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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10−Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2014

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

For the transition period from ____________ to _____________

Commission File Number: 000-52899

NUTRASTAR INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada	80-0264950
(State or other jurisdiction of	(I.R.S. Empl. Ident. No.)
incorporation or organization)

4/F Yushan Plaza

51 Yushan Road

Nangang District, Harbin 150090

People’s Republic of China

(Address of principal executive offices, Zip Code)

(86) 451-82287746

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]    No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 10, 2014 is as follows:

Class of Securities	Shares Outstanding
Common stock, $0.001 par value	16,909,986

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TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION	Page
Item 1.	Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4.	Controls and Procedures	13
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 1A.	Risk Factors	14
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3.	Defaults Upon Senior Securities	14
Item 4.	Mine Safety Disclosures	14
Item 5.	Other Information	14
Item 6.	Exhibits	14

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PART I FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page(s)
Condensed Consolidated Balance Sheets	F-2
Condensed Consolidated Statements of Income and Comprehensive Income	F-3
Condensed Consolidated Statements of Stockholders’ Equity	F-4
Condensed Consolidated Statements of Cash Flows	F-5
Notes to Condensed Consolidated Financial Statements	F-6 – F-35

F-1

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS EXPRESSED IN US DOLLARS)

		September 30, 2014			December 31, 2013
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	118,570,679		$	102,599,186
Accounts receivable		95,745			56,922
Inventories		1,311,948			691,847
Prepayments and other receivables		844,211			1,300,012
Total current assets		120,822,583			104,647,967
OTHER ASSETS
Intangible assets, net		731,913			1,107,737
Property, plant and equipment, net		14,595,098			15,481,249
Total assets	$	136,149,594		$	121,236,953
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Other payables and accruals	$	1,078,043		$	1,167,957
Taxes payable		2,411,915			2,879,172
Due to a related party		510,649			265,223
Preferred stock dividend payable		647,337			738,903
Total current liabilities		4,647,944			5,051,255
Total liabilities		4,647,944			5,051,255
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $0.001 par value, 1,000,000 shares authorized, 77,776 shares and 110,066 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively; aggregate liquidation preference amount: $2,177,728 and $3,081,848, plus accrued but unpaid dividend of $647,337 and $738,903, at September 30, 2014 and December 31, 2013, respectively		1,773,772			2,510,183
Common stock, $0.001 par value, 190,000,000 shares authorized, 16,953,541 shares issued and 16,909,986 shares outstanding at September 30, 2014; 16,421,161 shares issued and 16,377,606 shares outstanding at December 31, 2013		16,954			16,422
Additional paid-in capital		21,089,712			19,934,551
Statutory reserves		4,989,031			4,983,935
Treasury stock, at cost, 43,555 shares as of September 30, 2014 and December 31,2013		(78,767	)		(78,767	)
Retained earnings		96,195,815			80,242,877
Accumulated other comprehensive income		7,515,133			8,576,497
Total stockholders' equity		131,501,650			116,185,698
Total liabilities and stockholders' equity	$	136,149,594		$	121,236,953

See accompanying notes to consolidated financial statements

F-2

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(AMOUNTS EXPRESSED IN US DOLLARS)

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2014			2013			2014			2013
NET REVENUE	$	11,164,809		$	10,935,950		$	31,036,052		$	30,221,420
Cost of goods sold		(2,172,840	)		(2,159,255	)		(6,754,154	)		(6,662,959	)
GROSS PROFIT		8,991,969			8,776,695			24,281,898			23,558,461
Selling expenses		(326,760	)		(435,920	)		(1,052,655	)		(1,340,176	)
General and administrative expenses		(575,352	)		(588,375	)		(1,781,985	)		(1,877,642	)
Income from operations		8,089,857			7,752,400			21,447,258			20,340,643
Other income (expenses):
Interest income		102,481			72,633			291,565			235,122
Foreign exchange differences		(7,899	)		21,517			(27,627	)		47,974
Change in fair value of warrants		-			-			-			173
Total other income		94,582			94,150			263,938			283,269
Income before income taxes		8,184,439			7,846,550			21,711,196			20,623,912
Provision for income taxes		(2,124,781	)		(2,066,105	)		(5,622,242	)		(5,465,974	)
NET INCOME		6,059,658			5,780,445			16,088,954			15,157,938
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments		9,378			521,176			(1,061,364	)		2,150,468
COMPREHENSIVE INCOME	$	6,069,036		$	6,301,621		$	15,027,590		$	17,308,406
Earnings per share:
Basic	$	0.36		$	0.36		$	0.95		$	0.94
Diluted	$	0.34		$	0.34		$	0.91		$	0.89
Weighted average number of shares outstanding:
Basic		16,878,627			15,919,261			16,799,048			15,882,507
Diluted		17,702,788			17,060,119			17,684,076			17,018,122

See accompanying notes to consolidated financial statements

F-3

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(AMOUNTS EXPRESSED IN US DOLLARS)

																										Accumulated
	Preferred Stock						Common Stock							Additional												Other
		Number						Number of						Paid-In			Treasury			Statutory			Retained			Comprehensive
		of Shares			Amount			Shares			Amount			Capital			Stock			Reserves			Earnings			Income			Total
Balance at January 1, 2014		110,066		$	2,510,183			16,377,606		$	16,422		$	19,934,551		$	(78,767	)	$	4,983,935		$	80,242,877		$	8,576,497		$	116,185,698
Net income		-			-			-			-			-			-			-			16,088,954			-			16,088,954
Foreign currency translation adjustment		-			-			-			-			-			-			-			-			(1,061,364	)		(1,061,364	)
Preferred stock converted into common stock		(32,290	)		(736,411	)		322,900			323			736,088			-			-			-			-			-
Issuance common stock for Preferred stock dividend		-			-			79,480			79			222,407			-			-			-			-			222,486
Preferred stock dividend		-			-			-			-			-			-			-			(130,920	)		-			(130,920	)
Appropriation of statutory reserves		-			-			-			-			-			-			5,096			(5,096	)		-			-
Share-based payments to non employee (IR)		-			-			-			-			92,371			-			-			-			-			92,371
Share-based payments to employees		-			-			-			-			104,425			-			-			-			-			104,425
Issuance of unregistered common stock to non-employee (IR)		-			-			42,500			43			(43	)		-			-			-			-			-
Issuance of restricted stock to employees		-			-			87,500			87			(87	)		-			-			-			-			-
Balance at September 30, 2014 (Unaudited)		77,776		$	1,773,772			16,909,986		$	16,954		$	21,089,712		$	(78,767	)	$	4,989,031		$	96,195,815		$	7,515,133		$	131,501,650

See accompanying notes to consolidated financial statements

F-4

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(AMOUNTS EXPRESSED IN US DOLLARS)

		For the Nine Months Ended September 30,
		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,088,954		$	15,157,938
Adjustments to reconcile net income to cash provided by operating activities:
Change in fair value of warrants		-			(173	)
Depreciation and amortization		1,113,418			1,101,320
Share-based compensation expense		104,425			142,653
IR unregistered stock compensation expense		92,371			4,767
(Increase) decrease in assets:
Accounts receivable		(39,386	)		(6,347	)
Inventories		(627,118	)		(645,094	)
Prepayments and other receivables		444,593			127,818
Increase (decrease) in liabilities:
Other payables and accruals		(80,074	)		421,181
Advance from related party		237,956			-
Taxes payable		(441,777	)		(489,557	)
Net cash provided by operating activities		16,893,362			15,814,506
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from/(repayment to) related party		29,620			(36,106	)
Net cash provided by/(used in) financing activities		29,620			(36,106	)
Foreign currency translation adjustment		(951,489	)		1,855,165
INCREASE IN CASH AND CASH EQUIVALENTS		15,971,493			17,633,565
CASH AND CASH EQUIVALENTS, at the beginning of the period		102,599,186			75,526,533
CASH AND CASH EQUIVALENTS, at the end of the period	$	118,570,679		$	93,160,098
NON-CASH TRANSACTIONS
Preferred stock and dividend converted into common stock	$	958,897		$	-
Preferred stock dividend payable		130,920			170,601
Share-based payment to officers and directors under equity incentive plan		104,425			142,653
Share-based payment – IR unregistered stock compensation expense		92,371			4,767
SUPPLEMENTAL DISCLOSURE INFORMATION
Income taxes paid	$	5,839,167		$	5,605,361

See accompanying notes to consolidated financial statements

F-5

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1      DESCRIPTION OF BUSINESS AND ORGANIZATION

Nutrastar International Inc. (“Nutrastar” or the “Company”) was incorporated in the State of Nevada on December 22, 2002. On December 23, 2008, the Company completed a reverse acquisition with New Zealand WAYNE’S New Resources Development Co., Ltd. (“New Resources”). As a result of the reverse acquisition with New Resources, the Company is no longer a shell company and active business operations have been revived. Nutrastar together with its subsidiaries and affiliates as described below are referred to as the “Company”.

On May 19, 2009, the Company filed Amended and Restated Articles of Incorporation with the State of Nevada to amend the Company’s Articles of Incorporation to, among other things, (1) change the name of the Company from “YzApp International Inc.” to “Shuaiyi International New Resources Development Inc.,” (2) increase the total number of shares of common stock that the Company has the authority to issue from 50,000,000 to 190,000,000 shares and (3) effect a one for 114.59 reverse split of the Company’s outstanding common stock.

On January 11, 2010, the Company filed a Certificate of Amendment to its Articles of Incorporation with the State of Nevada, pursuant to which the Company further changed its name from "Shuaiyi International New Resources Development Inc." to "Nutrastar International Inc."

On October 22, 2010, New Resources, a wholly-owned British Virgin Islands subsidiary of the Company, entered into an equity transfer agreement with the original founders of Heilongjiang Shuaiyi (the “Shuaiyi Founders”), pursuant to which New Resources transferred all of its equity interests in Heilongjiang Shuaiyi New Energy Development Co., Ltd. (“Heilongjiang Shuaiyi”), a then wholly-owned Chinese subsidiary of New Resources, to the Shuaiyi Founders (the “Equity Transfer”).

In connection with the Equity Transfer, the Shuaiyi Founders, the Company’s indirectly wholly-owned Chinese subsidiary incorporated on July 13, 2010, Harbin Baixin Biotech Development Co., Ltd. (“Harbin Baixin”) and Heilongjiang Shuaiyi entered into the following commercial arrangements (the “Contractual Arrangement” and together with the Equity Transfer, the “Restructuring”), pursuant to which the Company has contractual rights to control and operate the businesses of Heilongjiang Shuaiyi and Heilongjiang Shuaiyi's two wholly-owned Chinese subsidiaries, Daqing Shuaiyi Biotech Co., Ltd. (“Daqing Shuaiyi”) and Harbin Shuaiyi Green & Specialty Food Trading LLC (“Harbin Shuaiyi” and together with Heilongjiang Shuaiyi and Daqing Shuaiyi, the “VIEs”):

Service Agreement
Pursuant to a technical service agreement, entered into by and between Harbin Baixin and Heilongjiang Shuaiyi, Harbin Baixin will provide certain exclusive technical services to Heilongjiang Shuaiyi in exchange for the payment by Heilongjiang Shuaiyi of a service fee that is calculated based on the market price in light of the particulars of the service and the time of such service provided by Harbin Baixin (the “Service Agreement”);

Option Agreement
Pursuant to an exclusive purchase option agreement, entered into by and among Harbin Baixin, the Shuaiyi Founders and Heilongjiang Shuaiyi, the Shuaiyi Founders granted to Harbin Baixin an option to purchase at any time during the term of this agreement, all or part of the equity interests in Heilongjiang Shuaiyi (the “Equity Interests”), at the exercise price equal to the lowest possible price permitted by Chinese laws (the “Option Agreement”); and

F-6

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1      DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED)

Voting Rights Agreement
Pursuant to a voting rights proxy agreement, entered into by and among Harbin Baixin, the Shuaiyi Founders and Heilongjiang Shuaiyi, each of the Shuaiyi Founders irrevocably entrusted Harbin Baixin and any entities or individuals designated by Harbin Baixin to, among others, exercise its voting rights and other rights as a shareholder of Heilongjiang Shuaiyi (the “Voting Rights Agreement”);

Pledge agreement
Pursuant to an equity pledge agreement, entered into by and among Harbin Baixin, the Shuaiyi Founders and Heilongjiang Shuaiyi, the Founders pledged all of the Equity Interests to Harbin Baixin to secure the full and complete performance of the obligations and liabilities on the part of the Shuaiyi Founders and Heilongjiang Shuaiyi under this and above contractual arrangements (the “Pledge Agreement” and together with the Service Agreement, the Option Agreement, the Voting Rights Agreement and the Equity Transfer Agreement, the “Restructuring Documents”).

As a result of the Restructuring, the Company transferred all of its indirect equity interests in Heilongjiang Shuaiyi back to the Shuaiyi Founders, among whom, Ms. Lianyun Han became a majority shareholder of Heilongjiang Shuaiyi by owning a 68.3% equity interest in Heilongjiang Shuaiyi. At the same time, through the above contractual agreement, the Company maintains substantial control over the VIEs’ daily operations and financial affairs, election of their senior executives and all matters requiring shareholder approval. As the primary beneficiary of the VIEs, the Company is entitled to consolidate the financial results of the VIEs in its own consolidated financial statements under Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 810 and related subtopics related to the consolidation of variable interest entities (collectively, “ASC Topic 810”).

F-7

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1      DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED)

As of September 30, 2014, details of the subsidiaries and affiliates of the Company are as follows:

						Percentage
		Domicile and date				of effective
Names		of incorporation		Paid-up capital		ownership		Principal activities
Subsidiaries
New Zealand WAYNE’S New Resources Development Co., Ltd (“New Resources”)		British Virgin Islands, March 13, 2008		$50,000		100%		Holding company of the other subsidiaries
Oriental Global Holdings Limited (“Oriental Global”)		Hong Kong, May 28, 2010		HK$1		100%		Holding company of Harbin Baixin
Harbin Baixin Biotech Development Co., Ltd (“Harbin Baixin”)		People’s Republic of China (“PRC”), July 13, 2010		$3,000,000		100%		Cordyceps Militaris (aka Chinese Golden Grass) cultivation technology research and development, services and Cordyceps Militaris products wholesale
VIEs
Heilongjiang Shuaiyi New Energy Development Co., Ltd (“Heilongjiang Shuaiyi”)		PRC, July 11, 2006		RMB60,000,000		100%		Principally engaged in investment and property holding
Daqing Shuaiyi Biotech Co. Ltd. (“Daqing Shuaiyi”)		PRC, August 8, 2005		RMB50,000,000		100%		Growing and sales of Cordyceps Militaris, which is widely used for Chinese medicine, and functional health beverages
Harbin Shuaiyi Green and Specialty Food Trading LLC. (“Harbin Shuaiyi”)		PRC, May 18, 2001		RMB1,500,000		100%		Sales of organic and specialty food products

F-8

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2      SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

Basis of preparation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Principle of consolidation
The accompanying consolidated financial statements include the financial statements of Nutrastar and its wholly owned subsidiaries, New Resources, Oriental Global and Harbin Baixin, and its VIEs Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi. All significant inter-company balances or transactions have been eliminated on consolidation.

The Company has evaluated the relationship with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi and based on the result of the evaluation, believes that these entities are variable interest entities and that it is the primary beneficiary of these entities. Consequently, the Company has included the results of operations of these variable interest entities in the consolidated financial statements. The Company’s relationships with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are governed by a series of contractual arrangements. Under PRC laws, Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are independent legal persons and none of them is exposed to liabilities incurred by the other parties.

The accounts of Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are consolidated in the accompanying financial statements pursuant to the Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 810 and related subtopics related to the consolidation of variable interest entities. The Company does not have any non-controlling interests in net income and accordingly, did not subtract any net income in calculating the net income attributable to the Company. Because of the contractual arrangements, the Company had a pecuniary interest in the VIEs that require consolidation of the Company’s and the VIEs’ financial statements.

Use of estimates
The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates under different assumptions or conditions. Significant estimates for the periods ended September 30, 2014 and 2013 include the useful lives of property and equipment and intangible assets, assumptions used in assessing impairment for long-term assets and the fair values of share-based payments.

Cash and cash equivalents
Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value.

Accounts receivable
Accounts receivable is stated at cost, net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and provides allowances where there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends.

F-9

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2      SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Inventories
Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. Management will write down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.

Derivative financial instruments
The Company evaluates all its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the consolidated statements of income. For stock-based derivative financial instruments, the Company uses Monte-Carlo simulation methods to value the derivative instruments at inception and on subsequent valuation dates.

Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred.

Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:

	Useful Life
	(In years)
Buildings	20-40
Machinery and motor vehicles	5-10
Office equipment	5

Intangible assets

The Company’s intangible assets include a ten-year exclusive right to use a proprietary process and computer software. The Company’s amortization policy on intangible assets is as follows:

	Useful Life
	(In years)
Exclusive right	10
Computer software	4

The Company accounts for its intangible assets pursuant to FASB ASC Subtopic 350-30, “General Intangibles Other Than Goodwill”. Under ASC 350-30-35, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Under FASB ASU No.2012-02 Intangible-Goodwill and Other (Topic 350), the Company assesses qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The Company would not be required to calculate the fair value of an indefinite-lived intangible asset unless the Company determines, based on a qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. If the qualitative assessment fails, intangibles with indefinite lives are further evaluated quantitatively for impairment by comparing the asset’s estimated fair value with its carrying value, based on cash flow methodology.

F-10

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2      SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Impairment of long-lived assets
The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups.

Revenue recognition
Revenue is recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.

Sales revenue is recognized net of value added and sales related taxes, sales discounts and returns at the time when the merchandise is delivered to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not recorded an allowance for estimated sales returns.

Share-based payments
The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.

The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Under FASB ASC Topic 718 and FASB ASC Subtopic 505-50, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as expenses as the goods or services are received.

Income taxes
The Company is subject to income taxes in the United States and other foreign jurisdictions where it operates. The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”. FASB ASC Topic 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

The Company’s income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the locations where it operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria of FASB ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 (formerly FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes”). The interpretation prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

F-11

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2      SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Research and development costs
Research and development costs are expensed as incurred, and are charged to general and administrative expenses. Research and development costs were $119,383 and $119,452 for the nine months ended September 30, 2014 and 2013, respectively.

Advertising costs
The Company expenses all advertising costs as incurred. Advertising costs charged to selling expenses were nil and $10,401 for the nine months ended September 30, 2014 and 2013, respectively.

Shipping and handling costs
Substantially all costs of shipping and handling of products to customers are included in selling expense. Shipping and handling costs for the nine months ended September 30, 2014 and 2013 were insignificant.

Comprehensive income
FASB ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Accumulated other comprehensive income includes foreign currency translation adjustments.

Foreign currency
The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The PRC subsidiaries and VIEs within the Company maintain their books and records in their functional currency, Chinese Renminbi (“RMB”), being the lawful currency in the PRC. Assets and liabilities of the PRC subsidiaries and VIEs are translated from RMB into US Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of People’s Bank of China and are as follows:

		September 30, 2014			December 31, 2013
Balance sheet items, except for equity accounts		US$1=RMB6.1525			US$1=RMB6.0969

		Three months ended September 30,
		2014			2013
Items in the statements of income		US$1=RMB6.1568			US$1=RMB6.1678

		Nine months ended September 30,
		2014			2013
Items in the statements of income and cash flows		US$1=RMB6.1450			US$1=RMB6.2149

No representation is made that the RMB amounts could have been, or could be, converted into US Dollars at the above rates. The value of RMB against US dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US Dollar reporting.

F-12

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2      SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Segment reporting
The Company follows FASB ASC Topic 280, “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance.

The Company believes that during the three and nine months ended September 30, 2014 and 2013, it operated in three business segments – growing and sales of Cordyceps Militaris, which is widely used for Chinese medicine, manufacturing and sale of functional health beverages featuring the Cordyceps Militaris as a core ingredient, and sales of organic and specialty products. The manufacturing and sale of Cordyceps Militaris functional health beverages was launched in the fourth quarter of 2010.

Throughout the three and nine months ended September 30, 2014 and 2013, all of the Company’s operations were carried out in one geographical segment - China.

Earnings per share
The Company reports earnings per share in accordance with the provisions of FASB ASC Topic 260, "Earnings per Share". FASB ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution (using the treasury stock method) that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

Commitments and contingencies
The Company follows FASB ASC Subtopic 450-20, “Loss Contingencies” in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

Recent accounting pronouncements
In April 2014, the FASB issued ASU 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Entities may “early adopt” the guidance for new disposals. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" which clarifies and improves the principles for recognizing revenue and develops a common revenue standard for United States generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) that among other things, improves comparability of revenue recognition practices and provides more useful information to users of financial statements through improved disclosure requirements. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently reviewing the effect of ASU 2014-09 on its revenue recognition.

In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718)" which provides explicit guidance on the treatment of awards with performance targets that could be achieved after the requisite service period. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.

F-13

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2      SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Recent accounting pronouncements (continued)
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

NOTE 3      FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

The Company values its financial instruments as required by FASB ASC 320-12-65 (formerly SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”). The estimated fair value amounts have been determined by the Company, using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

	Level one —	Quoted market prices in active markets for identical assets or liabilities;
	Level two —	Inputs other than level one inputs that are either directly or indirectly observable; and
	Level three —	Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The carrying values of cash and cash equivalents, trade and other receivables and payables approximate their fair values due to the short maturities of these instruments.

For stock-based derivative financial instruments, the Company uses Monte-Carlo simulation methods to value the derivative instruments at inception and on subsequent valuation dates. These stock-based derivative financial statements, including Series A Series B Warrants and Series C Warrants that expired on December 16, 2012 and June 28, 2013, respectively (Note 10).

There was no asset or liability measured at fair value on a non-recurring basis as of September 30, 2014 and December 31, 2013.

NOTE 4      ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following:

		September 30, 2014			December 31, 2013
Accounts receivable	$	95,745		$	56,922
Less: Allowance for doubtful debts		-			-
Accounts receivable, net	$	95,745		$	56,922

No allowance was deemed necessary as of September 30, 2014 and December 31, 2013.

F-14

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5      INVENTORIES

Inventories by major categories are summarized as follows:

		September 30, 2014			December 31, 2013
Raw materials	$	221,836		$	240,498
Work in progress		521,071			404,190
Finished goods		569,041			47,159
Total	$	1,311,948		$	691,847

NOTE 6      PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consisted of the following:

		September 30, 2014			December 31, 2013
Prepayments for raw material purchasing	$	818,409		$	1,271,672
Other receivables, net of $nil allowance		25,802			28,340
	$	844,211		$	1,300,012

NOTE 7      INTANGIBLE ASSETS, NET

Intangible assets, net consisted of the following:

		September 30, 2014			December 31, 2013
Computer software, cost	$	1,614		$	1,629
Exclusive right to use a secret process, cost		4,878,025			4,922,509
Less: Accumulated amortization		(4,147,726	)		(3,816,401	)
	$	731,913		$	1,107,737

In April 2006, the Company purchased from a third party a ten-year exclusive right to use a secret process and method in the cultivation and growing of Cordyceps Militaris, which is widely used for traditional Chinese medicine, for a cash consideration of RMB30,000,000, payable over five years. The exclusive right is amortized over its term of ten years using the straight-line method.

Amortization expense was $366,259 and $362,217 for the nine months ended September 30, 2014 and 2013, respectively, and $121,832 and $121,772 for the three months ended September 30, 2014 and 2013 respectively. The estimated expense of the intangible assets over each of the next three years will be:

Remainder of fiscal 2014	$	122,033
Fiscal 2015		487,846
Fiscal 2016		122,034
	$	731,913

F-15

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8      PROPERTY, PLANT AND EQUIPMENT, NET

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

		September 30, 2014			December 31, 2013
Cost:
Buildings	$	19,604,834		$	19,783,618
Office equipment		28,949			29,213
Machinery		136,570			137,815
Motor vehicles		118,168			119,246
Total cost		19,888,521			20,069,892
Less: Accumulated depreciation		(5,293,423	)		(4,588,643	)
Net book value	$	14,595,098		$	15,481,249

Depreciation expense was $747,159 and $739,103 for the nine months ended September 30, 2014 and 2013 respectively, and $248,534 and $248,420 for the three months ended September 30, 2014 and 2013, respectively.

NOTE 9      OTHER PAYABLES, ACCRUALS AND TAXES PAYABLE

Other payables and accruals consisted of the following:

		September 30, 2014			December 31, 2013
Accrued staff costs	$	1,030,483		$	1,086,644
Other payables		47,560			81,313
	$	1,078,043		$	1,167,957

Taxes payable consisted of the following:

		September 30, 2014			December 31, 2013
Value added tax	$	240,503		$	451,340
Income tax		2,078,668			2,316,261
Others		92,744			111,571
	$	2,411,915		$	2,879,172

F-16

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10      STOCKHOLDERS’ EQUITY

Private Placement in 2010

On December 17, 2009, the Company completed a private placement transaction and sold 1,000,000 shares of common stock to certain accredited investors at $2.50 per share for a total of $2.5 million pursuant to a securities purchase agreement. In addition, the Company issued to each of the investors two warrants to purchase in aggregate 500,000 shares of common stock, including a Series A warrant having a term of three years with an exercise price of $3.25 per share and a Series B warrant having a term of three years with an exercise price of $4.00 per share, both of which are subject to the usual adjustments for certain corporate events.

In addition, pursuant to the securities purchase agreement, the Shareholder agreed to place a total of 1,000,000 shares of the Company’s common stock held by it into escrow to secure the make good obligations described below on behalf of the investors. Under the securities purchase agreement, the Shareholder agreed that: (i) in the event that the Company’s consolidated financial statements reflect less than $9,000,000 of after-tax income for the fiscal year ended December 31, 2010, it would transfer to the investors, on a pro rata basis, for no additional consideration, 500,000 shares of common stock owned by it; and (ii) in the event that the Company’s consolidated financial statements reflect less than $11,000,000 of after-tax net income for the fiscal year ending December 31, 2011, it would transfer to the investors, on a pro rata basis, for no additional consideration, 500,000 shares of common stock owned by it. The Company achieved the 2011 and 2010 performance threshold and no escrow shares had been transferred to the investors.

On May 27, 2010, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with certain investors, pursuant to which, the Company agreed to issue and sell up to an aggregate of 250,000 units at a purchase price of $28.56 per unit, for an aggregate purchase price of up to $7,140,000 (the "Aggregate Purchase Price"). Each unit consists of (i) one share of a newly designated series A preferred stock, ("Series A Preferred Stock"), with an initial one-to-ten conversion ratio convertible into shares of the Company’s common stock, ("Common Stock"), and (ii) warrants to purchase five shares of Common Stock at an exercise price of $3.40 per share ("Warrants", together with the shares of Series A Preferred Stock, the "Securities"). In addition, the Company and the investors agreed, that the placement agent of this transaction, will receive from the investors a fee equal to 2% of the Aggregate Purchase Price and Warrants to purchase 2% of the aggregate number of shares of Common Stock that shares of Series A Preferred Stock to be issued under the Securities Purchase Agreement are convertible into.

Pursuant to the Securities Purchase Agreement, the Company also granted registration rights to holders of registrable securities, which include shares of Common Stock issued or issuable upon conversion of shares of the Series A Preferred Stock and shares of Common Stock issuable upon exercise of the Warrants (the "Registrable Securities"). Holders holding a majority of the Securities then outstanding may request the Company to file a registration statement to register the Registrable Securities within a pre-defined period (the "Registration Statement"). The Company may be subject to liquidated damages in the amounts prescribed by the Securities Purchase Agreement if it is unable to file the Registration Statement timely or maintain its effectiveness as required by the Securities Purchase Agreement.

On June 7, 2010, the Company effected the first closing of a private placement transaction and issued approximately 123,403 units at a purchase price of $28.56 per unit for gross proceeds of $3,524,342.

On June 28, 2010, the Company effected the second closing of a private placement transaction and issued approximately 74,303 units at a purchase price of $28.56 per unit for gross proceeds of $2,121,938.

F-17

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10      STOCKHOLDERS’ EQUITY (CONTINUED)

Stock Repurchase

Pursuant to the Securities Purchase Agreement, a written request was received from a holder holding a majority of Series A Preferred Stock on July 14, 2010 and the Company filed the Registration Statement on August 11, 2010. The Registration Statement was declared effective by the Securities and Exchange Commission (“SEC”) on September 15, 2010.

On August 24, 2011, the Board of Directors of the Company authorized a repurchase of up to $5 million of the Company’s common stock over twelve months (the “Repurchase Program”). In connection with the adoption of the Repurchase Program, the Company entered into an amendment agreement (“Amendment No. 1”) with the investors to amend the Securities Purchase Agreement. Specifically, under Amendment No. 1, the Company may use the proceeds for general corporate and working capital purposes and acquisition of assets, businesses or operations or for other purposes that the Board of Directors in good faith deems to be in the best interest of the Company, including the repurchase or redemption of shares of the Company’s capital stock.

Also on August 24, 2011, the Company entered into a lock up agreement with the investors, pursuant to which the investors agreed not to sell, transfer or dispose of, directly or indirectly, any shares of Company common stock or any securities convertible into or exercisable or exchangeable for shares of Company common stock that it beneficially owns without a prior written consent of the Company for a period of six months.

The Company repurchased 38,894 and 4,661shares of its common stock under the Repurchase Program at a weighted-average price of $1.78 and $2.05 per share for an aggregate purchase cost of $69,214 and $9,553 for the years ended December 31, 2012 and 2011, respectively. The Repurchase Program expired on August 24, 2012.

Allocation of Proceeds in the Private Placement

The guidance provided in ASC 470-20-30-5 has been applied to the amount allocated to the convertible Series A Preferred Stock, and the effective conversion price has been used, to measure the intrinsic value, if any, of the embedded conversion option. The fair value of the embedded conversion features of the Series A Preferred Stock of $1,143,198 and $644,532 were calculated using the intrinsic value model in accordance with the guidance provided in ASC Topic 470-20-30-6 (formerly EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”) and limited to the amount of the proceeds allocated to the convertible instrument on June 7, 2010 and June 28, 2010, respectively. The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion price, which was determined based on the proceeds from the private placement allocated to the convertible Series A Preferred Stock, and the market price of the Company’s common stock of $3.20 and $3.16 on June 7, 2010 and June 28, 2010, respectively. The fair value of $1,143,198 and $644,532 of the beneficial conversion feature has been recognized as a reduction to the carrying amount of the convertible Series A Preferred Stock and an addition to paid-in capital.

F-18

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10      STOCKHOLDERS’ EQUITY (CONTINUED)

Allocation of Proceeds in the Private Placement (continued)

The following table sets out the allocation of the proceeds from the Private Placement:

Proceeds of the private placement on June 7, 2010	$	3,524,342
Allocation of proceeds to Series C Warrants to investors		(718,698	)
Allocation of proceeds to beneficial conversion feature		(1,143,198	)
Amortization of discount resulting from the accounting for a beneficial conversion feature		1,143,198
Convertible Series A Preferred Stock (net of fees and expenses) at December 31, 2010		2,805,644
Preferred stock converted into common stock		(85,546	)
Convertible Series A Preferred Stock at December 31, 2011		2,720,098
Preferred stock converted into common stock		(689,392	)
Convertible Series A Preferred Stock at December 31, 2012 and 2013	$	2,030,706
Preferred stock converted into common stock		(509,535	)
Convertible Series A Preferred Stock at September 30, 2014	$	1,521,171
Proceeds of the private placement on June 28, 2010	$	2,121,938
Allocation of proceeds to Series C Warrants to investors		(418,668	)
Allocation of proceeds to beneficial conversion feature		(644,532	)
Amortization of discount resulting from the accounting for a beneficial conversion feature		644,532
Convertible Series A Preferred Stock (net of fees and expenses) at December 31, 2010		1,703,270
Preferred stock converted into common stock		(1,052,162	)
Convertible Series A Preferred Stock at December 31, 2011		651,108
Preferred stock converted into common stock		(104,490	)
Convertible Series A Preferred Stock at December 31, 2012		546,618
Preferred stock converted into common stock		(67,141	)
Convertible Series A Preferred Stock at December 31, 2013	$	479,477
Preferred stock converted into common stock		(226,876	)
Convertible Series A Preferred Stock at September 30, 2014	$	252,601

F-19

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10      STOCKHOLDERS’ EQUITY (CONTINUED)

Allocation of Proceeds in the Private Placement (continued)

In accordance with ASC Topic 470-20-30-6, the discount on the Series A Preferred Stock resulting from the accounting for a beneficial conversion feature was amortized and charged to retained earnings, because the Series A Preferred Stock is immediately convertible upon issuance and has no stated redemption date. Amortization of the discount resulting from the accounting for a beneficial conversion feature is considered analogous to a return to holders of perpetual preferred stock and has been accounted for as a reduction to net income available to common stockholders for the purpose of calculation of earnings per share.

Preferred Stock

The Board of the Company is authorized, without further action by the shareholders, to issue, from time to time, up to 1,000,000 shares of preferred stock in one or more classes or series. Similarly, the Board is authorized to fix or alter the designations, powers, preferences and the number of shares which constitute each such class or series of preferred stock. Such designations, powers or preferences may include, without limitation, dividend rights (and whether dividends are cumulative), conversion rights, if any, voting rights (including the number of votes, if any, per share), redemption rights (including sinking fund provisions, if any), and liquidation preferences of any unissued shares or wholly unissued series of preferred stock.

On May 27, 2010, the Company created, from the authorized but unissued shares of its preferred stock, a series of preferred stock consisting of 300,000 shares and has designated this series of preferred stock as the Series A Preferred Stock of which the Company issued 197,706 shares upon the closings of the private placement in 2010.

The following are the principal terms of the Series A Preferred Stock:

Rank: The Series A Preferred Stock ranks senior to the Company’s common stock, but junior to all indebtedness of the Company.

Dividend: Holders of the Series A Preferred Stock are entitled to a cumulative dividend at an annual rate of 6% of the Series A Preferred Stock, payable in additional shares of Series A Preferred Stock, compounded quarterly, and payable upon the occurrence of a Liquidation Event, Conversion, Mandatory Conversion or from time-to-time at the discretion of the Board. When dividends on the Series A Preferred Stock are paid, each such additional share of Series A Preferred Stock shall be valued at the Original Series A Purchase Price, which may be adjusted from time to time pursuant to a split, subdivision, combination or other similar events.

Optional Conversion: Shares of the Series A Preferred Stock are optionally convertible into fully paid and non-assessable shares of Common Stock at a conversion rate calculated by dividing (i) $28.00 per share plus any declared, accrued but unpaid dividends by (ii) the conversion price (the “Conversion Price”), which is initially $2.80 per share, subject to adjustment as provided in the Certificate. Initially, each share of Series A Preferred Stock is convertible into 10 shares of Common Stock.

Mandatory Conversion: All outstanding shares of the Series A Preferred Stock will automatically convert to shares of Common Stock, subject to the conversion restrictions set forth in the Certificate of Designation (the "Mandatory Conversion"), at the earlier to occur of (i) the Company’s shares of Common Stock are listed on the New York Stock Exchange, the NYSE Amex, the NASDAQ Global Market, the NASDAQ Global Select Market or the NASDAQ Capital Market (each, a "National Stock Exchange") and the registration statement on Form S-1 or such other appropriate form promulgated by the SEC registering the Common Stock underlying the Securities pursuant to the Securities Purchase Agreement is declared effective by the Commission, and (ii) 12 months from the date that the Company's shares of Common Stock are first listed on a National Stock Exchange.

F-20

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10      STOCKHOLDERS’ EQUITY (CONTINUED)

Preferred Stock (continued)

Adjustment to Conversion Price: If the Company shall issue any additional stock without consideration or for consideration per share less than the Conversion Price in effect immediately prior to the issuance of such additional stock, then such Conversion Price in effect immediately prior to such issuance shall be adjusted to a price determined by multiplying such Conversion Price by a fraction:

Sum of (x) the number of shares of Common Stock outstanding immediately prior to the issuance of such additional stock plus (y) the number of shares of Common Stock that the aggregate consideration received by the Company for the total number of such additional stock so issued would purchase at Conversion Price (divided by) (x) the number of shares of Common Stock outstanding immediately prior to the issuance of such additional stock plus (y) the number of shares of such additional stock so issued.

Voting: The holders of the Series A Preferred Stock will vote on an "as converted" basis, together with the Common Stock, as a single class, in connection with any proposal submitted to the Company’s stockholders, except as required by Nevada law.

Liquidation Preference: The Series A Preferred Stock has a preference over the Company’s common stock on the Company’s liquidation, dissolution or winding up equal to $28 per share of the Series A Preferred Stock plus any accrued but unpaid dividends thereon, as of the date of liquidation.

Registration Rights: The holders of Series A Preferred Stock have the right to request the Company to file a Registration Statement to register “Registrable Securities” (which include the common stock into which the Series A Preferred Stock and Warrants are convertible). Upon such request, no later than 30 days upon receipt of such request (the “Required Filing Date”) the Company should use its commercially reasonable efforts to register the Common Stock underlying the Registrable Securities and have the Registration Statement declared effective by the SEC which is not later than the earlier of (x) 150 calendar days after the Required Filing Date, or (y) if the Registration Statement is not reviewed by the SEC, 5 business days after oral or written notice to the Company or its counsel from the SEC that there will not be a review.

Effect of failure to file and obtain and maintain effectiveness of Registration Statement – the Company shall pay to each holder of Registrable Securities an amount in cash equal to 1% of the aggregate purchase price of the Securities owned by such holder as liquidated damages, but in no event shall liquidated damages exceed 8% of the Purchase Price.

IR Warrants

On May 27, 2010, the Company entered into an investor relations agreement with a consultant in which the consultant would provide certain consulting services to the Company for a term of one year. In exchange for the consulting services provided, the consultant should receive (i) a cash fee of $100,000 and (ii) 100,000 warrants (the “IR Warrants”) at an exercise price of $3.80 and a term of three years from issuance date. The above 100,000 IR Warrants were issued on July 1, 2010. The grant date fair value of these IR warrants was estimated at $89,435 using the Black-Scholes valuation model and $nil was charged as general and administrative expenses for the nine months ended September 30, 2014 and 2013. Series IR Warrants expired on June 7, 2013.

Accounting for Series A Preferred Stock

The Company has evaluated the terms of the Series A Preferred Stock and determined that the Series A Preferred Stock, without embodying an obligation for the Company to repurchase or to settle by transferring assets, is not a liability in accordance with the guidance provided in ASC Topic 480, Distinguishing Liabilities from Equity.

Also, the Series A Preferred Stock has no redemption clause at all, it is not a mezzanine equity (out of permanent equity) in accordance with the requirement of ASC 480-10-S99.

The Series A Preferred Stock is not subject to redemption (except on liquidation) and the holders of the Series A Preferred Stock are entitled to vote together with common stock holders on an as-converted basis. The Series A Preferred Stock, excluding the embedded conversion option, are considered to be an equity instrument and accordingly, the embedded conversion option has not been separated and accounted for as a derivative instrument liability.

F-21

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 10      STOCKHOLDERS’ EQUITY (CONTINUED)

Accounting for Series A Preferred Stock (continued)

During the nine months ended September 30, 2014, 32,290 shares of Series A Preferred Stock were converted into 322,900 shares of common stock, at a 1 for 10 ratio. In addition, during the nine months ended September 30, 2014, 79,480 shares of common stock were issued to the investors as settlement of stock dividends of $222,486. During the nine months ended September 30, 2013, no Series A Preferred Stock were converted into common stock and no common stock was issued to the investors as settlement of stock dividends.

Common Stock Purchase Warrants

Series C Warrants

In connection with the issuance of the Series A Preferred Stock, the Company issued Series C Warrants to the investors and the placement agent to purchase up to 592,327 and 24,681 shares, respectively, of common stock on June 7, 2010 and 356,634 and 14,859 shares, respectively, on June 28, 2010, respectively, all at an exercise price of $3.40 per share issued and outstanding. The Series C Warrants have a term of exercise expiring 3 years from the issuance date. The Series C Warrants at the option of the holder, may be exercised by cash payment of the exercise price or, the holder may acquire the underlying shares of common stock through a "cashless exercise."

The Company will not receive any additional proceeds to the extent that the Series C Warrants are exercised by cashless exercise.

The exercise price and number of shares of common stock issuable upon exercise of the Series C Warrants may be adjusted for: 1) upon issuance of additional stock lower than the exercise price. 2) upon subdivision or combination of common stocks; or 3) upon distribution of assets and other dilutive events.

Accounting for Series A, Series B and Series C Warrants

Series A and Series B Warrants issued to certain investors on December 17, 2009 to purchase 500,000 shares of the Company’s common stock had a term of three years and exercise prices of $3.25 and $4.00 per share, respectively. These warrants contain standard anti-dilution provisions for stock dividends, stock splits, stock combination, recapitalization and a change of control transaction. Because these warrants do not contain any contingent exercise provisions and their settlement amount will equal the difference between the fair value of a fixed number of the Company’s equity shares and a fixed strike price, these warrants, which are freestanding instruments, qualify for the scope exception under the guidance provided in ASC 815-40-15-5 through 815-40-15-8, and are considered indexed to the Company’s own stock. Accordingly, Series A and Series B Warrants have been classified as equity. Series A and Series B Warrants expired on December 16, 2012. (Note 3)

Since the Series C Warrants issued to the investors and the placement agent in June 2010 contain reset exercise price provisions, the Company had determined to classify these warrants as derivative liabilities. The reset exercise provisions of the warrants issued to the investors and the placement agent in June 2010 were recorded at their relative fair values at issuance of $1,182,860 and will continue to be recorded at fair value at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as other income (expense). These warrants will continue to be reported as a liability until such time when they are exercised or expire. The fair value of these warrants is estimated using Monte-Carlo simulation methods. Since all Series C Warrants expired on June 28, 2013, the Company recorded nil and $173 in other income related to the change in the fair value of the Series C Warrants during the nine months ended September 30, 2014 and 2013, respectively. (Note 3)

F-22

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11      STATUTORY RESERVES

In accordance with the PRC Companies Law, the Company’s PRC subsidiaries and VIEs are required to transfer 10% of their profits after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve. However, the Company’s PRC subsidiaries and VIEs are not required to transfer any profit after tax to the statutory surplus reserve after the accumulated statutory surplus reserves reached 50% of registered capital of the Company’s PRC subsidiaries and VIEs. The statutory surplus reserve is non-distributable.

NOTE 12      SHARE-BASED COMPENSATION

The Company was authorized to issue an aggregate of 2,500,000 shares of its common stock under the 2009 Equity Incentive Plan (“Plan”) as equity awards of incentive stock options, non-statutory stock options, restricted stock, and other equity incentives to employees, officers, directors and consultants. The Plan expires in 2019 and as of September 30, 2014, there were 432,500 shares of common stock available for grant pursuant to the Plan.

Stock options granted to Management

On July 16, 2010, the Company entered into a stock option agreement with Mr. Robert Tick (“Mr. Tick”), the Chief Financial Officer of the Company, under the Company’s 2009 Equity Incentive Plan. Pursuant to the terms of the stock option agreement, Mr. Tick was granted options to purchase an aggregate of 150,000 shares of common stock of the Company, consisting of, an option to purchase 75,000 shares that would vest in 2011 with an exercise price of $5.00 per share, and an option to purchase 75,000 shares that would vest in 2012 with an exercise price of $7.00 per share. Each of these options expires three years after their respective vesting dates.

According to the stock option agreement, in the event Mr. Tick’s employment with the Company is terminated for any reason except for death or disability, he may exercise these options only to the extent that these options would have been exercisable on the termination date and no later than three months after the termination date. If Mr. Tick’s employment is terminated because of his death or disability, these options may be exercised only to the extent that these options would have been exercisable by Mr. Tick on the termination date and must be exercised by Mr. Tick no later than twelve months after the termination date. If the employment is terminated for Cause as defined in the stock option Agreement, these options will terminate immediately. In no event will these options be exercised later than December 31, 2015. As of September 30, 2014, a total of 37,500 options granted on July 16, 2010, which vested on Jume 30, 2011, had expired.

On January 24, 2011, the Compensation Committee of the Board approved the repricing of the options that the Company granted to Mr. Tick on July 16, 2010. As a result, each such option outstanding had an exercise price of $3.50 per share which was higher than the closing price of the Company’s common stock on the OTC Bulletin Board on the date of repricing. In addition, the vesting schedules of the outstanding options granted to Mr. Tick were changed from vesting on an annual basis to vesting on a semi-annual basis.

On August 8, 2013, the Company entered into a stock option agreement with Mr. Tick, under the Company’s 2009 Equity Incentive Plan. Pursuant to the terms of the stock option agreement, Mr. Tick was granted options to purchase an aggregate of 75,000 shares of common stock of the Company, consisting of, an option to purchase 37,500 shares that would vest in November 15, 2013 with an exercise price of $0.83 per share, and an option to purchase 37,500 shares that would vest in April 15, 2014 with an exercise price of $0.83 per share. Each of these options expires three years after their respective vesting dates.

F-23

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12      SHARE-BASED COMPENSATION (CONTINUED)

Stock options granted to Management (continued)

In accordance with the guidance provided in ASC Topic 718, Stock Compensation, the compensation costs associated with these options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting period. Also in accordance with ASC Topic 718, incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. The fair value of the option award was estimated on the date of grant using the Black-Scholes option valuation model. The valuation was based on the assumptions noted in the following table.

Expected volatility	73%
Expected dividend	0%
Expected terms (in year)	1
Risk-free rate	0.12%

A summary of options issued and outstanding at September 30, 2014 and the movements since January 1, 2013 to September 30, 2014 are as follows:

					Weighted-
		Number of			Average			Aggregate			Weighted- Average
		Underlying			Exercise Price			Intrinsic			Contractual Life
		Shares			Per Share			Value (1)			Remaining in Years
Outstanding at January 1, 2013		150,000		$	3.50			-			2.25
Granted		75,000		$	0.83			96,750			3.08
Exercised		-			-			-			-
Expired		-			-			-			-
Forfeited								-
Outstanding at December 31, 2013		225,000		$	2.61		$	96,750			1.86
Granted		-			-			-			-
Exercised		-			-			-			-
Expired		(37,500	)	$	3.50			-			-
Forfeited		-			-			-			-
Outstanding at September 30, 2014		187,500		$	2.43		$	84,000			1.38
Exercisable at September 30, 2014		187,500		$	2.43		$	84,000			1.38

(1)

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been realized by the option holders had all option holders exercised their options on September 30, 2014. The intrinsic value of a stock option is the excess of the Company’s closing stock price on September 30, 2014 of $1.95 per share over the exercise price $0.83 per share, multiplied by the number of shares subject to the option.

The Company recognized compensation expense of $nil and $7,371 in relation to the options granted to Mr. Tick for the three and nine months ended September 30, 2014. In addition, the Company recognized compensation expense of $3,721 and $3,721 in relation to the options granted to Mr. Tick for the three and nine months ended September 30, 2013.

F-24

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12      SHARE-BASED COMPENSATION (CONTINUED)

Restricted shares granted to Management

On July 16, 2010, the Company also entered into a restricted shares grant agreement (the "Restricted Shares Grant Agreement") under the Company’s 2009 Equity Incentive Plan with Mr. Tick. Pursuant to the terms of the Restricted Shares Grant Agreement, the Company granted to Mr. Tick 150,000 restricted shares (the “Restricted Shares”) of the Company’s common stock subject to the vesting schedule therein. If Mr. Tick’s service with the Company ceases for any reason other than Mr. Tick’s (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company.

On November 26, 2012, the Company also entered into a restricted shares grant agreement (the "Second Restricted Shares Grant Agreement") under the Company’s 2009 Equity Incentive Plan with Mr. Tick. Pursuant to the terms of the Second Restricted Shares Grant Agreement, the Company granted to Mr. Tick 20,000 restricted shares (the “Restricted Shares”) of the Company’s common stock subject to the vesting schedule therein. If Mr. Tick’s service with the Company ceases for any reason other than Mr. Tick’s (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company. The Second Restricted Shares vested immediately upon grant, on November 26, 2012.

On August 8, 2013, the Company entered into a restricted shares grant agreement (the "Third Restricted Shares Grant Agreement") under the Company’s Plan with Mr. Tick. Pursuant to the terms of the Third Restricted Shares Grant Agreement, the Company granted to Mr. Tick 75,000 restricted shares (the “Restricted Shares”) of the Company’s common stock subject to the vesting schedule therein. If Mr. Tick’s service with the Company ceases for any reason other than Mr. Tick’s (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company. The Third Restricted Shares vest under the following schedule: 37,500 shares vest on November 15, 2013 and 37,500 shares vest on April 15, 2014.

The Restricted Shares vest under the following schedule:

Number of Shares	Vesting Date
25,000	December 31, 2010
25,000	June 30, 2011
25,000	December 31, 2011
25,000	June 30, 2012
20,000	November 26, 2012
25,000	December 31, 2012
25,000	June 30, 2013
37,500	November 15, 2013
37,500	April 15, 2014

The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the compensation cost recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date. No compensation cost is recognized for instruments that are forfeited by the Company because a service condition or a performance condition is not satisfied.

Accordingly, the Company recognized compensation expense of $nil and $25,896, related to the restricted shares granted to Mr. Tick for the three months and nine months ended September 30, 2014 ; and $13,446 and $88,862 for the three and nine months ended September 30, 2013, respectively, based on the estimated grant-date fair value of the Company’s common stock of $0.83 on August 8, 2013, $1.15 on November 26, 2012 and $3.00 on July 16, 2010.

F-25

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted shares granted to Employees

On November 15, 2013, the Company entered into a restricted shares grant agreement (the “Restricted Shares Grant Agreement”) under the Company’s Plans with eight employees. Pursuant to the terms of the Restricted Shares Grant Agreement, the Company granted to these employees a total of 350,000 restricted shares to the Company’s common stock subject to the vesting schedule therein. If these employees’ service with the Company ceases for any reason other than these employees’ (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company. The Restricted Shares vested immediately upon grant, on November 15, 2013.

The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the compensation cost recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date. No compensation cost is recognized for instruments that are forfeited by the Company because a service condition or a performance condition is not satisfied.

Accordingly, the Company recognized compensation expense of $414,000 related to the restricted shares granted to these employees for the year ended December 31, 2013, based on the estimated grant-date fair value of the Company’s common stock of $1.12.

Restricted shares granted to independent directors

On October 5, 2010, the Company entered into separate restricted shares grant agreements with the Company’s newly elected independent directors Mr. Henry Ngan, Ms. Virginia P’an and Mr. Jianbing Zhong. Pursuant the agreements, the Company granted, under the Company’s 2009 Equity Incentive Plan, to Mr. Ngan 40,000 restricted shares of the Company’s common stock, Ms. P’an 30,000 restricted shares and Mr. Zhong 20,000 restricted shares, as compensation for the services to be provided by them as independent directors.

On January 24, 2011, the Company entered into an independent director contract and an indemnification agreement with Mr. Kurtzig, whereby the Company agreed to grant, under the Company’s 2009 Equity Incentive Plan, to Mr. Kurtzig 20,000 restricted shares of the Company’s common stock as compensation for the services to be provided by him and indemnify Mr. Kurtzig against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by Mr. Kurtzig in connection with any proceeding if Mr. Kurtzig acted in good faith and in the best interests of the Company.

On August 11, 2011, the Company entered into a restricted shares grant agreement with Mr. Kurtzig, whereby the Company agreed to grant, under the Company’s 2009 Equity Incentive Plan, to Mr. Kurtzig 10,000 restricted shares of the Company’s common stock as compensation for the services to be provided by him.

On November 26, 2012, the Company entered into separate restricted shares grant agreements with the Company’s independent directors Mr. Henry Ngan, Ms. Virginia P’an, Mr. Jianbing Zhong and Mr. Richard E. Fearon, Jr. Pursuant the agreements, the Company granted, under the Company’s 2009 Equity Incentive Plan, to Mr. Ngan 30,000 restricted shares of the Company’s common stock, Ms. P’an 30,000 restricted shares, Mr. Zhong 20,000 restricted shares and to Mr. Fearon, Jr. 20,000 restricted shares, as compensation for the services to be provided by them as independent directors.

On August 15, 2014, the Company entered into separate restricted shares grant agreements with the Company’s independent directors Mr. Henry Ngan, Ms. Virginia P’an, Mr. Jianbing Zhong and Mr. Richard E. Fearon, Jr. Pursuant to the agreements, the Company granted, under the Company’s 2009 Equity Incentive Plan, 40,000 restricted shares to each person, as compensation for the services to be provided by them as independent directors.

The restricted shares granted to independent directors will vest in equal installments on a semi-annual basis over a two-year period. If the independent director’s service with the Company ceases for any reason other than the independent director’s (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company. On November 26, 2012, Mr. Kurtzig resigned as a member of the Board of Directors of the Company. As a result, the 5,000 unvested restricted shares have been automatically forfeited to the Company.

F-26

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted shares granted to independent directors (continued)

Accordingly, the Company recognized a total compensation expense of $71,158 and $50,070 related to the restricted shares granted to the directors for the nine month ended September 30, 2014 and 2013 and a total compensation expense of $37,962 and $16,874 related to the restricted shares granted to the directors for the three months ended September 30, 2014, and 2013, respectively, based on the estimated grant-date fair values of the Company’s common stock of $2.98 on October 5, 2010, $3.28 on January 24, 2011, $2.41 on August 11, 2011 , $1.15 on November 26, 2012 and $2.05 on August 15, 2014.

Unregistered shares granted to consultant

On August 3, 2013, the Company entered into an investor relations agreement (the “Agreement”) under the Company’s Plans with a consultant. Pursuant to the terms of the Agreement, the Company would grant a total of 25,000 unregistered shares to the Company’s investor relations consultant for consulting services provided by the consultant during the period August 2013 to June 2014. The Company issued 15,000 shares on September 16, 2013 (vesting date) and issued another 10,000 unregistered shares on Jan 1, 2014. The Company recognized total compensation expense of $nil and $4,767 for the three months ended September 30, 2014 and 2013; and $23,746 and $4,767 for the nine months ended September 30, 2014 and 2013, based on the fair values of the Company’s common stock of US$1.05 on September 16, 2013 for the 15,000 shares issued and the fair value of the Company’s common stock of $2.58 on January 1, 2014 for the 10,000 shares issued. Pursuant to the terms of the Agreement, if during any three-month period, the Average Closing Price is $2.00 per share or greater, the Company shall issue 12,500 (twelve thousand five hundred) Incentive Shares to the consultant. During the first three-month period of 2014, the Average Closing Price is $2.84 per share. The Company then issued 12,500 shares to the consultant on April 2, 2014. The Company recognized total compensation expense of $29,625 and nil for the nine months ended September 30, 2014 and 2013, based on the fair values of the Company’s common stock of US$2.37 on April 2, 2014 for the 12,500 shares issued, and no compensation expense had been recognized for the three months ended September 30, 2014 and 2013.

On August 15, 2014, the Company and American Capital Ventures (the “Consultant”) entered into certain Investor Relations Agreement (the “2014 Agreement”). The Company retained the Consulting Services provided by the Consultant from August 15, 2014 to June 30, 2015. Pursuant to the terms of the 2014 Agreement, the Company has agreed to issue up to 60,000 shares of unregistered common stock to the consultant and its designee, among which 20,000 shares were earned and vested as of August 18, 2014. During the service period, the consultant is entitled to receive additional 15,000 unregistered shares of common stock if the average closing price of the common stock as reported on the Over-the Counter Bulletin Board or any other market on which the common stock is listed or quoted for trading on the date in question (the “Average Closing Price”) is at or above $3.00 but lower than $4.00. The consultant is entitled to receive further 25,000 unregistered shares of common stock if the Average Closing Price is $4.00 per share or greater and the company qualifies, files and is approved for a NASDAQ uplisting. The Company recognized total compensation expense of $39,000 for the three and nine months ended September 30, 2014 and no compensation expense had been recognized for the three and nine months ended September 30, 2013, based on the fair values of the Company’s common stock of US$1.95 on September 22, 2014 for the 20,000 shares issued.

NOTE 13      INCOME TAXES

The Company’s VIEs and subsidiaries incorporated in the PRC are subject to PRC enterprise income tax (“EIT”). Before January 1, 2008, the PRC EIT rate was generally 33%. In March 2007, the PRC government enacted a new PRC Enterprise Income Tax Law, or the New EIT Law, and promulgated related regulations, Implementation Regulations for the PRC Enterprise Income Tax Law. The New EIT Law and Implementation Regulations became effective on January 1, 2008. The New EIT Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises registered in the PRC.

F-27

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13      INCOME TAXES (CONTINUED)

The New EIT Law provides a grandfathering on tax holidays which were granted under the then effective tax laws and regulations. Therefore, one of the Company's VIEs, Daqing Shuaiyi, being engaged in growing and sales of organic and specialty food products, continued to be entitled to a preferential tax treatment: an EIT holiday for the two years ended December 31, 2006 and 2007 and a 50% reduction on the EIT rate for the three years ended December 31, 2008, 2009 and 2010.

Daqing Shuaiyi, Harbin Shuayi and Heilongjiang Shuaiyi are subject to an EIT rate of 25% for the nine months ended September 30, 2014 and year ended December 31, 2013. No provision for PRC taxes was made for Heilongjiang Shuaiyi which had no taxable income in the PRC.

Harbin Baixin has been subject to an EIT rate of 25% since its incorporation. No provision for PRC taxes was made as Harbin Baixin had no taxable income in the PRC.

No provision for other overseas taxes is made as none of Nutrastar, New Resources and Oriental Global has any taxable income in the U.S., British Virgin Islands or Hong Kong, respectively.

The Company’s income tax expense consisted of:

		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2014			2013			2014			2013
Current income tax – PRC	$	2,124,781		$	2, 066,105		$	5,622,242		$	5,465,974
Deferred		-			-			-			-
	$	2,124,781		$	2, 066,105		$	5,622,242		$	5,465,974

A reconciliation of the provision for income taxes determined at the U.S. federal corporate income tax rate to the Company’s effective income tax rate is as follows:

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2014			2013			2014			2013
Pre-tax income	$	8,184,439		$	7,846,550		$	21,711,196		$	20,623,912
U.S. federal corporate income tax rate		34%			34%			34%			34%
Income tax computed at U.S. federal corporate income tax rate		2,782,709			2,667,827			7,381,806			7,012,130
Reconciling items:
Loss not recognized as deferred tax assets		67,729			74,475			250,093			260,316
Change in fair value of warrants		-			-			-			(59	)
Rate differential for PRC earnings		(750,521	)		(723,087	)		(2,005,836	)		(1,916,684	)
Non-deductible expenses and non-reportable income		24,580			46,890			(3,821	)		110,271
Effective tax expense	$	2,124,497		$	2, 066,105		$	5,622,242		$	5,465,974

F-28

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 13      INCOME TAXES (CONTINUED)

The Company had deferred tax assets as follows:

		September 30, 2014			December 31, 2013
Net operating losses carried forward	$	1,995,421		$	1,799,625
Less: Valuation allowance		(1,995,421	)		(1,799,625	)
Net deferred tax assets	$	-		$	-

As of September 30, 2014 and December 2013, Nutrastar had $5,868,886 and $5,293,016, respectively, of net operating loss carry forwards available to reduce future taxable income which will expire in various years through 2030. Management believes it is more-likely-than-not that the Company will not realize these potential tax benefits as the Company’s U.S. operations will not generate any operating profits in the foreseeable future. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.

As of September 30, 2014 and December 2013, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three and nine months ended September 30, 2014 and 2013, and no provision for interest and penalties is deemed necessary as of September 30, 2014 and December 31, 2013.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion.

NOTE 14      EARNINGS PER SHARE

The following table is a reconciliation of the net income and the weighted average shares used in the computation of basic and diluted earnings per share for the two years presented:

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2014			2013			2014			2013
Income available to common stockholders:
- Net income	$	6,059,658		$	5,780,445		$	16,088,954		$	15,157,938
Less: Preferred stock dividend		(42,671	)		(58,355	)		(130,920	)		(170,601	)
Income available to common stockholders (Basic)	$	6,016,987		$	5,722,090		$	15,958,034		$	14,987,337
Add: Preferred stock dividend		42,671			58,355			130,920			170,601
Income available to common shareholders (Diluted)		6,059,658			5,780,445			16,088,954			15,157,938
Weighted average number of shares:
- Basic		16,878,627			15,919,261			16,799,048			15,882,507
- Effect of dilutive preferred stock		777,760			1,130,100			815,901			1,130,100
- Effect of dilutive restricted stock units		1,485			10,758			20,586			5,515
- Effect of dilutive options		44,916			-			48,541			-
- Diluted		17,702,788			17,060,119			17,684,076			17,018,122
Net income per share
- Basic	$	0.36		$	0.36		$	0.95		$	0.94
- Diluted	$	0.34		$	0.34		$	0.91		$	0.89

F-29

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14      EARNINGS PER SHARE (CONTINUED)

Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding to assume the issuance of all dilutive potential common shares upon conversion.

The diluted earnings per share calculation for the nine months ended September 30, 2014 did not include management options and contingent unregistered shares to purchase up to 112,500 shares and 40,000 shares of common stock, respectively, because their effect was anti-dilutive.

The diluted earnings per share calculation for the three months ended September 30, 2014 did not include management options and contingent unregistered shares to purchase up to 112,500 shares and 40,000 shares of common stock, respectively, because their effect was anti-dilutive.

NOTE 15      RELATED PARTY TRANSACTIONS

Other than disclosed elsewhere in these financial statements, the Company also had the following related party balances and transactions:-

(a)	Due to related parties

			September 30, 2014			December 31, 2013
	Due to Ms. Lianyun Han, Chairperson, CEO and President of the Company	$	510,649		$	265,223

	The amount due to Ms. Han was non-interest bearing, unsecured and without a fixed repayment date. The balance was mainly for the payment of US $ denominated expences.
(b)	Lease of land
	For the nine months ended September 30, 2014 and 2013, the Company paid rental expense of $44,067 and $43,625, respectively, for the land leased from Heilongjiang Shuaiyi Technology Development Co., Ltd. (“Shuaiyi Technology”). Shuaiyi Technology and the Company are under common control and management.
	For the three months ended September 30, 2014 and 2013, the Company paid rental expense of $14,623 and $14,666 for the land leased from Shuaiyi Technology, respectively.
(c)	Acquisition of corporate headquarter premise
	On April 15, 2011, Heilongjiang Shuaiyi entered into an asset transfer agreement (the “Transfer Agreement”) with Ms. Han. Pursuant to the Transfer Agreement, Heilongjiang Shuiayi acquired an office building located at 54-1 Ganshui Road, Xiangfang District, Harbin, with a construction area of 1854.1 square meters, from Ms. Han at a cash consideration of RMB12.75 million (approximately $1.95 million including other incidental costs),which was fully paid in April 2011. The purchase price was determined based on a real property valuation report issued by an independent appraisal firm, Harbin Guoxin Real Estate Appraisal and Consulting Co., Limited on November 11, 2010 and reflected approximately equal valuation which Ms. Han originally paid when she acquired such property for the Company. Management believes that based on the property valuation report issued by the independent appraisal firm, the terms of the purchase transaction and the consideration that the Company paid in connection with this transaction were comparable to the terms available and the amounts that would be paid in an arm’s-length transaction.
	It is the current intention of the Company to move the Company headquarters to this office building in the foreseeable future.

F-30

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16      CONCENTRATION RISK

a)	Concentration of credit risk

As of September 30, 2014 and December 31, 2013, approximately 99.3% and 99.8%, respectively of the Company’s cash including cash on hand and deposits in accounts are maintained with one financial institution within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover such bank deposits in the event of bank failure. However, the Company has not experienced any losses in this financial institution and monitors the soundness and the credit ratings of this financial institution on a periodic basis, thus believes it is currently not exposed to any material risks on its bank deposits in bank accounts with this financial institution.

For the three and nine months ended September 30, 2014 and 2013, all of the Company’s sales arose in the PRC. In addition, all accounts receivable as of September30, 2014 and December 31, 2013 also arose in the PRC.

The following individual customer accounted for 10% or more of the Group’s revenues for the three and nine months ended September 30, 2014 and 2013:

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2014			2013			2014			2013
Lai En Century Co. Ltd		24.8%			24.2%			26.8%			26.0%

Individual customer accounts receivable that represented 10% or more of total accounts receivable as of September 30, 2014 and as of December 31, 2013 were as follows:

		Percentage of accounts receivable as of
		September 30, 2014			December 31, 2013
Great Northern Wilderness Grain and Oil Warehouse Market		53.5%			30.0%
Shenzhen South Ocean Gift Trade Co., Ltd		17.3%			-
Dalian Exalts Trade Co., Ltd		15.0%			-
Shandong Jinan Qing Jie Company		14.2%			23.8%

For the three and nine months ended September 30, 2014 and 2013, all of the Company’s purchases arose in the PRC. In addition, all accounts payable as of September 30,2014 and December 31, 2013 also arose in the PRC.

The following suppliers accounted for 10% or more of the Group’s procurement for the three and nine months ended September 30, 2014 and 2013:

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2014			2013			2014			2013
Zhangjiagang NongNong Drinking and Food Ltd Co.Ltd		39.6%			38.1%			29.8%			26.2%
Heilongjiang Xianfeng Agricultural Materials Trading Co., Ltd		18.9%			23.1%			23.2%			25.4%
Harbin Reservation During The Oil Co., Ltd.		17.7%			22.1%			19.7%			21.8%

No individual supplier accounted for 10% or more of total accounts payable as of September 30, 2014 and as of December 31, 2013.

F-31

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 16      CONCENTRATION RISK (CONTINUED)

(b)	Concentration of operating risk

Substantially all of the Company’s operations and assets are conducted in and located inside China. The Company’s operations and assets are subject to various political, economic, and other risks and uncertainties inherent in China. Among other risks, the Company’s operations and assets are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

NOTE 17      COMMITMENTS AND CONTINGENCIES

(a)	Operating leases

The Company has entered into tenancy agreements for the leases of an exhibition hall and land with a third party and a related company, Shuaiyi Technology (see 15(b)), respectively, for the purposes of the operation of its VIEs. The Company’s commitments for minimum lease payments under these operating leases for the next five years and thereafter as of September 30, 2014 are as follows:

		Related Parties			Non-related			Total
					Parties
Remainder of fiscal year ending December 31, 2014	$	14,689			10,589			25,278
Fiscal year ending December 31, 2015		58,757			10,971			69,728
Fiscal year ending December 31, 2016		58,757			-			58,757
Fiscal year ending December 31, 2017		58,757			-			58,757
Fiscal year ending December 31, 2018		58,757			-			58,757
Thereafter		699,472			-			699,472
Total	$	949,189		$	21,560		$	970,749

During the nine months ended September 30, 2014 and 2013, rental expenses under operating leases amounted to $74,775 and $82,936, respectively.

During the three months ended September 30, 2014 and 2013, rental expenses under operating leases amounted to $25,212 and $29,945, respectively.

(b)	PRC employee costs

According to the prevailing laws and regulations of the PRC, the Company’s subsidiaries and VIEs in the PRC are required to contribute to medical, retirement and unemployment insurance programs for its employees. We have recorded accruals for the probable estimated liability for approximately the past two years. However, in the past we did not provide for contributions for our temporary employees. If the PRC regulatory authorities take the view that we were required to make contributions to the social insurance and housing accumulation funds for our temporary employees, our failure to make previous payments may be in violation of applicable PRC labor laws and PRC governmental authorities may impose penalties on us for failure to comply. In addition, in the event that any current or former employee files a complaint with the PRC government, we may be subject to making up the contributions to the social insurance and housing accumulation funds as well as paying administrative fines. As the Company does not currently believe that it is probable that these additional contributions and fines would be material and, furthermore, cannot be reasonably estimated, no additional provision has been made in this regard.

F-32

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17      COMMITMENTS AND CONTINGENCIES (CONTINUED)

(c)	Indemnification agreement

On October 5, 2010, the Company entered into an indemnification agreement with each of its newly elected independent directors, Mr. Henry Ngan, Ms. Virginia P’an and Mr. Jianbing Zhong, pursuant to which the Company agreed to indemnify the independent directors against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the Independent directors in connection with any proceeding if the independent directors acted in good faith and in the best interests of the Company.

Also on October 5, 2010, the Company entered into an indemnification agreement with Mr. Tick pursuant to which the Company agreed to indemnify Mr. Tick against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by Mr. Tick in connection with any proceeding if Mr. Tick acted in good faith and in the best interests of the Company.

On January 24, 2011, the Company entered into an indemnification agreement with Mr. Joshua Kurtzig, its newly elected independent director, pursuant to which the Company agreed to indemnify Mr. Kurtzig against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the independent director in connection with any proceeding if the independent director acted in good faith and in the best interests of the Company. Mr. Kurtzig resigned from the Company’s Board effective November 26, 2012.

On November 26, 2012, the Company entered into an indemnification agreement with Mr. Richard E. Fearon, Jr., its newly elected independent director, pursuant to which the Company agreed to indemnify Mr. Fearon, Jr. against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the independent director in connection with any proceeding if the independent director acted in good faith and in the best interests of the Company.

NOTE 18      SEGMENT INFORMATION

The Company operates in three business segments identified by product, “Cordyceps Militaris”, “beverages” and “organic and specialty food products”. The Cordyceps Militaris segment consists of the growing and sales of Cordyceps Militaris, which business is conducted through Daqing Shuaiyi. The beverages segment consists of the manufacturing of functional health beverages featuring the Cordyceps Militaris as a core ingredient, which business is also conducted through Daqing Shuaiyi and was launched in the fourth quarter of 2010. The organic and specialty food products segment consists of the sales of rice, flour, silage corn and other agricultural products which business is mainly conducted through Harbin Shuaiyi.

During the three and nine months ended September 30, 2014 and 2013, all of the Company’s operations were carried out in one geographical segment - China.

F-33

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 18      SEGMENT INFORMATION (CONTINUED)

The Company’s segment revenue and results for the nine months ended September 30, 2014 and 2013 are as follows:

		Nine Months Ended September 30, 2014
								Organic and
		Cordyceps						Specialty Food			Corporate
		Militaris			Beverages			Products			Unallocated			Consolidated
Segment revenue from external customers	$	26,507,662		$	2,827,151		$	1,701,239		$	-		$	31,036,052
Segment income before income taxes	$	20,922,323		$	1,416,397		$	170,710		$	(798,234	)	$	21,711,196
Income before income taxes													$	21,711,196
Segment assets	$	132,691,382		$	61,937		$	1,480,294		$	1,915,981		$	136,149,594
Total assets													$	136,149,594
Other segment information:
Depreciation and amortization	$	1,030,070			4,170			1,390			77,788			1,113,418
Expenditure for segment assets	$	-		$	-		$	-		$	-		$	-

		Nine Months Ended September 30, 2013
								Organic and
		Cordyceps						Specialty Food			Corporate
		Militaris			Beverages			Products			Unallocated			Consolidated
Segment revenue from external customers	$	23,907,000		$	4,681,127		$	1,633,293		$	-		$	30,221,420
Segment income before income taxes	$	18,532,932		$	2,801,354		$	92,400		$	(802,774	)	$	20,623,912
Income before income taxes														20,623,912
Segment assets	$	109,326,450		$	63,371		$	1,511,933		$	2,031,240		$	112,932,994
Total assets													$	112,932,994
Other segment information:
Depreciation and amortization	$	1,018,562		$	4,123		$	1,374		$	77,261		$	1,101,320
Expenditure for segment assets	$	-		$	-		$	-		$	-		$	-

F-34

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NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 18      SEGMENT INFORMATION (CONTINUED)

The Company’s segment revenue and results for the three months ended September 30, 2014 and 2013 are as follows:

		Three Months Ended September 30, 2014
								Organic and
		Cordyceps						Specialty Food			Corporate
		Militaris			Beverages			Products			Unallocated			Consolidated
Segment revenue from external customers	$	9,755,483		$	842,081		$	567,245		$	-		$	11,164,809
Segment income before income taxes	$	7,757,021		$	590,498		$	54,939		$	(218,019	)	$	8,184,439
Income before income taxes														8,184,439
Segment assets	$	132,691,382		$	61,937		$	1,480,294		$	1,915,981		$	136,149,594
Total assets													$	136,149,594
Other segment information:
Depreciation and amortization	$	342,641		$	1,387		$	-		$	26,338		$	370,366
Expenditure for segment assets	$	-		$	-		$	-		$	-		$	-

		Three Months Ended September 30, 2013
								Organic and
		Cordyceps						Specialty Food			Corporate
		Militaris			Beverages			Products			Unallocated			Consolidated
Segment revenue from external customers	$	9,028,155		$	1,357,596		$	550,199		$	-		$	10,935,950
Segment income before income taxes	$	7,168,285		$	882,252		$	27,610		$	(231,597	)	$	7,846,550
Income before income taxes														7,846,550
Segment assets	$	109,326,450		$	63,371		$	1,511,933		$	2,031,240		$	112,932,994
Total assets													$	112,932,994
Other segment information:
Depreciation and amortization	$	342,426		$	1,386		$	5		$	26,375		$	370,192
Expenditure for segment assets	$	-		$	-		$	-		$	-		$	-

F-35

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; and any statements of belief or intention. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward looking statements. Such risks and uncertainties include any of the factors and risks mentioned in the “Risk Factors” sections of the Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2013 and subsequent SEC filings, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

Certain Terms

Except as otherwise indicated by the context, references in this report to:

• “BVI” refers to the British Virgin Islands;
• “China,” “Chinese” and “PRC” refer to the People’s Republic of China;
• “Exchange Act” refers to the Securities Exchange Act of 1934, as amended.
• “Nutrastar,” “we,” “us,” “our company” and “our” refer to Nutrastar International Inc., a Nevada corporation, its subsidiaries, and, in the context of describing our operations and business and consolidated financial information, include our VIE Entities;
• “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; and
• “VIE Entities” means our consolidated variable interest entities, including Heilongjiang Shuaiyi New Energy Development Co., Ltd. and its subsidiaries as depicted in our organizational chart included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview of Our Business

We are a leading China based producer and supplier of premium branded consumer products including commercially cultivated Cordyceps Militaris (aka Chinese Golden Grass), organic and specialty food products and functional health beverages.

Our primary product is Cordyceps Militaris, also known as Chinese Golden Grass. Cordyceps Militaris is a species of parasitic fungus that is typically found in Northeastern China. It is a precious ingredient in traditional Chinese medicine, as Cordyceps Militaris is widely believed in China to offer high medical and health benefits by nourishing the yin, boosting the yang, and invigorating the meridians of the lungs and kidneys. According to Georges Halpern's Healing Mushrooms, certain research has shown that Cordyceps Militaris may boost the immune system, and can be used as a supplement for combating certain effects of fatigue and aging, the occurrences of certain tumors, and combating arteriosclerosis and certain gastrointestinal disorders, as well as reducing blood pressure. In addition, Cordyceps Militaris has significantly high economic values and according to Halpern, wild Cordyceps Militaris can cost as much as $10,000 per kilogram. Due to the extremely sensitive growing conditions of Cordyceps Militaris, it is very difficult to grow the plant in a man-made environment. After several years of laboratory tests, we developed a technology to commercially grow and produce Cordyceps Militaris in 2006. Through Daqing Shuaiyi, we generated 87.4% and 82.6% of our revenues from Cordyceps Militaris for the third quarter of 2014 and 2013, respectively. We plan to continue to focus on Cordyceps Militaris related based consumer products, which is our fastest growing product line with the greatest market demand and a significantly higher profit margin.

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We also sell organic and specialty food products through our VIE, Harbin Shuaiyi, which was formed in 2001. After years of development, we believe that we have become one of the largest wholesale distributor of organic and specialty food in Heilongjiang Province, China. We plan to increase our focus in organic and specialty food products business, including efforts to become a producer and increase our distribution capabilities.

We introduced the Cordyceps Militaris based functional health beverages in the fourth quarter of 2010. The non-carbonized beverage products were developed internally and contain the Cordyceps Militaris as a key ingredient. The products are currently being marketed through distributors to consumers in select cities in Jiangsu and Anhui Province through various distribution channels. We produce and distribute our functional health beverages through Daqing Shuaiyi.

Third Quarter Financial Performance Highlights

We continued to experience strong demand for our products during the third quarter of 2014, which resulted in continued growth in our revenues and net income for the quarter.

The following are some financial highlights for the third quarter of 2014:

• Net Revenue: Our net revenue was approximately $11.16 million for the third quarter of 2014, an increase of 2.1% from $10.94 million of the same quarter of last year.
• Gross Margin: Gross margin was 80.5% for the third quarter of 2014, as compared to 80.3% for the same period in 2013.
• Operating Profit: Operating profit was approximately $8.09 million for the third quarter of 2014, an increase of 4.4% from $7.75 million of the same period last year.
• Net Income: Net income was approximately $6.06 million for the third quarter of 2014, an increase of 4.9% from $5.78 million the same period of last year.
• Basic and fully diluted earnings per share were $0.36 and $0.34 for the third quarter of 2014.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

The following table sets forth the key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

		Three Months Ended September 30, 2014						Three Months Ended
								September 30, 2013
					As a						As a
					percentage of						percentage of
		In Thousands			revenues			In Thousands			revenues
Net revenue	$	11,165			100 %		$	10,936			100 %
Cost of goods sold		(2,173	)		(19.5) %			(2,159	)		(19.7) %
Gross profit		8,992			80.5 %			8,777			80.3 %
Selling expenses		(327	)		(2.9) %			(436	)		(4.0) %
General and administrative expenses		(575	)		(5.1) %			(588	)		(5.4) %
Income from operations		8,090			72.5 %			7,752			70.9 %
Other income and (expenses):
Interest income		103			0.9 %			73			0.7 %
Foreign exchange differences		(8	)		(0.1) %			22			0.2 %
Total other income		96			0.8 %			95			0.9 %
Income before income tax		8,185			73.3 %			7,847			71.8 %
Provision for income tax		(2,125	)		(19.0) %			(2,066	)		(18.9) %
Net income	$	6,060			54.3 %		$	5,781			52.9 %

Net Revenue. Net revenue increased approximately $0.23 million, or 2.1%, to approximately $11.16 million for the three months ended September 30, 2014, from approximately $10.94 million for the same period in 2013. This increase was mainly attributable to the continued increase in the quantity sold of our core product, Cordyceps Militaris, resulting in an increase in net revenue of $0.73 million, offset by a decrease in the quantity sold of our beverage products, resulting in a decrease in net revenue of approximately $0.52 million compared with the same period in 2013. To meet the change in market demand, we realigned the beverage product lines by suspending the 160ml beverage product since January 2014, increasing production and quantity sold of the 210ml and 310ml beverage products and introduced the powder solution product. Net revenue from the powder solution product is classified into the Cordyceps Militaris business segment category, thus causing the increase in net revenue for the Cordyceps Militaris business segment.

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Business Segment Information

Our business operations can be categorized into three segments based on the type of products we produce and sell, specifically (i) Cordyceps Militaris, (ii) functional health beverages and (iii) organic and specialty food products. The following table illustrates the revenue from each of these three segments as well as the percentage change for the periods indicated:

Net Revenue by Product Segments
(all amounts, other than percentages, in thousands of U.S. dollars)

		Three Months Ended
		September 30,						Percent
		2014			2013			Change
Components of Net Revenue
Cordyceps Militaris	$	9,756		$	9,028			8.1%
Functional Health Beverages		842			1,358			(38.0%	)
Organic and Specialty Food Products		567			550			3.1%
Total revenues	$	11,165		$	10,936			2.1%

We expect that majority of our revenue for 2014 will continue to be generated from our Cordyceps Militaris related products. In addition, we expect to see an increase in the percentage of revenue coming from the powder solution and beverage products in the future if we are successful in expanding our distribution channel of such products.

Additional information regarding our products can be found at Note 18, Segment Information in our unaudited condensed consolidated financial statements contained under Part I, Item I “FINANCIAL STATEMENTS” above.

Cost of Goods Sold. Our cost of goods sold is primarily comprised of the costs of our raw materials, labor and overhead. Our cost of goods sold increased by $0.01 million, or 0.6%, to approximately $2.17 million for the three months ended September 30, 2014 from approximately $2.16 million during the same period in 2013. This slight increase in cost of goods sold in dollar terms was commensurate with the increase in production costs associated with the increase in the quantity sold of Cordyceps Militaris. As a percentage of net revenue, the cost of goods sold decreased to 19.5% for the three months ended September 30, 2014 from 19.7% during the same period in 2013. The decrease in cost of goods sold as a percentage of revenue was mainly attributable to the increase in net revenue and the economies of scale commensurate with an increase in capacity and utilization which outpaced the increase in associated costs.

Gross Profit. Gross profit increased by approximately $0.22 million, or 2.5%, to approximately $8.99 million for the three months ended September 30, 2014 from approximately $8.78 million during the same period in 2013. Gross profit as a percentage of net revenue, or gross margin, was 80.5% for the three months ended September 30, 2014, an increase of 0.2% from 80.3% during the same period in 2013. Such percentage increase was mainly due to the increase in the sales of our core Cordyceps Militaris products in the product mix which have a higher gross margin as compared to our beverages and organic and specialty foods.

Selling Expenses. Our selling expenses include sales commissions, cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, and other sales related costs. Selling expenses decreased by approximately $0.11 million, or 25.0%, to approximately $0.33 million for the three months ended September 30, 2014 from approximately $0.44 million during the same period in 2013. The decrease in selling expenses in terms of dollars for the three months ended September 30, 2014 was mainly attributable to the decrease in selling and marketing expenses incurred relating to advertising activities, as well as the decrease in sales personnel’s fringe expenses, because we have already established and maintained a good trading relationship with our major customers. As a percentage of net revenue, selling expenses decreased to 2.9% for the three months ended September 30, 2014 from 4.0% for the same period in 2013, which was mainly due to the increase in net revenue combined with the decrease in selling expenses.

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General and Administrative Expense. General and administrative expenses include the costs associated with staff and support personnel who manage our business activities, depreciation charge for fixed assets, and professional fees paid to third parties. General and administrative expenses decreased by approximately $0.01 million, or 2.2%, to approximately $0.58 million for the three months ended September 30, 2014 from approximately $0.59 million for the same period in 2013. The decrease in terms of dollars was mainly attributable to the slight decrease in consulting and administrative staff’s fringe expenses during the period. As a percentage of net revenue, general and administrative expenses were 5.1% for the three months ended September 30, 2014 as compared to 5.4% for the same period of 2013. The decrease of general and administrative expenses as a percentage of revenue was mainly attributable to the increase in net revenue combined with a slight decrease in general and administrative expenses.

Income Before Income Tax. Income before income tax increased by approximately $0.34 million, or 4.4%, to approximately $8.09 million during the three months ended September 30, 2014 from approximately $7.75 million during the same period in 2013. As a percentage of net revenue, income before income tax increased to 72.5% during the three months ended September 30, 2014 from 70.9% during the same period in 2013. The increase of income before income tax in dollar terms and as a percentage of net revenue is mainly attributable to the increase in gross profit of $0.22 million and the decrease of $0.12 million in selling, general and administrative expenses.

Income Taxes. Nutrastar International Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as Nutrastar International Inc. had no income taxable in the United States for the three months ended September 30, 2013. New Zealand WAYNE’s New Resources Development Co., Ltd. was incorporated in the BVI and under the current laws of the BVI, is not subject to income taxes. Oriental Global Holdings Limited was formed in Hong Kong and under the current laws of Hong Kong, is not subject to income taxes. Our PRC subsidiary and the VIEs are subject to national and local income taxes within China at the applicable tax rate on the taxable income as reported in their PRC statutory financial statements in accordance with relevant income tax laws. China promulgated a new Enterprise Income Tax Law, or the New EIT Law, and its implementing regulations, both of which became effective on January 1, 2008.

Each of the VIE entities, Heilongjiang Shuaiyi New Energy Development Co., Ltd. and Daqing Shuaiyi Biotech Co., Ltd. have been subject to an income tax rate of 25% since 2011.

Income tax increased by approximately $0.59 million to approximately $2.12 million for the three months ended September 30, 2014 from approximately $2.07 million for the same period in 2013. Income tax expense for the three months ended September 30, 2014 increased because of the increase in net revenue and taxable income.

Net Income. Net income increased by approximately $0.28 million, or 4.8% to approximately $6.06 million for the three months ended September 30, 2014 from approximately $5.78 million for the same period of 2013, as a result of the factors described above.

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Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

The following table sets forth the key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

		Nine Months Ended						Nine Months Ended
		September 30, 2014						September 30, 2013
					As a						As a
					percentage of						percentage of
		In Thousands			revenues			In Thousands			revenues
Net revenue	$	31,036			100 %		$	30,221			100 %
Cost of goods sold		(6,754	)		(21.8) %			(6,663	)		(22.0) %
Gross profit		24,282			78.2 %			23,558			78.0 %
Selling expenses		(1,053	)		(3.4) %			(1,340	)		(4.4) %
General and administrative expenses		(1,782	)		(5.7) %			(1,878	)		(6.2) %
Income from operations		21,447			69.1%			20,340			67.4%
Other income and (expenses):
Interest income		292			0.9%			236			0.8%
Foreign exchange differences		(28	)		(0.1)%			48			0.1%
Total other income		264			0.9%			284			0.9%
Income before income tax		21,711			70.0%			20,624			68.3%
Provision for income tax		(5,622	)		(18.1)%			(5,466	)		(18.1)%
Net income	$	16,089			51.8%		$	15,158			50.2%

Net Revenue. Net revenue increased approximately $0.81 million, or 2.7%, to approximately $31.04 million for the nine months ended September 30, 2014, from approximately $30.22 million for the same period in 2013. This increase was mainly attributable to the increase in the quantity sold of our core product, Cordyceps Militaris, resulting in an increase in net revenue of $2.60 million, offset by a decrease in the quantity sold of  our beverage products, resulting in a decrease in net revenue of $1.85 million. We realigned our product offerings to meet changes in market demand by suspending the 160ml beverage product since January 2014, increasing production of the 210ml and 310ml beverage products and introduced the powder solution product. As part of the realignment, net revenue from the powder solution product is classified into the Cordyceps Militaris business segment category, thus causing the increase in net revenue for the Cordyceps Militaris business segment.

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Business Segment Information

Our business operations can be categorized into three segments based on the type of products we produce and sell, specifically (i) Cordyceps Militaris, (ii) functional health beverages and (iii) organic and specialty food products. The following table illustrates the revenue from each of these three segments as well as the percentage change for the periods indicated:

Net Revenue by Product Segments
(all amounts, other than percentages, in thousands of U.S. dollars)

		Nine Months Ended
		September 30,						Percent
		2014			2013			Change
Components of Net Revenue
Cordyceps Militaris	$	26,508		$	23,907			10.9%
Functional Health Beverages		2,827			4,681			(39.6%	)
Organic and Specialty Food Products		1,701			1,633			4.2%
Total revenues	$	31,036		$	30,221			2.7%

Cost of Goods Sold. Our cost of goods sold increased by $0.09 million, or 1.4%, to approximately $6.75 million for the nine months ended September 30, 2014 from approximately $6.66 million during the same period in 2013. This increase in dollar terms was commensurate with the increase in production costs associated with the increase in quantity sold of Cordyceps Militaris. As a percentage of net revenue, the cost of goods sold decreased to 21.8% for the nine months ended September 30, 2014 from 22.0% during the same period in 2013. Such decrease of cost of goods sold as a percentage of net revenue was mainly attributable to the economies of scale commensurate with an increase in capacity and utilization which outpaced the increase in associated costs.

Gross Profit. Our gross profit increased by approximately $0.72 million, or 3.1%, to approximately $24.28 million for the nine months ended September 30, 2014 from approximately $23.56 million during the same period in 2013. Gross profit as a percentage of net revenue, or gross margin, was 78.2% for the nine months ended September 30, 2014, an increase of 0.2% from 78.0% during the same period in 2013. Such percentage increase was mainly due to the increase in the sales of our core Cordyceps Militaris products in the product mix which have a higher gross margin as compared to our beverages and organic and specialty foods.

Selling Expenses. Selling expenses decreased by approximately $0.29 million, or 21.5%, to approximately $1.05 million for the nine months ended September 30, 2014 from approximately $1.34 million during the same period in 2013. The decrease in selling expenses in terms of dollars for the nine months ended September 30, 2014 was mainly attributable to the decrease in selling and marketing expenses incurred relating to advertising activities for the beverage products due to the realignment of the product offerings, as well as the decrease in sales personnel’s fringe expenses including the business entrainment expenses and business traveling expenses etc., as we have already established and maintained a good business relationship with our major customers. As a percentage of net revenue, selling expenses decreased to 3.4% for the nine months ended September 30, 2014 from 4.4% for the same period in 2013. The percentage decrease was mainly due to the increase in net revenue combined with the decrease in selling expenses.

General and Administrative Expense. General and administrative expenses decreased by $0.1 million, or 5.1%, to approximately $1.78 million for the nine months ended September 30, 2014 from approximately $1.88 million during the same period in 2013. The decrease in terms of dollars was mainly attributable to the decrease in consulting and administrative staff's fringe expenses during the nine months ended September 30, 2014 as compared to the same period of 2013.  As a percentage of net revenue, general and administrative expenses were 5.7% for the nine months ended September 30, 2014 as compared to 6.2% for the same period of 2013. The percentage decrease was mainly due to the increase in net revenue combined with the decrease in general and administrative expenses.

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Income Before Income Tax. Income before income tax increased by approximately $1.09 million, or 5.3%, to approximately $21.71 million during the nine months ended September 30, 2014 from approximately $20.62 million during the same period in 2013. As a percentage of net revenue, income before income tax increased to70.0% during the nine months ended September 30, 2014 from 68.3% during the same period in 2013. The increase of income before income tax in dollar terms and as a percentage of net revenue is mainly attributable to the increase in gross profit of $0.72 million combined with a decrease in selling, general and administrative expenses of $0.38 million.

Income Taxes. Income tax increased by approximately $0.16 million to approximately $5.62 million for the nine months ended September 30, 2014 from approximately $5.47 million for the same period in 2013. Income tax expense for the nine months ended September 30, 2014 increased because of the increase in net revenue and taxable income.

Net Income. Net income increased by approximately $0.93 million, or 6.1% to approximately $16.09 million for the nine months ended September 30, 2014 from approximately $15.16 million for the same period of 2013, as a result of the factors described above.

Liquidity and Capital Resources

General

As of September 30, 2014, we had cash and cash equivalents of approximately $118.57 million. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.

Cash Flow
(All amounts in thousands of U.S. dollars)

		Nine Months Ended September 30,
		2014			2013
Net cash provided by operating activities	$	16,893		$	15,815
Net cash provided by investing activities		-			-
Net cash provided by (used in) financing activities		30			(36	)
Foreign currency translation adjustment		(952	)		1,855
Net cash flow	$	15,971		$	17,634

Operating Activities

Net cash provided by operating activities was approximately $16.89 million for the nine month period ended September 30, 2014, which is an increase of approximately $1.08 million from approximately $15.82 million for the same period of 2013. The increase in the cash provided by operating activities was mainly attributable to:

a)  $0.93 million increase in net income for the nine months ended September 30, 2014 compared to the same period in 2013;

b) $0.24 million operating cash inflow through the advancement from related party for payments of US$ denominated expenses during the period;

c)  $0.32 million operating cash inflow through utilization of prepayments and collection from other receivables; and

d) $0.41 million cash outflow for other operating activities contribution.

Investing Activities

Our primary uses of cash for investing activities are payments for the acquisition of property, plant and equipment.

For the nine-month period ended September 30, 2014 and 2013, there was no net cash used in or provided by investing activities. After we completed the Cordyceps Militaris capacity expansion and scaled back the expansion plan relating to the organic and specialty food segment of the business, we did not incur expenses for the acquisition of property, plant or equipment during these periods.

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Financing Activities

Net cash provided by financing activities for the nine-month period ended September 30, 2014 was approximately $30,000, an increase of approximately $66,000 from approximately $36,000 net cash used in financing activities for the same period of 2013. The increase in cash provided by financing activities was mainly attributable to cash advanced from a related party for general purpose for the nine-month period ended September 30, 2014. Also, we repaid approximately $36,000 to the related party last year while no repayment has been made in 2014.

We believe that our cash on hand and cash flow from operations will meet our expected capital expenditure and working capital requirements for the next 12 months. However, we may in the future require additional cash resources due to changed business conditions, implementation of our strategy to expand our production capacity, sales, marketing and branding activities or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

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.

Seasonality

The production and sale of our primary product, Cordyceps Militaris, have not been historically subject to material seasonal variations. However since all of our sales are in China, the timing of the various Chinese holidays such as Lunar Chinese New Year, May and October holidays may have some impact to our operating results and operating cash flows.

Critical Accounting Policies

Management’s discussion and analysis of its financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and judgments. See Note 2 to our condensed consolidated financial statements, “Summary of Significant Accounting Policies”. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Principle of consolidation

The accompanying consolidated financial statements include the financial statements of Nutrastar and its wholly owned subsidiaries, New Resources, Oriental Global and Harbin Baixin, and its VIEs Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi. All significant inter-company balances or transactions have been eliminated on consolidation.

The Company has evaluated the relationship with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi and based on the result of the evaluation, believes that these entities are variable interest entities and that it is the primary beneficiary of these entities. Consequently, the Company has included the results of operations of these variable interest entities in the consolidated financial statements. The Company’s relationships with Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are governed by a series of contractual arrangements. Under PRC laws, Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are independent legal persons and none of them is exposed to liabilities incurred by the other parties.

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The accounts of Heilongjiang Shuaiyi, Daqing Shuaiyi and Harbin Shuaiyi are consolidated in the accompanying financial statements pursuant to the Financial Accounting Standards Board Accounting Standard Codification (ASC) Topic 810 and related subtopics related to the consolidation of variable interest entities. The Company does not have any non-controlling interests in net income and accordingly, did not subtract any net income in calculating the net income attributable to the Company. Because of the contractual arrangements, the Company had a pecuniary interest in the VIEs that require consolidation of the Company’s and the VIEs’ financial statements.

Use of estimates

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates under different assumptions or conditions. Significant estimates for the periods ended September 30, 2014 and 2013 include the useful lives of property and equipment and intangible assets, assumptions used in assessing impairment for long-term assets and the fair values of share-based payments.

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. Management will write down the inventories to market value if it is below cost. Management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if a valuation allowance is required.

Derivative financial instruments

The Company evaluates all its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the consolidated statements of income. For stock-based derivative financial instruments, the Company uses Monte-Carlo simulation methods to value the derivative instruments at inception and on subsequent valuation dates.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred.

Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:

	Useful Life
	(In years)
Buildings	20-40
Machinery and motor vehicles	5-10
Office equipment	5

Intangible assets

The Company’s intangible assets include a ten-year exclusive right to use a proprietary process and computer software. The Company’s amortization policy on intangible assets is as follows:

	Useful Life
	(In years)
Exclusive right	10
Computer software	4

The Company accounts for its intangible assets pursuant to FASB ASC Subtopic 350-30, “General Intangibles Other Than Goodwill”. Under ASC 350-30-35, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Under FASB ASU No.2012-02 Intangible-Goodwill and Other(Topic 350), the Company assesses qualitative factors to determine whether it is necessary to perform a quantitative impairment test.

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The Company would not be required to calculate the fair value of an indefinite-lived intangible asset unless the Company determines, based on a qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. If the qualitative assessment fails, intangibles with indefinite lives are further evaluated quantitatively for impairment by comparing the asset’s estimated fair value with its carrying value, based on cash flow methodology.

Revenue recognition

Revenue is recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.

Sales revenue is recognized net of value added and sales related taxes, sales discounts and returns at the time when the merchandise is delivered to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not recorded an allowance for estimated sales returns.

Share-based payments

The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.

The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Under FASB ASC Topic 718 and FASB ASC Subtopic 505-50, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as expenses as the goods or services are received.

Income taxes

The Company is subject to income taxes in the United States and other foreign jurisdictions where it operates. The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes”. FASB ASC Topic 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

The Company’s income tax returns are subject to examination by the Internal Revenue Service (“IRS”) and other tax authorities in the locations where it operates. The Company assesses potentially unfavorable outcomes of such examinations based on the criteria of FASB ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 (formerly FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes”). The interpretation prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

Foreign currency

The Company uses the United States dollar (“US Dollar” or “US$” or “$”) for financial reporting purposes. The PRC subsidiaries and VIEs within the Company maintain their books and records in their functional currency, Chinese Renminbi (“RMB”), being the lawful currency in the PRC. Assets and liabilities of the PRC subsidiaries and VIEs are translated from RMB into US Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

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The exchange rates used to translate amounts in RMB into US Dollars for the purposes of preparing the consolidated financial statements are based on the rates as published on the website of People’s Bank of China and are as follows:

		September 30, 2014			December 31, 2013
Balance sheet items, except for equity accounts		US$1=RMB6.1525			US$1=RMB6.0969

		Three months ended September 30,
		2014			2013
Items in the statements of income		US$1=RMB6.1568			US$1=RMB6.1678

		Nine months ended September 30,
		2014			2013
Items in the statements of income and cash flows		US$1=RMB6.1450			US$1=RMB6.2149

No representation is made that the RMB amounts could have been, or could be, converted into US Dollars at the above rates. The value of RMB against US dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US Dollar reporting.

Segment reporting

The Company follows FASB ASC Topic 280, “Segment Reporting”, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance.

The Company believes that during the three and nine months ended September 30, 2014 and 2013, it operated in three business segments – growing and sales of Cordyceps Militaris, which is widely used for Chinese medicine, manufacturing and sale of functional health beverages featuring the Cordyceps Militaris as a core ingredient, and sales of organic and specialty products. The manufacturing and sale of Cordyceps Militaris functional health beverages was launched in the fourth quarter of 2010.

Throughout the three and nine months ended September 30, 2014 and 2013, all of the Company’s operations were carried out in one geographical segment - China.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, Ms. Lianyun Han and Mr. Robert Tick, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Ms. Lianyun Han and Mr. Robert Tick concluded that as of September 30, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting.

During the fiscal quarter ended September 30, 2014, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that would require disclosure under Item 103 of Regulation S-K. 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.

ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 contains a detailed discussion of risk factors that could materially adversely affect our business, our operating results, or our financial condition. There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any unregistered equity securities during the fiscal quarter ended September 30, 2014 that were not previously required to disclose in a current report on Form 8-K that was filed during that period.

On August 15, 2014, the Company entered into an investor relations agreement with a consultant in which the consultant would provide certain consulting services to the Company for a term of ten months. In exchange for the consulting services provided, the consultant should receive 20,000 unregistered shares, which were issued to the consultant and its designees during the fiscal quarter ended September 30, 2014. The issuance of the shares to the consultants was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for the offer and sale of securities not involving a public offering, Regulation D promulgated thereunder.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

EXHIBITS.

31.1*	Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from The Nutrastar International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Income and Comprehensive

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Income for the three months and nine months ended September 30, 2014 and 2013, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (iv) the Notes to Condensed Consolidated Financial Statements.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED: November 13, 2014

NUTRASTAR INTERNATIONAL INC.

By: /s/ Lianyun Han
Lianyun Han
Chief Executive Officer
(Principal Executive Officer)

By: /s/ Robert Tick
Robert Tick
Chief Financial Officer
(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
31.1*	Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from The Nutrastar International Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended September 30, 2014 and 2013, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (iv) the Notes to Condensed Consolidated Financial Statements.

* Filed herewith.

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