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China-Biotics, Inc – ‘10-K’ for 3/31/13

On:  Friday, 7/12/13, at 10:08am ET   ·   For:  3/31/13   ·   Accession #:  1144204-13-39226   ·   File #:  1-34123

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 7/12/13  China-Biotics, Inc                10-K        3/31/13  178:12M                                    Toppan Merrill/FA

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _______ to _________

333-110733

(Commission File Number)

CHINA-BIOTICS, INC.

(Exact name of registrant as specified in its charter)

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)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $0.0001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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 þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold was approximately $30,683,175 as of the last business day of the registrant’s most recently completed second fiscal quarter.

As of July 10, 2013, 22,150,200 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

PART I

The information in this document 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 “Item 1A. Risk Factors” beginning on page 21 and elsewhere in this Form 10-K. 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 document, except as required by applicable law.

ITEM 1. BUSINESS

Except as otherwise indicated by the context, references in this Annual Report on Form 10-K 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.

History

We were incorporated under the name of Otish Resources, Inc. in Delaware in February 2003. Prior to March 2006, we were a mineral exploration stage company specializing in acquiring and consolidating mineral properties with potential for commercial ore bodies. Although we conducted some preliminary exploration work with respect to our mineral properties, we never achieved full operations with respect to our mineral properties. We never generated any revenue from our mineral exploration operations.

On March 22, 2006, we entered into and completed a Securities Exchange Agreement with SGI and SGI’s shareholders pursuant to which the SGI shareholders transferred all of the equity securities of SGI to us in exchange for the issuance of shares of our common stock. We refer to this transaction in this document as the “Share Exchange.” At the closing of the Share Exchange, we issued to the SGI shareholders an aggregate of 15,980,000 shares of our common stock in exchange for their shares of SGI, and SGI became our wholly owned subsidiary. SGI owns all of the equity securities of Shining. As a result of the Share Exchange, we are no longer a mineral exploration stage company, and SGI’s business operations became our primary operations. We are currently engaged in the research, development, production, marketing, and distribution of probiotics products. These products contain live microbial food supplements that beneficially affect the host by improving its intestinal microbial balance.

SGI was incorporated in the British Virgin Islands on February 13, 2004. On December 9, 2005, SGI incorporated a wholly owned subsidiary, GSL, in accordance with the laws of the British Virgin Islands. On September 22, 2006, GSL established a wholly foreign-owned enterprise, Growing, in China.

On December 11, 2007, we sold a 4% Senior Convertible Promissory Note in the amount of $25,000,000 (the “Note”) with a maturity date of December 11, 2010, to Pope Investments II LLC, an affiliate of Pope Investments, LLC, in a private placement. In connection with the sale, we entered into an Investment Agreement (the “Investment Agreement”) and a Registration Rights Agreement. In addition, Mr. Jinan Song, the company’s Chief Executive Officer, Chairman and largest shareholder, entered into a Guaranty Agreement (the “Guaranty Agreement”) and a Pledge Agreement (the “Pledge Agreement”), pursuant to which Mr. Song agreed to guaranty the company’s obligations under the Note and to secure such guaranty with a pledge of 4,000,000 shares of China-Biotics’ common stock owned by Mr. Song. The principal amount of the Note was convertible into shares of our common stock at an exercise price of $12.00 per share at any time until the maturity date. Pursuant to the Investment Agreement, payment of our obligations under the Note was secured with a pledge of 100% of the stock of our subsidiary, SGI, to Pope Investments II LLC. Net proceeds of the Note were used to fund the construction of a 150 metric ton per-year manufacturing facility (now expanded to 300 metric tons per year) in Shanghai Qingpu Industrial Park District in Shanghai (“Qingpu”) and other capital expenditures.

On December 9, 2010, the Company repaid in full its obligations under the Note in the original aggregate principal amount of $25,000,000. The payoff amount of $29,684,932, consisting of $25,000,000 of outstanding principal and $4,684,932 of accrued interest, was paid to Pope Investments II LLC, and all security interests and liens held by Pope Investments II LLC were terminated and released, including (1) the Guaranty Agreement; and (2) the Pledge Agreement.

On October 5, 2009, the Company closed an underwritten public offering of 4,600,000 shares of its common stock at a price of $15.00 per share. On October 26, 2009, an additional 690,000 shares were sold pursuant to the exercise of an over-allotment option at the same price. Net proceeds of the offering, including the over-allotment, after deducting underwriting discounts and offering expenses, were approximately $74.9 million. Net proceeds from the offering were used for general corporate purposes, including expanding our retail operations, expanding our products, funding Phase 2 of our bulk manufacturing facility in Qingpu, funding our new project in the Yangling Agricultural High-Tech Industries Demonstration Zone in Shaanxi Province of China (the “Yangling Zone”), and for general working capital purposes.

On May 4, 2010, the Company incorporated a wholly owned subsidiary, KTG, in accordance with the laws of the British Virgin Islands. On June 25, 2010, KTG incorporated a wholly owned subsidiary, BDH, in accordance with the laws of the Special Administrative Region of Hong Kong (“Hong Kong”). On July 12, 2010, BDH incorporated a wholly owned subsidiary, Growing Yangling, in accordance with the laws of China. Growing Yangling commenced construction of a manufacturing plant in the Yangling Zone in April 2012 and expects to complete its construction by June 2014 and commence trial production by 2015.

Set forth below is a list of the Company’s direct and indirect subsidiaries and their respective jurisdiction of incorporation or registration:

Current Operations

Overview

We are 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.

Our first product, Shining Essence, was approved by the Chinese Ministry of Health for production and sale as a health product in August 2000. We launched Shining Essence in Shanghai in April 2001, and Shining Essence remains one of our best-selling retail products. The Health Food Association of China named Shining Essence as the best-selling liver health product in 2001.

As of March 31, 2013, we had 26 patents for a number of processes and products as described in “—Government Regulation—Intellectual Property” on Page 17. We have a total of twenty-six patents in different stages of the application, review or grant process, including eighteen patents that have been granted and have not yet expired, two patents that have been granted but have expired, and six patents currently under review.

We obtained the four certifications below from the TÜV Rheinland/Berlin-Brandenburg Group of Companies for our production plant in Pudong.

In addition to the foregoing, we hold two certificates from the Shanghai Food and Drugs Administration for our two production plants in Pudong and Qingpu, Shanghai: we obtained the Good Manufacturing Process (“GMP”) certification, which is valid through March 28, 2016, for our new bulk production facility in Qingpu, and on July 1, 2010, Shining’s GMP certificate was also renewed and is valid through June 19, 2016. The GMP certification program is a global quality assurance system that covers the testing and manufacturing of food, pharmaceutical products and medical devices. GMP stipulates stringent approval guidelines on various aspects of production based on evaluations of factory and equipment, materials, hygiene certificates, waste and recycling and after sales, among other things.

We are currently holding a Current Good Manufacturing Practices (cGMP) certification for our production plant in Qingpu, Shanghai, from the National Safety Foundation International (NSF International) for the period starting April 26, 2013 through December 31, 2013. cGMP refers to the Current Good Manufacturing Practice regulations enforced by the US Food and Drug Administration (FDA). cGMPs provide for systems that assure proper design, monitoring, and control of manufacturing processes and facilities. Adherence to the cGMP regulations assures the identity, strength, quality, and purity of drug products by requiring that manufacturers of medications adequately control manufacturing operations. This includes establishing strong quality management systems, obtaining appropriate quality raw materials, establishing robust operating procedures, detecting and investigating product quality deviations, and maintaining reliable testing laboratories. This formal system of controls at a pharmaceutical company, if adequately put into practice, helps to prevent instances of contamination, mix-ups, deviations, failures and errors. This assures that drug products meet their quality standards.

The cGMP requirements were established to be flexible in order to allow each manufacturer to decide individually how to best implement the necessary controls by using scientifically sound design, processing methods, and testing procedures. The flexibility in these regulations allows companies to use modern technologies and innovative approaches to achieve higher quality through continual improvement. Accordingly, the “c” in cGMP stands for “current,” requiring companies to use technologies and systems that are up-to-date in order to comply with the regulations. Systems and equipment that may have been “top-of-the-line” to prevent contamination, mix-ups and errors ten or 20 years ago may be less than adequate by today’s standards.

Products

We manufacture and sell several health supplements under the “Shining” or “双金 (Chinese)” brand in China as set forth below. All of these products have been approved by the Ministry of Health in China (“MOH”) and their content has been tested by the Shanghai Preventative Medicine Research Institute, which validated that our products contain the specified quantities of bacteria. While management believes these products to be effective, their effectiveness has not been conclusively established.

Our major retail products are

In February 2010, we commenced production at our new facility in Qingpu and began producing bulk additive probiotics products, which are sold to institutional customers, such as dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies. We intend to continue to develop new retail and bulk products to strengthen our product pipeline so that we may offer a wider array of products for sale in the market. Three years after commencing production in Qingpu, our customer base for bulk additive probiotics products has grown from 71 customers as of March 31, 2012 to 129 customers as of March 31, 2013. With respect to retail products, in keeping with the Company’s focus on bulk products and owing to increasing rent and labor costs, the Company has transitioned since January 2011 from focusing on point-of-sales to internet sales primarily through our distributors’ or their associates’ operating websites and wholesale sales through our distributors. Although the Company’s retail products sales during this transition period were negatively affected, the Company has succeeded in improving its business model for selling retail products via the internet primarily through our distributors’ or their associates’ operating websites and wholesale sales through our distributors.

We manufacture and sell three major categories of bulk additive products and their proportion to our bulk additive sales for the year of March 31, 2013 are shown as follows:

Recent Changes in our Business

Leveraging on what our management believes to be our technical competence, cost efficiencies, and highly recognized brand name, our management expects to achieve significant growth through:

Industry overview and market conditions

Probiotics

We manufacture and sell probiotics. Most probiotics are bacteria-based and naturally exist in the human body in the lower intestinal tract. The introduction of “helpful” bacteria and other organisms may aid in preventative fights against infection and improve digestion, especially with respect to dairy products.

Probiotics generally have a very short lifespan. Water, acid, and oxygen are critically harmful to probiotics subsistence. Most probiotics die or cease to function after a short period of time after extraction from their source. A reduction of these naturally-occurring organisms due to poor eating habits, stress, use of antibiotic drugs, or other factors may disrupt the natural equilibrium of the human body and could lead to a variety of abdominal ailments and the weakening of the immune system. Based on information available on the website www.usprobiotics.org, a non-profit research and education website sponsored by the California Dairy Research Foundation and Dairy & Food Culture Technologies, researchers are also studying the potential links between probiotics and their beneficial effects on a variety of ailments such as hypertension, certain types of cancer, high cholesterol, and allergies (to access this information, click on the Section “Probiotics Basics,” and then click on the Section “Health Effects of Probiotics.” The subsections of “Health Effects of Probiotics” include the following topics: hypertension, cancer, elevated blood cholesterol, and allergy, among others.).

Chinese market

China has limited capacity to produce probiotics. We believe that demand for probiotics and functional foods in China will continue to increase in the foreseeable future. We believe that China lacks manufacturing capabilities of bulk additives in a scale necessary to support the domestic functional foods industry. This has forced processed food producers to either import most of their probiotics or produce finished products abroad and re-import the final products. We believe this creates significant inefficiencies in both cost and probiotics efficacy, as some bacteria cease to function during transportation.

Demand for functional food products is expected to grow significantly. As the discretionary income and health-consciousness of the average Chinese consumers increase, we expect the demand for functional foods and dietary supplements to increase in tandem. We believe that the demand for functional foods and dietary supplements will be bolstered by the stated commitment of the Chinese government to reduce the use of antibiotics and promote the use of probiotics and other preventative measures.

Curtailment of the use of antibiotics may stimulate demand for probiotics. According to a Chinese newspaper article entitled “80,000 people in China die from inappropriate use of antibiotics each year, children suffer the most,” published in Xin Kuai Bao, dated December 12, 2003, available in Chinese at http://info.china.alibaba.com/news/detail/v8-d5779326.html,” China has the highest per capita consumption of antibiotics in the world. In 2000, the World Health Organization cautioned that “Super Diseases” are being created by the overuse of antibiotics. In order to stem the tide of these drug resistant strains, many nations have taken steps to limit the use of antibiotic drugs. In July 2004, the Chinese government took an active role in the fight against the overuse of antibiotics by requiring prescriptions for these drugs. To further reduce the use of antibiotics, the Chinese government has slashed the retail price of antibiotics by 60%, so that it is no longer profitable for a large number of antibiotics manufacturers to continue to manufacture such products. This resulted in a marked increase in the use of other products to not only treat existing infections, but to prevent infections from occurring as well. In addition, on May 20, 2005 (effective July 1, 2005) the State Food and Drug Administration (reference no. Guo Shi Yao Jian Zhu (2005) no. 202) issued a notice acknowledging that probiotics are beneficial to human health and also introduced guidelines for regulating manufacturers of probiotics products and registration of probiotics products with the State Food and Drug Administration.

Demand for dairy product additives is expected to increase significantly. The demand for functional foods and foods that use probiotics supplements is growing at a significant rate. According to AC Nielsen (article available at http://cn.en.acnielsen.com/news/20050916.shtml), yogurt and yogurt drinks are the fastest-growing products in the food products segment in China, with sales increasing by 38% in 2004 alone. Sales of infant formula grew 23% in the same year. Moreover, according to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics were to be added to baby milk powders produced in China, although it is unclear when this rule will come into effect. On October 24, 2011, the MOH published a list of probiotics which could be used in baby food for babies aged one year or older, all of which are currently produced and sold by the Company. These factors could translate into significant growth in demands in China for live bacteria as food additives. According to an article published by China BioTech Information Site on March 8, 2012 (available at http://www.biotech.org.cn/information/94968), the world’s consumption of probiotic supplements is expect to increase 48% from $2.7 billion in 2011 to $4.0 billion in 2016. Major product of the probiotic market primarily includes lactic acid drinks, following by yogurt drinks. The contribution of the growth is expected to be attributable from the countries in the emerging market, especially Brazil and China.

More use of probiotics in animal feed industry. Antibiotics have been widely used in animal feed by Chinese farmers. Human health has been negatively impacted, albeit indirectly, as a result of consuming dairy and meat produced by farms using antibiotics in animal feed. With the increasing public awareness of those issues, the government is expected to set up stricter regulations to monitor the non-therapeutic use of antibiotics in livestock feed to ensure food safety. At the same time, organic food is attracting more attention among Chinese consumers. This creates a favorable trend of using more probiotics in animal feed.

Business strategies

Leveraging on what we believe is our technical competence, cost efficiencies, and highly recognized brand name, our management expects to achieve significant growth through the:

Bulk market

In China, most probiotics used for the manufacturing of yogurt, milk powder products, and food preservatives are currently imported. However, we believe imported probiotics are generally more expensive and can be of lower quality, as some bacteria may not survive long distance transportation and the bacteria that do survive could lose some of their efficacy. We believe our bulk probiotics are of higher quality than most imported probiotics, and our lower costs provide an attractive alternative to domestic manufacturers of dairy, animal feed, and other food products that utilize probiotics as a raw material. In addition, as noted above, the government of the PRC is considering requiring that probiotics be added to baby milk powders and other products produced in China, with the relevant regulations and laws to be implemented at a future date.

Also as noted above, we have expanded into the bulk additives business for functional foods through completion of our new Qingpu facility by adding two production lines with 300 metric tons capacity and a state of the art research and development facility.

Geographic expansion

Our retail products are sold to distributors, who then distribute them to various retail channels such as drug stores and supermarkets. Over the past decade, we believe we have firmly established ourselves in Shanghai as the leading supplier and manufacturer of probiotics products. We are now expanding the sale of our retail products to other metropolitan cities in China primarily through our distribution network and via internet sales, which in recent years have been the most efficient and effective way to increase sales in China due to the increasing number of Chinese internet users.

In the past, we have operated our own retail outlets for direct sales. 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. The proportion of our bulk additive sales to total sales increased from 53% during the year ended March 31, 2012 to 77% during the year ended March 31, 2013.

As of March 31, 2013, we had a distribution network of 43 distributors for our retail products in China, and we have a fast-growing customer base of 129 institutional customers for our bulk products in dairy, animal feed, pharmaceutical, and other food industries. In addition, we have a website and two active online selling partners for selling our retail products online.

Introduction of new products

During fiscal year 2013, we launched several new retail products under the Shining brand. We currently have regulatory approval to produce 50 retail products, of which 30 are actively sold, that can be marketed under the Shining brand. We are continuing to develop new products to strengthen our retail product pipeline so that we may offer an array of retail products for sale in the market.

Under the “Growing” or “润盈(Chinese)” brand name, we have launched bulk additive products since May 2010, including products for animal feed, a medical and health supplement, food product, and yogurt products. In order to meet the demand of our institutional customers, we continue to develop new products to enrich our bulk products series. As of March 31, 2013, we had a total of 72 bulk additive products available for sale, of which 25 are actively sold.

Our Business Prospects

Growth potential from geographic expansion leveraging on the Shining brand.

We have experienced continued, long-term sales growth of our retail products that are sold through retail channels, mainly in the greater Shanghai area under our Shining brand. Management believes that the Shining brand is one of the most recognized health supplement brands in Shanghai. We are expanding the distribution network of our retail products to another major metropolitan area, Beijing. Given the high level of disposable income in the Beijing area, management anticipates that distribution in the greater Beijing area could be profitable. Expansion of retail sales through our distributors is also a key component in helping to grow our food additives products. We intend to co-brand with food producers allowing consumers to identify food products that use our additives as high quality and beneficial and currently have one of our trademarks “Flora-Focus” appearing on the package of our customer’s yogurt based drinks. As of March 31, 2013, we had entered into agreements with 129 institutional customers for use of our bulk products.

Significant potential from the new bulk business (yogurt).

Live bacteria are essential to the formulation of yogurt and yogurt-based drinks. Yogurt and yogurt drinks were the fastest-growing food product segments in China in 2004 according to AC Nielsen. However, yogurt producers in China currently import most of their probiotics additives. We believe that importing probiotics is costly and that a portion of the effective ingredient (bacteria) ceases to function during transportation. Our new Qingpu plant is being used for local production and supply of bulk manufacturing of probiotics for use as food additives for foods such as yogurt and yogurt drinks.

Significant potential from the new bulk business (milk powder).

Manufacturers have begun to add probiotics to infant formula and milk powders to improve digestion and absorption, as well as to strengthen the immune systems of infants. Currently, infant formula made in China by some multinational companies such as Nestle and Mead Johnson uses imported probiotics produced by Rodia SA, Chr. Hansen and other producers. As noted above, according to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics are required to be added to baby milk powders produced in China, and products made by the Company were included on a list published on October 24, 2011 by the MOH of probiotics applicable for baby food for babies aged one year and older. Besides, owing to the continuing monitoring of food safety in China, updated relevant rules and regulations are expected to be announced at a later date and from time to time. Currently, the Company’s management believes there is no other manufacturing facility in China that can meet the demand for probiotics if the aforementioned requirement is imposed. We believe we are well positioned to capture this significant new demand for probiotics.

Advanced technology provides product quality advantages.

We believe our proprietary production technologies give us the following competitive advantages:

Revenue and Cash Flow

Our products may or may not be able to generate sufficient cash flow to finance our operations. Sales of our products increased 28.6% to $75.7 million in fiscal year 2013 from $58.9 million in fiscal year 2012. Income before taxes increased from $5.6 million in fiscal year 2012 to $19.2 million in fiscal year 2013. Net cash provided by operating activities was $15.9 million and $1.3 million for the years ended March 31, 2013 and 2012, respectively.

Production

We use microecology technologies to produce live bacteria, which is the active ingredients of our probiotics. We use a multi-stage fermentation process under a strictly controlled environment utilizing our proprietary technology. Solid bacteria are then extracted and stored using controlled freeze drying method. Prior to sales to our customers, we transform the solid bacteria into capsule form and place it in sealed double aluminum packaging using our patented equipment.

As of March 31, 2011, we had registered the following patents in China:

As of March 31, 2012, we had registered the following patents in China:

As of March 31, 2013, we have registered the following additional patents:

From fiscal years 2008 through 2013, we submitted to the Intellectual Property Bureau of China twenty-six applications for registration of patents regarding the production of our products, which applications are in different stages: patents for eighteen such applications have been granted and have not yet expired, two patents have been granted but have expired and applications for six patents are currently under review.

Our management believes that we enjoy the following competitive advantages in utilizing such microecologics technology in our production process:

Distribution

We sell our retail products primarily in the greater Shanghai area to large distributors who then sell them through their networks to supermarkets, hypermarkets, and drug stores. As of March 31, 2013, we had 43 distributors located in Beijing, Shanghai, Jiangsu, Zhejiang, Harbin, Anhui and Hong Kong. As of March 31, 2011, we closed all of our retail outlets, as we believe the distribution network for, and internet sales of our retail products primarily through our distributors’ network are more efficient. Comparatively, direct selling through retail outlets involves increasing leasing expenses and staffing costs, while internet sales primarily through our distributors’ network are the most cost-effective and direct way of reaching customers across China.

Customers

We have two different types of customers: individual retail products consumers and institutional bulk additive products customers. Institutional customers include dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies. Individual consumers are primarily located in major metropolitan areas and they are middle-aged or above and have middle to higher income levels. We believe that these individuals are becoming increasingly health-conscious and, as their income levels increase, they will likely spend more on health-related products such as probiotics products. We sell our retail products through large distributors, who then sell them through their networks to supermarkets, hypermarkets and drug stores, and via the internet, where they are purchased by consumers. For the fiscal year ended March 31, 2013, we maintained active business relationship with 43 distributors for retail products and 129 institutional customers for bulk products, and no customer accounts for more than 10% of our sales revenue.

Backlog

We do not have any material backlog. Due to market fluctuation and the high profile on food safety supervision by the PRC Government in recently years, we sell our products on a spot-basis as orders are made.

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 days during the year. For the first two fiscal quarters ending in September, there are no major Chinese festivals or holidays, except for the Dragon Boat Festival and mid-Autumn Festival. However, in the last two fiscal quarters ending in March, there are some major Chinese and Western festivals and national holidays, including National Day, Christmas, New Year, and Chinese New Year.

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.

Marketing and Advertising

We promote our products through the media by placing advertisements in newspapers and magazines and on television and radio mainly in Shanghai, China. From time to time, we also sponsor local and territorial charitable events mainly in Shanghai to increase public awareness of the benefits of our health products.

Competition

We believe that we are well-positioned to compete in the Chinese pharmaceutical and nutra-ceutical market with our proprietary technology, strong brand, diverse product portfolio, research and development capabilities, established sales and service network and favorable cost structure. Other factors affecting competitive conditions in the Chinese pharmaceutical and nutra-ceutical market are our managerial and technological expertise, the ability to identify and capitalize on commercially viable products, time to market, patent position, product efficacy, safety, convenience, reliability, availability and pricing.

For retail products, our primary competitors in the Chinese domestic probiotics market are Biostime Inc., Shanghai Jiao Da Onlly Co., Ltd. and Shanghai Pharmaceutical Group Co. Ltd. – SINE Pharmaceutical Co. Ltd. These competitors produce similar retail probiotics products in the Chinese domestic market. In addition to these primary competitors, there are other secondary domestic competitors that compete with us in the Chinese market.

With respect to the bulk additives market, we believe that our competition comes mainly from large overseas producers and food importers, including Danisco A/S and Chr Hansen A/S, which produce their own supplements in facilities located outside China. In addition, a few foreign companies, like DSM, also entered the Chinese domestic market for probiotics products in recent years. However, our management believes that we are well-positioned to compete in the bulk additives market based on the high quality of our products, our favorable cost structure, our advantages in local production and transportation, our time-to-market in the domestic market and our established sales and service network. We are directing efforts toward encouraging customers to switch from imported bacteria to our products as additives for the production of yogurt, sour milk and other food products.

Research and Development

We have a strong research and development team supported by a technical advisory board of experts. As of March 31, 2013, we had 45 staff members with Masters Degrees or PhDs. In addition to having advanced technology in bacteria culturing and protection, we also conduct research and development into complimentary technology, including genetically engineered drugs, drug delivery solutions and Chinese medicine, in an effort to formulate solutions to address specific health problems and expand our product line. We incurred research and development costs of approximately $4,852,830 and $5,084,949 for the fiscal years ended March 31, 2013 and 2012, respectively. Such research and development costs are mainly comprised of raw material costs, laboratory expenses and staff salaries in the research and development division, which were included as part of the production costs in our financial statements for such periods.

Government Regulation

The Food Business

Laws and regulations governing our business include the following: the Law on the Food Conditions of the PRC promulgated and effective as of October 30, 1995; the Administrative Rules for Healthy Food promulgated by the Ministry of Health, or MOH, on March 15, 1996 and effective as of June 1, 1996; the Notice of Circulating the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food and its appendixes: the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food and the List of Good-Live-Bacteria Applicable for Healthy Food, both of which are promulgated by the MOH and effective as of March 23, 2001; and the Administration Rules for the Registration of Healthy Food (experimental) promulgated by the State Food and Drug Administration, or SFDA, on April 30, 2005 and effective as of July 1, 2005.

The previous governing authority of healthy food was the MOH. Since the General Office of the State Council of the PRC promulgated the Regulations on the Internal Organizations and Staff Schedule of the State Food and Drug Administration on April 25, 2003, the responsibility of approving healthy food of MOH has been assigned to the SFDA. The SFDA is a direct subordinate authority under the State Council and its responsibilities are generally supervising the safety control of food, healthy food and cosmetics, and supervising drugs.

Pursuant to the Law on the Food Conditions of the PRC, a food manufacturing or other food-related enterprise may not engage in any food manufacturing or other food-related business until it obtains a Health License issued by the competent health administration. While using a new resource in manufacturing food, before the formal production, the company must apply for an approval in accordance with applicable standard food condition application procedures, and obtain a New Food and Food-used Products Health Approval.

Pursuant to the Administrative Rules for Healthy Food, the MOH applied an approval system for healthy food. Any food claiming to have health care functions was required to be inspected and confirmed by the MOH, which would issue a Certificate of Healthy Food upon a successful inspection. After the Administration Rules for the Registration of Healthy Food were enacted, SFDA will make an integral appraisal and inspection of the safety, effectiveness, quality control and the label and introduction of the healthy food. If permitted, the SFDA will issue an Approval Certificate of Native Healthy Food, which is valid for five years.

Pursuant to the Appraisal Standard of Fungal and Good-Live-Bacterial Healthy Food, an enterprise using good-live-bacteria in manufacturing healthy food must satisfy the following requirements: form a Good Manufacturing Practice (GMP) and a step-by-step Hazard Analysis Critical Control Point (HACCP) quality control system; possess a pilot scale experiment manufacturing scale (at least 500 cubic liters), and submit its pilot scale experiment products for approval; have special plants or workshop, specific manufacturing equipment and devices, a good-live-bacteria lab, special staffs looking after the bacteria under the supervision of experts with at least middle level expert title, and specific technical rules and procedures. In addition, these Rules require that good-live-bacterial healthy food must maintain its active bacteria population at more than 10⁶ cfu/ml during its storage term.

Pursuant to the List of Good-Live-Bacteria Applicable for Healthy Food issued by MOH on April 22, 2010 in accordance with the Food Safety Law of the PRC, 21 good-live-bacteria can be used in healthy foods, including:

Intellectual Property

The tables below set forth the trademarks and patents that we have registered in China. The trademarks were granted by the Trademark Office of State Administration of Industry and Commerce of the People’s Republic of China and the patents were granted by the State Intellectual Property Administration Office of the People’s Republic of China. Each of these trademarks and patents is enforceable only within China.

Trademarks

Pursuant to the Trademark Law of the PRC and its implementation rules amended on October 27, 2001, a registered capital may refer to a trademark registered with the Trademark Bureau, including products, service trademarks, collective trademarks, and attest trademarks; a trademark owner shall have exclusive rights to use the trademark under the protection of applicable law. The exclusive rights of using a trademark is limited within a registered trademark and the registered products on which a trademark can be used. The Trademark Bureau of the State Administration for Industry and Commerce is responsible for managing the trademark registration and administration throughout the PRC. The protection period of a registered trademark is ten years from the registration date.

Patents

Retired Patents

We have a total of twenty-six patents in different stages of the application, review or grant process, including eighteen patents that have been granted and have not yet expired, two patents that have been granted but have expired, and six patents currently under review.

Pursuant to the Patent Law of the PRC and its implementation rules amended on August 25, 2000, Chinese laws protect the following three kinds of patents: patents for inventions, patents for utility models, and patents for designs. The State Bureau of Intellectual Property is responsible for the management of patents in China, accepting and reviewing patent applications and granting patents pursuant to applicable laws and regulations. Any invention or utility model for which a patent right may be granted must possess novelty, inventiveness, and practical applicability. Any design for which a patent right may be granted must neither be identical with, or similar to, any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, nor conflict with legal rights of any third party obtained before. The protection period of a patent for invention is 20 years, and the protection period of a patent for utility model or design is ten years, both calculated from the application date.

Pursuant to the Patent Law of the PRC, a retired patent is not subject to patent protection. However, the loss of protection of the retired patents has had no adverse effect on the production and sales of our products.

Under the Patent Law of the PRC, we may enforce our rights attached to the registered patents against an infringer by applying to the relevant governing authorities for an injunction. We may also apply to the Supreme People’s Court of the PRC for an order of specific performance, which prohibits any third parties from using the registered patents. The relevant governing authorities may also impose a fine up to four times the profits made by the infringer from the unauthorized use of the registered patents or a fixed fine up to RMB200,000 for cases in which the infringer has not earned any profits from such unauthorized uses.

Taxation and Local Governmental Support

We have our principal operations in the PRC and are 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 years 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%.

Our subsidiary Growing is located in Shanghai Qingpu Industrial Park and has similar business operations as Shining, but with a larger production scale.  Growing was exempted from PRC Enterprise Income Tax in calendar years 2008 and 2009, followed by 50% tax exemption for calendar years 2010 to 2012. Beginning January 1, 2013, Growing’s EIT rate is 25%.

Our other subsidiary, Growing Yangling, is located in Yangling and as of March 31, 2013 and 2012, 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 the local portion of EIT for three calendar years from the commencement of production, followed by 50% tax exemption of local portion for the following year. There is no financial effect from the tax holiday as Growing Yangling did not generate any assessable profit in fiscal years 2013 or 2012.

Foreign Exchange

Foreign exchange in China is principally governed by the PRC Foreign Exchange Control Regulations promulgated by the State Council and effective as of April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment promulgated by the State Council and effective as of July 1, 1996. Under these regulations, upon payment of the applicable taxes, foreign-invested enterprises may convert the dividends they received in Renminbi into foreign currencies and remit such amounts outside China through their foreign exchange bank accounts.

If a foreign-invested enterprise needs foreign exchange transaction services in relation to the current account item, it may make such payment through its foreign exchange account or make an exchange and payment at one of the designated foreign exchange banks by providing applicable receipts and certificates, and with an approval from the State Administration of Foreign Exchange, or SAFE. If a foreign-invested enterprise distributes dividends to its shareholders, it will be deemed as foreign exchange transaction services in relation to the current account item, therefore, as long as it provides the board resolutions and other documents authorizing the distribution of dividends, it may make such payment through its foreign exchange account or make an exchange and payment at one of the designated foreign exchange banks.

Notwithstanding the above, foreign exchange conversion matters under the capital account item are still subject to regulatory restrictions, and prior approval from SAFE or its relevant branches is required before conversion between Renminbi and other foreign currencies.

Facilities

On July 22, 2010, we acquired a property located at No. 26 Orient Global Headquarter Lane 118, Yonghe Road, Zhabei District, Shanghai 200072, People’s Republic of China as our principal executive office.

We conduct our retail probiotics products production from a leased facility in Pudong, Shanghai. Pursuant to our lease for this facility, which expires on December 31, 2013, we pay annual rent of $126,847 (RMB798,919), payable in quarterly installments of $31,712 (RMB199,730). This facility, which includes a level 100,000 clean room and a level 10,000 clean room, houses our office space, manufacturing facilities and warehouse. The maximum current production capacity at this location is approximately 3.5 million capsules per month. We have received GMP, ISO 9001, ISO 14001, OHSAS 18001 and HACCP certifications for this facility. See “Business—Current Operations—Overview” for further information with respect to these certifications.

We have expanded into the bulk additives business for functional foods through the completion of our 300-metric ton capacity plant in Qingpu, which commenced production in February 2010. Phase 1 of the project involved constructing a facility with a production capacity of 150 metric tons of probiotics per year that cost $36 million in total, the sum of which was invested in calendar year 2010. Phase 2 of this project commenced in September 2010 and cost $18 million, $11 million of which was paid in calendar year 2010 and the remaining $7 million of which was paid by the end of 2011, the date when construction of Phase 2 was completed. Phase 2 added an additional 150 metric tons of annual capacity. The construction of Phase 1 of the plant was funded by cash received from the sale of a convertible promissory note in December 2007 and the proceeds of the public offering of our common stock in October 2009. The construction cost of Phase 2 of the plant was funded by cash received from the public offering of our common stock in October 2009.

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 Qingpu on which we constructed the 300-metric ton capacity production plant described above 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.

The Company has commenced construction of a new facility in the Yangling Zone in the Shaanxi Province of China. The cost for constructing the Yangling Zone 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 (RMB20,608,112) 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. As of March 31, 2013, construction in progress included $15,853,917 related to the construction of this facility. The remaining unfunded contribution commitment for the completion of this facility was $25,189,765 as of March 31, 2013.

Employees

As of March 31, 2013, we had 341 staff and employees. The following table summarizes the functional distribution of our employees:

All of these employees were full-time. As of March 31, 2013, we did not have any payment obligations for any retirees and were not retaining any contractors.

According to Article 10 of the Trade Union Law of the People’s Republic of China, an enterprise, public institution, or government organ with 25 or more members must establish a basic-level trade union committee. However, a union is established only if it is voluntarily formed by the employees. As of March 31, 2013 and 2012, we did not have a trade union.

Available Information

We file periodic reports with the Securities and Exchange Commission (the “SEC”), including Annual Reports, on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports. All of our periodic reports may be inspected without charge at the Public Reference Room maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549. You may obtain copies of any registration statements, including the exhibits thereto, and all of our periodic reports, after payment of the fees prescribed by the SEC. For additional information regarding the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. The SEC also maintains a website which provides on-line access to reports and other information regarding registrants that file electronically with the SEC at the following web address: http://www.sec.gov.

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 had scheduled oral argument for July 10, 2013, but it later adjourned that date and rescheduled the oral argument for October 8, 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.

We maintain an internet website at http://www.chn-biotics.com. Our website contains a link to the SEC’s website at http://www.sec.gov, which provides free online access to our periodic reports. We will also provide electronic or paper copies of our filings free of charge upon request.

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 SEC had scheduled oral argument for July 10, 2013, but it later adjourned that date and rescheduled the oral argument for October 8, 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; and (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, 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. As set forth in the report of our management included under Item 9A. “Controls and Procedures” of this Annual Report on Form 10-K, 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. Also, as further set forth in the report of our management included under Item 9A. “Controls and Procedures” of this Annual Report on Form 10-K, our management has concluded that our disclosure controls and procedures were not effective as of March 31, 2013, and there existed material weaknesses in our internal control over financial reporting as of March 31, 2013. 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 27% and 21% of our total sales of retail products for the years ended March 31, 2013 and 2012, respectively. 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 approximately 36% and 38% of our total sales of retail products for the year ended March 31, 2013 and 2012, respectively. Any factors adversely affecting the pricing of, demand for, or market acceptance of, Shining Essence or Shining Probiotics Protein Powder, 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 fiscal years 2013 and 2012 arose in China. A significant number of our financial instruments, principally cash and accounts receivable, are located in China. These financial instruments include:

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 effect 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. By the end of 2011, the construction of Phase 2 of our Qingpu production facility was completed. Phase 2 added an additional 150 metric tons of annual capacity. 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:

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 closed all of 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 March 31, 2013, we had a total of 43 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/ (currently under construction and is temporarily used to provide product information only).

With respect to our bulk additives products business, we had 129 customers for bulk additives probiotics products as of March 31, 2013. 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.

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 $13,508,721, 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, 2013, 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.

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, our chief executive officer, and Ms. Yan, our interim chief financial officer and chief administrative officer, 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 Ms. Yan.

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.

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:

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 subsidiaries 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:

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 March 31, 2013, 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 March 31, 2013, 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:

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 9A. “Controls and Procedures” of this Annual Report on Form 10-K, 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. PROPERTIES.

On July 22, 2010, we acquired a property located at No. 26 Orient Global Headquarter Lane 118, Yonghe Road, Zhabei District, Shanghai 200072, People’s Republic of China as our principal executive office.

We conduct our retail probiotics products production from a leased facility in Pudong, Shanghai. Pursuant to our lease for this facility, which expires on December 31, 2013, we pay annual rent of $126,847 (RMB798,919), payable in quarterly installments of $31,712 (RMB199,730). This facility, which includes a level 100,000 clean room and a level 10,000 clean room, houses our office space, manufacturing facilities and warehouse. The maximum current production capacity at this location is approximately 3.5 million capsules per month. We have received GMP, ISO 9001, ISO 14001, OHSAS 18001 and HACCP certifications for this facility. See “Business—Current Operations—Overview” for further information with respect to these certifications.

We have expanded into the bulk additives business for functional foods through the completion of our 300-metric ton capacity plant in Qingpu, which commenced production in February 2010. Phase 1 of the project involved constructing a facility with a production capacity of 150 metric tons of probiotics per year that cost $36 million in total, the sum of which was invested in calendar year 2010. Phase 2 of this project commenced in September 2010 and cost $18 million, $11 million of which was paid in calendar year 2010 and the remaining $7 million of which was paid off by the end of 2011, the date when construction of Phase 2 was completed. Phase 2 added an additional 150 metric tons of annual capacity.

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 Qingpu on which we constructed our 300-metric ton capacity production plant described above 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.

The Company has commenced construction of a new facility in Yangling in the Shaanxi Province of China. 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 (RMB20,608,112) 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. As of March 31, 2013, construction in progress included $15,853,917 related to the construction of this facility. The remaining unfunded contribution commitment for the completion of this facility was $25,189,765 as of March 31, 2013. 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.

ITEM 3. LEGAL PROCEEDINGS

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.

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 had scheduled oral argument for July 10, 2013, but it later adjourned that date and rescheduled the oral argument for October 8, 2013.

ITEM 4. [REMOVED AND RESERVED]

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock was traded on the Nasdaq Global Stock Market between October 23, 2008 and July 20, 2011, under the symbol “CHBT.” It was formally de-listed from the Nasdaq Global Stock Market on July 21, 2011. Since July 1, 2011, our common stock has been quoted in the Pink Sheets and under “caveat emptor”.

Prior to listing on the Nasdaq Global Stock Market, our common stock was quoted on the OTC Bulletin Board.

Set forth below is information with respect to the intraday high and intraday low sales prices of our common stock for the periods indicated on the OTC Bulletin Board, the Nasdaq Global Stock Market and via the Pink Sheets.

Security Holders

As of July 10, 2013, there were 22,150,200 shares of our common stock outstanding held by approximately 14 stockholders of record.

Dividend Policy

We have not historically paid any cash dividends and do not intend to pay any dividends in the foreseeable future. We plan to use retained earnings, if any, to finance our growth. The declaration and payment of dividends in the future will be determined by our Board of Directors in light of conditions then existing, including, but not limited to, our financial condition, capital requirements, and restrictions in our financing agreements.

Equity Compensation Plans (As of March 31, 2013)

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. As of March 31, 2013, options to purchase 660,000 shares were outstanding under the 2010 Plan.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities during the year ended March 31, 2013.

Issuer Purchases of Equity Securities

During the Company’s fiscal year ended March 31, 2013, no purchases of the Company’s common stock were made by, or on behalf of, the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable to smaller reporting companies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this Form 10-K. The following discussion contains forward-looking statements reflecting our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You are also urged to carefully review and consider our discussions regarding the various factors which affect our business, including the information provided in the risk factors discussion beginning on page 21 of this Form 10-K. See the cautionary note regarding forward-looking statements at the beginning of Part I of this Form 10-K.

General

We were incorporated under the name of Otish Resources, Inc. in Delaware in February 2003. Until March 2006, we were a mineral exploration stage company specializing in acquiring and consolidating mineral properties with potential for commercial ore bodies. Although we conducted some preliminary exploration work with respect to our mineral properties, we never achieved full operations with respect to our mineral properties. We had never generated any revenue from our mineral exploration operations. We incurred a total of expenses of $257,914 from inception to February 28, 2006.

On March 22, 2006, we entered into and completed a securities exchange transaction with SGI and the shareholders of SGI, pursuant to which the SGI shareholders transferred all of the equity securities of SGI to us in exchange for an aggregate of 15,980,000 shares of our common stock. At the closing of the Share Exchange, SGI became our wholly owned subsidiary. Immediately after the Share Exchange and related transactions described elsewhere in this document, the former SGI shareholders and their designees collectively owned 98.7% of our common stock. As a result of the Share Exchange, we are no longer a mineral exploration stage company, and SGI’s business operations became our primary operations. We are currently engaged in the research, development, production, marketing and distribution of probiotics products. These products contain live microbial food supplements which beneficially affect the host by improving its intestinal microbial balance. See “Business – History.”

We accounted for the Share Exchange as a recapitalization, whereby the historical financial statements and operations of SGI became our historical financial statements, with no adjustment to the carrying value of the assets and liabilities. Our issued and outstanding common stock immediate prior to the Share Exchange is accounted for at the net book value at the time of the transaction.

Upon consummation of the Share Exchange, we changed our fiscal year end from August 31 to March 31 to conform to the year-end date of SGI. We filed a quarterly report on Form 10-QSB on April 14, 2006, for the quarter ended February 28, 2006. That quarterly report was our last filing under our previous fiscal year end date of August 31 and as a mineral exploration stage company. In our subsequent filings with the SEC, we have reported our business activities as a manufacturer and distributor of probiotics products based on our new fiscal year end date of March 31. SGI’s historical financial statements have become our historical financial statements.

The results of operations related to Otish Resources, Inc. as a mineral exploration stage company are not material and are therefore not included in the discussion below. Unless otherwise noted, all references to the “Company,” “we,” “us” and “our” hereafter in this section refer to the current business of China-Biotics, Inc., SGI and its subsidiaries, Shining, Growing, GSL, KTG, BDH and Growing Yangling, as applicable.

The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (“RMB”). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rate as of the balance sheet date. Income and expenditures are translated at the average exchange rate for the period presented.

The RMB is the functional currency of Shining, Growing, and Yangling Growing (the “Operating Subsidiaries”) as it is the currency of the People’s Republic of China, which is the primary economic environment the Operating Subsidiaries operate in and the environment in which the Company primarily generates and expends cash. RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.

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 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 primarily through our distributors’ or their associates’ operating websites. Our management believes that as China becomes more affluent and the number of Chinese internet users increases, Chinese citizens are becoming more health conscious, which has led to higher demand for healthy and functional foods such as probiotics and yogurt.

Our first retail product, Shining Essence, was launched in April 2001 and remains one of our best-selling products. Sales of Shining Essence represented approximately 27%, and 21% of our total sales of our retail products for the years ended March 31, 2013 and 2012, respectively. 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 approximately 36% and 38% of our total sales of our retail products for the years ended March 31, 2013 and 2012, respectively. As of March 31, 2013, we had a retail product portfolio of 50 products, and we are currently selling 30 of them in the market. As we have released new products, the percentage contribution of Shining Essence to our total retail sales has decreased as a result of the more restrictions and regulations imposed by the PRC government on health products.

As 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 represent the largest cost item. Based on sales invoiced value, our bulk products had a revenue contribution of 77% in fiscal year 2013, an increase from 53% in fiscal year 2012. The significant increase reflects the stability of the additive market as compared to the retail products market in the current adverse economic environment. In February 2010, our new bulk production facility in Qingpu commenced commercial production. The state of art bulk additives production facility has a full capacity of 300 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.

We manufacture and sell three major categories of bulk additive products and their proportion to our bulk additive sales for the year of March 31, 2013 are shown as follows:

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

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

Our operations are generally not labor-intensive. We employed 341 people as of March 31, 2013. With production ramp up in the Phase 1 facility and the construction of Phase 2 in Qingpu, we expect significant increases in our number of employees over the next two years. We have been recruiting senior executives to strengthen our management team. However, as wages in China are relatively inexpensive, we expect that labor costs will remain insignificant.

Results of Operations for the Year Ended March 31, 2013 Compared with the Year Ended March 31, 2012

Our results for 2013 and 2012 are summarized below:

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the fiscal years 2013 and 2012 comprised the following:

Net sales increased by $16,842,560 or 28.61% to $75,716,189 for the year ended March 31, 2013 from $58,873,629 for the year ended March 31, 2012. We had mixed results during the year ended March 31, 2013. Our retail sales continued to decline caused by the strict rules and regulations on health care products imposed by the PRC government. During the period from April to June 2012, there was a public health issue relating to so-called “poison capsules” in China that adversely affected all related industries that produce or distribute products in capsule form, including the food and additive markets. For safety purposes, all companies in these affected sectors, including the Company (which has not been linked to any defective or dangerous capsules) suspended the production of products in capsule form until the completion of required government inspection and approval for resuming production. Our sales were seriously affected by the negative effects of this issue. Consequently, our retail sales substantially declined during the year ended March 31, 2013.

On the other hand, sales for our bulk additives products increased at a rapid rate during the year ended March 31, 2013. During the second half of the fiscal year 2013, we added a second production line in our Qingpu facility. We substantially increased our customer numbers from 71 as of March 31, 2012 to 129 as of March 31, 2013. We also increased the product types to better meet our customers’ needs. As a result, our sales for bulk additive products increased substantially during the year ended March 31, 2013 compared to those during the year ended March 31, 2012.

The contributions of our products as a percentage of invoiced value on sales for the years ended March 31, 2013 and 2012, respectively, are summarized below.

Based on the invoiced value of sales, the retail products invoiced sales contributions decreased to 22.92% in the year ended March 31, 2013 from 49.41% in the year ended March 31, 2012. Our retail sales continued to decline caused by the strict rules and regulations on health care products imposed by the PRC government. As we shifted more focus on the bulk additives products, the proportion percentage of our retail products to total sales continued to decrease during the year ended March 31, 2013.

Cost of sales

Cost of sales for the year ended March 31, 2013 was $31,524,964 compared with $26,163,629 for the year ended March 31, 2012. The increase in cost of sales was primarily caused by increase in sales for the year ended March 31, 2012.

(Recovery of deposits) / cost of returns

For the year ended March 31, 2012, 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 the product returns after certain of our products did not meet our quality standards during the years ended March 31, 2012 and 2011, 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 $7,162,229 for these credits for the year ended March 31, 2012 that has been reflected as an additional cost of product returns in the accompanying consolidated financial statements.

During the year ended March 31, 2013, we recovered $2,514,240 of the deposits paid to distributors which were classified as a reduction of our cost of sales in the accompanying consolidated financial statements.

Gross profit

Gross profit increased by $21,157,694 or 82.82% to $46,705,465 for the year ended March 31, 2013, from $25,547,771 for the year ended March 31, 2012. Gross margin (gross profit divided by net sales) increased to 61.68% for the three months ended March 31, 2013 compared to 43.39% for the three months ended March 31, 2012. The increases in gross profit and gross margin were mainly attributable to the increase in sales volume for the bulk products and the recovery of deposits to distributors which was partially offset by the decline of sales for retail products. We wrote off the deposits to distributors of $7,162,229 during the year ended March 31, 2012 but were able to recover $2,514,240 of these deposits during the year ended March 31, 2013.

Selling expenses

Selling expenses were $11,638,150 or 15.37% of net sales for the year ended March 31, 2013, compared with $5,628,820 or 9.56% of net sales for the year ended March 31, 2012. The increase was primarily due to the increases of advertising and promotion expenses to $3,179,037 during the year ended March 31, 2013 as compared to $1,794,018 during the year ended March 31, 2012.

We implemented a new commission policy for our bulk addictive sector which gives more incentives to generate sales and collect our accounts receivable quicker. The outcome has been positive with this new policy. Compensation including salaries and commission increased to $6,842,059 during the year ended March 31, 2013 from $3,010,776 during the year ended March 31, 2012.

General and administrative expenses

General and administrative expenses increased by $760,116 or 6.76% to $11,996,055 or 15.84% of net sales for the year ended March 31, 2013, compared with $11,236,039 or 19.09% of net sales for the year ended March 31, 2012. We recorded a charge for the increase in allowance for doubtful accounts in the amount of $2,537,000 during the year ended March 31, 2013 compared to $1,645,000 during the year ended March 31, 2012. In addition, our overall general and administrative expenses increased as a result of our rapid growth in the sales of bulk additive products. These increases were partially offset by the decline of our general and administrative expenses as a result of the decline in sales of our retail products.

Research and development expenses

Our research and development cost decreased $232,119 or 4.56% to $4,852,830 for the year ended March 31, 2013 as compared to $5,084,949 or 8.64% for the year ended March 31, 2012. Our research and development cost fluctuates from time to time depending on the research projects we have in progress.

Non-recoverable cost related to acquired production technology

During the year ended March 31, 2013, the Company acquired certain production technology from a third party. As the technology acquired relates to future products and future processes, we could not with any degree of certainty determine the ultimate cash flow to be associated with this technology.  As such, we expensed $1,905,276 relating to the purchase of this technology during the year ended March 31, 2013.

Income from operations

Income from operations increased by $12,715,191 or 353.4% to $16,313,154 for the year ended March 31, 2013, from $3,597,963 for the year ended March 31, 2012. The increase was mainly attributable to the strong growth in the sales of bulk additive products which contributed approximately 84% of our income from operations for the year ended March 31, 2013.

Total other income (expenses)

Total other income increased by $874,922 or 43.51% to $2,885,937 for the year ended March 31, 2013, from $2,011,015 for the year ended March 31, 2012. The increase was mainly attributable to the investment income (net of fees) on the loan receivable totaled $3,050,536 for the year ended March 31, 2013 compared to $808,740 for the year ended March 31, 2012. Such increase was partially offset by the decrease in interest income as we invested $23,925,223 (RMB131,100,000) in loan receivable which allowed us to generate higher investment income.

Provision for income taxes

Provision for income taxes was $3,815,276 and $2,833,168 for the years ended March 31, 2013 and 2012, respectively. The increase in the provision for income taxes is primarily attributable to increase in operating profit.

Net income

Net income increased by $12,608,005 or 454.21% to $15,383,815 for the year ended March 31, 2013 from $2,775,810 for the year ended March 31, 2012. The increase of net income was mainly attributable to the increase of income from operations of $12,715,191 during the year ended March 31, 2013.

Segment reporting

We have adopted the “products and services” approach for segment reporting. For fiscal years 2013 and 2012, the management considers there to be two reporting segments: retail products and bulk additive products, as the new bulk production plant commenced production since February 2010 with a separate production and distribution channel. As the separate entity of production, there are also separate operational management teams and operations and marketing strategies. Therefore, we have adopted the segment reporting since fiscal year 2011.

Retail products

The results of retail products segment for the years ended March 31, 2013 and 2012 are summarized as below:

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the fiscal years 2013 and 2012 comprised the following:

Net sales decreased by $10,533,151 or 37.77% to $17,357,407 for the year ended March 31, 2013 from $27,890,558 for the year ended March 31, 2012. The decrease in sales of retails products was attributable to the implementation by the government of the PRC of new rules and regulations on health care products imposed during 2011. During April to June 2012, there was a public health issue relating to so-called “poison capsules” in China that adversely affected all related industries that produce or distribute products in capsule form, including the food and additive markets. Consequently, our retail sales continued to decline during the year ended March 31, 2013.

Cost of sales

Cost of sales decreased by $5,563,978 or 40.55% to $8,156,734 for the year ended March 31, 2013 from $13,720,712 for the year ended March 31, 2012. The decrease in cost of sales was primarily caused by the decrease of products sold during the fiscal year 2013. Cost of raw material, labor and overhead costs continued to increase. Due to highly competitive market conditions for health care products, we were unable to increase our selling prices at the same rate.

(Recovery of deposits) / cost of returns

For the year ended March 31, 2012, 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 the product returns after certain of our products did not meet our quality standards during the years ended March 31, 2012 and 2011, 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 $7,162,229 for these credits for the year ended March 31, 2012 that has been reflected as an additional cost of product returns in the accompanying consolidated financial statements.

During the year ended March 31, 2013, we recovered $2,514,240 of the deposits paid to distributors which were classified as a reduction of our cost of sales in the accompanying consolidated financial statements.

Gross profit

Gross profit increased by $4,707,296 or 67.17% to $11,714,913 for the year ended March 31, 2013 from $7,007,617 for the year ended March 31, 2012. Gross margin (gross profit divided by net sales) increased to 67.49% for the three months ended March 31, 2013 compared to 25.13% for the three months ended March 31, 2012. The increases in gross profit and gross margin were primarily caused by recovery of the deposits to distributors in the amount of $2,514,240 during the year ended March 31, 2013 as compared to the write-off of the $7,162,229 credits to distributors in the year ended March 31, 2012. Such gross profit increase was partially offset by the decline in gross margin of our products as a result of general increases in our manufacturing costs.

Selling expenses

Selling expenses were $4,082,995 or 23.52% of net sales for the year ended March 31, 2013, compared with $3,114,752 or 11.17% of net sales for the year ended March 31, 2012. The increase was primarily due to the increases of advertising and promotion expenses to $1,683,858 during the year ended March 31, 2013 as compared to $125,063 during the year ended March 31, 2012. We invested more in the advertising and promotion expenses as part of our efforts to stimulate our sales in the current tough environment in the health care and food supplement market.

General and administrative expenses

General and administrative expenses decreased by $79,068 or 3.25% to $2,356,183 or 13.57% of net sales for the year ended March 31, 2013 compared with $2,435,251 or 8.73% of net sales for the year ended March 31, 2012. We attempted to keep our general and administrative expense low to compensate the loss of operating profit as a result of the decrease in sales. Such decrease was partially offset by the charge for the increase in allowance for doubtful accounts in the amount of $1,171,000 during the year ended March 31, 2013 compared to $880,000 during the year ended March 31, 2012.

Research and development expenses

Our research and development cost decrease $415,429 or 18.15% to $2,035,645 for the year ended March 31, 2013 as compared to $2,487,074 for the year ended March 31, 2012. The overall health care industry was in a tough environment due to the new strict rules and regulations imposed by the PRC government on health care and food supplement products. As a result we reduced our spending on research and development cost to reduce our operating cost.

Income from operations

Income from operations increased by $4,269,550 to $3,240,090 for the year ended March 31, 2013 as compared $1,029,460 loss from operations. The increase in income from operations was mainly attributable to the recovery of $2,514,240 deposits paid to distributors compared to a write-off of the deposits in the amount of $7,162,229 to distributors in the year ended March 31, 2012. These effects were partially offset by the lower gross margin of our products as a result of increasing manufacturing costs.

Bulk products

The results of bulk additives products segment for the years ended March 31, 2013 and 2012 are summarized as below:

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the fiscal years 2013 and 2012 comprised the following:

Net sales increased by $27,375,711 or 88.36% to $58,358,782 for the year ended March 31, 2013, from $30,983,071 for the year ended March 31, 2012. During the second half of the fiscal year 2013, we added a second production line in our Qingpu facility. We substantially increased our customer numbers from 71 as of March 31, 2012 to 129 as of March 31, 2013. We also increased the product types to better meet our customers’ needs. As a result, our sales for bulk additive products increased substantially during the year ended March 31, 2013 compared to those during the year ended March 31, 2012.

Cost of sales

Cost of sales increased by $10,925,313 or 87.80% to $23,368,230 for the year ended March 31, 2013, from $12,442,917 for the year ended March 31, 2012. The increase in cost of sales was primarily caused by the increase in products sold for the year ended March 31, 2013.

Gross profit

Gross profit increased by $16,450,398 or 88.73% to $34,990,552 for the year ended March 31, 2013, from $18,540,154 for the year ended March 31, 2012. Gross margin (gross profit divided by net sales) increased slightly to 59.96% for the three months ended March 31, 2013 compared to 59.84% for the three months ended March 31, 2012. The increase of gross profit was primarily caused by the increase in products sold for the year ended March 31, 2013. Certain manufacturing overhead cost remained unchanged as our sales volume increased during the year ended March 31, 2013 which caused our gross margin to slightly increase.

Selling expenses

Selling expenses were $7,555,155 or 12.95% of net sales for the year ended March 31, 2013, compared with $2,514,068 or 8.11% of net sales for the year ended March 31, 2012. The selling expenses mainly included advertising expenses, promotion expenses and salaries including commission. We implemented a new commission policy which gives more incentives to generate sales and collect our accounts receivable quicker. The outcome has been positive with this new policy. Compensation including salaries and commission increased to $4,757,497 during the year ended March 31, 2013 from $412,921 during the year ended March 31, 2012.

General and administrative expenses

General and administrative expenses were $5,324,146 or 9.12% of net sales for the year ended March 31, 2013, compared with $3,451,310 or 11.14% of net sales for the year ended March 31, 2012. We recorded a charge for the increase in allowance for doubtful accounts in the amount of $1,366,000 during the year ended March 31, 2013 compared to $765,000 during the year ended March 31, 2012. In addition, our overall general and administrative expenses increased as a result of our rapid growth in the sales of bulk additive products.

Research and development expenses

Our research and development cost increased $219,310 or 8.44% to $2,817,185 for the year ended March 31, 2013 as compared to $2,597,875 for the year ended March 31, 2012. As our bulk additive continued to grow, we increased our spending on bulk additive products in order develop more new products to fulfill the market needs for the bulk additive products.

Non-recoverable cost related to acquired production technology

During the year ended March 31, 2013, the Company acquired certain production technology from a third party. As the technology acquired relates to future products and future processes, we could not with any degree of certainty determine the ultimate cash flow to be associated with this technology.  As such, we expensed $1,905,276 relating to the purchase of this technology during the year ended March 31, 2013.

Income from operations

Income from operations increased by $7,411,889 or 74.29% to $17,388,790 for the year ended March 31, 2013, from $9,976,901 for the year ended March 31, 2012. The increase was mainly attributable to the increase of gross profit of $12,442,917 from a an increase in sales which was partially offset by the increase in selling expenses, and general and administrative expenses for the year ended March 31, 2013.

Liquidity and Capital Resources

Liquidity

We had cash of $75.9 million and working capital of $77.9 million as of March 31, 2013 and cash of $70.1 million and working capital of $57.2 million as of March 31, 2012.

Our statements of cash flow for the years ended March 31, 2013 and 2012 are summarized as below:

Operating activities

During the year ended March 31, 2013, we had net cash provided by operating activities of $23,972,195 as compared to $1,294,041 during the year ended March 31, 2012. Net cash provided by operating activities during the year ended March 31, 2013 consisted primarily of net income of $15,383,815, depreciation expense of $4,628,595, change in allowance for doubtful accounts of $2,536,957, fair value of vested option expense of $1,516,258, non-recoverable cost related to production technology and a decrease in accounts receivable of $4,027,785 primarily due to substantially lower accounts receivable as a result of better collection efforts at year end. These increases were partially offset by the increase in investment income receivable which per the investment agreement is payable once per year. Net cash provided by operating activities during the year ended March 31, 2012 consisted primarily of net income of $2,775,810, depreciation expense of $3,672,224, change in allowance for doubtful accounts of $1,644,804, fair value of vested option expense of $1,484,690, which was primarily offset by the increase in accounts receivable of $7,599,639 as a result of strong sales recovery in the fourth quarter of fiscal year 2012 after a slump of our sales in the first half of fiscal 2012.

Our business is not capital or labor intensive. Typically, 60% of our sales take place in the second half of the fiscal year. Since our customers have historically been large distributors with whom we have done business for a number of years, our cash flows from our existing business have been, and we expect them to continue to be, fairly reliable.

Investing activities

During the years ended March 31, 2013 and 2012, we made prepayments of $12.6 million and $18.0 million, respectively, for the capital expenditures with respect to our Yangling and Qingpu facilities to contractors.

We incurred $14.4 million and $13.9 million capital expenditure related to the acquisitions of property, plant and equipment and construction in progress related to the Yangling and Qingpu facilities during the years ended March 31, 2013 and 2012, respectively.

On December 19, 2011, the Company entered into an agreement with Jiangxi International Trust Co., Ltd. (“Jiangxi”) to loan $20.0 million (RMB131,100,000) to the Jiangxi International Trust of Yinhe #7 Property, an investment fund sponsored by Jiangxi. The loan principal is due on December 26, 2013, is unsecured, and according to the loan agreement, the Company is to earn 20% interest per annum, less a 5% investment management fee per annum. 

On March 27, 2012, the Company paid a deposit of $22.3 million (RMB150 million) to the government of Yangling for a bid to acquire a local probiotics company located in Yangling, Shaanxi Province that is in receivership. According to the relevant regulations, the deposit will be treated as part of the purchase price of the acquisition if the transaction is approved. On June 28, 2013, the Company and the government of Yangling verbally agreed to terminate this potential acquisition and the acquisition deposit will be refunded to the Company within 90 days from the date of the termination.

On February 1, 2012, our subsidiary, Growing, entered into an agreement to acquire a patent regarding a production technology for $6.6 million (RMB 42,000,000) from an unrelated PRC company. Growing made a deposit of $6,330,616 (RMB 40,000,000) to the seller for the transfer of the patent within 210 days, or by August 30, 2012. The original terms of the agreement were that if the patent cannot be transferred to Growing within 210 days, Growing will be refunded the deposit paid and also be compensated an additional $159,000 (RMB 1,000,000) for damages. The transfer was not completed by August 30, 2012, and on September 3, 2012, Growing and the seller mutually agreed to extend the completion date to December 31, 2012. On December 24, 2012, Growing entered into a supplemental agreement with the Seller. Instead of purchasing the patents related to this production technology, under the terms of the supplemental agreement, Growing acquired the right to use this technology in producing its products for an amount of $1,914,914 (RMB12,000,000). Growing received a refund of $4.4 million (RMB28,000,000) during the three months ended March 31, 2013.

In 2012, our Growing Yangling, subsidiary of the Company that operates in Yangling, the PRC, acquired a land use right for a period of 50 years, beginning January 18, 2012, at a cost of $3.1 million.

Financing activities

During the year ended March 31, 2013 and 2012, we had net cash provided by financing activities of $3,718,693 and $12,192,030, respectively.

During the years ended March 31, 2013 and 2012, we received bank loans of $16,988,711 and $7,609,308, respectively, and repaid $9,050,061 and $0, respectively.

During the year ended March 31, 2013, we repaid $4,219,957 to a director, Mr. Song Jinan, for amount due to him. During the year ended March 31, 2012, we received advances from this director totaling $4,582,722.

The advance 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. The repayments were made in RMB by our operating entities in PRC.

Capital Resources

Loans Payable

Loans payable consist of the following:

Bank of China

On March 19, 2012, the Company received a loan from the Bank of China for $3,165,058 (RMB 20,000,000), secured by the corporate headquarters office building of Growing, due September 19, 2012. On September 19, 2012 the loan was exchanged for a new loan that was due September 19, 2013. Interest was at 7.08% per annum, based on 118% of the twelve months’ of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. On December 19, 2012, the loan for $3,165,058 (RMB 20,000,000) was fully repaid.

Bank of Jiangsu

On September 24, 2012, the Company obtained a bank loan facility from Bank of Jiangsu for $15,957,617 (RMB 100,000,000) (“Bank Loan Facility”), secured by the assets of Growing, including the corporate headquarters office building and facility buildings in Qingpu of Growing. The loan consisted of the following advances:

Shanghai Rural Commercial Bank

On December 7, 2011, the Company received a loan from Shanghai Rural Commercial Bank for $4,747,963 (RMB 30,000,000), secured by the land use right in Qingpu held by Growing, due May 27, 2014. Interest was at 7.65% per annum, based on 115% of the 1-to-3 years’ RMB borrowing prime rate set by the People’s Bank of China at the time of funding, and was due at the end of each calendar quarter. The balance outstanding as of March 31, 2012 was $4,747,963. During the year ended March 31, 2013, the loan was fully repaid.

On August 29, 2012, the Company received a loan from Shanghai Rural Commercial Bank for $791,264 (RMB 5,000,000), secured by the land use right in Qingpu of Growing, due August 28, 2013. Interest was 6.90% per annum, based on 118% of the one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The purpose of this loan was for purchase of raw materials. On November 30, 2012, the loan was repaid before its due date.

During September 2012, the Company received loans from Shanghai Rural Commercial Bank totaling $316,506 (RMB 2,000,000), secured by the land use right in Qingpu held by Growing, due December 2014. Interest was 7.36% per annum, based on 118% of one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and was due at the end of each calendar quarter. The purpose of this loan was for financing the costs of a renovation project. On November 30, 2012, the loans were repaid.

Due to the early repayment of the Shanghai Rural Commercial Bank loans, the Company incurred a penalty for early repayment of $79,517 during the year ended March 31, 2013.

 Taking into account our current cash position and our anticipated cash flows from operations, we expect that we will be able to meet all our funding needs in the next twelve months, including payments required to settle our contractual obligations and for the construction of our Yangling plant. No assurance, however, can be given that our business plan will succeed. In the event that our business plan does not materialize as predicted, we may need to seek external financing to fund our expansion plan. There can be no assurance that we will be able to raise needed capital on favorable terms, if at all. In addition, there is no assurance that our estimate of our liquidity needs is accurate or that new business development or other unforeseen events will not occur, resulting in the need to raise additional funds.

Commitments

Operating Leases

As of March 31, 2013, future minimum lease payments under non-cancellable operating leases for office, warehouse and factory were as follows:

Rental expense, which was charged to expense, amounted to $181,144 and $275,424 for the years ended March 31, 2013 and 2012, respectively.

Capital commitments

On August 12, 2010, BDH, a subsidiary of the Company, entered into 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. We obtained a one-year extension from the government agency which gives the Company until July 13, 2014 to inject the remaining capital.

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 March 31, 2013, construction in progress included $15,853,917 related to the construction of this facility. The remaining unfunded contribution commitment for the completion of this facility was $25,189,765 as of March 31, 2013.

Purchase obligations

The Company entered into agreements with the suppliers to purchase raw materials and packing materials. As of March 31, 2013, the amount of future payments was $7,305,852.

Other Obligations

The Company entered into agreements with a university to perform research and development for annual aggregate fees of $1,436,185 (RMB 9,000,000). Fee commitments for the remaining terms through October 31, 2014, the end of the terms, totaled $2,273,960 (RMB 14,250,000) as of March 31, 2013.

Inflation

We believe that inflation has not had a material impact on our results of operations for the years ended March 31, 2013 and 2012.

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 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 quarters, there are some major Chinese festivals and holidays, including National Day (October), Christmas (December), New Year (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

This MD&A discusses our consolidated financial statements for the years ended March 31, 2013 and 2012. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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.

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.

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.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. Such allowances are based upon several factors including, but not limited to, historical experience and the current and projected financial condition of specific customers. Since our inception of business, we have never experienced any material unrecoverable receivables. We had trade receivables totaling $31,299,849 and $35,057,662 as of March 31, 2013 and 2012, respectively, and an allowance for doubtful accounts of $4,228,769 and $1,665,188 for the years ended March 31, 2013 and 2012, respectively. We have considered all relevant factors, including the financial conditions, affecting the payment abilities of customers comprising these receivables up to the date of this 10-K, and we believe these customers are able to make required payments. We, however, cannot give assurance that these factors, including the financial conditions of these customers, will not change adversely in the future. We will continue to evaluate the ability of all our customers to make required payments. Were the financial condition of a customer to deteriorate, resulting in an impairment of its ability to make payments, allowances may be required.

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 grants 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.

Income taxes

In the process of preparing consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The Registrant and its subsidiaries, with the exception of Growing and Shining, generated no taxable income. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carry-forwards and credits by applying enacted statutory tax rates applicable to future years.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We conduct this analysis on a quarterly basis.

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

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.

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 $13,508,721, 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 year ended March 31, 2013 and 2012, 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 has no other material uncertain tax positions as of March 31, 2013 or unrecognized tax benefit which would favorably affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters as an income tax expense. As of March 31, 2013, there is no other interest and penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

Recent Accounting Pronouncements

See Note 2 to the Notes to the Consolidated Financial Statements for the Years Ended March 31, 2013 and 2012.

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CHINA-BIOTICS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MARCH 31, 2013 AND 2012

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

China-Biotics, Inc.

We have audited the accompanying consolidated balance sheets of China-Biotics, Inc. and Subsidiaries (the “Company”) as of March 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the years then ended. Our audits also included the financial statement schedule listed in the accompanying index. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China-Biotics, Inc. and Subsidiaries at March 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

On September 15, 2011, the staff of the Securities and Exchange Commission (“SEC”) informed the Company 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 the Commission’s review of this decision. The SEC had scheduled oral argument for July 10, 2013, but it later adjourned that date and rescheduled the oral argument for October 8, 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.

/s/ Weinberg and Company, P.A.

Los Angeles, California

July 12, 2013

CHINA-BIOTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts expressed in US Dollars)

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

(Amounts expressed in US Dollars)

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

CHINA-BIOTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED MARCH 31, 2013 AND 2012

(Amounts expressed in US Dollars)