UPON SENIOR SECURITIES
                  
                  
                  27ITEM
      4.
                  SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  
                  
                  27ITEM
      5.
                  OTHER
      INFORMATION
                  
                  
                  27ITEM
      6.
                  EXHIBITS
                  
                  
                  27SIGNATURES
                  
                  
                  30








PART
I - FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts
expressed in US Dollars)




September 30,
                    2009
                  
                  
                  March 31,
                    2009ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  79,444,634
                  
                  
                  $
                  70,824,041Accounts
      receivable
                  
                  
                  17,111,551
                  
                  
                  
                  14,428,382Other
      receivables
                  
                  
                  2,352
                  
                  
                  
                  6,493Inventories
                  
                  
                  912,505
                  
                  
                  
                  563,853Prepayment
                  
                  
                  1,615,913
                  
                  
                  
                  1,547,582Total
      current assets
                  
                  $
                  99,086,955
                  
                  
                  $
                  87,370,351Property,
      plant and equipment and land use right
                  
                  
                  36,994,021
                  
                  
                  
                  33,079,839Deferred
      tax assets
                  
                  
                  488,075
                  
                  
                  
                  354,157Total
      assets
                  
                  $
                  136,569,051
                  
                  
                  $
                  120,804,347LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  3,142,732
                  
                  
                  $
                  2,909,898Tax
      payables
                  
                  
                  27,263,898
                  
                  
                  
                  25,528,447Other
      payables and accruals
                  
                  
                  1,479,406
                  
                  
                  
                  1,517,753Amount
      due to a director
                  
                  
                  2,534,755
                  
                  
                  
                  2,380,007Total
      current liabilities
                  
                  $
                  34,420,791
                  
                  
                  $
                  32,336,105Non-current
      liabilitiesConvertible
      note, net of discount of $4,510,473 and $6,000,054 as of
      September 30, 2009 and March 31, 2009 respectively
                  
                  $
                  20,489,527
                  
                  
                  $
                  18,999,946Embedded
      derivatives
                  
                  
                  11,576,000
                  
                  
                  
                  2,660,000Interest
      payable
                  
                  
                  2,209,460
                  
                  
                  
                  1,411,942Total
      non-current liabilities
                  
                  $
                  34,274,987
                  
                  
                  $
                  23,071,888Commitments and
      contingenciesStockholders’
      equity:Common
      stock (par value of $0.0001, 100,000,000 shares authorized, 41,461,004
      shares issued and 17,080,000 outstanding as of September 30, 2009 and
      March 31, 2009)
                  
                  $
                  4,146
                  
                  
                  $
                  4,146Additional
      paid-in capital
                  
                  
                  7,863,031
                  
                  
                  
                  7,863,031Retained
      earnings
                  
                  
                  52,078,716
                  
                  
                  
                  49,794,033Treasury
      stock at cost (24,381,004 shares)
                  
                  
                  (2,438
                  )
                  
                  
                  (2,438
                  )Accumulated
      other comprehensive income
                  
                  
                  4,904,024
                  
                  
                  
                  4,711,788Capital
      and statutory reserves
                  
                  
                  3,025,794
                  
                  
                  
                  3,025,794Total
      stockholders’ equity
                  
                  $
                  67,873,273
                  
                  
                  $
                  65,396,354Total
      liabilities and stockholders’ equity
                  
                  $
                  136,569,051
                  
                  
                  $
                  120,804,347




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


1





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 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      sales
                  
                  $
                  17,148,659
                  
                  
                  $
                  11,495,249
                  
                  
                  $
                  32,561,121
                  
                  
                  $
                  22,865,906Cost
      of sales
                  
                  
                  (4,980,623
                  )
                  
                  
                  (3,462,853
                  )
                  
                  
                  (9,479,296
                  )
                  
                  
                  (6,721,522
                  )Gross
      profit
                  
                  $
                  12,168,036
                  
                  
                  $
                  8,032,396
                  
                  
                  $
                  23,081,825
                  
                  
                  $
                  16,144,384Operating
      expenses:Selling
      expenses
                  
                  $
                  (2,733,234
                  )
                  
                  $
                  (2,813,563
                  )
                  
                  $
                  (5,080,826
                  )
                  
                  $
                  (5,183,422
                  )General
      and administrative expenses
                  
                  
                  (1,937,218
                  )
                  
                  
                  (1,438,137
                  )
                  
                  
                  (3,671,883
                  )
                  
                  
                  (2,864,933
                  )Other
      income
                  
                  
                  32,483
                  
                  
                  
                  39,859
                  
                  
                  
                  68,931
                  
                  
                  
                  1,492,362Total
      operating expenses
                  
                  $
                  (4,637,969
                  )
                  
                  $
                  (4,211,841
                  )
                  
                  $
                  (8,683,778
                  )
                  
                  $
                  (6,555,994
                  )Income
      from operations
                  
                  $
                  7,530,067
                  
                  
                  $
                  3,820,555
                  
                  
                  $
                  14,398,047
                  
                  
                  $
                  9,588,390Other
      income and expenses:Changes
      in the fair value of embedded derivatives
                  
                  $
                  (9,430,000
                  )
                  
                  $
                  1,904,000
                  
                  
                  $
                  (8,916,000
                  )
                  
                  $
                  665,000Interest
      income
                  
                  
                  72,781
                  
                  
                  
                  66,662
                  
                  
                  
                  139,869
                  
                  
                  
                  153,048Total
      other  (expenses)/ income
                  
                  $
                  (9,357,219
                  )
                  
                  $
                  1,970,662
                  
                  
                  $
                  (8,776,131
                  )
                  
                  $
                  818,048(Loss)/Income
      before taxes
                  
                  $
                  (1,827,152
                  )
                  
                  $
                  5,791,217
                  
                  
                  $
                  5,621,916
                  
                  
                  $
                  10,406,438Provision
      for income taxes
                  
                  
                  (1,655,914
                  )
                  
                  
                  (1,319,097
                  )
                  
                  
                  (3,337,233
                  )
                  
                  
                  (2,697,568
                  )Net
      (loss) / income
                  
                  $
                  (3,483,066
                  )
                  
                  $
                  4,472,120
                  
                  
                  $
                  2,284,683
                  
                  
                  $
                  7,708,870(Loss)/
      earnings per share:Basic
                  
                  $
                  (0.20
                  )
                  
                  $
                  0.26
                  
                  
                  $
                  0.13
                  
                  
                  $
                  0.45Diluted
                  
                  $
                  0.31
                  
                  
                  $
                  0.13
                  
                  
                  $
                  0.58
                  
                  
                  $
                  0.37Weighted
      average shares outstandingBasic
                  
                  
                  17,080,000
                  
                  
                  
                  17,080,000
                  
                  
                  
                  17,080,000
                  
                  
                  
                  17,080,000Diluted
                  
                  
                  19,163,333
                  
                  
                  
                  19,163,333
                  
                  
                  
                  19,163,333
                  
                  
                  
                  19,163,333





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


2





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
                  
                  
                  TotalBalance-March 31, 2009
                  
                  
                  41,461,004
                  
                  
                  
                  4,146
                  
                  
                  
                  7,863,031
                  
                  
                  
                  49,794,033
                  
                  
                  
                  (2,438
                  )
                  
                  
                  4,711,788
                  
                  
                  
                  3,025,794
                  
                  
                  
                  65,396,354Comprehensive
      income:Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,284,683
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,284,683Other
      comprehensive income:Foreign
      currency translation adjustments, net of taxes of $0
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  192,236
                  
                  
                  
                  
                  
                  
                  
                  192,154Total
      comprehensive incomeBalance-
      September 30, 2009
                  
                  
                  41,461,004
                  
                  
                  
                  4,146
                  
                  
                  
                  7,863,031
                  
                  
                  
                  52,078,716
                  
                  
                  
                  (2,438
                  )
                  
                  
                  4,904,024
                  
                  
                  
                  3,025,794
                  
                  
                  
                  67,873,273





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




3




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


(Amounts
expressed in US Dollars)




Six months ended
                    September 30,2009
                  
                  
                  2008CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income
                  
                  $
                  2,284,683
                  
                  
                  $
                  7,708,870Adjustment
      for:Changes
      in the fair value of embedded derivatives
                  
                  
                  8,916,000
                  
                  
                  
                  (665,000
                  )Change
      in deferred tax
                  
                  
                  (133,353
                  )
                  
                  
                  -Depreciation
                  
                  
                  937,500
                  
                  
                  
                  863,740(Increase)/Decrease
      in accounts receivable
                  
                  
                  (2,632,668
                  )
                  
                  
                  3,044,946(Increase)/Decrease
      in inventories
                  
                  
                  (339,362
                  )
                  
                  
                  (344,093
                  )(Increase)/Decrease
      in prepayments
                  
                  
                  (67,851
                  )
                  
                  
                  19,822Increase/(Decrease)
      in accounts payable
                  
                  
                  178,523
                  
                  
                  
                  586,894Increase/(Decrease)
      in other payables and accruals
                  
                  
                  (540,397
                  )
                  
                  
                  682,843Increase/(Decrease)
      in tax payables
                  
                  
                  1,687,907
                  
                  
                  
                  205,230NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                  
                  $
                  10,290,982
                  
                  
                  $
                  12,103,252CASH
      FLOWS USED IN INVESTING ACTIVITIESPurchases
      of fixed assets
                  
                  $
                  (1,987,755
                  )
                  
                  $
                  (11,662,222
                  )NET
      CASH USED IN INVESTING ACTIVITIES
                  
                  $
                  (1,987,755
                  )
                  
                  $
                  (11,662,222
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      advance from a director
                  
                  
                  3,113,900
                  
                  
                  
                  11,661Repayment
      on loan from shareholders
                  
                  
                  (2,999,641
                  )
                  
                  
                  (1,120
                  )NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                  
                  $
                  114,259
                  
                  
                  $
                  10,541Effect
      of exchange rate changes on cash
                  
                  
                  203,107
                  
                  
                  
                  871,476NET
      INCREASE IN CASH AND CASH EQUIVALENTS BALANCES
                  
                  $
                  8,620,593
                  
                  
                  $
                  1,323,047CASH
      AND CASH EQUIVALENTS BALANCES AT BEGINNING OF PERIOD
                  
                  
                  70,824,041
                  
                  
                  
                  64,310,448CASH
      AND CASH EQUIVALENTS BALANCES AT END OF PERIOD
                  
                  $
                  79,444,634
                  
                  
                  $
                  65,633,495Supplemental
      disclosure cash flow information:Interest
      paid
                  
                  
                  755,833
                  
                  
                  
                  556,164Income
      tax paid
                  
                  
                  2,204,523
                  
                  
                  
                  1,448,019




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




4




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





1.          BASIS OF PRESENTATION AND PRINCIPALS 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 the interim periods reported. Such adjustments are of a
normal, recurring nature. Our operating results for the three and six months
ended September 30, 2009 are not necessarily indicative of the results that may
be expected for the year ending March 31, 2010.





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-K for the year
ended March 31, 2009. There have been no material changes in the
significant accounting policies followed by us during the three and six months
ended September 30, 2009.




Recent
Accounting Pronouncements
 
 In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value”, which is codified as ASC 820, “Fair Value
Measurements and Disclosures”. This Update provides amendments to ASC 820-10,
Fair Value Measurements and Disclosures –Overall, for the fair value measurement
of liabilities. This Update provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using a
valuation technique that uses the quoted price of the identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
when traded as assets, or that is consistent with the principles of ASC 820. The
amendments in this Update also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents transfer of the liability. The amendments in this Update also clarify
that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
assets are required are Level 1 fair value measurements. The guidance provided
in this Update is effective for the first reporting period (including interim
periods) beginning after issuance. The adoption of this Update did not have a
significant impact to the Company’s financial statements.
 
 In June
2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards
Codification’ and the Hierarchy of Generally Accepted Accounting Principles”,
which is codified as ASC 105 (“ASC 105”) ASC 105 establishes the “FASB
Accounting Standards Codification” (“Codification”),
which officially launched July 1, 2009, to become the source of authoritative
U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities
laws are also sources of authoritative U.S. GAAP for SEC registrants. The
subsequent issuances of new standards will be in the form of Accounting
Standards Updates that will be included in the Codification. Generally, the
Codification is not expected to change U.S. GAAP. All other accounting
literature excluded from the Codification will be considered
nonauthoritative.  ASC 105 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company has adopted ASC 105 for the quarter ending September 30, 2009. The
adoption of this Statement will not impact the results of operations or
financial position, as it only required disclosures. Beginning with this
Quarterly Report on Form 10-Q for September 30, 2009 and in all filings
thereafter, references to Financial Accounting Standards that have been codified
in the FASB Accounting Standards Codification have been replaced with references
to the appropriate guidance in the Codification.




In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No.
46(R)(“FAS167”)(ASC 810). FAS 167 amends the consolidated guidance
for  variable interest entities (“VIE”) by requiring an on-going
qualitative assessment of which entity has the power to direct matters that most
significantly impact the activities of a VIE and has the obligation to absorb
losses or benefits that could be potentially significant to the VIE. FAS 167 is
effective for the Company beginning in 2010.  Management does not
anticipate that the provisions of SFAS No. 167 will have an impact on the
Company’s consolidated results of operations or consolidated financial
position.
 
 In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140 (SFAS No. 166”). This standard has
not yet been codified in the FASB Accounting Standards Codification. SFAS No.
166 seeks to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets.
SFAS No. 166 is applicable for annual periods after November 15, 2009 and
interim periods therein and thereafter. The Company is currently evaluating the
effect, if any, the adoption of SFAS No. 166 will have on its results of
operations, financial position or cash flows.
 
 In May
2009, the FASB issued ASC 855-10, Subsequent Events (“ASC 855-10”). ASC 855-10
provides general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. ASC 855-10 is applicable for interim or annual periods
after June 15, 2009.  The Company adopted this amended topic effective
July 1, 2009.




2.          (LOSS)/ EARNINGS PER
SHARE





Basic
earnings per share is computed in accordance with SFAS No.128 (now known as ASC
260), “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.





5




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





The
following table sets forth the computation of basic and diluted earnings per
share:





Three months ended
                      September 30,
                    
                    
                    Six months ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(Loss)/
      earnings per share - Basic(Loss)/
      income for the period
                    
                    $
                    (3,483,066
                    )
                    
                    $
                    4,472,120
                    
                    
                    $
                    2,284,683
                    
                    
                    $
                    7,708,870Basic
      average common stock outstanding
                    
                    
                    17,080,000
                    
                    
                    
                    17,080,000
                    
                    
                    
                    17,080,000
                    
                    
                    
                    17,080,000Net
      (loss)/earnings per share
                    
                    $
                    (0.20
                    )
                    
                    $
                    0.26
                    
                    
                    $
                    0.13
                    
                    
                    $
                    0.45(Loss)/
      Earnings per share - Diluted(Loss)/income
      for the period
                    
                    $
                    (3,483,066
                    )
                    
                    $
                    4,472,120
                    
                    
                    $
                    2,284,683
                    
                    
                    $
                    7,708,870Change
      in fair value of embedded derivatives
                    
                    
                    9,430,000
                    
                    
                    
                    (1,904,000
                    )
                    
                    
                    8,916,000
                    
                    
                    
                    (665,000
                    )$
                    5,946,934
                    
                    
                    $
                    2,568,120
                    
                    
                    $
                    11,200,683
                    
                    
                    $
                    7,043,870Basic
      average common stock outstanding
                    
                    
                    17,080,000
                    
                    
                    
                    17,080,000
                    
                    
                    
                    17,080,000
                    
                    
                    
                    17,080,000Diluted
      effect from embedded derivatives
                    
                    
                    2,083,333
                    
                    
                    
                    2,083,333
                    
                    
                    
                    2,083,333
                    
                    
                    
                    2,083,333Diluted
      average common stock
                    
                    
                    19,163,333
                    
                    
                    
                    19,163,333
                    
                    
                    
                    19,163,333
                    
                    
                    
                    19,163,333Net
      earnings per share
                    
                    $
                    0.31
                    
                    
                    $
                    0.13
                    
                    
                    $
                    0.58
                    
                    
                    $
                    0.37




3.          RISKS, UNCERTAINTIES, AND
CONCENTRATIONS





(a)           Nature
of Operations





Substantially
all of the Group’s operations are conducted in the People’s Republic of China
(“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, 2009 and March 31, 2009, the Group had cash deposits of $73.67
million out of $79.44 million and $61.3 million out of $70.8 million
respectively placed in one bank in the PRC where there are currently no rules or
regulations in place for obligatory insurance of bank accounts.





For the
three months and six months ended September 30, 2009 and 2008, all of the
Group’s sales arose in the PRC. In addition, all accounts receivable as at
September 30, 2009 also arose in the PRC.





(c)           Concentration
of Customers





A
substantial percentage of the Group's sales are made to a small number of
customers. During the three months ended September 30, 2009 and 2008, the
following customers accounted for more than 10% of total gross
sales:





Percentage of Gross Sales
                          Three Months ended
                          September 30,
                        
                        
                        Percentage of
                          Accounts Receivable
                          as at September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Customer
      A
                        
                        
                        18
                        %
                        
                        
                        -
                        
                        
                        
                        23
                        %
                        
                        
                        -Customer
      B
                        
                        
                        
                        *
                        
                        
                        12
                        %
                        
                        
                        
                        *
                        
                        
                        
                        *


* less
than 10%





4.          ACCOUNTS RECEIVABLE





The
Group’s accounts receivable as of the balance sheet date as presented in these
financial statements are summarized as follows:





6




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





September 30,
                    2009
                  
                  March 31,
                    2009Trade
      receivables
                  
                  $
                  17,111,551
                  
                  
                  $
                  14,428,382Less
      : Allowances for doubtful debt
                  
                  
                  -
                  
                  
                  
                  -$
                  17,111,551
                  
                  
                  $
                  14,428,382





5.          INVENTORIES





The
Group’s inventories as of the balance sheet date as presented in these financial
statements are summarized as follows:





September 30,
                    2009
                  
                  
                  March 31,
                    2009Raw
      materials
                  
                  $
                  434,525
                  
                  
                  $
                  343,011Work-in-progress
                  
                  
                  118,772
                  
                  
                  
                  143,966Finished
      goods
                  
                  
                  359,208
                  
                  
                  
                  76,876$
                  912,505
                  
                  
                  $
                  563,853





7




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,
                    2009
                  
                  
                  March 31,
                    2009Land
      use right
                  
                  $
                  1,881,207
                  
                  
                  $
                  1,878,643Plant
      and machinery
                  
                  
                  7,521,659
                  
                  
                  
                  7,510,635Office
      equipment
                  
                  
                  3,574,890
                  
                  
                  
                  3,565,390Motor
      vehicles
                  
                  
                  246,325
                  
                  
                  
                  245,989Leasehold
      improvements
                  
                  
                  2,890,145
                  
                  
                  
                  2,422,57516,114,226
                  
                  
                  
                  15,623,232Less:
      Accumulated depreciation
                  
                  $
                  (7,415,801
                  )
                  
                  $
                  (6,460,354
                  )8,698,425
                  
                  
                  
                  9,162,878Construction
      in progress
                  
                  $
                  28,295,596
                  
                  
                  $
                  23,916,961$
                  36,994,021
                  
                  
                  $
                  33,079,839




Depreciation
and amortization expenses were $491,655 and $564,677 for three
months ended September 30, 2009 and 2008 respectively, and $947,248
and $867,498 for six months ended September 30, 2009 and 2008
respectively.




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,
                    2009
                  
                  
                  March 31, 2009Value
      added tax and other taxes
                  
                  $
                  6,384,641
                  
                  
                  $
                  5,949,853Income
      tax
                  
                  
                  4,312,368
                  
                  
                  
                  4,120,961Surcharge
                  
                  
                  12,617,623
                  
                  
                  
                  11,513,750Dividends
      withholding tax
                  
                  
                  3,949,266
                  
                  
                  
                  3,943,883$
                  27,263,898
                  
                  
                  $
                  25,528,447


8




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





The
income/(loss) generated in the United States, the British Virgin Islands and the
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 30,2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008(Loss)/income
      in the United States before income taxes
                              
                              $
                              (9,847,483
                              )
                              
                              $
                              1,760,181
                              
                              
                              $
                              (9,791,475
                              )
                              
                              $
                              488,302Income/
      (loss) in the British Virgin Islands before income taxes
                              
                              
                              1,113
                              
                              
                              
                              55,987
                              
                              
                              
                              (11,868
                              )
                              
                              
                              467,918Income
      in the PRC before income taxes
                              
                              
                              8,019,218
                              
                              
                              
                              3,975,049
                              
                              
                              
                              15,425,259
                              
                              
                              
                              9,450,218$
                              (1,827,152
                              )
                              
                              $
                              5,791,217
                              
                              
                              $
                              5,621,916
                              
                              
                              $
                              10,406,438




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 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.





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 30,2009
                    
                    2008
                    
                    2009
                    
                    2008Current
                    
                    $
                    1,789,267
                    
                    
                    $
                    1,319,097
                    
                    
                    $
                    3,470,586
                    
                    
                    $
                    2,697,568Deferred
                    
                    
                    (133,353
                    )
                    
                    
                    -
                    
                    
                    
                    (133,353
                    )
                    
                    
                    -$
                    1,655,914
                    
                    
                    $
                    1,319,097
                    
                    
                    $
                    3,337,233
                    
                    
                    $
                    2,697,568





The Group
has its principal operations in the PRC and is subject to a PRC Enterprise
Income Tax rate of 25% in calendar years 2009 and 2008.





However,
Shining, one of the PRC subsidiaries of the Group located in the Shanghai
Jinqiao special economic zone, is awarded the status of “high technology”
enterprise for the calendar year 2007 till 2011. Hence Shining enjoys a
preferential income tax of 15%, which represents a tax concession of 10% in the
year 2009 and 2008.





9





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





Another
newly set up PRC subsidiary of the Group, GBS, is located in Qingpu, will have
the same business and operation as Shining 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, GBS would then be fully exempted from PRC
Enterprise Income Tax for two years starting from calendar year 2008, followed
by 50% tax exemption for the next three calendar years, period from 2010 to
2012. There is no financial effect from the tax holiday as GBS did not generate
any assessable profit in 2009 and 2008.





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 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Computed
      tax at the local PRC statutory rate (25%)
                    
                    $
                    (456,788
                    )
                    
                    $
                    1,447,804
                    
                    
                    $
                    1,405,479
                    
                    
                    $
                    2,601,609Non-deductible
      items
                    
                    
                    3,353,026
                    
                    
                    
                    12,228
                    
                    
                    
                    3,512,869
                    
                    
                    
                    444,667Non-taxable
      items
                    
                    
                    (5,751
                    )
                    
                    
                    (624,686
                    )
                    
                    
                    (180,810
                    )
                    
                    
                    (727,669
                    )Effect
      of different tax rate in other jurisdiction
                    
                    
                    (886,274
                    )
                    
                    
                    158,416
                    
                    
                    
                    (881,233
                    )
                    
                    
                    43,947Valuation
      allowance
                    
                    
                    (66,546
                    )
                    
                    
                    74,575
                    
                    
                    
                    (1,226
                    )
                    
                    
                    (126,376
                    )Tax
      concession
                    
                    
                    (828,644
                    )
                    
                    
                    (299,134
                    )
                    
                    
                    (1,595,377
                    )
                    
                    
                    (626,129
                    )Surcharge
      at 0.05% per day on accrued taxes
                    
                    
                    546,891
                    
                    
                    
                    549,894
                    
                    
                    
                    1,077,531
                    
                    
                    
                    1,087,519Total
      provision for income at effective rate
                    
                    $
                    1,655,914
                    
                    
                    $
                    1,319,097
                    
                    
                    $
                    3,337,233
                    
                    
                    $
                    2,697,568




Deferred
tax assets were primarily raised from the tax losses carry forwards. As at
September 30, 2009, 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$1,952,300 (September 30, 2008: US$697,147).





10





CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





8.          COMMITMENTS





(a)  
Operating Leases





The Group
leases office space, warehouse facilities and retail outlets under various
operating leases, certain of which contain escalation clauses. Rental expenses
under operating leases included in the statement of income were $967,516 and
$1,225,432 for the quarters ended September 30, 2009 and 2008,
respectively.




At
September 30, 2009, the Group was obligated under operating leases requiring
minimum rental as follows:




September 30,
                    2009Payable
      within1
      year
                  
                  $
                  390,0502
      to 5 years
                  
                  
                  78,258Thereafter
                  
                  
                  -$
                  468,308





(b)  
Capital commitments





During
the period ended September 30, 2009, 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
$4,012,378 which was contracted, but not provided for as of September 30,
2009.





(c)
Purchase obligations





During
the period ended September 30, 2009, Shining entered into the agreements with
the suppliers to purchase raw materials and packing materials. The amount of
future payment is $14,286,905 which was contracted, but not provided for as of
September 30, 2009.





(d) Other
obligations





During
the period ended September 30, 2009, Shining entered into an agreement with an
university to perform research and development. The amount of future payment is
$938,880 which was contracted, but not provided for as of September 30,
2009.





9.          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.





11




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





Net
proceeds of the Note are being used to fund the construction of a
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 April
1, 2008, the Company adopted SFAS No.157, “Fair Value Measurements” (now known
as ASC 820), (“ASC 820”) which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. ASC 820 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. On July
1, 2009, the Company implemented the previously-deferred provisions of ASC 820
for nonfinancial assets and liabilities recorded at fair value as required. The
implementation did not have a material effect on the Company’s consolidated
financial position or results of operations.





ASC 820
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
September 30, 2009, 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 the embedded
derivatives was determined using the following inputs in accordance with ASC 820
at September 30, 2009:




Fair Value MeasurementsBalance
                    
                    
                    Quoted
                      Prices in
                      Active
                      Markets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)Embedded
      derivatives - conversion rightAs
      at September 30, 2009
                    
                    $
                    11,576,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    11,576,000As
      at March 31, 2009
                    
                    $
                    2,660,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,660,000





12




CHINA-BIOTICS,
INC. AND SUBSIDIARIES


NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
expressed in US Dollars)





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 March 31, 2009 to September 30, 2009:





Derivative Liability -
                    Conversion Rights2009
                  
                  
                  2008Balance
      at March 31
                  
                  $
                  2,660,000
                  
                  
                  $
                  5,752,000Adjustment
      to fair value included in earnings
                  
                  
                  8,916,000
                  
                  
                  
                  (665,000
                  )Balance
      at September 30
                  
                  $
                  11,576,000
                  
                  
                  $
                  5,087,000





The
embedded derivatives are revalued at the end of each reporting period and the
resulting difference is included in the results of operations. The estimated
fair value of the embedded derivatives as of September 30, 2009 and
March 31, 2009 was $11,576,000 and $2,660,000, respectively. The change in
the fair value of the embedded derivatives amounted to $9,430,000 for the
quarter ended September 30, 2009 and $3,092,000 for the year ended March 31,
2009 were charged to the consolidated statement of operation.





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





September 30,
                    2009
                  
                  
                  March 31,
                    2009Risk-free
      rate of return
                  
                  
                  0.40
                  %
                  
                  
                  0.54
                  %Time
      to expiration
                  
                  1.20 years
                  
                  
                  1.67 yearsVolatility
      rate
                  
                  
                  88.38
                  %
                  
                  
                  69.08
                  %Dividend
      yield
                  
                  
                  -
                  
                  
                  
                  -





As at
September 30, 2009 and March 31, 2009, the Note interest amounting to
$4,017,678 and $2,718,791 was capitalized under construction in
progress.




The
capitalized debt discount under construction in progress was $4,607,527 and
$3,117,946 as at September 30, 2009 and March 31, 2009
respectively.





10.        SUBSEQUENT EVENT








On October 5, 2009, the Company closed
an underwritten public offering of 4,600,000 shares of its common stock at a price of
$15.00 per share. On October, 26, 2009, an additional 690,000 shares were sold
pursuant to the exercise of an over-allotment option at the same price. Net
proceeds of the offering, including the over-allotment, afterdeducting underwriting discounts, but
excluding estimated offering expenses, were approximately $75.4million. The Company expects to use
the net proceeds from the offering for general corporate purposes, including
expanding its retail operations, expandingits products, acquiring additional
retail outlets and for generalworking capital purposes.




The
offering was made pursuant to an underwriting agreement, dated September 29,
2009, by and between the Company and Roth Capital Partners, LLC, as sole manager
and representative of the underwriters named therein. The offering of the Shares
was registered under the Securities Act of 1933, as amended, pursuant to the
Company’s shelf registration statement on Form S-3, as amended by Amendment No.
1 and Amendment No. 2 to Form S-3 (File No. 333-160519).









13





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, 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.





14





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.





15




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
                      September 30, 2009
                    
                    
                    Three months ended
                      September 30, 2008Amount
                    
                    
                    % of Net sales
                    
                    
                    Amount
                    
                    
                    % of Net salesNet
      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
                                                                                September 30, 2009
                                                                              
                                                                              
                                                                              Six months ended
                                                                                September 30, 2008Amount
                                                                              
                                                                              
                                                                              % of Net sales
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              % of Net salesNet
      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
                                                                              %




16





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
                  
                  
                  2008Invoiced
      value on sales
                  
                  $
                  18,208,310
                  
                  
                  $
                  11,963,213
                  
                  
                  $
                  34,672,435
                  
                  
                  $
                  23,774,115Less:
      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





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
                      
                      
                      2008Shining
      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
                      %





Certain
comparative figures have been reclassified to conform to the current year’s
presentation.





17




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 yearThree months ended September 30,2009
                      
                      
                      2008Unit
                        volume
                      
                      
                      Selling
                        prices
                      
                      
                      Overall
                        increase /
                        (decrease)
                      
                      
                      Unit
                        volume
                      
                      
                      Selling
                        prices
                      
                      
                      Overall
                        increase /
                        (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 yearSix months ended September 30,2009
                      
                      
                      2008Unit
                        volume
                      
                      
                      Selling
                        prices
                      
                      
                      Overall
                        increase /
                        (decrease)
                      
                      
                      Unit
                        volume
                      
                      
                      Selling
                        prices
                      
                      
                      Overall
                        increase /
                        (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
                      %





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:





18








Percentage increase (decrease) from the prior yearThree months ended September 30,2009
                                                          
                                                          
                                                          2008Unit
                                                            volume
                                                          
                                                          
                                                          Unit
                                                            costs
                                                          
                                                          
                                                          Overal
                                                            increase /
                                                            (decrease)
                                                          
                                                          
                                                          Unit
                                                            volume
                                                          
                                                          
                                                          Unit
                                                            costs
                                                          
                                                          
                                                          Overall
                                                            increase /
                                                            (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 yearSix months ended September 30,2009
                    
                    
                    2008Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (decrease)
                    
                    
                    Unit
                      volume
                    
                    
                    Unit
                      costs
                    
                    
                    Overall
                      increase /
                      (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
                    %




19





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
                          
                          
                          2008Average
      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.




20





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
located in China. We made all sales to external customers.





Liquidity
and Capital Resources





We had
cash of $79.44 million and working capital of $64.67 million as of
September 30, 2009. Cash generated from operations was $10.29 million in the six
months ended September 30, 2009 and $12.10 million in the six months
ended September 30, 2008.





We had
capital expenditures totaling $1.99 million in the six months ended September
30, 2009, mainly in connection with the construction of the new plant. We spent
$11.66 million on fixed assets in the six months ended September 30,
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
are constructing 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 by the end of calendar year 2009 and the
balance by the end of first quarter of calendar year 2010. The second phase of
this project will commence by the end of the calendar year.





We did
not have any changes related to financing activities for the six months ended
September 30, 2009. 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 being used to fund the construction of a
proposed 150-metric-ton-per-year manufacturing facility and for other capital
expenditures.





On October 5, 2009, the Company closed
an underwritten public offering of 4,600,000 shares of its common stock at a
price of $15.00 per share.
On October, 26, 2009, an additional 690,000 shares were sold pursuant to the
exercise of an over-allotment option at the same price. Net proceeds of the
offering, including the over-allotment, after deducting underwriting discounts,
but excluding estimated offering expenses, were
approximately $75.4million. The Company expects to use
the net proceeds from the offering for general corporate purposes, including
expanding its retail operations, expanding its products, acquiring additional
retailoutlets and for
generalworking capital
purposes.




The
offering was made pursuant to an underwriting agreement, dated September 29,
2009, by and between the Company and Roth Capital Partners, LLC, as sole manager
and representative of the underwriters named therein. The offering of the Shares
was registered under the Securities Act of 1933, as amended, pursuant to the
Company’s shelf registration statement on Form S-3, as amended by Amendment No.
1 and Amendment No. 2 to Form S-3 (File No. 333-160519).





21





Inflation





During
the quarter ended September 30, 2009, there were small increases in pulp and
paper costs. However, overall we believe that inflation did not have a
significant impact on our results of operations for the quarter.





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,
2009.





Contractual
                  Obligations
                
                Total
                
                
                Less than 1 year
                
                
                1-3 years
                
                
                3-5 years
                
                
                More than 5 yearsCapital
      Lease Obligations(1)
                
                $
                4,012,378
                
                
                $
                4,012,378
                
                
                
                -
                
                
                
                -
                
                
                
                -Operating
      Lease Obligations(1)
                
                $
                468,308
                
                
                $
                390,050
                
                
                
                78,258
                
                
                
                -
                
                
                
                -Purchase
      Obligations(2)
                
                $
                14,286,905
                
                
                $
                14,286,905
                
                
                
                -
                
                
                
                -
                
                
                
                -Long-term
      loan(3)
                
                $
                25,000,000
                
                
                
                -
                
                
                $
                25,000,000
                
                
                
                -
                
                
                
                -Others
                
                $
                938,880
                
                
                $
                616,140
                
                
                $
                322,740
                
                
                
                -
                
                
                
                -Total
                
                $
                44,706,471
                
                
                $
                19,305,473
                
                
                $
                25,400,998
                
                
                
                -
                
                
                
                -




(1) See
Note 8 to our consolidated financial statements in this Quarterly
Report.


(2)
Estimated contractual purchases with suppliers as of September 30,
2009.


(3) See
Note 9 to our consolidated financial statements in this Quarterly
Report.




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 $713,940 and
$765,816  in the three months ended September 30, 2009 and
September 30, 2008, 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-K for the
fiscal year ended March 31, 2009, 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,
2009 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.


22





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 $17,111,551 as of September 30, 2009, and a zero balance
for allowance for doubtful accounts. We have considered all relevant factors,
including the financial conditions, affecting the payment abilities of customers
comprising these receivables up to the date of this 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.





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,
2008 and 2009. The Group has reserved for the payment of taxes that may be owed
for calendar years prior to 2005 and any associated interest surcharges (which
are calculated at 0.05% per day on the accrued tax liabilities) in its financial
statements until the matter is fully resolved. Following the adoption of FIN48
(now known as ASC 740), the Group has reserved for the surcharges payable for
this reporting period. We consider it is more likely than not that the
associated penalty will not need to be paid.




Embedded
derivatives




On
December 11, 2007, the Company issued a 4% Senior Convertible Promissory Note in
an amount of $25,000,000 (the “Note”) which is due on December 11, 2010.
Pursuant to SFAS No. 133 (now known as ASC 816) “Accounting For Derivatives
Instruments And Hedging Activities” and EITF Issue No. 00-19 (now known as ASC
815) “Accounting For Derivatives Financial Instruments Indexed To And
Potentially Settled In A Company’s Own Stock”, the Company bifurcates the
conversion options with a mandatory conversion feature (“embedded derivatives”)
from the Note as the embedded derivatives are determined to be not clearly and
closely related to the host contract. The embedded derivatives are recorded at
fair value, mark-to-market at each reporting period, and are carried on a
separate line in the balance sheet.




23





Recent
Accounting Pronouncements
  See Note
1 of the September 30, 2009 Interim Financial Statements. Other new
pronouncements issued but not yet effective until after September 30, 2009 are
not expected to have a significant effect on the Company’s consolidated
financial position or results of operations.
  24




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 PRC. 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.





25





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 4.   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.





26





PART
II - OTHER INFORMATION





ITEM 1.   LEGAL PROCEEDINGS





None.





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-K for the year ended
March 31, 2009, which could materially impact our business, financial
condition or future results. The risks described in the Annual Report on Form
10-K 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





None.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





None.





ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS





None.





ITEM 5.   OTHER INFORMATION





None.





ITEM 6.   EXHIBITS




Number
              
              Exhibit3.1
              
              Amended
      and Restated Certificate of Incorporation (incorporated by reference to
      Exhibit 3.1 to China-Biotics, Inc.’s Form 8-K filed on March 23,
      2006).3.2
              
              Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
      China-Biotics, Inc.’s Form 8-K filed on March 23, 2006) as amended by the
      Amendment to the Amended and Restated Bylaws (incorporated by reference to
      Exhibit 3.2 to China-Biotics, Inc.’s Form 10-Q filed on November 10,
      2008).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, 2006 (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).





27





Number
              
              Exhibit10.5
              
              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).10.21
              
              Form
      of Purchase Agreement dated May 19, 2009 (incorporated by reference
      to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on May 20,
      2009).10.22
              
              Share
      Charge dated September 21, 2009 (effective as of January 24,
      2008).*10.23
              
              Underwriting
      Agreement dated September 29, 2009 (incorporated by reference to Exhibit
      1.1 to China-Biotics, Inc.’s Form 8-K filed on September 30,
      2009).


28





Number
              
              Exhibit14.1
              
              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).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).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





* * * *
*





29





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 JinanDate: November
      16, 2009
            Song
      JinanChief Executive
      Officer





30