China Nutrifruit Group LTD - FORM 10-Q

Attached files

file	filename
EX-3 - EXHIBIT 31.1 - China Nutrifruit Group LTD	exhibit31-1.htm
EX-3 - EXHIBIT 32.1 - China Nutrifruit Group LTD	exhibit32-1.htm
EX-3 - EXHIBIT 32.2 - China Nutrifruit Group LTD	exhibit32-2.htm
EX-3 - EXHIBIT 31.2 - China Nutrifruit Group LTD	exhibit31-2.htm

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: December 31, 2010

[ ] 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: 001-34440

CHINA NUTRIFRUIT GROUP LIMITED
(Exact Name of Registrant as Specified in Its Charter)

Nevada		87-0395695
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

5th Floor, Chuangye Building, Chuangye Plaza
Industrial Zone 3, Daqing Hi-Tech Industrial Development Zone
Daqing, Heilongjiang 163316
People’s Republic of China
(Address of principal executive offices, Zip Code)

(+86) 459-8972870
(Registrant’s telephone number, including area code)

______________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ 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 [ ] 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.

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 stock, as of February 14, 2011 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		36,794,532

CHINA NUTRIFRUIT GROUP LIMITED

*Quarterly Report on FORM 10-Q*
*Three Months Ended December 31, 2010*

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	(Removed and Reserved)	34
Item 5.	Other Information	34
Item 6.	Exhibits	34

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2010 AND FOR THE NINE MONTHS ENDED DECEMBER 31, 2010

Contents	Page
Condensed Consolidated Balance Sheets as of December 31, 2010 (unaudited) and March 31, 2010	3
Condensed Consolidated Statements of Income for the nine months ended December 31, 2010 and 2009 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2010 and 2009 (unaudited)	5
Notes to the Condensed Consolidated Financial Statements (unaudited)	6

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)
		December 31,		March 31,
		2010		2010
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents	$	24,336,712	$	35,994,443
Proceeds from private placement held in escrow account		-		931,630
Trade receivables, net of allowance		5,535,909		11,047,846
Inventories, net		20,138,578		4,179,910
Prepayments and deposits		10,164,077		-
Other current assets		1,512		116,196
Total current assets		60,176,788		52,270,025
Property and equipment, net		20,644,612		17,066,907
Construction in progress		5,152,212		-
Deferred tax assets		950,652		1,068,878
Land use rights, net		187,730		185,686
TOTAL ASSETS	$	87,111,994	$	70,591,496
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Other payables and accrued expenses	$	1,768,965	$	2,379,246
Trade payables		327,535		87,954
Income taxes payable		2,107,673		2,296,513
Total current liabilities		4,204,173		4,763,713
TOTAL LIABILITIES		4,204,173		4,763,713

Commitments and Contingencies
Shareholders' equity
Series A Preferred stock Authorized: 5,000,000 shares, par value $0.001 Issued and outstanding: 342,983 shares as at December 31, 2010; (365,109 as at March 31, 2010)		343		365
Common stock
Authorized: 120,000,000 shares, par value $0.001 Issued and outstanding: 36,794,532 shares as at December 31, 2010; (36,573,272 shares as at March 31, 2010)		36,794		36,573
Additional paid-in-capital		36,492,675		36,492,875
Statutory reserves - restricted		6,850,422		4,564,345
Accumulated other comprehensive income		3,108,926		440,714
Retained earnings		36,418,661		24,292,911
TOTAL SHAREHOLDERS’ EQUITY		82,907,821		65,827,783
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	87,111,994	$	70,591,496

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

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in US Dollars)
		Three months ended						Nine months ended
		December 31,						December 31,
		2010			2009			2010			2009
Net sales	$	22,136,504		$	17,816,916		$	54,955,885		$	46,502,988
Cost of sales		(11,856,020	)		(9,680,959	)		(29,600,110	)		(24,734,449	)
Gross profit		10,280,484			8,135,957			25,355,775			21,768,539
Selling expenses		(1,111,697	)		(1,094,111	)		(2,369,675	)		(2,592,363	)
General and administrative expenses		(807,231	)		(816,069	)		(2,503,801	)		(2,333,033	)
Operating earnings		8,361,556			6,225,777			20,482,299			16,843,143
Other income (expenses)
Other income		8,988			9,204			57,009			48,575
Total other income (expenses)		8,988			9,204			57,009			48,575
Earnings before income taxes		8,370,544			6,234,981			20,539,308			16,891,718
Provision for income taxes		(2,131,289	)		(1,609,004	)		(5,317,931	)		(4,379,594	)
Net earnings		6,239,255			4,625,977			15,221,377			12,512,124
Other comprehensive income
Foreign currency translation		1,092,793			(39,255	)		2,668,212			(19,452	)
Comprehensive income	$	7,332,048		$	4,586,722		$	17,889,589		$	12,492,672
Earnings per share
Basic	$	0.16		$	0.12		$	0.40		$	0.34
Diluted	$	0.15		$	0.11		$	0.38		$	0.33
Weighted average number of common stock outstanding
Basic		36,762,896			36,125,754			36,703,018			36,125,754
Diluted		40,375,048			40,167,345			40,350,605			37,507,917

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

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in US Dollars)

		Nine months ended
		December 31,
		2010			2009
Operating activities:
Net earnings	$	15,221,377		$	12,512,124
Adjustments to reconcile net earnings to net cash used
in operating activities
Depreciation and amortization		1,489,507			1,120,793
Benefit for deferred income taxes		117,392			164,934
Changes in operating assets and liabilities:
Trade receivables, net		5,644,090			3,149,316
Inventories		(15,705,832	)		(10,010,662	)
Prepayments and deposits		(10,025,807	)		291,788
Other current assets		114,703			(1,462	)
Trade payables		232,288			247,371
Income taxes payable		(218,770	)		136,031
Other payables and accrued expenses		(629,515	)		(1,908,952	)
Net cash (used in) provided by operating activities		(3,760,567	)		5,701,281
Investing activities:
Purchase of property and equipment		(4,333,519	)		(2,577,984	)
Addition to construction in progress		(5,084,541	)		-
Net cash used in investing activities		(9,418,060	)		(2,577,984	)
Financing activities:
Proceeds from issuance of preferred stocks		-			12,006,646
Proceeds from issuance of warrants		-			1,302,354
Cost of raising capital		-			(1,094,047	)
Dividend paid		(809,550	)		-
Proceeds from private placement held in escrow account		931,630			-
Net cash provided by financing activities		122,080			12,214,953
(Decrease) Increase in cash and cash equivalents		(13,056,547	)		15,338,250
Effect of exchange rate on cash and cash equivalents		1,398,816			(39,570	)
Cash and cash equivalents at beginning of the period		35,994,443			4,768,542
Cash and cash equivalents and proceeds from private placement held in escrow account at end of the period	$	24,336,712		$	20,067,222
Supplemental disclosure of cash flows information:
Cash paid for:
Income taxes	$	5,418,475		$	4,078,629
Supplemental disclosure of non-cash information:
Issuance of warrants	$	-		$	367,156
Purchases of property and equipment	$	-		$	160,183

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

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Nature of Business

China Nutrifruit Group Limited (the “Company”) was originally incorporated in the State of Utah on April 22, 1983 and changed its domicile from Utah to Nevada in April 1999. The Company had no business activities or meaningful operations, income producing assets or significant operating capital since at least 1989 until it acquired Fezdale Investments Limited (“Fezdale”) on August 14, 2008.

On August 14, 2008, the Company acquired all of the equity interests of Fezdale, a British Virgin Islands (the “BVI”) corporation, through a share exchange transaction (the “Share Exchange Transaction”), with the result that the shareholders of Fezdale became the beneficial owners of 83.5% of the Company’s common stock. As a result of such Share Exchange Transaction, Fezdale became a wholly-owned subsidiary of the Company and the former shareholders of Fezdale became the Company’s controlling shareholders. Accordingly, all references to shares of Fezdale’s ordinary shares were restated to reflect the equivalent numbers of the common stock of China Nutrifruit Group Limited.

Accounting principles generally accepted in the United States of America (“US GAAP”) require that a company whose shareholders retain the majority interest in a combined business be treated as the acquirer for accounting purposes. As a result, in the Share Exchange Transaction, Fezdale is treated as the accounting acquirer and China Nutrifruit Group Limited is treated as the acquired party. Accordingly, the Share Exchange Transaction was accounted for a recapitalization of the Company. The equity section of the accompanying financial statements was restated to reflect the recapitalization of the Company due to the Share Exchange Transaction as of the first day of the first period presented. The assets and liabilities acquired that, for accounting purposes, were deemed to have been acquired by Fezdale were not significant.

Also, on August 14, 2008, the Company’s majority shareholder, Yiu Fai Kung (“Mr. Kung”), entered into escrow agreements with the private placement investors and HFG International, Limited (“HFG”). Mr. Kung will deliver a certain number of shares of the Company’s common stock owned by him to the investors and HFG pro-rata in accordance with their respective investment amount for no additional consideration if:

The after tax net income for the fiscal year ending on March 31, 2009 was less than $13,919,707 and fiscal year ending on March 31, 2010 was less than $18,495,315; and

The return to Mr. Kung of any of the make good shares placed in escrow by him is considered to be a separate compensatory arrangement because Mr. Kung is a director of the Company’s subsidiary Fezdale. Accordingly, if any of the required earnings targets are met and shares are returned to Mr. Kung, the Company will recognize a non-cash compensation cost at that time equal to the then fair value of the shares returned (up to a total of 5,599,598 shares). For the year ended March 31, 2009, the earnings target for 2009 of net income of $13,955,178 (before any charges related to the release of any shares from escrow) was met. Accordingly, the Company has recorded a non-cash charge to compensation cost of $9,519,316.6 in the fourth quarter of 2009 related to the release from escrow to Mr. Kung of 2,799,799 shares.

For the year ended March 31, 2010, the earnings target for 2009 of net income of $18,495,315 was met. Accordingly, 2,799,799 shares were released to Mr. Kung from escrow.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONT’D)

On September 4, 2009, the Company’s common stock was approved by the NYSE Amex for listing and registration.

On September 30, 2009, the Company entered into a securities purchase agreement (the “Private Placement Transaction”) with certain accredited investors (“Investors”) and effected the initial closing of the purchase and sale of 359,502 units (the “Unit”) at $33.00 per Unit. Each Unit consisted of one share of the Company’s newly-designated Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred Stock”) and one warrant (the “Warrant”) to purchase 2.5 shares of the Company’s common stock, par value $.001 per share. The Series A Preferred Stock is convertible into ten shares of the Company’s common stock (subject to customary adjustments) and the Company is obligated to register the underlying shares of common stock within thirty days of the closing date. In connection with the initial closing of the offering, the Company raised $11.86 million.

On October 8, 2009, the Company effected the second and final closing of the Financing and issued 43,916 units (the “Unit”) for $33.00 per Unit for gross proceeds of $1,449,000.

On September 3, 2010, the Company paid dividends of $809,550 to the holders of Series A Preferred Stock.

Fezdale Investments Limited

Fezdale is a private limited liability company incorporated in BVI on August 22, 2007.

In November 2007, Solar Sun Holdings Limited (“Solar Sun”), a subsidiary of Fezdale, entered in a share purchase agreement with six owners of Daqing Longheda Food Company Limited (“Longheda”) under which the six owners of Longheda transferred 75% equity interests in Longheda to Solar Sun for RMB40,000,000 or $5.87 million. In May 2008, the six founders of Longheda transferred the remaining 25% equity interests in Longheda to Solar Sun. After the transfer, Longheda became a wholly owned subsidiary of Solar Sun.

Solar Sun Holdings Limited

Solar Sun is a private limited liability company (the “PLLC”) incorporated in Hong Kong on September 12, 2007. Solar Sun is a holding company and has no assets or operations other than its ownership of Longheda.

Daqing Longheda Food Company Limited

Longheda was incorporated in Heilongjiang province of Peoples’ Republic of China (the “PRC”) in June 2004. Longheda manufactures and sells a variety of food products processed from specialty premium fruits that grow in Northeast China. Currently, Longheda processes four types of premium specialty fruits, including golden berry, crab apple, blueberry and raspberry, and sells fresh fruits. Longheda currently has four types of fruit based products, including fruit concentrate, nectar, glazed fruits and concentrate pulp. Longheda sells its products through an extensive sales and distribution network. The fresh fruits are mainly sold to fruit supermarkets and stores while the processed fruit products are mainly sold to manufacturers for further processing into fruit juice and other fruit related products.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONT’D)

Jumbo Gloss Limited

Jumbo Gloss Limited (“Jumbo Gloss”) is a PLLC incorporated in BVI on October 13, 2009. Jumbo Gloss is a holding company and has no assets or operations other than its ownership of Daqing Senyang Fruit and Vegetable Food Technology Co., Ltd.

Daqing Senyang Fruit and Vegetable Food Technology Co., Ltd

Daqing Senyang Fruit and Vegetable Food Technology Co., Ltd (“Senyang”) was incorporated in Heilongjiang province of the PRC in June 2010. Senyang is a dormant company and currently has no operations. It is planned that Senyang will eventually be engaged in operating new fruit and vegetable production.

Basis of presentation

The interim condensed consolidated financial statements include the accounts of China Nutrifruit Group Limited and its subsidiaries (the “Group”). The interim condensed consolidated financial statements were prepared in accordance with the US GAAP. All significant intercompany transactions and balances were eliminated.

The interim condensed consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair representation of our condensed consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicatives of the annual results for the year ending March 31, 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with the US GAAP were condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”).

Segment information

The Group identifies and classifies its operating segments based on the nature of products with similar economic characteristics. No segment information is provided as the Group only has one business and geographical segment. The Group’s reportable segment is the manufacture and sale of food products, which operations are located in the PRC and sales were predominately made to customers located in the PRC.

Construction in progress

Construction in progress represents plant and properties under construction and is stated at cost less accumulated impairment losses. This includes cost of construction, plant and equipment and other direct costs plus borrowing costs which include interest charges and exchange differences arising from foreign currency borrowings used to finance these projects during the construction period, to the extent these are regarded as an adjustment to interest costs.

Construction in progress is not depreciated until such time as the assets are completed and ready for their intended use.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONT’D)

Use of estimates

The preparation of the interim condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Economic and political risks

The Group’s operations are conducted in the PRC. Accordingly, the Group’s business and financial position maybe influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy.

The Group’s operations in the PRC are subject to special considerations and significant risk not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environmental and foreign currency exchange. The Group’s results may be adversely affected by changes in the political and social conditions in the PRC, and in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

Earnings per share

Basic earnings per share is computed by dividing net operating results for the reporting period attributable to common shareholders by the weighted average number of common stocks outstanding during the period. Diluted earnings per share is calculated by dividing net operating results for the reporting period attributable to common shareholders by the weighted average number of common stocks outstanding and the dilutive effect of common stock equivalents.

Cash and cash equivalents

The Group considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents.

Trade accounts receivable

In the normal course of business, the Group extends credit to customers. Trade accounts receivable, less allowance for doubtful accounts, reflect the net realizable value of receivables, and approximate fair value. On a regular basis, the Group evaluates its trade accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances, credit conditions, and payment history. A receivable is considered past due if payments have not been received within the agreed upon invoice terms. No allowance for doubtful accounts at December 31, 2010 was recorded.

Inventories

The cost of finished products inventories includes raw materials, direct labor and indirect production costs. Inventories are stated at the lower of cost or market. The Group uses first-in, first-out methods to value its inventories. During the idle production period, overhead costs include depreciation are treated as current-period charges, which are expensed to general and administrative expense instead of costs of inventories.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONT’D)

Fair value of financial instruments

The carrying amount of certain of the Group’s financial instruments, including cash and cash equivalents, trade receivables, trade payables, other current assets, other payables and accrued expenses, approximates fair value due to the relatively short maturity.

Property and equipment, net

Property and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. The principal estimated useful lives generally are: buildings – 20 years; leasehold improvements – 10 years; machinery - 10 years, furniture, fixture and office equipment – 5 years; motor vehicles – 5 years. Depreciation of property and equipment was $552,782, $1,487,353, $372,668 and $1,118,780 for the three and nine months ended December 31, 2010 and 2009 respectively.

Revenue recognition

The Group recognizes revenue from sales of products, where persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price is fixed or determinable and collectibility is reasonably assured. This generally occurs when the customer receives the product or at the time title passes to the customer. Customers generally do not have the right to return product unless damaged or defective. Net sales are comprised of gross sales reduced by customer returns, trade promotions and discounts.

Shipping and handling costs

Shipping and handling costs are included in selling expenses. The shipping and handling costs for the three and nine months ended December 31, 2010 and 2009 were $856,936, $1,799,142, $907,934 and $2,125,427 respectively.

Impairment of long-lived assets

Long-lived assets, except indefinite-lived intangible assets, are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated by the Group to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value. During the periods, no impairment on long-lived assets was recorded by the Group.

All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specific period of time. Thus, all of the Group’s land located in the PRC is considered leasehold land and is stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is 50 years and will expire in 2055.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONT’D)

Negative goodwill

Negative goodwill represents the excess fair value of the net tangible and identifiable intangible assets acquired in a business combination over the purchase price. The negative goodwill is allocated as a pro rate reduction of the amounts assigned to the assets acquired excluding financial assets, deferred taxes and other current assets. If negative goodwill exceeds the amount of those assets, the remaining excess shall be recognized as an extraordinary gain in the period which the business combination is completed.

Other income recognition

Other income is comprised of interest income and others.

Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the loan to the loan’s net carrying amount.

Advertising costs

Advertising costs are expensed as incurred. The total advertising costs were $33,691, $49,094, $24,633 and $35,511 for the three and nine months ended December 31, 2010 and 2009 respectively.

Foreign currency translation

The accompanying financial statements are presented in United States dollars. The functional currency of the Group is Renminbi, “RMB”. The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

Balance sheet
December 31, 2010	RMB6.6120 to US$1.00
March 31, 2010	RMB6.8400 to US$1.00

Statement of income and comprehensive income
For the nine months ended December 31, 2010	RMB6.7721 to US$1.00
For the nine months ended December 31, 2009	RMB6.8400 to US$1.00

As at December 31, 2010, RMB159,748,811 or US$24,160,437 (March 31, 2010: RMB236,619,999 or US$34,613,303) is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONT’D)

Statutory reserves

The laws and regulations of the PRC require before an enterprise distributes profits to its owners, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations. The statutory reserves include a surplus reserve fund and a common welfare fund. These statutory reserves represent restricted retained earnings. The details of surplus reserve fund and common welfare fund are as follows:

Surplus reserve fund

The Company’s subsidiary in PRC is required to transfer 10 percent of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50 percent of that subsidiary’s paid-in capital.

The transfer to this reserve must be made before distribution of any dividends to owners. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years' losses, if any, and may be utilized for business expansion or converted into equity by raising equity from existing owners in proportion to their equity holdings.

Common welfare fund

The Company’s subsidiary in PRC is required to transfer 5 percent to 10 percent of its net income, as determined in accordance with the PRC accounting rules and regulations, to the statutory common welfare fund. This fund can only be utilized on capital items for the collective benefit of that subsidiary’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation. The transfer to this fund must be made before distribution of any dividends to owners.

Related party transactions

A related party is generally defined as (i) any person that holds 10% or more of the Group’s securities and their immediate families, (ii) the Group’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Group, or (iv) anyone who can significantly influence the management or operating decisions of the Group. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

Income taxes

The Group accounts for income taxes under the provision of Accounting Standards Codification 740 (“ASC 740”), resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the relevant periods. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred income tax assets and liabilities are computed for differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities that will result in taxable or deductible amounts in the future, as well as from net operating loss and tax credit carryforwards, and are measured at the enacted tax laws and rates applicable in the years which the differences are expected to be recovered or settled. A deferred tax asset is recognized if it is more likely than not that a benefit will be realized. The Group’s operations are primarily located in PRC and subject to PRC profits tax.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2010, the Financial Accounting Standards Board (FASB) issued an accounting pronouncement related to intangibles - goodwill and other, which requires a company to consider whether there are any adverse qualitative factors indicating that an impairment may exist in performing step 2 of the impairment test for reporting units with zero or negative carrying amounts. The provisions for this pronouncement are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010, with no early adoption. The Company will adopt this pronouncement for our fiscal year beginning April 1, 2011. The adoption of this pronouncement is not expected to have an impact on our consolidated financial statements.

In December 2010, the FASB issued an accounting pronouncement related to business combinations, which requires a company to disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only in comparative financial statements. The disclosure provisions are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. If applicable, we will include the required disclosures for our fiscal year beginning April 1, 2011.

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

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 3. EARNINGS PER SHARE

The computations of basic and diluted earnings per share for the three and nine months ended December 31 is as follows:

		Three months ended						Nine months ended
		December 31,						December 31,
		2010			2009			2010			2009
Numerator:
Net earnings	$	6,239,255		$	4,625,977		$	15,221,377		$	12,512,124
Less: dividends on preferred stock		(205,347	)		(253,780	)		(618,298	)		(253,780	)
Net earnings for basic earnings per share	$	6,033,908		$	4,372,197		$	14,603,079		$	12,258,344
Net earnings for basic earnings per share	$	6,033,908		$	4,372,197		$	14,603,079		$	12,258,344
Add: dividends on preferred stock		205,347			253,780			618,298			253,780
Net earnings for diluted earnings per share	$	6,239,255		$	4,625,977		$	15,221,377		$	12,512,124
Denominator:
Weighted average common stock outstanding		36,762,896			36,125,754			36,703,018			36,125,754
Effect of dilutive preferred stock		3,606,966			4,000,398			3,636,436			1,341,720
Effect of dilutive warrant		5,186			41,193			11,151			40,443
Weighted average common stock and dilutive
potential common stock		40,375,048			40,167,345			40,350,605			37,507,917
Basic net earnings per share	$	0.16		$	0.12		$	0.40		$	0.34
Diluted net earnings per share	$	0.15		$	0.11		$	0.38		$	0.33

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 4. INVENTORY, NET

At December 31, 2010 and March 31, 2010 (audited) inventory is comprised of the following:
		December 31		March 31
Finished goods	$	20,045,512	$	4,101,918
Raw material		93,066		77,992
	$	20,138,578	$	4,179,910

NOTE 5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, at December 31, 2010 and March 31, 2010 (audited) are summarized as follows:

		December 31			March 31
Buildings	$	5,585,300		$	4,673,420
Leasehold improvement		1,384,945			1,339,544
Machinery		18,958,233			14,616,662
Furniture, fixtures and office equipment		40,888			13,742
Motor vehicles		15,011			6,194
Total		25,984,377			20,649,562
Less: accumulated depreciation		(5,339,765	)		(3,582,655	)
	$	20,644,612		$	17,066,907

As of December 31, 2010, buildings and machinery, of $7,032,219 (March 31, 2010: $7,297,850) and $322,562 (March 31, 2010: $342,365) respectively, were pledged to secure the unused banking facilities obtained by the Group. (Note 13)

NOTE 6. PREPAYMENTS AND DEPOSITS

Prepayments and deposits mainly comprised the amount paid to the suppliers of property and equipment as of December 31, 2010.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 7. OTHER PAYABLES AND ACCRUED EXPENSES

Other payables and accrued expenses by major categories at December 31, 2010 and March 31, 2010 (audited) are summarized as follows:

		December 31,		March 31,
Accruals	$	449,807	$	723,588
Value added tax payables		628,890		1,104,630
Other payables		690,268		551,028
	$	1,768,965	$	2,379,246

The other payables mainly comprised amounts payable to the suppliers of property and equipment, amounting to $427,571 and $398,056 as of December 31, 2010 and March 31, 2010 respectively.

NOTE 8. PROVISION FOR INCOME TAXES

The provision for income tax is as follows:
		Three months ended				Nine months ended
		December 31,				December 31,
		2010		2009		2010		2009
Current:
PRC	$	2,091,951	$	1,553,696	$	5,200,539	$	4,214,660
Other jurisdictions		-		-		-		-
Deferred:
PRC		39,338		55,308		117,392		164,934
Other jurisdictions		-		-		-		-
	$	2,131,289	$	1,609,004	$	5,317,931	$	4,379,594

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 8. PROVISION FOR INCOME TAXES (CONT’D)

Deferred tax assets

The source of significant temporary difference that gives rise to the deferred tax asset is as follows:

		December 31,			March 31,
		2010			2010
					(audited)
Deferred tax assets:
Difference between book and tax basis of land use right and property and equipment	$	950,652		$	1,068,878
Tax losses carry-forward		1,111,335			913,721
Less: valuation allowance		(1,111,335	)		(913,721	)
Net deferred tax assets	$	950,652		$	1,068,878

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all of the assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in each tax jurisdiction during the periods in which temporary differences in those jurisdictions become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment.

The Company has provided valuation allowances of $1,111,335 and $913,721 in respect of federal net operating loss and foreign unused tax loss carryforwards, respectively, which it does not expect to utilize.

Gross deferred tax assets at December 31, 2010 and March 31, 2010 were reduced by valuation allowances of $1,111,335 and $913,721, respectively. The total valuation allowance between periods presented increased by $197,614 (March 31, 2010: $368,853) and such increase was attributable to the tax effect on foreign tax losses incurred for the nine months ended December 31, 2010 of $39,887 (March 31, 2010: $56,757) at enacted foreign profit tax rates and the tax effect on federal net operating loss incurred for the nine months ended December 31, 2010 of $157,727 (March 31, 2010: $312,096) at the federal tax rate of 35%.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 8. PROVISION FOR INCOME TAXES (CONT’D)

Income taxes

A reconciliation of the provision for income tax calculated using the statutory federal income tax rate and state and local income tax rate to the Company’s provision for income taxes for the three months and nine months ended December 31 is as follows:

		Three months						Nine months
		ended December 31,						ended December 31,
		2010			2009			2010			2009
Provision for income taxes at statutory rate of 35%	$	2,929,690		$	2,181,522		$	7,188,758		$	5,912,101
Chinese tax rate difference		(823,883	)		(604,347	)		(2,033,041	)		(1,644,633	)
Non-deductible expenses and non- assessable profits		(56,240	)		(76,969	)		(153,626	)		(65,973	)
Changes in valuation allowance		41,550			53,820			197,614			178,099
Tax effect of non-deductible temporary difference recognized		40,172			54,978			118,226			-
Income taxes	$	2,131,289		$	1,609,004		$	5,317,931		$	4,379,594

Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. U.S. income taxes and foreign withholding taxes were not provided on undistributed earnings of foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. It is not practical to determine the amount of undistributed earnings or income tax payable in the event the Company repatriated all undistributed foreign earnings. However, if these earnings were distributed to the U.S. in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes and foreign withholding taxes, offset by an adjustment for foreign tax credits.

NOTE 9. SHAREHOLDERS’ EQUITY

General

The Company’s total authorized capital at December 31, 2010 and March 31, 2010, is 125,000,000 shares of which 120,000,000 shares are common stock of par value $0.001 and 5,000,000 shares are preferred stock of par value $0.001.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. SHAREHOLDERS’ EQUITY (CONT’D)

Series A Preferred Stock

In connection with the first closing of Private Placement Transaction on September 30, 2009, certain investors received 359,502 shares of Series A Preferred Stock.

In connection with the second and final closing of Private Placement Transaction on October 8, 2009, certain investors received 43,916 shares of Series A Preferred Stock. A summary of terms of Series A Preferred Stock as follows:

Ranking

With respect to rights upon liquidation, winding-up or dissolution, the Series A Preferred Stock ranks senior to the Company’s common stock and any other classes or series of stock of the Company not designated as ranking senior to or pari passu with the Series A Preferred Stock.

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 shareholders, except as required by Nevada law.

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 (A) $33.00 per share (the "Liquidation Preference Amount") by (B) the conversion price, which is initially $3.30 per share, subject to adjustment as provided in the Certificate of Designation. Initially, each share of Series A Preferred Stock is convertible into 10 shares of common stock.

Mandatory Conversion

The Company may convert outstanding Series A Preferred Stock into shares of common stock upon (i) the closing of a sale by the Company of shares of common stock in a registered public offering in which the Company sells shares of its stock for at least $10 million in gross proceeds and the holders of the Series A Convertible Preferred Stock are able to offer and sell at least 50% of the common stock that would be received upon such mandatory conversion ("Qualified Sale") or (ii) when the average of the daily closing price of the common stock for at least 30 consecutive trading days is not less than $4.25 and the daily trading volume during each of those 30 trading days exceeds 75,000 shares (a "Market Forced Conversion," and collectively with a Qualified Sale, a "Forced Conversion"). The conversion rate to be applied in effecting a Forced Conversion is calculated by dividing the Liquidation Preference Amount per share by $2.75 (in the event of a Qualified Sale) or $3.30 (in the event of a Market Forced Conversion), as the case may be, subject to adjustment as provided in the Certificate of Designation. In addition, in connection with a Qualified Sale Forced Conversion, the Company will pay to the holder for each share of Series A Preferred Stock so converted a per share amount equal to seven percent (7%) of the original issue price plus all accrued and unpaid dividends

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. SHAREHOLDERS’ EQUITY (CONT’D)

Dividends

Each share of Series A Preferred Stock is entitled to receive cumulative dividends at the annual rate of 7% on the Liquidation Preference Amount thereof. Such dividends are payable annually on September 1 beginning with the first date after December 31, 2009 and any optional conversion date in cash.

Liquidation

In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Stock then outstanding will be entitled to receive, out of the assets of the Company available for distribution to its shareholders, $33.00 per share plus accrued but unpaid dividends, before any payment shall be made or any assets distributed to the holders of the Common Stock or any other class or series of stock issued by the Company not designated as ranking senior to or pari passu with the Series A Preferred Stock in respect of the right to participate in distributions or payments upon a liquidation event.

Redemption

At any time on or after less than 10% of the originally issued shares of Series A Preferred Stock shall remain outstanding and subject to the satisfaction of certain conditions, the Company may redeem all shares of Series A Preferred Stock then outstanding at one hundred and one percent (101%) of the Liquidation Preference Amount, plus any accrued and unpaid dividends. A holder of then outstanding Series A Preferred Stock may also, upon the satisfaction of the foregoing conditions and at the option of such holder, request the Company to redeem all or any of its shares of Series A Preferred Stock at the same price.

Common stock

The following is the movement of common stock during first quarter of fiscal 2011:

The Company’s Series A preferred shareholders converted 14,550 shares into 145,500 shares of the Company’s common stock at a conversion ratio of 1 Series A Preferred Stock to 10 shares of common stock. On April 7, 2010, April 21, 2010, May 5, 2010 and May 21, 2010, 33,340 shares, 30,310 shares, 36,380 shares and 45,470 shares of common stock in connection to such Series A Preferred Stock conversion were issued

The following is the movement of common stock during third quarter of fiscal 2011:

The Company’s Series A preferred shareholders converted 7,576 shares into 75,760 shares of the Company’s common stock at a conversion ratio of 1 Series A Preferred Stock to 10 shares of common stock. On November 8, 2010, 75,760 shares of common stock in connection to such Series A Preferred Stock conversion were issued

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. SHAREHOLDERS’ EQUITY (CONT’D)

Warrants

In connection with the private placement which closed on October 10, 2008, WLT Brothers Capital, Inc., Wentworth Securities, Inc. and Euro Pacific Capital, Inc., the Company’s placement agents, received, as partial compensation, warrants to purchase 66,171, 95,781 and 54,057 shares of the Company’s common stock, respectively. The warrants have a term of 3 years and are immediately exercisable at $2.78 per share, subject to the usual adjustments for certain corporate events.

The Company valued the warrants by Trinomial option pricing model at $331,357 which was recorded as cost of raising capital against additional paid-in capital. The Company estimated the fair value of each warrant award on the date of grant using the Trinomial option pricing model and the assumption noted in the following table. Expected volatility is based on the historical and implied volatility of a peer group of publicly traded entities. The expected term of options gave consideration to historical exercises, post-vesting cancellations and the options’ contractual term. The risk-free rate for the expected term of the option is based on the U.S. Treasury Constant Maturity at the time of grant. The assumptions used to value options granted during the year ended March 31, 2009 were as follows:

Risk free interest rate	3.479%
Expected volatility	59.92%
Expected dividend rate	-%
Expected life (years)	3

In connection with the first closing of Private Placement Transaction which closed on September 30, 2009, certain investors received 359,502 warrants to purchase 898,777 shares of the Company’s common stock. The warrants have a term of 4 years and are immediately exercisable at $3.30 per share, subject to customary adjustments.

The Company valued the warrants by Trinomial Option Pricing Model at $1,361,295 which was used to calculate the portion of proceeds from private placement transaction arising from warrants to record as additional paid-in capital. The Company estimated the fair value of each warrant award on the date of grant using the Trinomial Option Pricing Model and the assumption noted in the following table. Expected volatility is based on the historical and implied volatility of a peer group of publicly traded entities. The expected term of options gave consideration to historical exercises, post-vesting cancellations and the options’ contractual term. The risk-free rate for the expected term of the option is based on the U.S. Government Bond at the time of grant. The assumptions used to value options granted were as follows during fiscal 2010:

Risk free interest rate	2.264%
Expected volatility	56.03%
Expected dividend rate	-%
Expected life (years)	4

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. SHAREHOLDERS’ EQUITY (CONT’D)

In connection with the first closing of Private Placement Transaction on September 30, 2009, WLT Brothers Capital, Inc. and Euro Pacific Capital, Inc., the Company’s placement agents, received on October 8, 2009, as partial compensation, 86,281 warrants to purchase 215,703 shares of the Company’s common stock. The warrants have a term of 4 years and are immediately exercisable at $3.30 per share, subject to customary adjustments.

The Company valued the warrants by Trinomial Option Pricing Model at $326,705 which was recorded as cost of raising capital against additional paid-in capital. The Company estimated the fair value of each warrant award on the date of grant using the Trinomial Option Pricing Model and the assumption noted in the following table. Expected volatility is based on the historical and implied volatility of a peer group of publicly traded entities. The expected term of options gave consideration to historical exercises, post-vesting cancellations and the options’ contractual term. The risk-free rate for the expected term of the option is based on the U.S. Government Bond at the time of grant. The assumptions used to value options granted were as follows during fiscal 2010:

Risk free interest rate	2.264%
Expected volatility	56.03%
Expected dividend rate	-%
Expected life (years)	4

In connection with the second and final closing of Private Placement Transaction which closed on October 8, 2009, certain investors received 43,916 warrants to purchase 109,790 shares of the Company’s common stock. The warrants have a term of 4 years and are immediately exercisable at $3.30 per share, subject to customary adjustments.

The Company valued the warrants by Trinomial Option Pricing Model at $168,549 which was used to calculate the portion of proceeds from private placement transaction arising from warrants to record as additional paid-in capital. The Company estimated the fair value of each warrant award on the date of grant using the Trinomial Option Pricing Model and the assumption noted in the following table. Expected volatility is based on the historical and implied volatility of a peer group of publicly traded entities. The expected term of options gave consideration to historical exercises, post-vesting cancellations and the options’ contractual term. The risk-free rate for the expected term of the option is based on the U.S. Government Bond at the time of grant. The assumptions used to value options granted were as follows during fiscal 2010:

Risk free interest rate	2.324%
Expected volatility	51.62%
Expected dividend rate	-%
Expected life (years)	4

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. SHAREHOLDERS’ EQUITY (CONT’D)

In connection with the second and final closing of Private Placement Transaction which closed on October 8, 2009, certain placement agents received 10,540 warrants to purchase 26,349 shares of the Company’s common stock. The warrants have a term of 4 years and are immediately exercisable at $3.30 per share, subject to customary adjustments.

The Company valued the warrants by Trinomial Option Pricing Model at $40,450 which was recorded as cost of raising capital against additional paid-in capital. The Company estimated the fair value of each warrant award on the date of grant using the Trinomial Option Pricing Model and the assumption noted in the following table. Expected volatility is based on the historical and implied volatility of a peer group of publicly traded entities. The expected term of options gave consideration to historical exercises, post-vesting cancellations and the options’ contractual term. The risk-free rate for the expected term of the option is based on the U.S. Government Bond at the time of grant. The assumptions used to value options granted were as follows during fiscal 2010:

Risk free interest rate	2.324%
Expected volatility	51.62%
Expected dividend rate	-%
Expected life (years)	4

The following is the movement of warrants during the nine months ended December 31, 2010:

			Granted	Exercised		Outstanding at
		Outstanding at	during the	during the		December 31,		Exercise
Date of grant		April 1, 2010	period	period		2010		price
October 10, 2008		120,228	-	-		120,228	$	2.78
September 30, 2009		359,502	-	-		359,502	$	3.30
October 8, 2009		140,737	-	-		140,737	$	3.30
		620,467	-	-		620,467
Weighted average exercise price	$	3.20	-	-	$	3.20

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. SHAREHOLDERS’ EQUITY (CONT’D)

The following is the movement of warrants during the nine months ended December 31, 2009:

				Granted	Exercised		Outstanding at
		Outstanding at		during the	during the		December 31,		Exercise
Date of grant		April 1, 2010		period	period		2010		price
October 10, 2008		120,228		-	-		120,228	$	2.78
September 30, 2009		359,502		-	-		359,502	$	3.30
October 8, 2009		-		140,737	-		140,737	$	3.30
		479,730		140,737	-		620,467
Weighted average exercise price	$	3.17	$	3.30	-	$	3.20

NOTE 10. PRC CONTRIBUTION PLAN

Employees of the Group are entitled to retirement benefits calculated with reference to their salaries basis upon retirement and their length of service in accordance with a PRC government-managed retirement plan. The PRC government is directly responsible for the payments of the benefits to these retired employees. The Group is required to make contributions to the government-managed retirement plan based on certain percentages of the employees’ monthly salaries. The amounts contributed by the Group were $107,014, $231,311, $92,945 and $219,567 for the three and nine months ended December 31, 2010 and 2009 respectively.

NOTE 11. CONCENTRATION OF RISK

Credit Risk

Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and cash equivalents. As of December 31, 2010, substantially all of the Group’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality.

Group’s operations are in China

All of the Group’s products are produced in China. The Group’s operations are subject to various political, economic, and other risks and uncertainties inherent in China. Among other risks, the Group’s operations are subject to the risks of transfer of funds; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 31, 2010 and 2009 (Unaudited)
(Stated in U.S. Dollars)

NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES

Operating Lease Commitments

As of December 31, 2010, the Group did not have any significant operating lease commitments.

Rent for the three and nine months ended December 31, 2010 and 2009 was $4,500, $13,268, $4,386 and $19,141, respectively.

Capital Commitments

As of December 31, 2010, the Group had the followings outstanding capital expenditure commitments:

Authorized and contracted, but not provided for:
Construction in progress	$	2,041,301
Property and equipment		1,664,179
	$	3,705,480

NOTE 13. UNUSED SECURED CREDIT FACILITIES

As of December 31, 2010, the Group had $2,846,352 (March 31, 2010 (audited): $2,756,791) of unused credit facilities granted by banks. Those banking facilities were secured by land use rights, buildings and machinery, of $187,730 (March 31, 2010 (audited): $185,686), $7,032,219 (March 31, 2010 (audited): $7,297,850) and $322,562 (March 31, 2010 (audited): $342,365) respectively.

NOTE 14. SUBSEQUENT EVENTS

The Company evaluated all events or transactions through the date of this filing, which is the date the financial statements were issued. During this period, other than those disclosed above, the Company did not have any material subsequent events that impacted the consolidated financial statements.

End of condensed consolidated financial statements.

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 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, those concerning our expected financial performance; strategic and operational plans; management forecast; potential and contingent liabilities; management’s plans; taxes; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the 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. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to our views on the growth of the fruit industry, particularly the specialty fruit industry; general economic conditions; our ability to overcome competition in the Chinese fruit processing market; the impact that a downturn or negative changes in the industries in which our products are sold could have on our business and profitability; any decrease in the availability, or increase in the cost, of raw materials and energy; our ability to simultaneously fund the implementation of our business plan and invest in new projects; economic, political, regulatory, legal and foreign exchange risks associated with international expansion; loss of key members of our senior management; unexpected changes to China’s political or economic situation and legal environment; and any of the factors mentioned in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended March 31, 2010 and other risks and uncertainties mentioned in this Form 10-Q or our other reports filed with the Securities and Exchange Commission.

Readers are urged to carefully review and consider the various disclosures made by us in this Report and our other filings with the Securities and Exchange Commission. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Report speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context, all references in this Quarterly Report to: (i) “we,” “the Company,” “us,” “our company,” “our,” and “China Nutrifruit” are to the combined businesses of China Nutrifruit Group Limited and its consolidated subsidiaries; (ii) “Fezdale” are to Fezdale Investments Limited, a British Virgin Islands corporation, our direct, wholly-owned subsidiary; (iii) “Solar Sun” are to Solar Sun Holdings Limited, a Hong Kong corporation, our indirect, wholly-owned subsidiary; (iv) “Jumbo Gloss” are to Jumbo Gloss Limited, a British Virgin Islands corporation, our direct wholly-owned subsidiary; (v) “Longheda” are to Daqing Longheda Food Company Limited, a Chinese corporation, our indirect, wholly-owned subsidiary; (vi) “Senyang” are to Daqing Senyang Fruit and Vegetable Food Technology Company Limited, a Chinese corporation, our indirect, wholly-owned subsidiary; (vii) “Securities Act” are to the Securities Act of 1933, as amended; (viii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (ix) “RMB” are to Renminbi, the legal currency of China; (x) “U.S. dollar,” “$” and “US$” are to the legal currency of the United States; (xi) “China,” “Chinese” and “PRC” are to the People’s Republic of China; and (xii) “BVI” are to the British Virgin Islands.

Overview

We are a holding company and conduct all of our operations through our indirect, wholly-owned subsidiary, Longheda, which is a leading producer of premium specialty fruit-based products in China. We develop, process, market and distribute a variety of food products processed primarily from premium specialty fruits grown in Northeast China, mainly including golden berry, crab apple, blueberry, raspberry, blackcurrant and seabuckthorn. Our primary product offering includes fruit concentrate, nectar, glazed fruits, concentrate pulp as well as fresh fruits.

Our processed fruit products are mainly sold to food producers for further processing into fruit juice and other fruit related foods, and our fresh fruits are mainly sold to fruit retailers and supermarkets. Our manufacturing facilities are located in Daqing City and Mudanjiang City, Heilongjiang Province, China where abundant supply of various premium specialty fruits is readily available. We currently have five fruit processing lines with an aggregate capacity of 17,160 tons.

On June 29, 2010, we incorporated a wholly owned subsidiary Daqing Senyang Fruit and Vegetable Food Technology Company Limited in China for the purpose of operating new fruit and vegetable powder production. We expect the new fruit and vegetable power production line will start operation in June 2011 and its annual production capacity will be 10,000 tons.

Third Fiscal Quarter Highlights

We continued to experience strong growth in net sales and net income while maintaining stable margin during the third fiscal quarter. Market demand for our products remained strong and sales increased across all product categories in this fiscal quarter. Due to difficult weather conditions in Daqing, we decided to delay the final equipment installation phase of our new fruit and vegetable powder production facility until March 2011 and expect to commence trial production of the new production line in June 2011.

The following sets forth certain key financial information for the third fiscal quarter.

Net Sales: Net sales increased $4.3 million, or 24.2%, to $22.1 million for the third fiscal quarter of 2011 from $17.8 million for the same period last year.
Gross Margin: Gross margin was 46.4% for the third fiscal quarter of 2011, as compared to 45.7% for the same period last year.
Net Income: Net income increased $1.6 million, or 34.9%, to $6.2 million for the third fiscal quarter of 2011 from $4.6 million for the same period last year.
Fully diluted earnings per share: Fully diluted earnings per share were $0.15 for the third fiscal quarter of 2011, as compared to $0.11 for the same period last year.

Results of Operations

Comparison of Three Months Ended December 31, 2010 and December 31, 2009

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

(All amounts, other than percentages and per share number, in thousands of U.S. dollars)

		Three Months Ended			Three Months Ended
		December 31, 2010			December 31, 2009
			As a			As a
		In	Percentage		In	Percentage
		Thousands	of Net Sales		Thousands	of Net Sales
Net Sales	$	22,137	100.0%	$	17,817	100.0%
Costs of Sales		11,856	53.6%		9,681	54.3%
Gross profit		10,281	46.4%		8,136	45.7%
Selling expenses		1,112	5.0%		1,094	6.1%
General and administrative expenses		807	3.6%		816	4.6%
Other income		9	0.0%		9	0.0%
Income before noncontrolling interests and income taxes		8,371	37.8%		6,235	35.0%
Income taxes		2,132	9.6%		1,609	9.0%
Net income		6,239	28.2%		4,626	26.0%
Earnings per share:
Basic	$	0.16		$	0.12
Diluted	$	0.15		$	0.11

The functional currency of the Company is RMB, however, our financial information is expressed in USD. The results of operations reported in the table above is based on the exchange rate of RMB 6.667 to $1 for the three months ended December 31, 2010 and the rate of RMB 6.84 to $1 for the three months ended December 31, 2009.

Net Sales

Net sales consist of revenue from the sale of our fruit and fruit based products. We continued to experience strong growth in net sales in this fiscal quarter. Net sales increased $4.3 million, or 24.2 %, to $22.1 million for the three months ended December 31, 2010 from $17.8 million for the three months ended December 31, 2009. Strong market demand drove increased sales volume across all product categories, especially our concentrate pulp and glazed fruit products which grew from $1.9 million and $5.4 million in the three months ended December 31, 2009 to $4.9 million and $6.0 million in the three months ended December 31, 2010, respectively. Net sales also increased as a result of an increase in the average sales price of crab apple concentrate juice and pear concentrate pulp which increased approximately 37.6% and 48.4%, respectively, in this fiscal quarter as compared to the same quarter last year. Because beverage products usually require large capital for advertising and other sales and marketing efforts, we made a strategic decision to cease production of beverage products in March 2010 and to focus on our more profitable high-end premium products.

The following table sets forth percentage of net sales generated by each product for the three months ended December 31, 2010 and 2009:

(All amounts, other than percentages, in thousands of U.S. dollars)

		Three Months Ended			Three Months Ended
		December 31, 2010			December 31, 2009
			As a			As a
		In	Percentage		In	Percentage
Product		Thousands	of Net Sales		Thousands	of Net Sales
Fresh fruit	$	763	3.4%	$	545	3.1%
Glazed fruit		6,040	27.3%		5,355	30.1%
Nectar		1,297	5.9%		862	4.8%
Concentrate juice		9,164	41.4%		8,415	47.2%
Concentrate pulp		4,873	22.0%		1,876	10.5%
Beverage		-	-		764	4.3%
Total	$	22,137	100.0%	$	17,817	100.0%

Cost of Sales

Cost of sales is primarily comprised of the costs of our raw materials, labor, overhead and sales tax. Cost of sales increased $2.2 million, or 22.5%, to $11.9 million for the three months ended December 31, 2010 from $9.7 million for the three months ended December 31, 2009. Cost of sales as a percentage of net sales was 53.6% for the three months ended December 31, 2010, as compared to 54.3% for the same period last year. The amount increase in costs of sales was mainly attributable to the increased sales volume.

Gross Profit

Gross profit is equal to net sales less cost of sales. Gross profit increased by $2.2 million to $10.3 million for the three months ended December 31, 2010 from $8.1 million for the three months ended December 31, 2009. Gross profit as a percentage of net sales increased to 46.4% for the three months ended December 31, 2010 as compared to 45.7% for the same period last year. The slight increase in gross margin was mainly driven by a significant increase in the gross margin of concentrate pulp products. Our average sales price of concentrate pulp products increased due to strong market demand in this fiscal quarter. The gross margin for glazed fruit, nectar, concentrate juice and concentrate pulp products for the three months ended December 31, 2010 were 54.2%, 67.7%, 43.7% and 36.5%, as compared to 51.9%, 69.7%, 44.4% and 28.3% for the same period last year, respectively.

Selling and General and Administrative Expenses

Selling and general and administrative expenses remained stable at $1.9 million for the three months ended December 31, 2010.

Selling expenses include sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel and other sales related costs. Selling expenses increased $17,586, or 1.6%, to $1.1 million for the three months ended December 31, 2010 from $1.1 million for the three months ended December 31, 2009. As a percentage of net sales, selling expenses decreased 1.1% from 6.1% for three months ended December 31, 2009 to 5.0% for the three months ended December 31, 2010. Due to well established relationships with our existing customers, we received repeat orders with higher volume from our existing clients, which led to lower sales related expenses in this quarter. In addition, we incurred less selling expenses due to the cessation of production and sale of beverage products in this fiscal quarter. We plan to continue to spend more efforts on identifying new distributors in regions where we have no or limited sales to further expand our customer base and market share.

General and administrative expenses include the costs associated with staff and support personnel who manage our business activities, depreciation charge for fixed assets, including idle production line, and professional fees paid to third parties. Our general and administrative expenses decreased $8,838, or 1.1%, to $807,231 for the three months ended December 31, 2010 from $816,069 for the three months ended December 31, 2009. As a percentage of net sales, general and administrative expenses for the three months ended December 31, 2010 decreased by 1.0% to 3.6%, as compared to 4.6% for the three months ended December 31, 2009. Due to our efforts in cost management, we were able to keep our general and administrative expenses relatively stable despite the significant increase in net sales in this quarter.

Income before Noncontrolling Interests and Income Taxes

Income before noncontrolling interests and income taxes increased $2.2 million, or 34.3%, to $8.4 million for the three months ended December 31, 2010 from $6.2 million for the three months ended December 31, 2009. Income before noncontrolling interests and income taxes as a percentage of net sales increased from 35.0% for the three months ended December 31, 2009 to 37.8% for the three months ended December 31, 2010. The percentage increase was primarily attributable to the increase in gross margin and our ability to maintain stable selling and general and administrative expenses as discussed above.

Provision for Income Taxes

The provision for income taxes increased $522,285, or 32.5%, to $2.1 million for the three months ended December 31, 2010 from $1.6 million for the three months ended December 31, 2009. The increase in the provision for income taxes is mainly attributed to the increase in net income before income taxes.

We file separate tax returns in the United States and China. Income taxes of our PRC subsidiary are calculated in accordance with taxation principles currently effective in the PRC. For China Nutrifruit Group Limited, applicable U.S. tax laws are followed. The applicable tax rate for our PRC operating subsidiary Longheda was 25% in calendar year 2010 and is expected to remain at 25% for calendar year 2011.

Net Income

Net income increased $1.6 million, or 34.9%, to $6.2 million for the three months ended December 31, 2010 from $4.6 million for the three months ended December 31, 2009, mainly as a result of the increase in sales revenue as discussed above.

Comparison of Nine Months Ended December 31, 2010 and December 31, 2009

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

(All amounts, other than percentages and per share number, in thousands of U.S. dollars)

		Nine Months Ended				Nine Months Ended
		December 31, 2010				December 31, 2009
				As a			As a
		In		Percentage		In	Percentage
		Thousands		of Net Sales		Thousands	of Net Sales
Net Sales	$	54,956		100.0%	$	46,503	100.0%
Costs of Sales		29,600		53.9%		24,734	53.2%
Gross profit		25,356		46.1%		21,769	46.8%
Selling expenses		2,370		4.3%		2,592	5.6%
General and administrative expenses		2,504		4.6%		2,333	5.0%
Other income		57		0.1%		48	0.1%
Income before noncontrolling interests and income taxes		20,539		37.4%		16,892	36.3%
Income taxes		5,318		9.7%		4,380	9.4%
Net income		15,221		27.7%		12,512	26.9%
Earnings per share:
Basic	$	0.40	$			0.34
Diluted	$	0.38	$			0.33

The results of operations reported in the table above is based on the exchange rate of RMB 6.772 to $1 for the nine months ended December 31, 2010 and the rate of RMB 6.84 to $1 for the nine months ended December 31, 2009.

Net Sales

Net sales increased $8.5 million, or 18.2%, to $55.0 million for the nine months ended December 31, 2010 from $46.5 million for the nine months ended December 31, 2009. The increase was mainly attributable to increased sales volume of our concentrate juice, concentrate pulp and glazed products due to strong market demand. We also benefited from the increased average price of concentrate juice and concentrate pulp products, especially our crab apple concentrate juice and pear concentrate pulp products which increased approximately 24.3% and 25.8% as compared to the same period last year. We experienced strong demand for concentrate pulp products in the first nine months of fiscal year 2011, as a result, sales of concentrate pulp products increased $3.0 million, or 46.9% to $9.4 million for the nine months ended December 31, 2010. With the new glazed fruit production line and the upgrade of the concentrate juice production line, revenue generated from the sale of glazed fruit and concentration juice grew from $10.2 million and $20.1 million in the nine months ended December 31, 2009 to $11.6 million and $26.7 million in the nine months ended December 31, 2010, respectively. The increase in sales of concentrate juice products was mainly due to the increase of sales price of crab apple and raspberry concentrate juice. In addition, our new launched seabuckthorn and blackcurrant concentrate juice products generated revenues of approximately $1.3 million. The increase in sales of glazed fruit was due to increased sales of our new seabuckthorn and blackcurrant glazed fruit products which were launched in July 2010. The following table sets forth percentage of net sales generated by each product for the nine months ended December 31, 2010 and 2009:

(All amounts, other than percentages, in thousands of U.S. dollars)

		Nine Months Ended			Nine Months Ended
		December 31, 2010			December 31, 2009
			As a			As a
		In	Percentage		In	Percentage
Product		Thousands	of Net Sales		Thousands	of Net Sales
Fresh fruit	$	2,243	4.1%	$	2,220	4.8%
Glazed fruit		11,635	21.2%		10,202	21.9%
Nectar		5,056	9.2%		4,809	10.3%
Concentrate juice		26,663	48.5%		20,089	43.2%
Concentrate pulp		9,359	17.0%		6,370	13.7%
Beverage		-	-		2,813	6.0%
Total	$	54,956	100.0%	$	46,503	100.0%

Cost of Sales

Cost of sales increased $4.9 million, or 19.7%, to $29.6 million for the nine months ended December 31, 2010 from $24.7 million for the nine months ended December 31, 2009. Cost of sales as a percentage of net sales was 53.9% for the nine months ended December 31, 2010, as compared to 53.2% for the same period last year. The dollar increase was mainly due to increased sales volume and higher labor costs.

Gross Profit

Gross profit increased by $3.6 million to $25.4 million for the nine months ended December 31, 2010 from $21.8 million for the nine months ended December 31, 2009. Gross profit as a percentage of net sales was 46.1% for the nine months ended December 31, 2010 as compared to 46.8% for the same period last year. The slight decrease in gross margin was mainly because we sold more lower margin concentrate juice and concentrate pulp products in the nine months ended December 31, 2010, and we incurred start up costs associated with the launch of our new seabuckthorn and blackcurrant glazed fruit products in July 2010. As part of our marketing strategy, we offered our new seabuckthorn and blackcurrant glazed fruit products at attractive prices to our customers to test the market which resulted in relatively lower margins than our existing glazed fruit products. We will continue to monitor the market demand for these new products and may increase our sales price to improve gross margin in the future when market conditions permit. In addition, we ceased beverage production in March 2010, as a result, the portion of the factory overhead costs previously allocated to the beverage production line was re-allocated to other production lines in this production season. Furthermore, we increased workers’ salary in the nine months ended December 31, 2010. The gross margins for glazed fruit, nectar, concentrate juice and concentrate pulp products for the nine months period ended December 31, 2010 were 53.2%, 68.2%, 43.2% and 33.7%, as compared to 57.6%, 68.1%, 43.5% and 33.8% for the same period last year, respectively.

Selling and General and Administrative Expenses

Selling and general and administrative expenses decreased $51,920, or 1.1%, to $4.9 million for the nine months ended December 31, 2010 from $4.9 million for the nine months ended December 31, 2009.

Selling expenses decreased $222,689, or 8.6%, to $2.4 million for the nine months ended December 31, 2010 from $2.6 million for the nine months ended December 31, 2009. As a percentage of net sales, selling expenses decreased 1.3% from 5.6% for nine months ended December 31, 2009 to 4.3% for the nine months ended December 31, 2010. Due to well established relationships with our existing customers, we received repeat customer orders with higher volume, which led to lower sales related expenses in the first nine months of fiscal year 2011. In addition, we incurred less selling expenses due to the cessation of production and sale of beverage products in the nine months ended December 31, 2010.

Our general and administrative expenses increased $170,768, or 7.3%, to $2.5 million for the nine months ended December 31, 2010 from $2.3 million for the nine months ended December 31, 2009. As a percentage of net sales, general and administrative expenses for the nine months ended December 31, 2010 decreased by 0.4% to 4.6%, as compared to 5.0% for the nine months ended December 31, 2009. The slight dollar increase in general and administrative expenses was mainly attributable to the increase in staff salary and benefit, and depreciation expenses incurred in connection with our new glazed fruit production line launched in December 2009.

Income before Noncontrolling Interests and Income Taxes

Income before noncontrolling interests and income taxes increased $3.6 million, or 21.9%, to $20.5 million for the nine months ended December 31, 2010 from $16.9 million for the nine months ended December 31, 2009. Income before noncontrolling interests and income taxes as a percentage was 37.4% for the nine months ended December 31, 2010 as compared to 36.3% for the nine months ended December 31, 2009.

Provision for Income Taxes

The provision for income taxes increased $0.9 million, or 21.4%, to $5.3 million for the nine months ended December 31, 2010 from $4.4 million for the nine months ended December 31, 2009. The increase in the provision for income taxes is mainly attributed to the increase in net income before income taxes.

Net Income

Net income increased $2.7 million, or 21.7%, to $15.2 million for the nine months ended December 31, 2010 from $12.5 million for the nine months ended December 31, 2009, mainly as a result of the increase in sales revenue as discuss above.

Liquidity and Capital Resources

As of December 31, 2010, we had cash and cash equivalents of $24.3 million. The following table sets forth a summary of our cash flows for the periods indicated.

Cash Flow
(All amounts in thousands of U.S. dollars)
		Nine Months Ended December 31,
		2010		2009
Net cash (used in) provided by operating activities	$	(3,760	) $	5,701
Net cash used in investing activities		(9,418	)	(2,578	)
Net provided by financing activities		122		12,215
Effect of exchange rate on cash and cash equivalents		1,399		(40	)
Cash and cash equivalents at beginning of the period		35,994		4,769
Cash and cash equivalents at end of period		24,337		20,067

Operating Activities

Net cash used in operating activities was $3.8 million for the nine months ended December 31, 2010 as compared to $5.7 million provided by in operating activities for the nine months ended December 31, 2009. Net cash used in operating activities for the nine months ended December 31, 2010 was mainly attributable to approximately $10.0 million in advance payment for the construction of our fruit and vegetable powder factory and production line and a $15.7 million increase in inventories. The significant increase in inventories was mainly because our new production season started in July and we manufactured more products in this fiscal quarter as compared to the same period last year in anticipation of the increased market demand.

Investing Activities

During the nine months ended December 31, 2010, we used approximately $4.3 million to upgrade concentrate juice production lines in our Daqing and Mudanjiang facilities and approximately $5.1 million to construct a new fruit and vegetable powder factory. Our cash used in investing activities during the nine months ended December 31, 2009 was primarily for the purchase of a new glazed fruit production line in December 2009 for approximately $2.6 million.

Financing Activities

In connection with our 2009 private placement of Series A Convertible Preferred Stock, we set up an escrow account for the payment of dividends to holders of Series A Convertible Preferred Stock due on September 1, 2010, $809,550 of the escrow amount was paid as dividends to holders of our Series A Convertible Preferred Stock on September 1, 2010 and the remaining $122,080 was returned to us due to conversion of some shares of the Series A Convertible Preferred Stock before the dividend payment date. The net cash provided by financing activities for the nine months ended December 31, 2009 was the net proceeds from our private placement of the Series A Convertible Preferred Stock closed in September 2009.

On February 23, 2010, we entered into a $1.21 million revolving credit facility with the Heilongjiang Rural Credit Union with a term of three years. This facility is secured by land use rights, buildings and machinery located in Daqing City. On February 25, 2010, we entered into another $1.65 million revolving credit facility with the Longjiang Bank with a term of two years. This facility was secured by our land use rights, buildings and machinery in Mu Dan Jiang City. Both facilities are for working capital needs during our production season. As of the date of this report, we did not draw down on either of the facilities and did not have any outstanding bank loans.

On December 20, 2010, we filed a registration statement on Form S-1 to register 73,000,000 units of Taiwan Depositary Receipts (“TDRs”), representing 7,300,000 shares of our common stock, consisting 5,000,000 shares to be issued by our company and 2,300,000 shares of our common stock owned by a selling stockholder. We plan to apply for listing the TDRs on the Taiwan Stock Exchange upon the consummation of the proposed TDR offering. We intend to use the net proceeds from the proposed TDR offering to construct a new fruit and vegetable production line in Daqing and a new factory facility with a new multi-purpose concentrate juice/pulp production line in Mu Dan Jiang.

We believe that our currently available working capital should be adequate to sustain our operations at our current levels through at least the next twelve months. As stated above, we plan to expand our production capacities through the proposed TDR offering. We cannot assure that the proposed TDR offering will succeed and we may require additional cash resources due to changed business conditions or other investments or acquisitions we may decide to pursue. If the proposed TDR offering does not materialize or result in sufficient fund to support our planned capacity expansion, and 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, or we may have to abandon our capacity expansion plan. 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.

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Recently Issued Accounting Pronouncements

See Note 2 (Recent Account Pronouncements) to our unaudited condensed consolidated financial statements included elsewhere in this report.

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 harvest season for our source fruits is generally from mid July to mid November every year. As fruits cannot be stored at room temperature for a long time, they must be processed as soon as they are harvested. Our fruit processing production is generally busiest from mid-July to mid-November every year.

We will generally experience higher sales in the second, third and fourth fiscal quarters mainly due to distributors’ (i) efforts to obtain adequate supply of our fruit processing products before the fruit supply diminishes after production ceases in November; and (ii) anticipation of higher demand for processed fruit products as a result of festive seasons, such as Middle Autumn festival, Christmas and the Chinese New Year which were in the second, third and fourth quarter of our fiscal year.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Mr. Changjun Yu, and Chief Financial Officer, Mr. Colman Cheng, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Based on our assessment, Mr. Yu and Mr. Cheng determined that, as of December 31, 2010, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2010, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

ITEM 1A. RISK FACTORS.

Not Applicable.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No.	Description

31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certifications 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	Certifications 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.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 14, 2011

CHINA NUTRIFRUIT GROUP LIMITED

By: /s/ Changjun Yu

Changjun Yu, Chief Executive Officer
(Principal Executive Officer)

By: /s/ Colman Cheng

Colman Cheng, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)

EXHIBIT INDEX

Exhibit No.	Description

31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certifications 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	Certifications 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.

Attached files

China Nutrifruit Group LTD Reports

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