CNGL China Nutrifruit Grp. Limited

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2011

[   ] 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 [ x ]         No [   ]

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

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 November 10, 2011 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	36,915,762

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CHINA NUTRIFRUIT GROUP LIMITED

Quarterly Report on FORM 10-Q

For Three and Six Months Ended September 30, 2011

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	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	11
Item 4.	Controls and Procedures	11
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	11
Item 1A.	Risk Factors	11
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3.	Defaults Upon Senior Securities	12
Item 4.	(Removed and Reserved)	12
Item 5.	Other Information	12
Item 6.	Exhibits	12

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PART I
FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2011

Contents	Page
Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and March 31, 2011	F-1
Condensed Consolidated Statements of Income for the three and six months ended September 30, 2011 and 2010 (unaudited)	F-2
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010 (unaudited)	F-3
Notes to the Condensed Consolidated Financial Statements (unaudited)	F-4

2

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CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in US Dollars)
		September 30,			March 31,
		2011			2011
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents	$	9,958,660		$	43,542,075
Trade receivables, net of allowance		8,595,199			12,476,652
Inventories, net		44,757,427			6,419,152
Prepayments and deposits		9,211,101			264,878
Other current assets		11,705			1,527
Total current assets		72,534,092			62,704,284
Property and equipment, net		51,077,909			20,312,005
Prepayments and deposits		796,932			10,983,404
Construction in progress		988,479			5,915,395
Deferred tax assets		826,744			909,879
Land use rights, net		189,876			188,199
TOTAL ASSETS	$	126,414,032		$	101,013,166
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Other payables and accrued expenses	$	11,933,186		$	3,312,525
Bank borrowings		12,363,067			-
Due to a director		-			946,550
Trade payables		1,370,210			130,276
Income taxes payable		878,988			3,351,631
Total current liabilities		26,545,451			7,740,982
Bank borrowings		1,251,956			-
TOTAL LIABILITIES		27,797,407			7,740,982

Commitments and Contingencies
Shareholders’ equity
Preferred stock
Authorized: 5,000,000 shares, par value $0.001
Issued and outstanding: 330,860 shares as at September 30, 2011;
(330,860 as at March 31, 2011)		331			331
Common stock
Authorized: 120,000,000 shares, par value $0.001
Issued and outstanding: 36,915,762 shares as at September 30, 2011;
(36,915,762 shares as at March 31, 2011)		36,916			36,916
Additional paid-in-capital		36,492,566			36,492,566
Statutory reserves - restricted		6,850,422			6,850,422
Accumulated other comprehensive income		6,373,255			3,951,431
Retained earnings		48,863,135			45,940,518
TOTAL SHAREHOLDERS’ EQUITY		98,616,625			93,272,184
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	126,414,032		$	101,013,166

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

F-1

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CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in US Dollars)
		Three months ended						Six months ended
		September 30,						September 30,
		2011			2010			2011			2010
Net sales	$	19,792,138		$	23,191,125		$	30,085,303		$	32,819,381
Cost of sales		(14,854,451	)		(12,234,966	)		(20,353,144	)		(17,744,090	)
Gross profit		4,937,687			10,956,159			9,732,159			15,075,291
Selling expenses		(740,915	)		(673,469	)		(1,151,236	)		(1,257,978	)
General and administrative expenses		(1,381,994	)		(590,848	)		(3,047,884	)		(1,696,570	)
Operating earnings		2,814,778			9,691,842			5,533,039			12,120,743
Other income (expenses)
Interest expenses		(59,041	)		-			(115,216	)		-
Other income		50,640			17,550			111,640			48,021
Total other income (expenses)		(8,401	)		17,550			(3,576	)		48,021
Earnings before income taxes		2,806,377			9,709,392			5,529,463			12,168,764
Provision for income taxes		(920,275	)		(2,520,776	)		(1,842,796	)		(3,186,642	)
Net earnings		1,886,102			7,188,616			3,686,667			8,982,122
Other comprehensive income
Foreign currency translation		1,351,305			1,644,269			2,421,824			1,575,419
Comprehensive income	$	3,237,407		$	8,832,885		$	6,108,491		$	10,557,541

Earnings per share
Basic	$	0.05		$	0.19		$	0.09		$	0.23
Diluted	$	0.05		$	0.18		$	0.09		$	0.22
Weighted average number of common stock outstanding
Basic		36,915,762			36,718,772			36,915,762			36,695,054
Diluted		40,224,362			40,377,453			40,224,362			40,360,072

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

F-2

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CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in US Dollars)

		Six months ended
		September 30,
		2011			2010
Operating activities:
Net earnings	$	3,686,667		$	8,982,122
Adjustments to reconcile net earnings to net cash used in operating activities
Depreciation and amortization		1,550,090			936,036
Benefit for deferred income taxes		83,135			78,054
Changes in operating assets and liabilities:
Trade receivables, net		4,079,503			(6,424,588	)
Inventories		(38,183,941	)		(13,336,404	)
Prepayments and deposits		(8,930,868	)		(11,070,120	)
Other current assets		(10,125	)		114,703
Trade payables		1,236,539			839,645
Income taxes payable		8,558,556			237,377
Other payables and accrued expenses		(2,517,211	)		(1,064,534	)
Net cash used in operating activities		(30,447,655	)		(20,707,709	)
Investing activities:
Purchase of property and equipment		(15,930,152	)		(4,333,519	)
Addition to construction in progress		-			(5,084,541	)
Net cash used in investing activities		(15,930,152	)		(9,418,060	)
Financing activities:
Proceeds from bank borrowings		13,485,410			-
Dividend paid		(764,050	)		(809,550	)
Amount due to a director		(955,316	)		-
Proceeds from private placement held in escrow account		-			931,630
Net cash provided by financing activities		11,766,044			122,080
Decrease in cash and cash equivalents		(34,611,763	)		(30,003,689	)
Effect of exchange rate on cash and cash equivalents		1,028,348			1,163,427
Cash and cash equivalents at beginning of the period		43,542,075			35,994,443
Cash and cash equivalents and proceeds from private placement held in escrow account at end of the period	$	9,958,660		$	7,154,181
Supplemental disclosure of cash flows information:
Cash paid for:
Income taxes	$	4,283,161		$	2,871,211
Interest paid	$	115,216		$	-

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

F-3

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (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.

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

F-4

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

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 $0.001 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.

On September 3, 2011, the Company paid dividends of $764,050 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.

F-5

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

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 has no assets or operations.

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.

F-6

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

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. According the Group’s business, 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 September 30, 2011 was recorded.

F-7

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

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.

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 $983,135, $1,715,580, $506,884 and $934,571 for the three and six months ended September 30, 2011 and 2010 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 six months ended September 30, 2011 and 2010 were $539,119, $813,224, $477,021 and $942,206 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.

F-8

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

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.

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 $8,793, $15,912, $9,864 and $15,403 for the three and six months ended September 30, 2011 and 2010 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.

Statement of financial position
September 30, 2011	RMB6.39 to US$1.00
March 31, 2011	RMB6.55 to US$1.00
Statement of income and comprehensive income
For the six months ended September 30, 2011	RMB6.40 to US$1.00
For the six months ended September 30, 2010	RMB6.84 to US$1.00

F-9

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

As at September 30, 2011, RMB63,479,271 or US$9,934,158 (March 31, 2011: RMB284,742,770 or US$43,471,515) is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

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.

F-10

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force (“EITF”)), the American Institute of Certified Public Accountants (“AICPA”), 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.

 

F-11

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 3. EARNINGS PER SHARE

The computations of basic and diluted earnings per share for the three and six months ended September 30 are as follows:

		Three months ended						Six months ended
		September 30,						September 30,
		2011			2010			2011			2010
Numerator:
Net earnings	$	1,886,102		$	7,188,616		$	3,686,667		$	8,982,122
Less: dividends on preferred stock		(193,675	)		(209,475	)		(381,102	)		(412,321	)
Net earnings for basic earnings per share	$	1,692,427		$	6,979,141		$	3,305,565		$	8,569,801
Net earnings for basic earnings per share	$	1,692,427		$	6,979,141		$	3,305,565		$	8,569,801
Add: dividends on preferred stock		193,675			209,475			381,102			412,321
Net earnings for diluted earnings per share	$	1,886,102		$	7,188,616		$	3,686,667		$	8,982,122
Denominator:
Weighted average common stock outstanding		36,915,762			36,718,772			36,915,762			36,695,054
Effect of dilutive preferred stock		3,308,600			3,651,090			3,308,600			3,651,090
Effect of dilutive warrant		-			7,591			-			13,928
Weighted average common stock and dilutive potential common stock		40,224,362			40,377,453			40,224,362			40,360,072
Basic net earnings per share	$	0.05		$	0.19		$	0.09		$	0.23
Diluted net earnings per share	$	0.05		$	0.18		$	0.09		$	0.22

F-12

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 4. INVENTORY, NET

At September 30, 2011 and March 31, 2011, inventory is comprised of the following:

		September 30,			March 31,
		2011			2011
Finished goods	$	44,286,723		$	6,324,862
Raw material		470,704			94,290
	$	44,757,427		$	6,419,152

NOTE 5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, at September 30, 2011 and March 31, 2011 are summarized as follows:

		September 30,			March 31,
		2011			2011
Buildings	$	10,865,930		$	5,652,084
Leasehold improvement		5,179,069			1,398,033
Machinery		41,165,192			19,190,848
Furniture, fixtures and office equipment		18,608			15,378
Motor vehicles		43,344			41,556
Total		57,272,143			26,297,899
Less: accumulated depreciation		(6,194,234	)		(5,985,894	)
	$	51,077,909		$	20,312,005

As of September 30, 2011, buildings, leasehold improvement and machinery, of buildings, leasehold improvement and machinery, of $4,257,461 (March 31, 2011: $4,289,330), $1,013,292 (March 31, 2011: $1,054,948) and $905,014 (March 31, 2011: $942,218) respectively, were pledged to secure the unused banking facilities obtained by the Group. (Note 14)

F-13

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 6. PREPAYMENTS AND DEPOSITS

Prepayments and deposits by major categories are summarized as follows at September 30, 2011 and March 31, 2011:

		September 30,			March 31,
		2011			2011
Classified as current assets
Prepaid expenses	$	75,732		$	264,878
Prepaid value-added tax		9,135,369			-
		9,211,101			264,878
Classified as non-current assets
Prepayment for property and equipment		-			10,205,951
Prepayment for land use right		796,932			777,453
		796,932			10,983,404
	$	10,008,033		$	11,248,282

NOTE 7. OTHER PAYABLES AND ACCRUED EXPENSES

Other payables and accrued expenses by major categories at September 30, 2011 and March 31, 2011 are summarized as follows:

		September 30,			March 31,
		2011			2011
Accruals	$	1,008,480		$	968,822
Value added tax payables		-			1,545,707
Other payables		10,924,706			797,996
	$	11,933,186		$	3,312,525

The other payables mainly comprised amounts payable to the suppliers of property and equipment, amounting to $9,342,517 and $431,612 as of September 30, 2011 and March 31, 2011 respectively.

F-14

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 8. BANK BORROWINGS

The Company’s borrowings consist of the following:

		September 30,			March 31,
		2011			2010
Borrowings, due within one year	$	12,363,067		$	-
Borrowings due after one year		1,251,956			-
	$	13,615,023		$	-

The interest rates are based on benchmark lending rate issued by People’s Bank of China (“Lending Rate”) plus a certain percentage and subject to the change of Lending Rate. The range of effective interest rates (which are also equal to contracted interest rates) on the Company’s borrowings for the period ended September 30, 2011 was 8.26% per annum.

NOTE 9. PROVISION FOR INCOME TAXES

The provision for income tax is as follows:

		Three months ended						Six months ended
		September 30,						September 30,
		2011			2010			2011			2010
Current:
PRC	$	878,481		$	2,481,749		$	1,759,661		$	3,108,588
Other jurisdictions		-			-			-			-
Deferred:
PRC		41,794			39,027			83,135			78,054
Other jurisdictions		-			-			-			-
	$	920,275		$	2,520,776		$	1,842,796		$	3,186,642

F-15

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. PROVISION FOR INCOME TAXES (CONTINUED)

Deferred tax assets

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

		September 30,			March 31,
		2011			2011
Deferred tax assets:
Difference between book and tax basis of land use right and property and equipment	$	826,744		$	909,879
Tax losses carryforward		1,365,250			1,097,331
Less: valuation allowance		(1,365,250	)		(1,097,331	)
Net deferred tax assets	$	826,744		$	909,879

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 $1,365,250 and $1,097,331 in respect of federal net operating loss and foreign unused tax loss carryforwards, respectively, which it does not expect to utilize. As of September 30, 2011, the Company has net operating loss and foreign unused tax loss carryfowards of $3,067,278 (March 31, 2011: $2,699,300) and $1,513,743 (March 31, 2011: $912,879).

The total valuation allowance between periods presented increased by $267,919 (March 31, 2011: $401,905) and such increase was attributable to the tax effect on foreign tax losses incurred for the six months ended September 30, 2011 of $139,126 (March 31, 2011: $52,734) at enacted foreign profit tax rates and the tax effect on federal net operating loss incurred for the six months ended September 30, 2011 of $128,793 (March 31, 2011: $349,171) at the federal tax rate of 35%.

F-16

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 9. PROVISION FOR INCOME TAXES (CONTINUED)

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 six months ended September 30 is as follows:

		Three months						Six months
		ended September 30,						ended September 30,
		2011			2010			2011			2010
Provision for income taxes at statutory rate of 35%	$	1,320,917		$	3,398,287		$	2,273,997		$	4,259,067
Chinese tax rate difference		(269,971	)		(980,023	)		(549,549	)		(1,209,158	)
Non-deductible expenses and non- assessable profits		(302,868	)		(54,638	)		(232,706	)		(97,385	)
Changes in valuation allowance		130,403			118,123			267,919			156,064
Tax effect of non-deductible temporary difference recognized		41,794			39,027			83,135			78,054
Income taxes	$	920,275		$	2,520,776		$	1,842,796		$	3,186,642

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 10. SHAREHOLDERS’ EQUITY

General

The Company’s total authorized capital at September 30, 2011 and March 31, 2011, 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.

F-17

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 10. SHAREHOLDERS’ EQUITY (CONTINUED)

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

F-18

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 10. SHAREHOLDERS’ EQUITY (CONTINUED)

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.

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.

F-19

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 10. SHAREHOLDERS’ EQUITY (CONTINUED)

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, 2010 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

F-20

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 10. SHAREHOLDERS’ EQUITY (CONTINUED)

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

F-21

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 10. SHAREHOLDERS’ EQUITY (CONTINUED)

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 six months ended September 30, 2011:
					Granted			Exercised			Outstanding at
		Outstanding at			during the			during the			September 30,			Exercise
Date of grant		April 1, 2011			period			period			2011			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

 

F-22

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 10. SHAREHOLDERS’ EQUITY (CONTINUED)

The following is the movement of warrants during the six months ended September 30, 2010:

					Granted			Exercised			Outstanding at
		Outstanding at			during the			during the			September 30,			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

NOTE 11. 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 $56,029, $153,062, $32,763 and $124,297 for the three and six months ended September 30, 2011 and 2010 respectively.

NOTE 12. 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 September 30, 2011, 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.

F-23

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China Nutrifruit Group Limited and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011 and 2010 (Unaudited)
(Stated in U.S. Dollars)

NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES

Operating Lease Commitments

As of September 30, 2011, the Group did not have any significant operating lease commitments.

Rent for the three and six months ended September 30, 2011 and 2010 was $3,125, $11,048, $5,845 and $8,768 respectively.

Capital Commitments

As of September 30, 2011, the Group had the followings outstanding capital expenditure commitments:

Authorized and contracted, but not provided for:
Construction in progress	$	658,986

NOTE 14. UNUSED SECURED CREDIT FACILITIES

As of September 30, 2011, the Group had $2,949,249 (March 31, 2011: $2,877,206) unused credit facilities granted by banks. Those banking facilities were secured by land use rights, buildings, leasehold improvement and machinery, of $189,876 (March 31, 2011: $188,199), $4,257,461 (March 31, 2011: $4,289,330), $1,013,292 (March 31, 2011: $1,054,948) and $905,014 (March 31, 2011: $942,218) respectively.

NOTE 15. 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.

F-24

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ITEM 2.

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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report 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. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; 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 involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended March 31, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. 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, except as required by law, 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 report to:

	i)	“China” and “PRC” are to the People’s Republic of China;
	ii)	“Daqing Longheda” are to our operating subsidiary Daqing Longheda Food Company Limited;
	iii)	“Daqing Senyang” are to our operating subsidiary Daqing Senyang Fruit and Vegetable Food Technology Company Limited;
	iv)	“Exchange Act” are to the Securities Exchange Act of 1934, as amended;
	v)	“RMB” are to Renminbi, the legal currency of China;
	vi)	“we,” “the Company,” “us,” “our company,” “our,” and “China Nutrifruit” are to the combined businesses of China Nutrifruit Group Limited and its consolidated subsidiaries;
	vii)	“SEC” are to the United States Securities and Exchange Commission;
	viii)	“Securities Act” are to the Securities Act of 1933, as amended; and
	ix)	“U.S. dollar,” “$,” “USD” and “US$” are to the legal currency of the United States..

Overview

We are a leading producer of premium specialty fruit based products in China. We are primarily engaged, through our indirect Chinese subsidiaries, in developing, processing, marketing and distributing a variety of food products processed primarily from premium specialty fruits grown in Northeast China, mainly including golden berries, crab apples, blueberries, raspberries, blackcurrant and seabuckthorn. Our primary product offerings include concentrate juice, nectar, glazed fruits, concentrate pulp as well as fresh fruits.

We sell our products through an extensive nationwide sales and distribution network covering 18 provinces in China. As of September 30, 2011, this network was comprised of approximately 44 distributors. Our processed fruit products are mainly sold to food producers for further processing into fruit juice and other fruit based foods, and our fresh fruits are mainly sold to fruit supermarkets.

Our manufacturing facilities are located in Daqing City, Mudanjiang City and Zhaoyuan, Heilongjiang Province, China where an abundant supply of various premium specialty fruits is readily available. We currently have seven fruit and vegetable processing lines with an aggregate capacity of approximately 39,760 tons. We recently completed technological upgrades to our glazed fruit production lines in Daqing and installation of additional processing equipment to our concentrate juice production lines in Mudanjiang, thereby increasing our annual concentrate juice production capacity by 50% to reach 9,000 tons. Such upgrades are expected to contribute to our continuing efforts to improve operational efficiency and productivity, and expand our product portfolio as we begin production of our new cherry tomato glazed fruit products and golden berry dried fruit products. In addition, we recently completed constructing a new multi-purpose concentrate paste production line in Zhaoyuan, Helongjiang province with a production capacity of approximately 9,600 tons. We are in the process of obtaining the production permit for fruit and vegetable powder products and concentrate paste products from the local government, and will start sales of these products after we obtain such permit.

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Second Fiscal Quarter Summary

In the second quarter of fiscal year 2012, our net sales, gross margin and net income decreased mainly because of a significant increase in the prices of our raw material fruit supply and production costs in this fiscal year’s production season. The price of agricultural products in our industry can vary greatly from season-to-season for a variety of reasons, both within and beyond the control of our company. Some of the reasons include weather patterns and seasonal variations, agricultural disease, technological developments in growth enhancement products like fertilizers, macro-economic trends such as inflation and labor costs and other factors. In the second fiscal quarter, our industry experienced sharp increases in the price of our raw material fruit supply. Our raw material fruit costs rose ranging approximately 74%-217% as compared to the same period last year due mostly to inflationary influences in China and higher labor costs. Although we raised the per unit pricing of most of our products in an effort to mitigate the compression of our margins, we could not pass onto our customers the entire increase in our production cost as we endeavored to maintain our market share and competitiveness. Accordingly, the prices increases were generally less than the increase in raw material and direct labor costs. Most products that have been sold in this quarter were produced after our new production season began on July 25, 2011.

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

• Net Sales : Net sales decreased $3.4 million, or 14.7%, to $19.8 million for the three months ended September 30, 2011, from $23.2 million for the same period last year.
   
• Gross Margin : Gross margin was 24.9% for the three months ended September 30, 2011, as compared to 47.2% for the same period last year.
   
• Net Income : Net income decreased $5.3 million, or 73.8%, to $1.9 million for the three months ended September 30, 2011, from $7.2 million for the same period last year.
   
• Fully Diluted Earnings Per Share : Fully diluted earnings per share was $0.05 for the three months ended September 30, 2011, as compared to $0.18 for the same period last year.

Results of Operations

Comparison of Three Months Ended September 30, 2011 and September 30, 2010

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 numbers, in thousands of U.S. dollars)

		Three Months Ended						Three Months Ended
		September 30, 2011			September 30, 2010
					As a						As a
		In			Percentage			In			Percentage
		Thousands			of Net Sales			Thousands			of Net Sales
Net Sales	$	19,792			100.0%		$	23,191			100.0%
Costs of sales		14,854			75.1%			12,235			52.8%
Gross profit		4,938			24.9%			10,956			47.2%
Selling expenses		741			3.7%			673			2.9%
General and administrative expenses		1,382			7.0%			591			2.5%
Other income		50			0.3%			17			0.1%
Interest expenses		59			0.3%			-			-
Income before noncontrolling interests and income taxes		2,806			14.2%			9,709			41.9%

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Income taxes		920			4.7%			2,521			10.9%
Net income		1,886			9.5%			7,188			31.0%
Earnings per share:
Basic	$	0.05		$				0.19
Diluted	$	0.05		$				0.18

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 are based on the exchange rate of RMB 6.4 to $1 for the three months ended September 30, 2011 and the rate of RMB 6.843 to $1 for the three months ended September 30, 2010.

Net Sales

Net sales consist of revenue from the sale of our fruit and fruit based products. During this fiscal quarter, the average sales price of most of our products increased substantially. However, such increase was more than offset by the decrease in sales volume of our concentrate juice, concentrate pulp and glazed fruit products in this quarter. Our net sales decreased $3.4 million, or 14.7%, to $19.8 million for the three months ended September 30, 2011 from $23.2 million for the three months ended September 30, 2010. Net sales from concentrate juice products decreased $1.5 million, or 12.0%, to $11.0 million for the three months ended September 30, 2011 from $12.5 million for the three months ended September 30, 2010. Concentrate pulp products did not generate any revenue in this fiscal quarter. In response to rising production input costs, we made a decision to temporarily suspend cooperation with our OEM factories for the concentrate pulp products. We made this decision in order to mitigate the compression of our profit margin as we could not pass our cost escalations onto our customers in the form of high prices. Due to the more stringent application process for food producers following the outbreak of food safety problems in Taiwan this summer, our application for production permits for the new fruit and vegetable powder and concentrate paste product lines has been delayed. As a result, we have temporarily suspended production of these new products. We expect that it may take approximately six months for us to complete the necessary paperwork and reviews of the production permits for these new product lines and we do not expect these product segments to contribute to our financial performance in fiscal year 2012.

The following table sets forth percentage of net sales generated by each product for the three months ended September 30, 2011 and 2010:

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

			Three Months Ended						Three Months Ended
			September 30, 2011			September 30, 2010
						As a						As a
			In			Percentage			In			Percentage
Product			Thousands			of Net Sales			Thousands			of Net Sales
Fresh fruit		$	2,033			10.3%		$	1,480			6.4%
Glazed fruit			3,368			17.0%			3,847			16.6%
Nectar			3,417			17.3%			3,202			13.8%
Concentrate juice			10,974			55.4%			12,464			53.7%
Concentrate pulp			-			-			2,198			9.5%
Total		$	19,792			100.0%		$	23,191			100.0%

Cost of Sales

Cost of sales is primarily comprised of the costs of our raw materials, labor, overhead and sales tax. The cost of sales increased $2.6 million, or 21.4%, to $14.9 million for the three months ended September 30, 2011 from $12.2 million for the three months ended September 30, 2010. Cost of sales as a percentage of net sales was 75.1% for the three months ended September 30, 2011, as compared to 52.8% for the same period last year. Our industry experienced a significant surge in the pricing of agricultural products resulting from the inflationary pressures in China’s economy and higher labor costs. Our raw material fruit supply costs rose dramatically during our second fiscal quarter, ranging approximately 74%-217% as compared to last year. In addition, we experienced an approximately 30% increase in labor costs starting in July 2011.

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Gross Profit

Gross profit is equal to net sales less cost of sales. Gross profit decreased by $6.0 million to $5.0 million for the three months ended September 30, 2011 from $11.0 million for the three months ended September 30, 2010. Gross profit as a percentage of net sales decreased to 24.9% for the three months ended September 30, 2011, as compared to 47.2% for the same period last year. The significant decrease in gross margin was mainly driven by a significant increase in raw material cost and direct labor cost in the three months ended September 30, 2011. During this year’s production season, the cost of raw material fruit supply increased ranging approximately 74%-217% as compared to last year. The gross margins for our glazed fruit, nectar, concentrate juice and fresh fruit products for the three months ended September 30, 2011 were approximately 30.1%, 43.7%, 17.6% and 24.5%, as compared to approximately 53.2%, 68.0%, 42.1% and 46.2% for the same period last year, respectively.

Selling and General and Administrative Expenses

Selling and general and administrative expenses increased $858,592, or 67.9%, to $2.1 million for the three months ended September 30, 2011 from $1.3 million for the three months ended September 30, 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 $67,446 or 10.0%, to $740,915 for the three months ended September 30, 2011 from $673,469 for the three months ended September 30, 2010. As a percentage of net sales, selling expenses increased to 3.7% for the three months ended September 30, 2011 from 2.9% for the same period last year. The increase in selling expenses as a percentage of net sales was mainly due to higher fixed expenses and salaries and benefits of sales staff.

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 increased $791,146, or 133.9%, to $1.4 million for the three months ended September 30, 2011 from $590,848 for the three months ended September 30, 2010. As a percentage of net sales, general and administrative expenses increased to 7.0% for the three months ended September 30, 2011, from 2.5% for the same period last year. The increase in general and administrative expenses in this quarter was mainly attributable to the expenses associated with the operation of Daqing Senyang and the new factory in Zhaoyuan. In addition, we experienced an increase in compensation paid to our administrative staff in this quarter.

Income before Noncontrolling Interests and Income Taxes

Income before noncontrolling interests and income taxes decreased $6.9 million, or 71.1%, to $2.8 million for the three months ended September 30, 2011 from $9.7 million for the three months ended September 30, 2010. Income before noncontrolling interests and income taxes as a percentage of net sales decreased from 41.9% for the three months ended September 30, 2010 to 14.2% for the three months ended September 30, 2011. The percentage decrease was primarily attributable to the decrease in gross margin as discussed above.

Provision for Income Taxes

The provision for income taxes decreased $1.6 million, or 63.5%, to $0.9 million for the three months ended September 30, 2011 from $2.5 million for the three months ended September 30, 2010. The decrease in the provision for income taxes was mainly attributed to the decrease in taxable income.

We file separate tax returns in the United States and China. Income taxes of our PRC subsidiaries 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 subsidiaries Daqing Longheda and Daqing Senyang, is 25% in 2011.

Net Income

Net income decreased $5.3 million, or 73.8%, to $1.9 million for the three months ended September 30, 2011 from $7.2 million for the three months ended September 30, 2010, mainly as a result of the cumulative effect of the factors discussed above.

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Comparison of Six Months Ended September 30, 2011 and September 30, 2010

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 numbers, in thousands of U.S. dollars)

		Six Months Ended						Six Months Ended
		September 30, 2011			September 30, 2010
					As a						As a
		In			Percentage			In			Percentage
		Thousands			of Net Sales			Thousands			of Net Sales
Net Sales	$	30,085			100.0%		$	32,819			100.0%
Costs of sales		20,353			67.7%			17,744			54.1%
Gross profit		9,732			32.3%			15,075			45.9%
Selling expenses		1,151			3.8%			1,258			3.8%
General and administrative expenses		3,048			10.1%			1,696			5.2%
Other income		112			0.4%			48			0.1%
Interest expenses		115			0.4%			-			-
Income before noncontrolling interests and income taxes		5,530			18.4%			12,170			37.1%
Income taxes		1,843			6.1%			3,187			9.7%
Net income		3,687			12.3%			8,983			27.4%
Earnings per share:
Basic	$	0.09					$	0.23
Diluted	$	0.09					$	0.22

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 6.431 to $1 for the six months ended September 30, 2011 and the rate of RMB 6.843 to $1 for the six months ended September 30, 2010.

Net Sales

We experienced a decrease in net sales during six months ended September 30, 2011. Net sales decreased $2.7 million, or 8.3%, to $30.1 million for the six months ended September 30, 2011 from $32.8 million for the six months ended September 30, 2010. Such decrease was mainly attributable to the decrease in net sales in the second fiscal quarter as discussed in the quarterly comparison above. The revenue from sales of concentrate juice products decreased $1.3 million, or 7.6%, to $16.2 million for the six months ended September 30, 2011 from $17.5 million for the same period last year. Net sales from concentrate pulp products decreased $3.5 million, or 77.8%, to $1.0 million for the six months ended September 30, 2011 from $4.5 million for the same period last year. As discussed above, we made a strategic decision to temporarily suspend production of concentrate pulp products in the second fiscal quarter this year.

The following table sets forth percentage of net sales generated by each product for the six months ended September 30, 2011 and 2010:

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

			Six Months Ended						Six Months Ended
			September 30, 2011			September 30, 2010
						As a						As a
			In			Percentage			In			Percentage
Product			Thousands			of Net Sales			Thousands			of Net Sales
Fresh fruit		$	2,033			6.8%		$	1,480			4.5%
Glazed fruit			7,202			23.9%			5,595			17.0%
Nectar			3,683			12.2%			3,759			11.5%
Concentrate juice			16,172			53.8%			17,499			53.3%
Concentrate pulp			996			3.3%			4,486			13.7%
Total		$	30,085			100.0%		$	32,819			100.0%

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Cost of Sales

Cost of sales increased $2.6 million, or 14.7%, to $20.4 million for the six months ended September 30, 2011 from $17.7 million for the six months ended September 30, 2010. The increase in cost of sales was higher in our second fiscal quarter than in the first fiscal quarter for the reasons mentioned above in the quarterly comparisons. Overall, for the six months ended September 30, 2011, our cost of sales escalated, mostly due to inflationary pressures in China and higher labor costs which rose sharply. We experienced a significant price surge of our raw material fruit supply in our second fiscal quarter of approximately 74%-217% as compared to the same period last year. In addition, labor costs increased approximately 30% in July this year. Cost of sales as a percentage of net sales was 67.7% for the six months ended September 30, 2011, as compared to 54.1% for the same period last year.

Gross Profit

Gross profit decreased by $5.3 million to $9.7 million for the six months ended September 30, 2011 from $15.1 million for the six months ended September 30, 2010. Gross profit as a percentage of net sales decreased to 32.3% for the six months ended September 30, 2011, as compared to 45.9% for the same period last year. As explained above, our costs of sales outpaced the price increases that we were able to implement for our products. The gross margins for our glazed fruit, nectar, concentrate juice and fresh fruit products for the six months ended September 30, 2011 were approximately 43.3%, 45.4%, 26.0% and 24.5%, as compared to approximately 52.1%, 68.2%, 43.0% and 46.2% for the same period last year, respectively.

Selling and General and Administrative Expenses

Selling and general and administrative expenses increased $1.2 million, or 42.1%, to $4.2 million for the six months ended September 30, 2011 from $3.0 million for the six months ended September 30, 2010.

Selling expenses decreased $106,744 or 8.5%, to $1.2 million for the six months ended September 30, 2011 from $1.3 million for the six months ended September 30, 2010. Such decrease was mainly due to the decrease of selling expenses in the first fiscal quarter of 2011. We received repeat orders with higher volume from our existing clients in the first fiscal quarter of 2011, which led to lower sales related expenses in that quarter. As a percentage of net sales, selling expenses remained steady at 3.8% for both the six months ended September 30, 2011 and 2010.

Our general and administrative expenses increased $1.3 million, or 79.6%, to $3.0 million for the six months ended September 30, 2011 from $1.7 million for the six months ended September 30, 2010. As a percentage of net sales, general and administrative expenses for the six months ended September 30, 2011 increased by 4.9% to 10.1%, as compared to 5.2% for the six months ended September 30, 2010. The increase in general and administrative expenses in the six months ended September 30, 2011 was mainly attributable to the recognition of professional expenses related to our proposed Taiwan Deposit Receipt offering which was withdrawn in June 2011 and the beginning of operations of our Daqing Senyang facility and start up costs for the new factory in Zhaoyuan in the second quarter of this fiscal year. In addition, the increase in salary and wages of staff also contributed to the increase in general and administrative expenses this year.

Income before Noncontrolling Interests and Income Taxes

Income before noncontrolling interests and income taxes decreased $6.7 million, or 54.6%, to $5.5 million for the six months ended September 30, 2011 from $12.2 million for the six months ended September 30, 2010. Income before noncontrolling interests and income taxes as a percentage of net sales decreased from 37.1% for the six months ended September 30, 2010 to 18.4% for the six months ended September 30, 2011. The percentage decrease was primarily due to the decrease in gross margin as discussed above.

Provision for Income Taxes

The provision for income taxes decreased $1.3 million, or 42.2%, to $1.8 million for the six months ended September 30, 2011 from $3.2 million for the six months ended September 30, 2010. The decrease in the provision for income taxes was mainly due to the decrease in taxable income.

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Net Income

Net income decreased $5.3 million, or 59.0%, to $3.7 million for the six months ended September 30, 2011 from $9.0 million for the six months ended September 30, 2010, mainly as a result of the cumulative effect of the factors discussed above.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of approximately $10.0 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)

		Six Months Ended September 30,
		2011			2010
Net cash used in operating activities	$	(30,448	)	$	(20,708	)
Net cash used in investing activities		(15,930	)		(9,418	)
Net provided by financing activities		11,766			122
Effect of exchange rates on cash and cash equivalents		1,028			1,163
Cash and cash equivalents at beginning of the period		43,542			35,994
Cash and cash equivalents at end of period		9,959			7,154

Operating Activities

Net cash used in operating activities was $30.4 million for the six months ended September 30, 2011 as compared to $20.7 million net cash used in operating activities for the six months ended September 30, 2010. Net cash use in operating activities for the six months ended September 30, 2011 was mainly attributable to approximately $38 million cash outflow associated with inventory we built up in this year’s production season to be sold during the rest of the fiscal year.

Investing Activities

During the six months ended September 30, 2011, we invested approximately $3.9 million to upgrade glazed fruit and concentrate juice production lines in our Daqing and Mudanjiang facilities and approximately $11.3 million to construct a new concentrate paste production line in Zhaoyuan city. In addition, we invested approximately $0.7 million on the completion of the fruit and vegetable powder factory. During the six months ended September 30, 2010, we used approximately $4.3 million in the upgrade of concentrate juice production lines in our Daqing and Mudanjiang facilities and approximately $5.1 million in the construction of the new fruit and vegetable powder factory.

Financing Activities

Net cash provided by financing activities was $11.8 million for the six months ended September 30, 2011, mainly attributable to a short term bank loan of $7.8 million drawdown by Daqing Senyang on May 20, 2011 and short term bank loan advances of $1.1 million, $3.1 million and $0.3 million to Daqing Longheda on July 5, August 3 and September 23, 2011, respectively. On September 23, 2011, Daqing Longheda was advanced $1.3 million under a commercial loan which has a term of two years. We also repaid an advance of $1.0 million from a director in the six month period. Furthermore, we paid $764,060 as dividends to holders of our Series A Convertible Preferred Stock on September 1, 2010.

On February 23, 2010, Daqing Longheda entered into a $1.2 million (RMB 8.0 million) revolving credit facility with the Heilongjiang Rural Credit Union with a term of three years. This facility is secured by our land and buildings located in Daqing City. On February 25, 2010, we entered into another $1.7 million (RMB 10.8 million) revolving credit facility with the Longjiang Bank with a term of two years. This facility is secured by our land and buildings in Mudanjiang City. Both facilities are for our working capital needs during our production season. As of the date of this report, we have received no advanced under either facility.

The table below sets forth the amount, starting date, term and guarantor of each of our bank loans as of September 30, 2011.

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(All amounts in million of U.S. dollars)

Lender	Amount*	Starting Date	Term	Guarantor**
Longjiang Bank	$7.8	May 20, 2011	1 year	Daqing Commercial Guaranty Company Limited
Industrial & Commercial Bank of China	1.1	July 5, 2011	1 year	-
Longjiang Bank	3.1	August 3, 2011	1 year	Daqing Commercial Guaranty Company Limited
China Construction Bank	0.3	September 23, 2011	1 year	Daqing Commercial Guaranty Company Limited
China Construction Bank	1.3	September 23, 2011	2 years	Daqing Commercial Guaranty Company Limited
Total	$13.6

* Calculated on the basis that $1 = RMB 6.4.
** We pay approximately $250,000 (RMB1.6 million) to Daqing Commercial Guaranty Company Limited, an unaffiliated third party, for the guarantees of our loans.

Capital Expenditures

Our capital expenditures were $15.9 million and $9.4 million for the six months ended September 30, 2011 and 2010, respectively. Our capital expenditures were mainly used to upgrade and expand our production capacity. Our planned capital expenditures for the fiscal year ending March 31, 2012 will be mainly for upgrading existing production lines and expanding production capacity by adding new production line, including the construction of a refrigerated warehouse in close proximity to our fruit and vegetable powder production line. However, our actual capital expenditure may differ depending on our cash flow status.

We believe that our currently available working capital, after receiving the aggregate proceeds of our capital raising activities and credit facilities referred to above, should be adequate to sustain our operations at our current levels through at least the next twelve months. We may require additional cash resources due to changing business conditions, implementation of our strategy to expand our production capacity or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

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, 2011.

Recently Issued Accounting Pronouncements

See Note 2 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.

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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. In this fiscal year, our production season started on July 25, 2011.

We 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 are 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 September 30, 2011. Based on our assessment, Mr. Yu and Mr. Cheng determined that, as of September 30, 2011, 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

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.

11

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ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.

(REMOVED AND RESERVED).

ITEM 5.

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.
101		Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).

12

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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: November 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)

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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.
101		Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).

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