Second-quarter fiscal 2010 results announced by China-Biotics

China-Biotics, Inc. (Nasdaq: CHBT) ("China-Biotics", "the Company"), a leading Chinese firm specializing in the manufacture, research, development, marketing and distribution of probiotics products, today announced its financial results for the second quarter of its 2010 fiscal year, ended September 30, 2009.

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

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

Second Quarter 2010 Results

During the second quarter of the 2010 fiscal year, net sales increased 49.2% to $17.1 million from $11.5 million a year ago. The increase resulted from an increase in sales volume from all products, particularly for Shining Probiotics Protein Powder and significant growth in bulk additive sales and price 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 of fiscal 2009. Sales of bulk additives were $5.5 million, or 32.0% of total sales, an increase of 292% from $1.4 million, or 12.2% of total sales, a year ago. On a sequential basis, sales of bulk additives increased 53.9% from the first quarter of fiscal 2010.

Gross profit for the quarter increased 51.5% to $12.2 million from $8.0 million in the same period the prior year. Gross margin was 71.0% in the second quarter, up from 69.9% in the year-ago period, primarily due to increases 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 2010 was primarily due to an increase in legal and professional fees associated with preparation for public offerings. Selling expenses for the second quarter of 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 the result of the closure of three Shining retail outlets in early 2009 calendar year due to local community redevelopment.

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

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

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

Diluted earnings per share were $0.31, calculated on a weighted average basis, compared with $0.13 per diluted share in the second quarter of fiscal 2009. The calculation of diluted earnings per share for both periods assumes full conversion of the convertible notes and thus excludes the loss of $9.4 million, and the gain of $1.9 million, respectively, from the change in fair value of the notes.

Six Month Results

Net sales for the first six months of the 2010 fiscal year were $32.6 million, up 42.4% from $22.9 million in the same period the prior year. Gross profit 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 first six months of fiscal 2010 was $2.3 million, compared to $7.7 million in the same period of fiscal 2009. Adjusted net income, excluding loss on the revaluation of the convertible notes, was $11.2 million for the first six months of fiscal 2010, up 59.0% from $7.0 million during the same period last year. Diluted earnings per share were $0.58 compared with $0.37 per diluted share in the second quarter of fiscal 2009. The calculation of diluted earnings per share for both periods assumes full conversion of the convertible notes and thus excludes gains and losses related to the change in fair value of 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 of fiscal 2010, China-Biotics generated $10.3 million in cash flow from operations and recorded $2.0 million in capital expenditures, primarily for the construction of the new plant. Approximately 78% of the projected $27.5 million in capital expenditures related to the phase 1 of new facility had been made as of September 30, 2009. Accounts receivable were $17.1 million, and days' sales outstanding were 87. At September 30, 2009, the Company had stockholders' equity of $67.9 million.

Recent Events

In October, China-Biotics completed an underwritten public offering of 5,290,000 shares of its common stock at a price of $15.00 per share, including the exercise of the underwriters' over-allotment option, generating net proceeds of approximately $75.4 million. 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 retail outlets and for general working capital purposes.

On October 23, China-Biotics announced that Lewis Fan, Chief Financial Officer, resigned to pursue other professional interests and had no disagreements with the Company in regard to its financial statements or accounting matters. Eva Yan, Chief Administration Officer and Director of Shanghai Shining Biotechnology Ltd., a subsidiary of China-Biotics, will serve as interim Chief Financial Officer until a successor is named.

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

In October, China Biotics strengthened its senior management team with the additions 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. The Company also appointed of Dr. Tom Gu as vice president to oversee the research and development of its probiotics products.

Business Outlook

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