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China-Biotics, Inc. Reports Second Quarter Fiscal 2010 Financial Results

Tuesday, November 17, 2009 General News J E 4
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SHANGHAI, Nov. 17 China-Biotics, Inc.(Nasdaq: CHBT) ("China-Biotics", "the Company"), a leading Chinese firmspecializing in the manufacture, research, development, marketing anddistribution of probiotics products, today announced its financial results forthe second quarter of its 2010 fiscal year, ended September 30, 2009.

"We continued to improve margins in the second fiscal quarter anddelivered strong year-over-year growth in our top and bottom lines. This wasdriven by increased sales volumes and pricing of new products, particularly inour bulk additives business where we made significant headway," said Mr. JinanSong, Chairman and Chief Executive Officer of China-Biotics. "We madeexcellent progress in ramping-up our new facility during the quarter toaddress the growing commercial market for our high quality, customized bulkadditive products."

Second Quarter 2010 Results

During the second quarter of the 2010 fiscal year, net sales increased49.2% to $17.1 million from $11.5 million a year ago. The increase resultedfrom an increase in sales volume from all products, particularly for ShiningProbiotics Protein Powder and significant growth in bulk additive sales andprice increases on bulk additives products. Sales of retail products were$11.7 million, or 68.0% of total sales, up 15.5% from the same quarter offiscal 2009. Sales of bulk additives were $5.5 million, or 32.0% of totalsales, an increase of 292% from $1.4 million, or 12.2% of total sales, a yearago. On a sequential basis, sales of bulk additives increased 53.9% from thefirst quarter of fiscal 2010.

Gross profit for the quarter increased 51.5% to $12.2 million from $8.0million in the same period the prior year. Gross margin was 71.0% in thesecond quarter, up from 69.9% in the year-ago period, primarily due toincreases in selling prices during the quarter.

Operating expenses were $4.6 million, compared to $4.2 million a year ago.The increase in operating expenses during the second quarter of fiscal 2010was primarily due to an increase in legal and professional fees associatedwith preparation for public offerings. Selling expenses for the second quarterof 2010 were $2.7 million, or 15.9% of sales, down from $2.8 million, or 24.5%of sales, in the year ago period. The decline in selling expenses was theresult of the closure of three Shining retail outlets in early 2009 calendaryear due to local community redevelopment.

Operating income increased 97.1% to $7.5 million from $3.8 million in thesecond quarter of fiscal 2009. Operating margin was 43.9%, compared to 33.2% ayear ago.

Other expense in the second quarter of 2010 consisted of a $9.4 millionnon-cash fair value loss related to the Company's convertible notes issued inDecember 2007. This compares with $1.9 million non-cash fair value gain in theyear ago period.

For the second quarter of the 2010 fiscal year, the Company recorded a netloss of $3.5 million. Excluding the $9.4 million loss on the revaluation ofthe convertible notes, net income was $5.9 million, up 131.6% from adjustednet income of $2.6 million in the same quarter of the prior year.

Diluted earnings per share were $0.31, calculated on a weighted averagebasis, compared with $0.13 per diluted share in the second quarter of fiscal2009. The calculation of diluted earnings per share for both periods assumesfull conversion of the convertible notes and thus excludes the loss of $9.4million, and the gain of $1.9 million, respectively, from the change in fairvalue of the notes.

Six Month Results

Net sales for the first six months of the 2010 fiscal year were $32.6million, up 42.4% from $22.9 million in the same period the prior year. Grossprofit was $23.1 million, or 70.9% of sales, up 43.0% from gross profit of$16.1 million, or 70.6% of sales, in the first six months of fiscal 2009.Operating income was $14.4 million, or 44.2% of sales, an increase of 50.2%from $9.6 million, or 41.9% of sales, the prior year. Net income for the firstsix months of fiscal 2010 was $2.3 million, compared to $7.7 million in thesame period of fiscal 2009. Adjusted net income, excluding loss on therevaluation of the convertible notes, was $11.2 million for the first sixmonths of fiscal 2010, up 59.0% from $7.0 million during the same period lastyear. Diluted earnings per share were $0.58 compared with $0.37 per dilutedshare in the second quarter of fiscal 2009. The calculation of dilutedearnings per share for both periods assumes full conversion of the convertiblenotes and thus excludes gains and losses related to the change in fair valueof the notes.

Financial Condition

As of September 30, 2009, the Company had cash and cash equivalents of$79.4 million and working capital of $64.7 million. In the first six months offiscal 2010, China-Biotics generated $10.3 million in cash flow fromoperations and recorded $2.0 million in capital expenditures, primarily forthe construction of the new plant. Approximately 78% of the projected $27.5million in capital expenditures related to the phase 1 of new facility hadbeen made as of September 30, 2009. Accounts receivable were $17.1 million,and days' sales outstanding were 87. At September 30, 2009, the Company hadstockholders' equity of $67.9 million.

Recent Events

In October, China-Biotics completed an underwritten public offering of5,290,000 shares of its common stock at a price of $15.00 per share, includingthe exercise of the underwriters' over-allotment option, generating netproceeds of approximately $75.4 million. The Company expects to use the netproceeds from the offering for general corporate purposes, including expandingits retail operations, expanding its products, acquiring additional retailoutlets and for general working capital purposes.

On October 23, China-Biotics announced that Lewis Fan, Chief FinancialOfficer, resigned to pursue other professional interests and had nodisagreements with the Company in regard to its financial statements oraccounting matters. Eva Yan, Chief Administration Officer and Director ofShanghai Shining Biotechnology Ltd., a subsidiary of China-Biotics, will serveas interim Chief Financial Officer until a successor is named.

In October, China-Biotics signed four new bulk additive customers, mainlyengaged in manufacture of dairy, nutritional supplement and animal feedproducts, bringing its total number of its bulk additive customers to 24.

In October, China Biotics strengthened its senior management team with theadditions of Mr. Bin Li as vice president general manager of manufacturing,and Dr. Xiaoping Zhang as deputy director of the Company's R&D center. TheCompany also appointed of Dr. Tom Gu as vice president to oversee the researchand development of its probiotics products.

Business Outlook

"We look forward with anticipation to the remainder of fiscal 2010 and areexcited about the traction we are gaining in our bulk additives business. Ournew manufacturing facility is expected to begin commercial production in thefirst quarter of calendar year 2010, and our pipeline of potential new bulkadditives customers continues to be strong," Mr. Song said. "As the newcapacity comes online, we will be able to resume our Shining retail outletexpansion later in the fiscal year. We are already directing our attention tothe second phase of the capacity expansion, which we expect to begin byDecember 31, 2009. Demand for our bulk additive products has been significant,which should result in revenue growth of at least 50% during the 2010 fiscalyear."

Conference Call

The company will host a conference call at 11:00 a.m. EST on, Tuesday,November 17, 2009, to discuss its financial results for the second quarterended September 30, 2009. To participate in the event by telephone, pleasedial 1-877-407-4134 five to 10 minutes prior to the start time (to allow timefor registration) and reference pass code 337783. International callers shoulddial +1-201-689-8430. The conference call will be broadcast live over theInternet and can be accessed by all interested parties at the Company's Website, http://www.chn-biotics.com . To listen to the call, please visit thesite at least 15 minutes prior to the start of the call to register, download,and install any necessary audio software. For those unable to participateduring the live webcast, it will be archived using the same link for 90 days.A digital replay of the call will also be available on Friday, November 17, atapproximately 1:00 p.m. EST through Friday, December 1, at midnight EST. Dial1-877-660-6853 and enter the conference ID number 337783. Internationalcallers should dial +1-201-612-7415 and enter the same conference ID number.

Use of Adjusted Financial Information

GAAP results for the three and six month periods ended September 30, 2009and 2008 include non-cash gains and losses related to the change in fair valueof the Company's convertible notes. To supplement the Company's condensedconsolidated financial statements presented on a GAAP basis, the Company hasprovided adjusted financial information excluding the impact of these items inthis release, which are adjusted net income and adjusted diluted earnings pershare. The Company's management believes that these adjusted measures provideinvestors with a better understanding of how the results relate to theCompany's historical performance. A reconciliation of adjustments to GAAPresults appears in the tables accompanying this press release. This additionaladjusted information is not meant to be considered in isolation or as asubstitute for GAAP financials. The adjusted financial information that theCompany provides also may differ from the adjusted information provided byother companies.

About China-Biotics, Inc.

China-Biotics, Inc., a leading manufacturer of biotechnology products andsupplements, engages in the research, development, marketing and distributionof probiotics dietary supplements. Through its wholly owned subsidiary,Shanghai Shining Biotechnology Co., Ltd., the Company has operations inShanghai. Its proprietary product portfolio contains live microbialnutritional supplements under the "Shining" brand. Currently, the products aresold OTC through large distributors to pharmacies and supermarkets in Shanghai,Jiangsu, and Zhejiang. Currently, China-Biotics is strategically expanding itsproduction capacity of probiotics to meet growing demand in the bulk additivemarket. For more information, please visit http://www.chn-biotics.com .

Safe Harbor Statement Under the Private Securities Litigation Reform Actof 1995: The information in this release contains forward-looking statementswhich involve risks and uncertainties, including statements regarding theCompany's capital needs, business strategy and expectations. Any statementscontained herein that are not statements of historical fact may be deemed tobe forward-looking statements, which may be identified by terminology such as"may," "should," "will," "expect," "plan," "intend," "anticipate," "believe,""estimate," "predict," "potential," "forecast," "project," or "continue," thenegative of such terms or other comparable terminology. Readers should notrely on forward-looking statements as predictions of future events or results.Any or all of the Company's forward-looking statements may turn out to bewrong. They can be affected by inaccurate assumptions, risks and uncertaintiesand other factors which could cause actual events or results to be materiallydifferent from those expressed or implied in the forward-looking statements.In evaluating these statements, readers should consider various factors,including the risks described in "Item 1A. Risk Factors" beginning on page 15and elsewhere in the Company's 2009 Annual Report on Form 10-K. These factorsmay cause the Company's actual results to differ materially from anyforward-looking statement. In addition, new factors emerge from time to timeand it is not possible for the Company to predict all factors that may causeactual results to differ materially from those contained in anyforward-looking statements. The Company disclaims any obligation to publiclyupdate any forward-looking statements to reflect events or circumstances afterthe date of this document, except as required by applicable law.Second Quarter 2010 Highlights -- Net sales increased 49.2% year-over-year to $17.1 million -- Gross profit rose 51.5% year-over-year to $12.2 million -- Gross margin was 71.0% up from 69.9% a year ago -- Operating income increased 99.2% to $7.5 million, with an operating margin of 43.9% -- Excluding a book loss related to the revaluation of convertible notes, adjusted net income was $5.9 million, or $0.31 per diluted share, up 131.6% year-over-year -- Signed four new bulk additive customers -- Attended the 2009 National Exchange Seminar on Probiotics in Shenzhen, China

SOURCE China-Biotics, Inc.
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