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EX-23.1 - EXHIBIT 23.1 - Yayi International Incexhibit23-1.htm

Registration No. 333 -170172

As filed with the Securities and Exchange Commission on July 14, 2011

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933

YAYI INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)

Delaware 2020 87-0046720
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

No. 9 Xingguang Road,
Northern Industrial Park of Zhongbei Town,
Xiqing District, Tianjin 300384, China
(86)22-2798-4033
(Address and telephone number of principal executive offices)
____________________________

  Copies of Correspondence to:
   
CT, a Wolters Kluwer business Louis A. Bevilacqua, Esq.
111 Eighth Avenue, 13th Floor Pillsbury Winthrop Shaw Pittman LLP
New York, New York 10011 2300 N Street, NW
Tel: (212) 894-8940 Washington, DC 20037
  (202) 663-8000
(Names, addresses and telephone numbers of  
agents for service)  

Approximate date of commencement of proposed sale to public: From time to time after the effective date of this Registration Statement, as determined by market conditions and other factors.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement the same offering. [   ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [   ]

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 definitions of “large accelerated filer," "accelerated filer,” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ] Accelerated filer                   [   ]
Non-accelerated filer   [   ] Smaller reporting company [X]
(Do not check if a smaller reporting company)  


CALCULATION OF REGISTRATION FEE

Title of securities
to be registered

Amount to be registered(1)
Proposed maximum offering
price per share
Proposed maximum aggregate
offering price
Amount of
registration fee
Common stock, par value $0.001 per share, underlying convertible notes held by certain selling stockholders (1) 4,460,000 (2) $1.48 (3) $6,600,800 (3) $471
Common stock, par value $0.001 per share, underlying warrants held by certain selling stockholders (1) 1,115,000 (4) $2.50 (5) $2,787,500 (5) $199
Total 5,575,000   $9,388,300 $670(6)

(1) In accordance with Rule 416(a), the Registrant is also registering hereunder an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.
(2) Represents shares of common stock issuable upon the conversion of the principal amount of the Registrant’s 9% convertible notes held by certain selling stockholders named in this registration statement.
(3) Estimated pursuant to Rule 457(c) of the Securities Act of 1933 solely for the purpose of computing the amount of the registration fee based on the average of high and low prices reported on the Over-the-Counter Bulletin Board on October 25, 2010.
(4) Represents shares of common stock issuable upon exercise of Series F common stock purchase warrants to purchase shares of common stock held by certain selling stockholders named in this registration statement.
(5) Calculated in accordance with Rule 457(g) based upon the exercise price of the Series F common stock purchase warrants held by certain selling stockholders named in this registration statement.
(6) Previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.



 

 

PROSPECTUS

Subject to completion, dated July 14, 2011

5,575,000 Shares  

 
 YAYI INTERNATIONAL INC.
 
 Common stock, par value $0.001 per share
_________________________
 

                    This prospectus relates to 5,575,000 shares of common stock of Yayi International Inc. that may be sold from time to time by the selling stockholders named in this prospectus, which include:

 

4,460,000 shares of common stock issuable to the selling stockholders upon conversion of $8,920,000 aggregate amount of 9% convertible promissory notes, or the Convertible Notes; and

 

1,115,000 shares of common stock issuable to the selling stockholders upon the exercise of Series F common stock purchase warrants, or the Series F Warrants.

 

                    We will not receive any proceeds from the sales of outstanding shares of common stock by the selling stockholders, but we will receive funds from the exercise of Series F Warrants held by the selling stockholders, if exercised for cash.

 

                    Our common stock is quoted on the Over-the-Counter Bulletin Board, or the OTCBB, under the symbol “YYIN.” The closing price for our Common Stock on July 8, 2011 was $0.52 per share, as reported on the OTCBB. You are urged to obtain current market quotations of our Common Stock before purchasing any of the shares being offered for sale pursuant to this prospectus.

 

                    The shares of our common stock offered under this prospectus are being registered to permit the selling stockholders to sell the shares from time to time in the public market. The selling stockholders may sell the shares through ordinary brokerage transactions or through any other means described in the section titled “Plan of Distribution.” We do not know when or in what amount the selling stockholders may offer the shares for sale. The selling stockholders may sell any, all or none of the shares offered by this prospectus.

 

                    Investing in the shares being offered pursuant to this prospectus involves a high degree of risk. You should carefully read and consider the information set forth in the section of this prospectus titled “Risk Factors,” beginning on page 8, when determining whether to purchase any of these shares.

 

                    Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is                     , 2011.


TABLE OF CONTENTS

  Page
   
PROSPECTUS SUMMARY 1
   
RISK FACTORS 8
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 21
   
USE OF PROCEEDS 21
   
BUSINESS 22
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
   
HISTORY AND CORPORATE STRUCTURE 42
   
MANAGEMENT 46
   
EXECUTIVE COMPENSATION 50
   
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS; CORPORATE GOVERNANCE 52
   
SELLING STOCKHOLDERS 53
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 63
   
DESCRIPTION OF SECURITIES 64
   
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS 67
   
SHARES ELIGIBLE FOR FUTURE SALE 69
   
PLAN OF DISTRIBUTION 70
   
LEGAL MATTERS 71
   
EXPERTS 71
   
WHERE YOU CAN FIND MORE INFORMATION 71

You should rely only on the information provided in this prospectus. Neither we nor the selling stockholders have authorized anyone to provide you with additional or different information. The selling stockholders are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should assume that the information in this prospectus is accurate only as of the date on the front of the document.

i


PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering, including “Risk Factors” and our consolidated financial statements and related notes, included elsewhere in, or incorporated by reference into, this prospectus.

Conventions Used in this Prospectus

In this prospectus, unless indicated otherwise,

  • “BVI” refers to the British Virgin Islands;

  • “China,” “Chinese” and “PRC,” refer to the People’s Republic of China and for the purpose of this prospectus, do not include Taiwan and the special administrative regions of Hong Kong and Macau;

  • “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

  • “Fuping Milkgoat” refers to Fuping Milkgoat Dairy Co., Ltd., a company organized under the laws of the PRC;

  • “Milkgoat China” refers to Milkgoat (China) Goat Dairy Co., Ltd., a company organized under the laws of the PRC;

  • “Milkgoat Industrial” refers to Milkgoat Industrial Co., Ltd, a limited liability company organized under the laws of BVI;

  • “Renminbi” and “RMB” refer to the legal currency of China;

  • “SEC” refers to the United States Securities and Exchange Commission;

  • “Securities Act” refers to the Securities Act of 1933, as amended;

  • “U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States;

  • “we,” “us,” “our company,” “our” and “Yayi” refer to the combined business of Yayi International Inc. and/or its consolidated subsidiaries, as the case may be; and

  • “Weinan Milkgoat” refers to Weinan Milkgoat Production Co., Ltd., a company organized under the laws of the PRC.

1


The Company

Overview of Our Business

According to the China Quality Net, maintained by China Quality Inspection Association, we are the first and one of the leading producers and distributors of premium goat milk formula products for infants, toddlers, young children, and adults in China. We began selling powder products in Tianjin and Beijing in 2001, in Southern China in 2004 and Northern China in 2006. We currently manufacture and distribute goat milk powder products. In strict compliance with various national standards, we developed our goat milk powder products with multiple formulations designed to meet nutritional requirements and help promote an infant or toddler’s healthy growth at each developmental stage. Through several years of laboratory tests, we developed the goat odor elimination technology based on know-how licensed from a third party, which substantially eliminates the goat odor from our goat milk powder products without adding any artificial flavors. Most of our goat milk products are formulated through the inclusion of supplements such as vitamins, calcium, iron, selenium, chromium and omega-3 fatty acids, as needed to address the nutritional or health needs of the consumers. To ensure the product quality and safety, we import all of these supplements from other countries, such as Malaysia, the United States and Ireland.

Our current formula product lines are targeted at the premium segment of the dairy market and health-conscious consumers. Headquartered in Tianjin, China, we sell and distribute our products through a nationwide network of retail points across China in 23 provinces and municipalities including infant-maternity chain stores, supermarkets (including multinational chains) and drug stores, as well as catalogue sales and a dedicated online store at Taobao.com. We are vertically integrated and source raw goat milk from our proprietary dairy farms as well as neighboring goat dairy farmers on a long-term contract basis in milk collection centers, which helps us maintain quality control.

Since the end of 2009, we have been working with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our "Milk Goat" brand as the premium goat milk brand throughout China. We have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy. Our new product portfolio consists of three segments, infant formula products, adult products and children products with an aggregate 26 formula products under the "Milk Goat" brand with three package sizes of 600, 665 and 365 grams. Most of our goat milk products are formulated through the inclusion of supplements such as vitamins, calcium, iron, selenium, chromium and omega-3 fatty acids, as needed to address the nutritional or health needs of the consumers. We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores, domestic and multinational supermarkets and drug stores, as well as catalogue sales across China. We sell most of our products to more than 200 distributors, who in turn sell our products to the retail points. The distributors are located in 23 provinces in China. In addition, since the end of December 2010, we have been selling our products with 365-gram, 600-gram and 665-gram package sizes to the infant-maternity retail stores. We expect such new sales strategy to help further strengthen our market presence in this distribution channel.

Our Competitive Strengths

We believe that our success to date and potential for future growth can be attributed to a combination of our strengths, including the following:

  • First Mover Advantage. Various researches and publications indicate that goat milk is emerging as an ideal substitute to cow milk as consumers are increasingly aware of its benefits particularly for infants, who prefer a dairy product with a nutritional and molecular composition closer to human milk. Goat milk differs from cow milk in a number of ways and some of its attributes make it closer to human milk, such as high level of bioactive components, similar casein composition and secretion process in both human milk and goat milk. We are the first Chinese company to produce, sell and distribute goat milk formula products throughout China and we have been doing so since 2001.

  • Dedication to Quality Control. We source raw milk from our proprietary dairy farms and other goat dairy farmers on a long-term contractual basis in Shaanxi Province in northwestern China, where dairy goats are abundant and of optimal breed for milk production. Vertically integrated production and the ability to control raw goat milk sources enable us to secure raw material supply, and thus maintain our leading position in the market.

  • High-end Products. Our current formula product lines are targeted at the premium segment of the dairy market and health-conscious consumers. Given goat milk’s nutritional and molecular composition closer to human milk as well as the relative scarcity of goat milk since dairy goats have limited production capacity when compared to dairy cows, our goat milk products are positioned at the higher end of the dairy cost spectrum.

  • Experienced Management. Our senior management team has extensive operating experience and industry knowledge. For instance, Ms. Li Liu, who is our founder, Chairwoman, CEO and President, started the Company’s goat milk business in 2001. She is a pioneer in the goat milk industry. Mr. Fung Shek, who has served as our Director, Vice President and Deputy General Manager, also has significant experience in the goat milk business. He was formerly Director of Sales for P&G Taiwan, a company that provides consumer products in various areas.

2


Our Growth Strategy

As a leading goat milk producer and distributor in China, we believe we are well positioned to capitalize on future industry growth in China. We are dedicated to providing healthy and high quality products to our consumers. We will implement the following strategic plans to take advantage of industry opportunities and our competitive strengths:

  • Focus on brand development. In order to manifest our position as China’s leader in goat milk products and to educate consumers about the benefits of goat milk, we plan to invest in strengthening our brand equity. In November 2009, we engaged US-based branding and strategic positioning agency, Trout & Partners to enhance our brand position and build “Milk Goat” into a household brand in China. We have increased our advertising expenses and plan to continue advertising on China Central Television, or CCTV, in order to market our products as premium goat milk powder products.

  • Increase production capacity. We are in the process of increasing our production capacity for goat milk products by more than 400%. We broke ground on a new spray drying processing facility in Shaanxi Province in November 2009, which is expected to commence production by the fourth calendar quarter of 2013 and become the largest raw goat milk processing base in China with an expected production capacity of approximately 4,600 metric tons per annum. We have also invested in a new packing facility and warehouse in Tianjin, which is expected to go into operation in the fourth calendar quarter of 2012.

  • Expand distribution network. We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores, supermarkets (including multinational chains) and drug stores, as well as catalogue sales across China. Since 2010, we have expanded aggressively into the supermarkets segment as well as online sales through our online store at Taobao.com.

  • Focus on quality control. We continue to improve our product inspection procedures and monitor our raw milk suppliers in order to ensure the high quality of our products. We believe we can maintain our production of high quality dairy products by continuing to enter exclusive contracts with dairy farmers who can deliver quality goat milk, strengthening our company-owned large-scale dairy farm operations, expanding our company-owned collection stations and production facilities, and employing comprehensive testing and quality control measures.

Our Background and History

We were originally incorporated in Delaware in 1986 under the name of Commercial Ventures Ltd. We changed our name to FIN U.S.A., Inc. in 1987, and in 1993 to I/NET, INC, when we developed and marketed computer software for mid range computers. In 2006, Tryant acquired a majority of our outstanding capital stock. In connection with that acquisition, we ceased our operations and became a shell company in search of an operating business to acquire. On April 15, 2007, our name was changed to Ardmore Holding Corporation and in September 2008, following the Merger with Milkgoat Industrial as described below, we ceased being a shell company and began active goat milk and related products production and sale operations.

On September 12, 2008, we filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and changed our name to Yayi International Inc.

Acquisition of Milkgoat Industrial

On June 6, 2008, pursuant to an agreement and plan of merger, or the Merger Agreement, we, our wholly owned subsidiary, Ardmore Acquisition Corp., Milkgoat Industrial and Tryant consummated a merger, or the Merger, pursuant to which Ardmore Acquisition Corp. was merged with and into Milkgoat Industrial. As the surviving entity in the Merger, Milkgoat Industrial became our wholly-owned subsidiary.

3


In connection with the Merger, all of the outstanding shares of Milkgoat Industrial were converted into an aggregate of 22,325,000 shares of our common stock, par value $0.001 per share, or the Common Stock. In addition, Jeff D. Jenson, Steve Markee and Alex Ferries resigned from their positions as our directors and Li Liu, Fung Shek, and Cili Yan were appointed as our new directors. Our executive officers were also replaced by the Milkgoat China’s executive officers upon the closing of the Merger.

Private Placement Transaction in 2008

Contemporaneously with, and as a condition to, the completion of the Merger, we issued, pursuant to an amended and restated securities purchase agreement, 52 units to certain investors for an aggregate purchase price of $1.3 million. Each unit consisted of: (i) an 8% convertible promissory note in the principal amount of $25,000 and (ii) series A common stock purchase warrant to acquire 11,575 shares of our Common Stock, or the Series A Warrant. As a result, we issued to the investors an aggregate of $1,300,000 principal amount of 8% convertible promissory notes and the Series A Warrants to purchase 601,900 shares of our Common Stock.

We paid the placement agent, WestPark Capital, Inc., or WestPark, $104,000 in commissions and approximately $20,000 for expenses (including its non-accountable expense allowance) for its services in the offering and issued to it and its designees series D common stock purchase warrants (with the same terms as the Series A Warrants) to acquire an aggregate of 144,448 shares of our Common Stock, or the Series D Warrants.

Private Placement Transaction in 2009

On June 18, 2009, we entered into a series A preferred stock purchase agreement, or the Stock Purchase Agreement with our majority shareholder, Global Rock Stone Industrial Ltd, a BVI company, or Global Rock, Milkgoat Industrial, Milkgoat China, the individuals named thereto and an accredited investor, SAIF Partners III L.P., or SAIF. Pursuant to the Stock Purchase Agreement, we issued and sold to SAIF 1,530,612 shares of our series A preferred stock, par value $0.001 per share, or the Series A Preferred Stock, at a price per share of $9.80 for an aggregate purchase price of $15.0 million. The Series A Preferred Stock is convertible into our Common Stock at an initial conversion price at $0.98 per share, which conversion price is subject to stock split, recapitalization and other anti-dilution protection.

In anticipation of the above private placement transaction, on June 16, 2009, we filed a Certificate of Designation of Series A Preferred Stock with the Secretary of State of the State of Delaware, or the Certificate, which became effective upon filing. Pursuant to the Certificate, there are 1,530,612 shares of Series A Preferred Stock authorized. The holders of the Series A Preferred Stock are entitled to receive non-cumulative dividends, when, as and if declared by the Board. The shares of Series A Preferred Stock may be converted into the Company’s Common Stock at the option of the holders of the Series A Preferred Stock in whole or in part at any time at an initial conversion price of $0.98, subject to future adjustments set forth in the Certificate. As described below, the Certificate was amended and restated by us on July 20, 2010.

Private Placement Transaction in 2010

On September 27, 2010, we entered into a securities purchase agreement, or the Securities Purchase Agreement, with 119 U.S. accredited investors, or the PIPE Investors, and Euro Pacific Capital, Inc., or Euro Pacific, as representative of the PIPE Investors, pursuant to which we issued and sold to the PIPE Investors 892 units at a purchase price of $10,000 per unit, resulting in gross proceeds of $8.92 million to us. Each unit consists of a three-year, 9% Convertible Note in the principal amount of $10,000, and a three-year Series F Warrant, to purchase 1,250 shares of our Common Stock at an exercise price of $2.50 per share.

The Convertible Notes are payable at an interest rate of 9% per annum, semiannually in arrears on the last day of the first and third calendar quarters commencing March 31, 2011 and mature on September 26, 2013, or the Maturity Date. The Convertible Notes are also convertible into shares of Common Stock at any time prior to the Maturity Date at $2.00 per share, which conversion price is subject to weighted average and other customary anti-dilution protections. At any time after September 26, 2011, we may redeem all but not less than all of the outstanding principal amount of any Convertible Note by payment of 108% of the outstanding principal amount of the Convertible Note, together with accrued but unpaid interest.

The Series F Warrants entitle the PIPE Investors to purchase an aggregate of 1,115,000 shares of Common Stock at an initial exercise of $2.50 per share, which exercise price is subject to the customary weighted average and stock based anti-dilution protection. The Series F Warrants may be exercised in a cash or cashless way at any time upon the election of the holders until September 26, 2013.

4


Euro Pacific acted as the sole placement agent of this private placement transaction, in which it received from us a cash commission of $713,600, which is equal to 8% of the gross proceeds of the financing. In addition, we issued Series F Warrants to the designees of Euro Pacific to purchase an aggregate of 312,200 shares of Common Stock at an exercise price of $2.50 per share, as partial compensation for services provided by them in connection with the private placement transaction.

Corporate Information

All of our business operations are conducted through our indirectly, wholly-owned Chinese subsidiaries. The following chart reflects our organizational structure as of the date of this prospectus.

Our corporate headquarters are located at No. 9 Xingguang Road, Northern Industrial Park of Zhongbei Town, Xiqing District, Tianjin 300384, China. Our telephone number is (86)22-2798-4033. We maintain a website at http://www.milkgoatchina.com that contains information about us, but that information is not a part of this prospectus.

5


The Offering

Common Stock offered by selling stockholders

5,575,000 shares, consisting of 4,460,000 shares of Common Stock issuable upon the conversion of the Convertible Notes and 1,115,000 shares of Common Stock issuable upon the exercise of Series F Warrants held by the selling stockholders.

Common Stock outstanding before the offering

 

26,454,558 shares

 

Common Stock outstanding after the offering, assuming all the shares are issued upon the conversion of the Convertible Notes and all the Series F Warrants held by selling stockholders are exercised for cash.

32,029,558 shares

Proceeds to us

We will not receive any proceeds from the sale of Common Stock covered by this prospectus. We will, however, receive approximately $2.79 million from the exercise of the warrants held by the selling stockholders, if all of such warrants are exercised for cash.

Trading Symbol

Our Common Stock is quoted on the OTCBB under the symbol “YYIN”

6


Summary Consolidated Financial Information

The following summary consolidated statement of income data for the years ended March 31, 2011 and October 31, 2009 and for the five months ended March 31, 2010 and 2009 and the consolidated balance sheet data as of March 31, 2011 and 2010 are derived from our consolidated financial statements included in this prospectus. The financial information provided for the five months ended March 31, 2009 is unaudited, since it represented an interim period of the fiscal year ended October 31, 2009. Such unaudited financial information includes all adjustments, consisting of only normal recurring accruals, which our management considers necessary for the fair presentation of our financial position and results of operations for such interim periods. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of our results for any future periods.

STATEMENT OF INCOME
Year Ended March 31,
Five Months Ended March 31,
Year Ended
October 31,
  2011 2010 2009 2009
      (Unaudited)  
Net sales $26,909,879 $6,085,193 $9,283,420 $24,845,685
Operating expenses (16,657,594) (5,226,650) (2,659,055) (7,732,636)
Operating income (Loss) 176,833 (1,511,099) 3,731,656 9,088,040
Income tax (expense) benefit (468,086) 289,093 (869,614) (2,201,032)
Net (loss) income from continuing operations $(1,291,499) $(1,602,795) $2,175,164 $5,395,981
Earnings Per Share        
     Basic $(0.05) $(0.06) $0.09 $0.22
     Diluted $(0.05) $(0.06) $0.09 $0.22

BALANCE SHEET DATA As of March 31,
  2011 2010
     
Working capital $9,738,658 $2,958,109
Current assets 25,772,598 13,147,476
Total assets 55,594,305 39,803,111
Current liabilities 16,033,940 10,189,367
Total liabilities 28,795,017 15,519,177
Stockholders’ equity $11,054,123 $10,019,063

7


RISK FACTORS

The shares of our Common Stock being offered for resale by the selling stockholders are highly speculative in nature, involve a high degree of risk and should be purchased only by persons who can afford to lose the entire amount invested in the Common Stock. Before purchasing any of the shares of Common Stock, you should carefully consider the following factors relating to our business and prospects. You should pay particular attention to the fact that we conduct all of our operations in China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in the U.S. and other countries. If any of the following risks actually occurs, our business, financial condition or operating results will suffer, the trading price of our Common Stock could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

Our products may not achieve or maintain market acceptance

We may have difficulty gaining market acceptance for goat milk generally and our products in particular because cow milk dominates the milk market in China (constituting more than 90% of the milk sold), the favorable pricing of cow milk compared to goat milk, and the historic and long-term association of goat milk with unpleasant smells and tastes. As a result, achieving and maintaining market acceptance for our products will require substantial marketing efforts and the expenditure of significant funds to encourage consumption of goat milk in general, and the purchase of our products in particular. There is substantial risk that the market may not accept or be receptive to our products. Market acceptance of our products will depend, in large part upon our ability to inform potential customers that the distinctive characteristics of our products make them superior to competitive products and justify their pricing. Our products may not be accepted by consumers or be able to compete effectively.

Recently discovered contamination of milk powder products produced in China could result in negative publicity and have a material adverse effect on our business.

Recently, a number of milk powder products produced within China were found to contain unsafe levels of tripolycyanamide, also known as melamine, sickening thousands of infants. This prompted the Chinese government to conduct a nationwide investigation into how the milk powder was contaminated, and caused a worldwide recall of certain milk powder products produced within China. It is possible that the illnesses caused by contamination in the milk powder industry may lead to a sustained decrease in demand for milk powder products produced within China, thereby having a material adverse effect on our business.

We do not carry any business interruption insurance, third-party liability insurance for our production facilities or insurance that covers the risk of loss of our products in shipment.

Operation of our facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances and other business interruptions. Furthermore, if any of our products are faulty, then we may become subject to product liability claims or we may have to engage in a product recall. We do not carry any business interruption insurance, product recall or third-party liability insurance for our production facilities or with respect to our products to cover claims pertaining to personal injury or property or environmental damage arising from defects in our products, product recalls, accidents on our property or damage relating to our operations. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

Our sales and reputation may be affected by product liability claims, litigation, product recalls, or adverse publicity in relation to our products.

The sale of products for human consumption involves an inherent risk of injury to consumers. We face risks associated with product liability claims, litigation, or product recalls, if our products cause injury, or become adulterated or misbranded. Our products are subject to product tampering, and to contamination risks, such as mold, bacteria, insects, and other pests, and off-flavor contamination during the various stages of the procurement, production, transportation and storage processes. If any of our products were to be tampered with, or become tainted in any of these respects and we were unable to detect this, our products could be subject to product liability claims or product recalls. We cannot predict what impact such product liability claims or resulting negative publicity would have on our business or on our brand image. The successful assertion of product liability claims against us could result in potentially significant monetary damages, diversion of management resources and require us to make significant payments and incur substantial legal expenses. We do not have product liability insurance and have not made provisions for potential product liability claims. Therefore, we may not have adequate resources to satisfy a judgment if a successful claim is brought against us. Even if a product liability claim is not successfully pursued to judgment by a claimant, we may still incur substantial legal expenses defending against such a claim. Finally, serious product quality concerns could result in governmental action against us, which, among other things, could result in the suspension of production or distribution of our products, loss of certain licenses, or other governmental penalties. A widespread product recall could result in significant loss due to the cost of conducting a product recall including destruction of inventory and the loss of sales resulting from the unavailability of the product for a period of time. In addition, product liability claims and product recalls could have a material adverse effect on the demand for our products and on our business goodwill and reputation. Adverse publicity could result in a loss of consumer confidence in our products.

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Our business and financial results depend on maintaining a consistent and cost-effective supply of raw milk and other raw materials, which come from limited geographic areas in China. Any interruption in our supply of raw milk could materially and adversely affect our results of operations, financial condition and business prospects.

Raw goat milk is the primary raw material we use to produce our products. We currently own ten dairy goat farms. However, most of our supply of raw goat milk comes from Saanen dairy goats raised on individual and collective goat farms in Weinan City in China’s Shaanxi Province. We have long-term supply arrangements with local governmental and quasi-governmental authorities pursuant to which we purchase all the milk produced by the small collective farms at a price negotiated from time to time by us and the individual farms. If we are not able to maintain our relationships with current suppliers and develop new sources of supply, we will not be able to meet our production goals and our sales will fall. If we are forced to expand our sources for raw milk, it may be more and more difficult for us to maintain our quality control over the handling of the product in our supply and manufacturing chain. A decrease in the quality of our raw materials would cause a decrease in the quality of our product and could damage our reputation and cause sales to decrease.

Raw goat milk production is, in turn, influenced by a number of factors that are beyond our control including, but not limited to, the following:

  • seasonal factors: goats generally do not produce milk from November through February; further goats produce more milk in temperate weather than in cold or hot weather and extended unseasonably cold or hot weather could lead to lower than expected production;

  • environmental factors, with the volume and quality of milk produced by dairy goats closely linked to the quality of the nourishment provided by the environment around them. A major outbreak of any illness or disease in goats could lead to a serious loss of consumer confidence in, and demand for, our goat milk products; and

  • governmental agricultural and environmental policy: declines in government grants, subsidies, provision of land, technical assistance and other changes in agricultural and environmental policies may have a negative effect on the viability of individual and small farms, and the numbers of dairy goats and quantities of milk they are able to produce.

Even if we are able to source sufficient quantities of raw milk or our other raw materials to meet our needs, downturns in the supply of such raw materials caused by one or more of these factors could lead to increased raw material costs which we may not be able to pass on to the consumers of our products, causing our profit margins to decrease.

We depend on the national and local governments to support our industry and us.

The government plays a significant role in the economy in general and, the dairy industry in particular. Governmental authorities provide support for the development of the goat milk industry by, among other things, providing land, space and equipment for goat farms, financing goat farms, waiving compliance with otherwise applicable regulations, and reducing or eliminating tax obligations. Changes in governmental policies supportive of the development of this industry or failure to maintain good relations with governmental authorities may require us to incur expenses we are otherwise not required to incur. We may not have sufficient funds to pay such additional expenses and even if we do, our profitability may be reduced.

Our failure to protect our exclusive rights to use the knowhow provided by Taiwan Richlink Enterprise Company Ltd. may have a negative effect on our results of operations.

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Our goat odor elimination technology which eliminates odor in our products is developed from the know-how that was exclusively licensed to us from Taiwan Richlink Enterprise Company Ltd., or Taiwan Richlink, pursuant to an exclusive licensing agreement, dated April 10, 2001. The licensing agreement was amended on June 12, 2009 and expired on April 10, 2011. Although we have the right to use the knowhow for free after the expiration of this agreement, there can be no assurance that such rights will be exclusive. Taiwan Richlink may license the knowhow to other Chinese goat milk producers in the future, which may increase our competition because we may lose this competitive advantage and as a result may have a negative impact on our operations. In addition, while we are not aware of any disputes between Taiwan Richlink and us or any third party, in the event the goat odor elimination technology is challenged or infringed, Taiwan Richlink may determine not to protect its intellectual property rights that we license from it and we may be unable defend such intellectual property rights on our own or we may have to undertake costly litigation to defend the intellectual property rights of Taiwan Richlink. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition.

Failure to timely collect amounts due to us from Tianjin Mengyang should Tianjin Mengyang fail to complete construction projects relating to the building of an office building, warehouses and factory for us could adversely affect our liquidity, financial condition and results of operations.

Pursuant to our agreements with Tianjin Mengyang Biological Development Co., Ltd, or Tianjin Mengyang, as of March 31, 2011, we had paid Tianjin Mengyang an aggregate of $16,193,741 as advances to purchase an office building and certain warehouses and factory. These advances accounted for approximately 29.1% of our total assets as of March 31, 2011. After several delays, the construction of these projects was completed in September 2010. These projects are currently under inspections by the relevant PRC government authorities before they can be delivered to us by Tianjin Mengyang. Although we expect that the inspections will be completed during the fourth calendar quarter of 2011 there is no guarantee that these projects will not continue to be delayed. According to the agreements between us and Tianjin Mengyang, if these projects continue to be delayed due to construction quality issues, we have a right to terminate the agreements and under the contract law of PRC, are entitled to receive a full refund of the paid advances plus any accrued interests from Tianjin Mengyang. However, there is no assurance that Tianjin Mengyang will pay us the full advances plus interests timely upon our request. Our ability to collect the amounts that may become due to us from Tianjin Mengyang could be impacted by various factors such as a deterioration in the financial condition of Tianjin Mengyang, inability of Tianjin Mengyang to obtain bank credit lines and our efforts to pursue collections. If our collection efforts fail, we may have to undertake costly litigation to collect these amounts or request possession of the properties that we intend to purchase. Any such lawsuit would be time-consuming and result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition.

The milk business is highly competitive and, therefore, we face substantial competition in connection with the marketing and sale of our products.

We face competition from cow milk and goat milk producers. Most of our competitors producing cow milk are well established, have greater financial, marketing, personnel and other resources than we have and have been in business for longer periods of time than we have, and have products that have gained wide customer acceptance in the marketplace. The greater financial resources of such competitors will permit them to procure retail store shelf space and to implement extensive marketing and promotional programs, both generally and in direct response to our advertising claims. The milk industry is also characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. We may be unable to compete successfully or our competitors may develop products that have superior qualities or gain wider market acceptance than ours.

We compete in an industry that is brand-conscious, and unless we are able to establish and maintain brand name recognition, our sales may be negatively impacted.

Our business is substantially dependent upon awareness and market acceptance of our products and brand by our targeted consumers. In addition, our business depends on acceptance by our suppliers and consumers of our brand. Although we believe that we have made progress towards establishing market recognition for our brands “Mei Ke Gao Te” and “Yi Mei Shi” in the dairy products industry in China, it is too early in the product life cycle of the brand to determine whether our products and brand will achieve and maintain satisfactory levels of acceptance by our customers.

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Possible volatility of raw milk costs makes our operating results difficult to predict, and a steep cost increase could cause our profits to diminish significantly.

The policy of China since the mid-1990s has focused on moving the industry in a more market-oriented direction. These reforms have resulted in the potential for greater price volatility relative to past periods, as prices are more responsive to the fundamental supply and demand aspects of the market. These changes in China’s dairy policy could increase the risk of price volatility in the dairy industry, making our net income difficult to predict. Also, if prices are allowed to escalate sharply, our costs will rise which will lead to a decrease in profits.

Our inability to protect our intellectual property may prevent us from successfully marketing our products and competing effectively

Failure to protect our intellectual property could harm our brands and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks, patents, copyrights, know how and trade secrets, could result in the expenditure of significant financial and managerial resources. We produce, market and sell our products using trademarks of “Mei Ke Gao Te” and “Yi Mei Shi.” We regard our intellectual property, particularly our trademark, know how and trade secrets to be of considerable value and importance to our business and our success. We rely on a combination of patent, trademark, trade secrecy laws, and contractual provisions to protect our intellectual property rights. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our patent, trademark, trade secrets or similar proprietary rights. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective, mainly due to lack of procedural rules for discovery of evidence, low damage awards and low rates of criminal penalties against intellectual property right infringements. Accordingly, protection of intellectual property rights in China may not be as effective as in the United States and other western countries. In addition, there can be no assurance that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. However, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to commence litigation to enforce or defend our proprietary rights or to determine the enforceability, scope and validity of our proprietary rights or those of others. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. The experience and capabilities of PRC courts in handling intellectual property litigation vary, and outcomes are unpredictable. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse affect on our ability to market or sell our brands, and profitably exploit our products.

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosure.

We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, all of our operations are located in China. Since all of our operations and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the China Securities Regulatory Commission, or CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.

Our management has identified deficiencies in our internal control over financial reporting, which if not properly remediated could result in material misstatements in our future interim and annual financial statements and have a material adverse effect on our business, financial condition and results of operations and the price of our Common Stock.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.

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Management assessed our internal control over financial reporting as of March 31, 2011. Management's assessment of internal control over financial reporting was conducted using the criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our management concluded that our internal controls over financial reporting as of March 31, 2011 were not effective due to the following significant deficiencies:

  • Our internal audit function is significantly deficient due to insufficient qualified resources and appropriate system to perform such function. Therefore, our ability to prevent and control lapses and errors in our accounting function could not be rendered effectively.

  • Our current accounting staff is relatively inexperienced with respect to U.S. GAAP and needs substantial training to meet the higher demands of being a U.S. public company.

In order to correct the foregoing significant deficiencies, we have taken and are taking the following remediation measures:

  • We have engaged a third party professional consultant, as announced on November 17, 2009, to assist us in assessing, improving and monitoring our internal control over financial reporting. We have been actively working with the external consultant to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting.

  • We are committed to develop a comprehensive and risk-based internal audit function within the Company. Due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we have engaged an external professional consultancy firm to assist the management in developing the internal audit system. At the same time, we have employed experienced staff with respect to U.S. GAAP-based reporting. We have enhanced our efforts to hire sufficient internal audit resources with assistance from recruiters and through referrals.

  • Ms. Veronica Jing Chen was appointed as our new Chief Financial Officer, effective February 24, 2010, who is a seasoned executive with more than 20 years of experience in accounting, financial management, and general management of several U.S.-listed Chinese companies.

  • Ms. Ping An was appointed as our senior finance manager, effective April 19, 2010, who has more than five years experience in a “Big Four” Accounting firm - Deloitte & Touch Tianjin.

Although we are in the process of implementing the above initiatives aimed at addressing these deficiencies, there is no guarantee that these initiatives will remediate the inadequacy completely. Failure to achieve and maintain an effective internal control environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public company, which could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause our investors to lose confidence in the information we report, which could adversely affect the price of our Common Stock.

We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants, sales agents or distributors of our company, because these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. We have adopted a general FCPA policy in our amended Code of Ethics and have informed our personnel and third-party sales agents and distributors regarding the requirements of the FCPA. We plan to further develop and implement systems for formalizing contracting processes, performing diligence on agents and improving our record-keeping and auditing practices. 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. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

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The global economic crisis could further impair the dairy industry thereby limiting demand for our products and affecting the overall availability and cost of external financing for our operations.

The continuation or intensification of the global economic crisis and turmoil in the global financial markets may adversely impact our business and our potential sources of capital financing. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, these economic conditions also impact levels of consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future. Consumer purchases of discretionary items, including our goat milk powder, generally decline during recessionary periods and other periods where disposable income is adversely affected. If demand for our products fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed. Presently, it is unclear whether and to what extent the economic stimulus measures and other actions taken or contemplated by the Chinese government and other governments throughout the world will mitigate the effects of the crisis on the dairy industry and other industries that affect our business. Although these conditions have not presently impaired our ability to access credit markets and finance our operations, the impact of the current crisis on our ability to obtain capital financing in the future, and the cost and terms of same, is unclear.

We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have limited protections against related party transactions, conflicts of interest and similar matters.

Since our Common Stock is not listed for trading on a national securities exchange, we are not subject to certain of the corporate governance requirements established by the national securities exchanges pursuant to the Sarbanes-Oxley Act of 2002, or SOX. These include rules relating to independent directors, and independent director nomination, audit and compensation committees. We do not currently have a majority of independent directors on our board of directors. As a result, we have not established independent audit, compensation, or nominating committees of our board of directors. In the absence of a majority of independent directors, our officers and directors could establish policies and enter into transactions without independent review and approval. In certain circumstances, management may not have the same interests as the shareholders and conflicts of interest may arise. Notwithstanding the exercise of their fiduciary duties as directors and executive officers and any other duties that they may have to us or our shareholders in general, these persons may have interests different than yours which could adversely affect your investment.

There are limitations on the liability of our directors, and we may have to indemnify our officers and directors in certain instances.

Our amended and restated certificate of incorporation contains a specific provision that eliminates the personal liability of our directors for monetary damages for breach of their fiduciary duties as directors to the extent provided by Delaware law. Our bylaws provide that we will indemnify our officers and directors and may indemnify our employees and other agents. We may also have contractual indemnification obligations under agreements with our executive officers and directors. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit us and our stockholders.

Expansion of our business may put added pressure on our management and operational infrastructure impeding our ability to meet any potential increased demand for the products that we sell and possibly hurting our future operating results.

Our business plan is to grow our operations significantly to meet anticipated growth in demand for the products that we sell, and by the introduction of new product offerings. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:

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  • our ability to successfully and rapidly expand sales to potential new distributors in response to potentially increasing demand;

  • the costs associated with such growth, which are difficult to quantify, but could be significant; and

  • rapid technological change.

To accommodate any such growth and compete effectively, we may need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage our employees, and such funding may not be available in sufficient quantities, if at all. If we are not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, our operating results could suffer.

We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.

Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including Li Liu, our chief executive officer and chairperson, and Fung Shek, our Vice President. If we lose any of these key employees and are unable to find a qualified replacement in a timely manner, our business will be negative impacted. In addition, if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantly deplete the institutional knowledge held by our existing senior management team. We depend on the skills and abilities of these key employees in managing the reclamation, technical, and marketing aspects of our business, any part of which could be harmed by turnover in the future.

We may have to pay up to 8% of the gross proceeds we received in the recent private placement as liquidated damages to the investors since the registration statement of which this prospectus is a part has not been declared effective within the time periods specified.

In connection with the recent private placement described above, on September 27, 2010, we entered into a registration rights agreement with the PIPE Investors, or the Registration Rights Agreement, pursuant to which, we granted registration rights to holders of registrable securities, which include (i) the shares of Common Stock issuable upon the conversion of the Convertible Notes, (ii) the make good shares deposited in connection with the private placement, as applicable, (iii) the shares of Common Stock issuable upon the exercise of Series F Warrants, and (iv) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any price adjustment as a result of such stock splits, reverse stock splits or similar events with respect to any of the securities referenced in (i) – (iii) above. Under the terms of the Registration Rights Agreement, if this registration statement is not declared effective by the SEC within the time period specified in the Registration Rights Agreement, then we are required to pay the PIPE Investors, as liquidated damages, 1.0% of the amount invested for each 30-day period during which such failure continues, for up to a maximum of 8% of each PIPE Investor’s investment pursuant to the Registration Rights Agreement, except that we will not be obligated to pay any such fee if we are unable to fulfill our registration obligations as a result of rules, regulations, positions or releases issued or actions taken by the SEC with respect to Rule 415 of the Securities Act, so long as we register at such time the maximum number of securities permissible by the SEC. We have failed to cause this registration statement to be declared effective by the SEC with the prescribed period. There can be no assurance that this registration statement will be declared effective by the SEC in the coming future. Therefore, we may have to suffer monetary losses by paying up to 8% of the gross proceeds we received in this private placement as liquidated damages to the investors.

RISKS RELATED TO DOING BUSINESS IN CHINA

Extensive regulation of the food processing and distribution industry in China could increase our expenses resulting in reduced profits.

We are subject to extensive regulation by China’s Agricultural Ministry, and by other county and local authorities in jurisdictions in which our products are processed or sold, regarding the processing, packaging, storage, distribution and labeling of our products. Applicable laws and regulations governing our products may include nutritional labeling and serving size requirements. Our processing facilities and products are subject to periodic inspection by national, county and local authorities. To the extent that new regulations are adopted, we will be required to conform our activities in order to comply with such regulations. Our failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, operations and finances.

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Because Shaanxi Coalfield Geology Bureau Hydrological Team failed to obtain necessary approval from relevant government authority when they leased an allocated land to Fuping Milkgoat, there is no guarantee that the PRC government will not challenge the validity of the lease in the future.

In 2004, when Shaanxi Coalfield Geology Bureau Hydrological Team, or Shaanxi Coalfield, leased an allocated land to Fuping Milkgoat for its business use, it did not obtain necessary approvals from relevant land administrations of municipal or county governments or complete necessary administrative procedures. On August 8, 2008, Milkgoat China acquired Fuping Milkgoat. According to Provisional Rules on Administration of Allocated Land Use Right of PRC, promulgated by State Land Administration on March 8, 1992, land users who transfer, lease or mortgage allocated land use right must bear state-owned land use certificate and legal documents of the premises and attached structures and properties and apply in written form to land administrations of local municipal or county people's governments. Land administrations of municipal or county people's governments, through negotiations, sign land use right transfer contract with the applicant. Land users shall, within 60 days after the signing of land use right leasing contracts, pay lease fees to local municipal or county people's governments and have the land use right leasing registered at the land administrations of the municipal or county people's governments. Both parties involved in transfer, leasing or mortgaging of land use right shall, within 15 days after the registration of a land use right lease, go to land administrations of municipal or county people's governments to have the transfer, leasing or mortgaging of land use right registered. Shaanxi Coalfield failed to comply with the above requirement for not obtaining the government approval or completing the necessary administrative procedures before they leased the allocated land to us. Shaanxi Coalfield is in the process of applying for the approval from the PRC regulatory authorities with respect to their lease of the allocated land to Fuping Milkgoat. There is no guarantee that the PRC regulatory agency will not challenge the validity of our lease in the future. If these leases are deemed invalid by the PRC regulatory authorities, we will lose the land use right to this allocated land. As a result, Fuping Milkgoat’s business of processing raw goat milk could be affected negatively. We believe that our cost of raw milk powder will increase by approximately RMB 332 (approximately $50.5) per ton as we will need to have third-party processors to spray dry raw goat milk into milk powder.

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

We conduct substantially all of our operations and generate all of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:

  • a higher level of government involvement;
  • a early stage of development of the market-oriented sector of the economy;
  • a rapid growth rate;
  • a higher level of control over foreign exchange; and
  • the allocation of resources.

As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.

Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.

Any adverse change in economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our business and prospects.

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Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and all of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.

Our operations are subject to PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations, we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations. Our failure to comply with applicable PRC laws and regulations could subject us to administrative penalties and injunctive relief, as well as civil remedies, including fines, injunctions and recalls of our products. It is possible that changes to such laws or more rigorous enforcement of such laws or with respect to our current or past practices could have a material adverse effect on our business, operating results and financial condition.

The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

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

All our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.

Foreign exchange transactions by our PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including the SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with the SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or the MOFCOM, or their respective local counterparts. These limitations could affect their ability to obtain foreign exchange through debt or equity financing.

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Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our Common Stock will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Restrictions under PRC law on our PRC subsidiaries' ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our businesses.

Substantially all of our revenues are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to our non-PRC stockholders and us.

China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Because the New EIT Law and its implementing rules are new, no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

If the PRC tax authorities determine that Yayi International Inc. is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2008 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

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If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.

If the CSRC, or another PRC regulatory agency determines that CSRC approval is required in connection with the acquisition of Milkgoat Industrial, the acquisition may be unwound, or we may become subject to penalties.

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule, among other things, requires that an offshore company controlled by PRC companies or individuals that have acquired a PRC domestic company for the purpose of listing the PRC domestic company’s equity interest on an overseas stock exchange must obtain the approval of the CSRC prior to the listing and trading of such offshore company’s securities on an overseas stock exchange. On September 21, 2006, the CSRC, pursuant to the M&A Rule, published on its official web site procedures specifying documents and materials required to be submitted to it by offshore companies seeking CSRC approval of their overseas listings.

We do not believe that the M&A Rule concerning the CSRC approval for acquisition of a PRC domestic company by an offshore company controlled by PRC companies or individuals applies to our reverse acquisition of Milkgoat Industrial because neither Yayi International Inc. nor Milkgoat Industrial is a “Special Purpose Vehicle” or an “offshore company controlled by PRC companies or individuals” as defined in the M&A Rule. If the CSRC or another PRC governmental agency subsequently determines that we must obtain CSRC approval prior to the completion of the reverse acquisition, the reverse acquisition may be unwound and we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China and limit our operating privileges in China, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.

The 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.

The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the PRC Ministry of Commerce be notified in advance of any change-of-control transaction and in some situations, require approval of the PRC Ministry of Commerce when a foreign investor takes control of a Chinese domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also requires PRC Ministry of Commerce anti-trust review of any change-of-control transactions involving certain types of foreign acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the PRC 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 implementation of the new PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.

A new employment contract law became effective on January 1, 2008 in China. It imposes more stringent requirements on employers in relation to entry into fixed-term employment contracts, recruitment of temporary employees and dismissal of employees. In addition, under the newly promulgated Regulations on Paid Annual Leave for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid vacation ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. As a result of the new law and regulations, our labor costs may increase. There is no assurance that disputes, work stoppages or strikes will not arise in the future. Increases in the labor costs or future disputes with our employees could damage our business, financial condition or operating results.

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You may have difficulty enforcing judgments against us.

We are a Delaware holding company and most of our assets are located outside of the United States. Most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY

Our Common Stock is quoted on the OTCBB which may have an unfavorable impact on our stock price and liquidity.

Our Common Stock is quoted on the OTCBB. The OTCBB is a significantly more limited market than the New York Stock Exchange or NASDAQ system. The quotation of our shares on the OTCBB may result in a less liquid market available for existing and potential stockholders to trade shares of our Common Stock, could depress the trading price of our Common Stock and could have a long-term adverse impact on our ability to raise capital in the future.

The market price of our Common Stock is volatile, leading to the possibility of its value being depressed at a time when you may want to sell your holdings.

The market price of our Common Stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our Common Stock to fluctuate significantly. In addition to market and industry factors, the price and trading volume for our Common Stock may be highly volatile for specific business reasons. Factors such as variations in our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our products could cause the market price for our shares to change substantially.

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.

Moreover, the trading market for our Common Stock will be influenced by research or reports that industry or securities analysts publish about us or our business. If one or more analysts who cover us downgrade our Common Stock, the market price for our Common Stock would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price for our Common Stock or trading volume to decline.

Furthermore, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our Common Stock and other interests in our company at a time when you want to sell your interest in us.

We are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our Common Stock.

The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Because our Common Stock is a “penny stock”, we are subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

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For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

There can be no assurance that our Common Stock will qualify for exemption from the Penny Stock Rule. In any event, even if our Common Stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

Certain provisions of our amended and restated certificate of incorporation may make it more difficult for a third party to effect a change-of-control.

Our amended and restated certificate of incorporation authorizes our board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our Common Stock, and therefore could reduce the value of such Common Stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our Common Stock. In connection with our private placement transaction in June 2009, we filed a Certificate of Designation of Series A Preferred Stock with the Secretary of State of the State of Delaware on June 16, 2009, pursuant to which we designated and issued 1,530,612 shares of Series A Preferred Stock to SAIF.

The conversion of preferred stock and convertible notes or the exercise of warrants we issued in our previous private placements may result in dilution to the holders of our Common Stock and cause the price of our Common Stock to decline.

Dilution of the per share value of our Common Stock could result from the conversion of our outstanding Series A Preferred Stock and the Convertible Notes or the exercise of outstanding warrants that we issued in connection with our previous private placement transactions. As of July 8, 2011, there were 1,530,612 shares of our Series A Preferred Stock outstanding, which may be converted into our Common Stock at the option of the holders of the Series A Preferred Stock in whole or in part at any time at an initial conversion price of $0.98. Our outstanding Convertible Notes are also convertible into an aggregate of 4,460,000 shares of Common Stock with an initial conversion price of $2.00 per share. In addition, as of July 8, 2011, there were outstanding warrants to purchase an aggregate of 4,414,439 shares of our Common Stock. When the conversion price of the Series A Preferred Stock and the Convertible Notes or the exercise price of the warrants is less than the trading price of our Common Stock, the conversion of Series A Preferred Stock and the Convertible Notes or the exercise of the warrants would have a dilutive effect on our shareholders. The possibility of the issuance of shares of our Common Stock upon the conversion of Series A Preferred Stock and the conversion of our Convertible Notes or the exercise of the warrants could cause the trading price of our Common Stock to decline as well.

We may not have sufficient funds to redeem our outstanding Series A Preferred Stock upon the request of the holders and we may have difficulties to raise the funds necessary to settle redemption of the Series A Preferred Stock, which could negatively affect our financial condition and results of operations.

We filed the Certificate with the Secretary of State of the State of Delaware on June 16, 2009, in which we authorized 1,530,612 shares of Series A Preferred Stock. According to the Certificate, at any time and from time to time after June 30, 2012, the holders of the Series A Preferred Stock have the right to request the Company to redeem all of the then outstanding shares of Series A Preferred Stock in cash, if any of the following qualified events has not occurred: (i) the Company’s shares of Common Stock are listed on the New York Stock Exchange or the NASDAQ Global Market, and (ii) the closing market price of such listing securities represents a price of no less than $4.25 per share of Common Stock, subject to adjustment, in any consecutive 30-trading-day period. It will cost an amount equals to the sum of (x) the purchase price plus an annualized internal rate of return of 25% for the period from the issuance date of the Series A Preferred Stock to the redemption date and (y) an amount equal to all declared but unpaid dividends for each outstanding share of Series A Preferred Stock, proportionally adjusted for recapitalizations to redeem a share of Series A Preferred Stock. We cannot assure you that we would have sufficient financial resources, or would be able to arrange financing, to redeem all of the shares of the Series A Preferred Stock upon the request of the holders. According to the Certificate, to the extent our available cash flow is insufficient to fund all redemption requests, those funds will be used to redeem the maximum possible number of such shares ratably among the holders. The shares not redeemed shall remain outstanding and at any time thereafter when additional funds of the Company are available for the redemption, such funds will immediately be used to redeem the balance of the shares. Our obligations to redeem the balance of the shares may limit our ability to borrow money or sell stock to fund and as a result, may require a substantial portion of our cash flow from operations to be used for the redemption of these shares, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes. One or a combination of these factors could adversely affect our financial condition and results of operations.

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We do not intend to pay dividends for the foreseeable future.

We have not paid a dividend in the past and it is unlikely that we will declare or pay a dividend in the foreseeable future. The declaration, amount and date of distribution of any dividends in the future will be decided by the Board of Directors from time-to-time, based upon, and subject to our earnings, financial requirements and other conditions prevailing at the time.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of these terms, and other comparable terminology, although not all forward-looking statements contain these identifying words. These forward-looking statements, which are subject to risks, uncertainties, and assumptions, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially from the results, level of activity, performance, or achievements expressed or implied by the forward-looking statements. Those factors include, but are not limited to, the highly competitive nature of the markets in which we sell our products, changes in demand for our products and services, our ability to develop new products and services, competitive pressures, changes in laws and regulations governing our business and the other factors discussed under the caption “Risk Factors.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. We undertake no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events, or other such factors that affect the subject of these statements, except where we are expressly required to do so by law or other undertaking.

USE OF PROCEEDS

We will not receive proceeds from the sales by the selling stockholders. If the warrants are exercised for cash, then we will receive the proceeds payable by the selling stockholders upon exercise of the warrants. We will use these proceeds, if received, for general working capital purposes.

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BUSINESS

Business Overview

According to the China Quality Net, maintained by China Quality Inspection Association, we are the first and one of the leading producers and distributors of premium goat milk formula products for infants, toddlers, young children, and adults in China. We began selling powder products in Tianjin and Beijing in 2001, in Southern China in 2004 and Northern China in 2006. Our current formula product lines are targeted at the premium segment of the dairy market and health-conscious consumers. Headquartered in Tianjin, we sell and distribute our products through a nationwide network of retail points across China in 23 provinces and municipalities including infant-maternity chain stores, supermarkets (including multinational chains) and drug stores, as well as catalogue sales and our dedicated online store at Taobao.com. We are vertically integrated and source raw goat milk from our proprietary dairy farms as well as neighboring goat dairy farmers on a long-term contract basis in milk collection centers, which helps us maintain quality control.

Our powder products are sold throughout most of China. Since the end of 2009, we have been working with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our “Milk Goat” brand as the premium goat milk brand throughout China. We have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy. Our new product portfolio consists of 26 formula products under the “Milk Goat” brand with three package sizes of 600, 665 and 365 grams with upgraded formula. Most of our goat milk products are formulated through the inclusion of supplements such as vitamins, calcium, iron, selenium, chromium and omega-3 fatty acids, as needed to address the nutritional or health needs of the consumers. We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores, domestic and multinational supermarkets and drug stores, as well as catalogue sales across China. We sell most of our products to more than 200 distributors, who in turn sell our products to the retail points. The distributors are located in 23 provinces in China. In addition, since the end of December 2010, we have been selling our products with 365-gram, 600-gram and 665-gram package sizes to the infant-maternity retail stores. We expect such new sales strategy to help further strengthen our market presence in this distribution channel.

Dairy Industry in China

Industry Growth Drivers

China’s large population, growing disposable income and rapidly changing consumer habits create a favorable market for premium dairy products. The prospects for China’s infant formula market look particularly promising with on average 17 million newborns each year. The country may be experiencing a small baby boom due to an exception to China’s one-child policy; parents who are both single children of their respective families are allowed to have a second child. According to Euromonitor, the infant formula market is expected to grow at a compound annual growth rate of 23.1% between 2008 and 2013. In general, the one-child policy makes Chinese parents inclined to prioritize their children’s health over other consumption, which supports the market for premium infant formula products.

The Case of Goat Milk

China’s government has been promoting milk consumption since the mid 1990s because of its beneficial nutritional properties. The Eleventh Five-Year Plan (2006-2011) encourages every Chinese citizen to consume 0.5 kg of dairy products per day. The favorable government policies coupled with the prevalence of sensitivity towards cow milk products in China further support the demand for goat milk. Independent studies demonstrate that goat milk has a beneficial protein structure compared with cow milk, facilitating absorption of nutrients in goat milk by the human digestive system, which may make goat milk a more suitable alternative for Chinese consumers who have experienced problems with digesting cow milk.

Compared with cow milk, the molecules of lactose and fat globules are smaller in goat milk, making goat milk more easily absorbed by individuals who are sensitive to milk products. Moreover, lower acidity, the concentration of medium-chain triglyceride fatty acids, and the absence of r-casein, the main allergen found in cow milk, improve the digestibility of goat milk, making it an appealing substitute for cow milk. We believe that we, with our broad product portfolio and first mover position in goat milk production and distribution, are well positioned to take advantage of this increased demand.

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Post Melamine Scandal Era

In 2008, the reputation of China’s dairy industry was severely damaged as melamine, a toxic chemical used to manufacture plastics, was discovered in products from 22 domestic dairy producers. In response, the Chinese government issued the Regulation on the Supervision and Administration of the Quality and Safety of Dairy Products, which encourages stricter national standards for the quality and safety of dairy products, heightens sanitary requirements, and imposes more responsibility on dairy processors to control the sources of raw milk. In addition, a Food Safety Act has been implemented in June 2009 to revise problems related to the scandal. Dairy processors are strongly encouraged to implement HACCP or GMP quality certification systems. Further efforts to align the interests of different parties including farmers, processors, dairies and consumers are underway.

Following the scandal, the Ministry of Agriculture stipulated that only one milk processing plant be allowed on a ranch within the radius of 60 kilometers. New projects must reach processing capacity of 200 tons of raw milk per day based on raw milk sources proprietary to or controlled by the dairy processor, and raw milk must contribute to no less than 30% of total processing capacity. The added capacity in expansion projects must reach at least 100 tons of raw milk per day, and 75% of the existing processing capacity must be based on raw milk sources proprietary to or controlled by the dairy processor.

With the growing awareness and lingering safety concerns about cow milk, we are well positioned to take advantage of the unprecedented opportunity to solidify our presence in the goat milk and premium infant formula sectors. We place primary importance on quality. In order to ensure the quality and safety of our raw materials, we have established our subsidiary, Weinan Milkgoat, in the main area where Saanen dairy goats are raised because most of our supply of raw goat milk comes from Saanen dairy goats. We have designated staff monitoring the whole process of raw goat milk collection at each of our collection stations in this area. The collected raw goat milk is directly transported to our subsidiary for inspection in compliance with national standards, including the detection of melamine. After the inspection, qualified raw goat milk will be sprayed to be milk powder, packed and transported to Milkgoat China for canning. Before the canning, our quality control staff conducts a second inspection of the goat milk powder.

Compared with many cow milk powder producers with decentralized raw cow milk sources, we believe its more efficient and cost-effective for us to conduct quality control of our raw materials with a centralized raw goat milk collection system. The melamine contamination incident has resulted in significant negative publicity for the entire domestic cow milk industry and consumers are seeking substitutes for cow milk due to such lingering safety concerns. We have increased our spending on advertising in which we emphasize the fact that our products are always qualified in previous government inspections and melamine has never been detected in our products. We also conduct promotional activities with supermarket chains and infant-maternity stores in order to reach out our target market. We believe our advertizing and promotional activities have allowed us to obtain preferential product placement in retail points and to compete effectively against multinational and domestic cow milk powder producers. In addition, we believe that due to our current market position, brand recognition and customer loyalty, combined with our strong distribution network, the impact on our business will not be material when the safety concerns regarding contaminated cow milk products begin to wane in the future.

Dairy Industry Access Conditions and Policies

In March 2008, the PRC National Development and Reform Commission, or the NDRC, promulgated the Access Conditions for Dairy Products Processing Industry, or the Access Conditions. The Access Conditions set forth the conditions an entity must satisfy in order to engage, or continue to engage, in the dairy products processing business, including technique and equipment, product quality, energy and water consumption, sanitation and environmental protection, as well as production safety. Any new or continuing dairy products processing projects or enterprises will be required to meet all the conditions and requirements set forth in the Access Conditions. For projects or enterprises that already commenced operations before the promulgation of the Access Conditions, improvements or rectification actions may need to be taken in order to have such projects or enterprises meet the conditions within two years of the effective date of the Access Conditions on April 1, 2010.

The Access Conditions also set forth some requirements relating to the location, processing capacity and raw milk source for any new or continuing dairy products processing project or enterprise. Any new or continuing dairy products processing projects or enterprises that fail to meet the requirements will not be able to procure land, license, permits, loan facility and electricity necessary for the processing of dairy products, and those projects or enterprises already in operation before the promulgation of the Access Conditions will be deregistered and ordered to shut down if they fail to meet the conditions within a two-year rectification period.

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In May 2008, the NDRC issued the Dairy Industry Policies, or the Policies. According to the PRC government, the Policies are the first set of comprehensive government policies on the PRC dairy industry, covering a broad range of matters such as industry planning, closure of inefficient capacity, milk supply, quality control and product safety, environmental protection and promotion of milk consumption. Moreover, the Policies provide conditions that new entrants to the dairy industry must meet in addition to the conditions set forth in the Access Conditions.

Our Competitive Strengths

We believe that our success to date and potential for future growth can be attributed to a combination of our strengths, including the following:

  • First Mover Advantage. Various researches and publications indicate that goat milk is emerging as an ideal substitute to cow milk as consumers are increasingly aware of its benefits particularly for infants, who prefer a dairy product with a nutritional and molecular composition closer to human milk. Goat milk differs from cow milk in a number of ways and some of its attributes make it closer to human milk, such as high level of bioactive components, similar casein composition and secretion process in both human milk and goat milk. We are the first Chinese company to produce, sell and distribute goat milk formula products throughout China and we have been doing so since 2001. We believe we are in a strong position in competing with our competitors because we have familiar products, brand loyalty and established distribution systems for being the first to market. Based on market analysis conducted by our marketing department, we believe in 2010 we were the largest seller in the goat milk products in China by holding approximately 45% market share of goat milk products sold.

  • Dedication to Quality Control. We source raw milk from our proprietary dairy farms and other goat dairy farmers on a long-term contractual basis in Shaanxi Province in northwestern China, where dairy goats are abundant and of optimal breed for milk production. Vertically integrated production and the ability to control raw goat milk sources enable us to secure raw material supply, and thus maintain our leading position in the market. Proprietary dairy farm and goat milk collection centers have also benefited us following the 2008 cow milk scandal, when melamine was found in various cow milk-based infant formula products in China. In the wake of the scandal, Chinese food safety authorities imposed stricter industry regulation regarding supply chain quality control and expansion plans for dairy processors, which has benefited established players like us. Our facilities are ISO 9001 certified and have Hazard Analysis & Critical Control Point, or HACCP certification issued by HSL Certification Service and Beijing Zhongdahuayuan Certification Center. ISO 9001 is an internationally recognized verification system for quality management overseen by the International Standard Organization based in Geneva, Switzerland. The certification is based on a review of our programs and procedures designed to maintain and enhance quality production and is subject to annual review and recertification. HACCP is a system used to manage food safety through the analysis and control of biological, chemical, and physical hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the finished product.

  • High-end Products. We have been a leading producer and distributor of goat milk formula products for infants, toddlers, young children, and adults in China. Our current formula product lines are targeted at the premium segment of the dairy market and health-conscious consumers. Given goat milk’s nutritional and molecular composition closer to human milk as well as the relative scarcity of goat milk since dairy goats have limited production capacity when compared to dairy cows, our goat milk products are positioned at the higher end of the dairy cost spectrum.

  • Experienced Management. Our senior management team has extensive operating experience and industry knowledge. Ms. Li Liu, who is our founder, Chairwoman, CEO and President, started our company’s goat milk business in 2001. She is a pioneer in the industry. Mr. Fung Shek, who serves as our Director and Vice President, also has significant experience in the goat milk business. He was formerly Director of Sales for P&G Taiwan, a company that provides consumer products in various areas. Ms. Veronica Jing Chen, our CFO, has extensive auditing, accounting and financial management experience in various U.S. public companies. Prior to joining us, Ms. Chen held CFO positions in three U.S. public companies, including China Natural Gas, Inc., a company primarily involved in the distribution of compressed natural gas in China, from May 2009 to January 2010, China Valves Technology, Inc., a company engaged in the business of developing, manufacturing and selling high-quality metal valves, from October 2008 to February 2009 and Origin Agritech, Limited, a technology-focused crop seed company in China from December 2007 to September 2008.

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Our Growth Strategy

As a leading goat milk producer and distributor in China, we believe we are well positioned to capitalize on future industry growth in China. We are dedicated to providing healthy and high quality products to our consumers. We will implement the following strategic plans to take advantage of industry opportunities and our competitive strengths:

  • Focus on brand development. In order to manifest our position as China’s leader in goat milk products and to educate consumers about the benefits of goat milk, we plan to invest in strengthening our brand equity. In November 2009, we engaged US-based branding and strategic positioning agency, Trout & Partners to enhance our brand position and build “Milk Goat” into a household brand in China. As part of the strategy, we intend to target more supermarkets with our products. We believe that our products enjoy a reputation for high quality among those familiar with them, and our products routinely pass government and internal quality inspections. We have increased our advertising expenses and plan to continue advertising on CCTV in order to market our products as premium goat milk powder products. We believe many consumers in China tend to regard higher prices as indicative of higher quality and higher nutritional value, and as a result consumers with higher disposable incomes are increasingly inclined to purchase higher priced products, particularly in the areas of infant formula and nutritional products.

  • Increase production capacity. We are in the process of increasing our production capacity for goat milk products by more than 400%. Our current raw milk powder processing capacity is approximately 1,000 metric tons per annum and processed milk powder processing capacity is approximately 2,100 metric tons per year. We broke ground on a new spray drying processing facility in Shaanxi Province in November 2009, which is expected to commence production by the fourth calendar quarter of 2013 and become the largest raw goat milk processing base in China with an expected production capacity of approximately 4,600 metric tons per annum. We have also invested in a new packing facility and warehouse in Tianjin, which is expected to go into operation in the fourth calendar quarter of 2012 with an expected production capacity of approximately 5,200 metric tons per annum. While increasing production, we also develop our product portfolio in order to penetrate additional consumer segments.

  • Expand distribution network. We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores, supermarkets (including multinational chains) and drug stores, as well as catalogue sales across China. Since 2010, we have expanded aggressively into the supermarkets segment as well as online sales through our online store at Taobao.com. Currently, our sales through supermarkets and online sales constitute 37% of our sales revenue while the infant-maternity chain stores contribute 63%..

  • Focus on quality control. We continue to improve our product inspection procedures and monitor our raw milk suppliers in order to ensure the high quality of our products. We believe we can maintain our production of high quality dairy products by continuing to enter exclusive contracts with dairy farmers who can deliver quality goat milk, strengthening our company-owned large-scale dairy farm operations, expanding our company-owned collection stations and production facilities, and employing comprehensive testing and quality control measures.

We are also, as described under “Liquidity and Capital Resources,” engaged in expanding our administrative, processing and warehousing facilities.

Our Goat Milk Powder Products

We currently manufacture and distribute goat milk powder products. Our powder products are sold throughout most of China. We began selling powder products in Tianjin and Beijing in 2001, in Southern China in 2004 and Northern China in 2006. Since the end of 2009, we have been working with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our “Milk Goat” brand as the premium goat milk brand throughout China. We have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy. Our new product portfolio consists of 26 formula products under the “Milk Goat” brand with three package sizes of 600, 665 and 365 grams with upgraded formula. Our principal goat milk powder products may generally be categorized as follows:

  • powder products for infants aged from 0 - 6 months old, babies 6 - 12 months old;

  • powder products for toddlers aged from 1-3 years old, pre-schools from 3-7 years old; and

  • powder products for different target groups: students, seniors, women, men, pre-and post-natal women and gift packaging.

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In addition, we still sell our original goat milk powder products. Our principal original goat milk powder product lines may generally be categorized as follows:

  • Powder products for infants aged 0 - 6 months old, babies 6 - 12 months old, toddlers from 1 - 3 years old, pre-schoolers from 3-7 years old and children, teens and adolescents. Powders targeted to or formulated for pre-and post-natal women.

  • Sugar-free goat milk powder products for those who desire to regulate their sugar intake.

  • Powder products for health conscious adults.

Most of our goat milk products are formulated through the inclusion of supplements such as vitamins, calcium, iron, selenium, chromium and omega-3 fatty acids, as needed to address the nutritional or health needs of the consumer.

Raw Materials and Suppliers

We currently own ten dairy goat farms, which are located in Shaanxi Province and operated by our subsidiary, Weinan Milkgoat. For the fiscal years ended March 31, 2011 and ended October 31, 2009, our subsidiary, Weinan Milkgoat provided 2.84% and 0.1% of our raw goat milk, respectively.

Most of our supply of raw goat milk comes from Saanen dairy goats raised on individual and collective goat farms in Weinan City in China’s Shaanxi Province. The Saanen is believed to be one of most popular goats primarily because of their consistency in producing large quantities of milk in conjunction with their capacity to tolerate environmental change. According to Angie Pollock, originating from the Saane Valley of Switzerland, the Saaneen is primarily kept for milk production and is known for being easy to care for, having a docile temperament and good toleration of changes in their environment. Shaanxi Province is one of major goat milk producing areas in China; an area especially conducive to the production of goat milk, with a reputation as one of the most fertile and agriculturally rich regions in China in which to raise dairy goats. According to Dairy Times, a newspaper published in China, the goat milk products produced by companies located in Shaanxi Province constitute approximately 70% of the total goat milk products in China. Through Weinan Milkgoat, we entered into long-term supply arrangements with local governmental and quasi-governmental authorities pursuant to which we purchase all the goat milk produced by the small collective farms at a price negotiated from time to time by us and the individual farms.

Pursuant to the raw goat milk supply agreements, our suppliers are obligated to provide us with a certain volume of raw goat milk during the terms of these agreements at a purchase price ranging between RMB 3.0 to RMB 3.5 per kilogram. Our suppliers also are required to deliver to us raw goat milk at the contracted location between 6 am to 1 pm local time every day. Upon mutual written consent, the parties may amend or terminate the agreements. In addition, each agreement includes a force majeure clause. If the supplier fails to perform its obligations due to unforeseen events beyond its control, neither party will be liable for any damages caused by the force majeure event. In addition, in that case, either party may terminate the agreement. However, our suppliers are required to notify us within 10 days after the occurrence of a force majeure event and provide a certificate certifying this event issued by a relevant authority within 15 days. For the fiscal year 2011, we entered into supply arrangement with 40 small-scale farms, which provided 7,063 tons of raw goat milk to us.

During the fiscal year 2011, there were two suppliers each accounted for more than ten percent of our raw goat milk supply. We believe that our relationships with our raw goat milk suppliers are satisfactory and that alternative sources of supply are available to us on no less favorable terms than are currently available.

Other materials used to produce our powdered products include desalting whey powder, lactose, plant fat powder, lactalbumin, whey protein concentrate, soybean lecithin, various vitamin and mineral supplements and packaging materials. We have not experienced any significant difficulty in purchasing these or any other materials. We believe that alternative sources of supply are available to us on no less favorable terms than are currently available.

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Processing

The raw goat milk is collected by hand or machine and brought to a collection station. There are approximately 500 collection stations (sixty-five of which are engaged with us through cooperation) distributed throughout Weinan County that are used to collect the goat milk into refrigerated storage tanks, which are then delivered by refrigerated vans to our processing plants.

The raw milk to be converted into a powder is passed through a high pressure gauge, converting the milk into a fine spray which, through the use of a high temperature fan, quickly dries the spray into a powder. The powder is then shipped to another processing facility at which it is supplemented with various nutritional components and is then packaged into various types of containers for distribution to our wholesale distributors.

We own one spray tower in Fuping Milkgoat, which is used to make raw liquid goat milk into raw goat milk powder.

We have also engaged two independent processors to assist us in the processing of our raw goat milk into powder products. They provide, among other things, production facilities, offices, dormitories, equipment and personnel to assist in the processing of raw liquid goat milk into raw goat milk powder products. For the fiscal year ended March 31, 2011, we processed an aggregate of approximately 963 tons of raw goat milk powder, of which approximately 82.3% was processed through our subsidiaries, Fuping Milkgoat and Weinan Milkgoat, and approximately 17.7% through external suppliers. For the fiscal year ended October 31, 2009, we processed an aggregate of approximately 1,117 tons of raw goat milk powder, of which approximately 89.7% was processed through Fuping Milkgoat and Weinan Milkgoat, and approximately 10.3% through external suppliers. We believe that our relationships with our raw goat milk powder suppliers are satisfactory and that alternative sources of supply are available to us on no less favorable terms than are currently available.

Sales and Marketing

Currently, we have 804 experienced marketing personnel who are responsible for market research, promotion and advertisement. We strengthen our market presence by employing various types of marketing strategies. We participate in annual trade shows such as the National Baby and Young Children Fair and the National Sugar and Spirit Fair, offer seminars and lectures to local communities regarding the health benefits of our goat milk products, television advertisements at national and local levels, and other promotional activities. These activities help to promote our reputation and brand name recognition in the industry.

We use more than 200 distributors to sell our products. The distributors are located in 23 provinces in China. We sell and distribute our products through a network of approximately 3,800 retail points including infant-maternity chain stores, supermarkets (including multinational chains) and drug stores, as well as catalogue sales across China.

We use two independent trucking contractors to distribute our products throughout China. We selected these trucking companies based on cost and efficiency. We believe that alternative shipping arrangements are available if required, on no less favorable terms than are currently available.

We do not significantly depend on any single customer for the sales of our products. We did not have any customer constituting greater than 10% of net sales for the fiscal years ended March 31, 2011 and October 31, 2009.

Our Competition

The dairy industry in China is highly competitive and we face substantial competition from both cow and goat milk producers.

Cow milk accounts for more than 95% of the milk consumed in China. The principal producers and distributors of cow milk are Inner Mongolia Yili Industrial Group Co., Ltd. and Inner Mongolia Meng Niu Dairy (Group) Co., Ltd. We compete with cow milk based on the nutritional advantages of goat milk. Those advantages include higher nutritional levels of proteins and vitamins (in particular, vitamins B1, B2 and C) and ease of digestibility. These factors make goat milk particularly attractive for those interested in maintaining a healthy lifestyle and for use by infants and other consumers sensitive to dairy products or allergic to cow milk. However, cow milk’s competitive advantages over goat milk include more favorable pricing, easy availability, and greater market acceptance. This greater market acceptance is attributable to, among other things, the historic association of goat milk with unfavorable smells, a much larger supply of available cow milk, and the fact that goat milk has only recently developed as an alternative available to consumers in China on a mass-market basis. We are working to improve acceptance of goat milk through marketing efforts geared towards emphasizing its nutritional advantages and its favorable taste and smell.

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We also compete directly with China and foreign-based goat milk manufacturers. Our China based competitors include Xi’an Baiyue Yubao Dairy Co., Ltd., Qingdao Ruishi Biotechnology Co., Ltd. We believe that our principal competitive advantages in competing with our China-based competitors are product recognition (including recognition based on quality flavor and price), strong distribution relationships, established supply sources, and quality. Our foreign competitors include Karihome Dairy Goat Co-operative (NZ) Ltd. and other smaller New Zealand goat milk brands. We compete with our foreign competitors through more favorable pricing though we believe that the quality of our products is comparable to, if not superior to, the quality of our competitors’ products. Based on market analysis conducted by our marketing department, we believe in 2010 we held approximately 45% market share of goat milk products sold, making us the largest seller of the goat milk products in China, followed by Xi’an Baiyue Yubao Dairy Co., Ltd. with 25% market share, Qingdao Ruishi Biotechnology Co., Ltd with 10% and Karihome Dairy Goat Co-operative (NZ) Ltd. with 5%.

Research and Development

Our research and development activities focus on upgrading and enhancing our unique, traditional recipes for our products and improvement in packaging. We currently have five employees dedicated to research and development.

For the fiscal years ended March 31, 2011 and October 31, 2009, we expended $74,331 and $150,101, respectively, with respect to research and development activities. We are in the process of developing new goat milk based products but do not anticipate that such products will have a material impact in the near term on our results of operations.

Intellectual Property

In 2002, we registered in China the trademark, “Mei Ke Gao Te” (a transliteration of “Milk Goat” in Chinese) for use with our liquid and powder products and the trademark, “Yi Mei Shi” for use with our powder products. The “Mei Ke Gao Te” mark is generally used for all our products other than those formulated to provide a particular nutritional or health benefit and the “Yi Mei Shi” mark is used for those products emphasizing a specific health or nutritional benefit. Each of such trademarks has a term of ten years and may be renewed thereafter.

Our goat odor elimination technology which eliminates odor in our products is developed from the know-how that was exclusively licensed to us from Taiwan Richlink Enterprise Company Ltd., pursuant to an exclusive licensing agreement, dated April 10, 2001. The licensing agreement was amended on June 12, 2009. Although the agreement expired on April 10, 2011, according to the agreement we have the right to use the know-how for free after the expiration.

Regulation

We are regulated under national, provincial and local laws in China. These regulations govern, among other things, the manufacture and composition of products and ingredients, product labeling and packaging (including the format and content of product labels nutritional information), product safety and specified manufacturing practices (including mandating quality assurance programs). Our facilities are subject to inspection and licensing requirements and our trade practices (including claims made with respect to product effectiveness of our products) are regulated.

The national, provincial and local governments have increased their oversight of the production and distribution of dairy products in response to melamine contamination of certain dairy products produced in China. In September 2008, our goat milk products were inspected by China's Administration of Quality Supervision, Inspection and Quarantine, or AQSIQ. AQSIQ determined that our products are safe. We anticipate that we will incur additional expense in complying with additional governmental regulation and oversight. We anticipate that we will generate additional net sales as consumers migrate to dairy products processed by companies, such as Milkgoat China, with reputations for producing quality products, though no assurance can be given in this regard. We believe that we comply in all material respects with applicable rules and regulations.

Following the media hormone allegations, on November 1, 2010, AQSIQ promulgated new rules which govern the licenses granted to producers of dairy products and infant formula powder (2010 version). These new regulations require that such producers, even if they have obtained a production license previously, must re-apply for a production license prior to December 31, 2010 and if a producer is not able to obtain a new production license by March, 2011, such producer must stop its production of dairy products and infant formula powder. By March 31, 2011, we successfully renewed our production licenses with AQSIQ.

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Our Employees

As of March 31, 2011, we employed 973 full-time employees. The following table sets forth the number of our employees by function as of March 31, 2011.

FUNCTION NUMBER OF EMPLOYEES
Sales Department 804
Production Department 61
Financial Department 24
Administrative Office 84
TOTAL 973

Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages and we believe our relationship with our employees is satisfactory.

We are required by the PRC law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC laws.

Seasonality

Goat milk production is seasonal because goats generally do not produce milk from November through February. During such period, we generate sales of goat milk powder from our inventory that builds during the period preceding such hiatus. In addition, the consumption of goat milk is also seasonal with greater demand in winter and public holiday seasons.

Insurance

We do not have any business liability, interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure. See “Risk Factors – We do not carry any business interruption insurance, third-party liability insurance for our production facilities or insurance that covers the risk of loss of our products in shipment.”

Litigation

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

According to the China Quality Net, maintained by China Quality Inspection Association, we are the first and one of the leading producers and distributors of premium goat milk formula products for infants, toddlers, young children, and adults in China. Our powder products are sold throughout most of China. We began selling powder products in Tianjin and Beijing in 2001, in Southern China in 2004 and Northern China in 2006. Our current formula product lines are targeted at the premium segment of the dairy market and health-conscious consumers. Headquartered in Tianjin, we sell and distribute our products through a nationwide network of retail points across China in 23 provinces and municipalities including supermarkets (including multinational chains), infant-maternity chain stores and drug stores, as well as catalogue sales and our dedicated online store at Taobao.com. We are vertically integrated and source raw goat milk from our proprietary dairy farms as well as neighboring goat dairy farmers on a long-term contract basis in milk collection centers, which helps us maintain quality control.

Since the end of 2009, we have been working with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our “Milk Goat” brand as the premium goat milk brand throughout China. We have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy. Our new product portfolio consists of three segments, infant formula products, adult products and children products with an aggregate 22 formula products under the "Milk Goat" brand with three package sizes of 600, 665 and 365 grams. As of March 2011, approximately 43.6% of our revenues were generated from the infant formula products, approximately 10.7% from products for children and approximately 45.7% from products for students and adults.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

  • Perceptions of Product Quality and Safety. Rising consumer wealth in China has contributed to a greater acceptance by consumers in China of and desire for higher-priced products with perceived quality advantages associated with such products. Thus, we believe that infant formula producers with a reputation for quality and safety should be able to command higher average selling prices and thereby generate higher gross margins than competitors that do not possess the same perceived reputation for quality and safety. Conversely, any decrease in consumer perceptions of quality and safety could adversely impact such producers’ sales and gross margins. We believe our past growth has benefited from our brand recognition and from real and perceived safety and quality of our formula products. Moreover, a decrease in the quality and safety of any particular producer could trigger wider negative perception of the decrease in the quality and safety of all producers, thereby affecting the industry generally. For example, the melamine contamination incident had resulted in a significant reduction in the sales of a number of major dairy product companies in China. If a future market crisis involving any of our products should occur, especially if management fails to respond to such a crisis in a timely and effective manner, our brand recognition and reputation could be severely damaged, which could adversely affect our results of operations.

  • Brand Recognition and Customer Loyalty. In recent years, there has been growing demand in China for premium formula products due to increasing consumer awareness of brand image and nutritional value of the products offered by leading producers. Although the market is still highly competitive, we believe that companies with strong national brands and customer loyalty will increasingly capture market share from regional brands with less brand recognition. Our success depends on sustaining the strength of our brands. If we fail to promote and maintain the brand equity of our products, then consumer perception of the superior nutritional benefits of our products may be diminished. If the difference in the value attributed to our products as compared to those of our competitors narrows, consumers may choose not to buy our products

  • Competition and Market Position. While China’s formula market is expected to grow significantly, we are facing intense competition. The market has become highly fragmented in recent years as an increasing number of formula producers have entered the market. We face significant competition from domestic and multinational producers of both cow and goat milk. We focus on developing and marketing premium products for the goat formula market in China. By leveraging our focused marketing strategy, our brand name and our sales and marketing infrastructure, we have been able to sell formula products to consumers in China’s largest cities and we believe that we are perceived as a company that is able to deliver premium quality that justifies our premium prices. This strategy has allowed us to maintain and improve our market share in our primary markets.

  • Product Offering and Pricing. As China becomes more affluent, formula products have become more affordable, resulting in the rapid growth of the overall market for formula in China. Despite the recent rapid growth, we believe much of the market is still underserved with respect to formula. We expect that this growth in demand will help drive sales for many formula producers, but companies with strong brand loyalty and extensive distribution networks in China will have greater ability to capitalize on such growth as well as to increase prices and pass on higher raw material costs to customers.

  • Raw Material Supply and Prices. The per unit costs of producing our formula are subject to the supply and price volatility of raw milk and other raw materials. For example, raw milk prices are affected by fluctuations in production and competition. Historically, we have been able to meet our raw milk supply needs by building our processing facilities close to our milk suppliers. Through our subsidiary Weinan Milkgoat located in Shaanxi Province, we have entered into long-term supply arrangements with local governmental and quasi-governmental authorities pursuant to which we purchase all the goat milk produced by the small collective farms at a price negotiated from time to time by us and the individual farms.

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Taxation

United States

Yayi International Inc. is subject to United States federal income tax at a tax rate of 41%. No provision for income taxes in the United States has been made as Yayi International Inc. had no income taxable in the United States.

British Virgin Islands

Milkgoat Industrial was incorporated in the BVI and under the current laws of the BVI, is not subject to income taxes.

PRC

In 2007, the PRC government promulgated the new Enterprise Income Tax Law, or EIT Law, and the relevant implementation rules, which became effective on January 1, 2008. Under the EIT Law and its implementation rules, all domestic and foreign investment companies will be subject to a uniform enterprise income tax at the rate of 25% and dividends from PRC subsidiaries to their non-PRC shareholders will be subject to a withholding tax at a rate of 20%, which is further reduced to 10% by the implementation rules, if the non-PRC shareholder is considered to be a non-PRC tax resident enterprise without any establishment or place within China or if the dividends payable has no connection with the non-PRC shareholder’s establishment or place within China, unless any such non-PRC shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. In addition, pursuant to the EIT Law, enterprises established under the laws of non-PRC jurisdictions, but whose “de facto management body” is located in the PRC, should be treated as resident enterprises for PRC tax purposes However, it is currently uncertain whether we may be deemed a resident enterprise, or how to interpret whether any income or gain is derived from sources within China. See “Risk Factors - Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to our non-PRC shareholders and us.” If we, as a Delaware company with substantially all of our management located in China, were treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which would have an impact on our effective tax rate.

The EIT Law and the Implementing Rules also imposes a unified EIT of 25% on both foreign invested enterprises and domestic enterprises, effective January 1, 2008. As a result, each of our PRC subsidiaries, Milkgoat China, Weinan Milkgoat, Fuping Milkgoat, and Shaanxi Milkgoat have been subject to a 25% income tax rate in calendar year 2008, 2009, 2010 and 2011.

Change in Fiscal Year

On March 26, 2010, our board of directors approved a change in our fiscal year end from October 31 to March 31, effective immediately. The fiscal year end change resulted in a five month reporting period from November 1, 2009 to March 31, 2010. As a result, we included the disclosure relating to the results of operations for years ended March 31, 2011 and October 31, 2009 and the five months ended March 31, 2010 and 2009 in this prospectus. The comparative financial information provided for the five months ended March 31, 2009 is unaudited, since it represented an interim period of the fiscal year ended October 31, 2009. The unaudited financial information for the five months ended March 31, 2009 includes all normal recurring adjustments necessary for the fair statement of the results for that period.

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Results of Operations

Year Ended March 31, 2011 Compared to Year Ended October 31, 2009

The following table sets forth a summary of certain key components of our results of operations for periods indicated, in dollars and the percentage of change from the prior period.

    Year Ended              
    March 31, 2011     October 31, 2009     change     variance  
Net Sales $  26,909,879   $  24,845,685   $  2,064,194     8.3%  
Cost of goods sold   (10,075,452 )   (8,025,009 )   (2,050,443 )   25.6%  
Gross profit   16,834,427     16,820,676     13,751     0.1%  
Operating expenses                        
Sales and marketing expenses   (12,353,238 )   (5,760,446 )   (6,592,792 )   114.4%  
General and administrative expenses   (4,304,356 )   (1,972,190 )   (2,332,166 )   118.3%  
Income from continuing operations   176,833     9,088,040     (8,911,207 )   -98.1%  
Other income (expenses), net   (1,000,246 )   (1,491,027 )   490,781     -32.9%  
Income tax (expense)   (468,086 )   (2,201,032 )   1,732,946     -78.7%  
Net (loss) income attributable to Yayi International Inc.   (1,291,499 )   5,395,981     (6,687,480 )   -123.9%  

Net Sales. Our net sales are generated from sales of products of premium goat milk formula. Net sales for the fiscal year ended March 31, 2011 were approximately $26.9 million, an increase of 8.3% compared to the fiscal year ended October 31, 2009. This increase was primarily attributable to the increase in the unit sales price, which was offset in part by an increase in the slotting fees offset to revenue as incurred and a decrease in sales volume. The unit sales price increased by 25.2% from $19,260 to $24,111 per ton, mainly due to an upgrade of formula and increased prices of main raw materials. In the first quarter of calendar year 2010, we started to streamline our product portfolio from 58 Store Keeping Units (SKU) to 10 SKU under the “MilkGoat” brand with upgraded formula. In addition, in order to develop infant-maternity stores as a sales channel alongside our commitment to establish our presence in supermarkets, we launched 14 infant-formula products specifically targeting infant-maternity stores in this fiscal year. The slotting fees increased to $5.5 million for the fiscal year ended March 31, 2011 compared to none incurred for the fiscal year ended October 31, 2009 mainly due to the expanding sales channels in hypermarkets and supermarkets. The sales volume decreased by 13.5% from 1,290 ton to 1,116 ton mainly due to the time required for the acceptance of the new products by the market.

In late 2010, AQSIQ announced new regulatory measures based on China’s Food Safety Law adopted by the People’s Congress earlier in 2010 requiring all infant milk formula and dairy product companies to submit applications to renew manufacturing licenses by the end of 2010 and to complete the renewal process by the end of March 2011. AQSIQ’s inspections have disrupted our normal manufacturing schedules and the roll out of our supermarket-focused distribution strategy has been slower than expected in the second half of calendar 2010. The distributors were hestitant to order our products after the new regulations were issued, which caused the slower growth of our sales volume than expected during September 2010 to March 2011. We obtained the renewed production licenses on March 31, 2011.

We believe the recent scandal will change the competitive landscape of China’s infant formula market and we expect more visibility after June 2011 when the approval process for new licenses is finalized. In the meantime, we are confident that our dual-pronged approach of developing infant-maternity stores while continuing to execute on our supermarket penetration strategy will build a solid foundation for our future growth momentum and profitability.

The following table sets forth the information relating to the quantity and sales price of goat milk powder we sold during the periods indicated:

          Year Ended  
Product Name         March 31, 2011     October 31, 2009  
Goat Milk Powder   Quantity (ton)     1,116     1,290  
Products   Unit price   $  24,111 $     19,260  

Cost of goods sold. Our cost of goods sold is primarily comprised of the costs of our raw materials, labor and overhead. Cost of goods sold for the year ended March 31, 2011 was approximately $10.1 million, an increase of 25.6% from the year ended October 31, 2009, primarily due to the giveaways that we distributed to customers for promotion purposes under the "buy two get one free" strategy and the increase in raw milk and added nutrients. The unit cost increased by 45.1%, from $6,221 per ton to $9,027 per ton. Due to the formula upgrading, the unit cost of manufacturing increased by 35.5% from $5,971 per ton to $8,093 per ton. The giveaway cost increased by 223.4% from $0.3 million for the year ended October 31, 2009 to $1.0 million for the year ended March 31, 2011. As a part of our marketing strategy for the new products, our sales people provided free promotional products to the new purchasers of our products.

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Gross Profit. Our gross profit is equal to the difference between our net sales and the cost of goods. Gross profit for the 2011 fiscal year was approximately $16.8 million, an increase of 0.1% compared to the fiscal year ended October 31, 2009. Our gross margin for the fiscal year 2011 decreased to 62.6% from 67.7% for the fiscal year ended October 31, 2009. The decrease in gross margin is mainly due to the increase in giveaway costs and raw material prices, and the slotting fees incurred in fiscal year ended March 31, 2011.

Operating expenses. Our total operating and administrative expenses consist primarily of sales and marketing expenses and general and administrative expenses. Our total operating and administrative expenses for the fiscal year ended March 31, 2011 increased by approximately $8.9 million to $16.7 million or 115.4% from the fiscal year ended October 31, 2009. The following is a discussion of the reasons for this increase broken down by category of operating expense:

Sales and marketing expenses. For the fiscal year 2011, sales and marketing expenses increased approximately 114.4% to $12.4 million from $5.8 million for the fiscal year ended October 31, 2009. The increase was a combined result of an increase in temporary promoter’s salaries, promotional and advertising expenses. Promotional expenses were approximately $6.2 million for the fiscal year ended March 31, 2011, an increase of 313.3% compared with $1.5 million for the fiscal year ended October 31, 2009, which is mainly due to our sales road show program organized across 23 provinces and municipalities for the new products. Advertising expenses were approximately $2.1 million for the fiscal year ended March 31, 2011, an increase of 312.1% compared with $0.5 million for the fiscal year ended October 31, 2009. The primary reason for the increase was that we launched our new television advertisement campaign in CCTV to promote the new product portfolio nationwide. The television commercials started airing on January 1, 2010 on China Central Television Channel, which is generally considered one of the most valuable channels in China. Temporary promoter’s salaries increased 75.2% from 1.7 million to 2.9 million compared with the fiscal year ended October 31, 2009, which mainly due to expanding sales channels in supermarkets this fiscal year. In the second half of 2009, we spent $0.4 million to engage Trout & Partners, a U.S.-based marketing strategy consultancy with a strong presence in China, to assist us in refining our product positioning and marketing strategy. Trout & Partners has a proven track record in China of transforming regional Chinese brands into nationally recognized names. We believe that our investment in sales and marketing for building our "Milkgoat" brand as well as further strengthening our distribution capability will bring substantial and tangible benefits in the long term.

General and administrative expenses. General and administrative expenses for the fiscal year ended March 31, 2011 increased by 118.3% to $4.3 million from $2.0 million for the fiscal year ended October 31, 2009. It was primarily attributable to $1.1 million for the stock options granted to key employees and certain directors in June 2010, as well as the increased compensation of $0.7 million for the current and new senior managers and executives.

Other income/(expenses). Our other income (expenses) consists primarily of change in fair value of derivative liabilities, interest and amortization of deferred debt issuance cost. Other expenses for the fiscal year ended March 31, 2011 was approximately $1.0 million, decreased by approximately $0.5 million compared to the fiscal year ended October 31, 2009. This decrease was a combined result of an increase income of $2.8 million for the fair value of derivative liabilities related to the $8.92 million convertible notes, the decrease expenses of $0.1 million for liquidated damages arising from the registration rights agreement settlement in November 2009 and modification expense of Series A and D warrants in December 2009, offset by an increase expense of $0.4 million in amortization of deferred financing costs and debt discount, an increased expense of $0.2 million for make good shares and $0.3 million registration penalties related to $8.92 million convertible notes, an increase of $1.5 million in interest expenses for $15 million Series A Preferred Stock. See Note 20 to the Consolidated Financial Statements for our accounting treatment of Series A Preferred Stock.

Income Tax. Our income tax expenses for the fiscal year ended March 31, 2011 decreased by 78.7%, from approximately $2.2 million for the fiscal year ended October 31, 2009, to approximately $0.5 million. The decrease was primarily attributable to decrease in income before tax in the year ended March 31, 2011.

Net Income (Loss). As a result of the factors described above, net loss was approximately $1.3 million for the fiscal year ended March 31, 2011 as compared to net income of $5.4 million for the fiscal year ended October 31, 2009.

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Five Months Ended March 31, 2010 Compared to Five Months Ended March 31, 2009

The following table sets forth a summary of certain key components of our results of operations for periods indicated, in dollars and the percentage of change from the prior period.

    Five months ended March 31              
    2010     2009              
    (audited)     (unaudited)     change     variance  
                         
Net Sales $  6,085,193   $  9,283,420   $  (3,198,227 )   -34.5%  
Cost of goods sold   2,369,642     2,892,709     (523,067 )   -18.1%  
Gross profit   3,715,551     6,390,711     (2,675,160 )   -41.9%  
Operating expenses:                        
Sales and marketing expenses   3,908,573     1,973,212     1,935,361     98.1%  
General and administrative expenses   1,318,077     685,843     632,234     92.2%  
Income from continuing operations   (1,511,099 )   3,731,656     (5,242,755 )   -140.5%  
Other income (expenses), net   (380,789 )   (686,878 )   306,089     -44.6%  
Income tax benefit (expense)   289,093     (869,614 )   1,158,707     -133.2%  
Net income from discontinued operations, net of tax                
Foreign currency translation adjustment   6,039     (44,791 )   50,830     -113.5%  
Net income attributable to Yayi International Inc.   (1,596,756 )   2,130,373     (3,727,129 )   -175.0%  

Net Sales. Net sales for the five months ended March 31, 2010 were approximately $6.1 million, a decrease of 34.5% from the five months ended March 31, 2009. This decrease was primarily due to the restructuring of our product portfolio. From the end of 2009, we worked together with Trout & Partners to streamline our product portfolio and refine our brand image in order to position and strengthen our "Milk Goat" brand as the premium goat milk brand throughout China. Thereafter, we have restructured our original product portfolio of dozens of products and specifications and refined our marketing strategy during the three months ended October 31, 2009. As a result, we gradually reduced the production of original products from the end of 2009 in anticipation of the introduction of our new products in January 2010. Our new product portfolio consists of only ten formula products under the "Milk Goat" brand with only one product specification of 600 grams. We suspended our sales efforts in supermarkets during these few months as we transitioned from our original product portfolio to the new one with new packaging, stock-keeping units (SKUs), and new (higher) pricing. Our new product portfolio has only been launched in the market since January 2010.

The following table sets forth the information relating to the quantity and sales price of goat milk powder we sold during the periods indicated:

    Five months ended     Five months ended  
    March31, 2010     March31, 2009  
Product Name            
             
Goat Milk Powder Quantity (ton)   351     510  
Unit price $  17,337   $  18,203  

Cost of goods sold. Cost of goods sold for the five months ended March 31, 2010 was approximately $2.4 million, a decrease of 18.1% from the five months ended March 31, 2009, primarily due to the decrease in our net sales. However, the unit cost increased by 19.0% from $5,672.0 per ton to $6,751.1 per ton, primarily attributable to giveaways distributed to purchasers of our new products. To a lesser extent, increased prices of main raw materials also contributed to the increase in our unit cost.

Gross Profit. Gross profit for the five months ended March 31, 2010 was approximately $3.7 million, a decrease of 41.9% from the five months ended March 31, 2009. Our gross margin for the five months ended March 31, 2010 decreased to 61.1% compared to 68.8% for the five months ended March 31, 2009. This decrease was primarily attributable to promotional products distributed to purchasers of our new products and slotting fees paid to supermarkets. However, the gross margin of our new product portfolio is higher than original product portfolio which partially offset the decrease caused by promotional products and slotting fees paid to supermarkets.

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Operating and administrative expenses. Our total operating and administrative expenses consist primarily of sales and marketing expenses and general and administrative expenses. Our total operating and administrative expenses increased by approximately $2.6 million, or 96.6 % from the five months ended March 31, 2009.

Sales and marketing expenses. For the five months ended March 31, 2010, sales and marketing expenses increased approximately 98.1% to $3.9 million from $2.0 million for the five months ended March 31, 2009. The increase was primarily attributable to the large increase in advertising and promotion expenses. Advertising and promotional expenses for the five months ended March 31, 2010 was approximately $2.7 million, an increase of 160.5% from the five months ended March 31, 2009. Advertising expenses were approximately $2.0 million for the five months ended March 31, 2010, an increase of 586.5% compared with $0.3 million for the five months ended March 31, 2009. The primary reason for the increase was that we launched our new television advertisement campaign to promote the new product portfolio nationwide. The television commercials started airing on January 1, 2010 on China Central Television Channel 1 (CCTV-1) right before the channel's flagship national news program (XinWenLianBo) at 7pm, which is generally considered one of the most valuable prime-time advertising time slots in China.

General and administrative expenses. General and administrative expenses for the five months ended March 31, 2010 increased by 92.2% to $1.3 million from $0.7 million for the five months ended March 31, 2009. It was primarily attributable to labor cost increase for recruiting senior managers and professionals such as CFO, Director of Production and compensation increase for CEO and director, professional fees increase for engaging Ernest &Young as our SOX consultant and IT expenditures as a result of the expansion of our business.

Other income (expenses). Our other income (expenses) consists primarily of interest and finance cost. Other expenses decrease by approximately $ 0.3 million, or 44.6%, primarily attributable to the repayment of commercial loans of approximately US$ 2.7 million and decreased deferred debt issuance cost amortization.

Income Tax. Our income tax in the five months ended March 31, 2010 decreased by 133.2%, from an expense of approximately $0.9 million in the five months ended March 31, 2009 to a benefit of approximately $0.3 million in the five months ended March 31, 2010. The decrease was primarily attributable to losses experienced in the five months ended March 31, 2010.

Net Income(loss). As a result of the foregoing, net income attributable to Yayi International Inc. decreased by 175.0% in the five months ended March 31, 2010 as compared to the five months ended March 31, 2009.

Liquidity and Capital Resources

As of March 31, 2011, we had cash and cash equivalents of approximately $13.4 million and working capital of approximately $9.7 million.

We intend to, and are in the process of, expanding our administrative and production facilities to meet our current needs and anticipated increased demand for our products. In connection therewith, we plan to spend approximately $8.0 million during the eighteen months ending September 30, 2012 ($3.4 million during the fiscal year ending March 31, 2012 and $4.6 million during the six months ending September 30, 2012. The $8.0 million in capital expenditure is expected to be mainly used for the following items:

  • the purchase of machineries and equipment for the new powder processing plant in Weinan, Shaanxi and machineries and equipment in Fuping, Shaanxi with the capital expenditure of $3.1 million;
  • the purchase of livestock, the construction of goat farms and goat milk collection stations in an amount of $0.5 million;
  • the packing equipment purchase and renovation of the office and staff apartment building in Jinghai, Tianjin in an amount of $4.2 million; and the purchase of information technology equipment and systems in an amount of $0.2 million.

On July 30, 2010, Milkgoat China renewed a loan of RMB 10,000,000 (approximately $1,469,000) from Shanghai Pudong Development Bank, Tianjin Branch, or Pudong Bank, for use as working capital. The loan has an annual interest rate of 6.372% and the interest must be paid on a quarterly basis on the 20th of the last month of each quarter. Under the terms of the loan agreement, Milkgoat China is subject to customary affirmative and negative covenants. The loan may be accelerated and Pudong Bank may demand immediate payment of the principal and accrued interest upon the occurrence of an event of default which includes, among other things, a failure to make principal or interest payments, a failure to comply with other covenants and certain events of liquidation or bankruptcy.

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On September 27, 2010, we entered into a securities purchase agreement, or the Securities Purchase Agreement, with 119 U.S. accredited investors, or the PIPE Investors, and Euro Pacific Capital, Inc., as representative of the PIPE Investors, pursuant to which we issued and sold to the PIPE Investors 892 units at a purchase price of $10,000 per unit, resulting in gross proceeds of $8.92 million to us. Each unit consists of a three-year, 9% convertible promissory note in the principal amount of $10,000, or the Convertible Note, and a three-year Series F Warrant, to purchase 1,250 shares of our common stock at an exercise price of $2.50 per share. The Convertible Notes are payable at an interest rate of 9% per annum, payable semiannually in arrears on the last day of the first and third calendar quarters commencing March 31, 2011 and mature on September 26, 2013, or the Maturity Date. The Convertible Notes are also convertible into shares of our common stock at any time prior to the Maturity Date at $2.00 per share, which conversion price is subject to weighted average and other customary anti-dilution protections. See our Current Report on Form 8-K filed on October 1, 2010 for more information of this private placement transaction.

On November 4, 2010, Milkgoat China entered into a working capital loan agreement with Tianjin Bank, Shaoxing Dao Branch, or Tianjin Bank, pursuant to which, Tianjin Bank loaned to Milkgoat China RMB20,000,000 (approximately $2,991,862) to purchase raw materials. The loan has a term of 12 months and expires on November 3, 2011. The fixed annual interest rate of the loan is 6.672% . Under the terms of the loan agreement, Milkgoat China is subject to customary affirmative and negative covenants. The loan may be accelerated and Tianjin Bank may demand immediate payment of the principal and accrued interests upon the occurrence of an event of default which includes, among other things, a failure to make principal or interest payments timely, a failure to comply with other covenants and certain events of bankruptcy. On November 5, 2010, RMB15, 000,000 (approximately $2,246,922) was disbursed to Milkgoat China, and the remaining RMB 5,000,000 (approximately $744,940) was disbursed to Milkgoat China on January 6, 2011.

On November 8, 2010, Milkgoat China entered into a non-committed short term revolving facility agreement with CITI Bank (China) Co., Ltd, Tianjin Branch, or Citi Bank, pursuant to which, Citi Bank agreed to make available to Milkgoat China a RMB 8 million (approximately $1,217,637) revolving credit facility to purchase raw materials and for working capital purposes. A separate agreement will be entered into each time as advance is made under the credit facility. The term of each advance is up to three months. The interest rate on each advance will be memorialized in the separate agreement. Tianjin Mengyang Biotechnology Co., Ltd., Fung Shek and Li Liu acted as guarantors under this agreement. As of March 31, 2011, no advance had been made.

On January 6, 2011, Milkgoat China entered into a working capital loan agreement with Bank of Beijing. Pursuant to the short-term loan agreement, Bank of Beijing agreed to loan to the Company an aggregate RMB 10,000,000 (approximately $1,489,880) for the use as working capital. The loan has a monthly interest rate of 0.5084% and the interests must be paid on a quarterly basis on the 20th of the last month of each quarter. The loan expires on January 5, 2012 but can be renewed upon the written consent by Bank of Beijing. Under the terms of the loan agreement, we are subject to customary affirmative and negative covenants. The loan may be accelerated and Bank of Beijing. may demand immediate payment of the principal and accrued interests upon the occurrence of an event of default which includes, among other things, a failure to make principal or interest payments, a failure to comply with other covenants and certain events of liquidation or bankruptcy.

On June 10, 2011, Milkgoat China renewed a loan agreement with Tianjin Rural Commercial Bank for RMB30,000,000 (approximately $4,566,140). The annual interest rate is 7.572% and the loan is due on June 9, 2012. The loan is guaranteed by Tianjin Haitai Investment Guarantee Co., Ltd.

We believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. However, depending on our future needs, changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional debt financing from commercial bank or equity financing in the private or public markets.

The following table summarizes information about our net cash flows for the periods as indicated.

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  Years Ended   Five Months Ended
  March 31, October 31,   March 31,  
  2011 2009   2010 2009
  (Audited) (Audited)   (Audited) (Unaudited)
           
Net cash provided by (used in) operating activities $(1,181,337) $6,534,843   $(3,896,858) $3,285,902
Net cash (used in) investing activities (1,765,867) (12,400,482)   (1,980,422) (4,192,349)
Net cash provided by financing activities 11,359,250 15,360,090   235,867 1,648,847
Net increase (decrease) in cash and cash equivalent $8,632,715 9,476,935   (5,640,536) 740,289

Operating Activities:

Net cash used in operating activities for the fiscal year ended March 31, 2011 was approximately $1.2 million compared to net cash provided by operating activities of approximately $6.5 million for the fiscal year ended October 31, 2009. Net cash used in operating activities for the fiscal year ended March 31, 2011 was mainly attributable to the net loss from operations of approximately $1.3 million, non-cash items not affecting cash flows of $2.0 million and an approximately $1.9 million increase in working capital. The changes in working capital for the fiscal year ended March 31, 2011 was primarily related to a $1.0 million increase in accounts receivable reflecting extended credit term for new products promotion. We increased goat milk powder production to meet expected sales demand, which resulted in a $1.2 million increase in inventory and a $0.2 million increase in accounts payables. We increased bank’s acceptance bills paid to our suppliers instead of paying by cash in bank directly during the three months ended March 31, 2011, which resulted in a $1.0 million increase in restricted cash and a $0.5 million increase in notes payables. There was a $0.8 million decrease in advance to suppliers due to the decrease in the prepayment for CCTV advertising expenses and the prepayment for packaging materials. We issued $8.92 million convertible notes in September 2010, which caused $0.4 million increase in restricted cash that should be left in the escrow account and $0.4 million increase in other payables due to the accrued interest expenses.

Net cash provided by operating activities for the fiscal year ended October 31, 2009 was mainly attributable to the net income of $5.4 million, non-cash items not affecting cash flows of $0.8 million and a $0.3 million decrease in working capital.

Net cash used in operating activities was approximately $3.9 million for the five months ended March 31, 2010, as compared to net cash provided by operating activities of approximately $3.3 million for the five months ended March 31, 2009. Net cash used in operating activities for the five months ended March 31, 2010 was mainly due to net loss of 1.6 million, non-cash items not affecting transition period cash flows of $0.3 million and a $2,6 million increase in working capital. The changes in working capital for the five months ended March 31, 2010 were primarily related to a $0.9 million increase in advance due to prepayment for raw goat milk powder and other materials, a $0.5 million increase in accounts receivable due to our extended credit term for new products promotion, a $0.5 million increase in deferred tax assets due to taxable temporary difference such as advertise expenses and allowance for bad debt, a $0.6 million decrease in accounts payable due to the shorten payment term of main materials.

Investing Activities:

Net cash used in investing activities for the fiscal year ended March 31, 2011 was approximately $1.8 million, a decrease of approximately $10.6 million from the fiscal year ended October 31, 2009. The change was mainly caused by the fact that the prepayment of $9.9 million for the construction of Jinghai fortifying plant; $1.8 million for the prepayment of Jinghai equipment during the fiscal year ended October 31, 2009, while we did not make similar payments during the fiscal year ended March 31, 2011. During the fiscal year ended March 31, 2011, there was also an increase in capital expenditures of approximately $1.8 million, among which $0.6 million for Shaanxi new processing plant, $0.5 million for the prepayment of production equipment for the new fortifying plant in Jinghai, Tianjin; $0.7 million for Tianjin and Fuping production facilities upgrading related to our production licenses renewal.

Net cash used in investing activities for the five months ended March 31, 2010 was approximately $2.0 million, a decrease of approximately $2.5 million from the five months ended March 31, 2009. This decrease in net cash used in investing activities is primarily because we prepaid $ 3.8 million for the construction of Jing Hai factory and warehouse during the five months ended March 31, 2009, but did not make any same kind of payment during the five months ended March 31, 2010. During the five months ended March 31, 2010, there was also an increase in capital spending of approximately $2.0 million, among which $0.4 million was for purchasing equipment, $0.6 million was for purchasing livestock and $0.80 million was for acquisition of land-use rights from Shaanxi Province. See note 5 of our consolidated financial statements.

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Financing Activities:

Net cash provided by financing activities for the fiscal year ended March 31, 2011 was approximately $11.4 million compared to approximately $15.4 million of net cash provided by these activities during the fiscal year ended October 31, 2009. The change is primarily attributable to the $8.9 million gross proceeds from the convertible debt transaction closed on September 27, 2010, compared with $15.0 million gross proceeds from the private placement transaction closed in June 2009. In addition, the net cash provided by bank loans increased by $2.5 million for the fiscal year ended March 31, 2011 compared with the fiscal year ended October 31, 2009.

Net cash provided by financing activities for the five months ended March 31, 2010 was approximately $0.2 million compared to approximately $1.6 million of net cash provided by these activities during the corresponding period in the prior year. The change is primarily attributable to the repayment of approximately $2.7 million of bank loan, which is $2.0 million more than the corresponding period in the prior year, partially offset by the borrowings of approximately $3.0 million of bank loan that is $0.6 million more than the corresponding period in the prior year. See note 9 of our consolidated financial statements.

Effects of Inflation

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor the price change and continually maintain effective cost control in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

Critical Accounting Policies

The consolidated financial statements include the financial statements of us and our subsidiaries. All transactions and balances among us and our subsidiaries have been eliminated upon consolidation. Certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated, requiring us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. These estimates and assumptions affect the amounts we report for assets and liabilities, our disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reported periods. We routinely evaluate these estimates, utilizing historical experience, consulting with experts and utilizing other methods we consider reasonable in the particular circumstances.

Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

Estimates of allowances for bad debts – We must periodically review our trade and other receivables to determine if all are collectible or whether an allowance is required for possible uncollectible balances. When determining the allowances, a number of factors are considered, including the length of time the receivable is past due, past loss history, the counter party’s current ability to pay and the general condition of the economy and industry. Accounts receivable are written off if reasonable collection efforts are not successful.

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Estimate of the useful lives of property and equipment and biological assets – We must estimate the useful lives and residual values of our property and equipment and biological assets. We must also review property and equipment and biological assets for possible impairment whenever events and circumstances indicate that the carrying value of those assets may not be recovered from the estimated future cash flows expected to result from their use and eventual disposition.

Inventory – We value inventories at the lower of cost or market value. We determine the cost of inventories using the weighted average cost method and include any related production overhead costs incurred in bringing the inventories to their present location and condition. We must determine whether we have any excessive, slow moving, obsolete or impaired inventory. We perform this review quarterly, which requires management to estimate the future demand of our products and market conditions. We make provisions on the value of inventories at period end equal to the difference between the cost and the estimated market value. If actual market conditions change, additional provisions may be required. In addition, we may write off some provisions if we later sell some of the subject inventory.

Goodwill – We must test goodwill annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. We perform impairment tests at the reporting unit level to identify potential goodwill impairment. We recognize a goodwill impairment loss in our statements of operations and comprehensive income when the carrying amount of goodwill exceeds its implied fair value. We perform the impairment test at the end of the fourth quarter each year.

Land use rights– Land use rights are stated at cost less accumulated amortization. Amortization is charged using the straight-line method over the period of lease term.

Revenue recognition - The Company recognizes revenue on product sales when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Net sales of products represent the invoiced value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT which is levied on majority of the Company’s products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. Input VAT paid is recoverable from output VAT charged to customers.

Prior to January 1, 2009, the Company allows for exchange of goods that are near expiration. The Company provided for an allowance for return products since the Company has experienced returns in the normal course of business. Subsequent to January 1, 2009, the Company revised its sales contracts to disallow returns for sales made after January 1, 2009.

The Company treats temporary price reduction programs, merchandising fees, co-operative advertising and slotting expenses as a reduction in gross sales. The Company records the liability when pervasive evidence exists that the Company and the customer or distributor have reached agreement and that an advertising action will result in an expense to the company in the near future. The liability is maintained until the customer takes the deduction against payments due. In addition, in accordance with ASC 605-50 in accounting for customer payments and incentives, if the temporary price reduction recorded is in excess of gross sale for any retailer, the amount in excess will be recorded as selling expense.

Slotting fees - The Company accounts for slotting fees in accordance with ASC 605-50. ASC 605-50 requires that cash considerations, including sales incentives, given by a vendor to a customer is presumed to be a reduction of the selling price, and therefore, should be characterized as a reduction to gross sales. This presumption is overcome and the consideration would be characterized as an expense incurred if the vendor receives an identifiable benefit in exchange for the consideration and the fair value of that identifiable benefit can be reasonably estimated. Furthermore, if the consideration recorded is in excess of gross sale of any retailer, the amount in excess will be recorded as selling expense.

The Company treats one-time slotting fees paid to retails shops who are direct customers of the Company’s distributors as a reduction in gross sales.

Recent Accounting Pronouncements

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

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For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.

Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. This standard is not currently applicable to the Company.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial position or results of operations.

In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. This standard is not currently applicable to the Company.

In January 2010, FASB issued ASU N0. 2010-01, Equity (ASC Topic 505), Accounting for Distributions to Shareholders with Components of Stock and Cash. The update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of ASC Topic 505 and Topic 260, Earnings Per Share. This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. This standard is not currently applicable to the Company.

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (ASC Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. This standard will be adopted as of April 1,2011 and the adoption of this standard will not have a material impact to the financial statements.

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In December 2010,FASB issued ASU No.2010-29 Business Combinations(Topic 805):Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.The Company intends to adopt the disclosure requirements for any business combinations after April 1, 2011. The adoption of this standard will not have any material impact to the Company's financial statements.

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HISTORY AND CORPORATE STRUCTURE

General

We were originally incorporated in Delaware in 1986 under the name of Commercial Ventures Ltd. We changed our name to FIN U.S.A., Inc. in 1987, and in 1993 to I/NET, INC, when we developed and marketed computer software for mid range computers. In 2006, Tryant acquired a majority of our outstanding capital stock. In connection with that acquisition, we ceased our operations and became a shell company in search of an operating business to acquire. On April 15, 2007, our name was changed to Ardmore Holding Corporation and in September 2008, following the Merger with Milkgoat Industrial, we ceased being a shell company and began active goat milk and related products production and sale operations.

On September 12, 2008, we filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and changed our name to Yayi International Inc.

Acquisition of Milkgoat Industrial and Formation of Our Other Subsidiaries

Charleston Industrial Ltd, or Charleston, is a limited liability company organized under the laws of BVI on October 31, 2007 in anticipation of a business combination with a U.S. reporting company. On January 15, 2008, Charleston acquired Tianjin Yayi Industrial Co., Ltd., or Tianjin Yayi, and its wholly-owned subsidiary, Weinan Milkgoat. Tianjin Yayi is a Chinese company formed in the PRC in May 1994. On June 6, 2008, pursuant to the Merger Agreement, we, our wholly owned subsidiary, Ardmore Acquisition Corp., Charleston and Tryant consummated the Merger, pursuant to which Ardmore Acquisition Corp. was merged with and into Charleston and Charleston thus became the surviving entity of the Merger. As a result, Charleston became our wholly owned subsidiary.

In connection with the Merger, all of the outstanding shares of Charleston were converted into an aggregate of 22,325,000 shares of our Common Stock. In addition, Jeff D. Jenson, Steve Markee and Alex Ferries resigned from their positions as of directors and Li Liu, Fung Shek, and Cili Yan were appointed as our new directors. Our executive officers were also replaced by the Tianjin Yayi executive officers upon the closing of the Merger.

On June 6, 2008, in consideration for introducing us to Charleston, we issued to Grand Orient Fortune Investment Ltd., a BVI limited liability company, or Grand Orient, and its designees an aggregate of 2,000,000 shares of our Common Stock and our Series B Warrants to acquire 2,148,148 shares of our Common Stock at an exercise price of $1.08 per share. These warrants are exercisable on a cashless basis and may be exercised through June 6, 2011. The exercise price of these warrants and the number of shares issuable upon their exercise is subject to adjustment upon the occurrence of specified events.

In addition, on June 6, 2008, we entered into an indemnification agreement with Tryant, pursuant to which Tryant agreed to the cancellation of 325,198 shares of our Common Stock it owned and agreed to, among other things, indemnify us for one year for breaches of representations and warranties in the Merger Agreement. In exchange, we (i) paid Tryant an aggregate of $200,000 (excluding $50,000 that had been previously paid), (ii) issued Tryant a note in principal amount of $250,000 maturing in August 2008, and (iii) issued Tryant and its designees our Series C Warrants, exercisable on a cashless basis to acquire through June 6, 2011, an aggregate of 185,185 shares of our Common Stock at an exercise price of $1.35 per share. The exercise price and number of shares issuable upon exercise of these warrants is subject to specified anti-dilution adjustments.

On August 8, 2008, Tianjin Yayi acquired 100% ownership of Fuping Milkgoat, from eight individuals, including Jingchuan Chang, Lixue Du, Xilin Jia, Xuhe Zhang, Mingxun Zhang, Pingan Li, Chongli An and Fuping Xing for a cash consideration of RMB 4,240,846 (approximately $620,360). Fuping Milkgoat currently has a registered capital of RMB 5,000,000 (approximately $731,411). Fuping Milkgoat’s principal business is purchasing and processing raw liquid goat milk into raw goat milk powder.

On September 9, 2009, Tianjin Yayi formed a wholly-owned PRC subsidiary, Shaanxi Milkgoat Dairy Co., Ltd, or Shaanxi Milkgoat, and obtained the business license from the Industrial and Commercial Bureau of Weinan City, Shaanxi Province with a registered capital of RMB 5,000,000 (approximately $731,411). Shaanxi Milkgoat’s principal business is purchasing and processing raw liquid goat milk into raw goat milk powder. During the first quarter of 2010, Shaanxi Milkgoat increased its registered capital by RMB 25,000,000 (approximately $3,657,056) to RMB 30,000,000 (approximately $4,388,467).

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On August 18, 2010, Charleston changed its name to Milkgoat International to more accurately reflect our marketing and branding strategy and products.

On December 17, 2010, Tianjin Yayi changed its name to Milkgoat China to more accurately reflect our marketing and branding strategy and products.

Private Placement Transaction in 2008

Contemporaneously with, and as a condition to, the completion of the Merger, we issued, pursuant to an amended and restated securities purchase agreement, 52 units to certain investors for an aggregate purchase price of $1.3 million. Each unit consisted of: (i) an 8% convertible promissory note in the principal amount of $25,000 and (ii) a Series A Warrant to subscribe for 11,575 shares of our Common Stock. As a result , we issued to the investors an aggregate of $1,300,000 principal amount of 8% convertible promissory notes and Series A Warrants to subscribe for 601,900 shares of our Common Stock. The notes are unsecured and are convertible into our Common Stock at a conversion price of $1.08. The Series A Warrant included in each unit is exercisable (under specified circumstances, on a cashless basis) through June 6, 2011 (subject to extension if, under specified circumstances, the underlying shares are not registered for resale) to acquire 11,575 shares of our Common Stock at an exercise price equal to the lesser of $1.35 and the Next Round Value. The term “Next Round Value” means the per share dollar value of the securities issued by us in the first private placement that is effected after the Merger. As described below, as a result of the private placement transaction closed on June 18, 2009 and pursuant to a settlement agreement between us and the investors, dated November 24, 2009, the exercise price of Series A Warrants was reduced to $0.98.

We paid the placement agent WestPark $104,000 in commissions and approximately $20,000 for expenses (including its non-accountable expense allowance) for its services in the offering and issued to it and its designees Series D Warrants (with the same terms as the Series A Warrants) to acquire an aggregate of 144,448 shares of our Common Stock.

Pursuant to a registration rights agreement with these investors, we agreed to register the resale of the shares of Common Stock underlying the notes and Series A Warrants. If we fail, subject to specified exceptions, to comply with certain of our obligations under this agreement, we may be required, for each 30 day period in which we are in default under such obligations, to pay the investors partial liquidated damages equal to 1.5% of the purchase price paid by the investor for any unregistered securities held by them that are required to be registered; provided, however, that the maximum amount payable to an investor pursuant to such provisions shall not exceed 20% of the purchase price paid by the investor. We did not register these shares in accordance with the registration rights agreement. On November 24, 2009, we and the investors entered into a Settlement Agreement pursuant to which, (i) each of the investors converted its own entire principal amount of and accrued interest on all of the notes it holds into an aggregate 1,296,275 shares of our Common Stock at a conversion price of $1.08 per share, (ii) we adjusted the exercise price of Series A Warrants to $0.98 per share, and (iii) we agreed to pay to the investors, on or before December 6, 2009, liquidated damages in the aggregate amount equal to $140,000 through Wellfleet Partners, Inc., the representative of the investors for pro rata distribution to the investors. We have satisfied all of our obligations under the Settlement Agreement. Upon making such payment, the registration rights agreement was, as between us and each investor, terminated and all our obligations thereunder were discharged and all claims against us arising therefrom were released.

Private Placement Transaction in 2009

On June 18, 2009, we entered into the Stock Purchase Agreement with Global Rock, Milkgoat Industrial, Milkgoat China, the individuals named thereto and SAIF. Pursuant to the Stock Purchase Agreement, we issued and sold to SAIF 1,530,612 shares of our Series A Preferred Stock at a price per share of $9.80 for an aggregate purchase price of $15.0 million. The Series A Preferred Stock is convertible into our Common Stock at an initial conversion price at $0.98 per share, which conversion price is subject to stock split, recapitalization and other anti-dilution protection, as well as adjustments based on our financial performance.

In connection with the above private placement transaction, on June 16, 2009, we filed the Certificate with the Secretary of State of the State of Delaware, which became effective upon filing. Pursuant to the Certificate, there are 1,530,612 shares of Series A Preferred Stock authorized. The holders of the Series A Preferred Stock are entitled to receive non-cumulative dividends, when, as and if declared by the Board. The shares of Series A Preferred Stock may be converted into the Company’s Common Stock at the option of the holders of the Series A Preferred Stock in whole or in part at any time at an initial conversion price of $0.98, subject to future adjustments set forth in the Certificate.

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On July 20, 2010, we filed an Amended and Restated Certificate of Designation of Series A Preferred Stock with the Secretary of State of the State of Delaware, or the Amended Certificate, to modify the terms of the Series A Preferred Stock. Among other things, the Amended Certificate removed Section 6(f) Special Conversion Price Adjustment Based on 2010 and 2011 Accounts of the Certificate and added the provisions relating to the make good shares that the holders of Series A Preferred Stock may be entitled to receive if we fail to meet certain performance targets set forth in the Amended Certificate. Specifically, if our combined after tax net income reported in our Annual Report on Form 10-K for both of the fiscal years ending March 31, 2011 and 2012 is less than $20 million, we will issue up to 612,245 shares of Series A Preferred Stock to holders of shares of Series A Preferred Stock pursuant to a formula set forth in the Amended Certificate.

Private Placement Transaction in 2010

On September 27, 2010, we entered into the Securities Purchase Agreement, with the PIPE Investors and Euro Pacific, pursuant to which we issued and sold to the PIPE Investors 892 units at a purchase price of $10,000 per unit, resulting in gross proceeds of $8.92 million to us. Each unit consists of a Convertible Note in the principal amount of $10,000 and a three-year Series F Warrant to purchase 1,250 shares of our Common Stock at an exercise price of $2.50 per share.

The Convertible Notes are payable at an interest rate of 9% per annum, payable semiannually in arrears on the last day of the first and third calendar quarters (i.e., March 31 and September 30) commencing March 31, 2011 and mature on September 26, 2013, or the Maturity Date. Except for our secured Indebtedness (as defined in the Convertible Note) in existence on September 27, 2010, our obligations under the Convertible Notes will rank senior with respect to all our existing indebtedness as of September 27, 2010 and to any and all Indebtedness incurred thereafter. The Convertible Notes are also convertible into shares of Common Stock at any time prior to the Maturity Date at $2.00 per share, which conversion price is subject to weighted average and other customary anti-dilution protections. At any time after September 26, 2011, we may redeem all but not less than all of the outstanding principal amount of any Convertible Note by payment of 108% of the outstanding principal amount of the Convertible Note, together with accrued but unpaid interest.

The Series F Warrants entitle the PIPE Investors to purchase an aggregate of 1,115,000 shares of Common Stock at an initial exercise of $2.50 per share, which exercise price is subject to the customary weighted average and stock based anti-dilution protection. The Series F Warrants may be exercised in a cash or cashless way at any time upon the election of the holders until September 26, 2013.

Euro Pacific acted as the sole placement agent of the private placement transaction. Euro Pacific received from us a cash commission of $713,600, which is equal to 8% of the gross proceeds of the financing. In addition, we issued Series F Warrants to the designees of Euro Pacific to purchase an aggregate of 312,200 shares of Common Stock at an exercise price of $2.50 per share, as partial compensation for services provided by them in connection with the private placement.

On September 27, 2010, we, Global Rock, Euro Pacific and Escrow, LLC, as escrow agent, or the Escrow Agent, entered into a make good escrow agreement, or the Make Good Escrow Agreement. Pursuant to the Make Good Escrow Agreement, Global Rock agreed to place a total of 669,000 shares of Common Stock held by it, which is equal to 15% of the amount of shares of Common Stock issuable upon conversion of the Convertible Notes, or the Make Good Shares, into escrow to secure our certain make good obligations. In the event that our combined net sales of both of the fiscal years ending March 31, 2011 and 2012 is less than $125 million, Global Rock will transfer the Make Good Shares to the PIPE Investors, on a pro rata basis, for no additional consideration.

We and the PIPE Investors also entered into the Registration Rights Agreement, pursuant to which, we granted registration rights to holders of registrable securities, which include (i) the shares of Common Stock issuable upon the conversion of the Convertible Notes, (ii) the Make Good Shares, as applicable, (iii) the shares of Common Stock issuable upon the exercise of Series F Warrants, and (iv) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any price adjustment as a result of such stock splits, reverse stock splits or similar events with respect to any of the securities referenced in (i) – (iii) above.

Pursuant to the Registration Rights Agreement, we are required to file a registration statement on Form S-1, or the Registration Statement, within 30 days after the closing of the private placement and cause the Registration Statement to be declared effective by the SEC within 180 days after the closing of the private placement. We may be subject to liquidated damages in an amount up to 8% of the aggregate investment amount paid by the PIPE Investors in the private placement if we are unable to file, obtain and maintain effectiveness of the Registration Statement as required by the Registration Rights Agreement.

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On September 27, 2010, we also entered into a closing escrow agreement with Euro Pacific and the Escrow Agent, or the Closing Escrow Agreement, pursuant to which, among other things, we have placed a certain amount of cash received from the private placement, or the Holdback Amount, with the Escrow Agent, which is sufficient to satisfy the payment to the PIPE Investors of one semiannual interest payment due on the aggregate principal amount of all Convertible Notes issued in the private placement, which includes accrued interest due on the principal amount of the Convertible Notes from September 27, 2010 through March 31, 2011. If, an Event of Default (as defined in the Convertible Notes) is declared by Euro Pacific with respect to a failure by us to make a semiannual interest payment to the PIPE Investors in accordance with the Convertible Notes, the Escrow Agent will disburse a certain portion of the Holdback Amount to the PIPE Investors, and within 30 days following the disbursement, we will deposit an additional amount equal to the Holdback Amount with the Escrow Agent to be retained and disbursed. On the Maturity Date or at any time prior to the Maturity Date when 75% of all Convertible Notes have been converted, all remaining funds of the Holdback Amount will be disbursed to us.

All of our business operations are conducted through our indirectly, wholly-owned Chinese subsidiaries. The following chart reflects our organizational structure as of the date of this prospectus.

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MANAGEMENT

Directors and Executive Officers

The following sets forth information about our directors and executive officers as of the date of this prospectus:

NAME AGE POSITION
Li Liu 52 Chairperson, CEO and President
Fung Shek 55 Director and Vice President
Cili Yan 52 Director
Veronica Jing Chen 45 Chief Financial Officer
Kenneth Jue Lee 43 Director
Gang Sheng 37 Director

Li Liu. Ms. Liu has been our Chairwoman, CEO and President since the completion of the reverse acquisition of Charleston on June 6, 2008. Ms. Liu has also served as Chairwoman and General Manager of Milkgoat China since 1994. Ms. Liu has extensive experience in operational management and business development. Ms. Liu graduated with a medical degree from Tianjin Medical University in 1983 and received her Executive MBA from Tshinghua University, China in September 2006.

Fung Shek. Mr. Shek became our director and Vice President on June 6, 2008. Mr. Shek has served as a Deputy General Manager of Milkgoat China since 2000. As Deputy General Manager, he is responsible for Milkgoat China’s sales network and market development. He was formerly a Director of Sales at P&G Taiwan. Mr. Shek graduated from University of Massachusetts Boston.

Cili Yan. Ms. Yan became our director on June 6, 2008. She is a committee member of the Tianjin Subcommission of the Chinese Revolutionary Nationalist. Ms. Yan has been teaching at Tianjin Huanhu Secondary School since 1999. She graduated from Tianjin Normal Specialized Postsecondary College.

Veronica Jing Chen. Ms. Chen became our Chief Financial Officer on February 24, 2010. Prior to joining us, Ms. Chen held Chief Financial Officer positions at several NASDAQ listed Chinese companies, including China Natural Gas, Inc., a company primarily involved in the distribution of compressed natural gas in China, from May 2009 to January 2010, China Valves Technology, Inc., a company engaged in the business of developing, manufacturing and selling high-quality metal valves, from October 2008 to February 2009 and Origin Agritech, Limited, a technology-focused crop seed company in China from December 2007 to September 2008. Before that, she served as Senior Director of Finance at iKang Healthcare, Inc., a leading healthcare management service provider in China from December 2006 to November 2007, Director of Finance at eLong, a Beijing-based online travel service provider from August 2001 to November 2006, and Finance Manager of the North China Region for Eli Lilly Asia’s China Representative Office, a global pharmaceutical company from September 2000 to July 2001. Ms. Chen currently holds memberships with CPA Australia and The National Institute of Accountants (MNIA) of Australia. She received a degree of Doctor of Business Administration from Victoria University, Neuchatel, Switzerland and an MBA degree from City University of Seattle, Washington.

Kenneth Jue Lee. Mr. Lee became our director on June 16, 2009. Mr. Lee is a Principal at SAIF Partners, which is one of the largest and most successful growth venture capital funds focused on China. He has about 15 years of experience across private equity investment, corporate finance, and business development in China. Before becoming a member of the SAIF team in 2007, Mr. Lee had served as the CFO of Topsec Holdings, a leading domestic network security company in China, from 2006 to 2007. From 2004 to 2005, he worked as a Principal at RimAsia Capital Partners, an independent, pan-Asia private equity firm established in 2004 with a deeply connected local presence across Asia. Prior to RimAsia Capital Partners, Mr. Lee was with Delta Associates – the exclusive advisor to Asia Equity Infrastructure Fund, CNK Telecom, H&Q Asia Pacific, and Salomon Brothers in New York. Mr. Lee is a graduate of Amherst College with a Bachelor of Arts degree in Philosophy.

Gang Sheng. Mr. Sheng became our director on June 16, 2009. Mr. Sheng is a Vice President at SAIF Partners. Prior to joining SAIF Partners in 2007, Mr. Sheng was a director in investment banking with Latitude Capital Group in Hong Kong and Beijing from 2004 to 2007 where he executed cross-border mergers & acquisitions, private placement transactions for Chinese companies. From 2003 to 2004, Mr. Sheng worked as a Senior Investment Manager of China Digital TV Holdings Co., Ltd. (NYSE:STV), a leading provider of conditional access systems to China’s expanding digital television market. Mr. Sheng holds a Bachelor’s degree in Economics from Renmin University of China and a MBA degree from Peking University.

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In connection with the private placement transaction consummated on June 18, 2009, we, Global Rock, Ms. Liu, Mr. Shek and SAIF entered into a voting agreement, or the Voting Agreement, pursuant to which, among other things, the parties agreed to vote, or cause to be voted, all shares owned by them, to ensure that (i) the size of our Board of Directors will be set and remain at five directors, which size can only be changed with first obtaining the approval of the holders of at least two-thirds of the then outstanding shares of Series A Preferred Stock voting separately as a single class and (ii) two representatives designated by the holders of a majority of the outstanding shares of Series A Preferred Stock will be elected to our Board of Directors. No director elected pursuant to the Voting Agreement may be removed without the vote or written consent of the stockholders entitled to designate such director pursuant to the Voting Agreement. In the event of the resignation, death or disqualification of a director, the stockholders entitled to designate such director shall promptly nominate a new director and the parties to the Voting Agreement shall promptly vote his, her or its shares of capital stock of the Company to elect such nominee to the Board of Directors.

The obligation of the parties to the Voting Agreement to vote, or cause to be voted, all shares owned by them to ensure that two representatives designated by the holders of a majority of the outstanding shares of Series A Preferred Stock will be elected as our directors exists until the Voting Agreement is terminated by the parties. Other than a mutual termination, there is no specific termination date in the agreement and the voting arrangement is otherwise perpetual. Such obligation is binding upon the successors in interest, heirs and assigns to any of the shares owned by the parties. On June 16, 2009, pursuant to the Voting Agreement, two representatives of SAIF, Mr. Lee and Mr. Sheng were elected as directors to our Board of Directors.

Except as noted above, there is no other arrangement or understanding between any of our executive officers or directors and any other person pursuant to which such executive officer or director was or is to be selected as an officer or a director.

Directors are elected until their successors are duly elected and qualified.

Director Qualifications

Below is a summary of the qualifications, attributes, skills and experience of each of our directors that led us to the conclusion that such director should serve as a director of our Company, in light of our business and structure.

Ms. Li Liu

  • Leadership and Management experience – founder of Milkgoat China and has been Milkgoat China’s Chairwoman since 1994 and the Company’s Chairwoman since 2008

  • Education background – Medical degree from Tianjin Medical University and Executive MBA from Tsinghua University

Mr. Fung Shek

  • Leadership and Management experience – has served as a Deputy General Manager of Milkgoat China since 2000 and the Company’s director and Vice President since 2008

  • Education background – graduated from University of Massachusetts Boston

Ms. Cili Yan

  • Leadership and Management experience – has been the Company’s director since 2008

Mr. Kenneth Jue Lee

  • Leadership and Management experience – a Principal at SAIF Partners and served as the CFO of Topsec Holdings, a leading domestic network security company in China, from 2006 to 2007

  • Education background - Bachelor’s degree in Philosophy from Amherst College

Mr. Sheng Gang

  • Leadership and Management experience – a Vice President at SAIF Partners and severed as a Director in investment banking with Latitude Capital Group in Hong Kong and Beijing from 2004 to 2007

  • Education background - Bachelor’s degree in Economics from Renmin University of China and MBA degree from Peking University.

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Significant Employees

In addition to the foregoing named officers and directors, the following employee is also key to our business and operations:

NAME AGE POSITION
Bao Zhou 35 Marketing Director

Bao Zhou. Mr. Zhou has served as our Marketing Director since May 11, 2010. Mr. Zhou is a seasoned executive with over 15 years of experience in sales and marketing planning and execution, in addition to a solid background in the dairy industry. From February 2008 to May 2010, Mr. Zhou was Director of Sales Operations and Director of Strategic Planning at Xiamen Huierkang Food Co., Ltd., a food and beverage supplier based in Southeast China that is best known for its PET glucose beverage, rice pudding and peanut milk. Before that, from April 2001 to September 2009, he successively served as Sales Director at Milopo Nutrition (Shanghai) Corporation Ltd., General Manager, Milk Powder Division at American Dairy, Inc. (NYSE: ADY), and National Sales Support Manager at Mead Johnson Guangzhou Co., Ltd. Mr. Zhou has also had different sales and marketing responsibilities at well-known multinational consumer product companies such as Wrigley, Henkel, Pillsbury and Nestle in China. Mr. Zhou obtained a Bachelor’s degree of Business English from Beijing Construction University and an Executive MBA degree from Renmin University of China.

Board Composition and Committees

The board of directors is currently composed of five members, Ms. Li Liu, Mr. Fung Shek, Ms. Cili Yan, Mr. Kenneth Jue Lee and Mr. Gang Sheng. All Board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.

We currently do not have standing audit, nominating or compensation committees. Our board of directors handles the functions that would otherwise be handled by each of the committees. We intend, however, to establish an audit committee, a nominating committee and a compensation committee of the board of directors as soon as practicable. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. The nominating committee would be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The nominating committee would also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. The compensation committee will be primarily responsible for reviewing and approving our compensation and benefit policies, including compensation of executive officers.

Our board of directors has not made a determination as to whether any member of our board is an audit committee financial expert. Upon the establishment of an audit committee, the board will determine whether any of the directors qualify as an audit committee financial expert.

Family Relationships

Other than the relationship between Fung Shek and Li Liu as husband and wife, there is no family relationship among any of our officers or directors.

Code of Ethics

Our board of directors has adopted a code of business conduct and ethics that applies to all employees, officers and directors of us. The code of ethics addresses, among other things, ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, FCPA compliance and reporting of violations of the code. A copy of the code of business conduct and ethics was filed as Exhibit 14.1 to our Current Report on Form 8-K on January 28, 2011 and will be made available on our website, www.milkgoatchina.com as soon as possible. Any amendments or waivers to the code of ethics will be posted on our website within four business days of such amendment or waiver.

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Involvement in Certain Legal Proceedings

None of our directors or executive officers has, during the past ten years:

  • been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

  • had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;

  • been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;

  • been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

  • been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

  • been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act, any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

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EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000.

    Salary Bonus Total
Name and Principal Position Period ($) ($) ($)
Li Liu, CEO and President Year Ended March 31, 2011 76,102 - 76,102
  Year Ended March 31, 2010 65,827 - 65,827
         
Veronica Jing Chen, CFO(1) Year Ended March 31, 2011 121,764 - 121,764
  Year Ended March 31, 2010 9,752 - 9,752

(1) Ms. Chen became our Chief Financial Officer on February 24, 2010.

Narrative Disclosure to Executive Compensation

Our indirect subsidiary Milkgoat China entered into the following employment agreements with our executive officers:

Milkgoat China entered into an employment agreement with our CEO and President, Ms. Li Liu. Ms. Liu’s employment agreement has a three-year term beginning on June 1, 2009 and ending on June 30, 2012. Ms. Liu’s employment agreement provides for an annual salary of RMB 450,000 (approximately $65,828). Ms. Liu is subject to customary non-competition and confidentiality covenants under the agreement. The employment agreement does not entitle Ms. Liu to severance payments or payments following a change in control. On June 1, 2010, Milkgoat China entered into a supplemental employment agreement with Ms. Liu, pursuant to which, effective on June 1, 2010, Ms. Liu's annual compensation was increased to RMB 510,000 (approximately $75,000).

Milkgoat China entered into an employment agreement with our Vice President Mr. Fung Shek. Mr. Shek’s employment agreement has a three-year term beginning on June 1, 2009 and ending on June 30, 2012. Mr. Shek’s employment agreement provides for an annual salary of RMB 350,000 (approximately $51,200). Mr. Shek is subject to customary non-competition and confidentiality covenants under the agreement. The employment agreement does not entitle Mr. Shek to severance payments or payments following a change in control.

Milkgoat China entered into an employment agreement with our CFO, Ms. Veronica Jing Chen. Ms. Chen’s employment agreement is for three years commencing on February 24, 2010 and terminating on February 23, 2013. Ms. Chen’s employment agreement provides for an annual salary of RMB 800,000 (approximately $121,764). Ms. Chen is subject to customary non-competition and confidentiality covenants under the agreement. The employment agreement does not entitle Ms. Chen to severance payments or payments following a change in control.

Outstanding Equity Awards at Fiscal Year End

On May 31, 2010, we entered into separate Yayi International Inc. 2010 Employee Stock Option and Stock Award Plan Award Agreements, or the Option Agreements, with each of Ms. Veronica Jing Chen and Mr. Fung Shek. Under the terms of the Option Agreements, we agreed to grant a stock option, at an exercise price at $2.25 per share, to each of Ms. Chen and Mr. Shek for the purchase of 250,000 shares of Common Stock and 106,000 shares of Common Stock, respectively. According to the Option Agreements, 25% of the option granted to each of Ms. Chen and Mr. Shek will vest on the first anniversary of the grant date, and the balance will vest in equal quarterly installments over the next three years on the last day of each quarter, subject to Ms. Chen's and Mr. Shek's continuing employment with us through these dates.

The following table sets forth information concerning the fiscal 2011 year-end value of unexercised options for Mr. Fung Shek and Ms. Veronica Jing Chen. No other executive officers received unexercised options or stock that has not vested or equity incentive plan awards that remained outstanding as of the end of the fiscal year 2011.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

      Option Awards    
Name Number of Number of  Equity  Option   Option
  securities securities incentive exercise   expiration
  underlying underlying plan price date
  unexercised unexercised awards: ($)  
  options (#) options (#) Number of    
  exercisable unexercisable securities    
      underlying    
      unexercised    
      unearned    
      options (#)    
Fung Shek 0 106,000 0 2.25 5/31/2020
Veronica Jing Chen 0 250,000 0 2.25 5/31/2020

Compensation of Directors

Except as disclosed below, no member of our board of directors received any compensation for his or her service as a director during the fiscal year ended March 31, 2011.

On June 11, 2010, we entered into an Option Agreement with Mr. Kenneth Lee. Under the terms of the Option Agreement, we granted a stock option, at an exercise price at $0.98 per share, to Mr. Lee for the purchase of 707,992 shares of Common Stock of the Company. According to the Option Agreement, the option will fully vest after six months from the grant date. Pursuant to the employment arrangement between Mr. Lee and SAIF, Mr. Lee is deemed to hold such option for the benefit of SAIF.

                      Non-Equity              
    Fees Earned or     Stock     Option     Incentive Plan     All Other        
    Paid in Cash     Awards     Awards     Compensation     Compensation     Total  
                                     
Name   ($)     ($)     ($)     ($)     ($)     ($)  
                                     
Kenneth Jue Lee   -     -     951,315     -     -     951,315  

51


TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS; CORPORATE GOVERNANCE

Transactions with Related Persons

The following includes a summary of transactions since the beginning of the 2010 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under Item 11 Executive Compensation).

  • We have borrowed money from time to time from Li Liu, our chief executive officer. Such borrowings do not bear interest, are unsecured and have no stated maturity date. As of March 31, 2011, we owed her $3,531,966 in connection with these borrowings.

  • On June 18, 2009, we entered into separate indemnification agreements with each of our directors, Mr. Kenneth Lee and Mr. Gang Sheng, or the Indemnification Agreements. Under the terms of the Indemnification Agreements, the Company agreed to indemnify each of Messrs. Lee and Sheng against expenses, judgments, fines, penalties or other amounts paid or incurred by them in connection with any proceeding unless Mr. Lee or Mr. Sheng committed (i) acts of active and deliberate dishonesty, (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated.

  • On April 30, 2010, we entered into a loan agreement with SAIF, or the Loan Agreement, pursuant to which the Company borrowed $3.0 million from SAIF. The loan has an interest rate of twelve percent (12%) per annum, calculated on the basis of the actual number of days elapsed during the relevant period and a 360- day year. In addition, the entire principal amount of the loan and any accrued interest on the loan shall become fully due and payable on the date that is the earlier to occur of (i) the date that is six (6) months after the release of the principal of the loan, unless extended in the sole discretion of SAIF; and (ii) the acceleration of the maturity of the loan upon the occurrence of an Event of Default (as defined in the Loan Agreement), without further action on the part of SAIF. On the same day, to secure repayment by the Company of the loan, the Company’s major shareholder, Global Rock executed in favor of SAIF a stock pledge agreement, pursuant to which Global Rock pledged 13,024,725 shares of Common Stock of the Company as security for the obligations of the Company under the Loan Agreement. The loan was paid off on September 30, 2010.

Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

Promoters and Certain Control Persons

We did not have any promoters at any time during the past five fiscal years.

Parents of the Company

Global Rock currently owns 56.8% of our issued and outstanding shares of Common Stock.

Director Independence

We currently do not have any independent directors, as the term “independent” is defined by the rules of the Nasdaq Stock Market.

52


SELLING STOCKHOLDERS

This prospectus relates to the resale by the selling stockholders named below from time to time of up to a total of 5,575,000 shares of our Common Stock that were issued or are issuable to selling stockholders pursuant to transactions exempt from registration under the Securities Act. All of the Common Stock offered by this prospectus is being offered by the selling stockholders for their own accounts.

Private Placement Transaction

On September 27, 2010, we completed a private placement transaction disclosed above and issued to the PIPE Investors 892 units at a purchase price of $10,000 per unit, resulting in gross proceeds of $8.92 million to us. Each unit consists of a Convertible Note in the principal amount of $10,000 and a three-year Series F Warrant to purchase 1,250 shares of our Common Stock at an exercise price of $2.50 per share. The Convertible Notes are convertible into an aggregate 4,460,000 shares of Common Stock at any time prior to the Maturity Date at $2.00 per share, which conversion price is subject to weighted average and other customary anti-dilution protections. The Series F Warrants entitle the PIPE Investors to purchase an aggregate of 1,115,000 shares of Common Stock at an initial exercise of $2.50 per share, which exercise price is subject to the customary weighted average and stock based anti-dilution protection. The Series F Warrants may be exercised in a cash or cashless way at any time upon the election of the holders until September 26, 2013.

Euro Pacific acted as the sole placement agent of the transaction. Euro Pacific received from us a cash commission of $713,600, which is equal to 8% of the gross proceeds of the financing. In addition, we issued Series F Warrants to the designees of Euro Pacific to purchase an aggregate of 312,200 shares of Common Stock at an exercise price of $2.50 per share. The foregoing issuance was made in reliance upon exemptions provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering and Regulation D promulgated thereunder. For additional information regarding the private placement and full copies of the related transaction documents, please see our Current Report on Form 8-K filed on October 1, 2010.

Selling Stockholders

The table below, which was prepared based on information filed publicly or supplied to us by the selling stockholders, sets forth information regarding the beneficial ownership of outstanding shares of our Common Stock owned by the selling stockholders and the shares that they may sell or otherwise dispose of from time to time under this prospectus. Each of the selling stockholders, or their respective transferees, donees or their successors, may resell, from time to time, all, some or none of the shares of our Common Stock covered by this prospectus, as provided in this prospectus under the section entitled “Plan of Distribution” and in any applicable prospectus supplement. However, we do not know when or in what amount the selling stockholders may offer their shares for sale under this prospectus, if any.

The number of shares disclosed in the table below as “beneficially owned” are those beneficially owned as determined under the rules of the SEC. Such information is not necessarily indicative of ownership for any other purpose. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. In computing the number of shares beneficially owned by a selling stockholder and the percentage of ownership of that selling stockholder, shares of Common Stock underlying shares of convertible preferred stock, options or warrants held by that selling stockholder that are convertible or exercisable, as the case may be, within 60 days of July 8, 2011 are included. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other selling stockholder. Each selling stockholder’s percentage of ownership in the following table is based upon 26,454,558 shares of Common Stock outstanding as of July 8, 2011.

Unless otherwise indicated and subject to community property laws where applicable, the selling stockholders named in the following table have, to our knowledge, sole voting and investment power with respect to the shares beneficially owned by them. In addition, none of the selling stockholders has any family relationships with our officers, directors or controlling stockholders. Furthermore, no selling stockholder is a registered broker-dealer or an affiliate of a registered broker-dealer, except that Peter Schiff is the president of Euro Pacific Capital, Inc., a registered broker-dealer. Mr. Shiff has certified to the Company that he acquired the shares in the ordinary course of business and at the time of the acquisition did not have any arrangements or understandings with any person to distribute the securities.

53


Information concerning any of the selling stockholders may change from time to time, and any changed information will be presented in a prospectus supplement as necessary. Please carefully read the footnotes located below the table in conjunction with the information presented in the table.






Name and Address

Shares of
Common Stock
Beneficially
Owned Before
the Offering (1)

Shares of
Common
Stock
Included in
Prospectus


Beneficial
Ownership
After the
Offering**
Percentage of
Common
Stock
Beneficially
Owned After
Offering (2)
AMY J STEFANIK TTEE AMY J STEFANIK REVOCABLE TRUST U/A 2/6/01 62,500(3) 62,500(3) 0 *
ANDREW P COOK SUSAN R COOK 31,250(4) 31,250(4) 0 *
ARNOLD WILLIAM GOLDSCHLAGER NORA GOLDSCHLAGER TTEE THE GOLDSCHLAGER FAMILY TRUST U/A 6/24/04 31,250(5) 31,250(5) 0 *
ART KLEPPEN KIMBERLY KLEPPEN 62,500(6) 62,500(6) 0 *
BARBARA HEARST 62,500(7) 62,500(7) 0 *
BARBARA J PETERSON TTEE REV TR OF BARBARA J PETERSON U/A 2/4/00 43,750(8) 43,750(8) 0 *
BARBARA S MEISTER TTEE THE MEISTER NON-EXEMPT MARITAL TR U/A 11/17/83 62,500(9) 62,500(9) 0 *
BARBARA SEIDEL TTEE BARBARA GALLUN SEIDEL RESIDUAL TRUST U/A 2/9/60 31,250(10) 31,250(10) 0 *
BARBARA SUE WILSON DAVID D WILSON TTEE THE BARBARA SUE WILSON U/A 8/23/94 31,250(11) 31,250(11) 0 *
BERT HUNTSINGER 31,250(12) 31,250(12) 0 *
BRENT PAULGER SHARISSA PAULGER 31,250(13) 31,250(13) 0 *
BRIAN S BEHAN 31,250(14) 31,250(14) 0 *
BRUCE WALKER RAVENEL III 187,500(15) 187,500(15) 0 *
BUCKTHORN LLC(16) 31,250(16) 31,250(16) 0 *
CARLOS A MERINO TTEE CARLOS ALFONSO MERINO REV LIVING TRUST, U/A 12/04/96 31,250(17) 31,250(17) 0 *
CAROLYN R LONG 37,500(18) 37,500(18) 0 *
CHARLOTTE J BELASCO 31,250(19) 31,250(19) 0 *
CHRISTIANNA SEIDEL TTEE PROPERTY TRUST U/A 11/5/99 FBO CHRISTIANNA SEIDEL 31,250(20) 31,250(20) 0 *
CINDY J LEWIS TTEE CINDY J LEWIS DECL OF TRUST U/A 3/11/93 31,250(21) 31,250(21) 0 *
COREY SHANNON MCNAMEE 31,250(22) 31,250(22) 0 *
CYNTHIA KESSLER & JAMES KESSLER 31,250(23) 31,250(23) 0 *
DAVID ALAN SCULLY 62,500(24) 62,500(24) 0 *
DAVID ARITA TOD 31,250(25) 31,250(25) 0 *
DAVID BRISBIN TTEE INNES/BRISBIN LIVING TRUST DATED 6/8/04 62,500(26) 62,500(26) 0 *
DAVID W LARSON JENNIFER L LARSON 62,500(27) 62,500(27) 0 *
DEBORAH FOREMAN TTEE DEBORAH D FOREMAN TRUST U/A 9/29/94 31,250(28) 31,250(28) 0 *
DOUGLAS W JOHNSON TTEE DOUGLAS WILLIAM JOHNSON REV TRST U/A 6/25/10 31,250(29) 31,250(29) 0 *
DR UZZI REISS MRS YAEL REISS TTEE THE REISS FAMILY TRUST U/A 12/29/88 31,250(30) 31,250(30) 0 *
EVA MARIE SALAS TTEE EVA M SALAS TRUST 31,250(31) 31,250(31) 0 *
GAYLE M & DEBORAH SANDERS TTEE THE GAYLE M SANDERS FAM TR REV TR, U/A 8/15/02 62,500(32) 62,500(32) 0 *

54



GEORGE FELDMAN 156,250(33) 156,250(33) 0 *
GILBERT DOMINGUEZ TTEE DOMINGUEZ TRUST U/A 3/3/05 218,750(34) 218,750(34) 0 *
HCR INVESTMENTS INC. (35) 62,500(35) 62,500(35) 0 *
HEIDI W KIENE KEVIN KIENE 62,500(36) 62,500(36) 0 *
HEMANT KATHURIA P/ADM H KATHURIA INVESTMENTS II P PLAN 31,250(37) 31,250(37) 0 *
JACK ABRAMS MARGO ABRAMS TTEE JACK ABRAMS PENSION PLAN 1 31,250(38) 31,250(38) 0 *
JANET D RUSSELL TTEE JANET DICKINSON RUSSELL LIVING TR U/A 1/20/10 31,250(39) 31,250(39) 0 *
JEAN A DAVIDS-OSTERHAUS TTEE JEAN A DAVIDS-OSTERHAUS REV U/A 10/03/07 31,250(40) 31,250(40) 0 *
JEFF ARCHIBALD 62,500(41) 62,500(41) 0 *
JERRY F MCWILLIAMS 31,250(42) 31,250(42) 0 *
JIM GRIFFIN CUST DANIEL J GRIFFIN UTMA OH 37,500(43) 37,500(43) 0 *
JIM GRIFFIN CUST MICHELLE E GRIFFIN UTMA OH 37,500(44) 37,500(44) 0 *
JIM ROBERT PUGH 31,250(45) 31,250(45) 0 *
JIMMIE C WEST CAROLYN E WEST 31,250(46) 31,250(46) 0 *
JOHN A RUPP TTEE JOHN A RUPP TRUST U/A 3/9/07 31,250(47) 31,250(47) 0 *
JOHN D SMEAD 31,250(48) 31,250(48) 0 *
JOSEPH MCCARTHY MIKI MCCARTHY TOD 31,250(49) 31,250(49) 0 *
JULIA L GRIFFIN 37,500(50) 37,500(50) 0 *
KENNETH H NASS & MAUREEN K NASS TTEE KENNETH H NASS & MAUREEN K NASS CHARITRUST U/A 6/7/05 62,500(51) 62,500(51) 0 *
KEVIN MOORE 31,250(52) 31,250(52) 0 *
KK SWOGGER ASSET MANAGEMENT, LP(53) 50,000(53) 50,000(53) 0 *
LARRY GUAGLIARDO TOD 43,750(54) 43,750(54) 0 *
LAURA SMITH FORREST SMITH TTEE CONNELLY JOHNSON SMITH FAM TR U/A 4/2/09 31,250(55) 31,250(55) 0 *
MARC A PIERRE, P BARRAGAN P/ADM CENTER FOR PHYS HLTH 401K PSP MARC PIERRE 31,250(56) 31,250(56) 0 *
MARC BIENSTOCK JENNY I BIENSTOCK 31,250(57) 31,250(57) 0 *
MARC W LEVIN SUSAN G LEVIN 31,250(58) 31,250(58) 0 *
MARK A OSTERHAUS TTEE THE MARK A OSTERHAUS REV TR U/A 10/31/07 31,250(59) 31,250(59) 0 *
NFS/FMTC ROLLOVER IRA FBO MARK DUGGER 31,250(60) 31,250(60) 0 *
MARK EDWARD SMEAD TTEE MARK E SMEAD REVOC LIVING TRUST U/A 11/17/95 62,500(61) 62,500(61) 0 *
MARK STERIN 43,750(62) 43,750(62) 0 *
MAUREEN K NASS KENNETH H NASS TTEE MAUREEN K NASS LIVING TRUST U/A 5/16/05 31,250(63) 31,250(63) 0 *
MICHAEL J HANRATTY LYNSAY F HANRATTY 62,500(64) 62,500(64) 0 *
MICHAEL SCULLY 62,500(65) 62,500(65) 0 *
MITCHELL MARTIN DEBORAH MARTIN 31,250(66) 31,250(66) 0 *
NANCY L BENSON TTEE THE NANCY L BENSON LIVING TRUST U/A 11/11/02 31,250(67) 31,250(67) 0 *
N E APPERSON, P MCEACHERN TTEE NORMAN E APPERSON AND PAMELA MCEACHERN TR, U/A 7/22/96 62,500(68) 62,500(68) 0 *

55



NFS/FMTC IRA FBO DIANE D SPOLUM 125,000(69) 125,000(69) 0 *
NFS/FMTC IRA FBO HOWARD W WAHL 62,500(70) 62,500(70) 0 *
NFS/FMTC IRA FBO LEONARD SIEGEL 31,250(71) 31,250(71) 0 *
NFS/FMTC IRA FBO LYNN HAVLIK 31,250(72) 31,250(72) 0 *
NFS/FMTC IRA FBO ROYCE V JACKSON 62,500(73) 62,500(73) 0 *
NFS/FMTC IRA FBO ROBERT STEPHEN ADAMS 62,500(74) 62,500(74) 0 *
NFS/FMTC ROLLOVER IRA FBO ANDRES KEICHIAN 31,250(75) 31,250(75) 0 *
NFS/FMTC ROLLOVER IRA FBO BERTRAND BROOKS CARDER 31,250(76) 31,250(76) 0 *
NFS/FMTC ROLLOVER IRA FBO DONALD T GLASER JR 31,250(77) 31,250(77) 0 *
NFS/FMTC ROLLOVER IRA FBO EDWIN BRUNO KAEHLER 31,250(78) 31,250(78) 0 *
NFS/FMTC ROLLOVER IRA FBO JAMES A TAMBORELLO 62,500(79) 62,500(79) 0 *
NFS/FMTC ROLLOVER IRA FBO JERRY R SPEAKS 31,250(80) 31,250(80) 0 *
NFS/FMTC ROLLOVER IRA FBO LYNN ROLLINS STULL 31,250(81) 31,250(81) 0 *
NFS/FMTC ROLLOVER IRA FBO RALPH DALE EDSON 62,500(82) 62,500(82) 0 *
NFS/FMTC ROLLOVER IRA FBO RICHARD DAVIS MOORE 25,000(83) 25,000(83) 0 *
NFS/FMTC ROLLOVER IRA FBO ROBERT M WEISSBERG 31,250(84) 31,250(84) 0 *
NFS/FMTC ROLLOVER IRA FBO RONALD ALLEN MCCANN 31,250(85) 31,250(85) 0 *
NFS/FMTC ROLLOVER IRA FBO TODD HOWARD OVERGARD 31,250(86) 31,250(86) 0 *
NFS/FMTC ROTH IRA FBO HELEN ERSKINE 31,250(87) 31,250(87) 0 *
NFS/FMTC ROTH IRA FBO VIRGINIA C ADAMS 31,250(88) 31,250(88) 0 *
NFS/FMTC SEP IRA FBO CARTER LAREN 62,500(89) 62,500(89) 0 *
NFS/FMTC SEP IRA FBO GERALD E MANWILL 31,250(90) 31,250(90) 0 *
NFS/FMTC SEP IRA FBO GERALD MONA 31,250(91) 31,250(91) 0 *
NORMAN S KRAMER & LINDA L KRAMER 31,250(92) 31,250(92) 0 *
OLEKSANDR TUMKO OKSANA TUMKO 31,250(93) 31,250(93) 0 *
PETER D SCHIFF(94) 229,067 125,000(94) 104,067 *
POINT AUX CHENES, LLC(95) 31,250(95) 31,250(95) 0 *
POM INVESTMENTS LLC(96) 62,500(96) 62,500(96) 0 *
PRASAD REALTY CORP(97) 31,250(97) 31,250(97) 0 *
QUINCY MURPHY INC(98) 31,250(98) 31,250(98) 0 *
R STEVEN SMITH 62,500(99) 62,500(99) 0 *
RICHARD GRIFF JACKIE GRIFF 93,750(100) 93,750(100) 0 *
RICHARD P ANTHONY III & KIMBERLY J ANTHONY 31,250(101) 31,250(101) 0 *
RICHARD POTAPCHUK 187,500(102) 187,500(102) 0 *
ROBERT L BISHOP TOD FRANCINE BISHOP 31,250(103) 31,250(103) 0 *
ROBERT T FOSS MARGARET FOSS TTEE ROBERT T & MARGARET FOSS REV TR U/A 3/31/04 37,500(104) 37,500(104) 0 *
SCOTT & MISTY DAVIES TTEE THE SCOTT & MISTY DAVIES LIVING TR, U/A 6/28/07 50,000(105) 50,000(105) 0 *

56



SCOTT R GRIFFIN 37,500(106) 37,500(106) 0 *
SHELBY JORDAN, BECKY JORDAN 31,250(107) 31,250(107) 0 *
SKEE GOEDHART TTEE THE PARACELSUS REVOCABLE TRUST U/A 7/25/97 31,250(108) 31,250(108) 0 *
STEPHEN RASKIN P/ADM DREW & RASKIN P/S PLAN FBO STEPHEN RASKIN 62,500(109) 62,500(109) 0 *
STEVE & COLLEEN HOKE TTEE HOKE LIVING TRUST U/A 4/19/02 31,250(110) 31,250(110) 0 *
STEVEN JAY EPSTEIN 31,250(111) 31,250(111) 0 *
SUSAN C CULLEN 31,250(112) 31,250(112) 0 *
THOMAS L INGRAM CARISSA INGRAM TTEE INGRAM LIVING TRUST U/A 11/2/05 31,250(113) 31,250(113) 0 *
TIMOTHY CRANE TTEE TIMOTHY R CRANE TRUST U/A 12/6/04 62,500(114) 62,500(114) 0 *
TRISHA L FRERES THEODORE KYLE FRERES TTEE TRISHA L FRERES LIVING TRUST U/A 12/20/04 31,250(115) 31,250(115) 0 *
WALTER FRIESEN 50,000(116) 50,000(116) 0 *
WILLIAM A KARGES JR TTEE KARGES REVOC INTERVIVOS TRUST U/A 4/29/85 31,250(117) 31,250(117) 0 *
WILLIAM BRADLEY P/ADM BRADLEY ANESTHESIOLOGY PSP 31,250(118) 31,250(118) 0 *
WILLIAM J CYR 43,750(119) 43,750(119) 0 *
WILLIAM TEN BRINK TTEE TEN BRINK TRUST U/A 10/2/86 56,250(120) 56,250(120) 0 *
WILLIAM WILEY MARIANNE WILEY TTEE WILEY FAMILY LIVING TRUST U/A 7/19/95 37,500(121) 37,500(121) 0 *

* Less than 1%.
** Assumes that all securities offered are sold.

(1)

Represents total ownership with respect to all shares of our Common Stock underlying the Series C Warrants and Series A Preferred Stock, as a single class and on an “as converted” basis.

   
(2)

As of July 8, 2011, a total of 26,454,558 shares of our Common Stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above, any options or warrants exercisable within 60 days have been included in the denominator.

   
(3)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(4)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(5)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(6)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 125,000 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(7)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 125,000 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(8)

Includes 35,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 8,750 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(9)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(10)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

57



(11)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(12)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(13)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(14)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(15)

Includes 150,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 37,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(16)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock. Lloyd Hendrix is the Director of Buckthorn LLC and has voting and investment control over the securities held by it.

   
(17)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(18)

Includes 30,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 7,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(19)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(20)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(21)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(22)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(23)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(24)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(25)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(26)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(27)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(28)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(29)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(30)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(31)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(32)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

58



(33)

Includes 125,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 31,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(34)

Includes 175,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 43,750 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(35)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock. Charles Indyg is the President of HCR Investments Inc. and has voting and investment control over the securities held by it.

   
(36)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(37)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(38)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(39)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(40)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(41)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(42)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(43)

Includes 30,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 7,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(44)

Includes 30,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 7,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(45)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(46)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(47)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(48)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(49)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(50)

Includes 30,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 7,5000 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(51)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(52)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(53)

Includes 40,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 10,000 shares underlying the Series F Warrants to purchase shares of our Common Stock. Kurt Swogger is the Partner of KK Swogger Asset Management, LP and and has voting and dispositive control over the securities held by it.

   
(54)

Includes 35,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 8,750 shares underlying the Series F Warrants to purchase shares of our Common Stock.

59



(55)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(56)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(57)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(58)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(59)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(60)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(61)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(62)

Includes 35,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 8,750 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(63)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(64)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(65)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(66)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(67)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(68)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(69)

Includes 100,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 25,000 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(70)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(71)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(72)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(73)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(74)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(75)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(76)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

60



(77)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(78)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(79)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(80)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(81)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(82)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(83)

Includes 20,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 5,000 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(84)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(85)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(86)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(87)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(88)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(89)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(90)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(91)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(92)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(93)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(94)

Includes 100,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 25,000 shares underlying the Series F Warrants to purchase shares of our Common Stock. Peter Schiff is the president of Euro Pacific Capital, Inc., a registered broker-dealer.

   
(95)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock. John S. Mavar is the Manager of Point Aux Chenes, LLC and has voting and dispositive control over the securities held by it.

   
(96)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock. David and Ann Struve have voting and dispositive control over the securities held by Pom Investments LLC.

   
(97)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock. Pankaj Prasad is the President of Prasad Realty Corp. and has voting and dispositive control over the securities held by it.

61



(98)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock. Quincy Murphy is the President of Quincy Murphy Inc. and has voting and dispositive control over the securities held by it.

   
(99)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(100)

Includes 75,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 18,750 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(101)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(102)

Includes 150,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 37,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(103)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(104)

Includes 30,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 7,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(105)

Includes 40,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 10,000 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(106)

Includes 30,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 7,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(107)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(108)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(109)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(110)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(111)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(112)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(113)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(114)

Includes 50,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 12,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(115)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(116)

Includes 40,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 10,000 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(117)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(118)

Includes 25,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 6,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

62



(119)

Includes 35,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 8,750 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(120)

Includes 45,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 11,250 shares underlying the Series F Warrants to purchase shares of our Common Stock.

   
(121)

Includes 30,000 shares of our Common Stock issuable upon the conversion of the Convertible Notes and 7,500 shares underlying the Series F Warrants to purchase shares of our Common Stock.

We will not receive any proceeds from the sale of any shares by the selling stockholders but we will receive funds from the exercise of the warrants held by the selling stockholders if and when those warrants are exercised for cash. We have agreed to bear expenses incurred by the selling stockholders that relate to the registration of the shares being offered and sold by the selling stockholders, including the SEC registration fee and legal, accounting, printing and other expenses of this offering.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding beneficial ownership of our Common Stock as of July 8, 2011 (i) by each person who is known by us to beneficially own more than 5% of our voting securities; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of Yayi International Inc., No. 9 Xingguang Road, Northern Industrial Park of Zhongbei Town, Xiqing District, Tianjin 300384, China.

    Shares Beneficially Owned(1)

Name & Address of Beneficial
Owner

Office, If Any
Common Stock(2) Series A Preferred
Stock(3)
% Total
Voting
Power(4)

Shares
% of
Class

Shares
% of
Class
 Directors and Officers    
Li Liu Chairperson, CEO & President 15,024,725(5)(6) 56.8% 0 * 36.0%
Veronica Jing Chen Chief Financial Officer 0 * 0 * *
Fung Shek Director 15,024,725(5)(6) 56.8% 0 * 36.0%
Cili Yan Director 1,000,160 3.8% 0 * 2.4%
Kenneth Jue Lee Director 707,992(7) 2.6% 0 * 1.7%
Gang Sheng Director 0 * 0 * *
All Officers and Directors as a group (6 persons named above)   16,732,877 63.2% 0 * 40.1%
 5% Security Holders    
Global Rock Stone Industrial Ltd.   15,024,725(5)(6) 56.8% 0 * 36.0%
SAIF Partners III L.P.   707,992(7)(8) 2.6% 1,530,612(9) 100% 38.3%
Andrew Y. Yan   707,992(7)(8) 2.6% 1,530,612(9) 100% 38.3%

*Less than 1%

(1)

Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of the Company’s stock. For each Beneficial Owner above, any options exercisable within 60 days have been included in the denominator.

   
(2)

Based on 26,454,558 shares of Common Stock issued and outstanding as of July 8, 2011.

63



(3)

Based on 1,530,612 shares of Series A Preferred Stock issued and outstanding as of July 8, 2011. Shares of Series A Preferred Stock are convertible, at the option of the holder thereof, at any time, into Common Stock on a 1-to-10 basis. Holders of Series A Preferred Stock vote with the holders of Common Stock on all matters on an as-converted to Common Stock basis. See “Description of Securities – Preference Shares” below for more information regarding our Series A Preferred Stock.

 

(4)

Percentage of Total Capital Stock represents total ownership with respect to all shares of our Common Stock and Series A Preferred Stock, as a single class and on an as-converted to Common Stock basis.

 

(5)

Including 15,024,725 shares of Common Stock indirectly held by her spouse, Mr. Fung Shek.

 

(6)

Includes 15,024,725 shares of Common Stock held by Global Rock. Mr. Shek is the sole shareholder and sole director of Global Rock and has voting and dispositive power over the shares held by Global Rock. Pursuant to a stock pledge agreement, dated April 30, 2010, between Global Rock and SAIF Partners III L.P., or SAIF, Global Rock pledged 13,024,725 shares of Common Stock of the Company as security for certain obligations of the Company. In addition, pursuant to the Make Good Escrow Agreement, dated September 27, 2010, Global Rock placed a total of 669,000 shares held by it into escrow that may be released to the investors in the event we do not meet the performance thresholds for the fiscal years 2011 and 2012 required in the Make Good Escrow Agreement. The remaining 14,355,725 shares of Common Stock owned by Global Rock are subject to a lock up agreement with Euro Pacific, dated September 27, 2010 for a 90-day lock up period.

 

(7)

Includes an option to acquire 707,992 shares of Common Stock granted to Mr. Lee under our 2010 Employee Stock Option and Stock Award Plan, dated June 11, 2010. The option will fully vest after six months from the grant date. Because Mr. Lee is an employee of SAIF and pursuant to the employment arrangement between Mr. Lee and SAIF, Mr. Lee is deemed to hold the reported option for the benefit of SAIF, and must exercise the option solely upon the direction of SAIF, which is entitled to the shares issued upon exercise. SAIF may be deemed the indirect beneficial owner of the option and Mr. Lee may be deemed the indirect beneficial owner of the option through his employment arrangement with SAIF. Mr. Lee disclaims beneficial ownership of the option except to the extent of his pecuniary interest therein.

 

(8)

Andrew Y. Yan is the sole shareholder and sole director of SAIF III GP Capital Ltd., a limited liability entity formed under the laws of the Cayman Islands, the sole general partner of SAIF III GP, L.P., a limited partnership formed under the laws of the Cayman Islands, which in turn is the sole general partner of SAIF Partners III L.P., a limited partnership formed under the laws of the Cayman Islands. Mr. Yan is deemed to have sole voting and dispositive powers with respect to the securities held by SAIF Partners III L.P.

DESCRIPTION OF SECURITIES

Our amended and restated certificate of incorporation authorizes us to issue 100,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share. As of July 8, 2011, there were 26,454,558 shares of Common Stock, and 1,530,612 shares of Series A Preferred Stock outstanding.

Common Stock

Subject to the rights of the holders of our outstanding preferred stock, holders of Common Stock:

  • are entitled to any dividends validly declared;

  • will share ratably in our net assets in the event of a liquidation; and

  • are entitled to one vote per share.

Holders of Common Stock have no preemption, subscription, redemption, or call rights related to their shares.

Preferred Stock

We may issue up to 10,000,000 shares of preferred stock, par value $0.001 per share, in one or more classes or series within a class as may be determined by our board of directors, who may establish, from time to time, the number of shares to be included in each class or series, may fix the designation, powers, preferences and rights of the shares of each such class or series and any qualifications, limitations or restrictions thereof. Any preferred stock so issued by our board of directors may rank senior to the Common Stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both.

64


On June 16, 2009, we filed the Certificate with the Secretary of State of the State of Delaware, which was amended and restated on July 20, 2010. Pursuant to the Amended Certificate, there are 1,530,612 shares of Series A Preferred Stock, par value $0.001 per share, authorized. The holders of the Series A Preferred Stock are entitled to receive non-cumulative dividends, when, as and if declared by the board of directors. If there is a Liquidation Event, as defined in the Amended Certificate, the holders of the Series A Preferred Stock will be entitled to receive, prior to any distribution to holders of the Common Stock, an amount per share equal to the sum of (i) $9.80 plus an annualized internal rate of return of 15% for the period from the issuance date of the Series A Preferred Stock to the date when the full payment is made and (ii) an amount equal to all declared but unpaid dividends for each outstanding share of Series A Preferred Stock, subject to stock split, stock dividend, recapitalization or other similar events as provided for in the Amended Certificate.

At any time and from time to time after June 30, 2012, the holders of not less than a majority of the then outstanding Series A Preferred Stock have the right to request us to redeem all of the then outstanding shares of Series A Preferred Stock, if any of the following events has not occurred: (i) our shares of Common Stock or American Depository Shares representing shares of the Common Stock are listed on the New York Stock Exchange or the Nasdaq Global Market, and (ii) the closing market price of such listing securities represents a price of no less than $4.25 per share of Common Stock, subject to adjustment, in any consecutive 30-trading-day period.

The shares of Series A Preferred Stock may be converted into our Common Stock at the option of the holders of the Series A Preferred Stock in whole or in part at any time at an initial conversion price of $0.98, subject to future adjustments set forth in the Amended Certificate. In addition, if our combined after tax net income reported in our Annual Report on Form 10-K for both of the fiscal years ending March 31, 2011 and 2012 is less than $20 million, we will issue up to 612,245 shares of Series A Preferred Stock to holders of shares of Series A Preferred Stock pursuant to a formula set forth in the Amended Certificate.

The holders of Series A Preferred Stock have the right to one vote for each share of our Common Stock into which a share of Series A Preferred Stock could then be converted. The holders of Series A Preferred Stock have full voting rights and powers equal to the voting rights and powers of the holders of our Common Stock, and are entitled to notice of any stockholders’ meeting in accordance with our Bylaws and to vote, together with the holders of Common Stock as a single class, with respect to any matter upon which holders of Common Stock have the right to vote. In addition, as long as there are at least 15,306 shares of Series A Preferred Stock outstanding, we may not, without the approval of the holders of at least two-thirds of the then outstanding shares of Series A Preferred Stock voting together as a single class or the approval from at least one director elected by the holders of shares of Series A Preferred Stock, take certain material corporate actions as provided for in the Amended Certificate.

In connection with the private placement transaction closed on June 18, 2009, we issued 1,530,612 shares of Series A Preferred Stock to the sole investor, SAIF.

Warrants

On June 6, 2008, in connection with a private placement transaction, we issued and sold to certain investors 52 units for an aggregate purchase price of $1.3 million. Each unit consisted of an 8% convertible promissory note in principal amount of $25,000 and our series A warrants, or Series A Warrants, to acquire 11,575 shares of our Common Stock. The Series A Warrants expired on June 6, 2011.

In addition, WestPark served as the placement agent in connection with this private placement. As partial compensation for its services, we issued to WestPark and its designees Series D Warrants to acquire an aggregate of 144,448 shares of Common Stock. The Series D Warrants have the same terms as the Series A Warrants and expired on June 6, 2011.

On June 6, 2008, we issued and sold to Grand Orient and its designees an aggregate of 2,000,000 shares of our Common Stock and our Series B Warrants to acquire 2,148,148 shares of Common Stock for its services provided in connection with our merger with Milkgoat Industrial. These warrants were exercisable on a cashless basis and expired on June 6, 2011.

65


On June 6, 2008, we issued and sold to Tryant a note in principal amount of $250,000 maturing in August 2008 and our Series C Warrants to acquire an aggregate of 185,185 shares of our Common Stock at an exercise price of $1.35 per share. The Series C Warrants were exercisable on a cashless basis for three years and expired on June 6, 2011.

On April 3, 2008, we entered into a loan agreement with Allied Merit International Investment, Inc., or Allied Merit for $1,000,000. The loan was originally due on July 7, 2008. Allied Merit extended the maturity date of the loan to December 31, 2008. On July 15, 2008, in exchange for extending the loan’s maturity date, we granted to Allied Merit Series E Warrants to purchase 250,000 shares of our Common Stock at an exercise price of $1.08 per share. The Series E Warrants are exercisable until July 15, 2011 and the exercise price is subject to adjustment for stock splits, reverse splits, stock dividends and other similar events. As of July 8, 2011, there were Series E Warrants to purchase 250,000 shares of our Common Stock outstanding.

On September 27, 2010, we completed a private placement transaction disclosed above and issued and sold to the PIPE Investors 892 units at a purchase price of $10,000 per unit, resulting in gross proceeds of $8.92 million to us. Each unit consists of a three-year, Convertible Note in the principal amount of $10,000 and a three-year Series F Warrant to purchase 1,250 shares of our Common Stock at an exercise price of $2.50 per share. The Series F Warrants entitle the PIPE Investors to purchase an aggregate of 1,115,000 shares of Common Stock and the exercise price is subject to the customary weighted average and stock based anti-dilution protection. The Series F Warrants may be exercised in a cash or cashless way at any time upon the election of the holders until September 26, 2013. In addition, we issued Series F Warrants to the designees of Euro Pacific to purchase an aggregate of 312,200 shares of Common Stock at an exercise price of $2.50 per share, as partial compensation for services provided by them in connection with the private placement. As of July 8, 2011, there were Series F Warrants to purchase 1,427,200 shares of our Common Stock outstanding.

Convertible Notes

On September 27, 2010, we issued and sold to the PIPE Investors Convertible Notes with an aggregate principal amount of $8.92 million. The Convertible Notes are payable at an interest rate of 9% per annum, payable semiannually in arrears on the last day of the first and third calendar quarters commencing March 31, 2011 and mature on the Maturity Date. Except for our secured Indebtedness (as defined in the Notes) in existence on September 27, 2010, our obligations under the Convertible Notes will rank senior with respect to all our existing indebtedness as of September 27, 2010 and to any and all Indebtedness incurred thereafter. The Convertible Notes are also convertible into an aggregate of 4,460,000 shares of Common Stock at any time prior to the Maturity Date at $2.00 per share, which conversion price is subject to weighted average and other customary anti-dilution protections. At any time after September 26, 2011, we may redeem all but not less than all of the outstanding principal amount of any Convertible Note by payment of 108% of the outstanding principal amount of the Convertible Note, together with accrued but unpaid interest.

The Convertible Notes contain customary affirmative and negative covenants that, among other things, limit our ability to:

  • incur certain kinds of indebtedness;
  • loan certain amounts of money or property to or invest in any person or entity;
  • pay dividends or make any other distribution on shares of our capital stock;
  • assume lien on any of our property or assets;
  • assume guarantees;
  • engage in sale and leaseback transactions;
  • except for an aggregate amount of up to $19 million in capital expenditures may be made during fiscal years 2011 and 2012 for the purchase of machinery and equipment and construction of new facilities, make capital expenditure in excess of $5,000,000 in any fiscal year;
  • materially alter the nature of our business;
  • sell or otherwise dispose of any subsidiary or allow a subsidiary to issue additional shares of our capital stock;
  • effect a consolidation, merger or disposition of all or substantially all of our assets; and
  • conduct transactions with our affiliates.

The Convertible Notes also contain customary events of default, upon which the holders of the Convertible Notes may declare all outstanding Convertible Notes to be due and payable immediately. As of July 8, 2011, there were Convertible Notes with an aggregate principal amount of $8.92 million outstanding.

66


Anti-Takeover Provisions of Delaware Law and Charter Provisions

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a “business combination,” except under certain circumstances, with an “interested stockholder” for a period of three years following the date such person became an “interested stockholder” unless:

  • before such person became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction that resulted in the interested stockholder becoming an interested stockholder;

  • upon the consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares held by directors who also are officers of the corporation and shares held by employee stock plans; or

  • at or following the time such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of 662/3% of the outstanding voting stock of the corporation which is not owned by the interested stockholder.

The term “interested stockholder” generally is defined as a person who, together with affiliates and associates, owns, or, within the three years prior to the determination of interested stockholder status, owned, 15% or more of a corporation’s outstanding voting stock. The term “business combination” includes mergers, asset or stock sales and other similar transactions resulting in a financial benefit to an interested stockholder. Section 203 makes it more difficult for an “interested stockholder” to effect various business combinations with a corporation for a three-year period. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of Common Stock held by stockholders.

Our Certificate of Incorporation contains certain provisions that may have anti-takeover effects, making it more difficult for or preventing a third party from acquiring control of the Company or changing our board of directors and management. Our Certificate of Incorporation authorizes our board of directors to issue up to 10,000,000 shares of preferred stock without further stockholder approval. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our Common Stock, and therefore could reduce the value of such Common Stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our Common Stock. In connection with our private placement transaction in June 2009, we filed a Certificate of Designation of Series A Preferred Stock with the Secretary of State of the State of Delaware on June 16, 2009, pursuant to which we issued 1,530,612 shares of Series A Preferred Stock to SAIF.

Transfer Agent and Registrar

Our independent stock transfer agent is American Registrar & Transfer Co., located at 342 East 900 South, Salt Lake City, UT 84111. Their phone number is (801) 363-9065 and facsimile number is (801) 363-9066.

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our Common Stock is quoted under the symbol “YYIN” on the OTCBB but had not been traded in the OTCBB except on a limited and sporadic basis. The CUSIP number is 985290105.

The following table sets forth, for the periods indicated, the high and low closing prices of our Common Stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

67



    Closing Bid Prices (1)
  High Low
Year Ended March 31, 2012    
1st Quarter $0.79 $0.34
2nd Quarter (through July 8, 2011) $0.70 $0.52
     
Year Ended March 31, 2011    
1st Quarter $2.95 $1.55
2nd Quarter $1.85 $1.05
3rd Quarter $1.63 $1.055
4th Quarter $1.30 $0.45
     
Year Ended March 31, 2010    
1st Quarter $0.80 $0.51
2nd Quarter $1.25 $0.25
3rd Quarter $1.90 $1.17
4th Quarter $3.95 $1.55

________________________

(1)

The above table sets forth the range of high and low closing bid prices per share of our Common Stock as reported by www.quotemedia.com for the periods indicated.

Holders

On July 8, 2011, there were approximately 381 stockholders of record of our Common Stock. The number of record holders does not include persons who held our Common Stock in nominee or “street name” accounts through brokers.

Dividends

We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table includes the information as of the end of fiscal year 2011 for each category of our equity compensation plan:





Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
Plan category (a) (b) (c)
Equity compensation plans approved by security holders(1) 1,521,092(2) $1.66 838,882
Equity compensation plans not approved by security holders  _ _ _
Total      
   
(1)

On May 31, 2010, our Board of Directors adopted the Plan. Up to 2,359,974 shares of common stock of the Company, (subject to adjustment as described in the Plan) may be issued under the Plan. The Plan permits the grant of Nonqualified Stock Options, Restricted Stock, and Incentive Stock to employees, officers, directors, and consultants of the Company and its subsidiaries. The Plan was approved by our shareholders on May 25, 2011.

   
(2)

Including options granted to our officers, director and certain employees under the Plan.

68



SHARES ELIGIBLE FOR FUTURE SALE

As of July 8, 2011, 26,454,558 shares of our Common Stock were issued and outstanding.

Shares Covered by this Prospectus

All of the 5,575,000 shares being registered in this offering may be sold without restriction under the Securities Act, so long as the registration statement of which this prospectus is a part is, and remains, effective.

Rule 144

The SEC has recently adopted amendments to Rule 144 which became effective on February 15, 2008 and apply to securities acquired both before and after that date. Under these amendments, a person who has beneficially owned restricted shares of our Common Stock or warrants for at least six months is entitled to sell its securities provided that (1) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale, (2) we are subject to the Exchange Act reporting requirements for at least 90 days before the sale and (3) if the sale occurs prior to satisfaction of a one-year holding period, we provide current information at the time of sale.

Persons who have beneficially owned restricted shares of our Common Stock or warrants for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of:

  • 1% of the total number of securities of the same class then outstanding, which will equal approximately 320,255 shares immediately after this offering; or

  • the average weekly trading volume of such securities during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale.

However, since our shares are quoted on the OTCBB, which is not an “automated quotation system,” our stockholders will not be able to rely on the market-based volume limitation described in the second bullet above. If, in the future, our securities are listed on an exchange or quoted on NASDAQ, then our stockholders would be able to rely on the market-based volume limitation. Unless and until our stock is so listed or quoted, our stockholders can only rely on the percentage based volume limitation described in the first bullet above.

Such sales by affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144. The selling stockholders will not be governed by the foregoing restrictions when selling their shares pursuant to this prospectus.

69


Historically, the SEC staff has taken the position that Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies, like us. The SEC has codified and expanded this position in the amendments discussed above by prohibiting the use of Rule 144 for resale of securities issued by any shell companies (other than business combination related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, 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 Current Reports on Form 8-K; and
  • the least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status as an entity that is not a shell company.

As a result, it is likely that pursuant to Rule 144 our stockholders, who were stockholders of ours prior to the acquisition of Milkgoat Industrial that concluded on June 8, 2008, were able to sell the their shares of our Common Stock from and after June 8, 2009 (the one year anniversary of our filing of the Current Report on Form 8-K reporting the reverse acquisition of Milkgoat Industrial) without registration.

PLAN OF DISTRIBUTION

The selling stockholders and any of their pledgees, domes, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or quoted or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:

  • ordinary brokerage transactions and transactions in which the broker-dealer solicits Investors;

  • block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

  • purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

  • an exchange distribution in accordance with the rules of the applicable exchange;

  • privately negotiated transactions;

  • through the writing of options on the shares;

  • to cover short sales made after the date that this Registration Statement is declared effective by the Commission;

  • broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; and

  • a combination of any such methods of sale.

The selling stockholders may also sell shares under Rule 144 of the Securities Act, if available, rather than under this prospectus. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if it deems the purchase price to be unsatisfactory at any particular time.

The selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of Common Stock in block transactions to market makers or other purchasers at a price per share which may be below the then existing market price. We cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. The selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be “underwriters” as that term is defined under the Securities Act, the Exchange Act and the rules and regulations of such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

70


We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholders, but excluding brokerage commissions or underwriter discounts.

The selling stockholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. The selling stockholders have not entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.

The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling stockholders and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Exchange Act, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any other such person. In the event that any of the selling stockholders are deemed an affiliated purchaser or distribution participant within the meaning of Regulation M, then the selling stockholders will not be permitted to engage in short sales of Common Stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In addition, if a short sale is deemed to be a stabilizing activity, then the selling stockholders will not be permitted to engage in a short sale of our Common Stock. All of these limitations may affect the marketability of the shares.

If a selling stockholder notifies us that it has a material arrangement with a broker-dealer for the resale of the Common Stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholder and the broker-dealer.

LEGAL MATTERS

The validity of the Common Stock offered by this prospectus will be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP, Washington, DC.

EXPERTS

The audited consolidated financial statements of Yayi International Inc. for the years ended March 31, 2011 and October 31, 2009 and for the five months ended March 31, 2010 and 2009 included in this prospectus and in the registration statement have been audited by Morison Cogen LLP, independent registered public accounting firm, to the extent and for the periods sent forth in their respective reports appearing elsewhere herein and in the registration statement, and are included in reliance on such reports, given the authority of said firms as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the Common Stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to us and the Common Stock offered in this offering, we refer you to the registration statement and to the attached exhibits. With respect to each such document filed as an exhibit to the registration statement, we refer you to such exhibit for a more complete description of the matters involved.

You may inspect our registration statement and the attached exhibits and schedules without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of our registration statement from the SEC upon payment of prescribed fees. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.

Our SEC filings, including the registration statement and the exhibits filed with the registration statement, are also available from the SEC’s website at www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

71


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  Page
   
YAYI INTERNATIONAL INC. AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2011 AND OCTOBER 31, 2009
   
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Condensed Consolidated Statements of Operations and Comprehensive Income F-5
Condensed Consolidated Statements of Stockholders’ Equity F-6
Condensed Consolidated Statements of Cash Flows F-8
Notes to Condensed Consolidated Financial Statements F-10 - F-37
   
YAYI INTERNATIONAL INC. AND SUBSIDIARIES FINANCIAL STATEMENTS FOR THE FIVE MONTHS ENDED MARCH 31, 2010 AND 2009
   
Reports of Independent Registered Public Accounting Firm F-38
Consolidated Balance Sheets F-39
Consolidated Statements of Operations and Comprehensive Income (Loss) F-41
Consolidated Statements of Stockholders’ Equity F-42
Consolidated Statements of Cash Flows F-45
Notes to Consolidated Financial Statements F-48 - 84

F-1


Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of Yayi International Inc.

We have audited the accompanying consolidated balance sheets of Yayi International Inc. (“the Company”) as of March 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for the year ended March 31, 2011, the five-month period ended March 31, 2010 and the year ended October 31, 2009. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the year ended March 31, 2011, the five-month period ended March 31, 2010 and the year ended October 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/Morison Cogen LLP
Bala Cynwyd, Pennsylvania
June 29, 2011

F-2


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

March 31 2011 March 31 2010
             
             
ASSETS  
Current assets:            
   Cash and cash equivalents $  13,360,392   $  4,727,677  
   Restricted cash   1,412,404     28,314  
   Accounts receivable, net of allowances of $72,036 and $53,771   4,776,780     3,530,937  
   Other receivable, net of allowances of $43,230 and $22,833   574,383     598,170  
   Inventories, net of allowances of $0 and $0   3,885,481     2,561,265  
   Prepaid expenses   309,894     121,523  
   Land use rights - current portion   19,611     18,847  
   Advances   900,033     1,560,743  
   Deferred tax asset – current portion   374,124     -  
   Deferred financing cost - current portion   159,496     -  
Total current assets   25,772,598     13,147,476  
             
   Property, plant and equipment, net   8,063,507     6,505,130  
   Livestock, net   563,402     659,584  
   Goodwill   289,643     278,372  
   Land use rights   942,939     923,525  
   Advances on property, plant and equipment   19,063,439     17,816,135  
   Deferred tax asset   31,225     472,889  
   Deferred financing cost   867,552     -  
             
Total assets $  55,594,305   $  39,803,111  
             
             
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:            
   Short term loans $  10,654,328   $  6,704,406  
   Accounts payable   884,407     662,120  
   Other payable and accrued expenses   3,172,782     1,257,185  
   Advance from customers   90,232     141,136  
   Income and other tax payable   1,214,494     1,338,194  
   Accrued sales return   -     45,503  
   Long term loans - current portion   17,697     40,823  
Total current liabilities   16,033,940     10,189,367  
             
Long-term liabilities:            
   Due to shareholders   5,450,233     5,312,801  
   Derivative liabilities   1,776,400     -  
   Convertible notes, net of discount of $3,858,839 and $0   5,061,161     -  
   Accrued expenses - non current portion   473,283     -  
   Long-term loans   -     17,009  
    12,761,077     5,329,810  
             
Total liabilities   28,795,017     15,519,177  
             
Commitments and contingencies (Note 18)   -     -  

F-3



PREFERRED STOCK, par value $0.001, 10,000,000 shares authorized, Series A 10% non-cumulative redeemable convertible preferred stock, redemption $9.80 per share plus 25% interest from date of issuance to date of redemption, 1,530,612 shares issued and outstanding

  15,745,165     14,264,871  

 

           

STOCKHOLDERS' EQUITY

           

 

           

Common stock, par value $0.001, 100,000,000 shares authorized, 26,454,558 and 26,387,728 shares issued and outstanding, respectively

  26,454     26,387  

Additional paid-in capital

  5,840,290     4,721,337  

Statutory surplus reserve fund

  1,142,397     1,142,397  

Retained earning

  2,529,601     3,821,100  

Accumulated other comprehensive income

  1,515,381     307,842  

 

           

Total stockholders’ equity

  11,054,123     10,019,063  

 

           

Total liabilities and stockholders' equity

$  55,594,305   $  39,803,111  

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

F-4


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

  Year ended March 31,     Five months ended March 31,     Year ended October 31,  
    2011     2010     2009     2009  
                (unaudited)        
Net sales $  26,909,879   $  6,085,193   $  9,283,420   $  24,845,685  
                         
Cost of goods sold   (10,075,452 )   (2,369,642 )   (2,892,709 )   (8,025,009 )
                         
Gross profit   16,834,427     3,715,551     6,390,711     16,820,676  
                         
Operating expenses:                        
Sales and marketing expenses   (12,353,238 )   (3,908,573 )   (1,973,212 )   (5,760,446 )
General and administrative expenses   (4,304,356 )   (1,318,077 )   (685,843 )   (1,972,190 )
                         
Total operating expenses   (16,657,594 )   (5,226,650 )   (2,659,055 )   (7,732,636 )
                         
(Loss) income from operations   176,833     (1,511,099 )   3,731,656     9,088,040  
                         
Other income (expenses):                        
Interest income   19,909     8,250     2,902     11,993  
Interest expenses   (2,195,219 )   (221,549 )   (359,014 )   (706,750 )
Amortization of deferred debt issuance cost   -     (91,227 )   (333,160 )   -  
Amortization of deferred financing costs and debt discount   (957,865 )   -     -     (572,747 )
Change in fair value of derivative liabilities   2,771,080     -     -     -  
Warrant modification expense   -     (88,500 )   -     -  
Liquidated damages   -     -     -     (140,000 )
Expense on make good provision   (205,683 )   -     -     -  
Registration penalties   (267,600 )   -     -     -  
Other (expenses) income   (164,868 )   12,237     2,394     (83,523 )
                         
(Loss) income before income tax   (823,413 )   (1,891,888 )   3,044,778     7,597,013  
                         
Income tax benefit (expenses)   (468,086 )   289,093     (869,614 )   (2,201,032 )
                         
Net (loss) income from operations   (1,291,499 )   (1,602,795 )   2,175,164     5,395,981  
                         
Other comprehensive income                        
Foreign currency translation adjustment   1,207,539     6,039     (44,791 )   (50,928 )
                         
Comprehensive (loss) income $  (83,960 ) $  (1,596,756 ) $  2,130,373   $  5,345,053  
                         
(Loss) earnings per share of common stock                        
- Basic $  (0.05 ) $  (0.06 ) $  0.09   $  0.22  
- Diluted $  (0.05 ) $  (0.06 ) $  0.09   $  0.22  
Weighted average shares of common stock outstanding                
- Basic   26,438,125     26,017,835     25,000,000     25,000,000  
- Diluted   26,438,125     26,017,835     25,000,000     25,000,000  

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

F-5


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

                    Statutory           Accumulated        

 

  Common stock     Additional     Surplus           Other     Total  

 

  Number of           paid-in     Reserve     Retained     Comprehensive     Stockholders’  

 

  shares     Amount     capital     Fund     Earnings     Income     Equity  

 

                                         

Balance at October 31, 2009

  25,000,000   25,000   $ 3,234,224   $ 1,142,397   $ 5,423,895   301,803   $  10,127,319  

 

                                         

Conversion of convertible notes and accrued interest into 1,296,274 shares of common stock

  1,296,274     1,296     1,398,704     -     -     -     1,400,000  

 

                                         

Warrant modification expense

  -     -     88,500     -     -     -     88,500  

 

                                         

Cashless exercise of 110,000 Series D Warrants into 78,432 shares of common stock

  78,432     78     (78 )   -     -     -     -  

 

                                         

Cashless exercise of 17,363 Series A warrants into 13,022 shares of common stock

  13,022     13     (13 )   -     -     -     -  

 

                                         

Net loss for the five months ended March 31, 2010

  -     -     -     -     (1,602,795 )   -     (1,602,795 )

 

                                         

Foreign currency translation

  -     -     -     -     -     6,039     6,039  

 

                                         

Balance at March 31, 2010

  26,387,728     26,387     4,721,337     1,142,397     3,821,100     307,842   $  10,019,063  

 

                                         

Cashless exercise of 9,169 Series D warrants into 5,840 shares of common stock

  5,840     6     (6 )   -     -     -     -  

 

                                         

Cashless exercise of 171,185 Series C warrants into 46,794 shares of common stock

  46,794     47     (47 )   -     -     -     -  

 

                                         

 

                                         

F-6



Cashless exercise of 34,725 Series A warrants into 14,196 shares of common stock

  14,196     14     (14 )   -     -     -     -  

 

                                         

Employee stock-based compensation

  -     -     1,119,020     -     -     -     1,119,020  

 

                                         

Net loss for the year ended March 31, 2011

  -     -     -     -     (1,291,499 )   -     (1,291,499 )

 

                                         

Foreign currency translation

  -     -     -     -     -     1,207,539     1,207,539  

 

                                         

Balance at March 31, 2011

  26,454,558    $  26,454    $  5,840,290    $  1,142,397    $  2,529,601    $  1,515,381    $  11,054,123  

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

F-7


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended March 31, Five months ended March 31, Year Ended October 31
    2011     2010     2009     2009  
                (unaudited)        
                         
Cash flow from operating activities                        
Net (loss) income $  (1,291,499 ) $  (1,602,795 ) $  2,175,164   $  5,395,981  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                
         Net foreign currency transaction loss   -     337     -     15,743  
         Depreciation of property, plant and equipment   646,028     195,151     143,189     348,561  
         Depreciation of livestock   86,105     11,600     1,449     6,126  
         Amortization of land use rights   17,612     -     -     -  
         Amortization of deferred financing costs   93,061     18,686     -     184,846  
         Disposal of property, plant and equipment   -     6,144     -     -  
         Allowance of bad debts-Accounts receivable   14,728     7,498     -     5,263  
         Allowance of bad debts-Other receivable   19,217     13,684     -     (20,078 )
         Employee stock-based compensation   1,119,020     -     -     -  
         Sales return allowance   (45,520 )   (121,025 )   107,544     (77,770 )
         Warrant modification expense   -     88,500     -     -  
         Change in fair value of derivative liabilities   (2,771,080 )   -     -     -  
         Make good provision   205,683     -     -     -  
         Registration penalties   267,600     -     -     -  
         Accretion of debt discount   864,804     72,541     -     387,901  
         Accretion of preferred stock   1,480,294       -       -       -  
                         
(Increase) decrease in operating assets:                        
         Restricted cash   (1,379,798 )   (28,314 )   -     396  
         Accounts receivable   (1,032,329 )   (499,891 )   (632,746 )   (443,691 )
         Other receivable   32,811     110,629     (332,944 )   (646,217 )
         Inventories   (1,167,287 )   (54,224 )   554,803     816,331  
         Prepaid expenses   (183,774 )   (37,588 )   (3,394 )   (44,199 )
         Advances   739,946     (875,434 )   387,347     (669,021 )
         Other Assets   -     -     -     (4,078 )
         Deferred tax asset and current assets   100,104     (475,320 )   176,258     15,888  
                         
Increase (decrease) in operating liability:                        
         Accounts payable   231,265     (606,517 )   (288,104 )   (194,617 )
         Advance from customers   (54,288 )   84,769     (3,576 )   52,713  
         Income and other tax payable   (177,240 )   (231,178 )   230,797     324,290  
         Other payable and accrued expenses   1,003,200     25,889     770,114     1,080,475  
Net cash (used in) provided by operating activities   (1,181,337 )   (3,896,858 )   3,285,901     6,534,843  
                         
Cash flows from investing activities                        
         Purchase of property, plant and equipment   (1,200,949 )   (411,613 )   (175,169 )   (3,586,072 )
         Advance for construction of factory and warehouse   -     -     (3,795,704 )   (6,462,478 )
         Advance for acquisition of land use rights   -     -     (145,989 )   (145,940 )
         Deposit for purchase of machinery and equipment   (597,987 )   (208,980 )   -     (2,091,053 )
         Proceeds from sale of livestock   93,461     -     -     -  
         Purchase and breeding of livestock   (60,392 )   (563,723 )   (75,487 )   (114,939 )
         Acquisition of land use right   -     (796,106 )   -     -  
Net cash used in investing activities   (1,765,867 )   (1,980,422 )   (4,192,349 )   (12,400,482 )

F-8



Cash flows from financing activities                        
         Proceeds from short term loans   13,391,277     2,925,705     2,232,020     6,681,198  
         Repayment of short term loans   (9,608,176 )   (2,691,648 )   (729,943 )   (5,433,460 )
         Proceeds from long term loans   -     61,235     167,579     -  
         Repayment of long term loans   (41,553 )   (3,402 )   (14,473 )   (33,999 )
         Repayment of convertible debt and accrued interest   -     (56,000 )   -     -  
         Net proceeds from issuance of Series A preferred stock   -     -     -     14,264,871  
         Capital contribution from shareholders   -     -     -     5,979  
         Net proceeds received from issuance of convertible notes   7,623,729     -     -     -  
         Dividend paid to previous stockholders of Milkgoat China   -     -     -     (2,550,504 )
         Due (from) to shareholders   (6,027 )   (23 )   (6,336 )   2,426,005  
Net cash provided by financing activities   11,359,250     235,867     1,648,847     15,360,090  
                         
Effect of exchange rate changes in cash   220,669     877     (2,110 )   (17,516 )
                         
Net increase in cash and cash equivalents   8,632,715     (5,640,536 )   740,289     9,476,935  
                         
Cash and cash equivalents, beginning of period   4,727,677     10,368,213     891,278     891,278  
                         
Cash and cash equivalents, end of period $  13,360,392   $  4,727,677   $  1,631,567   $  10,368,213  
                         
Supplemental disclosure of cash flow information                        
Cash paid during the period                        
                         
Interest paid $  672,686   $  242,458   $  316,883   $  604,633  
Income tax paid $  634,096     372,528   $  421,461   $  2,050,646  
                         
Supplemental disclosure of non-cash financing and investing activities;                
Accrued payment for purchase of property, plant and equipment   707,846     -     -     -  
                         
Repayment of short-term loan from Tianjin Mengyang offset against advances $  -   $  -   $  -   $  877,508  
 Settlement of dividend payable $  -   $  -   $  -   $  1,916,669  
 Non-cash exercise of 127,363 warrants into common stock $  -   $  91   $  -   $  -  
Conversion of convertible note plus accrued interest into common stock $  -   $  1,400,000   $  -   $  -  
 Non-cash exercise of 215,079 warrants into common stock $  67   $  -   $  -   $  -  
 Placement agent warrants in deferred cost financing $  231,929   $  -   $  -   $  -  
 Advances transferred to property, plant and equipment $  83,567   $  269,124   $  -   $  -  
 Advance transferred to land use rights $  -   $  146,285   $  -   $  -  

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

F-9


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Nature of Business

Yayi International, Inc (“Yayi International”), formerly known as Ardmore Holding Corporation or “Ardmore”, was originally organized under the laws of the state of Delaware in 1986 under the name of a predecessor corporation which engaged in a software development and consulting service business. During 2007 and 2006, Ardmore sold 875,000 post-stock split adjusted shares to Tryant, LLC, a then unrelated party, which represented over 85% of Ardmore’s outstanding shares. Subsequently, Ardmore's management decided to wind up all business operations related to the former products sold by the predecessor corporation. On April 16, 2007, the name of the predecessor corporation was changed to Ardmore Holding Corporation. From April 16, 2007 until June 6, 2008 when the Company completed a reverse acquisition transaction with Charleston Industrial Limited (“Charleston”), the Company was a blank check company and did not engage in active business operations other than its search for, and evaluation of, potential business opportunities for acquisition or participation. The Company changed its fiscal year from December 31 to October 31. The Company amended its articles of incorporation on September 12, 2008 and changed its name to Yayi International Inc.

On June 6, 2008, Ardmore, its wholly owned subsidiary, Ardmore Acquisition Corp. (“Ardmore Acquisition”), Charleston Industrial Ltd., (“Charleston”) and Tryant LLC, a Delaware limited liability company and at such time the holder of a majority of Ardmore’s outstanding shares of common stock, consummated a merger pursuant to which Ardmore Acquisition was merged into Charleston and Charleston became Ardmore’s wholly owned subsidiary. Charleston is the owner of Tianjin Yayi Industrial Co., Ltd. (“Tianjin Yayi”), an entity organized under the laws of the People’s Republic of China and as a result of this merger, Ardmore became the owner of Tianjin Yayi. Pursuant to the merger, all 50,000 shares of Charleston’s stock were exchanged for 22,325,000 shares newly issued common stock of Ardmore. Accordingly, all references to shares of Charleston’s common stock and per share amounts have been retroactively restated to reflect the equivalent numbers of Ardmore shares. Charleston thereby became the Company’s wholly owned subsidiary and the former stockholders of Charleston became the Company’s controlling stockholders.

Under accounting principles generally accepted in the United States, the merger is considered to be a capital transaction in substance, rather than a business combination. That is, the merger is equivalent to the issuance of stock by Charleston for the net monetary assets of Ardmore, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the merger will be identical to that resulting from a reverse acquisition, except that no goodwill will be recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Ardmore, are those of the legal acquiree, Charleston and subsidiary, which are considered to be the accounting acquirer.

On August 18, 2010, one of the Company’s subsidiaries, Charleston Industrial Limited changed its name to Milkgoat Industrial Co., Ltd. (“Milkgoat Industrial”), under the BVI Business Companies Act, 2004.

On December 17, 2010, one of the Company’s subsidiaries, Tianjin Yayi Industrial Co., Ltd. changed its name to Milkgoat (China) Goat Dairy Co., Ltd. (“Milkgoat China”), as approved by Tianjin City Administration for Industry & Commerce.

In March 2010, Yayi International Inc. changed its fiscal year end from October 31 to March 31.

The principal business activities of the Company consist of manufacturing and selling of goat milk powder. All business activities of the Company are conducted principally by its subsidiaries Milkgoat China, Weinan Milkgoat Production Co., Ltd. (“Weinan Milkgoat”), Fuping Milkgoat Dairy Co., Ltd (“Fuping Milkgoat”) and Shaanxi Milkgoat Dairy Co., Ltd (“Shaanxi Milkgoat”) operating in the PRC whereas Milkgoat Industrial is a BVI investment holding company.

2. Summary of Significant Accounting Policies

Basis of Consolidation - The consolidated financial statements include the accounts of Yayi International Inc. and its wholly-owned subsidiary, Milkgoat Industrial together with its wholly-owned subsidiaries, Milkgoat China, Weinan Milkgoat Fuping Milkgoat and Shaanxi Milkgoat. All material intercompany transactions have been eliminated in consolidation.

Credit risk - The Company may be exposed to credit risk from its cash at bank, fixed deposits, and bills and accounts receivable. Bills and accounts receivable are subjected to credit evaluations. An allowance has been made for estimated irrecoverable amounts determined by reference to past default experience and the current economic environment.

Cash and cash equivalents - Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased.

F-10


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies – Continued

Inventory - Inventory is stated at the lower of cost or market, determined by the weighted average method. Work-in-progress and finished goods inventories consist of raw materials, direct labor and overhead associated with the manufacturing process.

Trade accounts receivable - Trade accounts receivable are stated at the amount management expects to collect from balances outstanding at the period end.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Allowances for doubtful accounts receivable balances are recorded when circumstances indicate that collection is doubtful for particular accounts receivable or as a general reserve for all accounts receivable. Management estimates such allowances based on historical evidence such as amounts that are subject to risk. Accounts receivable are written off if reasonable collection efforts are not successful.

Based on management’s evaluation of historical experience, the following policy for allowance of doubtful accounts is established:

Trade and other receivables due: % of Balance
Within 90 days: 1.5%
Between 91 and 180 days: 5.0%
Between 181 and 360 days: 20.0%
Between 361 and 720 days: 50.0%
Over 721 days: 100.0%

Livestock – Livestock consists of goats for milk production and for breeding purposes. The livestock is depreciated according to its estimated useful lives, which is 5 years for male goats and 7 years for female goats. The cost of raising the young goat is allocated to livestock and depreciation starts upon reaching maturity 13 months from date of birth. Not all young goats survive to maturity or disposition. Normal losses of young goats are not expensed directly but allocated to the surviving young goats. When abnormal losses of young goats occur, the accumulated costs of young goats lost are written off in the period in which the abnormal losses occur.

Fair Value of Financial Instruments – FASB ASC 820-10 requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.

For certain financial instruments, including cash, accounts and other receivables, accounts payable, short-term loans, accruals and other payables, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations. The carrying amounts of long-term loans payable approximate fair value since the interest rate associated with the debt approximates the current market interest rate.

Property, plant and equipment-Property, plant and equipment are stated at cost including the cost of improvements. Maintenance and repairs are charged to expense as incurred. Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Depreciation and amortization are provided on the straight-line method based on the shorter of the estimated useful lives of the assets or lease term as follows:

Leasehold improvement Lesser of term of the lease or the estimated useful lives of the assets
Plant and machinery 10 years
Furniture, fixtures and equipment 5 years
Motor vehicles 5 years

Recoverability of Long Lived Assets -The Company follows FASB ASC 360. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. The Company is not aware of any events or circumstances that indicate the existence of impairment, which would be material to the Company’s financial statements.

F-11


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies – Continued

Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination, In accordance with FASB ASC 350-30, goodwill is no longer subject to amortization. Rather, goodwill will be subject to at least an annual assessment for impairment, applying a fair-value based test fair value is generally determined using a discounted cash flow analysis.

Revenue recognition - The Company recognizes revenue on product sales when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Net sales of products represent the invoiced value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT which is levied on majority of the Company’s products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. Input VAT paid is recoverable from output VAT charged to customers.

Prior to January 1, 2009, the Company allows for exchange of goods that are near expiration. The Company provided for an allowance for return products since the Company has experienced returns in the normal course of business. Subsequent to January 1, 2009, the Company revised its sales contracts to disallow returns for sales made after January 1, 2009.

The Company treats temporary price reduction programs, merchandising fees, co-operative advertising and slotting expenses as a reduction in gross sales. The Company records the liability when pervasive evidence exists that the Company and the customer or distributor have reached agreement and that an advertising action will result in an expense to the company in the near future. The liability is maintained until the customer takes the deduction against payments due. In addition, in accordance with ASC 605-50 in accounting for customer payments and incentives, if the temporary price reduction recorded is in excess of gross sale for any retailer, the amount in excess will be recorded as selling expense.

Research and development - Research and development costs are expensed as incurred. Research and development expenses amounted to $74,337 and $150,101 for the year ended March 31, 2011 and October 31, 2009, respectively, $40,898 and $57,558 for the five months ended March 31, 2010 and 2009, respectively.

Advertising and promotion costs - Costs incurred in direct-response advertising are capitalized and amortized on a straight-line basis over the duration of the advertising campaign. As of March 31, 2011, there was no capitalized direct-response advertising. All other advertising costs are expensed as incurred. Advertising and promotion costs amounted to $8,232,330 and $1,956,512 for the year ended March 31, 2011 and October 31, 2009, respectively, As of March 31, 2010, there was no capitalized direct-response advertising. Advertising and promotion costs amounted to $2,727,631 and $1,046,940 for the five months ended March 31, 2010 and 2009, respectively.

Comprehensive income - The Company follows FASB ASC 220-10 in reporting comprehensive income. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net (loss) income and foreign currency translation adjustments.

Income taxes – The Company follows FASB ASC 740 when accounting for income taxes. Income taxes are provided on an asset and liability approach for financial accounting and reporting of income taxes. Current tax is based on the profit or loss from ordinary activities adjusted for items that are non-assessable or disallowable for income tax purpose and is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred income tax liabilities or assets are recorded to reflect the tax consequences in future differences between the tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.

Foreign currency translation and transactions – The accompanying consolidated financial statements are presented in United States Dollars (“US$”). The Company’s functional currency is the US$, while the Charleston’s functional currency is its local currency and the wholly-owned Chinese subsidiaries’ functional currency is the Renminbi (“RMB”). The functional currencies of the Company’s foreign operations are translated into US$ for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are recorded as a separate component of stockholders’ equity, captioned accumulated other comprehensive income (loss).

Gains and losses resulting from transactions denominated in foreign currencies are included in other income (expense) in the consolidated statements of operations.

F-12


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies – Continued

Post-retirement and post-employment benefits - The Company’s subsidiaries contribute to a state pension plan in respect of its PRC employees. Other than the above, neither the Company nor its subsidiary provides any other post-retirement or post-employment benefits.

Earnings Per Common Share - The Company follows FASB ASC 260-10, resulting in the presentation of basic and diluted earnings per share. Diluted earnings per common share assumes that outstanding common shares were increased by shares issuable upon exercise of those stock warrants for which market price exceeds the exercise price, less shares that could have been purchased by the Company with related proceeds.

Use of estimates - The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts in the financial statements and related disclosure in the accompanying notes. Actual results could differ from those estimates. The financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to warrants valuation, discount on convertible notes, debts issuance cost, allowance for uncollectible accounts receivable, work in process inventory valuation, inventory obsolescence, depreciation, useful lives of property, plant and equipment, taxes, contingencies and employee benefit plans. These estimates may be adjusted as more current information becomes available and any adjustment could be significant. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

Cost of goods sold - Cost of goods sold consists primarily of costs of raw materials, direct labor, depreciation of plant and machinery, and overhead associated with the manufacturing process.

Shipping and handling cost - Shipping and handling costs related to delivery of finished goods are included in other selling, general and administrative expenses. During the year ended March 31, 2011 and October 31, 2009, shipping and handling costs were $445,688 and $504,353, respectively. During the five months ended March 31, 2010 and 2009, shipping and handling costs were $137,942 and $89,011, respectively.

Slotting fees - The Company accounts for slotting fees in accordance with ASC 605-50. ASC 605-50 requires that cash considerations, including sales incentives, given by a vendor to a customer is presumed to be a reduction of the selling price, and therefore, should be characterized as a reduction to gross sales. This presumption is overcome and the consideration would be characterized as an expense incurred if the vendor receives an identifiable benefit in exchange for the consideration and the fair value of that identifiable benefit can be reasonably estimated. Furthermore, if the consideration recorded is in excess of gross sale of any retailer, the amount in excess will be recorded as selling expense.

The Company treats one-time slotting fees paid to retails shops who are direct customers of the Company’s distributors and the fees pays to distributors upon signing of contract as a reduction in gross sales.

Slotting fees of $5,526,217 and $1,345,838 were recorded as a reduction of sales revenue for the year ended March 31, 2011 and five months ended March 31, 2010, respectively. There were no slotting fees incurred for the year ended October 31, 2009 and five months ended March 31, 2009.

Retained earnings-appropriated - In accordance with the relevant PRC regulations and the Company’s PRC subsidiaries’ articles of association, Milkgoat China, Weinan Milkgoat and Fuping Milkgoat are required to allocate their respective net income to statutory surplus reserve.

Statutory surplus reserve - In accordance with the relevant laws and regulations of the PRC and the articles of associations of the Company’s PRC subsidiaries, Milkgoat China, Weinan Milkgoat and Fuping Milkgoat are required to allocate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve, on an annual basis. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further allocation is optional.

The statutory surplus reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.

F-13


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies – Continued

Recently Adopted Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. The adoption of this standard did not have a material impact to the Company’s financial position or results of operations.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial position.

In January 2010, FASB issued ASU N0. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. The update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of ASC Topic 505 and Topic 260, Earnings Per Share. This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this standard did not have a material impact to the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements Not Yet Adopted

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (ASC Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to ASC Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition.

Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. This standard will be adopted effective April 1, 2011.

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.

Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings.

This standard is not currently applicable to the Company.

F-14


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings.

This standard is not currently applicable to the Company.

2. Summary of Significant Accounting Policies – Continued

In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company intends to adopt the disclosure requirements for any business combinations after April 1, 2011.

As of March 31, 2011, there were no other recently issued accounting standards not yet adopted which would have had a material effect on the Company’s financial statements.

3. Restricted Cash

    March 31,     March 31,  
    2011     2010  
             
Bank deposits held as collateral for bills payable $  1,004,314   $  28,314  
Bank deposits held in escrow (Note 15)   408,090     -  
  $  1,412,404   $  28,314  

Cash of $408,090 from the private placement was held in escrow for the Company as of March 31, 2011 (Note 15).

4. Other Receivable

    March 31,     March 31,  
    2011     2010  
             
Advance to staff $  37,892   $  28,542  
Security deposit   470,313     592,461  
Sundry   109,408        
    617,613     621,003  
Less: allowance for bad debts   (43,230 )   (22,833 )
  $  574,383   $  598,170  

The amount due from an unrelated party is interest-free, unsecured and has no stated terms of repayment.

F-15


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Inventories, net

Inventories, net consist of:

    March 31,     March 31,  
    2011     2010  
             
Raw materials $  2,709,596   $  1,678,207  
Packaging   497,341     289,188  
Finished goods   678,544     593,870  
  $  3,885,481   $  2,561,265  

As of March 31, 2011 and 2010, there was no allowance made for obsolete or slow moving inventory.

6. Advances on Property, Plant and Equipment

Advances and deposits on property, plant and equipment consist of:

    March 31,     March 31,  
    2011     2010  
             
Advances to Tianjin Mengyang Biological Development Co., Ltd ("Tianjin            
Menyang"), formerly Tianjin Milkgoat Dairy Co., Ltd.            
   - purchase of office building (Note 18) $  4,348,488   $  4,179,284  
   - purchase of factory and warehouse (Note 18)   11,489,095     11,042,041  
   - advances for renovation of office building (Note 18)   356,159     342,300  
Deposits for construction in progress (Note 18)   572,366     331,696  
Advanced payment for purchasing machinery and equipment   2,297,331     1,920,814  
  $  19,063,439   $  17,816,135  

The main body construction of office building had been completed as of September 2010. The construction project is under inspection and the completion date is subject to the inspection report to be issued. Based on the Company’s estimate, the completion date is expected to be postponed to the end of October, 2011 (Note 18). The Company expects that the building will be operational during the fourth calendar quarter of 2012.

The main body construction of factory and warehouse had been completed as of September 2010. The construction project is under inspection and the completion date is subject to the inspection report to be issued. Based on the Company’s estimate, the completion date is expected to be postponed to the end of October, 2011 (Note 18). The Company expects that the facility will start operating during the fourth calendar quarter of 2012.

The construction in progress relates to the construction and installation of central system pipelines. The estimated completion date of installation is postponed to the fourth calendar quarter of 2013 (Note 18).

The advanced payment for purchasing machinery and equipment relates to the purchases of machinery and equipment from several suppliers. They are expected to be delivered to the Company between July 2012 and March 2013 after the approval of final inspection.

F-16


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Property, Plant and Equipment, net

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

    March 31,     March 31,  
    2011     2010  
             
At cost:            
Leasehold improvement $  71,714   $  68,924  
Plant and buildings   4,338,544     1,708,463  
Machinery   3,895,981     2,525,876  
Furniture, fixtures and equipment   239,364     202,581  
Motor vehicles   338,091     324,936  
    8,883,694     4,830,780  
Less: accumulated depreciation and amortization   (1,799,269 )   (1,096,228 )
    7,084,425     3,734,552  
Construction in progress   979,082     2,770,578  
  $  8,063,507   $  6,505,130  

During the year ended March 31, 2011, depreciation expenses amounted to $646,028, of which $550,895 and $95,133 was recorded as cost of sales and other selling, general and administrative expense, respectively.

During the year ended October 31, 2009, depreciation expenses amounted to $348,561, of which $275,487 and 73,074 was recorded as cost of sales and other selling, general and administrative expense, respectively.

During the five months ended March 31, 2010, depreciation expenses amounted to $195,151, of which $165,485 and $29,666 was recorded as cost of sales and other selling, general and administrative expense, respectively.

During the five months ended March 31, 2009, depreciation expenses amounted to $143,189, of which $111,087 and $32,102 was recorded as cost of sales and other selling, general and administrative expense, respectively.

F-17


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Land use rights

Land use rights consist of:

    March 31,     March 31,  
    2011     2010  
             
Land use rights $  980,526   942,372  
Less: accumulated amortization   17,976     -  
    962,550     942,372  
Less: current portion   19,611     18,847  
Land use rights, net of current portion $  942,939   923,525  

The estimated aggregate amortization expenses for intangible assets for the five succeeding years are as follows:

Year      
2011 $  19,611  
2012   19,611  
2013   19,611  
2014   19,611  
2015   19,611  
Thereafter   864,495  
  $  962,550  

During the year ended March 31, 2011 and October 31, 2009, amortization expenses amounted to $17,612 and $0 was recorded as cost of sales, respectively. During the five months ended March 31, 2010 and 2009, there was no amortization expenses incurred.

F-18


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Short Term Loans

Lender   Loan Period     Collateral / Guarantee     Interest Rate
per annum
    March 31,
2011
    March 31,
2010
 
                               
Shanghai Pudong
Development Bank
  Renew on July 30, 2010
and the new due date is July 30, 2011
    Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    6.4%     304,409     292,565  
                               
Shanghai Pudong
Development Bank
  Renew on July 30, 2010
and the new due date is July 30, 2011
    Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    6.4%     1,217,637     1,170,258  
                               

Allied Merit
International Investment, Inc.

  November 5, 2007 to the
completion of first round
of fund raising after the
reverse merger -
        -   $  -   $  121,705  
                               
Tianjin Rural
Commercial Bank
  June 3, 2010 to June 2, 2011     Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    5.8%     913,229     -  
                               

Tianjin Rural
Commercial Bank

  June 3, 2010 to June 2, 2011     Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    5.8%     1,217,637     -  
                               
Tianjin Rural
Commercial Bank
  June 3, 2010 to June 2, 2011     Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    5.8%     1,217,637     -  
                               
Tianjin Rural
Commercial Bank
  June 3, 2010 to June 2, 2011     Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    5.8%     1,217,637     -  
                               
Bank of Beijing   January 6, 2011 to January 5, 2012     Guaranteed by the
Beijing Huaxia Jingu
Guarantee Co., Ltd.
    6.1%     1,522,047     -  
                               
Bank of Tianjin   January 6, 2011 to November 3, 2011     Guaranteed by the
Tianjin Bohai Investment
Guarantee Co., Ltd.
    6.7%     761,024     -  
                               
Bank of Tianjin   November 4, 2010 to November 3, 2011     Guaranteed by the
Tianjin Bohai
Investment Guarantee Co., Ltd.
    6.7%     2,283,071     -  
                               
China Development
Bank Co., Ltd.
  December 25, 2009 to December 24, 2010     Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    5.8%     -     1,462,822  
                               
Tianjin Rural
Commercial Bank
  May 22, 2009 to May 21, 2010     Guaranteed by the
Tianjin Haitai
Investment Guarantee Co., Ltd.
    6.4%     -     1,462,822  
                               
Tianjin Rural Commercial Bank   July 3, 2009 to May 21, 2010     Guaranteed by the Tianjin Haitai Investment Guarantee Co., Ltd.     6.4%     -     2,194,234  
                               
                    $ 10,654,328   $ 6,704,406  

F-19


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. Short Term Loans – Continued

On April 30, 2010, the Company entered into a loan agreement with SAIF Partners III L.P. (“SAIF Partners”), pursuant to which the Company borrowed $3 million from SAIF Partners with an interest rate of 12% per annum. SAIF Partners currently owns 1,530,612 shares of the Company’s Series A Preferred Stock with par value $0.001 per share (the “Series A Preferred Stock”), which constitute all of the issued and outstanding Series A Preferred Stock of the Company. To secure the repayment by the Company of the loan, the Company’s major shareholder, Global Rock Stone Industrial Ltd (“Global Rock”), executed in favor of SAIF Partners a stock pledge agreement, pursuant to which Global Rock pledged 13,024,725 shares of common stock of the Company as security for the obligations of the Company under the loan agreement. The loan was repaid on September 30, 2010.

On June 3, 2010, the Company entered into three loan agreements with Tianjin Rural Commercial Bank for RMB8,000,000 (approximately $1,217,637) each and a loan agreement for RMB6,000,000 (approximately $913,229). The annual interest rate is 5.8% and the loans are due on June 2, 2011. These loans are guaranteed by Tianjin Haitai Investment Guarantee Co., Ltd. with the guarantee fee of RMB360,000 (approximately $54,794) paid on July 20, 2010. The loans were subsequently renewed on June 10, 2011 (Note 22).

On July 30, 2010, the Company renewed two loan agreements with Shanghai Pudong Development Bank for RMB2,000,000 (approximately $304,409) and RMB8,000,000 (approximately $1,217,637). RMB 10,000,000 (approximately $1,522,047) was paid on November 4, 2010 and RMB 5,000,000 (approximately $761,024) was paid on January 6, 2011. The annual interest rate is 6.4% and the loans are due on November 3, 2011. These loans are guaranteed by Tianjin Haitai Investment Guarantee Co., Ltd. with the guarantee fee of RMB150,000 (approximately 22,831) paid on July 30, 2010.

On November 4, 2010, the Company entered into a loan agreement with Bank of Tianjin for RMB15,000,000 (approximately $2,283,071). The annual interest rate is 6.7% and the loan is due on November 3, 2011. The loan is guaranteed by Tianjin Bohai Investment Guarantee Co., Ltd. with the guarantee fee of RMB400,000 (approximately $60,882) paid on November 4, 2010.

On January 6, 2011, the Company entered into a loan agreement with Bank of Beijing for RMB10,000,000 (approximately $1,522,047). The annual interest rate is 6.1% and the loan is due on January 5, 2012. The loan is guaranteed by Beijing Huaxia Jingu Guarantee Co., Ltd. with the guarantee fee of RMB230,400 (approximately $35,068) paid on January 6, 2011.

F-20


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Due to Shareholders            
    March 31,     March 31,  
    2011     2010  
    (audited)     (audited)  
             
Li Liu, a director of the Company, officer and principal shareholder $  3,531,966    $ 3,394,534  
Other shareholders   1,918,267     1,918,267  
  $  5,450,233    $ 5,312,801  

On June 12, 2009, the persons who were shareholders of Milkgoat China before Milkgoat Industrial acquired their interests in Milkgoat China on January 15, 2008 (the “Original Shareholders”) entered into a restructuring agreement whereby the Original Shareholders, upon receipt of RMB30,500,000 (approximately $4,564,345) of dividend payable from Milkgoat Industrial agreed to provide an interest-free loan of the same amount to Milkgoat China. The entire amount of dividend was paid to the Original Shareholders and was lent to Milkgoat China by the Original Shareholders.

The amounts due to director, Li Liu and the other shareholders are unsecured with no stated interest and are not expected to be repaid within the fiscal year ending March 31, 2012.

11. Long-Term Loans

As of March 31, 2011 and 2010, the Company has the following long-term loans:

    March 31,     March 31,  
    2011     2010  
             
Installment loan from Daimler-chrysler Automotive Finance Ltd, interest free,
monthly principal and interest payment of $3,402 from February 5,
2010 to August 5, 2011
$ 17,697 $ 57,832
Less: current portion   (17,697 )   (40,823 )
Long-term loans, net of current portion $  -   $  17,009  

(a) The convertible notes payable, net of debt discount consists of the following as of March 31, 2011 and 2010:

    March 31,     March 31,  
    2011     2010  
             
Convertible notes payable $  4,604,447   $  -  
Accretion of debt discount - warrants and beneficial conversion feature   456,714     -  
Convertible notes payable, net $  5,061,161   $  -  

Accrued interest on the convertible notes payable as of March 31, 2011 was $0. The interest expense on the convertible notes for the year ended March 31, 2011 was $154,342.

Accrued interest on the convertible notes payable as of March 31, 2010 was $0. The interest expense on the convertible notes for the five months ended March 31, 2010 was $9,829. These notes have been converted into common shares on December 6, 2009.

F-21


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Income and Other Tax Payables

Income and other tax payables consist of the following:

    March 31,     March 31,  
    2011     2010  
             
Income tax (receivable) payable $  (251,670 ) $  17,585  
Value added tax payable   1,439,970     1,295,321  
Individual income withholding tax payable   4,962     316  
Other tax payables   21,232     24,972  
  $  1,214,494   $  1,338,194  

13. Income Tax

The enterprise income tax is reported on a separate entity basis.

United States

The Company was incorporated in Delaware and is subject to United States of America tax law. No provisions for income taxes have been made as the Company has a taxable loss for the year ended March 31, 2011. No tax benefit has been realized since a valuation allowance has offset the deferred tax asset resulted from the net operating loss.

BVI

Milkgoat Industrial was organized in the British Virgin Islands and is not subject to income taxes under the current laws of the British Virgin Islands.

PRC

Milkgoat China, Weinan Milkgoat, Fuping Milkgoat and Shaanxi Milkgoat are subject to PRC income tax. Income tax expense for the year ended March 31, 2011 and October 31, 2009 were $468,086 and $2,201,032, respectively. Income tax expense (benefit) for the five months ended March 31, 2010 and 2009 were ($289,093) and $869,614 respectively.

Effective January 1, 2008, the statutory PRC tax rate is 25%. Therefore, the statutory PRC rate for the years ended March 31, 2011 and October 31, 2009 and the five months ended March 31, 2010 and 2009 was 25%.

The income tax provision (benefit) consists of the following:

    Year ended     Five months ended     Year ended  
    March 31,     March 31,     October 31,  
    2011     2010     2009     2009  
                (unaudited)        
Current $  535,626   (155,700 ) 1,090,628   $  2,189,207  
    -     -     -     -  
Deferred   368,713     (472,893 )   (17,514 )   (455,475 )
Change in valuation allowance   (436,253 )   339,500     (203,500 )   467,300  
  $  468,086   (289,093 869,614   $  2,201,032  

F-22


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Income Tax – Continued

The following is a reconciliation of the tax derived by applying the PRC statutory rate to the earnings before income taxes, and comparing that to the recorded income tax provision (benefit):

    Year ended     Five months ended     Year ended  
    March 31,     March 31,     October 31,  
    2011     2010     2009     2009  
                (unaudited)        
                         
Tax provision (benefit) at PRC statutory rate   (25.0% )   (25.0% )   25.0%     25.0%  
(Over) under accrual in prior years   (10.5% )   0.0%     0.1%     1.7%  
Unrecognized tax benefit of current period tax losses   16.8%     0.6%     0.0%     0.0%  
Parent company's expenses not subject to PRC tax   75.5%     9.1%     3.5%     2.3%  
Effective tax rate   56.8%     (15.3% )   28.6%     29.0%  

The components of the deferred tax assets are as follows:

    March 31,     March 31,  
    2011     2010  
             
Deferred tax asset for NOL carryforwards - China $  263,600   $  173,000  
Deferred tax asset for NOL carryforwards - US   1,538,769     1,618,300  
Warrant and option expense   1,168,384     743,200  
Temporary difference from advertisement   -     232,236  
Temporary difference from intercompany sales profit   2,409     1,259  
Temporary difference from slotting fee   374,124     220,243  
Temporary difference from allowance for doubtful accounts receivable   28,816     19,151  
    3,376,102     3,007,389  
Valuation allowance   (2,970,753 )   (2,534,500 )
Total deferred tax assets $  405,349   $  472,889  

Deferred income taxes have been classified in the consolidated balance sheets as of March 31, 2011 and 2010 as follows:

    March 31,     March 31,  
    2011     2010  
             
Current assets $  374,124   $  -  
Noncurrent assets   31,225     472,889  
             
Net deferred tax assets $  405,349   $  472,889  

The valuation allowance for deferred tax assets as of March 31, 2011 and 2010 was $2,970,753 and $2,534,500, respectively. The change in total allowance for the year ended March 31, 2011was an increase of $436,253 and for the 5 months ended March 31,2010 was an increase of $339,500.

F-23


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. Income Tax – Continued

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating losses and temporary differences become deductible. Management considered projected future taxable income and tax planning strategies in making this assessment. At March 31, 2011, the Company had net operating loss carry forwards for United States Federal and State income tax purposes of approximately $3,585,455 (the “NOL carry forwards-US”), which were available to offset future US taxable income, if any, through 2031. At March 31, 2011, the Company had net operating loss carry forwards, associated with its subsidiaries Weinan Milkgoat, Fuping Milkgoat and Shaanxi Milkgoat, for PRC income tax purposes of approximately $1,054,542 (the “NOL carry forwards – China”), which are available to offset future PRC taxable income, if any, until it is fully offset against future taxable income subject to the approval of the Chinese tax authority. Based upon the uncertainty of future US taxable income, the limited operating histories of its subsidiaries, Weinan Milkgoat, Fuping Milkgoat, and Shaanxi Milkgoat, management has fully reserved the deferred tax asset associated with the warrant expense and NOL carry forwards for US and PRC income tax purposes.

The Company did not recognize any interest or penalties related to unrecognized tax benefits in the year ended March 31, 2011 and five months ended March 31, 2010. The Company had no uncertain positions that would necessitate recording of tax related liability. The Company is subject to examination by the respective tax authorities.

14. Warrants

Series A Warrants

During the year ended March 31, 2011, 14,196 shares of common stock had been issued upon the cashless exercise of 34,725 Series A Warrants. For the five months ended March 31, 2010, 13,022 shares of common stock had been issued upon the cashless exercise of 17,363 Series A Warrants.

Series C Warrants

As of March 31, 2011, 46,794 shares of common stock had been issued upon the cashless exercise of 171,185 Series C Warrants.

Series D Warrants and Placement Agent Fee

In connection with the merger with Milkgoat Industrial on June 6, 2008, we paid the placement agent an aggregate of approximately $104,000 in commissions and approximately $21,000 for expenses for its services in the offering. We also issued the placement agent and its designees Series D Warrants (which generally have the same terms as the Series A Warrants) to acquire an aggregate of 144,448 shares of common stock. The Series D Warrants were valued at $67,368 as the fair value. Of the total placement agent expense of $192,368, $150,828 was allocated to debt issuance costs and the remaining $41,540 of advisory cost was recorded as an expense. The debt issuance costs are amortized by the interest method over the term of the convertible notes.

For the year ended March 31, 2011 and October 31, 2009, amortization of debt issuance costs and accretion of debt discount from the warrants and embedded derivatives issued in respect of the merger on June 6, 2008 totaled $0 and $487,821 as they have been fully amortized and accreted as of March 31, 2011. For the five months ended March 31, 2010 and 2009, amortization of debt issuance costs and accretion of debt discount from the warrants and embedded derivatives issued in respect of the merger on June 6, 2008 (“merger”) totaled $91,227 and $118,913, respectively.

Each series of warrants issued in respect of the merger were valued using a Black-Scholes model. The following assumptions were used to calculate the fair value of Series B, C, E warrants: dividend yield of 0%, expected volatility of 70.31%, risk-free interest rate of 2.73%, expected life of 3 years, and stock price of $1.10 per share with exercise price of $1.08 -$1.35 per share. Assumptions were used to calculate the fair value of Series A and D warrants: dividend yield of 0%, expected volatility of 100%, risk-free interest rate of 0.73%, expected life of 1.5 years, and stock price of $1.4 per share with exercise price of $0.98 per share.

Pursuant to a registration rights agreement with the purchasers of 52 units of convertible promissory notes issued upon completion of merger with Milkgoat Industrial on June 6, 2008, the Company agreed to register the resale of the shares of common stock underlying these notes and Series A Warrants. The Company did not file a registration statement by July 21, 2008, as required by the agreement.

F-24


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. Warrants – Continued

On November 24, 2009, the Company and the investors entered into a Settlement Agreement (the “Settlement Agreement”), to settle the Company’s obligations under the aforementioned registration rights agreement for failure to file a registration statement in accordance with the terms of the registration rights agreement. Pursuant to the Settlement Agreement, each investor is entitled to convert the entire principal amount of and accrued interest on all of the notes it holds into the Company’s common stock at a conversion price of $1.08 per share.

The Company modified the Series A and Series D warrant exercise price to $0.98 per share in 2009 pursuant to the Settlement Agreement. Additional expenses of $71,400 and $17,100, respectively, were recorded as a result of the reduction in Series A and Series D warrant exercise prices.

During the year ended March 31, 2011, 5,840 shares of common stock had been issued upon the cashless exercise of 9,169 Series D Warrants. For the five months ended March 31, 2010, 78,432 shares of common stock had been issued upon the cashless exercise of 110,000 Series D Warrants.

15. Issuance of Convertible Notes and Series of Warrants

On September 27, 2010, the Company issued and sold to certain investors 892 units at a purchase price of $10,000 per unit, resulting in gross proceeds of $8.92 million to the Company. Each unit consists of a three-year, 9% convertible promissory note in the principal amount of $10,000 (the “9% Convertible Note”) and a three-year Series F common stock purchase warrant (the “Series F Warrant”), to purchase 1,250 shares of the Company’s common stock at an exercise price of $2.50 per share.

The 9% Convertible Notes are payable at an interest rate of 9% per annum, payable semiannually in arrears on the last day of the first and third calendar quarters (i.e., March 31 and September 30) commencing March 31, 2011 and mature on September 26, 2013 (the “Maturity Date”). Except for the secured Indebtedness (as defined in the 9% Convertible Note) of the Company and its subsidiaries in existence on September 27, 2010, the obligations of the Company under the 9% Convertible Notes will rank senior with respect to all existing indebtedness of the Company as of September 27, 2010 and to any and all Indebtedness incurred thereafter. The 9% Convertible Notes are also convertible into shares of common stock at any time prior to the Maturity Date at $2.00 per share, which conversion price is subject to weighted average and other customary anti-dilution protections. At any time after September 26, 2011, the Company may redeem all but not less than all of the outstanding principal amount of any 9% Convertible Notes by payment of 108% of the outstanding principal amount of the 9% Convertible Notes, together with accrued but unpaid interest.

The 9% Convertible Notes contain customary affirmative and negative covenants. The 9% Convertible Notes also contain customary events of default, upon which the holders of the 9% Convertible Notes may declare all outstanding 9% Convertible Notes to be due and payable immediately.

The Series F Warrants issued in connection with the private placement in September 2010 entitle the investors to purchase an aggregate of 1,115,000 shares of common stock at an initial exercise of $2.50 per share, which exercise price is subject to the customary weighted average and stock based anti-dilution protection. The Series F Warrants may be exercised in a cash or cashless way at any time upon the election of the holders until September 26, 2013.

Placement Agent Fee

The Company paid a cash commission of $713,600, which is equal to 8% of the gross proceeds of the financing to the placement agent. In addition, the Company issued Series F Warrants to the designees of the placement agent to purchase an aggregate of 312,200 shares of common stock of the Company at an exercise price of $2.50 per share, as partial compensation for services provided by them in connection with the private placement.

F-25


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Issuance of Convertible Notes and Series of Warrants - Continued

Make Good Escrow Agreement

On September 27, 2010, the Company, a major shareholder of the Company, Global Rock, Euro Pacific Capital, Inc. and Escrow, LLC entered into a make good escrow agreement (the “Make Good Escrow Agreement”). Pursuant to the Make Good Escrow Agreement, Global Rock agreed to place a total of 669,000 shares of common stock held by it, which is equal to 15% of the amount of shares of common stock issuable upon conversion of the 9% Convertible Notes (the “Make Good Shares”), into escrow to secure certain make good obligations of the Company. In the event that the combined net sales of the Company of both of the fiscal years ending March 31, 2011 and 2012 is less than $125 million, Global Rock will transfer the Make Good Shares to the investors, on a pro rata basis to the extent of shortfall of the actual net sales achieved compare to the guaranteed net sales of $125 million for no additional consideration. As of March 31, 2011, it is probable that the guaranteed net sales of $125 million for fiscal years ending March 31, 2011 & 2012 may not be achieved. The estimated fair value as of March 31, 2011 of the 266,390 shares expected to be delivered is $205,683 and is reflected as accrued expenses – non current on the balance sheet as of March 31, 2011. The fair value of Make Good Escrow Agreement will be analyzed every period end using a probability weighted assessment method and adjusted if necessary.

Registration Rights Agreement

In connection with the private placement of September 2010, the Company and the investors entered into a registration rights agreement (the “Registration Rights Agreement”), pursuant to which, the Company granted registration rights to holders of registrable securities, which include (i) the shares of common stock issuable upon the conversion of the 9% Convertible Notes, (ii) the Make Good Shares, as applicable, (iii) the shares of common stock issuable upon the exercise of Series F Warrants issued to the investors and the placement agent, and (iv) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any price adjustment as a result of such stock splits, reverse stock splits or similar events with respect to any of the securities referenced in (i) – (iii) above.

Pursuant to the Registration Rights Agreement, the Company is required to file a registration statement on Form S-1 (the “Registration Statement”), within 30 days after the closing of the private placement, or the Closing, and cause the Registration Statement to be declared effective by the Securities and Exchange Commission with 180 days after the Closing. The Company may be subject to liquidated damages in an amount up to 8% ($713,600) of the aggregate investment amount paid by the investors in the private placement if it is unable to file, obtain and maintain effectiveness of the Registration Statement as required by the Registration Rights Agreement by March 27, 2011. The Company filed the Registration Statement on October 27, 2010. As of March 31, 2011, the Company has accrued a registration penalty of $267,600.

Closing Escrow Agreement

On September 27, 2010, the Company also entered into a closing escrow agreement with the placement agent and the escrow agent (the “Closing Escrow Agreement”), pursuant to which, among other things, the Company has placed a certain amount of cash received from the private placement ($408,090) (the “Holdback Amount”), with the escrow agent, which is sufficient to satisfy the payment to the investors of one semiannual interest payment due on the aggregate principal amount of all 9% Convertible Notes issued in the private placement, which includes accrued interest due on the principal amount of the 9% Convertible Notes from September 27, 2010 through March 31, 2011. If, an event of default (as defined in the 9% Convertible Notes) is declared by the placement agent with respect to a failure by the Company to make a semiannual interest payment to the investors in accordance with the 9% Convertible Notes, the escrow agent will disburse a certain portion of the Holdback Amount to the investors, and within 30 days following the disbursement, the Company will deposit an additional amount equal to the Holdback Amount with the escrow agent to be retained and disbursed. On the Maturity Date or at any time prior to the Maturity Date when 75% of all 9% Convertible Notes have been converted, all remaining funds of the Holdback Amount will be disbursed to the Company.

F-26


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Issuance of Convertible Note and Series of Warrants - Continued

Accounting for Convertible Notes and Series F Common Stock Warrants

The 9% Convertible Notes and Series F Warrants (issued to both investors and the placement agent) contain ratchet provision which will reduce the conversion and exercise price, based on a formula, if the Company sells or issues securities at a price lower than the conversion or exercise price. The embedded conversion option of the 9% Convertible Notes and the warrants do not meet the test of being indexed only to the Company’s common stock as defined in ASC 815-40-15 because the formula is not based on the market price. Accordingly, the embedded conversion option and warrants are accounted for as derivative liabilities and are required to be re-measured at the end of every reporting period with the change in fair value in the statement of operations.

The 8% placement agent fee and other offering costs totaling $888,180 and the fair value of the Series F warrants issued to the placement agent of $231,929 are accounted for deferred financing fees. The gross proceeds of $8,920,000 are allocated to the fair value of the Series F warrants issued to the investors of $828,319, fair value of the embedded conversion option of $3,487,233, and the carrying value of the convertible notes of $4,604,447. The fair value of the embedded conversion option is calculated using a Cox-Ross-Rubinstein (“CRR”) binomial model with the following assumptions: conversion price of $2.00, risk free interest rate of 0.66%, expected term of 3 years, and a volatility of 130%. The fair value of the warrants is calculated using the CRR binomial model with the following assumptions: exercise price of $2.5 per share, risk free interest rate of 0.66%, expected term of 3 years, and a volatility of 130%. The expected volatility is based on average volatility of five comparable companies in the same industry and the Company’s historical volatility.

The value of the embedded conversion option and the warrants are re-measured at March 31, 2011 using the CRR binomial model with the same assumptions as stated above except for a risk free interest rate of 0.91% and volatility of 120%. The decrease in fair value of these derivative liabilities for the year ended March 31, 2011 totaled $2,771,081, respectively (Note 16).

The initial carrying value of the convertible notes will be accreted to their redemption value of $8,920,000 over the three years term of the convertible notes at an effective interest rate of 34.77 %. Effective interest expense recorded for the year ended March 31, 2011 is $864,805.

The following table summarizes all of the Company’s warrants outstanding as of March 31, 2011.

    Shares outstanding     Fair Value  
Warrants outstanding in respect of the merger:            
Series A Warrants   549,812   $  432,097  
Series B Warrants   2,148,148     1,144,743  
Series C Warrants   14,000     6,530  
Series D Warrants   25,279     19,867  
    2,737,239   $  1,603,237  
             
Warrants outstanding for extension of maturity date of loan from Allied Merit:            
Series E Warrants   250,000   $  233,547  

F-27


YAYI INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Issuance of Convertible Note and Series of Warrants - Continued

                Exercise Price  
    Warrant     Vested     per Common  
    Shares     Shares     Stock Range  
                   
Balance, October 31, 2009   3,329,681     3,329,681   $ 1.08-$1.35  
                   
Granted or vested during the 5 months ended March 31, 2010   -     -     -  
Exercised during the 5 months ended March 31, 2010   (127,363 )   (127,363 ) $ 0.98  
Expired during the 5 months ended March 31, 2010   -     -     -  
Balance, March 31, 2010   3,202,318     3,202,318   $ 0.98-$1.35  
                   
Granted or vested during the year ended March 31, 2011   1,427,200     1,427,200   $ 2.50  
Exercised during the year ended March 31, 2011   (215,079 )   (215,079 ) $ 0.98-$1.35  
Expired during the year ended March 31, 2011   -     -     -  
Balance, March 31, 2011   4,414,439     4,414,439   $ 0.98-$1.35  

The following table summarizes the weighted average remaining