- Quarterly Report (10-Q)

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

FORM 10−Q

(Mark One)

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

For the quarterly period ended: December 31, 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
incorporation or organization)	Identification No.)

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 February 13, 2012 is as follows:

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

CHINA NUTRIFRUIT GROUP LIMITED

Quarterly Report on Form 10-Q

For Three and Nine Months Ended December 31, 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	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	(Removed and Reserved)	36
Item 5.	Other Information	36
Item 6.	Exhibits	36

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED DECEMBER 31, 2011

Contents	Page
Condensed Consolidated Balance Sheets as of December 31, 2011 (unaudited) and March 31, 2011	3
Condensed Consolidated Statements of Income for the three and nine months ended December 31, 2011 and 2010 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2011 and 2010 (unaudited)	5
Notes to the Condensed Consolidated Financial Statements (unaudited)	6

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Stated in US Dollars)

		December 31,		March 31,
		2011		2011
ASSETS		(unaudited)
Current assets:
Cash and cash equivalents	$	13,300,218	$	43,542,075
Trade receivables, net of allowance		11,528,807		12,476,652
Inventories, net		43,350,669		6,419,152
Prepayments and deposits		7,760,608		264,878
Other current assets		66,338		1,527
Total current assets		76,006,640		62,704,284
Property and equipment, net		50,191,204		20,312,005
Prepayments and deposits		801,952		10,983,404
Construction in progress		994,706		5,915,395
Deferred tax assets		784,687		909,879
Land use rights, net		189,947		188,199
TOTAL ASSETS	$	128,969,136	$	101,013,166

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Other payables and accrued expenses	$	3,083,506	$	3,312,525
Receipt in advance		1,274,083		-
Bank borrowings		22,204,724		-
Due to a director		-		946,550
Trade payables		134,961		130,276
Income taxes payable		670,725		3,351,631
Total current liabilities		27,367,999		7,740,982
Bank borrowings		1,259,843		-
TOTAL LIABILITIES		28,627,842		7,740,982

Commitments and Contingencies
Contingencies (Note 15)
Shareholders' equity
Preferred stock Authorized: 5,000,000 shares, par value $0.001
Issued and outstanding: 330,860 shares as at December 31, 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 December 31, 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		9,399,141		6,850,422
Accumulated other comprehensive income		7,014,098		3,951,431
Retained earnings		47,398,242		45,940,518
TOTAL SHAREHOLDERS’ EQUITY		100,341,294		93,272,184
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	128,969,136	$	101,013,166

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

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Stated in US Dollars)

		Three months ended						Nine months ended
		December 31,						December 31,
		2011			2010			2011			2010

Net sales	$	21,612,680		$	22,136,504		$	51,697,983		$	54,955,885

Cost of sales		(17,010,425	)		(11,856,020	)		(37,363,569	)		(29,600,110	)

Gross profit		4,602,255			10,280,484			14,334,414			25,355,775

Selling expenses		(669,121	)		(1,111,697	)		(1,820,357	)		(2,369,675	)
General and administrative expenses		(1,832,266	)		(807,231	)		(4,880,150	)		(2,503,801	)

Operating earnings		2,100,868			8,361,556			7,633,907			20,482,299

Other income (expenses)
Interest expenses		(312,177	)		-			(427,393	)		-
Other income		8,791			8,988			120,431			57,009
Total other income (expenses)		(303,386	)		8,988			(306,962	)		57,009

Earnings before income taxes		1,797,482			8,370,544			7,326,945			20,539,308

Provision for income taxes		(713,656	)		(2,131,289	)		(2,556,452	)		(5,317,931	)

Net earnings		1,083,826			6,239,255			4,770,493			15,221,377
Other comprehensive income
Foreign currency translation		640,843			1,092,793			3,062,667			2,668,212
Comprehensive income	$	1,724,669		$	7,332,048		$	7,833,160		$	17,889,589

Earnings per share
Basic	$	0.02	$	0.16	$	0.11	$	0.40

Diluted	$	0.03	$	0.15	$	0.12	$	0.38

Weighted average number of common stock outstanding
Basic		36,915,762		36,762,896		36,915,762		36,703,018

Diluted		40,224,362		40,375,048		40,224,362		40,350,605

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

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Stated in US Dollars)

		Nine months ended
		December 31,
		2011			2010
Operating activities:
Net earnings	$	4,770,493		$	15,221,377
Adjustments to reconcile net earnings to net cash used in operating activities
Depreciation and amortization		2,781,423			1,489,507
Benefit for deferred income taxes		125,192			117,392
Changes in operating assets and liabilities:
Trade receivables, net		1,200,038			5,644,090
Inventories		(36,455,075	)		(15,705,832	)
Prepayments and deposits		(6,988,639	)		(10,025,807	)
Other current assets		(64,684	)		114,703
Trade payables		1,245,908			232,288
Income taxes payable		(1,615,464	)		(218,770	)
Other payables and accrued expenses		(2,731,010	)		(629,515	)
Net cash used in operating activities		(37,731,818	)		(3,760,567	)

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		23,464,567			-
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		21,745,201			122,080

Decrease in cash and cash equivalents		(31,916,769	)		(13,056,547	)

Effect of exchange rate on cash and cash equivalents		1,674,912			1,398,816

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	$	13,300,218		$	24,336,712

Supplemental disclosure of cash flows information:
Cash paid for:
Income taxes	$	5,168,559		$	5,418,475

Interest paid	$	427,393		$	-

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

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 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.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

On December 31, 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 nine owners of Daqing Longheda Food Company Limited (“Longheda”) under which the nine owners of Longheda transferred 75% equity interests in Longheda to Solar Sun for RMB40,000,000 or $5.87 million. In May 2008, the nine founders of Longheda transferred the remaining 25% equity interests in Longheda to Solar Sun. After the transfer, Longheda became a wholly owned subsidiary of Solar Sun.

Solar Sun Holdings Limited

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

Daqing Longheda Food Company Limited

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

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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 owns vegetable powder products facility in Daqing. Up to the date of this report, Senyang still not obtained the production certificate.

Basis of presentation

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

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

Segment information

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

Construction in progress

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

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

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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 December 31, 2011 was recorded.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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 $1,230,611, $2,946,191, $552,782 and $1,487,353 for the three and nine months ended December 31, 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 nine months ended December 31, 2011 and 2010 were $440,009, $2,155,589, $856,936 and $1,799,142 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.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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 $13,522, $29,434, $33,691 and $49,094 for the three and nine months ended December 31, 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
December 31, 2011	RMB6.35 to US$1.00
March 31, 2011	RMB6.55 to US$1.00

Statement of income and comprehensive income
For the nine months ended December 31, 2011	RMB6.41 to US$1.00
For the nine months ended December 31, 2010	RMB6.77 to US$1.00

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

As at December 31, 2011, RMB79,148,892 or US$13,244,711 (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 tax liabilities and assets are the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established, when necessary, to reduce net deferred tax assets to the amount expected to be realized. Our foreign subsidiaries are taxed in local jurisdictions at local statutory rates. The Group’s operations are primarily located in PRC and subject to PRC profits tax.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We believe the adoption of ASU 2011-05 concerns presentation and disclosure only and will not have an impact on our consolidated financial position or results of operations.

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.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 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 nine months ended December 31 are as follows:

		Three months ended						Nine months ended
		December 31,						December 31,
		2011			2010			2011			2010
Numerator:
Net earnings	$	1,083,826		$	6,239,255		$	4,770,493		$	15,221,377
Less: dividends on preferred stock		(191,072	)		(205,347	)		(573,215	)		(618,298	)
Net earnings for basic earnings per share	$	892,754		$	6,033,908		$	4,197,278		$	15,160,079

Net earnings for basic earnings per share	$	892,754		$	6,033,908		$	4,197,278		$	15,160,079
Add: dividends on preferred stock		191,072			205,347			(573,215	)		618,298
Net earnings for diluted earnings per share	$	1,083,826		$	6,239,255		$	4,770,493		$	15,221,377

Denominator:
Weighted average common stock outstanding		36,915,762			36,762,896			36,915,762			36,703,018
Effect of dilutive preferred stock		3,308,600			3,606,966			3,308,600			3,636,436
Effect of dilutive warrant		-			5,186			-			11,151
Weighted average common stock and dilutive potential common stock		40,224,362			40,375,048			40,224,362			40,350,305

Basic net earnings per share	$	0.02		$	0.16		$	0.11		$	0.41

Diluted net earnings per share	$	0.03		$	0.15		$	0.12		$	0.38

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

NOTE 4. INVENTORY, NET

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

		December 31,		March 31,
		2011		2011
Finished goods	$	43,174,733	$	6,324,862
Raw material		175,936		94,290
	$	43,350,669	$	6,419,152

NOTE 5. PROPERTY AND EQUIPMENT, NET

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

		December 31,			March 31,
		2011			2011
Buildings	$	10,943,710		$	5,652,084
Leasehold improvement		5,211,693			1,398,033
Machinery		41,469,125			19,190,848
Furniture, fixtures and office equipment		18,874			15,378
Motor vehicles		43,805			41,556

Total		57,687,207			26,297,899
Less: accumulated depreciation		(7,496,003	)		(5,985,894	)
	$	50,191,204		$	20,312,005

As of December 31, 2011, buildings, leasehold improvement and machinery, of buildings, leasehold improvement and machinery, of $4,214,206 (March 31, 2011: $4,289,330), $985,426 (March 31, 2011: $1,054,948) and $880,125 (March 31, 2011: $942,218) respectively, were pledged to secure the unused banking facilities obtained by the Group. (Note 14)

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 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 December 31, 2011 and March 31, 2011:

		December 31,		March 31,
		2011		2011
Classified as current assets
Prepaid expenses	$	69,626	$	264,878
Prepaid value-added tax		7,690,982		-
		7,760,608		264,878

Classified as non-current assets
Prepayment for property and equipment		-		10,205,951
Prepayment for land use right		801,952		777,453
		801,952		10,983,404
	$	8,562,560	$	11,248,282

NOTE 7. OTHER PAYABLES AND ACCRUED EXPENSES

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

		December 31,		March 31,
		2011		2011
Accruals	$	963,442	$	968,822
Value added tax payables		-		1,545,707
Other payables		2,120,064		797,996
	$	3,083,506	$	3,312,525

The other payables mainly comprised amounts payable to the suppliers of property and equipment, amounting to $1,748,782 and $431,612 as of December 31, 2011 and March 31, 2011 respectively.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

NOTE 8.BANK BORROWINGS

The Company's borrowings consist of the following:

		December 31,		March 31,
		2011		2010
Borrowings, due within one year	$	22,204,724	$	-
Borrowings due after one year		1,259,843		-
	$	23,964,567	$	-

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 December 31, 2011 was 8.26 % per annum.

NOTE 9. PROVISION FOR INCOME TAXES

The provision for income tax is as follows:

		Three months ended				Nine months ended
		December 31,				December 31,
		2011		2010		2011		2010
Current:
PRC	$	671,599	$	2,091,951	$	2,431,260	$	5,200,539
Other jurisdictions		-		-		-		-
Deferred:
PRC		42,057		39,338		125,192		117,392
Other jurisdictions		-		-		-		-
	$	713,656	$	2,131,289	$	2,556,452	$	5,317,931

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

Deferred tax assets

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

		December 31,			March 31,
		2011			2011
Deferred tax assets:
Difference between book and tax basis of land use right and property and equipment	$	784,687		$	909,879
Tax losses carryforward		1,504,465			1,097,331
Less: valuation allowance		(1,504,465	)		(1,097,331	)
Net deferred tax assets	$	784,687		$	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 $1,504,465 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 December 31, 2011, the Company has net operating loss and foreign unused tax loss carryfowards of $3,126,220 (March 31, 2011: $2,699,300) and $2,011,137 (March 31, 2011: $912,879).

The total valuation allowance between periods presented increased by $407,134 (March 31, 2011: $401,905) and such increase was attributable to the tax effect on foreign tax losses incurred for the nine months ended December 31, 2011 of $149,442 (March 31, 2011: $52,734) at enacted foreign profit tax rates and the tax effect on federal net operating loss incurred for the nine months ended December 31, 2011 of $257,712 (March 31, 2011: $349,171) at the federal tax rate of 35%.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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 nine months ended December 31 is as follows:

		Three months						Nine months
		ended December 31,						ended December 31,
		2011			2010			2011			2010
Provision for income taxes at statutory rate of 35%	$	1,249,162		$	2,929,690		$	3,523,159		$	7,188,758
Chinese tax rate difference		(190,693	)		(823,883	)		(740,242	)		(2,033,041	)
Non-deductible expenses and non- assessable profits		(526,085	)		(56,240	)		(758,791	)		(153,626	)
Changes in valuation allowance		139,215			41,550			407,134			197,614
Tax effect of non-deductible temporary difference recognized		42,057			40,172			125,192			118,226
Income taxes	$	713,656		$	2,131,289		$	2,556,452		$	5,317,931

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 December 31, 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.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

Series A Preferred Stock

In connection with the first closing of Private Placement Transaction on December 31, 2009, certain investors received 359,502 shares of Series A Preferred Stock.

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

Ranking

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

Voting

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

Conversion

Shares of the Series A Preferred Stock are optionally convertible into fully paid and non-assessable shares of common stock at a conversion rate calculated by dividing (A) $33.00 per share (the "Liquidation Preference Amount") by (B) the conversion price, which is initially $3.30 per share, subject to adjustment as provided in the Certificate of Designation. Initially, each share of Series A Preferred Stock is convertible into 10 shares of common stock.

Mandatory Conversion

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

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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 December 31, 2009, certain investors received 359,502 warrants to purchase 898,777 shares of the Company’s common stock. The warrants have a term of 4 years and are immediately exercisable at $3.30 per share, subject to customary adjustments.

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

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

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

In connection with the first closing of Private Placement Transaction on December 31, 2009, WLT Brothers Capital, Inc. and Euro Pacific Capital, Inc., the Company’s placement agents, received on October 8, 2009, as partial compensation, 86,281 warrants to purchase 215,703 shares of the Company’s common stock. The warrants have a term of 4 years and are immediately exercisable at $3.30 per share, subject to customary adjustments.

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

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

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

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

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

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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

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

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

The following is the movement of warrants during the nine months ended December 31, 2011:

			Granted	Exercised		Outstanding at
		Outstanding at	during the	during the		December 31,		Exercise
Date of grant		April 1, 2011	period	period		2011		price
October 10, 2008		120,228	-	-		120,228	$	2.78
December 31, 2009		359,502	-	-		359,502	$	3.30
October 8, 2009		140,737	-	-		140,737	$	3.30
		620,467	-	-		620,467
Weighted average exercise price	$	3.20	-	-	$	3.20

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

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

			Granted	Exercised		Outstanding at
		Outstanding at	during the	during the		December 31,		Exercise
Date of grant		April 1, 2010	period	period		2010		price
October 10, 2008		120,228	-	-		120,228	$	2.78
December 31, 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 nine months ended December 31, 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 December 31, 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.

China Nutrifruit Group Limited and Subsidiaries

Notes to Condensed Consolidated Financial Statements

December 31, 2011 and 2010 (Unaudited)

(Stated in U.S. Dollars)

NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES

Operating Lease Commitments

As of December 31, 2011, the Group did not have any significant operating lease commitments.

Rent for the three and nine months ended December 31, 2011 and 2010 was $3,150, $14,198, $4,500 and $13,268 respectively.

Capital Commitments

As of December 31, 2011, the Group had the followings outstanding capital expenditure commitments:

Authorized and contracted, but not provided for:
Construction in progress	$	663,137

NOTE 14. UNUSED SECURED CREDIT FACILITIES

As of December 31, 2011, the Group had $2,967,826 (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 $187,730 (March 31, 2011: $188,199), $4,214,206 (March 31, 2011: $4,289,330), $985,426 (March 31, 2011: $1,054,948) and $880,125 (March 31, 2011: $942,218) respectively.

NOTE 15. CONTINGENCIES

In December 2011, the Company was informed by its subsidiary’s customer (the “Customer”) that the Group's concentrate juice and glazed fruit products contain higher than specified levels of sodium. The Customer has requested the Group for a full refund of the purchased products. During the period from 1 August 2011 to 31 December 2011, the Group has recognized the sales to the Customer of approximately RMB41,045,176 or USD 6,463,807. In response to this matter, the Group is currently performing independent laboratory tests to verify the product quality claims of the Customer. If verified, the Group is prepared to coordinate a voluntary recall and refund to the Customer.

As the results of the independent laboratory tests did not available and the Company did not obtain any documents from the Customer as of the date of this report, the Company considers that the probability of an unfavorable outcome on this claim is still uncertain and, therefore, no contingent liability has been recorded as at December 31, 2011. The effect of the financial statement cannot be verified up to the date of this report.

NOTE 16. 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.

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:

“we,” “the Company,” “us,” “our company,” “our,” and “China Nutrifruit” are to the combined businesses of China Nutrifruit Group Limited, a Nevada corporation, and its wholly-owned subsidiaries: Fezdale, Solar Sun, Jumbo Glass, Daqing Longheda and Daqing Senyang
“Fezdale” are to Fezdale Investments Limited, a British Virgin Islands company;
“Solar Sun” are to Solar Sun Holdings Limited, a Hong Kong company;
“Jumbo Gloss” are to Jumbo Gloss Limited, a British Virgin Islands company;
“Daqing Longheda” are to Daqing Longheda Food Company Limited, a PRC company;
“Daqing Senyang” are to Daqing Senyang Fruit and Vegetable Food Technology Company Limited, a PRC company;
“China” and “PRC” are to the People’s Republic of China;
“SEC” are to the United States Securities and Exchange Commission;
“Securities Act” are to the Securities Act of 1933, as amended;
“Exchange Act” are to the Securities Exchange Act of 1934, as amended;
“RMB” are to Renminbi, the legal currency of China; and
“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 sea buckthorn. Our primary product offerings include concentrate juice, nectar, glazed fruits as well as fresh fruits.

We sell our products through an extensive nationwide sales and distribution network covering 18 provinces in China. As of December 31, 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, Heilongjiang 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.

Third Fiscal Quarter Summary

In the third 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 third fiscal quarter, our industry experienced sharp increases in the price of our raw material fruit supply. Our raw material fruit costs rose from approximately 74% to 217% as compared to the same period last year, due mostly to inflation 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 on the entire increase in our production cost to our customers as we endeavored to maintain our market share and competitiveness. Accordingly, the price increases were generally less than the increase in raw material and direct labor costs. All products sold in this quarter were produced after our new production season began on July 25, 2011.

In December 2011, the Company was informed by a customer that the Company's concentrate juice and glazed fruit products contain higher than specified levels of sodium. The customer has requested for a full refund for the purchased products. During the period from August 1, 2011 to December 31, 2011, the Company has recognized the sales to the customer of approximately RMB41 million, or USD $6.5 million. In response to this matter, the Company is currently performing independent laboratory tests to verify the product quality claims of the customer. If verified, the Company is prepared to coordinate a voluntary recall and refund to the customer.

As the results of the independent laboratory tests are not yet available and the Company has not obtained any documents from the customer as of the date of this report, the Company considers that the probability of an unfavorable outcome on this claim is still uncertain and, therefore, no contingent liability has been recorded as at December 31, 2011.

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

Net Sales : Net sales decreased $0.5 million, or 2.4%, to $21.6 million for the three months ended December 31, 2011, from $22.1 million for the same period last year.
Gross Margin : Gross margin was 21.3% for the three months ended December 31, 2011, as compared to 46.4% for the same period last year.
Net Income : Net income decreased $5.1 million, or 82.6%, to $1.1 million for the three months ended December 31, 2011, from $6.2 million for the same period last year.
Fully Diluted Earnings Per Share : Fully diluted earnings per share was $0.03 for the three months ended December 31, 2011, as compared to $0.15 for the same period last year.

Results of Operations

Comparison of Three Months Ended December 31, 2011 and December 31, 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
		December 31, 2011	December 31, 2010
			As a			As a
		In	Percentage		In	Percentage
		Thousands	of Net Sales		Thousands	of Net Sales
Net Sales	$	21,613	100.0%	$	22,137	100.0%
Costs of sales		17,011	78.7%		11,856	53.6%
Gross profit		4,602	21.3%		10,281	46.4%
Selling expenses		669	3.1%		1,112	5.0%
General and administrative expenses		1,832	8.5%		807	3.6%
Other income		9	0.0%		9	0.0%
Interest expenses		312	1.4%		-	-
Income before income taxes		1,798	8.3%		8,371	37.8%
Income taxes		714	3.3%		2,132	9.6%
Net income		1,085	5.0%		6,239	28.2%
Earnings per share:
Basic	$	0.02		$	0.16
Diluted	$	0.03		$	0.15

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 6.35 to $1 for the three months ended December 31, 2011, and the rate of RMB 6.667 to $1 for the three months ended December 31, 2010.

Net Sales

Net sales consist of revenue from the sale of our fruit and fruit based products. Our net sales decreased $0.5 million, or 2.4%, to $21.6 million for the three months ended December 31, 2011, from $22.1 million for the three months ended December 31, 2010. During this fiscal quarter, the average sales price of most of our products increased substantially. The demand for our glazed fruit and nectar products in this fiscal quarter still have a moderate increase. However, concentrate pulp products did not generate any revenue in this fiscal quarter. In response to rising production input costs, we made a decision in the second quarter 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 higher prices. Due to the more stringent application process for food producers following the outbreak of food safety problems in Taiwan last 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 nine months for us to complete the necessary paperwork and reviews of the production permits and we do not expect these product segments to contribute to our financial performance in fiscal year 2013.

The following table sets forth the percentage of net sales generated by each product for the three months ended December 31, 2011 and 2010:

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

		Three Months Ended			Three Months Ended
		December 31, 2011	December 31, 2010
			As a			As a
		In	Percentage		In	Percentage
Product		Thousands	of Net Sales		Thousands	of Net Sales
Fresh fruit	$	35	0.2%	$	763	3.4%
Glazed fruit		10,777	49.9%		6,040	27.3%
Nectar		1,629	7.5%		1,297	5.9%
Concentrate juice		9,172	42.4%		9,164	41.4%
Concentrate pulp		-	-		4,873	22.0%
Total	$	21,613	100.0%	$	22,137	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 $5.1 million, or 43.5%, to $17.0 million for the three months ended December 31, 2011, from $11.9 million for the three months ended December 31, 2010. Cost of sales as a percentage of net sales was 78.7% for the three months ended December 31, 2011, as compared to 53.6% for the same period last year. Our industry experienced a significant surge in the pricing of agricultural products resulting from inflationary pressures in China’s economy and higher labor costs. Our raw material fruit supply costs rose dramatically during our production season in the second and third quarter, increasing in the range of 74% to 217% as compared to last year. In addition, we experienced an approximately 30% increase in labor costs beginning in July 2011.

Gross Profit

Gross profit is equal to net sales less cost of sales. Gross profit decreased by $5.7 million to $4.6 million for the three months ended December 31, 2011, from $10.3 million for the three months ended December 31, 2010. Gross profit as a percentage of net sales decreased to 21.3% for the three months ended December 31, 2011, as compared to 46.4% 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 production season in 2011. During this year’s production season, the cost of raw material fruit supply increased in the range of 74% to 217% as compared to last year. The gross margins for our glazed fruit, nectar and concentrate juice products for the three months ended December 31, 2011 were approximately 22.2%, 41.1% and 16.9%, as compared to approximately 54.2%, 67.7% and 41.1% for the same period last year, respectively.

Selling and General and Administrative Expenses

Selling and general and administrative expenses increased $0.6 million, or 30.4%, to $2.5 million for the three months ended December 31, 2011, from $1.9 million for the three months ended December 31, 2010.

Selling expenses include sales commissions, transportation expenses, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel and other sales related costs. Selling expenses decreased $0.4 million, or 39.8%, to $0.7 million for the three months ended December 31, 2011 from $1.1 million for the three months ended December 31, 2010. As a percentage of net sales, selling expenses decreased to 3.1% for the three months ended December 31, 2011 from 5.0% for the same period last year. The decrease in selling expenses was mainly due to the decrease in sales volume in this fiscal quarter.

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 $1.0 million, or 127.0%, to $1.8 million for the three months ended December 31, 2011, from $0.8 million for the three months ended December 31, 2010. As a percentage of net sales, general and administrative expenses increased to 8.5% for the three months ended December 31, 2011, from 3.6% 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. The general and administrative expenses for both factories was approximately $0,5 million for the three months ended December 31, 2011. In addition, we experienced an increase in compensation paid to our administrative staff in this quarter.

Income before Income Taxes

Income before income taxes decreased $6.6 million, or 78.5%, to $1.8 million for the three months ended December 31, 2011 from $8.4 million for the three months ended December 31, 2010. Income before income taxes as a percentage of net sales decreased from 37.8% for the three months ended December 31, 2010 to 8.3% for the three months ended December 31, 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 $1.4 million, or 66.5%, to $0.7 million for the three months ended December 31, 2011 from $2.1 million for the three months ended December 31, 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, was 25% in 2011.

Net Income

Net income decreased $5.1 million, or 82.6%, to $1.1 million for the three months ended December 31, 2011 from $6.2 million for the three months ended December 31, 2010, as a result of the cumulative effect of the factors discussed above.

Comparison of Nine Months Ended December 31, 2011 and December 31, 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)

		Nine Months Ended			Nine Months Ended
		December 31, 2011	December 31, 2010
			As a			As a
		In	Percentage		In	Percentage
		Thousands	of Net Sales		Thousands	of Net Sales
Net Sales	$	51,698	100.0%	$	54,956	100.0%
Costs of sales		37,364	72.3%		29,600	53.9%
Gross profit		14,334	27.7%		25,356	46.1%
Selling expenses		1,820	3.5%		2,370	4.3%
General and administrative expenses		4,880	9.4%		2,504	4.6%
Other income		120	0.2%		57	0.1%
Interest expenses		427	0.8%		-	-
Income before income taxes		7,327	14.2%		20,539	37.4%
Income taxes		2,556	4.9%		5,318	9.7%
Net income		4,771	9.3%		15,221	27.7%
Earnings per share:
Basic	$	0.11		$	0.40
Diluted	$	0.12		$	0.38

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 6.41 to $1 for the nine months ended December 31, 2011 and the rate of RMB 6.772 to $1 for the nine months ended December 31, 2010.

Net Sales

We experienced a decrease in net sales during the nine months ended December 31, 2011. Net sales decreased $3.3 million, or 5.9%, to $51.7 million for the nine months ended December 31, 2011, from $55.0 million for the nine months ended December 31, 2010. Such decrease was mainly attributable to the decrease in net sales in the second and third fiscal quarters. The revenue from sales of concentrate juice products decreased $1.3 million, or 4.9%, to $25.3 million for the nine months ended December 31, 2011 from $26.7 million for the same period last year. Net sales from concentrate pulp products decreased $8.4 million, or 8.4%, to $1.0 million for the nine months ended December 31, 2011 from $9.4 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 revenue from glazed fruit increased $6.3 million, or 54.5%, to $17.98 million for the nine months ended December 31, 2011 due to increasing demand from our customers. The increase partially mitigated the decrease of sales from concentrate juice and concentrate pulp.

The following table sets forth percentage of net sales generated by each product for the nine months ended December 31, 2011 and 2010:

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

		Nine Months Ended			Nine Months Ended
		December 31, 2011	December 31, 2010
			As a			As a
		In	Percentage		In	Percentage
Product		Thousands	of Net Sales		Thousands	of Net Sales
Fresh fruit	$	2,068	4.0%	$	2,243	4.1%
Glazed fruit		17,978	34.8%		11,635	21.2%
Nectar		5,312	10.3%		5,056	9.2%
Concentrate juice		25,344	49.0%		26,663	48.5%
Concentrate pulp		996	1.9%		9,359	17.0%
Total	$	51,698	100.0%	$	54,956	100.0%

Cost of Sales

Cost of sales increased $7.8 million, or 26.2%, to $37.4 million for the nine months ended December 31, 2011 from $29.6 million for the nine months ended December 31, 2010. The increase in cost of sales was higher in our second and third fiscal quarters than in the first fiscal quarter for the reasons mentioned above in the quarterly comparison. Overall, for the nine months ended December 31, 2011, our cost of sales escalated, mostly due to inflationary pressures in China and higher labor costs. We experienced a significant price surge of our raw material fruit supply in our second and third fiscal quarters, with such increase ranging from 74% to 217% as compared to the same period last year. Labor costs increased approximately 30% from July 2011 until December 31, 2011. Cost of sales as a percentage of net sales was 72.3% for the nine months ended December 31, 2011, as compared to 53.9% for the same period last year.

Gross Profit

Gross profit decreased by $11.1 million to $14.3 million for the nine months ended December 31, 2011 from $25.4 million for the nine months ended December 31, 2010. Gross profit as a percentage of net sales decreased to 27.7% for the nine months ended December 31, 2011, as compared to 46.1% for the same period last year. As explained above, the increase of 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, and concentrate juice products for the nine months ended December 31, 2011 were approximately 30.6%, 44.1% and 22.7%, respectively, as compared to approximately 53.2%, 68.2% and 43.2% for the same period last year.

Selling and General and Administrative Expenses

Selling and general and administrative expenses increased $1.8 million, or 37.5%, to $6.7 million for the nine months ended December 31, 2011 from $4.9 million for the nine months ended December 31, 2010.

Selling expenses decreased $0.6 million, or 23.2%, to $1.8 million for the nine months ended December 31, 2011 from $2.4 million for the nine months ended December 31, 2010. As a percentage of net sales, selling expenses for the nine months ended December 31, 2011 decreased by 0.8% to 3.5%, as compared to 4.3% for the nine months ended December 31, 2010. The decrease in selling expenses was mainly due to the decrease in sales volume in the first nine months ended December 31, 2011.

Our general and administrative expenses increased $2.4 million, or 94.9%, to $4.9 million for the nine months ended December 31, 2011, from $2.5 million for the nine months ended December 31, 2010. As a percentage of net sales, general and administrative expenses for the nine months ended December 31, 2011 increased by 4.8% to 9.4%, as compared to 4.6% for the nine months ended December 31, 2010. The increase in general and administrative expenses in the nine months ended December 31, 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. The general and administrative expenses for both factories was approximately $0,7 million for the nine months ended December 31, 2011 In addition, the increase in salary and wages of staff also contributed to the increase in general and administrative expenses this year.

Income before Income Taxes

Income before income taxes decreased $13.2 million, or 64.3%, to $7.3 million for the nine months ended December 31, 2011 from $20.5 million for the nine months ended December 31, 2010. Income before income taxes as a percentage of net sales decreased from 37.4% for the nine months ended December 31, 2010 to 14.2% for the nine months ended December 31, 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 $2.8 million, or 51.9%, to $2.5 million for the nine months ended December 31, 2011 from $5.3 million for the nine months ended December 31, 2010. The decrease in the provision for income taxes was mainly due to the decrease in taxable income.

Net Income

Net income decreased $10.5 million, or 68.7%, to $4.8 million for the nine months ended December 31, 2011, from $15.2 million for the nine months ended December 31, 2010, as a result of the cumulative effect of the factors discussed above.

Liquidity and Capital Resources

As of December 31, 2011, we had cash and cash equivalents of approximately $13.3 million. The following table sets forth a summary of our cash flows for the periods indicated.

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

		Nine Months Ended December 31,
		2011			2010
Net cash used in operating activities	$	(37,732	)	$	(3,760	)
Net cash used in investing activities		(15,930	)		(9,418	)
Net provided by financing activities		21,745			122
Effect of exchange rates on cash and cash equivalents		1,675			1,399
Cash and cash equivalents at beginning of the period		43,542			35,994
Cash and cash equivalents at end of period		13,300			24,337

Operating Activities

Net cash used in operating activities was $37.7 million for the nine months ended December 31, 2011 as compared to $3.8 million for the nine months ended December 31, 2010. The increase was mainly attributable to an approximately $36.5 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 nine months ended December 31, 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 nine months ended December 31, 2010, we used approximately $4.3 million to upgrade concentrate juice production lines in our Daqing and Mudanjiang facilities and approximately $5.1 million to construct the new fruit and vegetable powder factory.

Financing Activities

Net cash provided by financing activities was $21.7 million for the nine months ended December 31, 2011, mainly attributable to bank loans of $23.5 million drawn down by Daqing Senyang and Daqing Longheda. We also repaid an advance of $1.0 million from a director in the nine month period. Furthermore, we paid $764,060 as dividends to holders of our Series A Convertible Preferred Stock on September 1, 2011.

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 not withdrawn any loan under either facility.

The table below sets forth the amount, starting date, term and guarantor of each of our bank loans as of December 31, 2011.

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

Lender	Amount*	Starting Date	Term	Guarantor**
Longjiang Bank	$7.9	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
Longjiang Bank	1.6	November 24, 2011	0.5 year	Daqing Commercial Guaranty Company Limited
Longjiang Bank	2.2	December 6, 2011	1 year	Daqing Commercial Guaranty Company Limited
Harbin Bank	0.6	December 15, 2011	1 year	Daqing Commercial Guaranty Company Limited
China Construction Bank	2.4	December 23, 2011	1 year	Daqing Commercial Guaranty Company Limited
China Construction Bank	2.4	December 28, 2011	0.5 year	Daqing Commercial Guaranty Company Limited
Longjiang Bank	0.6	December 28, 2011	1 year	Daqing Commercial Guaranty Company Limited
Total	$23.5

* Calculated on the basis that $1 = RMB 6.35.
** We pay approximately $0.3 million (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 nine months ended December 31, 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 a 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.

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 (i) distributors’ efforts to obtain an 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 the 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 December 31, 2011. Based on our assessment, Mr. Yu and Mr. Cheng determined that, as of December 31, 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

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).

SIGNATURES

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

Date: February 14, 2012	CHINA NUTRIFRUIT GROUP LIMITED

	By:	/s/ Changjun Yu
		Changjun Yu, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Colman Cheng
		Colman Cheng, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No.	Description
31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).

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