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Second Quarter 2009 Results
During the second quarter of the 2009 fiscal year, net sales increased47.0% to $11.5 million from $7.8 million the prior year, as a result of growthin the sales volume of new products and increases in the sales price ofselected products. Sales also benefited from an increase in the number of theCompany's Shining retail outlets to 110 from 22 the prior year. New products,including Shining Essence Stomach Protection Capsules, Shining ProbioticsProtein Powder and other products accounted for 16.3% of total sales duringthe quarter, up from a combined 4.0% a year ago. Sales of bulk additives tocommercial customers totaled $1.4 million, or 12.2% of sales, during thesecond quarter of 2009, up from $1.0 million, or 8.8% of sales, during thefiscal first quarter. There were no bulk additives sales in the secondquarter the prior year.
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"We are delighted to see continued revenue growth in the second quarter,as we benefited from strong volume and price increases in our retail businessand increased demand from our existing bulk additives customers," said Mr.Jinan Song, Chairman and Chief Executive Officer of China-Biotics. "OurShining retail outlet expansion resulted in an additional 27 openings duringthe quarter and should result in increased profits during the second half ofthe fiscal year. As we prepare for the completion of our new manufacturingfacility, we are carefully balancing existing production capacity between ourretail expansion and bulk additive business development. We signed one newbulk customer during the second quarter, and we remain in negotiations withmore than 100 potential business clients."
Gross profit during the quarter increased 43.1% to $8.0 million from $5.6million in the second quarter the prior year. Gross margin was 69.9%,compared to 71.8% a year ago. This was primarily caused by an increase in theprice of electricity used to run the Company's manufacturing facility and anincrease in the cost of packaging materials, including pulp and paper costs.
Selling expenses increased to $2.8 million, or 24.5% of sales, from $1.6million, or 20.0% of sales, in the second quarter a year ago, as the Companysignificantly increased the number of retail outlets. General andadministrative expenses increased to $1.4 million, or 12.5% of sales, from$1.1 million, or 13.9% of sales, in the second quarter of fiscal 2008. Theincrease was primarily related to $0.3 million of additional research costs todevelop and launch new products and staff and administrative costs incurred inconnection with the construction of the new manufacturing facility. As ofSeptember 30, 2008, the Company had 339 employees and operated 110 Shining-branded retail outlets, up from 266 employees and 22 Shining outlets onSeptember 30, 2007.
Operating expenses during the quarter were $4.3 million, or 37.0% of sales,compared to $2.6 million, or 33.9% of sales, a year ago.
Operating income for the quarter was $3.8 million, compared to $3.0million a year ago.
Other income of $2.0 million in the second quarter of 2009 consisted of a$1.9 million book gain related to the change in the fair value of the $25million convertible notes issued in December 2007.
Net income for the second quarter was $4.5 million. Excluding the $1.9million gain on the revaluation of the convertible notes, net income was $2.6million, up 30.4% from $2.0 million during the same quarter a year ago.
Diluted earnings per share were $0.13, calculated on a weighted averagebasis, compared with $0.11 per diluted share in the second quarter of fiscal2008. The calculation of diluted earnings per share for the second quarter of2009 assumes full conversion of the convertible notes and thus excludes thegain from the change in fair value of the notes.
Six Month Results
Net sales for the first six months of fiscal 2009 were $22.9 million, up31.9% from $17.3 million in the same period the prior year. Gross profit was$16.1 million, or 70.6% of sales, up 29.4% from gross profit of $12.5 million,or 72.0% of sales, in the first half of fiscal 2008. Operating income was$8.1 million, or 35.4% of sales, up 5.1% from operating income of $7.7 million,or 44.4% of sales, the prior year. Net income for the first six months offiscal 2009 was $7.7 million, or $0.37 per diluted share, up from $5.5 million,or $0.32 per diluted share, in the same period of fiscal 2008.
Financial Condition
As of September 30, 2008, the Company had cash and cash equivalents of$65.6 million and working capital of $49.2 million. We were able to slightlyincrease our cash balance despite having $11.7 million of capital expendituresduring the first six months of 2009. Days' sales outstanding for the secondquarter of the 2009 fiscal year was 85 days. At September 30, 2008, theCompany had stockholders' equity of $53.1 million.
In the first six months of 2009, China-Biotics generated $12.7 million incash flow from operations and recorded $11.7 million in capital expendituresmainly related to the construction of its new $27.5 million manufacturingfacility, $25 million of which is to be paid by the end of the third quarterof fiscal 2009. The remaining balance is expected to be paid during fiscal2010. The Company believes its current cash balance, combined with cash flowfrom operations, will be sufficient to fund its planned expenditures duringthe next 12 months.
Business Outlook
The Company's new bulk additives production facility remains scheduled tobegin production during the fiscal third quarter. As of September 30, 2008,China-Biotics had signed contracts with five business customers to supplythose customers with bulk probiotics in powder form that can be added toproducts such as milk, ice cream, yogurt, baked goods and nutritionalsupplements. The Company was in discussions with more than 100 otherpotential customers in that segment in preparation for the plant coming onlineat the end of this calendar year.
With limited capacity in its existing production facility, managementbelieves it is prudent to proceed with the retail outlet expansion at ameasured pace, which will enable the Company to focus on the completion of thenew manufacturing facility and signing on customers to fill productioncapacity once the new facility becomes operational. As a result, theCompany's plan to open a total of 300 Shining retail outlets is expected to becompleted in the 2010 fiscal year.
"As we look to the second half of the year, we continue to make greatprogress in our retail expansion strategy, and we expect that our newmanufacturing facility will come online during the fiscal third quarter," Mr.Song said. "We now have 22 Shining outlets that have been open at least oneyear, and all of these have demonstrated very strong growth year-over-year.As we accelerate our rollout of Shining outlets, we expect a significantincrease in selling expenses. However, sales from existing outlets shouldhelp to offset increased expenses, as 60% of our retail sales typically occurduring the second half of our fiscal year. The bulk additive business shouldcontinue to expand, as our new facility becomes operational and we are able totake on additional orders."
Recent Events
In October 2008, the Company announced it was approved to list shares ofits common stock on the Nasdaq Global market. Shares began trading on Nasdaqon October 23 under the symbol "CHBT."
Also in October 2008, the Company announced that it has engaged theShanghai office of KPMG Advisory (China) Limited to assist the Company incomplying with the financial reporting and controls requirements of Sarbanes-Oxley Act Section 404 ("SOX 404"). KPMG Shanghai's engagement is designed toassist China-Biotics as it complies with SOX 404, which requires the Companyand its external auditor to report on the adequacy of the Company's internalfinancial reporting and controls systems after documenting and testingfinancial reporting and control procedures.
Conference Call
The company will host a conference call at 9:00 a.m. EST on, Tuesday,November 11, 2008, to discuss its financial results for the fiscal secondquarter ended September 30, 2008. To participate in the event by telephone,please dial 888-241-0558 five to 10 minutes prior to the start time (to allowtime for registration) and reference passcode 71784337. International callersshould dial 647-427-3417. The conference call will be broadcast live over theInternet and can be accessed by all interested parties atthe 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 Tuesday, November 11,at approximately 11:00 a.m. EST through Tuesday, November 18, at midnight EST.Dial 800-677-6425 and enter the conference ID number 71784337. Internationalcallers should dial 402-220-1449 and enter the same conference ID number.
Use of Non-GAAP Financial Information
GAAP results for the second quarter ended September 30, 2008, include anon-cash gain related to the change in fair value of the Company's convertiblenotes. To supplement the Company's condensed consolidated financialstatements presented on a GAAP basis, the Company has provided non-GAAPfinancial information excluding the impact of this item, which is non-GAAP netincome, in this release. The Company's management believes that this non-GAAPmeasure provides investors with a better understanding of how the resultsrelate to the Company's historical performance. A reconciliation ofadjustments to GAAP results appears in the table accompanying this pressrelease. This additional non-GAAP information is not meant to be consideredin isolation or as a substitute for GAAP financials. The non-GAAP financialinformation that the Company provides also may differ from the non-GAAPinformation provided by other companies.
About China-Biotics, Inc.
China-Biotics, Inc. ("China-Biotics," "the Company"), a leadingmanufacturer of biotechnology products and supplements, engages in theresearch, development, marketing and distribution of probiotics dietarysupplements. Through its wholly owned subsidiary, Shanghai ShiningBiotechnology Co., Ltd., the Company has operations in Shanghai. Itsproprietary product portfolio contains live microbial nutritional supplementsunder the "Shining" brand. Currently, the products are sold OTC through largedistributors to pharmacies and supermarkets in Shanghai, Jiangsu, and Zhejiang.China-Biotics plans to launch 300 Shining brand retail outlets in major citiesin China. Currently, China-Biotics is strategically expanding its productioncapacity of probiotics to meet growing demand in the bulk additive market.For more information, please visit http://www.chn-biotics.com .
Safe Harbor Statement Under the Private Securities Litigation Reform Actof 1995: Any statements set forth above that are not historical facts areforward-looking statements that involve risks and uncertainties that couldcause actual results to differ materially from those in the forward-lookingstatements. Such factors include, but are not limited to, the Company'sability to market existing and new products, ability to access to capital forexpansion, and changes from anticipated levels of sales, future national orregional economic and competitive conditions, market acceptance of its retailstore concept, changes in relationships with customers, dependence on itsflagship product profits and other factors detailed from time to time in theCompany's filings with the United States Securities and Exchange Commissionand other regulatory authorities. The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.Second Quarter 2009 Highlights -- Net sales increased 47.0% year-over-year to $11.5 million -- Gross profit increased 43.1% year-over-year to $8.0 million -- Gross margin was 69.9% -- Net income was $4.5 million -- Excluding a $1.9 million gain related to the change in fair value of convertible notes, net income increased 30.4% year over year to $2.6 million -- Diluted earnings per share was $0.13, compared to $0.11 the prior year -- Opened 27 retail outlets during the quarter, bringing the total number of outlets to 110 in 13 cities in China -- Signed agreement with Henan Square Pharmaceutical Co., Ltd to supply probiotics for its probiotics-based medicines -- Began installing equipment for its new manufacturing facility in Qing Pu Industrial Park in Shanghai -- Began trading on the Nasdaq Global Market in October
SOURCE China-Biotics, Inc.
