UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2011

¨ 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. 26 Orient Global Headquarter

Lane 118, Yonghe Road

Zhabei District, Shanghai 200072

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 ¨ No x

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 x

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. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (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 x No ¨

As of September 30, 2011, 22,150,200 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37
ITEM 4.	CONTROLS AND PROCEDURES	37
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	39
ITEM 1A.	RISK FACTORS	40
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	56
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	56
ITEM 4.	[REMOVED AND RESERVED.]	56
ITEM 5.	OTHER INFORMATION	56
ITEM 6.	EXHIBITS	56
SIGNATURES		59

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts expressed in US Dollars)

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

TABLE OF CONTENTS

Unaudited Condensed Consolidated Financial Statements		2

Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and March 31, 2011		3

Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the three and six months ended September 30, 2011 and 2010		4

Unaudited Condensed Consolidated Statements of Stockholders' Equity for the six months ended September 30, 2011		5

Unaudited Condensed Consolidated Statements of Cash Flow for the six months ended September 30, 2011 and 2010		6

Notes to the Unaudited Condensed Consolidated Financial Statements		7

CHINA-BIOTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts expressed in US Dollars)

	September 30, 2011 (Unaudited)			March 31, 2011
ASSETS
Current assets
Cash and cash equivalents	$	147,958,635		$	143,988,348
Accounts receivable, net		3,478,102			26,194,313
Inventories		3,431,980			1,772,321
Deposits - short term		-			85,546
Prepayments		-			1,245,565
Other receivables		194,230			276,047
Total current assets		155,062,947			173,562,140

Prepayments for equipment and land use rights		8,319,282			3,146,229
Property, plant and equipment, net		57,450,766			59,142,556
Land use rights		1,804,037			1,780,354
Total assets	$	222,637,032		$	237,631,279
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	725,035		$	5,532,443
Other payables and accruals		4,460,711			4,439,986
Tax payables		29,791,232			30,942,752
Amount due to director		5,004,027			371,623
Total current liabilities		39,981,005			41,286,804
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value of $0.01, 10,000,000 shares authorized, none issued		-			-
Common stock, par value of $0.0001, 100,000,000 shares authorized,42,370,000 shares issued and 22,150,200 outstanding as of September 30, 2011 and March 31, 2011, respectively		4,237			4,237
Additional paid-in capital		84,053,723			83,242,926
Retained earnings		88,460,014			102,377,471
Treasury stock at cost, 20,219,800 shares as of September 30, 2011 and March 31, 2011, respectively		(2,741,634	)		(2,741,634	)
Accumulated other comprehensive income		9,853,893			10,435,681
Capital and statutory reserve		3,025,794			3,025,794
Total stockholders’ equity		182,656,027			196,344,475
Total liabilities and stockholders' equity	$	222,637,032		$	237,631,279

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME (LOSS)

(Amounts expressed in US Dollars)

	Three months ended September 30,						Six months ended September 30,
	2011			2010			2011			2010
Net sales	$	4,150,101		$	23,588,647		$	13,109,326		$	48,524,366
Cost of sales		3,239,758			8,300,608			7,722,174			16,119,083
Cost of product returns		7,143,914			-			7,143,914			-
Gross profit (loss)		(6,233,571	)		15,288,039			(1,756,762	)		32,405,283
Operating expenses:
Selling expenses		2,018,182			2,559,158			3,988,351			5,617,536
General and administrative expenses		3,735,529			3,070,248			8,386,190			5,355,285
Total operating expenses		5,753,711			5,629,406			12,374,541			10,972,821
Income (loss) from operations		(11,987,282	)		9,658,633			(14,131,303	)		21,432,462
Other income and expenses:
Interest expense		(66	)		-			(336	)		-
Interest income		397,921			97,294			785,861			185,170
Change in the fair value of embedded derivatives		-			2,742,000			-			11,950,000
Exchange gain (losses), net		(37,908	)		(66,477	)		(454,729	)		76,490
Other income (expenses)		(233,093	)		324,710			(75,042	)		278,597
Total other income		126,854			3,097,527			255,754			12,490,257
Income (loss) before taxes		(11,860,428	)		12,756,160			(13,875,549	)		33,922,719
Income taxes		-			1,922,233			41,908			4,227,256
Net income (loss)		(11,860,428	)		10,833,927			(13,917,457	)		29,695,463
Other comprehensive income
Foreign currency translation adjustment		1,930,620			1,685,156			(581,788	)		2,070,216
Comprehensive income (loss)	$	(9,929,808	)	$	12,519,083		$	(14,499,245	)	$	31,765,679

Weighted average number of shares
Basic		22,150,200			22,308,098			22,150,200			22,338,880
Diluted		22,150,200			24,391,431			22,150,200			24,422,213

Income (loss) per common stock
Basic	$	(0.54	)	$	0.49		$	(0.63	)	$	1.33
Diluted	$	(0.54	)	$	0.33		$	(0.63	)	$	0.73

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts expressed in US Dollars)

	Common Stock
	Shares		Par value $0.0001		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Capital and Statutory Reserve		Total

Balance- April 1, 2011		42,370,000	$	4,237	$	83,242,926	$	102,377,471		$	(2,741,634	)	$	10,435,681		$	3,025,794	$	196,344,475
Fair value of vested options		-		-		810,797		-			-			-			-		810,797
Net loss		-		-		-		(13,917,457	)		-			-			-		(13,917,457	)
Foreign currency translation adjustments		-		-		-		-			-			(581,788	)		-		(581,788	)
Balance- September 30, 2011 (Unaudited)		42,370,000	$	4,237	$	84,053,723	$	88,460,014		$	(2,741,634	)	$	9,853,893		$	3,025,794	$	182,656,027

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Amounts expressed in US Dollars)

	Six months ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(13,917,457	)	$	29,695,463
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Change in the fair value of embedded derivatives		-			(11,950,000	)
Loss on disposal of property and equipment		-			272,308
Change in deferred tax		-			298,894
Amortization		19,284			18,897
Depreciation		1,546,791			1,441,813
Provision of allowance for doubtful accounts		814,828			-
Fair value of vested options		810,797			-
Change in deferred tax
Change in operating assets and liabilities :
- Accounts receivable		22,464,888			(5,050,340	)
- Inventories		(1,612,140	)		138,451
- Deposits		87,372			-
- Prepayments		(2,701,323	)		855,167
- Other receivables		88,258			526,552
- Accounts payable		(4,927,553	)		(1,363,472	)
- Other payables and accruals		(86,642	)		(1,132,038	)
- Taxes payable		(1,896,122	)		973,268	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		690,981			14,724,963

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property and equipment		-			976
Prepayments for long-term capital expenditures		(1,108,936	)		-
Purchase of property, plant and equipment		(108,843	)		(8,459,056	)
NET CASH USED IN INVESTING ACTIVITIES		(1,217,779	)		(8,458,080	)

CASH FLOWS FROM FINANCING ACTIVITIES
Advance from director		4,632,404			1,743,864
Repayment on advances from director		-			(3,250,000	)
Treasury stock acquired		-			(2,739,634	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		4,632,404			(4,245,770	)

Effect of exchange rate changes on cash and cash equivalents		(135,319	)		1,243,075
NET CHANGES IN CASH AND CASH EQUIVALENTS BALANCES		3,970,287			3,264,188
CASH AND CASH EQUIVALENTS BALANCES, beginning of period		143,988,348			155,579,371
CASH AND CASH EQUIVALENTS BALANCES, end of period	$	147,958,635		$	158,843,559

Supplemental disclosure of cash flow information:
Interest paid	$	-		$	500,052
Income taxes paid	$	1,553,351		$	2,523,939

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED SEPTEMBER 30, 2011 AND 2010

ORGANIZATION AND DESCRIPTION OF BUSINESS

China-Biotics, Inc. (sometimes referred to as “China-Biotics” or the “Company”) is engaged in the research, development, production, marketing, and distribution of probiotics products (which we sometimes refer to simply as “probiotics”), which are products that contain live microbial food supplements that beneficially affect the host by improving its intestinal microbial balance. The Company was incorporated under the name Otish Resources, Inc. in Delaware in February 2003.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements as of and for the three months and six months ended September 30, 2011 and 2010 have been prepared based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of September 30, 2011 and for all periods presented. Information as of March 31, 2011 was derived from the audited consolidated financial statements of the Company for the year ended March 31, 2011.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-K filed on May 21, 2013 for the year ended March 31, 2011. The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of the operating results to be expected for the full year ending March 31, 2012.

The condensed consolidated financial statements and accompanying notes are presented in United States dollars and prepared in conformity with US GAAP which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Those estimates and assumptions include estimates for allowance for doubtful accounts, inventory valuation, impairment consideration, assumptions used in the valuation of derivative liabilities, and estimates for potential penalties for late payment of taxes.

Basis of consolidation

The unaudited condensed consolidated financial statements for China-Biotics, Inc. and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Sinosmart Group Inc. (“SGI”), Growing State Limited (“GSL”) and King Treasure Group Limited (“KTG”); SGI’s wholly owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”); GSL’s wholly owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“Growing”); KTG’s wholly owned subsidiary, Best Design Holdings Limited (“BDH”); and BDH’s wholly owned subsidiary, Growing Bio (Yangling) Co. Ltd (“Growing Yangling”). Intercompany accounts and transactions have been eliminated in consolidation.

Fair value of financial instruments

Fair value measurements are determined using authoritative guidance issued by the FASB, with the exception of the application of the guidance to non-recurring, non-financial assets and liabilities as permitted. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1-Quoted prices in active markets for identical assets or liabilities.

Level 2-Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.

Level 3-Unobservable inputs based on the Company’s assumptions

The Company is required to use observable market data if available without undue cost and effort. As of September 30, 2011 and March 31, 2011, the carrying amounts reported in the consolidated financial statements for the current assets and current liabilities approximate fair value due to the short term nature of these financial instruments.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04 “Amendments to achieve common fair value measurement and disclosure requirements in US GAAP and IFRSs” (“ASU 2011-04”), which clarify how to measure and disclose fair value. The amendment clarifies the intent behind the application of existing fair value measurements and disclosures and other amendments which change principles or requirements for fair value measurements or disclosures. The amendment becomes effective prospectively for the Company’s interim period ending March 31, 2012. Early application is not permitted. The Company does not expect the amendment to have a material impact on its financial position, result of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05 “Presentation of Comprehensive Income” (“ASU 2011-05”) to amend ASC 220 “Comprehensive Income”. The amendments require comprehensive income to be presented as either a continuous statement of comprehensive income or two separate but consecutive statements. The amendments do not affect the disclosures required regarding comprehensive income. These amendments are to be applied retrospectively for interim and fiscal year periods beginning after December 15, 2011. The Company believes that its current presentation of comprehensive income has already complied with the amendments and the adoption of such amendments does not have a material impact on its financial results and disclosures.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. The Company does not expect the adoption of this guidance to have a material impact on its financial position, result of operations or cash flows.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income (loss) per share:

	Three months ended September 30,					Six months ended September 30,
	2011			2010		2011			2010
Income (loss) per share – Basic
Income (loss) for the period	$	(11,860,428	)	$	10,833,927	$	(13,917,458	)	$	29,695,463
Basic average common stock outstanding		22,150,200			22,308,098		22,150,200			22,338,880
Net income (loss) per share	$	(0.54	)	$	0.49	$	(0.63	)	$	1.33

	Three months ended September 30,						Six months ended September 30,
	2011			2010			2011			2010
Income (loss) per share – Diluted
Income (loss) for the period	$	(11,860,428	)	$	10,833,927		$	(13,917,458	)	$	29,695,463
Change in fair value of embedded derivatives		-			(2,742,000	)		-			(11,950,000	)
		(11,860,428	)		8,091,927			(13,917,458	)		17,745,463

Basic average common stock outstanding		22,150,200			22,308,098			22,150,200			22,338,880
Diluted effect from stock options and conversion shares		-			2,083,333			-			2,083,333
Diluted average common stock outstanding		22,150,200			24,391,431			22,150,200			24,422,213
Net income (loss) per share	$	(0.54	)	$	0.33		$	(0.63	)	$	0.73

Basic income (loss) per share is computed by dividing the net income by the weighted average number of outstanding common stock during the period. The diluted income (loss) 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 shares of common stock has been outstanding to the total time in that period. In 2010, the Company had convertible debt outstanding. The conversion shares are in diluted earnings per share based on the “if converted method”.

RISKS, UNCERTAINTIES, AND CONCENTRATIONS

Economic and political risks

The Company’s operations are conducted in the PRC and are subject to various political, economic, and other risks and uncertainties inherent in this country. Among other risks, the Company’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.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. As of September 30, 2011 and March 31, 2011, the Company had cash deposits of $147.3 million and $140.3 million, respectively, placed with several banks in the PRC, which includes the Special Administrative Region of Hong Kong, where there is currently no rule or regulation in place for obligatory insurance of bank accounts. For the three and six months ended September 30, 2011 and 2010, all of the Company’s sales arose in the PRC. In addition, all accounts receivable as at September 30, 2011 and March 31, 2011 were from customers in the PRC.

Concentration of Customers

For the three and six months ended September 30, 2012 or 2011, there was no customer that accounted for over 5% of our sales revenue. As of September 30, 2011, there is one customer that accounted for 14.8% of our accounts receivable. As of March 31, 2011, there was one customer that accounted for 2.9% of our accounts receivable.

ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

	September 30, 2011 (Unaudited)			March 31, 2011

Accounts receivable	$	4,300,723		$	26,194,313
Less: Allowance for doubtful accounts		(822,621	)		-
	$	3,478,102		$	26,194,313

INVENTORIES

Inventories consisted of the following:

	September 30, 2011 (Unaudited)		March 31, 2011

Raw materials	$	1,662,604	$	744,667
Work-in-progress		238,160		94,756
Finished goods		1,531,216		932,898
	$	3,431,980	$	1,772,321

LAND USE RIGHTS

The land use rights consisted of the following:

	September 30, 2011 (Unaudited)			March 31, 2011

Land use rights	$	1,946,803		$	1,900,734
Less: Accumulated amortization		(142,766	)		(120,380	)
	$	1,804,037		$	1,780,354

On March 21, 2006, GSL, our subsidiary, entered into an agreement, as amended, with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 36,075 square meters of land in the Shanghai Qingpu Industrial Park District on which we constructed our 300-metric ton capacity production plant for a term of 50 years beginning January 15, 2008. The agreement provides for the payment of leasing fees of approximately $1.8 million. In February 2009, the formal land use right certificate was issued. There are no future lease payments under this land lease. At September 30, 2011, the net book value of such land use right was $1,804,037.

Amortization expense amounted to $9,707 and $9,486 for the three months ended September 30, 2011, and 2010, respectively. Amortization expense amounted to $19,284 and $18,897 for the six months ended September 30, 2011, and 2010, respectively.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net, consisted of the following:

	September 30, 2011 (Unaudited)			March 31, 2011

Building	$	12,103,811		$	12,047,068
Plant and machinery		52,158,177			51,430,868
Leasehold improvements		1,793,046			1,750,615
Office equipment		4,783,359			4,007,571
Motor vehicles		456,433			445,632
Construction in progress		280,382			1,762,970
		71,575,208			71,444,724
Less: Accumulated depreciation		(14,124,442	)		(12,302,168	)
	$	57,450,766		$	59,142,556

For the three months ended September 30, 2011 and 2010, depreciation expense amounted to $754,468 and $844,442, respectively. For the six months ended September 30, 2011 and 2010, depreciation expense amounted to $1,546,791 and $1,441,813, respectively.

The Company is currently in Phase 2 construction of a research and development center and other ancillary facilities in Qingpu. At September 30, 2011, construction in progress included $190,622 related to the construction of this facility.

The cost for constructing the Yangling facility is expected to be over $58 million invested over two years, which would be mainly facilitated by the capital injection from BDH. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in its construction stage. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu) which is included in prepayments for equipment and land use rights in the accompanying unaudited condensed consolidated balance sheets. We received the land certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014. As of September 30, 2011, construction in progress included $89,760 related to the construction of this facility.

AMOUNT DUE TO DIRECTOR

As of September 30, 2011 and March 31, 2011, due to a director, Mr. Song Jinan, in the amount of $5,004,027 and $371,623, respectively, represented advances to the Company which are unsecured, interest-free and repayable on demand. The advances from such director were entered into because of the difficulty the Company faced in paying expenses incurred outside China in non-PRC currency due to the difficulties the Company had in converting currency because of foreign exchange controls.

10.

INCOME TAXES

For the six months ended September 30, 2011 and 2010, the components of income (loss) before income taxes were:

	Six months ended September 30,
	2011 (Unaudited)			2010 (Unaudited)
Income before income taxes generated in the PRC	$	(12,152,174	)	$	22,028,986
(Loss) income before income taxes generated in the United States of America		(1,522,818	)		11,812,913
Loss before income taxes generated in the British Virgin Islands		(199,871	)		80,820
Loss before income taxes generated in Hong Kong		(686	)		-
	$	(13,875,549	)	$	33,922,719

For the three and six months ended September 30, 2011 and 2010, there was no tax provision related to income (loss) generated in the United States of America, the British Virgin Islands, and Hong Kong. For the six months ended September 30, 2011 and 2010, the provision for income taxes relating to income generated in the PRC consists of the following:

	Six months ended September 30,
	2011 (Unaudited)		2010 (Unaudited)
Current-PRC	$	41,908	$	4,227,256
Deferred-PRC		-		-
	$	41,908	$	4,227,256

For the six months ended September 30, 2011 and 2010, the reconciliation between the PRC statutory tax rate and effective tax rate are as follows:

	Six months ended September 30,
	2011 (Unaudited)			2010 (Unaudited)
Statutory rate		25.0	%		25.0	%
Preferential tax rate		(7.5	)%		(7.4	)%
Effect of different tax rates in other jurisdictions		(2.1	)%		-	%
Change in the fair value of embedded derivatives not subject to tax		-	%		(8.8	)%
Expenses not deductible for tax purpose		(0.7	)%		0.4	%
Effect of taxable temporary difference		(7.1	)%		-	%
Tax surcharge		-	%		3.2	%
Tax losses not recognized		(7.5	)%		-	%
Other		-			(0.0	)%
Effective tax rate		0.1	%		12.4	%

As of September 30, 2011 and March 31, 2011, the Company had incurred tax losses of approximately $3.7 million and $2.2 million, respectively which can be carried forward in various jurisdictions from five to 25 years.

The components of deferred taxes are summarized as follows:

	September 30, 2011 (Unaudited)			March 31, 2011
Deferred tax assets
Net operating loss carryforwards
- PRC	$	35,716		$	63,970
- United States of America		517,758			-
- Hong Kong		8,829			5,714
Less: Valuation allowance		(562,303	)		(69,684	)
Net deferred tax assets	$	-		$	-

The Company is incorporated in Delaware and is subject to U.S. tax law. The daily operations of the Company in the United States principally relate to payment of legal and professional fees. The income generated from the United States in 2011 primarily related to the change in the fair value of derivative liability, which is a permanent difference between book and tax reporting. The Company has no taxable income in the United States and does not expect it will be able to realize the U.S. tax losses.

There is no income tax for companies not carrying out business activities in the British Virgin Islands or Hong Kong. Accordingly, the Company's financial statements do not present any income tax provisions related to the British Virgin Islands or Hong Kong tax jurisdictions.

The Company has its principal operations in the PRC and is subject to a PRC Enterprise Income Tax (“EIT”) rate of 25% in calendar years 2012 and 2011, subject to certain rate reductions. The Company’s subsidiary Shining is located in the Shanghai Jinqiao Special Economic Zone and was awarded the status of “high technology” enterprise for the calendar year 2007 until 2011. Therefore, Shining enjoyed a preferential income tax rate of 15% in 2007 to 2011. Beginning January 1, 2012, Shining’s EIT rate is 25%.

The Company’s subsidiary Growing is located in Qingpu and has similar business operations as Shining, but with a larger production scale. Growing was exempted from PRC Enterprise Income Tax in calendar 2008 and 2009, followed by 50% tax exemption for calendar 2010 to 2012.

The Company’s subsidiary, Growing Yangling, is located in Yangling and as of September 30, 2011, its manufacturing plant was under construction. According to the investment agreement with the local government, Growing Yangling is entitled to have a tax incentive that exempts local portion of EIT for three calendar years from the commencement of production, followed by 50% tax exemption of local portion for the next year. There is no financial effect from the tax holiday as Growing Yangling did not generate any assessable profit for the three and six months ended September 30, 2011 or 2010.

At September 30, 2011 and March 31, 2011, taxes payable consisted of the following:

	September 30, 2011 (Unaudited)			March 31, 2011
Taxes arising prior to 2005:
Value added tax and other taxes	$	5,038,962		$	5,505,930
Income taxes		4,207,944			3,002,391
Dividends withholding tax		3,990,377			4,095,745
Total taxes arising prior to 2005		13,237,283			12,604,066

Value added tax and other taxes		402,356			515,637
Income taxes		(749,250	)		1,317,961
Accrued interest on taxes		16,900,843			16,505,088
	$	29,791,232		$	30,942,752

In addition to the EIT, companies in the PRC that are engaged in the sale of goods are generally required to pay value added taxes (“VAT”) at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.

Our management believes that our operations in China were exempted from EIT and VAT for all years prior to 2005 because we had been recognized by the local government as an advanced technology enterprise. However, the Company never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in China prior to 2005. As a result, there is no way to ascertain the ultimate position which may be taken by the relevant PRC tax authorities in the future and accordingly, full provisions for tax liabilities in the amount of $13,237,283, for all years prior to 2005 have been recorded by the Company. Beginning in January 2006, we made tax payments to the PRC tax authorities for 2005 and we have made regular tax payments to the PRC tax authorities for all subsequent periods.

In addition, in connection with dividends paid to the Shining shareholders between April 2003 to June 2005, Shining did not deduct a withholding tax at the rate of 20% as required by applicable Chinese laws and regulations. The Company has accrued the dividend withholding tax and interest on the dividend withholding tax.

According to PRC tax regulations, the overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to interest at the 0.05% per day, and potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of taxes payable. Through March 31, 2011, the Company accrued the interest that may be potentially payable upon these taxes incurred prior to 2005 and the unpaid dividend withholding tax. Interest related to the unpaid taxes was recognized in the Company’s consolidated statements of operations as a component of its income tax provision.

For the six months ended September 30, 2011, management made an assessment of whether it was necessary to provide a further provision for interest and penalties on these unpaid amounts. Management determined that no further provision for interest and penalties was necessary given the unlikelihood of payment of the amount already accrued and provided in the financial statements. This assessment was based upon receipt by the Company of a report by an independent tax expert that the amount of taxes prior to 2005 may not be payable, the length of time the amount has been outstanding, and that there have been no requests from PRC tax authorities for payment of the unpaid taxes outstanding amounts. As such, management believes that the previously recorded amounts are sufficient to cover any settlement of this liability.

The Company’s PRC subsidiaries are deemed “high technology” enterprises subject to preferred tax rates (tax holiday). The table below shows the effect of using the higher rates and earnings per share.

	Six months ended September 30,
	2011 (Unaudited)			2010 (Unaudited)

Income (loss) per common share-basic	$	(0.63	)	$	1.33
Effect of tax holiday		0.01			(0.11	)
Pro forma income (loss) per common share-basic	$	(0.62	)	$	1.22

11.

OPTION INCENTIVE PLAN

On January 16, 2011, the Board adopted the 2010 Equity Incentive Plan (the “2010 Plan”) and reserved 1,500,000 shares of common stock for issuance under the 2010 Plan. On March 9, 2011, the 2010 Plan was approved by the Company’s stockholders at the 2010 Annual Meeting of Stockholders.

On January 16, 2011, the Company granted to the directors and officers an option to purchase 910,000 shares of common stock under the 2010 Plan. The options have exercise price of $14.81 per share, an expiration date of five to ten years from the date of grant, and vest over 48 consecutive months: 20% in the first 12-month period; 20% in the second 12-month period; 30% in the third 12-month period; and 30% in the forth 12-month period. The Company determined the fair value of the options on the date of grant was $9,477,024 using the Black-Scholes-Merton option pricing model with the following assumptions: expected volatility, 76%; risk-free interest rate, 1.95%; expected weighted average life, five to ten years; and expected dividend yield, 0%. As of September 30, 2011 and March 31, 2011, the total vested options were 124,000 shares and 45,500 shares, respectively.

During June 2011, two candidates resigned from their positions and terminated their services to the Company. They also did not exercise their vesting options within three months from the date of their termination. According to the option agreement, their options were forfeited and cancelled. The total number of forfeited and cancelled options was 250,000.

During the six months ended September 30, 2011 and 2010, no vested options were exercised.

At September 30, 2011, outstanding options were as follows:

	Number of Shares under Options			Weighted Average Exercise Price

Options outstanding at March 31, 2011		910,000		$	14.81
Options granted		-			-
Options expired or forfeited		(250,000	)		14.81
Options exercised		-			-
Options outstanding at September 30, 2011		660,000		$	14.81

The following table summarizes information about options outstanding at September 30, 2011:

		Options Outstanding						Options Exercisable
Exercise price		Number of shares under Option		Weighted average remaining contractual life (years)		Weighted Average Exercise Price		Number of shares under Option		Weighted Average Exercise Price

$	14.81		660,000		7.75	$	14.81		124,000	$	14.81

As of September 30, 2011 and March 31, 2011, the total vested options were 132,000 shares and 45,500 shares, respectively.

At September 30, 2011 and March 31, 2011, the options outstanding and exercisable had no intrinsic value.

For the three months ended September 30, 2011 and 2010, the Company has recorded $336,946 and $0, respectively, as the fair value of the vested options. For the six months ended September 30, 2011 and 2010, the Company has recorded $810,797 and $0, respectively, as the fair value of the vested options.

As of September 30, 2011, total compensation cost related to non-vested stock options and restricted stock not yet recognized was approximately $5,728,085, which is expected to be recognized over the next 39 months

13.

PRODUCT RETURN CONCESSIONS

Product returns of $474,505 were deducted from sales due to a batch of probiotics products produced in June 2011 that were below the Company’s quality standards due to production problems.

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these special credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the three months ended September 30, 2011 that has been reflected as an additional cost of product returns in the accompanying unaudited condensed consolidated financial statements.

13.

COMMITMENTS AND CONTINGENCIES

Capital commitments

On August 12, 2010, BDH, a subsidiary of the Company, entered into the agreements with a government agency to establish manufacturing facilities for animal probiotics products in the Yangling Agricultural High-tech Industries Demonstration Zone in Shaanxi Province of China. In furtherance of such agreements, BDH incorporated a foreign, wholly owned subsidiary, Growing Yangling, with a registered capital of $50 million. As of March 31, 2012, the Company had injected into Growing Yangling $7.5 million as registered capital. According to the approval from the government agency dated October 12, 2010, the remaining balance of Growing Yangling’s registered capital of $42.5 million must be injected before July 13, 2013.

The cost for constructing the Yangling facility is expected to be over $58 million invested over two years, which would be mainly facilitated by the capital injection from BDH. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in its construction stage. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014. As of September 30, 2011, Growing Yangling entered into agreements with contractors related to the construction of the plant and manufacturing facilities for future payments of $2,989,961.

The Company is currently in Phase 2 construction of a research and development center and other ancillary facilities in Qingpu. As of September 30, 2011, agreements with contractors related to the construction of the plant, manufacturing facilities and purchase of production equipment with future payments of $15,901,163 and $4,017,082, respectively.

Purchase obligations

The Company entered into the agreements with its suppliers to purchase raw materials and packing materials. As of September 30, 2011, the amount of future payments related to these obligations is $13,138,325.

Other obligations

Growing entered into an agreement with a university in the PRC to perform research and development. The aggregate amount of future payments per year is approximately $1,407,327 (RMB9 million).

Pending litigation

The Company and certain of its current and former officers and directors have been named as defendants in three putative shareholder class action lawsuits, one in the United States District Court for the Central District of California (Mohapatra v. China-Biotics, Inc., et al., No. 10-cv-6954 (C.D. Cal.), the “Mohapatra case”), and two in the United States District Court for the Southern District of New York (Hill v. China-Biotics, Inc., et al., No. 10-cv-7838 (S.D.N.Y.), the “Hill case”, and Casper v. Jinan, et al., No. 12-cv-4202 (S.D.N.Y.), the “Casper case”). After certain shareholders filed motions for appointment as lead plaintiff, the plaintiff in the Mohapatra case voluntarily dismissed its case and the plaintiff in the Hill case, together with another shareholder, were appointed as lead plaintiffs. The lead plaintiffs filed an amended complaint in which they allege that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements or failing to disclose certain material information regarding, among other things, the Company’s financial condition, operations, and future business prospects, and the quality, nature, and quantity of the Company’s retail outlets. The lead plaintiffs seek to represent a class of shareholders who bought the Company’s securities between July 10, 2008 and August 27, 2010.

On August 18, 2011, the Company filed a motion to dismiss the lead plaintiffs’ amended complaint. The court dismissed the lead plaintiffs’ Section 11 claim, but gave them leave to replead. The court did not rule on the motion to dismiss the Section 10(b) claim. On January 9, 2012, the lead plaintiffs filed a second amended complaint that included a new named plaintiff and new allegations for the Section 11 claim. On February 27, 2012, the Company filed a motion to dismiss the amended Section 11 claim. Both that motion and the original motion to dismiss the Section 10(b) and Section 20(a) claims are currently pending before the court. The Company intends to defend this action vigorously.

In the Casper case, the plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements and seeks to represent a class of stockholders who bought the Company’s securities between February 9, 2011 and July 1, 2011. On October 18, 2012, the Hill case and the Casper case were consolidated, but no consolidated amended complaint has yet been filed. The Company intends to defend this action vigorously.

The Company and its directors have been named as defendants in a derivative lawsuit filed in the United States District Court for the District of Columbia (Marteney v. Song Jinan, et al., No. 10-cv-1983 (D.D.C.)). The complaint alleges that the directors breached their fiduciary duties by disseminating false and misleading financial statements and seeks unspecified damages. On March 26, 2012, the plaintiff filed an amended complaint in which he added Roth Capital Partners LLC and Maxim Group LLC (the “Underwriters”) as defendants. On September 7, 2012, the Underwriters filed a motion to dismiss. On October 23, 2012, the court approved a stipulation in which the plaintiff voluntarily dismissed the claim against the Underwriters. On November 13, 2012, the clerk entered a default against the director defendants. On December 7, 2012, the parties submitted a stipulation lifting the clerk’s entry of default. The defendants intend to defend this action vigorously.

With respect to the above-referenced litigation matters, the Company is unable at this time to estimate possible losses, if any, or any other impact of the outcome of the litigation matters on the consolidated financial statements.

Review of decision ordering that the registration of the Company’s securities be revoked

On September 15, 2011, the staff of the SEC informed the Company that it intended to recommend that the SEC institute a public administrative proceeding against the Company for alleged violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 or 13a-16 promulgated thereunder. On October 7, 2011, the SEC issued an Order Instituting Proceedings to determine whether it was necessary and appropriate to suspend or revoke the registration of the Company’s securities. On February 22, 2012, the administrative law judge overseeing the proceedings issued a decision ordering that the registration of the Company’s securities be revoked. On March 26, 2012, the SEC granted the Company’s petition for review of this decision. The SEC scheduled oral argument for July 10, 2013.

14.

BUSINESS SEGMENTS

The Company operates two business segments for the three and six months ended September 30, 2011 and 2010, which are retail probiotics products as a health supplement and bulk additives for institutional customers in the PRC. The following is the summary information by segment as of September 30, 2011 and 2010, and for the three and six months ended September 30, 2011 and 2010:

Three months ended September 30, 2011	Retail products			Bulk additives			Segment Total			Corporate			Total

Net revenue	$	744,672		$	3,405,429		$	4,150,101		$	-		$	4,150,101
Loss from operations		(9,947,427	)		(1,134,475	)		(11,081,902	)		(905,380	)		(11,987,282	)
Income taxes		-			-			-			-			-
Total assets		100,406,511			78,893,527			179,300,038			43,336,994			222,637,032
Depreciation and amortization		267,082			302,966			570,048			194,127			764,175

Three months ended September 30, 2010	Retail products		Bulk additives		Segment Total		Corporate			Total

Net revenue	$	13,666,634	$	9,922,013	$	23,588,647	$			$	23,588,647
Income from operations		4,975,551		5,219,814		10,195,365		(536,732	)		9,658,633
Income taxes		1,238,061		684,172		1,922,233					1,922,233
Total assets		128,574,686		38,397,566		166,972,252		85,687,774			252,660,026
Depreciation and amortization		281,806		572,122		853,928		-			853,928

Six months ended September 30, 2011	Retail products			Bulk additives			Segment Total			Corporate			Total

Net revenue	$	5,286,770		$	7,822,556		$	13,109,326		$	-		$	13,109,326
Loss from operations		(11,184,896	)		(1,044,147	)		(12,229,043	)		(1,902,260	)		(14,131,303	)
Income taxes		-			41,908			41,908			-			41,908
Total assets		100,406,511			78,893,527			179,300,038			43,336,994			222,637,032
Depreciation and amortization		570,998			606,938			1,177,936			388,139			1,566,075

Six months ended September 30, 2010	Retail products		Bulk additives		Segment Total		Corporate			Total

Net revenue	$	28,160,477	$	20,363,889	$	48,524,366	$	-		$	48,524,366
Income (loss) from operations		10,689,983		11,750,521		22,440,504		(1,008,042	)		21,432,462
Income taxes		2,649,116		1,578,140		4,227,256		-			4,227,256
Total assets		128,574,686		38,397,566		166,972,252		85,687,774			252,660,026
Depreciation and amortization		763,084		697,626		1,460,710		-			1,460,710

Reconciliation is provided for unallocated amounts relating to corporate operations, which is not included in the segment information.

	Three months ended September 30,						Six months ended September 30,
Reconciliation	2011			2010			2011			2010

Total segment operating income	$	(11,081,902	)	$	10,195,365		$	(12,229,043	)	$	22,440,504
Corporate overhead expenses		(905,380	)		(536,732	)		(1,902,260	)		(1,008,042	)
Other income, net		126,854			3,097,527			255,754			12,490,257
Income tax expense		-			(1,922,233	)		(41,908	)		(4,227,256	)
Total consolidated net income (loss)	$	(11,860,428	)	$	10,833,927		$	(13,917,457	)	$	29,695,463

15.

SUBSEQUENT EVENTS

Subsequent to September 30, 2011, the Company has entered into numerous transactions relating to a loan receivable from a trust, short and long term bank loans, land use rights and deposits on potential acquisitions. We refer the reader to the previously filed Form 10K for the year ended March 31, 2012 filed on September 14, 2012 as well as the interim reports filed on Form 10Q for the period ending June 30, 2012 filed on January 4, 2013; for the period ending September 30, 2012 filed on December 26, 2012, and; for the period ending December 31, 2012 filed on February 14, 2013 for a complete discussion of these transactions, and other matters occurring after September 30, 2011.

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,” and “our” are to the combined business of China-Biotics, Inc. (the “Company”) and to the Company’s wholly owned direct subsidiaries, Sinosmart Group Inc. (“SGI”), Growing State Limited (“GSL”) and King Treasure Group Limited (“KTG”); SGI’s wholly owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”); GSL’s wholly owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“Growing”); KTG’s wholly owned subsidiary, Best Design Holdings Limited (“BDH”); and BDH’s wholly owned subsidiary, Growing Bio (Yangling) Co. Ltd (“Growing Yangling”). 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 sold primarily in the Chinese domestic market.

Our retail products are mainly sold to distributors, who then distribute them to various retail outlets such as drug stores and supermarkets or sell directly to enterprise accounts. Typically, 60 to 90 days’ credit is given to the distributors. Our bulk additives products are primarily sold to institutional customers, such as dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies. Typically, 60 to 90 days’ credit is given to the bulk additives products customers. Because of the adverse market environment, the Company has temporarily extended an additional 30 days’ credit to all distributors of retail products and customers of the bulk additives products. As a result, the collection period has also been extended further 30 days to 120 days.

Because of the increasing cost of rents and sales personnel in recent years, since January 2011 we have expanded our retail product sales in China through our growing distribution network and via internet sales. Our management believes that as China has become more affluent, the number of Chinese internet users has increased and Chinese citizens have become more health conscious, resulting in higher demand for healthy and functional foods such as probiotics and yogurt.

Our retail products comprise mainly live bacteria, which are reproduced by fermentation, we have historically had a low cost of production, of which packaging costs, including the cost of capsules, represent the largest cost item.

The government of the PRC imposed new rules and regulations on health care products during calendar year 2011. Many Chinese customers, including many of our customers, have developed in recent years a lack of confidence in the safety of locally produced food and healthcare products, which has had a noticeable effect on our sales volume. During the second quarter of fiscal year 2012, we temporarily suspended our retail production due to the implementation by the government of the PRC of new health and safety rules.

Shining Probiotics Protein Powder has become our best-selling product as of September 30, 2011, representing approximately 38% and 20% of our total sales of our retail products for the six months ended September 30, 2011 and 2010, respectively. Although we have released new products, the percentage contribution of Shining Essence, for many years our biggest-selling retail product, to our total retail sales has decreased, representing approximately 20% and 11% for the six months ended September 30, 2011 and 2010, respectively. Shining Essence is still within top three of our best-selling products. As of September 30, 2011, we had a retail product portfolio of approximately100 products, and we are currently selling 35 of them in the market.

Sales of our bulk products contributed 60% of our gross revenue for the six months ended September 30, 2011 as compared to 42% of our gross revenue for the six months ended September 30, 2010.

In February 2010, our new bulk production facility in Qingpu commenced commercial production. The state-of-the-art bulk additives production facility has a full capacity of 150 metric tons. Management believes our new facility will help us to continue to meet the increasing market demand for high quality and low cost products.

Our management believes that the following trends in China will have an important impact on, and present significant opportunities for, our business:

Increasing demand for functional food and health supplement products. As the discretionary income and health-consciousness of the average Chinese consumer increase, we expect the demand for functional foods and health supplements to increase.

Curtailment of the use of antibiotics and preservatives and government support for probiotics. China has the highest per capita consumption of antibiotics in the world. To curtail the overuse of antibiotics, the Chinese government has taken steps to limit the use of antibiotic drugs and preservatives for both humans and animals. Moreover, the Chinese State Food and Drug Administration has also acknowledged that probiotics are beneficial for human health. Recently, the Ministry of Health (MOH) in China announced an expanded list of probiotics strains allowed to be used in the food industry. The number of probiotics strains on the list has doubled. Management believes that this reflects that the Chinese government is encouraging wider uses of probiotics products in the food industry. Management also believes that it also demonstrates the rapidly expanding probiotics market in China.

Increasing demand for dairy product additives. The demand for functional foods and foods that use probiotics supplements is growing at a significant rate, and our management believes that it will continue to do so. According to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics would be required to be added to baby milk powders produced in China. On October 24, 2011, the MOH published a list of probiotics applicable for baby food for babies aged one year or older.

Our management expects to capitalize on the opportunities created by these trends to achieve significant growth through the following:

We are currently focused on two fast-growing industries in China: the dairy and animal feed sectors. As of September 30, 2011, we had entered into contracts with 60 customers, same as the number of customers at March 31, 2011, for the bulk additives business. In this regard, we have created a number of formulations for testing by many potential customers. We have established business relationships with a variety of commercial customers located in major cities, including Beijing, Tianjin, Chongqing, and Shanghai. We are planning to develop sales plans for new customers in four additional provinces: Gansu, Hebei, Heilongjiang and Shanxi. Besides the major cities mentioned above in which we do business, our customers are now in 20 provinces, including Guangdong, Jiangsu and Jiangxi, among others. These growing companies are among the leaders in the dairy, animal feed, baked foods, and pharmaceutical industries.

Construction of a new facility in Yangling - Encouraged by the growing demand for the animal feed market in China, the Company commenced construction of a new facility in the Yangling Zone in the Shaanxi Province of China in June 2012. The cost for constructing the Yangling facility is expected to be over $58 million invested over two years. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in the construction stage, and the plan is subject to government approval prior to implementation. During the year ended March 31, 2011, the Company made total payments of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land use right certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014 and trial production is expected to commence in 2015. In the existing market environment, the Company will utilize its available cash and bank facilities to fund such construction.

Wholesale and e-commerce businesses - In our continuing effort to transition from a retail, business-to-consumer model to a wholesale, business-to-business model, and to improve operating efficiency, we have completed the consolidation of our retail outlets. We closed all of our retail outlets by the end of fiscal year 2011, as we believe our distribution network is more efficient for our retail products sales. We have a total of 39 distributors for retail products as of September 30, 2011. In light of increasing online sales of health food and supplements in China and to maintain our existing retail customer base, we launched a “Community Network,” which is dedicated to promoting and selling our retail products online through the Company’s website at http://www.shiningbt.com/Product/. Since its establishment, the in-house e-commerce department is working to better access the market and existing and potential customers. We have also been working with two online selling companies to sell our retail products, including www.ule.com.cn and www.yihaodian.com. In addition, we have established a customer service center to reply to inquiries from our end users.

Improvement in research and development of new products and services - We continue to develop new retail products aimed at improving general human health conditions, enhancing the immune system, and reducing health problems. To further improve our competitiveness in the bulk additives market, we continue to improve and provide our value-added service to institutional customers by assisting their lab and production testing and providing customized technical support, among other things. In addition, we are also working with certain universities, including Northeast Agricultural University, to carry out research and development projects in order to seek to increase the probiotics industry’s capability.

Our operations are generally not labor-intensive. We employed 385 people as of September 30, 2011. With production ramping up in the Phase 1 facility and the construction of Phase 2 in Qingpu, we expect increases in our number of employees over the next two years to meet the increase of production capacity and sales demand. We have also been recruiting senior executives to strengthen our management team. However, as wages in China remain relatively low, we expect that labor costs will not materially affect our results of operations in the near term.

Results of Operations for the Three Months Ended September 30, 2011 Compared with the Three Month Ended September 30, 2010

Our results for the three months ended September 30, 2011 and 2010 are summarized below:

	Three months ended September 30,
	2011 Amount			% of Net sales			2010 Amount			% of Net sales
Net sales	$	4,150,101			100.00	%	$	23,588,647			100.00	%
Cost of sales		3,239,758			78.06	%		8,300,608			35.19	%
Cost of product returns		7,143,914			172.14	%		-			-	%
Gross profit (loss)		(6,233,571	)		(150.20	)%		15,288,039			64.81	%
Operating expenses:
Selling expenses		2,018,182			48.63	%		2,559,158			10.85	%
General and administrative expenses		3,735,529			90.01	%		3,070,248			13.02	%
Total operating expenses		5,753,711			138.64	%		5,629,406			23.86	%
Income (loss) from operations		(11,987,282	)		(288.84	)%		9,658,633			40.95	%
Other income and expense:
Interest expense		(66	)		(0.00	)%		-			(0.00	)%
Interest income		397,921			9.59	%		97,294			0.41	%
Change in the fair value of embedded derivatives		-			-			2,742,000			11.62	%
Exchange gain (loss), net		(37,908	)		(0.91	)%		(66,477	)		(0.28	)%
Other expenses		(233,093	)		(5.62	)%		324,710			1.38	%
Total other income		126,854			3.06	%		3,097,527			13.13	%
Income (loss) before taxes		(11,860,428	)		(285.79	)%		12,756,160			54.08	%
Income taxes		-			-	%		1,922,233			8.15	%
Net income (loss)	$	(11,860,428	)		(285.79	)%	$	10,833,927			45.93	%

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 ended September 30, 2011 and 2010 comprised the following:

	Three months ended September 30,
	2011			2010
Invoiced value of sales	$	4,254,187		$	24,230,413
Less: Sales discount		(83,880	)		(467,411	)
Less: Sales tax		(20,206	)		(174,355	)
	$	4,150,101		$	23,588,647

Net sales decreased by $19,438,546 or 82.41% to $4,150,101 for the three months ended September 30, 2011 from $23,588,647 for the three months ended September 30, 2010. The decrease was mainly attributable to the implementation by the PRC government of new rules and regulations on health care products, including our probiotics products, during 2011. Certain health care products, including our probiotics products, have been repositioned as food and so are now governed by the PRC’s Food Safety Law, resulting in the Company and its competitors having to adapt to the new rules and regulations.

During June 2011, we also found a batch of probiotics products worth $474,505 that were below the Company’s quality standards due to production problems; the Company tracked and destroyed all such products after obtaining them from its distributors.

The contributions of our products as a percentage of invoiced value on sales for the three months ended September 30, 2011 and 2010, respectively, are summarized below.

	Three months ended September 30,
	2011			2010
Retail products		17.94	%		57.94	%
Bulk additives		82.06	%		42.06	%
		100.00	%		100.00	%

Sales for retail products decreased to 17.94% of total sales for the three months September 30, 2011 from 57.94% of total sales for the three months ended June 30, 2010. The decrease was mainly attributable to the implementation by the government of the PRC of new rules and regulations on health care products during calendar year 2011, as noted above. Many Chinese customers, including many of our customers, have developed in recent years a lack of confidence in the safety of locally produced food and healthcare products, which has had a noticeable effect on our sales volume. During the three months ended September 30, 2011, the Company suspended retail production due to the implementation by the government of the PRC of new health and safety rules.

Sales for bulk additives also decreased as a result of the implementation by the government of the PRC of new rules and regulations on health care products during 2011. However since our bulk products are used in various industries including dairy, animal feed, pharmaceutical, and other food industries, the adverse effects on bulk additive sales were not as severe as those on our retail product sales. As a result, percentage of bulk additives sales to total sales increased to 82.06% for the three months ended September 30, 2011 from 42.06% for the three months ended September 30, 2010.

In addition, we operated our own retail outlets for direct sales in the past. With the successful commercial production at the Qingpu facility since February 2010, the Company began a strategic move from retail operations (a business-to-consumer model) to wholesale and bulk product sales (a business-to-business model). Therefore, we also consolidated our retail outlets starting around the beginning of fiscal year 2011 and, by the end of fiscal year 2011, the Company had closed all of its retail outlets.

Cost of sales

Cost of sales for the three months ended September 30, 2011 was $3,239,758, compared with $8,300,608 for the three months ended September 30, 2010. The decrease in cost of sales was primarily caused by the decrease in sales for the three months ended September 30, 2011.

Cost of product returns

As a result of product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the three months ended September 30, 2011.

Gross profit (loss)

Gross loss increased by $21,521,610 to $6,233,571 for the three months ended September 30, 2011 from gross profit of $15,288,039 for the three months ended September 30, 2010. The increase of gross loss was mainly attributable to the credits of $7,143,914 to our distributors to reimburse our end-user customers for products which were recalled. The increase of our gross loss was also attributable to the decline in sales volume of both bulk additive products and retail products for the three months ended September 30, 2011.

Selling expenses

Selling expenses decreased by $540,976 or 21.14% to $2,018,182 or 48.63% of net sales for the three months ended September 30, 2011, compared with $2,559,158 or 10.85% of net sales for the three months ended September 30, 2010. The decrease was mainly attributable to decrease in sales commission to staff as a result of lower sales and cash collection of outstanding balances from our customers.

General and administrative expenses

General and administrative expenses increased by $665,281 or 21.67% to $3,735,529 or 90.01% of net sales for the three months ended September 30, 2011, compared with $3,070,248 or 13.02% of net sales for the three months ended September 30, 2010. The increase was primarily attributable to certain non-cash compensation expenses related to the vested options in the amount of $336,946 during the three months ended September 30, 2011 as compared to $0 for the same period of 2010.

Income (loss) from operations

Loss from operations increased by $21,645,915 to $11,987,282 for the three months ended September 30, 2011, from $9,658,633 income from operations for the three months ended September 30, 2010. The increase in loss from operations was mainly attributable to the decrease in sales and the credits paid to our distributors to reimburse our end-user customers for products for the three months ended September 30, 2011.

Total other income

Total other income decreased by $2,970,673 or 95.90% to $126,854 for the three months ended September 30, 2011, from $3,097,527 for the three months ended September 30, 2010. We recognized income of $2,742,000 for the changes in the fair value of embedded derivatives during the three months ended September 30, 2010. We did not recognize such income in the three months ended September 30, 2011.

Income taxes

Provision for income taxes was $0 and $1,922,233 for the three months ended September 30, 2011 and 2010, respectively. The decrease in the provision for income taxes is primarily attributable to the decrease in operating profit.

Net income (loss)

Net loss increased by $22,694,355 to $11,860,428 for the three months ended September 30, 2011 from net income of $10,833,927 for the three months ended September 30, 2010. The increase in net loss or decrease in net income was mainly attributable to the decrease of income from operations of $21,645,915. In addition, we recognized income of $2,742,000 in the changes in the fair value of embedded derivatives during the three months ended September 30, 2010. We did not recognize such income in the three months ended September 30, 2011.

Segment reporting

We have adopted the “products and services” approach for segment reporting. For three months ended September 30, 2011 and 2010, the management considers there to be two reporting segments: retail products and bulk additive products, as the new bulk production plant commenced operations in February 2010 with a separate production and distribution channel. There are also separate operational management teams and operations and marketing strategies for each segment. Therefore, we have used the segment reporting since fiscal year 2011.

Retail products

The results of retail products segment for the three months ended September 30, 2011 and 2010 are summarized as below:

	Three months ended September 30,
	2011 Amount			% of Net sales			2010 Amount		% of Net sales
Net sales, retail products	$	744,672			100.00	%	$	13,666,634		100.00	%
Cost of sales		1,665,750			223.69	%		5,198,641		38.04	%
Cost of product returns		7,143,914			959.34	%		-		-	%
Gross profit (loss), retail products		(8,064,992	)		(1,083.03	)%		8,467,993		61.96	%
Operating expenses:
Selling expenses		562,389			75.52	%		2,267,421		16.59	%
General and administrative expenses		1,320,046			177.27	%		1,225,021		8.96	%
Total operating expenses		1,882,435			252.79	%		3,492,442		25.55	%
Income (loss) from operations, retail products	$	(9,947,427	)		(1,335.81	)%	$	4,975,551		36.41	%

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 ended September 30, 2011 and 2010 comprised the following:

	Three months ended September 30,
	2011			2010
Invoiced value on sales	$	835,900		$	14,249,691
Less: Sales discount		(83,880	)		(467,411	)
Less: Sales tax		(7,348	)		(115,546	)
	$	744,672		$	13,666,634

Net sales decreased by $12,921,962 or 94.55% to $744,672 for the three months ended September 30, 2011 from $13,666,634 for the three months ended September 30, 2010. The decrease was mainly attributable to the implementation by the government of the PRC of new rules and regulations on health care products Many Chinese customers, including many of our customers, have developed in recent years a lack of confidence in the safety of locally produced food and healthcare products, which has had a noticeable effect on our sales volume. During the three months ended September 30, 2011, the Company suspended production due to the implementation by the government of the PRC of new health and safety rules.

Cost of sales

Cost of sales decreased by $3,532,891 or 67.96% to $1,665,750 for the three months ended September 30, 2011 from $5,198,641 for the three months ended September 30, 2010. The decrease in cost of sales was primarily caused by the decrease of products sold.

Cost of product returns

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the three months ended September 30, 2011.

Gross profit (loss)

Gross loss increased by $16,532,985 to $8,064,992 for the three months ended September 30, 2011 from gross profit of $8,467,993 for the three months ended September 30, 2010. The increase of gross loss was mainly attributable to the credits of $7,143,914 to our distributors to reimburse our end-user customers for products which were recalled. The increase of our gross loss was also attributable to the decline in sales volume of retail products for the three months ended September 30, 2011. .

Selling expenses

Selling expenses were $562,389 or 75.52% of net sales for the three months ended September 30, 2011, compared with $2,267,421 or 16.59% of net sales for the three months ended September 30, 2010. The selling expenses mainly included salary and advertising expenses. This decrease in selling expenses was primarily attributable to a decrease in sales. The percentage to sales increased as part of our selling expenses is fixed therefore lower sales cause the ratio of selling expense to net sales to increase.

General and administrative expenses

General and administrative expenses increased by $95,025 or 7.76% to $1,320,046 or 177.27% of net sales for the three months ended September 30, 2011 compared with $1,225,021 or 8.96% of net sales for the three months ended September 30, 2010. During the three months ended September 30, 2011, because the Company suspended production due to the implementation by the government of the PRC of new health and safety rules, $239,087 of original production costs such as salary payments and related expenses were charged as general and administrative expenses.

Income (loss) from operations

Loss from operations increased by $14,922,978 to $9,947,427 for the three months ended September 30, 2011 from $4,975,551 income from operations for the three months ended September 30, 2010. The increase was mainly attributable to substantially decrease of sales volume as a result of the temporary suspended production for the three months ended September 30, 2011.

Bulk products

The results of bulk additives products segment for the three months ended September 30, 2011 and 2010 are summarized as below:

	Three months ended September 30,
	2011 Amount			% of Net sales			2010 Amount		% of Net sales
Net sales, bulk additives products	$	3,405,429			100.00	%	$	9,922,013		100.00	%
Cost of sales		1,574,008			46.22	%		3,101,967		31.26	%
Gross profit, bulk additives products		1,831,421			53.78	%		6,820,046		68.74	%
Operating expenses:
Selling expenses		1,455,793			42.75	%		291,737		2.94	%
General and administrative expenses		1,510,103			44.34	%		1,308,495		13.19	%
Total operating expenses		2,965,896			87.09	%		1,600,232		16.13	%
Income (loss) from operations, bulk additives products	$	(1,134,475	)		(33.31	)%	$	5,219,814		52.61	%

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 ended September 30, 2011 and 2010 comprised the following:

	Three months ended September 30,
	2011			2010
Invoiced value on sales	$	3,418,287		$	9,980,722
Less: Sales tax		(12,858	)		(58,709	)
	$	3,405,429		$	9,922,013

Net sales decreased by $6,516,584 or 65.68% to $3,405,429 for the three months ended September 30, 2011, from $9,922,013 for the three months ended September 30, 2010. The decrease in sales of bulk additive products was primarily attributable to the implementation by the government of the PRC of new rules and regulations on health care products during 2011.

Cost of sales

Cost of sales decreased by $1,527,959 or 49.26% to $1,574,008 for the three months ended September 30, 2011, from $3,101,967 for the three months ended September 30, 2010. The decrease in cost of sales was primarily caused by the decrease in products sold for the three months ended September 30, 2011.

Gross profit

Gross profit decreased by $4,988,625 or 73.15% to $1,831,421 for the three months ended September 30, 2011, from $6,820,046 for the three months ended September 30, 2010. The decrease of gross profit was primarily caused by the decrease in products sold for the three months ended September 30, 2011.

Selling expenses

Selling expenses were $1,455,793 or 42.75% of net sales for the three months ended September 30, 2011, compared with $291,737 or 2.94% of net sales for the three months ended September 30, 2010. The selling expenses mainly included advertising expenses, promotion expenses, commission and salary. This increase in selling expenses was primarily attributable to salary expenses of approximately $1,289,000 for the three months ended September 30, 2011 compared to $44,000 for the six months ended September 30, 2010.

General and administrative expenses

General and administrative expenses were $1,510,103 or 44.34% of net sales for the three months ended September 30, 2011, compared with $1,308,495 or 13.19% of net sales for the three months ended September 30, 2011. The increase in general and administrative expenses was mainly attributable to the increase in our depreciation expense to approximately $333,000 for the three months ended September 30, 2011 from approximately $173,000 for the three months ended September 30, 2010.

Income (loss) from operations

Loss from operations increased by $6,354,289 to $1,134,475 for the three months ended September 30, 2011, from $5,219,814 income from operations for the three months ended September 30, 2010. The increase is mainly attributable to the decrease of gross profit of $$4,988,624 from the decrease in sales, increases in in selling expenses and general and administrative expenses for the three months ended September 30, 2011.

Results of Operations for the Six Months Ended September 30, 2011 Compared with the Six Month Ended September 30, 2010

Our results for the six months ended September 30, 2011 and 2010 are summarized below:

	Six months ended September 30,
	2011 Amount			% of Net sales			2010 Amount		% of Net sales
Net sales	$	13,109,326			100.00	%	$	48,524,366		100.00	%
Cost of sales		7,722,174			58.91	%		16,119,083		33.22	%
Cost of product returns		7,143,914			54.49	%		-		-	%
Gross profit (loss)		(1,756,762	)		(13.40	)%		32,405,283		66.78	%
Operating expenses:
Selling expenses		3,988,351			30.42	%		5,617,536		11.58	%
General and administrative expenses		8,386,190			63.97	%		5,355,285		11.04	%
Total operating expenses		12,374,541			94.39	%		10,972,821		22.61	%
Income (loss) from operations		(14,131,303	)		(107.80	)%		21,432,462		44.17	%
Other income and expense:
Interest expense		(336	)		(0.00	)%		-		-	%
Interest income		785,861			5.99	%		185,170		0.38	%
Interest income, net – loan receivable		-			-	%		11,950,000		24.63	%
Other expenses		(454,729	)		(3.47	)%		76,490		0.16	%
Exchange gain (loss), net		(75,042	)		(0.57	)%		278,597		0.57	%
Total other income		255,754			1.95	%		12,490,257		25.74	%
Income (loss) before taxes		(13,875,549	)		(105.84	)%		33,922,719		69.91	%
Income taxes		41,908			0.32	%		4,227,256		8.71	%
Net income (loss)	$	(13,917,457	)		(106.16	)%	$	29,695,463		61.20	%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the six months ended September 30, 2011 and 2010 comprised the following:

	Six months ended September 30,
	2011			2010
Invoiced value of sales	$	13,736,981		$	50,488,844
Less: Sales discount		(570,240	)		(1,491,393	)
Less: Sales tax		(57,415	)		(473,085	)
	$	13,109,326		$	48,524,366

Net sales decreased by $35,415,040 or 72.98% to $13,109,326 for the six months ended September 30, 2011, from $48,524,366 for the six months ended September 30, 2010. The decrease in sales of bulk additive products is primarily attributable to the implementation by the government of the PRC of new rules and regulations on health care products during 2011.

The contributions of our products as a percentage of invoiced value on sales for the six months ended September 30, 2011 and 2010, respectively, are summarized below:

	Six months ended September 30,
	2011			2010
Retail products		40.33	%		58.03	%
Bulk additives		59.67	%		41.97	%
		100.00	%		100.00	%

Sales for retail products decreased to 40.33% of total sales for the six months ended September 30, 2011 from 58.03% of total sales for the six months ended September 30, 2010. The decrease was mainly attributable to the implementation by the government of the PRC of new rules and regulations on health care products during calendar year 2011, as noted above. Many Chinese customers, including many of our customers, have developed in recent years a lack of confidence in the safety of locally produced food and healthcare products, which has had a noticeable effect on our sales volume. During the six months ended September 30, 2011, the Company suspended retail production due to the implementation by the government of the PRC of new health and safety rules.

Cost of sales

Cost of sales for the six months ended September 30, 2011 was $7,722,174, compared with $16,119,083 for the six months ended September 30, 2010. The decrease in cost of sales was primarily caused by the decrease in sales for the six months ended September 30, 2011.

Cost of product returns

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the six months ended September 30, 2011.

Gross profit (loss)

Gross loss increased by $34,162,045 to $1,756,762 for the six months ended September 30, 2011, from $32,405,283 operating income for the six months ended September 30, 2010. The increase of gross loss was partially attributable to the credits of $7,143,914 to our distributors to reimburse our end-user customers for products which were recalled. The increase of our gross loss was also attributable to the decline in sales volume of retail products for the six months ended September 30, 2011.

Selling expenses

Selling expenses decreased by $1,629,185 or 29.00% to $3,988,351 or 30.42% of net sales for the six months ended September 30, 2011, compared with $5,617,536 or 11.58% of net sales for the six months ended September 30, 2010. The decrease was mainly attributable to decrease in sales commission to staff as a result of lower sales and cash collection of outstanding balances from our customers.

General and administrative expenses

General and administrative expenses increased by $3,030,905 or 56.60% to $8,386,190 or 63.97% of net sales for the six months ended September 30, 2011, compared with $5,355,285 or 11.04% of net sales for the six months ended September 30, 2010. The increase was primarily attributable to certain non-cash compensation expenses related to the vested options in the amount of $810,797 during the six months ended September 30, 2011 as compared to $0 for the same period of 2010. Research and development expense increased to approximately $2,577,000 for the six months ended September 30, 2011 from approximately $1,950,000 for the six months ended September 30, 2010. We also had write-offs of returned products and allowances for doubtful accounts in the amount of $1,492,000 for the six months ended September 30, 2011 compared to $0 for the six months ended September 30, 2010.

During the six months ended September 30, 2011, because the Company suspended production due to the implementation by the government of the PRC of new health and safety rules, $239,087 of original production costs such as salary payments and related expenses were charged as general and administrative expenses.

Income (loss) from operations

Loss from operations increased by $35,563,765 to $14,131,303 for the six months ended September 30, 2011, from $21,432,462 income from operations for the six months ended September 30, 2010. The increase in loss from operations was mainly attributable to the decrease in sales and the credits paid to our distributors to reimburse our end-user customers for products for the six months ended September 30, 2011.

Total other income

Total other income decreased by $12,234,503 or 97.95% to $255,754 for the six months ended September 30, 2011, from $12,490,257 for the six months ended September 30, 2010. We recognized income of $11,950,000 for the changes in the fair value of embedded derivatives during the six months ended September 30, 2010. We did not recognize such income in the six months ended September 30, 2011.

Income taxes

Provision for income taxes was $41,908 and $1,922,233 for the six months ended September 30, 2011 and 2010, respectively. The decrease in the provision for income taxes is primarily attributable to the decrease in operating profit.

Net income (loss)

Net loss increased by $43,612,920 to $13,917,457 for the six months ended September 30, 2011 from net income of $29,695,463 for the six months ended September 30, 2010. The increase in net loss was mainly attributable to the decrease of income from operations of $35,563,765. In addition, we recognized income of $11,950,000 in the changes in the fair value of embedded derivatives during the six months ended September 30, 2010. We did not recognize such income in the six months ended September 30, 2011.

Segment reporting

We have adopted the “products and services” approach for segment reporting. For six months ended September 30, 2011 and 2010, the management considers there to be two reporting segments: retail products and bulk additive products, as the new bulk production plant commenced operations in February 2010 with a separate production and distribution channel. There are also separate operational management teams and operations and marketing strategies for each segment. Therefore, we have used the segment reporting since fiscal year 2011.

Retail products

The results of retail products segment for the six months ended September 30, 2011 and 2010 are summarized as below:

	Six months ended September 30,
	2011 Amount			% of Net sales			20110 Amount		% of Net sales
Net sales, retail products	$	5,286,770			100.00	%	$	28,160,477		100.00	%
Cost of sales		4,267,091			43.79	%		9,731,493		34.56	%
Cost of product returns		7,143,914			-	%		-		-	%
Gross profit (loss), retail products		(6,124,235	)		56.21	%		18,428,984		65.44	%
Operating expenses:
Selling expenses		1,695,460			25.21	%		5,095,355		18.09	%
General and administrative expenses		3,365,202			26.92	%		2,643,646		9.39	%
Total operating expenses		5,060,662			52.12	%		7,739,001		27.48	%
Income (loss) from operations, retail products	$	(11,184,897	)		4.08	%	$	10,689,983		37.96	%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the six months ended September 30, 2011 and 2010 comprised the following:

	Six months ended September 30,
	2011			2010
Invoiced value on sales	$	5,886,805		$	30,006,267
Less: Sales discount		(570,240	)		(1,491,393	)
Less: Sales tax		(29,795	)		(354,397	)
	$	5,286,770		$	28,160,477

Net sales decreased by $22,873,707 or 81.23% to $5,286,770 for the six months ended September 30, 2011 from $28,160,477 for the six months ended September 30, 2010. The decrease was mainly attributable to the implementation by the government of the PRC of new rules and regulations on health care products Many Chinese customers, including many of our customers, have developed in recent years a lack of confidence in the safety of locally produced food and healthcare products, which has had a noticeable effect on our sales volume. During the three months ended September 30, 2011, the Company suspended the retail production due to the implementation by the government of the PRC of new health and safety rules.

Cost of sales

Cost of sales decreased by $5,464,402 or 56.15% to $4,267,091 for the six months ended September 30, 2011 from $9,731,493 for the six months ended September 30, 2010. The decrease in cost of sales was primarily caused by the decrease of products sold.

Cost of product returns

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the six months ended September 30, 2011.

Gross profit (loss)

Gross loss increased by $24,553,219 to $6,124,235 for the six months ended September 30, 2011 from gross profit of $18,428,984 for the six months ended September 30, 2010. The increase of gross loss was partially attributable to the credits of $7,143,914 to our distributors to reimburse our end-user customers for products which were recalled. The increase of our gross loss was also attributable to the decline in sales volume of retail products for the six months ended September 30, 2011.

Selling expenses

Selling expenses were $1,695,460 or 25.21% of net sales for the six months ended September 30, 2011, compared with $5,095,355 or 18.09% of net sales for the six months ended September 30, 2010. The selling expenses mainly included salary and advertising expenses. This decrease in selling expenses was primarily attributable to a decrease in sales. The percentage to sales increased as part of our selling expenses is fixed therefore lower sales cause the ratio of selling expense to net sales to increase.

General and administrative expenses

General and administrative expenses increased by $721,556 or 27.29% to $3,365,202or 26.92% of net sales for the six months ended September 30, 2011 compared with $2,643,646 or 9.39% of net sales for the six months ended September 30, 2010. During the six months ended September 30, 2011, because the Company suspended production due to the implementation by the government of the PRC of new health and safety rules, $239,087 of original production costs such as salary payments and related expenses were charged as general and administrative expenses.

Income (loss) from operations

Loss from operations increased by $21,874,880 to $11,184,897 for the six months ended September 30, 2011 from $10,689,983 income from operations for the six months ended September 30, 2010. The increase was mainly attributable to substantially decrease of sales volume as a result of the temporary suspended production for the six months ended September 30, 2011.

Bulk products

The results of bulk additives products segment for the six months ended September 30, 2011 and 2010 are summarized as below:

	Six months ended September 30,
	2011 Amount			% of Net sales			2010 Amount		% of Net sales
Net sales, bulk additives products	$	7,822,556			100.00	%	$	20,363,889		100.00	%
Cost of sales		3,455,083			44.17	%		6,387,590		31.37	%
Gross profit, bulk additives products		4,367,473			55.83	%		13,976,299		68.63	%
Operating expenses:
Selling expenses		2,292,891			29.31	%		522,181		2.56	%
General and administrative expenses		3,118,728			39.87	%		1,703,597		8.37	%
Total operating expenses		5,411,619			69.18	%		2,225,778		10.93	%
Income (loss) from operations, bulk additives products	$	(1,044,146	)		(13.35	)%	$	11,750,521		57.70	%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the six months ended September 30, 2011 and 2010 comprised the following:

	Six months ended September 30,
	2011			2010
Invoiced value on sales	$	7,850,176		$	20,482,577
Less: Sales tax		(27,620	)		(118,688	)
	$	7,822,556		$	20,363,889

Net sales decreased by $12,541,333 or 61.59% to $7,822,556 for the six months ended September 30, 2011, from $20,363,889 for the six months ended September 30, 2010. The decrease in sales of bulk additive products is primarily attributable to the implementation by the government of the PRC of new rules and regulations on health care products during 2011.

Cost of sales

Cost of sales decreased by $2,932,507 or 45.91% to $3,455,083 for the six months ended September 30, 2011, from $6,387,590 for the six months ended September 30, 2010. The decrease in cost of sales was primarily caused by the decrease in products sold for the six months ended September 30, 2011.

Gross profit

Gross profit decreased by $9,608,826 or 68.75% to $4,367,473 for the six months ended September 30, 2011, from $13,976,299 for the six months ended September 30, 2010. The decrease of gross profit was primarily caused by the decrease in products sold for the six months ended September 30, 2011.

Selling expenses

Selling expenses were $2,292,891 or 29.31% of net sales for the six months ended September 30, 2011, compared with $1,522,181 or 2.56% of net sales for the six months ended September 30, 2010. The selling expenses mainly included advertising expenses, promotion expenses, commission and salary. This increase in selling expenses was primarily attributable to salary expenses of approximately $1,388,000 for the six months ended September 30, 2011 compared to $76,000 for the six months ended September 30, 2010.

General and administrative expenses

General and administrative expenses were $3,118,728 or 39.87% of net sales for the six months ended September 30, 2011, compared with $1,703,597 or 8.37% of net sales for the six months ended September 30, 2010. The increase in general and administrative expenses was mainly attributable to the increase in our depreciation expense to approximately $409,000 for the six months ended September 30, 2011 from approximately $340,000 for the six months ended September 30, 2010. In addition, we incurred approximately 1,380,000 in research and development expense during the six months ended September 30, 2011 compared to approximately $695,000 for the six months ended September 30, 2010.

Income (loss) from operations

Loss from operations increased by $12,794,667 to $1,044,146 for the six months ended September 30, 2011, from $11,750,521 income from operations for the six months ended September 30, 2010. The increase was mainly attributable to the decrease of gross profit of $9,608,825 from the decrease in sales, increases in in selling expenses and general and administrative expenses for the six months ended September 30, 2011.

Liquidity and Capital Resources

Liquidity

We had cash of $148.0 million and working capital of $115.1 million as of September 30, 2011 and cash of $144.0 million and working capital of $132.3 million as of March 31, 2011.

Our statements of cash flow for the six months ended September 30, 2011 and 2010 are summarized as below:

	Six months ended September 30,
	2011			2010
Net cash provided by operating activities	$	690,981		$	14,724,963
Net cash used in investing activities		(1,217,779	)		(8,458,080	)
Net cash provided by (used in) financing activities		4,632,404			(4,245,770	)
Effect of exchange rate changes on cash		(135,319	)		1,243,075
Net change in cash and cash equivalents balances	$	3,970,287		$	3,264,188

Operating activities

Net cash provided by operating activities was $691,000 and $14.7 million for the six months ended September 30, 2011 and 2010, respectively. During the six months ended September 30, 2011, net cash provided by operating activities primarily consisted of the net loss of $13.9 million, increase in prepayments of $2.7 million and $4.9 million which were offset by the decrease in accounts receivable of $22.5 million. During the six months ended September 30, 2010, net cash provided by operating activities primarily consisted of net income of $29.7 million, which was offset by the change in the fair value of embedded derivatives of $12.0 million, increase in accounts receivable of $5.1 million, decrease in accounts payable of $1.4 million and decrease in other payables and accruals of $1.1 million. Our overall net cash flow generated by operating activities decreased due to the downturn of our business during the six months ended September 30, 2011.

Investing activities

We had capital expenditures totaling $1.2 million for the six months ended September 30, 2011, primarily related to the prepayment of $1.1 million for certain capital expenditures with respect to our facility in Qingpu and Yangling, and $100,000 in the acquisition of property, plant and equipment in Qingpu and Shining.

Financing activities

The net cash provided by financing activities for the six months ended September 30, 2011 was derived primarily from an advance from Mr. Song Jinan a director and stockhoder to the Company amounting to $4.6 million. During the six months ended September 30, 2010, we received advances of $1.7 million from this director and repaid $3.3 million to this director.

During the periods ended September 30, 2011 and 2010, the advance from a director, Mr. Song Jinan, was entered into because of the difficulty the Company faced in paying expenses incurred outside China in non-PRC currency due to the difficulties the Company had in converting currency because of foreign exchange controls.

In addition, we repurchased $2.8 million of our common stock during the six month ended September 30, 2010.

Commitments

Capital commitments

The cost for constructing the Yangling facility is expected to be over $58 million invested over two years, which would be mainly facilitated by the capital injection from BDH. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in its construction stage. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014. As of September 30, 2011, Growing Yangling entered into agreements with contractors related to the construction of the plant and manufacturing facilities for future payment of $2,990,810.

Purchase obligations

Other obligations

Growing entered into an agreement with a university in the PRC to perform research and development. The aggregate amount of future payments per year is approximately $1,407,327 (RMB9 million).

Inflation

We believe that inflation has not had a material impact on our results of operations for the six months ended September 30, 2011 and 2010.

Seasonality

Regarding our retail products, many of our customers purchase our products as gifts during the Chinese festivals and holidays, and the seasonal effect is correlated to these holidays during the year. For the first two fiscal quarters, there are no major Chinese festivals or holidays, except for the Dragon Boat Festival (June) and mid-Autumn Festival (September). However, in the last two fiscal quarters, there are some major Chinese festivals and holidays, including National Day (October), Christmas (December), New Year’s Day (January), and Chinese New Year (January to February).

With respect to our bulk additive products, while it is still too early to tell, we expect that our bulk additives sales will not be seasonal in nature because the bulk products are purchased by food manufacturers consistently over the year. Except for the possibility of the PRC government implementing from time to time new or different rules and regulations for the food industry, including with respect to additives and related products, we are not aware of and do not foresee any seasonal effects on our bulk additive products business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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, 2011, 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, 2011 and 2010. 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.

Revenue Recognition

Revenues of the Company are from the sale of our probiotics products. We recognize revenue from the sale of goods when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. Revenues are presented net of value added tax (VAT”). In our revenue arrangements, physical delivery is the point in time when customer acceptance occurs since title and risk of loss are transferred to the customer.

Stock based compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board, whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board, whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s common stock option grant is estimated using the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.

Use of estimates as applied to potential penalties for the late payment of taxes

In addition to the PRC Enterprise Income Tax (“EIT”), companies in the PRC that are engaged in the sale of goods are generally required to pay value added taxes (“VAT”) at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.

Our management believes that our operations in China were exempted from EIT and VAT for all years prior to 2005 because we had been recognized by the local government as an advanced technology enterprise. However, the Company never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in China prior to 2005. As a result, there is no way to ascertain the ultimate position which may be taken by the relevant PRC tax authorities in the future and accordingly, full provisions for tax liabilities in the amount of $12,734,640, for all years prior to 2005 have been recorded by the Company. Beginning in January 2006, we made tax payments to the PRC tax authorities for 2005 and we have made regular tax payments to the PRC tax authorities for all subsequent periods.

For the six months ended September 30, 2011, management made an assessment of whether it was necessary to provide a further provision for interest and penalties on these unpaid amounts. Management determined that no further provision for interest and penalties was necessary given the unlikelihood of payment of the amount already accrued and provided in the financial statements. This assessment was based upon receipt by the company of a report by an independent tax expert that the amount of taxes prior to 2005 may not be payable, the length of time the amount has been outstanding, and that there have been no requests from PRC tax authorities for payment of the unpaid taxes outstanding amounts. As such, management believes that the previously recorded amounts are sufficient to cover any settlement of this liability.

Recent Accounting Pronouncements

See Note 2 to the Notes to the Unaudited Condensed Consolidated Financial Statements for the Three and Six months Ended September 30, 2011.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rates Risk

Our exposure to interest rate risk for changes in interest rates relates primarily to the interest-bearing bank loans and interest income generated by our bank deposits. We have not used any derivative financial instruments in our investment portfolio or for cash management purposes. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. Nevertheless, our future interest expense or interest income may expect to be decreased due to changes in interest rates in the PRC.

Foreign Exchange Rates Risk

We do not hold any derivative instruments and do not engage in any hedging activities. Because most of our purchases and sales are made in RMB, any exchange rate change affecting the value of the RMB relative to the U.S. Dollar could have an effect on our financial results as reported in U.S. Dollars. If the RMB were to depreciate against the U.S. Dollar, amounts reported in U.S. Dollars would be correspondingly reduced. If the RMB were to appreciate against the U.S. Dollar, amounts reported in U.S. Dollars would be correspondingly increased.

ITEM 4.

CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

In a letter to the Company on January 9, 2012, the SEC concluded that the Company’s lack of U.S. GAAP experience is a material weakness in our disclosure controls and procedures. The SEC required the Company to include disclosure about this material weakness in subsequent filings. For information on the Company’s correspondence with the SEC with respect to the Company’s internal controls over financial reporting, see “– Management’s Quarterly Report on Internal Control over Financial Reporting” below.

Since the SEC’s letter of January 9, 2012, the Company has endeavored to address the concerns raised by the SEC. The Company’s Audit Committee and our management are still engaged in discussions about how best to rectify fully the material weakness in our disclosure controls and procedures. The Audit Committee has recommended that the Company hire additional qualified personnel to prepare the Company’s books and records and financial statements in accordance with U.S. GAAP. The Company has retained the services of an accounting professional to perform our internal audit and assist with SEC compliance for purposes of all future reporting. Management believes that these remediation measures have improved and will materially improve the Company’s disclosure controls and procedures for periods subsequent to March 31, 2012, and that the corresponding material weaknesses are being addressed with respect to periods subsequent to March 31, 2012.

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, as of such date, our disclosure controls and procedures were not effective and suffered from a material weakness because of the Company’s lack of training and/or experience with preparing financial statements in accordance with U.S. GAAP.

Management’s Quarterly Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with policies may deteriorate.

In a letter dated January 7, 2011, the SEC commented on the Company’s Annual Report on Form 10-K for Fiscal Year ended March 31, 2010 and Quarterly Report for the Period Ended September 30, 2010. The SEC asked the Company a number of questions about how we prepare financial statements and how we assess our internal controls over financial reporting. The Company replied to the SEC’s comment letter on February 16, 2011, and the SEC and the Company subsequently exchanged numerous comment and reply letters, respectively, through January 9, 2012. In a letter to the Company on that date, the SEC concluded that the Company’s lack of U.S. GAAP experience is a material weakness in our internal control over financial reporting. For information on the Company’s correspondence with the SEC with respect to the Company’s disclosure controls and procedures, see “Disclosure Controls and Procedures” above.

In reaching such decision, the SEC concluded that those primarily responsible for the preparation of the Company’s books and records and financial statements do not have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP. The SEC noted that the Company’s former and interim Chief Financial Officers do not hold a license such as that of a Certified Public Accountant in the U.S. and have not attended U.S. institutions or extended educational programs that would provide sufficient relevant education relating to U.S. GAAP; the SEC also noted that most of the U.S. GAAP audit experience, if any, of the Company’s former and interim Chief Financial Officers consists of audits of subsidiary financial information that supports or is included in the U.S. GAAP financial statements of parent registrants. The SEC also noted that the Company’s retention of a consultant to assist with the preparation and fulfillment of all SEC and U.S. GAAP reporting requirements was further evidence that our accounting department does not possess the requisite U.S. GAAP knowledge to prepare financial statements in accordance with U.S. GAAP. The SEC required the Company to file an amended Annual Report on Form 10-K for the year ended March 31, 2010 disclosing such material weakness, which the Company intends to file as promptly as is reasonably practicable, and also required the Company to include disclosure about this material weakness in subsequent filings.

Since the SEC’s letter of January 9, 2012, the Company has endeavored to address the concerns raised by the SEC. The Company’s Audit Committee and our management are still engaged in discussions about how best to rectify fully the material weakness in our internal control over financial reporting. The Audit Committee has recommended that the Company hire additional qualified personnel to prepare the Company’s books and records and financial statements in accordance with U.S. GAAP. The Company has retained the services of an accounting professional to perform our internal audit and assist with SEC compliance for purposes of all future reporting. Management believes that these remediation measures have improved and will materially improve the Company’s internal control over financial reporting for periods subsequent to March 31, 2012, and that the corresponding material weaknesses are being addressed with respect to periods subsequent to March 31, 2012.

Management is continuing its review of the Company’s internal control over financial reporting as it believes the following material weaknesses still exist: (i) a lack of senior management personnel who have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP; (ii) the Company did not maintain an adequate financial reporting organizational structure (in part due to the turnover of the executives in the CFO and Interim CFO positions) to support the complexity and operating activities of the Company resulting in a weakness in efficiency and controls related to the financial statement closing process; and (iii) the Company may not have maintained sufficiently consistent corporate governance (including proper recording of minutes of meetings and decisions of the Company’s Board of Directors) and financial controls to ensure proper delegation of authority limits and timeliness of Board approval for significant transactions. However, the Company has taken steps described above to remediate these deficiencies.

Inherent Limitations on the Effectiveness of Controls

Management does not expect that the Company’s disclosure controls and procedures or its internal controls over financial reporting will prevent or detect all errors and all fraud. 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. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

ITEM 1A.

RISK FACTORS.

If the SEC revokes the registration of our common stock, the trading market for our common stock may cease to exist.

On September 15, 2011, the staff of the SEC informed the Company that it intended to recommend that the SEC institute a public administrative proceeding against the Company for alleged violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 or 13a-16 promulgated thereunder. On October 7, 2011, the SEC issued an Order Instituting Proceedings to determine whether it was necessary and appropriate to suspend or revoke the registration of the Company’s securities. On February 22, 2012, the administrative law judge overseeing the proceedings issued a decision order that the registration of the Company’s securities be revoked. On March 26, 2012, the SEC granted the Company’s petition for review of this decision. The results of the SEC’s review are pending as of June 21, 2013. Oral argument has been scheduled for July 10, 2013. If the registration of the Company’s securities is revoked, no U.S. registered broker-dealer may execute trades in the Company’s shares and the trading market for our common stock may cease to exist. In such event, investors may not be able to liquidate their investment.

Risks Related to Our Business

We have identified material weaknesses relating to: (i) a lack of senior management personnel who have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP; (ii) the Company did not maintain an adequate financial reporting organizational structure to support the complexity and operating activities of the Company resulting in a weakness in efficiency and controls related to the financial statement closing process; (iii) management of the Company did not conduct adequate monitoring and assessments of its accounting and financial statement control processes throughout the reporting periods, which have affected and could continue to affect our ability to ensure timely and reliable financial reports, have affected and could continue to affect the ability of our auditors to attest to the effectiveness of our internal controls should we once again become an accelerated filer in the future, and weaken investor confidence in our financial reporting.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies in their annual reports to include a report of management on the reporting company’s disclosure controls and procedures and internal controls over financial reporting. After reviewing our Annual Report on Form 10-K for the year ended March 31, 2010 and our Quarterly Report on Form 10-Q for the period ended December 31, 2010, the SEC concluded in a letter to the Company dated as of January 9, 2012, that the Company’s lack of U.S. GAAP experience is a material weakness in our disclosure controls and procedures and in our internal control over financial reporting. In its letter, the SEC also required the Company to file an amended Annual Report on Form 10-K for the year ended March 31, 2010 disclosing such material weakness, which the Company intends to file as promptly as is reasonably practicable. Our management has concluded that our disclosure controls and procedures were not effective as of September 30, 2011, and there existed material weaknesses in our internal control over financial reporting as of September 30, 2011. The Company’s Audit Committee and our management are still engaged in discussions about how best to rectify fully such weakness. The Audit Committee has recommended that the Company hire, and management has retained the services of, additional qualified personnel to prepare the Company’s books and records and financial statements in accordance with U.S. GAAP.

We depend on the services of our directors and key employees, the loss of which could harm our business.

We believe our success relies on the strategies, vision, efforts and technical expertise of our directors and key management personnel, including Mr. Song Jinan. The resignation or departure of any of these key people could have a material adverse impact on our operations and future prospects. In addition, if any of these key people join a competitor or form a competing company, we could lose customers and incur additional expenses to recruit replacements and train personnel. We have entered into standard form confidentiality agreements with our technical employees with the exception of our directors and our key executives, which contain non-competition clauses. We do not maintain key-man life insurance for any of our key executives.

Failure to attract and retain qualified employees may adversely affect our business.

Our continued success depends largely on our ability to attract and retain highly skilled executive, managerial and technical employees. We may face difficulties in recruiting skilled personnel in our industry due to its specialized nature. If we are unable to attract and retain a sufficient number of suitably skilled and qualified personnel, our business would be materially and adversely affected. We may also have to pay substantial wages to attract sufficient numbers of skilled employees and professionals, which may adversely affect our operating margins.

We are not insured against potential losses and could be seriously harmed by natural disasters, catastrophes or acts of war.

Our facilities and inventories could be materially damaged by hurricanes, floods and other natural disasters, catastrophes, acts of war or other catastrophic circumstances. We do not maintain insurance covering such events. If any of these events occur, we could incur material losses and liabilities, which could negatively affect our operating results.

We may incur material product liability claims, which could increase our costs and adversely affect our reputation, revenues and operating income.

As a manufacturer of products designed for human consumption, we are subject to product liability claims that the use of our products has resulted in injury. Our products contain three types of live bacteria, lactobacillus acidophilus, bifidobacterium bifidum and bifidobacterium adolescentis, which fall within the nine types of “good” live bacteria that are approved for direct sale to the public in China as health food. We obtain our bacteria from human sources. Although we believe this reduces the risk that it will be rejected by the human body, there can be no assurance that consumption of such bacteria could not result in adverse health effects. We do not maintain any product liability insurance. A product liability claim against us could result in costly litigation and could adversely affect our reputation with our customers, which in turn could adversely affect our revenues and operating income.

Our revenues primarily depend on sales of one product, and a decline in sales of this product could cause our revenues to decrease.

We receive a large portion of our revenue from the sale of our Shining Essence product. Sales of this product represented approximately 20% and 11% of our total sales of our retail products for the six months ended September 30, 2011 and 2010, respectively, and 19% of our total sales of retail products for the year ended March 31, 2011. We expect that Shining Essence will continue to account for a sizable portion of our revenues for the foreseeable future. In addition to Shining Essence, our research and development team has successfully developed other new retail products, such as Shining Probiotics Protein Powder, which represented 38% and 20% for the six months ended September 30, 2011 and 2010, respectively, of our total sales of our retail products for the six months ended September 30, 2011 and 2010, respectively, and 24% of our total sales of retail products for the year ended March 31, 2011. Any factors adversely affecting the pricing of, demand for, or market acceptance of, Shining Essence, including increased competition, could cause our revenues to decline and our business and future operating results to suffer.

Consumer concerns regarding the safety and quality of food products or health concerns could adversely affect sales of our products.

Our sales performance could be adversely affected if consumers lose confidence in the safety and quality of our products. Consumers in China are increasingly conscious of food safety and nutrition. Consumer concerns about, for example, the safety of pork products, or the safety of food additives used in processed meat products, could discourage them from buying certain products and cause our results of operations to suffer. Specifically, in 2011, there was some negative publicity regarding the quality and safety of certain meat products which had a broad effect on Chinese consumer habits with respect to many food products. While we believe that we maintain an advanced system for quality assurance and control, our operations may be impacted by the deteriorating reputation of the food industry in China due to recent food safety scandals. In addition, the product return program we commenced at the end of calendar year 2011 in response to certain of our products which were below the Company’s quality standards, and the special concession credits we made to certain of our distributors to address complaints from their customers in respect of such products, could have a negative effect on our customers’ perception of the safety and reliability of our probiotics products.

We are subject to concentrations of credit risk that could adversely affect our operations.

Our principal operations are in China and all of our sales during the interim periods of fiscal year 2012 and fiscal year 2011 arose in China. A significant number of our financial instruments, principally cash and accounts receivable, are located in China. These financial instruments include:

cash deposits in China, which includes the Special Administrative Region of Hong Kong, where there is currently no rule or regulation in place for obligatory insurance of bank accounts;

accounts receivable; and

a loan receivable.

The concentration of these financial instruments in China subjects us to concentrations of credit risk that could adversely affect our operating results.

If our products fail to keep pace with advances in the industry, they may be displaced by competitors’ newly developed products.

Other companies in our industry may gain significant competitive advantages by introducing new products to the market, delivering constant innovation in products and techniques and offering competitive prices. Our future growth partially depends on our ability to develop products that are more effective in meeting consumer needs. In addition, we must be able to manufacture and effectively market those products. The sales of our existing products may decline if a competing product is introduced by other companies.

We may have difficulty competing with larger and better-financed companies in our industry, which could require us, among other things, to lower our prices and could result in the loss of our customers.

Some of our existing and future competitors may have greater technical and financial resources than we do and may use these resources to pursue a competitive position that threatens our products. Our products could be rendered obsolete or uneconomical by the development of new products to treat conditions addressed by our products, as a result of technological advances affecting the cost of production, or as a result of marketing or pricing action by one or more of our competitors.

Additionally, with China’s accession to the World Trade Organization, the Chinese government has undertaken to open up the Chinese market to foreign companies. China reduced its average import tariff rate overall to 11.50% in 2003 and has further reduced it to 9.90% in 2005. As a result, foreign competitors may form alliances with or acquire companies in our industry in China. Intensified competition from these foreign competitors may lead to lower profit margins due to price competition, loss of customers and slower than anticipated growth.

Unfavorable publicity or research reports casting a negative light on our industry or our products could change consumer perceptions and have an adverse affect on our ability to market and sell our products.

We believe that our industry is affected by media attention. Future research reports or publicity about the quality of products in our industry generally, or our products in particular, could have a material adverse effect on our business. Scientific research to date is preliminary and there can be no assurance that future scientific research or publicity will be favorable to our industry or any particular product or consistent with earlier favorable research or publicity. Adverse publicity could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately. Given our dependence upon consumer perceptions, adverse publicity, whether or not accurate, associated with illness or other adverse effects resulting from the consumption of our products or any similar products distributed by other companies could have a material adverse effect on our business.

Our expansion into the bulk additives business may not generate sufficient revenues, and the construction of our new facilities to accommodate this business may result in increased costs and losses.

We are expanding our operations into the bulk additives business through the supply of high quality probiotics to be used as additives in, among other things, dairy products to manufacturers in China. We have completed construction of Phase I of our new Qingpu production plant, which has a 150-metric tons annual capacity that can accommodate our new bulk additives business. We began commercial production at this plant in February 2010. In addition, we commenced construction in June 2012 on a new facility in Yangling related to the production of probiotics and probiotics-related biological additives for the animal feed industries. This will expose us to many risks, including the following:

there may not be sufficient market demand for bulk probiotics additives or our products in particular;

we may experience delays and cost overruns during construction of our new facilities, which may result in losses; and

we may experience substantial start up losses when the plants are first commissioned.

Our shift in focus from retail to the bulk additives business, and the shift from direct selling to selling through a distribution network, may fail.

In our continuing effort to shift our focus from retail to bulk additives business and to improve operating efficiency, we have consolidated our retail outlets, as we believe the distribution network for our retail products is more efficient. Comparatively, directly selling through retail outlets involves increased leasing expenses and large staffing cost. By selecting six new distributors, we have expanded our distribution network into the Pan-Beijing area to sell the Company’s retail products. The local distributors sell the Company’s retail probiotics products through established distribution networks, including malls, hypermarkets, supermarkets, and functional food stores, adding approximately 30 new points of sale. As of September 30, 2011, we had a total of 39 distributors for retail products. In light of the increasing online sales of health food in China, we have started to work with two on-line selling companies, www.ule.com.cn and www.yihaodian.com, to sell our retail products. Furthermore, the Company has established and launched an in-house e-commerce department dedicated to promoting and selling our retail products online through the Company’s website at http://www.shiningbt.com/Product/.

With respect to our bulk additives products business, we had 60 customers for bulk additives probiotics products as of September 30, 2011. Our customers are mainly in the industries of animal feed manufacturers, functional food, nutritional products and pharmaceutical producers, and dairy companies.

As we shift our focus from retail to bulk additives and implement a distribution network selling model, there is a risk that our current systems may not be able to accommodate the increased volume or the complexity of the future business. Our short term operating results may be adversely affected as additional capital investments will have to be made for system upgrades, replacements, or improvements.

We face potential tax exposure.

In addition to the Enterprise Income Tax (“EIT”), companies in the PRC that are engaged in the sale of goods are generally required to pay value added taxes (“VAT”) at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.

According to PRC tax regulations, the overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to interest at the 0.05% per day, and potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of taxes payable. Through September 30, 2011, the Company accrued the interest that may be potentially payable upon these taxes incurred prior to 2005 and the unpaid dividend withholding tax. Interest related to the unpaid taxes was recognized in the Company’s unaudited condensed consolidated statements of operations as a component of its income tax provision.

We may not be able to protect our intellectual property against claims by other parties or enforce our rights with respect to our intellectual property.

Without patents, we may have no legal recourse in the event that our processes and technologies are replicated by other parties. If our competitors are able to replicate our processes, technologies, and systems at lower costs, we may lose our competitive advantage and our profitability will be adversely affected.

In addition, we believe that over the last five years our “Shining” brand has become a highly recognizable brand in our industry in Shanghai. To protect this brand, which we consider important to our continued success, we have registered eight trademarks in China. If our competitors introduce products of inferior qualities to the market using trademarks that are confusingly similar to the “Shining” or “Growing” trademarks, our reputation and operating results will be adversely affected.

From time to time, we may have to resort to litigation to enforce our rights with respect to our intellectual property. This type of litigation could result in substantial costs and diversion of our resources, which would adversely affect our results of operations.

Management by a small team of officers may create conflicts of interests and impede the successful implementation of our growth plans.

Mr. Song and Dr. Chang, our only executive officers, are responsible for all managerial functions of the Company. We have been hiring additional employees to complete our management team, but we cannot assure you that we can assemble a management team that can tackle the expansion plans that we have. The concentration of management could be disadvantageous to stockholders with interests different from those of Mr. Song or Dr. Chang.

Risks Related to Government Regulations

We are subject to government regulation in China, and changes in Chinese regulations may substantially increase the cost of manufacturing and selling our products.

The manufacturing and marketing of our products are subject to various governmental regulations in China. Government regulation includes inspection of and controls over manufacturing, safety and environmental controls, efficacy, labeling and the sale and distribution of wellness products.

As a company which produces probiotics supplements, we are subject to the Law on the Food Conditions of the PRC which became effective on October 30, 1995, the Administrative Rules for Healthy Food promulgated by the Ministry of Health on March 15, 1996 which became effective on June 1, 1996, the Notice of Circulating the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food and its appendixes-Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food, and List of Good-Live-Bacteria Applicable for Healthy Food, promulgated by the Ministry of Health which became effective on March 23, 2001, the Administration Rules for the Registration of Healthy Food (experimental) promulgated by the State Food and Drug Administration on April 30, 2005, which became effective on July 1, 2005, and other relevant rules and regulations issued by the Ministry of Health and the State Food and Drug Administration. In addition, Shining is a Chinese corporation and therefore is subject to the Company Law of China and more specifically to the Foreign Company provisions of the Company Law and the Law on Foreign Capital Enterprises of China.

Our industry is relatively new in China, and the manner and extent to which it is regulated is evolving. Changes in existing laws or new interpretations of such laws may have a significant impact on our methods and costs of doing business. For example, new legislative proposals that affect our product pricing, reimbursement levels, approval criteria and manufacturing requirements may be proposed and adopted.

The costs of compliance with current or future legislation or regulatory requirements may be significant, and could force us to curtail our operations or otherwise have a material adverse effect on our financial condition, results of operations or cash flows. For example, we have obtained three licenses and permits which are required for us to operate our business in China. If the regulations regarding these licenses and permits are changed, it may be materially burdensome for us to obtain or renew these licenses and permits or they may be otherwise unavailable.

Government regulation of our retail prices and advertising methods may adversely affect our results of operations.

We are subject to government regulations with respect to the prices we charge, the rebates we may offer to customers and our marketing methods. In addition, we are required to obtain approval from Chinese government authorities regarding the contents of advertisements related to our products before they can be published. If the Chinese government requires that we set our retail prices at undesirable prices or significantly limits our ability to advertise our products, it could have a material adverse effect on our results of operations.

We may not be able to obtain regulatory approvals for our products or reimbursement from the sale of our products.

The manufacture and sale of our products in China is highly regulated by a number of state, regional and local authorities. These regulations significantly increase the difficulty and costs involved in obtaining and maintaining regulatory approval for marketing new and existing products. In addition, our future growth and profitability are, to a significant extent, dependent upon our ability to obtain timely regulatory approvals from the relevant authorities.

We may not be able to obtain manufacturing or marketing approvals or pass on-site inspections for our current and future products, including re-registration certification and re-evaluation of our products or our production facilities, and failure to obtain the necessary approvals or pass as referenced above could materially harm our business prospects.

Certain capsules that are used by the Company as delivery methods for some of its probiotics products are considered medicines and so are regulated as such. All medicines must be approved by the State Food and Drug Administration (SFDA) before they can be manufactured, marketed or sold in the PRC. The SFDA requires a pharmaceutical manufacturer to successfully complete clinical trials of a new medicine and demonstrate its manufacturing capability before approval to manufacture that new medicine is granted. Clinical trials are expensive and their results are uncertain. It usually takes two to five years for a manufacturer to obtain approval of a typical SFDA production application. However, the SFDA may not strictly adhere to such general timeline and may alter the review procedure. We have no ability to foresee or control any such changes in procedure, which could delay our launch of new products. Furthermore, the SFDA and other regulatory authorities may apply new standards for safety, manufacturing, labeling, marketing and distribution of future products. Complying with these standards may be time-consuming and expensive. In addition, our future products may not be efficacious or may have undesirable or unintended side effects, toxicities or other characteristics that may preclude us from obtaining approval or may prevent or limit their commercial use. As a result, we may not be able to obtain SFDA or other governmental approvals for our future products on a timely basis or at all.

Furthermore, even after we obtain such approvals for a proposed product, we may not be able to pass the on-site inspections required prior to the launch of such proposed product. If we fail to pass the on-site inspection in connection with a production permit application, we will not be able to obtain the production permit and commence production. Failure to obtain or renew approvals or pass on-site inspections for our existing or future products could materially harm our business prospects. In addition, in connection with our manufacture of any new products that will require us to add to or expand our existing production lines or to construct new production lines, we will be required to obtain production permits. Failure to obtain such permits could render us unable to produce any new products.

Failure to comply with applicable GMP standards could have a material adverse effect on our business, financial condition and results of operations.

We are required to comply with applicable GMP regulations, which include requirements relating to personnel, premises and equipment, raw materials and products, qualification and validation, document management, production management, quality control and quality assurance and products distribution and recall. Manufacturing facilities must be approved by governmental authorities before we can use them to commercially manufacture our products and are subject to inspection by regulatory agencies. The SFDA has implemented more stringent GMP standards which are aimed at improving drug production management and controlling risks in the production process and introduce internationally-recognized quality control mechanisms. The latest update to the GMP standards requires increased quality control and documentation and improved overall manufacturing processes, thus causing an increase of cost in manufacturing and decrease of profit margins.

A pharmaceutical manufacturer must meet the new GMP standards, which became effective on March 1, 2011, for each of its production facilities in China with respect to each form of pharmaceutical products it produces within a five-year grace period. Manufacturers of injectables, blood products or vaccines have a three-year grace period to bring existing facilities in line with the revisions.

Although each of our eight production lines meets GMP guidelines promulgated in 1998 and we are in the process of upgrading our production facilities to bring them in line with the new GMP standards, we may not obtain clearance from the SFDA in the event that we are inspected. Any failure to comply with the new GMP standards may subject us to fines or other penalties, which may have a material and adverse impact on our business, financial condition and results of operations.

The PRC Government has focused more on food safety in recent years and we may be subject to substantial liabilities should the consumption of any of our products cause personal injury or illness, and unlike most food processing companies in the United States, we do not maintain product liability insurance to cover our potential liabilities.

The sale of food products for human consumption involves an inherent risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or degeneration, including the presence of foreign contaminants, chemical substances or other agents or residues during the various stages of the procurement and production process. The PRC’s Food Safety Law, which became effective on June 1, 2009, enhances the supervision and examination of PRC governmental authorities over food production and provides that no exemption from such inspections and examinations shall be permitted. While we are subject to governmental inspections and regulations, we cannot assure you that consumption of our products will not cause a health-related illness in the future, or that we will not be subject to claims or lawsuits relating to such matters.

Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions that our products caused personal injury or illness could adversely affect our reputation with customers and our corporate and brand image. In addition, the product return program we commenced at the end of calendar year 2011 in response to certain of our products which were below the Company’s customary quality standards, and the special credits that were given to certain of our distributors to address complaints from their customers in respect of such products, could have a negative effect on our customers’ perception of the safety and reliability of our probiotics products. Unlike most food processing companies in the United States, but in line with industry practice in China, we do not maintain product liability insurance. Furthermore, our products could potentially suffer from product tampering, contamination or degeneration, or they could be mislabeled or otherwise damaged. Under certain circumstances, we may be required to recall products. Even if a situation does not necessitate a product recall, we cannot assure you that product liability claims will not be asserted against us as a result. A product liability judgment against us or a product recall could have a material adverse effect on our revenues, profitability and business reputation.

Risks Related to Doing Business in China

Adverse changes in China’s economic, political and social conditions and government policies could have a material adverse effect on the overall economic growth of China, which could adversely affect our results of operations and financial condition.

We currently conduct our business solely in China. Changes in the economic and political situation in China and the economic, financial, fiscal and other policies adopted by the Chinese government may affect our operations, performance and profitability. The economy of China differs from the economies of most developed countries in many respects, including:

structure;

extent of government involvement;

level of development;

growth rate;

control of foreign exchange; and

allocation of resources.

China’s economy has traditionally been subject to central planning, with a series of economic plans promulgated and implemented by the Chinese government. Over the past 30 years, the Chinese government has been reforming the economic and political systems in China in an attempt to achieve economic and social advancements. Many of these reforms were unprecedented and are expected to continue while political, economic and social factors may also lead to further adjustments to China’s reform measures. These reforms and adjustments may not always have a positive effect on our operations. Accordingly, we cannot assure you that our performance and profitability will not be adversely affected from these measures. In addition, there is no assurance that the Chinese government will continue to pursue economic liberalization and other reforms.

Macroeconomic measures taken by the Chinese government may cause the Chinese economy to slow down.

In response to concerns relating to China’s high rate of growth in industrial production, bank credit, fixed investment and money supply and growing inflationary pressures, the Chinese government has taken measures to slow economic growth to a more manageable level. Among the measures that the Chinese government has taken are restrictions on bank loans in certain sectors and the increase of interest rates. We cannot assure you that those measures will not result in a slowdown in economic growth and hence a reduction in demand for consumer products in China. These measures and any additional measures could contribute to a slowdown in the Chinese economy and could potentially cause the economy to enter a recession, which could have an adverse impact on demand for a wide range of products in China, including our products.

There are risks inherent in doing business in China.

The PRC is a developing country with a young market economic system overshadowed by the state under heavy regulation and scrutiny. Its political and economic systems are very different from the more developed countries. China also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationship with other countries, including but not limited to the United States. Such shocks, instabilities and crises may in turn significantly and adversely affect our performance.

Substantially all of our assets are located in the PRC and all of our revenues are derived from our operations in the PRC. Accordingly, our results of operations and prospects are subject, to a significant extent, to the political and legal developments in the PRC.

Substantially all of our assets are located in the PRC and all of our revenues are derived from our operations in the PRC. Accordingly, our results of operations and prospects are subject, to a significant extent, on the economic, political and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects.

The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. We cannot assure you that changes in the PRC’s economic, political or legal systems will not detrimentally affect our business, prospects, financial conditions and results of operations.

There are uncertainties regarding interpretation and enforcement of Chinese laws and regulations.

China’s legal system is a civil law system based on statutory law. Prior legal decisions and judgments have little precedential value. China is still in the process of developing a comprehensive statutory framework and its legal system is still considered to be underdeveloped in comparison with the legal systems in some western countries. Since 1979, the Chinese government has formulated and enacted a large number of laws and regulations governing economic matters, securities activities and foreign investments.

Despite significant development in its legal system, China does not have a comprehensive system of laws. The interpretation of Chinese law by courts and tribunals may be inconsistent and influenced by government policies and other considerations. In addition, the enforcement of existing laws and regulations can be uncertain and unpredictable. Judgments and arbitration rulings may be unenforceable. The promulgation of new laws, changes to existing laws and inconsistent interpretation of laws could have a negative impact on our business.

Our business may be affected by unexpected changes in regulatory requirements in the jurisdictions in which we operate.

Our company, and its subsidiaries, is subject to many general regulations governing business entities and their behavior in China and in other jurisdictions in which we and our subsidiaries have, or plan to have, operations and market products. In particular, we are subject to laws and regulations covering food, dietary supplements and pharmaceutical products. Such regulations typically deal with licensing, approvals and permits. Any change in product licensing may make our products more or less available on the market. Such changes may have a positive or negative impact on the sale of our products and may directly impact the associated costs in compliance and our operational and financial viability. Such regulatory environment also covers any existing or potential trade barriers in the form of import tariff and taxes that may make it difficult for us to import our products to certain countries and regions, such as Hong Kong, which would limit its international expansion.

All of our officers and directors, and substantially all of our assets, are located in China, thus it may be extremely difficult to acquire jurisdiction and enforce liabilities against our management and our assets.

Because our executive officers and directors are Chinese citizens, it may be difficult, if not impossible, to acquire jurisdiction over them in the event a lawsuit is initiated against us or our management by a stockholder or group of stockholders in the United States. We anticipate that future members of our management will also be Chinese citizens. Because the majority of our assets are located in China, it would also be extremely difficult to access those assets to satisfy an award entered against us in U.S. court.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

Since almost all of our future revenues may be in the form of Renminbi, any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. There are significant restrictions on convertibility of the Renminbi for current account transactions, including primarily the restriction that foreign invested enterprises may only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions.

Inflation in the PRC could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, it has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products do not rise at a rate that is sufficient to fully absorb inflation-driven increases in our costs of supplies, our profitability can be adversely affected.

In addition, in order to control inflation, the PRC government might impose controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. The implementation of these and other similar policies may impede economic growth and thereby harm the market for our products in the future.

Deterioration of the PRC’s political relations with the U.S., Europe, or other nations could make Chinese businesses less attractive to Western investors.

The relationship between the U.S. and the PRC is subject to sudden fluctuation and periodic tension. Changes in political conditions in the PRC and changes in the state of Sino-foreign relations are difficult to predict and could cause potential target businesses or services to become less attractive. This could lead to a decline in our profitability. Any weakening of relations between the U.S., Europe, or other nations and the PRC could also have a material adverse effect on our ability to raise additional capital.

The enforcement of new labor contract law and its implementation rules and increase in labor costs in the PRC may adversely affect our business and our profitability.

China adopted the PRC Employment Contract Law, or the new Labor Contract Law, effective January 1, 2008 and the implementation rules effective September 18, 2008. The new Labor Contract Law and its implementation rules impose more stringent obligations on employers for, among others, entering into written employment contracts, hiring temporary employees, dismissing employees, setting compensations for dismissal and protecting certain sick or disabled employees from dismissal and setting forth detailed requirements relating to the contents of the employment contracts. The implementation of the new Labor Contract Law may increase our operating expenses, in particular our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the new Labor Contract Law may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.

Failure to comply with PRC regulations regarding the registration requirements for employee equity incentive plans may subject our PRC citizen employees or us to fines and other legal or administrative sanctions.

On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Share Option Plan of Overseas-Listed Company, or the Share Option Rule. Under the Share Option Rule, PRC citizens who are granted share options or other employee equity incentive awards by an overseas publicly-listed company are required, through a PRC agent who may be a PRC subsidiary of such overseas publicly-listed company, to register with the SAFE and complete certain other procedures related to the share options or other employee equity incentive plans. We and our PRC citizen employees who are granted share options or other equity incentive awards under our 2010 Equity Incentive Plan, or PRC optionees, are subject to the Share Option Rule. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.

We are subject to environmental regulations and may be exposed to liability and potential costs for environmental compliance.

We are subject to PRC laws and regulations concerning the discharge of waste water, gaseous waste and solid waste during our manufacturing processes. We are required to establish and maintain facilities to dispose of waste and report the volume of waste to the relevant government authorities, which conduct scheduled or unscheduled inspections of our facilities and treatment of such discharge. We may not at all times comply fully with environmental regulations. Any violation of these regulations may result in substantial fines, criminal sanctions, revocations of operating permits, shutdown of our facilities and obligation to take corrective measures. Our cost of complying with current and future environmental protection laws and regulations and our liabilities which may potentially arise from the discharge of effluent water and solid waste may materially adversely affect our business, financial condition and results of operations. The government may take steps towards the adoption of more stringent environmental regulations. Due to the possibility of unanticipated regulatory or other developments, the amount and timing of future environmental expenditures may vary substantially from those currently anticipated. If there is any unanticipated change in the environmental regulations, we may need to incur substantial capital expenditures to install, replace, upgrade or supplement our pollution control equipment or make operational changes to limit any adverse impact or potential adverse impact on the environment in order to comply with new environmental protection laws and regulations. If such costs become prohibitively expensive, we may be forced to cease certain aspects of our business operations.

The 2006 M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

On August 8, 2006, six PRC regulatory agencies (the Ministry of Commerce, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and SAFE) jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. The 2006 M&A Rule establishes additional procedures and requirements that could make some acquisitions of PRC companies by foreign entities, such as our company, more time-consuming and complex, including requirements in some instances that the approval of the Ministry of Commerce be obtained for transactions involving the shares of an offshore-listed company being used as the acquisition consideration by foreign entities, including Sino-foreign joint ventures. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of the 2006 M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

The increased scrutiny of acquisition transactions by the PRC tax authorities may have a negative impact on our acquisition strategy.

In connection with the new EIT law, the Ministry of Finance and State Administration of Taxation jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59, on April 30, 2009. On December 10, 2009, the State Administration of Taxation issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or Circular 698. Both Circular 59 and Circular 698 became effective retroactively to January 1, 2008. By promulgating and implementing these circulars, the PRC tax authorities have strengthened their scrutiny over the direct or indirect transfer of equity interest in a PRC resident enterprise by a non-resident enterprise. For example, Circular 698 specifies that the PRC State Administration of Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed as abusing corporate structures for tax-avoidance purposes and without reasonable commercial intention. We may pursue acquisitions as one of our growth strategies, and may conduct acquisitions involving complex corporate structures. We cannot be assured that the PRC tax authorities will not, at their discretion, adjust the applicable capital gains, tax thus causing us to incur additional acquisition costs.

Our China-sourced income is subject to PRC withholding tax under the new Enterprise Income Tax Law of the PRC, and we may be subject to PRC enterprise income tax at the rate of 25% when more detailed rules or precedents are promulgated.

We are a Delaware holding company with substantially all of our operations conducted through our operating subsidiary in China. Under the new PRC Enterprise Income Tax Law, or the new EIT law, and its implementation rules, both of which became effective on January 1, 2008, China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, is generally subject to a 10% withholding tax. The new EIT law, however, also provides that enterprises established outside China whose “de facto management bodies” are located in China are considered “tax resident enterprises” and will generally be subject to the uniform 25% enterprise income tax rate as to their global income. Under the implementation rules, “de facto management bodies” are defined as the bodies that have, in substance, overall management control over such aspects as the production and business, personnel, accounts and properties of an enterprise. In April 2009, the PRC tax authority promulgated the Notice on Determination of Tax Resident Enterprises of Chinese-controlled Offshore Incorporated Enterprises in accordance with Their De Facto Management Bodies, or Circular 82, to clarify the criteria for determining whether the “de facto management bodies” are located within the PRC for enterprises incorporated overseas with controlling shareholders being PRC enterprises. As all of our operational management is currently based in the PRC, and we expect them to continue to be located in China, our company may be deemed a PRC resident enterprise and therefore be subject to the PRC enterprise income tax at a rate of 25% on our worldwide income, which excludes the dividends received directly from another PRC resident enterprise. Due to the lack of clear guidance on the criteria pursuant to which the PRC tax authorities will determine our tax residency under the new EIT law, it remains unclear whether the PRC tax authorities will treat us as a PRC resident enterprise. Therefore, we are unable to confirm whether we are subject to the tax applicable to resident enterprises or non-resident enterprises under the new EIT law. Furthermore, in connection with the new EIT law and Tax Implementation Regulations, the Ministry of Finance and State Administration of Taxation jointly issued, on April 30, 2009, the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59, which became effective retroactively to January 1, 2008. As Circular 59 has only recently been promulgated, it is uncertain to us as to how it will be implemented and the respective tax base and the tax exposure cannot be determined reliably at this stage. In case we are required to pay the income tax on capital gains by the relevant PRC tax authorities, our financial conditions and results of operations could be adversely affected.

Dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to taxes under PRC tax laws.

Under the new EIT law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in China to any of its foreign investors who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Under the arrangement for avoidance of double taxation between mainland China and Hong Kong, the effective withholding tax applicable to a Hong Kong non-resident company is currently 5% if it directly owns no less than a 25% stake in the Chinese foreign-invested enterprise and meets the definition of “beneficial owner.”

Under the new EIT law and its implementation rules, to the extent that we are considered a “resident enterprise” which is “domiciled” in China, PRC income tax at the rate of 10% (which must be withheld by the Company on all such distributions) is applicable to dividends payable by us to investors that are “non-resident enterprises” so long as such “non-resident enterprise” investors do not have an establishment or place of business in China or, despite the existence of such establishment or place of business in China, the relevant income is not effectively connected with such establishment or place of business in China. Similarly, any gain realized on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within China and we are considered a “resident enterprise” which is domiciled in China for tax purposes. Additionally, there is a possibility that the relevant PRC tax authorities may take the view that our purpose is that of a holding company, and the capital gain derived by our overseas stockholders would be deemed China-sourced income, in which case such capital gain may be subject to PRC withholding tax at the rate of up to 10%. It is unclear how this tax would be applied to or enforced against non-PRC citizens or residents. If we are required under the new EIT law to withhold PRC income tax on our dividends payable to our foreign stockholders who are “non-resident enterprises”, or if you are required to pay PRC income tax on the transfer of our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected. It is unclear whether, if we are considered a PRC “resident enterprise,” holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

As our ultimate holding company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with our company, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

Because significant portion of our funds are held in banks in the PRC that do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

Any outbreak of the Swine Flu (H1N1), severe acute respiratory syndrome, or SARS, the Avian Flu, or another widespread public health problem in the PRC could adversely affect our operations.

There have been recent outbreaks of the highly pathogenic Swine Flu, caused by the H1N1 virus, in certain regions of the world, including parts of China, where all of our manufacturing facilities are located and where all of our sales occur. Our business is dependent upon our ability to continue to manufacture and distribute our products, and an outbreak of the Swine Flu, or a renewed outbreak of SARS, the Avian Flu, or another widespread public health problem in China, could have a negative effect on our operations. Any such outbreak could have an impact on our operations as a result of:

quarantines or closures of our manufacturing or distribution facilities or the retail outlets, which would severely disrupt our operations;

the sickness or death of our key officers and employees; and

a general slowdown in the Chinese economy.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

Any outbreak of earthquake, tsunami, adverse weather or oceanic conditions or other calamities may result in disruption in our operations and could adversely affect our sales.

We are based in Shanghai, which is situated in southeast China on the coast of the East China Sea. Shanghai is a vital navigation hub between the East China Sea and South China Sea, and is also rich in agricultural and marine resources.

In 2004, an undersea earthquake occurred off the west coast of Sumatra, Indonesia. This earthquake triggered a series of devastating tsunamis along the costs of most landmasses boarding the Indian Ocean. More than 225,000 people in 11 countries were killed, and coastal communities were inundated with waves up to 100 feet.

On May 12, 2008, there was an 8.0 magnitude scale earthquake centered on Sichuan Province of China. It was also known the Wenchuan earthquake, which by any name killed at least 69,000 people and injured more than 374,000 people, with 18,000 listed as missing. The earthquake left about 4.8 million people homeless, thought the number could be as high as 11 million. It was the deadliest earthquake to hit China since the 1976 Tangshan earthquake.

Due to the location of our business, we may be at risk of experiencing another tsunami, earthquake or other adverse weather or oceanic conditions. This may result in the breakdown of our facilities, such as our cold storage facilities, which will in turn lead to deterioration of our products with the potential for spoilage. This could adversely affect our ability to fulfill our sales orders and adversely affect our profitability.

Adverse weather conditions affecting the normal operation order of Shanghai such as storms, heavy rainfall, cyclones and typhoons or cataclysmic events such as heavy rainfall may affect our transportation of products outside Shanghai area.

We may be affected by global climate change or by legal, regulatory or market responses to such changes. The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Changing weather patterns, along with the increased frequency or duration of extreme weather conditions, could impact the availability or increase the cost of key raw materials that we use to produce our products.

Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas emissions. For example, proposals that would impose mandatory requirements on greenhouse gas emissions may be considered by policy makers in the territories that we operate. Laws enacted that directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients, and water could all impact our business and financial results.

Risks Related to our Common Stock

Shares of our common stock which are eligible for immediate sale by our stockholders may decrease the market price of our common stock.

We had 22,150,200 shares outstanding as of September 30, 2011, including approximately 12,523,745 shares which are free trading and may be sold immediately by our stockholders. If our stockholders sell substantial amounts of our common stock, or there is a perception in the market that such sales may occur, then the market price of our common stock could decrease.

Concentration of our ownership by Mr. Song, our Chairman and Chief Executive Officer and a Director, and his family may dissuade new investors from purchasing our securities, which could result in a lower trading price for our securities than if our ownership was less concentrated.

As of September 30, 2011, Mr. Song, our Chairman and Chief Executive Officer and a Director, owned approximately 23.1% of our issued and outstanding common stock on a fully diluted basis. As a result, Mr. Song has the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of control could be disadvantageous to other stockholders with interests different from those of Mr. Song. In addition, this concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with a significant concentration of ownership among a limited number of stockholders.

Our preferred stock may make a third-party acquisition of our company more difficult, which in turn would make a purchase of our shares less desirable, thereby potentially reducing our stock price or the liquidity of our shares.

Our Certificate of Incorporation authorizes our Board of Directors to issue up to 10,000,000 shares of preferred stock having such rights as may be designated by our Board of Directors, without stockholder approval. The issuance of preferred stock could inhibit a change in our control by making it more difficult to acquire the majority of our voting stock and thereby making the purchase of our shares by new investors less likely. A lesser interest in the purchase of our shares could reduce our market price or make it more difficult for stockholders to sell their shares. No shares of preferred stock are currently outstanding.

“Penny Stock” rules may make buying or selling our common stock difficult.

Trading in our common stock is subject to the “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer that recommends our common stock to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market price and liquidity of our common stock.

There is currently a limited trading market for our common stock and a more liquid trading market may never develop or be sustained and stockholders may not be able to liquidate their investment at all, or may only be able to liquidate the investment at a price less than the Company’s value.

There is currently a limited trading market for our common stock and a more liquid trading market may never develop. As a result, the price of our shares may not reflect the value of the Company. Consequently, investors may not be able to liquidate their investment at all, or if they are able to liquidate it may only be at a price that does not reflect the value of our business. Because the price for our stock is low, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to effect a transaction in our stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of common stock like ours as collateral for any loans. Even if a more active market should develop, the price may be highly volatile.

Our common stock is currently quoted in the Pink Sheets and under “caveat emptor”. We do not satisfy the listing standards of the New York Stock Exchange, The Nasdaq Stock Market or any other U.S. securities exchange. If we never are able to satisfy any of those listing standards our common stock will never be listed on an exchange, or we may choose not to apply for any such listing. As a result, the trading price of our stock may be lower than if we were listed on an exchange. Our stock may be subject to increased volatility. When a stock is thinly traded, a trade of a large block of shares can lead to a dramatic fluctuation in the share price. These factors may make it more difficult for our shareholders to sell their shares.

Restrictions on the use of Rule 144 by shell companies or former shell companies could affect your ability to resale our shares.

Historically, the SEC has taken the position that Rule 144 under the Securities Act, as amended, is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies like us, to their promoters or affiliates despite technical compliance with the requirements of Rule 144. The SEC has codified and expanded this position in its amendments to Rule 144, effective on February 15, 2008, and which apply to securities acquired both before and after that date by prohibiting the use of Rule 144 for resale of securities issued by shell companies (other than business transaction related shell companies) or issuers that have been at any time previously a shell company. The SEC has provided an exception to this prohibition if the following conditions are met: the issuer of the securities that was formerly a shell company has ceased to be a shell company; the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and at least one year has elapsed from the time that the issuer filed current Form 10-type information with the SEC reflecting its status as an entity that is not a shell company. As such, due to the fact that we had been a shell company prior to October 2007, holders of “restricted securities” within the meaning of Rule 144, when they resell their shares pursuant to Rule 144, shall be subject to the conditions set forth in Rule 144.

We do not anticipate paying dividends.

We do not anticipate paying dividends in the foreseeable future. Any dividends which we may pay in the future will be at the discretion of our board of directors and will depend on our future earnings, any applicable regulatory considerations, our financial requirements and other similarly unpredictable factors. For the foreseeable future, we anticipate that we will retain any earnings which we may generate from our operations to finance and develop our growth.

The market price for our common stock may be volatile and subject to wide fluctuations, which may adversely affect the price at which you can sell our shares.

The market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:

actual or anticipated fluctuations in our quarterly operating results;

changes in financial estimates by securities research analysts;

conditions in foreign or domestic food processing or agricultural markets;

changes in the economic performance or market valuations of other food processing companies;

announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;

addition or departure of key personnel;

fluctuations of exchange rates between the RMB and the U.S. dollar;

intellectual property litigation; and

general economic or political conditions in China.

Furthermore, certain short sellers and other funds have in the past, and may again in the future, take a short position or positions in our shares for the specific purpose of driving down our share price. Short sellers may also publish articles or other allegations in conjunction with such attacks. Even when there is no truth to their claims and we rebut their allegations, such attacks can have a material impact on our share price and divert management resources and attention. The securities market has also experienced significant price and volume fluctuations from time to time that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

As discussed further in the report of our management included under Item 4. “Controls and Procedures” of Part I of this Quarterly Report on Form 10-Q, after reviewing our Annual Report on Form 10-K for the year ended March 31, 2010 and our Quarterly Report on Form 10-Q for the period ended December 31, 2010, the SEC concluded in a letter to the Company dated as of January 9, 2012, that the Company’s lack of U.S. GAAP experience is a material weakness in our disclosure controls and procedures and in our internal control over financial reporting. In its letter, the SEC also directed the Company to file an amended Form 10-K for the year ended March 31, 2010 identifying the Company’s lack of U.S. GAAP experience as a material weakness in our disclosure controls and procedures and in our internal control over financial reporting, which the Company intends to file as promptly as is reasonably practicable.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS.

Number		Exhibit
3.1		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).

10.5		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 Form SB-2/A filed on April 27, 2007).

10.14		English Translation of Subscription Agreement dated August 11, 2005 (incorporated by reference to Exhibit 10.13 to China-Biotics, Inc.’s Form SB-2/A filed on April 27, 2007).

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 (incorporated 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) (incorporated by reference to Exhibit 10.22 to China-Biotics, Inc.’s Form 10-Q filed on November 16, 2009).

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).

10.24		District Entrance Project Agreement dated August 12, 2010 (incorporated by reference to Exhibit 10.19 to China-Biotics, Inc.’s Form 10-Q filed on February 14, 2011).

10.25		2010 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 to China-Biotics, Inc.’s Registration Statement on Form S-8 filed on March 11, 2011).

14.1		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).

16.1		Letter dated April 13, 2006 from Malone & Bailey PC to the United States Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 to China-Biotics, Inc.’s Form 8-K filed on May 31, 2006).

16.2		Resignation Letter of BDO Limited, dated June 22, 2011 (incorporated by reference to Exhibit 16.1 to China-Biotics, Inc.’s Form 8-K filed on June 23, 2011).

23.1		Letter from BDO Limited, dated June 23, 2011, to the United States Securities and Exchange Commission (incorporated by reference to Exhibit 16.2 to China-Biotics, Inc.’s Form 8-K filed on June 23, 2011).

23.2		Letter from Thornhill Capital LLC to the United States Securities and Exchange Commission, dated September 10, 2012 (incorporated by reference to Exhibit 16.3 to China-Biotics, Inc.’s Form 10-K filed on September 14, 2012).

31.1		Certification of CEO pursuant to Rule 13a-14(a)/15(d)-14(a).

31.2		Certification of CFO pursuant to Rule 13a-14(a)/15(d)-14(a).

32.1		Certification of CEO pursuant to Section 1350.

32.2		Certification of CFO pursuant to Section 1350.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	By:	/s/ Song Jinan
		Mr. Song Jinan
		Chairman of the Board, Chief Executive Officer, Treasurer and Secretary (Principal Executive Officer)

Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on June 24, 2013.

/s/ Song Jinan		Chairman of the Board and Chief Executive Officer
Song Jinan		(Principal Executive Officer)

/s/ Yan Yihong		Chief Financial Officer
Yan Yihong		(Principal Financial and Accounting Officer)

/s/ Chin Ji Wei		Director
Chin Ji Wei

/s/ Du Wen Min		Director
Du Wen Min

/s/ Ivan Chu		Director
Ivan Chu

CHINA-BIOTICS, INC 10-Q