China Nutrifruit Group LTD - FORM 10-K

Attached files

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EX-21 - EXHIBIT 21 - China Nutrifruit Group LTD	exhibit21.htm
EX-31.1 - EXHIBIT 31.1 - China Nutrifruit Group LTD	exhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - China Nutrifruit Group LTD	exhibit32-2.htm
EX-23.1 - EXHIBIT 23.1 - China Nutrifruit Group LTD	exhibit23-1.htm
EX-31.2 - EXHIBIT 31.2 - China Nutrifruit Group LTD	exhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - China Nutrifruit Group LTD	exhibit32-1.htm

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

FORM 10-K

(Mark One)

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

For the fiscal year ended: March 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 No. 001-34440

CHINA NUTRIFRUIT GROUP LIMITED
(Exact name of registrant as specified in its charter)

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.001 per share	NYSE Amex LLC

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] No [X]

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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 [ ]	Smaller reporting company [X]
(Do not check if a smaller reporting company)

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

As of September 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing price of such shares as reported on the NYSE AMEX) was approximately $23 million. Shares of the registrant’s common stock held by each executive officer and director and each person who owns 10% or more of the outstanding common stock have been excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were a total of 36,915,762 shares of the registrant’s common stock outstanding as of June 20, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

None.

CHINA NUTRIFRUIT GROUP LIMITED

Annual Report on FORM 10-K

For the Fiscal Year Ended March 31, 2011

TABLE OF CONTENTS

PART I

Item 1.	Business.	1
Item 1A.	Risk Factors.	12
Item 1B.	Unresolved Staff Comments.	12
Item 2.	Properties.	25
Item 3.	Legal Proceedings	25
Item 4.	(Removed and Reserved)	25

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Selected Financial Data	26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	33
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	34
Item 9A.	Controls and Procedures.	34
Item 9B.	Other Information.	35

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	35
Item 11.	Executive Compensation.	38
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	40
Item 13.	Certain Relationships and Related Transactions, and Director Independence	40
Item 14.	Principal Accounting Fees and Services	42

PART IV

Item 15.	Exhibits, Financial Statement Schedules.	43

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 and Section 21E of the Exchange Act. 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; uncertainties related to conducting business in China, 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, as well as assumptions, that, if they were to ever materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties, among others, include:

our ability to attract new customers;
market demand for our existing and new products;
our ability to employ and retain qualified employees;
our ability to stay abreast of market trends and technological advances;
competition and competitive factors in the markets in which we compete;
general economic and business conditions in China and in the local economies in which we regularly conduct business, which can affect demand for our products;
changes in laws, rules and regulations governing the business community in China in general and the fruit processing industry in particular; and
the risks identified in Item 1A. “Risk Factors” included herein.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

Use of Terms

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

PART I

ITEM 1. BUSINESS.

Business 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 berry, crab apple, blueberry, raspberry, blackcurrant and seabuckthorn. Our primary product offering includes concentrate juice, nectar, glazed fruits, concentrate pulp as well as fresh fruits. We have been producing our premium specialty fruit based products since 2004.

We sell our products through a nationwide sales and distribution network covering approximately 18 provinces in China. As of March 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 related foods, and our fresh fruits are mainly sold to fruit supermarkets.

Quality and safety are of primary importance to us. We have established quality control and food safety management systems for all stages of our business, including raw material sourcing, producing, packaging, storage and transportation of our products. We currently operate from our manufacturing facilities located in Daqing and Mudanjiang, Heilongjiang province, China, where an abundant supply of a variety of premium specialty fruits is available. We have five fruit processing lines with an aggregate capacity of 17,160 tons.

Corporate History and Structure

We are a Nevada holding company and conduct substantially all of our business in China through our operating subsidiaries, Longheda and Daqing Senyang Fruit and Vegetable Food Technology Company Limited (“Daqing Senyang”). We indirectly own all of the equity in Longheda as a result of our 100% ownership of Fezdale and Fezdale’s intermediate ownership of Solar Sun Holdings Limited. Both Fezdale and Solar Sun Holdings Limited are intermediate holding companies and have no other significant assets and operations. Longheda was incorporated in China in 2004. Subsequently, in a series of transactions between 2007 and 2008, Solar Sun Holdings Limited acquired 100% ownership of Longheda. Jumbo Gloss Limited is a private limited liability company that was established on October 13, 2009 under the laws of the British Virgin Islands. Jumbo Gloss Limited has no business operations other than its 100% ownership of Daqing Senyang which was incorporated in China on June 29, 2010 for the purpose of operating our new fruit and vegetable powder production. We expect the new fruit and vegetable powder production line to begin operations in July 2011, and its annual production capacity is expected to be approximately 10,000 tons.

The following chart reflects our organizational structure as of the date of this report.

We were originally incorporated in the State of Utah on April 22, 1983 under the name Portofino Investment, Inc. In January 1984, we changed our name to Fashion Tech International, Inc. In April 1999, our stockholders approved a merger with Fashion Tech International, Inc., a Nevada corporation, to change the domicile of the Company from Utah to Nevada. We were a developmental-stage company from inception to January 1, 1984, when we became the holding company of certain operating or development-stage subsidiaries. From April 1, 1985 to August 14, 2008, we re-entered development-stage status.

On August 14, 2008, we acquired Fezdale in a reverse acquisition transaction, which involved a financing transaction and a related share exchange transaction whereby all of our current business operations were acquired by Fezdale. In the share exchange transaction, 100% of the issued and outstanding shares of Fezdale were exchanged for 30,166,878 shares of our common stock, thereby making the existing stockholders of Fezdale owners of 83.5% of our stock and also making Fezdale our wholly owned subsidiary. In the related financing transaction, we completed a private placement in which we sold 3,085,840 newly issued shares of our common stock for aggregate proceeds of $8.6 million.

Our Industry

According to a report on China’s fruit processing industry issued by Beijing Business & Intelligence Consulting Co. Ltd., an independent market research firm, which is hereinafter referred to as the “BBIC Report”, China’s fruit processing industry has grown significantly in the past several years. The total output of processed fruit products in China grew from $22.2 billion in 2006 to $66.2 billion in 2009, representing a Compound Annual Growth Rate (“CAGR”) of approximately 31.4%. The sales value of processed fruit products in China grew from $21.0 billion in 2006 to $65.2 billion in 2010, representing a CAGR of approximately 32.7%. The following table sets forth the output and CAGR of four categories of processed fruit products.

Output Value Breakdown of Fruit Processing Industry in China
(in Billions of U.S.$, except for CAGR data)

		2006		2007		2008		2009		2010	CAGR
Canned Fruit	$	3.7	$	4.3	$	6.3	$	7.8	$	9.7	27.25%
Deep Processed Fruit*		13.1		16.1		23.6		29.1		41.8	33.65%
Fruit Juice and Beverage		4.4		5.7		7.6		10.2		11.2	26.31%
Glazed Fruits		1.0		1.4		2.0		2.6		3.5	36.78%

* Deep processed fruits include nectar, dried fruit and fruit wine, etc.

Source: 2006-2011 Chinese Fruit processing industry Investment Decision Consultation and Industrial Competitiveness Research Report, Beijing Business & Intelligence Consulting Co. Ltd.

The table below sets forth the sales and CAGR of the fruit processing industry in China from 2006 to 2010

Sales of Fruit Processing Industry in China, 2006-2010
(in Billions of U.S.$, except for CAGR data)

		2006			2007			2008			2009			2010			CAGR
Sales	$	21.0		$	26.1		$	37.9		$	47.0		$	65.2		$	32.74%

Source: 2006-2011 Chinese Fruit processing industry Investment Decision Consultation and Industrial Competitiveness Research Report, Beijing Business & Intelligence Consulting Co. Ltd.

We anticipate that growth in China’s fruit processing industry, especially, premium specialty fruit-based products, will mainly be driven by the following factors:

The low per capita rate of fruit consumption in China. With approximately a quarter of the world’s population, China represents a key growth driver for the global fruit food market. Per capita fruit juice consumption in China is currently well below that of major developed countries according to Euromonitor.

Growing affluence fosters increased consumption of processed fruit products. China’s economy has grown significantly in recent years. According to the National Bureau of Statistics of China (the “NBS”), China’s gross domestic product (“GDP”) has increased from RMB12.0 trillion ($1.6 trillion) in 2002 to RMB39.8 trillion ($5.8 trillion) in 2010. According to the Economic Blue Book issued by the Academy of Social Science of China, China’s GDP is expected to grow 9.9% in 2010 and the growth rate will reach 10% in 2011. China’s economic growth has resulted in a significant increase in household disposable income in China. According to the NBS, between 2002 and 2009, urban household disposable income per capita increased from RMB7,703 ($1,055) to RMB17,175 ($2,512), or a CAGR of approximately 12.1%, and rural per capita cash income increased from RMB2,476 ($339) to RMB5,153 ($754), or a CAGR of approximately 11.0%. We believe that as GDP and disposable income increase, processed fruit products will become more affordable and consumers will generally spend an increasing portion of their disposable income on healthy nutritional products, such as our premium specialty fruit-based products.

Greater health awareness is expected to affect consumption of fruit and processed fruit products. We believe that concern for improved living standards and growing household disposable income have led to greater health awareness among the population. As people become more affluent, we believe that their spending on quality health food and nutritional products, like our products, will increase. The juice beverage market in China continued growing steadily in 2010 as the growth in urban population and disposable income continued to drive demand for natural and healthy beverage products. According to the BBIC Report, the world fruit juice consumption is expected to increase from 33 billion liters in 1997 to 74 billion liters in 2020.

Government aims to promote the growth of China’s fruit processing industry. According to the BBIC Report, approximately 20-30% of fruit grown in China is lost, less than 50% of the total harvested fruit can be commercialized, and less than 10% of the total commercialized fruit is processed. We believe that the Chinese government will promote the development of the fruit and fruit processing industry, as evidenced by the “Development Program of Food Processing Industry 2006-2010” report issued by the PRC Ministry of Agriculture (“MOA”).

Our Products

Our primary product offerings include concentrate juice, nectar, glazed fruits, concentrate pulp as well as fresh fruits. We are also in the process of developing several new products.

The following charts set forth our product offerings categorized by both product and source fruit type in terms of net sales for the fiscal years 2011 and 2010:

Product Mix – By Product

Product Mix – By Fruit Type

Concentrate Juice

Concentrate juice is our primary product line, accounting for approximately 48.0% and 47.6% of our total net sales in fiscal years 2011 and 2010, respectively. We currently produce primarily six types of concentrate juice: golden berry, crab apple, blueberry, raspberry, seabuckthorn and blackcurrant. We currently have two concentrate production lines which are allocated for the production of all of six types of concentrates with an annual total production capacity of 9,960 tons. We plan to continue to focus on concentrate juice, which is our fastest growing product line with the greatest market demand. To achieve this end, we are upgrading our concentrate juice production line in Mudanjiang which is expected to be completed in July 2011 and will increase its designed production capacity from 6,000 tons to approximately 9,000 tons. In addition, we also started the construction of a new multi-purpose concentrate paste production line in Zhaoyuan, Helongjiang province with a production capacity of approximately 9,600 tons which is expected to begin trail production in July 2011.

Among the six types of concentrate, the new seabuckthorn and blackcurrant concentrate generally have the highest gross margin and crab apple concentrate consumes most of our production capacity even though it has a relatively lower gross margin. We produce more crab apple concentrate despite its relatively lower gross margin mainly because of the high demand for crab apple products and abundant supply of fresh crab apples, which has the largest supply in Northeast China as compared to the other source fruits.

Crab apple is a special species of apple which has much higher acidity than the normal species of apple. The apple concentrate produced in China commonly has an acidity of 1.2 to 1.8 while crab apple concentrate typically has acidity over 3.2. The only way to raise the acidity of apple concentrate is to mix it with another apple concentrate with higher acidity. Since apple concentrates that are exported from China to overseas markets are usually required to have an acidity of no less 2.0, the local producers of apple concentrate need large quantities of high acidity apple concentrate to add to their low acidity apple concentrate. Therefore, crab apple concentrate is in high demand in the market.

Nectar

Our nectar product line accounted for approximately 8.3% and 9.5% of our total net sales in fiscal years 2011 and 2010, respectively. Nectar is an unfermented and unconcentrated pulp product. To produce nectar, fresh fruits are crushed and then instantaneously sterilized under high temperature without adding any additives other than citric acid. It preserves the nutritional value and flavor of the fresh fruit and elongates shelf life. Nectar is easy to store and transport, thus providing the producers of fresh fruit based products a much better alternative material than fresh fruit.

We currently produce and sell nectar products using only golden berries. Our nectar products are commonly re-processed into a wide variety of products, including bottled fruit juice, fruit ice cream, nectar beverages, biscuits, fruit jam and fruit yogurt. Our nectar products were certified as green food by the China Green Food Development Center in May 2006.

Glazed Fruits

Our glazed fruits product line accounted for approximately 25.6% and 22.8% of our total net sales in fiscal years 2011 and 2010, respectively. Glazed fruit is preserved fruit with high sugar content and is a popular, traditional Chinese food. Glazed fruits have a long shelf life and are commonly consumed as snacks.

We currently produce and sell our glazed fruits products using golden berries, blueberries, seabuckthorn and blackcurrant. We launched our glazed blueberry products in December 2009 and seabuckthorn and blackcurrant glazed fruit products in the second fiscal quarter of 2011 which were well received by our customers. In December 2009, we added a new glazed fruits production line with an annual production capacity of 1,200 tons in our Daqing factory which increased our total annual production capacity of glazed fruit products to 2,400 tons. We are in the process of upgrading our glazed fruits production line in our Daqing facility, which is expected to be completed in July 2011. We expect that after the upgrade, this glazed fruits production line will be able to produce dried fruit products, including dried golden berry and dried cherry tomato.

Our glazed fruits are mainly sold as a premium snack. Due to the special taste of golden berries and blueberries, our products are also commonly used in a wide variety of foods such as baked foods. Our glazed golden berry fruit products were certified as green food by China Green Food Development Center in May 2006.

Concentrate Pulp

Since fiscal year 2008, due to demand from our distributors, we started to distribute apple concentrate pulp products and pear concentrate pulp products. These concentrate products are processed by third party vendors according to our technical requirements and standards. Sales from concentrate pulp contributed approximately 15.5% and 12.9% of our total net sales in fiscal years 2011 and 2010, respectively.

Fresh Fruit

Sales from fresh golden berries accounted for approximately 2.6% and 3.0% of our total net sales in fiscal years 2011 and 2010, respectively. We sell fresh golden berries to our distributors during the picking season which is typically mid-July to mid-November every year. We purchase fresh golden berries from local farmers in Heilongjiang province and sort them into different grades. Only the top-grade golden berries that are freshest and have the best color, shape and aroma are sold as fresh fruit. The rest of the fresh golden berries are further processed into glazed fruits, nectar, or concentrate.

Golden berries are especially difficult to preserve and usually perish within one week after harvest. To achieve longer shelf life, we keep the fresh fruit in ice houses before we pack them with preservative packing. With these measures, our products can generally remain fresh after long distance transportation and have at least one week longer of shelf life than other similar products in the market.

Others

Beverages accounted for approximately 4.2% of our total net sales in fiscal years 2010. Beverage products usually require large capital for advertising and special sales and marketing efforts. We decided to cease beverage production in March 2010 and believe that we will be more profitable by focusing on our primary high-end premium products.

New products under development

We plan to further diversify our product mix to cater to different customer tastes and preferences. We are building a new fruit and vegetable power production line, which is expected to become operational in July 2011. We plan to produce tomato and pumpkin powder in the first year of operation of this production line.

Production

Production Facility

Our primary production facility is located in Daqing, Heilongjiang province and started production in 2004. The facility is located on an approximately 24,217-square-meter tract and encompasses approximately 5,998 square meters of plant and warehouse space. We built another processing facility in Mudanjiang, Helongjiang province in August 2008 where a 6,000 ton concentrate juice production line is located.

We currently own and operate five fruit processing lines with an aggregate processing capacity of 17,160 tons. The average utilization rate of our fruit processing lines was approximately 94.5% in fiscal year 2011. Since fresh fruits are difficult to preserve, particularly in the hot season, we generally keep no inventory of fresh fruits during production. We believe the current utilization rate of the fruit processing lines is close to the highest rate we can achieve while maintaining no inventory. Our production is mainly conducted from mid-July to mid-November each year because our primary source fruits are typically harvested during that time and must be processed right away.

To meet the expected growth of our business and to broaden our product offerings, we are currently building a new fruit and vegetable powder manufacturing facility with an expected annual production capacity of approximately 10,000 tons in Daqing. The new facility is funded by proceeds from our preferred stock offering in 2009 and is expected to begin production in July 2011. The new facility will produce tomato, pumpkin and other popular fruit and vegetable powders that can be used as ingredients in a variety of products, including baby food, ready-to-drink mixes, instant soup mixes, snacks and other confectionery items. We plan to build another fruit and vegetable powder production line with an expected annual production capacity of approximately 10,000 tons in Daqing. We are also currently constructing a new factory facility in Zhaoyuan, Helongjiang which will house a new multi-purpose concentrate paste production line with an expected annual production capacity of approximately 9,600 tons. We plan to use this new multi-purpose concentrate paste production line to produce tomato paste initially. As part of our vertical integration strategy, we anticipate not only selling the concentrate paste products to customers, but also using the concentrate paste products as raw materials for our fruit and vegetable powder production line during the non-harvest season. We plan to leverage our established supplier relationship and distributor network to cross sell our new fruit and vegetable powder products and concentrate paste products.

We upgraded our concentrate juice production lines at our facilities in Daqing and Mudanjiang in 2010. The upgrades included the purchase of additional equipment and implementation of more advanced production techniques. We are in the process of upgrading our glazed fruit production line in our Daqing facility and the concentrate juice production line in our Mudanjiang facility, which is expected to be complete before the commencement of the new production season in July 2011. We expect that the upgraded glazed production line will be able to produce dried golden berry. In addition, the planned upgrade to the concentrate juice production line in Mudanjiang is expected to increase its annual production capacity from 6,000 tons to approximately 9,000 tons. We expect the upgrading will result in more efficient use of raw materials and have a favorable impact on gross margin.

Production Process

The processing of our concentrate juice, nectar and glazed fruits begins with the collection of fresh fruits from fruit farmers. Fresh fruits are first sorted and washed after arriving in our facility. Cleaned fresh fruits then go through the following processes to be made into different products.

Nectar: crush fresh fruits into tiny granules – beat crushed fruits into raw nectar – homogenize raw nectar in a blending tank – pasteurize and sterilize the raw nectar – fill aseptic bags with sterilized nectar.
Concentrate juice: crush and beat fresh fruits into mashes – press fruit mashes until fruit juice comes out – mix raw fruit juice with proper amount of compound enzyme to remove pectin and starch – filter concentrate fruit juice in three-way concentrators to achieve the target content of soluble solids, acidity and other quality standards as well as no additives – fill the aseptic bags with concentrates.
Concentrate pulp: crush and beat fresh fruits into mashes – mix raw fruit pulp – filter concentrate pulp in three-way concentrators to achieve the target content of soluble solids, acidity and other quality standards as well as no additives – fill the aseptic bags with concentrate pulp.

Glazed fruits: separate fresh fruits into different grades – go through needling machine to get the fruits needled at the surface – blanch needled fruits in a blanching boiler – evacuate the air from fruits – soak evacuated fruits in sugar solution in a sugaring tank – bake sugared fruits in a group of tunnel dryers.

Quality Control

Our production facility has ISO 9001 and HACCP series qualifications. We have established a quality control and food safety management system for the purchase of raw materials, fruit processing, packaging, storage and distribution. We have also adopted internal quality standards that we believe are stricter than the standards mandated by the PRC government. Our quality control team closely monitors and tests the quality of our products to ensure compliance with these standards.

High quality raw materials are crucial to the production of quality fruit products. Therefore, we rigorously examine and test fresh fruits arriving at our plant. Any fruits that fail to meet our quality standard will be rejected. We perform routine product inspection and sample testing at our production facility and adhere to strict hygiene standards. For example, every employee involved in production is required to change into specially made clothes, wear working caps and shoes. No one is allowed to enter our production room unless he or she is directly involved in the production process.

All of our products undergo inspection at each stage of the production process, as well as post-production inspection and final checking before distribution for sales. Products in storage or in the course of distribution are also subject to regular quality testing.

Raw Materials and Suppliers

Raw Materials

Our business depends on maintaining a regular, timely and adequate supply of high-quality fresh fruits, which accounted for approximately 79% of our cost of sales in fiscal year 2011. Our facility is strategically located in Heilongjiang province, where an abundant supply of source fruits is available. The close proximity of our facility to the orchards enables us to purchase fresh fruits at a lower cost. Our other raw materials mainly include packing materials (e.g. aseptic bags) and auxiliary processing materials (e.g. sugar and additives) that are widely available.

Suppliers and Supply Arrangements

We employ different procurement strategies to support our rapid growth based on the source fruit type. We coordinate primarily with the local government for the supply of golden berries and rely on a large group of vendors for the supply of other source fruits.

Golden berries in Heilongjiang are mainly grown in four fruit farms. We estimate that the annual output of golden berries at these four fruit farms is approximately 100,000 tons, which accounts for approximately 50% of the total output of golden berries in Heilongjiang province. Our processing volume of golden berries (including those sold as fresh fruits) in fiscal year 2011 was approximately 30,850 tons. We currently purchase a majority of our golden berries from two of these fruit farms -- Hailun and Nehe. It is costly and inefficient to purchase fresh fruits from each individual farmer so we coordinate with the local governments which plan and coordinate the overall fruit planting activities of individual farmers.

We normally sign written agreements with the local governments of Hailun and Nehe at the beginning of each year, which generally have a one-year term. The agreement typically sets forth the total quantity of golden berries to be purchased by us and a predetermined minimum price. The local governments deliver the demand information to individual farmers and coordinate corresponding growth and harvesting activities. In the picking season, we submit our daily request of golden berries to the local governments, who then instruct the farmers to deliver fresh fruits to our plant on a timely basis. The final purchase price is based on the prevailing market price, subject to a predetermined minimum price. This arrangement cuts down our procurement costs significantly and allows the local governments to protect and maximize the interests of constituent farmers.

We generally purchase other source fruits directly from vendors as there is no centralized farm base for these fruits. As an alternative, we have developed a large group of agents who purchase fruits from the local farmers and then re-sell them to us. Our sourcing staff maintains close communication with our agents to ensure their efficiency and loyalty. Our sourcing staff also spends a lot of time developing new agents in the planting area of these fruits. We believe we have established an effective and loyal group of agents who are able to provide us with sufficient fresh fruits to support our growth.

Marketing, Sales and Distribution

Sales and Distribution

We currently sell our products directly to approximately 44 regional distributors in China who then sell the products to various customers, including food processors, supermarkets and wholesale stores. As of March 31, 2011, our sales team consisted of 18 employees. We divide the national market into six regions and assign each region a sales team. Northern China is currently our biggest market, accounting for approximately 54.4% of our total net sales in fiscal year 2011.

We generally require our distributors to pay the full purchase price in cash before we deliver the products. We also offer credit for our products to selected existing distributors with excellent credit records and with whom we maintained long-term business relationships. The credit term is generally up to 45 days. We utilize different pricing policies based on the type of source fruit. For instance, the price of our golden berry products is set based on raw material costs to ensure stable profit margin. We believe that we are a leading golden berry processor in China and the only processor in Northeast China which allows us to have strong pricing power. For products based on other source fruits, we price our products at the prevailing market price.

Distributors normally have distribution rights to sell our products within a defined territory. We typically enter into a one-year contract with each of our distributors at the beginning of the year. The contract generally requires a 15-day notice of the purchase amount prior to the required delivery date. We have the right to supervise and monitor distributors’ sale of our products. We generally have a no return policy. According to our standard distribution agreement, we are liable for any loss resulted from a quality problem only if the distributor provides certification from relevant authorities. However, distributors will bear any losses caused by their negligence in the storage of the products. We offer no sales rebates or rewards to our distributors.

We believe we maintain stable relationships with our distributors, and many of them have been our distributors for more than three years. Our top ten distributors accounted for approximately 71.2% and 64.6% of our total net sales in fiscal year 2011 and 2010, respectively. The biggest distributor accounted for approximately 16.6% and 13.5% of our total net sales in fiscal years 2011 and 2010, respectively. In fiscal year 2011, our two biggest distributors Beijing Huanpenyuan Food Company Limited and Harbin Shengjinlai Economic and Technology Development Company Limited accounted for approximately 16.6% and 13.2% of our total net sales, respectively.

Marketing

As of March 31, 2011, we have four marketing personnel who are responsible for market research, promotion and advertisement. We strengthen our market presence through various types of marketing campaigns. We participate in several domestic and international trade fairs, such as China National Sugar and Alcoholic Commodities Fair and International China Harbin Fair for Trade and Economic Cooperation. These trade fairs help to promote our reputation and name recognition in the industry.

Our Competition

Since we process premium specialty fruits grown in Northeast China, we face little direct competition from the processors of common fruits or broad-based food processors. Our main competitors are local fruit processors that offer products similar to ours. Most of our competitors are small-sized local processors that process only one or two types of specialty fruits. Compared to these competitors, we believe we have more diversified products, higher production capacity and greater resources. Our major competitors in China include Dalian Xinlian Food Company, Shandong Longkou Fudi Food Co. Ltd., Zhalantun Changzheng Beverage Factory and Muxing Quick Frozen Food Factory.

Research and Development

Our research and development activities focus on new product development for new premium specialty fruits and quality improvement. In fiscal year 2011, we successfully launched blackcurrant and seabuckthorn concentrate juice and glazed fruit products. After the technology cooperation agreement with Heilongjiang Ba Yi Land Reclamation University (“HLAU”), an agriculture university in China, expired this year, we concentrated on our internal research and development effort. We benefited from our cooperation with HLAU and developed several kinds of fruit and vegetable powder products, including tomato, pumpkin and carrot. We are also doing research and development on dried fruit products and new fruit paste products. We currently have five employees dedicated to research and development.

Newly developed products will be put into production and commercialized when certain criteria are met, including: market demand is material, adequate supplies of raw material are secured to allow for efficient mass production, and production capacity is in place.

Intellectual Property

We believe that our product formulations are proprietary or have proprietary aspects. We have not registered or applied for protections in China for most of our intellectual property or proprietary technologies relating to the formulations of our products. See Item 1A, “Risk Factors—Risks Related to Our Business—Our inability to protect our trademarks, patent and trade secrets may prevent us from successfully marketing our products and competing effectively.” Although we believe that, as of today, patents and copyrights have not been essential to maintaining our competitive market position, we intend to assess appropriate occasions in the future for seeking patent and copyright protections for those aspects of our business that provide significant competitive advantages.

We sell our concentrate juice, glazed fruit and nectar products under the brand of “农珍之冠”. Our chairman Changjun Yu transferred the trademark for “农珍之冠” in both class 29 and class 32 to our company which was approved by the Trademark Office of the State of Administration for Industry and Commerce of China in March 2009. The trademark expires in 2018.

We rely on trade secret protection and confidentiality agreements to protect our proprietary information and know-how. Our management and each of our research and development personnel have entered into a standard annual employment contract, which includes a confidentiality clause and a clause acknowledging that all inventions, designs, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership rights that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use, without our consent, intellectual property that we own or are licensed to use. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business. See Item 1A, “Risk factors—Risks Related to Our Business—Our inability to protect our trademarks, patent and trade secrets may prevent us from successfully marketing our products and competing effectively.”

Regulation

Because our operating subsidiaries are located in the PRC, we are regulated by the national and local laws of the PRC. The food industry, of which fruit based products form a part, is subject to extensive regulation in China. The following paragraphs summarize the most significant PRC regulations governing our business in China.

We are also subject to the PRC’s foreign currency regulations. The PRC government has controlled Renminbi reserves primarily through direct regulation of the conversion of Renminbi into other foreign currencies. Although foreign currencies, which are required for “current account” transactions, can be bought freely at authorized PRC banks, the proper procedural requirements prescribed by PRC law must be met. At the same time, PRC companies are also required to sell their foreign exchange earnings to authorized PRC banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the PRC government.

Food Hygiene and Safety Laws and Regulations

As a producer of food products in China, we are subject to a number of PRC laws and regulations governing food safety and hygiene, including:

the PRC Product Quality Law;
the PRC Food Safety Law;
the Implementation Rules on the PRC Food Safety Law;
the Measures of the Administration on the New Food-Additives;

the Measures of the Filing of the Enterprise Standard of the Food Safety;
the Implementation Rules on the Administration and Supervision of Quality and Safety in Food Producing and Processing Enterprises;
the Regulation on the Administration of Production Licenses for Industrial Products;
the General Standards for the Labeling of Prepackaged Foods;
the Standardization Law;
the Regulation on Administration of Bar Code of Merchandise; and
the PRC Metrology Law.

These laws and regulations set out safety and hygiene standards and requirements for various aspects of food production, such as the use of additives, production, packaging, handling, labeling and storage, as well as facilities and equipment. Failure to comply with these laws and regulations may result in confiscation of our products and proceeds from the sales of non-compliant products, destruction of our products and inventory, fines, suspension of production and operations, product recalls, revocation of licenses, and, in extreme cases, criminal liability.

Environmental Regulations

We are subject to various governmental regulations related to environmental protection. The major environmental regulations applicable to us include:

the Environmental Protection Law of the PRC;
the Law of PRC on the Prevention and Control of Water Pollution;
Implementation Rules of the Law of PRC on the Prevention and Control of Water Pollution;
the Law of PRC on the Prevention and Control of Air Pollution;
Implementation Rules of the Law of PRC on the Prevention and Control of Air Pollution;
the Law of PRC on the Prevention and Control of Solid Waste Pollution; and
the Law of PRC on the Prevention and Control of Noise Pollution.

We have obtained all permits and licenses required for production of our products and believe we are in material compliance with all applicable laws and regulations.

Environmental Matters

Our manufacturing facilities are subject to various pollution control regulations with respect to noise, water and air pollution and the disposal of waste and hazardous materials. We are also subject to periodic inspections by local environmental protection authorities. We believe we are in material compliance with the relevant PRC environmental laws and regulations and are not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.

Our Employees

As of March 31, 2011, we employed a total of approximately 516 full-time employees. The following table sets forth the number of our employees by function.

Department		Number of
		Employees
Senior Management		11
Human Resources & Administration		61
Production		348
Procurement		3
Marketing		4
Sales		17
Logistic		36
Research & Development		5
Quality Control		20
Accounting		11
TOTAL		516

Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any material work stoppages.

We are required under PRC law to make contributions to the employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC laws.

Seasonality

As is typical in the fruit processing industry, we experience seasonality in our business. Our fruit processing production lines are mainly carried out from mid-July to mid-November each year because our primary source fruits are typically harvested during that period and must be processed right away. As a result of seasonality in production, our personnel, working capital requirements, cash flow and inventories vary substantially throughout the year. In fiscal year 2011, sales during the second, third and forth fiscal quarters accounted for approximately 26.7%, 25.5% and 36.8% of our total net sales respectively. Generally we experience lesser sales in the first fiscal quarter because of lower demand and decreased inventory levels.

Insurance

We have property insurance for our facility located in Daqing and Mudanjiang City. We believe our insurance coverage is customary and standard for companies of comparable size in comparable industries in China.

We do not have any business liability, interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure. See Item 1A, “Risk Factors—Risks Related to Our Business—We have limited insurance coverage and do not carry any business interruption insurance, third-party liability insurance for our production facilities or insurance that covers the risk of loss of our products in shipment.”

Litigation

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

Available Information

Our Internet website address is www.chinanutrifruit.com. We make available at this address, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the United States Securities and Exchange Commission, or SEC. Information available on our website is not incorporated by reference in and is not deemed a part of this report. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, DC, 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issues that file electronically with the SEC at www.sec.gov.

ITEM 1A. RISK FACTORS.

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

RISKS RELATED TO OUR BUSINESS

The recent financial crisis could negatively affect our business, results of operations, and financial condition.

While the financial crisis has stabilized in China, the global economy remains precarious and faces many challenges, which affect our business in a variety of ways. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, these economic conditions also impact levels of consumer spending, which may remain depressed for the foreseeable future. Consumer purchases of discretionary items generally decline during recessionary periods and other periods where disposable income is adversely affected. If demand for our products fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.

Any ill effects, product liability claims, recalls, adverse publicity or negative public perception regarding particular fruits we use as raw materials, our products or our industry in general could harm our sales and cause consumers to avoid our products.

The food industry is subject to risks posed by food spoilage and contamination, product tampering, product recall, and consumer product liability claims. Our operations could be impacted by both genuine and fictitious claims regarding our and our competitors’ products. In the event of product contamination or tampering, we may need to recall some of our products. A widespread product recall could result in significant loss due to the cost of conducting a product recall including destruction of inventory and the loss of sales resulting from the unavailability of the product for a period of time.

In addition, any adverse publicity or negative public perception regarding particular fruits we use as raw materials, our products, our actions relating to our products, or our industry in general could result in a substantial drop in demand for our products. This negative public perception may include publicity regarding the safety or quality of particular fruits we use as raw materials or products in general, of other companies or of our products specifically. Negative public perception may also arise from regulatory investigations or product liability claims, regardless of whether those investigations involve us or whether any product liability claim is successful against us. We could also suffer losses from a significant product liability judgment against us. Either a significant product recall or negative publicity, involving either our company or our competitors, could also result in a loss of consumer confidence in our products or the food category, and an actual or perceived loss of value of our brands, materially impacting consumer demand.

Any fluctuations in raw material supply and prices may negatively impact our revenue.

A secure supply of principal raw materials is crucial to our operation. Fresh fruits accounted for approximately 79% of our cost of sales in fiscal year 2011. The per unit costs of producing our products are subject to the supply and price volatility of raw materials, especially fresh fruits which are affected by factors such as weather, growing conditions and pests that are beyond our control. According to the BBIC Report, approximately 20-30% of fruit grown in China is lost. Historically, we have been able to meet our fresh fruit supply needs by building our processing facilities in close proximity to orchards and by collaborating with local government and establishing an effective group of vendors. Increases in the price of fresh fruits would negatively impact our gross margins if we are not able to offset such price increases through increases in our selling price or changes in our product mix.

If we cannot maintain a consistent and cost-effective supply of source fruits, our results of operations, financial condition and business prospects will deteriorate.

The availability, size, quality and cost of source fruits for the production of our products are subject to operational risks inherent to farming, such as crop size, quality, and yield fluctuation caused by poor weather and growing conditions, pest and disease problems, and other factors beyond our control. These and other operational risks could cause significant fluctuations in the availability and cost of the source fruits we use as raw materials. The prices of our fresh source fruits and other raw materials are generally determined by the market, and may change at any time. Increases in prices for any of these raw materials could have a material adverse impact on our ability to achieve profitability.

Currently, we source our fresh golden berries primarily from two fruit farms pursuant to cooperation agreements with local governments and other fruits from agents who procure fruit for us from individual farmers. While we believe that we have adequate sources of raw materials and that we in general maintain good supplier relationships, if we are unable to continue to find adequate suppliers for our raw materials on economic terms acceptable to us, it will adversely affect our results of operations, financial condition and business prospects.

Product liability claims against us could result in adverse publicity and potentially significant monetary damages.

As with other manufacturers of fruit based products, we are also exposed to risks associated with product liability claims if the consumption of our products results in injury or death. Although our products have not been the subject of any product liability claims, if any such claims are brought against us, we cannot predict what impact such product liability claims or resulting negative publicity would have on our business or on our brand image. The successful assertion of product liability claims against us could result in potentially significant monetary damages, diversion of management resources and require us to make significant payments and incur substantial legal expenses. We do not have product liability insurance and have not made provisions for potential product liability claims. Therefore, we may not have adequate resources to satisfy a judgment if a successful claim is brought against us. Even if a product liability claim is not successfully pursued to judgment by a claimant, we may still incur substantial legal expenses defending against such a claim and our brand image and reputation would suffer. Finally, serious product quality concerns could result in governmental actions against us, which, among other things, could result in the suspension of production or distribution of our products, loss of certain licenses, or other governmental penalties.

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Some of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely and your investment in our stock could be rendered worthless.

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

Our business is substantially dependent upon awareness and market acceptance of our products and brand by our targeted consumers. In addition, our business depends on acceptance by our independent distributors and consumers of our brand. Although we believe that we have made progress towards establishing market recognition for our brand “农珍之冠” in the Chinese fruit products industry, it is too early in the product life cycle of the brand to determine whether our products and brand will achieve and maintain satisfactory levels of acceptance by independent distributors and retail consumers.

We compete in an industry characterized by rapid changes in consumer preferences, so our inability to continue developing new products to satisfy our consumers’ changing preferences would have a material adverse effect on our sales volumes.

Our products are processed from premium specialty fruits and sell at a high price. A decline in the consumption of our products could occur as a result of a change in consumer preferences, perceptions and spending habits at any time. Future success will depend partly on our ability to anticipate or adapt to such changes and to offer, on a timely basis, new products that meet consumer preferences. Our failure to adapt our product offering to respond to such changes may result in reduced demand and lower prices for our products, resulting in a material adverse effect on our sales volumes, sales and profits.

Our current market distribution and penetration is limited as compared with the potential market and so our initial views as to customer acceptance of a particular product can be erroneous, and there can be no assurance that true market acceptance will ultimately be achieved. In addition, customer preferences are also affected by factors other than taste. If we do not adjust to respond to these and other changes in customer preferences, our sales may be adversely affected.

We rely primarily on third-party distributors, which could affect our ability to efficiently and profitably distribute and market our products, maintain our existing markets and expand our business into other geographic markets.

We do not sell our products directly to end customers. Instead, we rely on third-party distributors for the sale and distribution of our products. As of March 31, 2011, this network consisted of approximately 44 distributors. We typically do not enter into long-term agreements with distributors and have no control over their everyday business activities. To the extent that our distributors are detracted from selling our products or do not expend sufficient efforts in managing and selling our products, our sales will be adversely affected. Our ability to maintain our distribution network and attract additional distributors will depend on a number of factors, many of which are outside of our control. Some of these factors include: (i) the level of demand for our brand and products in a particular distribution area; (ii) our ability to price our products at levels competitive with those offered by competing products and (iii) our ability to deliver products in the quantity and at the time ordered by distributors.

There can be no assurance that we will be able to meet all or any of these factors in any of our current or prospective geographic areas of distribution. Furthermore, a shortage of adequate working capital may make it impossible for us to do so. Our inability to achieve any of these factors in a geographic distribution area will have a material adverse effect on our relationships with our distributors in that particular geographic area, thus limiting our ability to maintain and expand our market, which will likely adversely effect our revenues and financial results.

We generally do not have long-term agreements with our distributors, and we may need to spend significant time and incur significant expense in attracting and maintaining key distributors.

Our marketing and sales strategy presently, and in the future, will rely on the performance of our independent distributors and our ability to attract additional distributors. We generally have one-year written agreements with our distributors which are renewable at the beginning of every year. In addition, despite the terms of the written agreements with certain of our significant distributors, we have no assurance as to the level of performance under those agreements, or that those agreements will not be terminated. There is also no assurance that we will be able to maintain our current distribution relationships or establish and maintain successful relationships with distributors in new geographic distribution areas. Moreover, there is the additional possibility that we will have to incur significant expenses to attract and maintain key distributors in one or more of our geographic distribution areas in order to profitably exploit our geographic markets. We may not have sufficient working capital to allow us to do so.

A large percentage of our net sales has been derived from sales to a limited number of distributors, and our business will suffer if sales to these distributers decline.

A significant portion of our net sales historically has been derived from a limited number of distributors. Our top ten distributors accounted for approximately 71.2% and 64.6% of our total net sales in fiscal year 2011 and 2010, respectively. In fiscal year 2011, our two biggest distributors Beijing Huanpenyuan Food Company Limited and Harbin Shengjinlai Economic and Technology Development Company Limited accounted for approximately 16.6% and 13.2% of our total net sales, respectively. Any significant reduction in demand for products manufactured by any of these major distributors and/or their customers and any decrease in their demand for our products could harm our sales and business operations. The loss of one or more of these distributors could damage our business, financial condition and results of operations.

Failure to execute our business expansion plan could adversely affect our financial condition and results of operations.

We are currently building a new fruit and vegetable powder facility in Daqing and a new factory facility in Zhaoyuan with a new multi-purpose concentrate paste production line. We also plan to build another fruit and vegetable powder production line with an expected annual production capacity of approximately 10,000 tons in Daqing. Our decision to increase our production capacity was based in part on our projections of market reception, increases in our sales volume and growth in the size of the premium specialty fruit and vegetable based product market in China. If actual customer demand does not meet our projections, we will likely suffer overcapacity problems and may have to leave capacity idle, which may reduce our overall profitability and adversely affect our financial condition and results of operations. Our future success depends on our ability to expand our business to address growth in demand for our current and future products. Our ability to add production capacity and increase output is subject to significant risks and uncertainties, including:

the unavailability of additional funding to expand our production capacity, purchase additional fixed assets and purchase raw materials on favorable terms or at all;
delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as problems with equipment vendors and suppliers of raw materials;
failure to maintain high quality control standards;
shortage of source fruits;
our inability to obtain, or delays in obtaining, required approvals by relevant government authorities;
diversion of significant management attention and other resources; and
failure to execute our expansion plan effectively.

As our business grows, we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including improvements to our accounting and other internal management systems by dedicating additional resources to our reporting and accounting functions, and improvements to our record keeping and contract tracking system. We will need to respond to competitive market conditions and continue to enhance existing products and develop new products, and retain existing customers and attract new customers. We will also need to recruit more personnel and train and manage our growing employee base. Furthermore, we will need to maintain and expand our relationships with our current and future customers, suppliers, distributors and other third parties, and there is no guarantee that we will succeed.

If we encounter any of the risks described above, or are otherwise unable to establish or successfully operate additional production capacity or to increase production output, we may be unable to grow our business and revenues, reduce our operating costs, maintain our competitiveness or improve our profitability, and our business, financial condition, results of operations and prospects may be adversely affected.

Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate and our annual performance will depend largely on results from three quarters.

Our business is highly seasonal in production, reflecting the harvest season of our primary source fruits during the months from mid-July to mid-November. Typically, a substantial portion of our revenues are earned during our second, third and forth fiscal quarters. We generally experience lowest revenues during our first fiscal quarter. Sales in the second, third and forth fiscal quarters accounted for approximately 26.7%, 25.5% and 36.8% of our total net sales for the fiscal year ended March 31, 2011, respectively. If sales in these quarters are lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on our annual operating results.

Due to our rapid growth in recent years, our past results may not be indicative of our future performance and evaluating our business and prospects may be difficult.

Our business has grown and evolved rapidly in recent years as demonstrated by our growth in net sales for the fiscal year ended March 31, 2011 to $87.0 million from $56.4 million for fiscal year 2009. We may not be able to achieve similar growth in future periods, and our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. Moreover, our ability to achieve satisfactory production results at higher volumes is unproven. Therefore, you should not rely on our past results or our historical rate of growth as an indication of our future performance.

Our growth strategy may require additional capital that may not be available on favorable terms or at all.

We have, in the past, sold our common stock to raise additional capital. Our business expansion requires significant capital and although we believe that our current cash and cash flow from operations will be sufficient to meet our present and reasonably anticipated cash needs, we may, in the future, require additional cash resources due to changed 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 and there can be no assurance that such financing will be available as needed or, if available, on terms favorable to us. Any additional equity financing may be dilutive to shareholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing common stock. 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. If we are unable to generate sufficient cash flow from operating activities or obtain funds for required payments of interest and principal on such additional indebtedness, or if we fail to comply with our debt covenants, we will be in default. 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.

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

Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including Changjun Yu, our Chairman and Chief Executive Officer and Colman Cheng, our Chief Financial Officer. None of these key management members currently owns any shares of common stock or any other equity interest in the Company. Although they have signed employment agreements with our subsidiary Fezdale which include a non-competition provision which prohibits them from engaging in the food processing industry during the term of the agreement and for two years after the termination of employment, such employment agreements can be terminated at will. If we lose any of these key employees and are unable to find a qualified replacement in a timely manner, our business will be negatively impacted. In addition, if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantly deplete the institutional knowledge held by our existing senior management team. We depend on the skills and abilities of these key employees in managing the reclamation, technical, and marketing aspects of our business, any part of which could be harmed by turnover in the future.

The concentration of ownership of our securities by our controlling stockholders who do not participate in the management of our business can result in stockholder votes that are not in our best interests or the best interests of our minority stockholders.

Mr. Yiu Fai Kung and Mr. Kwan Mo Ng, collectively beneficially own approximately 79% of our outstanding voting securities, giving them controlling interest in the Company. However, neither Mr. Kung nor Mr. Ng is an executive officer or director of the Company and is not a participant in any way in the day to day affairs of the Company. Mr. Kung and Mr. Ng may have little or no knowledge of the details of the Company’s operations and do not participate in the corporate governance of the Company. In addition, this concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares.

Our inability to protect our trademarks, patent and trade secrets may prevent us from successfully marketing our products and competing effectively.

Failure to protect our intellectual property could harm our brands and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks, patents, copyrights and trade secrets, could result in the expenditure of significant financial and managerial resources. We produce, market and sell our products under “农珍之冠”. We regard our intellectual property, particularly our trademarks and trade secrets to be of considerable value and importance to our business and our success. We rely on a combination of trademark and trade secrecy laws, and contractual provisions to protect our intellectual property rights. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets (including our flavor concentrate trade secrets) or similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse affect on our ability to market or sell our brands, and profitably exploit our products.

We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or “SOX 404”, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-K. In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to the operating effectiveness of the company’s internal controls. As a smaller reporting company, we are currently exempt from the auditor attestation requirements. We can provide no assurance that we will comply with all of the requirements imposed thereby. There can be no positive assurance that we will receive a positive attestation from our independent auditors, when required. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.

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

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

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

We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties and we make most of our sales in China. PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

RISKS RELATED TO DOING BUSINESS IN CHINA

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

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

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

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

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

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

PRC food hygiene and safety laws may become more onerous, which may adversely affect our operations and financial performance and lead to an increase in our costs which we may be unable to pass on to our customers.

Operators within the PRC fruit processing industry are subject to compliance with PRC food hygiene and safety laws and regulations. Such laws and regulations require all enterprises engaged in the production of fruit based products to obtain a hygiene license. They also set out hygiene standards with respect to food and food additives, packaging and containers, labeling on packaging as well as hygiene requirements for food production and sites, facilities and equipment used for the transportation and the sale of food. Failure to comply with PRC food hygiene and safety laws may result in fines, suspension of operations, loss of hygiene license and, in certain cases, criminal proceedings against an enterprise and its management. Although we are in compliance with current PRC food hygiene and safety laws and regulations, in the event that such laws and regulations become more stringent or widen in scope, we may fail to comply with such laws, or if we comply, our production and distribution costs may increase, and we may be unable to pass these additional costs on to our customers.

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

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

You may have difficulty enforcing judgments against us.

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

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

Our operations are subject to PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations, we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations.

In addition, our facilities and products are subject to many laws and regulations administered by the PRC State Administration for Industry and Commerce, the PRC State Administration of Taxation, the PRC Ministry of Health and Hygiene Permitting Office, the PRC General Administration of Quality Supervision, Inspection and Quarantine, and the PRC State Food and Drug Administration Bureau relating to the processing, packaging, storage, distribution, advertising, labeling, quality, and safety of food products. Our failure to comply with these and other applicable laws and regulations in China could subject us to administrative penalties and injunctive relief, as well as civil remedies, including fines, injunctions and recalls of our products. It is possible that changes to such laws or more rigorous enforcement of such laws or with respect to our current or past practices could have a material adverse effect on our business, operating results and financial condition. Further, additional environmental, health or safety issues relating to matters that are not currently known to management may result in unanticipated liabilities and expenditures.

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

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

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

Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.

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

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

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

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

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

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

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

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

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

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.

Our ability to conduct foreign-exchange activities in the PRC is subject to uncertainties surrounding the interpretation of SAFE regulations, one of which is Circular 75. Under the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China (as amended and supplemented, “Circular 75”), PRC residents must register with a local branch of SAFE (1) before they establish or gain control of an overseas special purpose vehicle, or SPV, for the purpose of overseas equity financing (including convertible debt financing); (2) when they contribute their assets or equity interests in a domestic enterprise to an SPV or engage in overseas financing after contributing assets or equity interests to an SPV; and (3) when their SPV undergoes a material change outside of China, such as a change in share capital or merger or acquisition. If any PRC resident who holds stock in an SPV fails to make the required SAFE registration and make any amended registration, the onshore PRC subsidiaries of that offshore company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore SPV. Failure to comply with the SAFE registration and amendment registration requirements described above could result in liability for evading PRC laws applicable to foreign exchange restrictions.

We have advised our shareholders who are PRC residents, as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident shareholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the “M&A Rule”, which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change-of-control transaction and in some situations, require approval of MOFCOM when a foreign investor takes control of a Chinese domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also requires MOFCOM antitrust review of any change-of-control transactions involving certain types of foreign acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

We face uncertainty from the Circular on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Share Transfer (“Circular 698”) released in December 2009 by China's State Administration of Taxation (SAT), effective as of January 1, 2008.

Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country (jurisdiction) where the effective tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the foreign investor must provide the PRC tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfer.

Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through the “abuse of form of organization” and there are no reasonable commercial purposes for such form with the result that the corporate income tax liability is avoided, the PRC tax authorities shall have the power to reassess the nature of the equity transfer in accordance with the “substance-over-form” principle and deny the existence of an offshore holding company that is used for tax planning purposes.

“Income derived from equity transfers” as mentioned in this circular refers to income derived by nonresident enterprises from direct or indirect transfers of equity interest in China resident enterprises, excluding shares in Chinese resident enterprises that are bought and sold openly on the stock exchange.

While the term “indirectly transfer” is not defined, we understand that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. The relevant PRC tax authorities have not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the offshore country (jurisdiction) and to what extent and the process of the disclosure to the PRC tax authority in charge of that Chinese resident enterprise. Meanwhile, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to determine if our company complies with the Circular 698.

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

China passed a new Enterprise Income Tax Law, or the EIT Law, and its implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. However, detailed measures on imposition of tax from non-domestically incorporated resident enterprises are still unavailable. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow.

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

RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY

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

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

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

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

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

The market price of our stock may be affected by low volume.

Although our common stock is traded on the NYSE Amex, the trading volume of our common stock has generally been low. Reported average daily trading volume in our common stock for the three month period ended June 20, 2011 was approximately 20,633 shares. Limited trading volume will subject our shares of common stock to greater price volatility and may make it difficult for our stockholders to sell their shares of common stock at a price that is attractive to them.

Certain provisions of our Articles of Incorporation may make it more difficult for a third party to effect a change-of-control.

Our Articles of Incorporation authorizes the board of directors to issue up to 5,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not Applicable.

ITEM 2. PROPERTIES.

There is no private land ownership in China. Individuals and companies are permitted to acquire land use rights for specific purposes. We were granted land use rights from the PRC government for approximately 24,217 and 37,309 square meters of land located at No. 3, Xin Fa Street, Daqing Hi-tech Industrial Development Zone, Daqing City and Bei Dian Village, Wu Lin Town, Lin Kou County, Mudangjiang City, respectively. The land use rights of these two parcels of land will expire on May 19, 2055 and February 28, 2058, respectively.

We recently acquired the land use right for approximately 41,000 square meters of land located in Daqing to build our new fruit and vegetable powder manufacturing facility. The new facility is expected to begin production in July 2011 and will produce tomato, pumpkin and other popular fruit and vegetable powders that can be used as ingredients in a variety of products, including baby food, ready-to-drink mixes, instant soup mixes, snacks and other confectionery items. The land use right will expire in 2061.

We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

ITEM 3. 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 4. (REMOVED AND RESERVED).

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is quoted on the NYSE Amex and trades under the symbol “CNGL.” The following table sets forth, for the periods indicated, the high and low closing prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

		Closing Bid Prices⁽¹⁾
		High		Low
*Year Ended March 31, 2011*
1^stQuarter	$	3.67	$	3.05
2^ndQuarter		3.24		2.60
3^rdQuarter		3.15		2.70
4^thQuarter		3.60		2.65

*Year Ended March 31, 2010*
1^stQuarter	$	4.00	$	2.69

	Closing Bid Prices⁽¹⁾
	High	Low
2^ndQuarter	4.50	3.27
3^rdQuarter	4.26	3.00
4^thQuarter	4.67	3.63

________________________________
(1) The above table sets forth the range of high and low closing prices per share of our common stock as reported by www.finance.yahoo.com for the periods indicated.

Approximate Number of Holders of Our Common Stock

As of June 20, 2011, there were approximately 473 holders of record of our common stock. This number excludes the shares of our common stock owned by stockholders holding stock under nominee security position listings.

Dividends

Other than dividends paid by our subsidiary Longheda to its shareholders before our acquisition of Fezdale, we have never declared dividends or paid cash dividends. Our board of directors will make any future decisions regarding dividends. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

On October 19, 2010, our board of directors approved the China Nutrifruit Group Limited 2010 Equity Incentive Plan, which was amended on December 10, 2010. On January 12, 2011, our shareholders approved the plan at the Company’s annual meeting of shareholders. As of the date of this report, the Company has not issued any securities under such plan.

Recent Sales of Unregistered Securities

We have not sold any equity securities during the fiscal year ended March 31, 2011 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2011 fiscal year.

Purchases of Equity Securities

No repurchases of our common stock were made during the fourth quarter of 2011.

ITEM 6. SELECTED FINANCIAL DATA.

Not Applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements.

Overview

We sell our products through an extensive nationwide sales and distribution network covering 18 provinces in China. As of March 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 related foods, and our fresh fruits are mainly sold to fruit supermarkets.

Our manufacturing facilities are located in Daqing City and Mudanjiang City, Heilongjiang Province, China where an abundant supply of various premium specialty fruits is readily available. We currently have five fruit processing lines with an aggregate capacity of 17,160 tons.

Principal Factors Affecting Our Financial Performance

Our operating results are primarily affected by the following factors:

Growth of China’s fruit processing industry. We believe that the recent growth in processed fruit product consumption in China is largely attributable the increased affordability of processed fruit products and increased health and wellness consciousness in China. We expect these factors to continue to drive industry growth, especially in our primary markets – premium specialty processed fruit products. Such growth will not only increase the overall market size for processed fruit products, but will also benefit companies that are well positioned to sell in these markets.
Product Offering and Pricing. Processed fruit products including concentrate juice, glazed fruit, nectar and concentrate pulp have been, and are expected to remain, our primary product offering. Our processed fruit products accounted for approximately 97.4% and 92.8% of our total net sales for fiscal years ended March 31, 2011 and 2010, respectively. The gross margin for our processed fruit products was approximately 47.0% for the fiscal year ended March 31, 2011. We plan to continue to focus on our higher margin processed fruit products and further expand our product portfolio in the future. Because we have strong bargaining power on golden berry products, we generally closely tie the pricing of gold berry products to the raw material prices to ensure a stable profit margin. We price our other products with reference to the prevailing market price.
Fluctuations in Raw Material Supply and Prices. The per unit cost of producing our products is subject to the supply and price volatility of raw materials, especially fresh fruits which are affected by factors such as weather, growing conditions and pests that are beyond our control. Fresh fruits accounted for approximately 79% of our total cost of sales in fiscal year 2011. Historically, we have been able to meet our fresh fruit supply needs by building our processing facilities in close proximity to orchards and by collaborating with local government and establishing an effective group of vendors. Increases in the price of fresh fruits would negatively impact our gross margins if we are not able to offset such price increases through increases in our selling price or change in product mix.
PRC Government Policy Promoting the Development of the Fruit Processing Industry. In the PRC central government’s eleventh five-year guideline, the central government emphasized its determination to solve the problems of farmers, boost modern agriculture and increase rural affluence. After the onset of the economic crisis in late 2008, the Ministry of Agriculture also stated its objective to promote fruit processing and fruit commercialization. We believe that our business model is structured within the framework of these Ministry of Agriculture initiatives and that government policies will continue to have a positive impact on the sale of our products.

Expansion of our production capacity. We believe expansion of our capacity is needed to satisfy increased demand for our products. The average utilization rate for our five fruit processing production lines was approximately 94.5% in fiscal year 2011. In order to increase our production capacity, we plan to make capital investments to build additional production lines to satisfy the projected demand for our products.

Results of Operations

Year Ended March 31, 2011 Compared to Year Ended March 31, 2010

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

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

		Fiscal Year Ended			Fiscal Year Ended
		March 31, 2011			March 31, 2010
		In	As a		In	As a
		Thousands	Percentage		Thousands	Percentage
		(audited)	of Net Sales		(audited)	of Net Sales
Net sales	$	86,954	100.0%	$	72,917	100.0%
Costs of sales		46,137	53.1%		39,656	54.4%
Gross profit		40,817	46.9%		33,261	45.6%
Selling expenses		3,100	3.6%		3,547	4.9%
General and administrative expenses		4,354	5.0%		3,977	5.5%
Interest expenses		5	-		-	-
Other income		85	0.1%		70	0.1%
Gain on disposal of property and equipment		-	-		290	0.4%
Income before income taxes		33,444	38.5%		26,098	35.8%
Income taxes		8,700	10.0%		6,849	9.4%
Net income		24,743	28.5%		19,249	26.4%
Earnings per share:
Basic	$	0.66		$	0.52
Diluted	$	0.62		$	0.51

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 an exchange rate of RMB6.73 to $1 for the fiscal year ended March 31, 2011 and the rate of RMB6.84 to $1 for the fiscal year ended March 31, 2010.

Net Sales

Net sales increased $14.0 million, or 19.3%, to $86.9 million in fiscal year 2011 from $72.9 million in fiscal year 2010. The increase was mainly attributable to the increased sales volume of our products, especially our glazed fruit and concentrate pulp products. Market demand for our products remained strong in fiscal year 2011, due in part to growth in the health conscious urban population and a rise in per capita disposable income in China. Sales of glazed fruit and concentrate pulp grew significantly from $16.6 million and $9.4 million, respectively, in fiscal year 2010 to $22.3 million and $13.5 million, respectively, in fiscal year 2011. Our new glazed fruit production line started operation in December 2009 and we produced more glazed fruit products in fiscal year 2011 as compared to last fiscal year. In addition, sales of concentrate juice products increased from $34.7 million in fiscal year 2010 to $41.7 million in fiscal year 2011, primarily due to the increased per unit sales price resulting from the increased cost of our source fruits crab apple, blueberry and raspberry. We continuously monitor our pricing policies and have generally been able to pass the increased raw material costs to our customers. We also benefited from our new products, blackcurrant and seabuckthorn glazed fruit and concentrate juice which were launched during fiscal year 2011 and were well received by the market. In fiscal year 2011, we generated approximately $4.3 million of net sales from our new blackcurrant and seabuckthorn glazed fruit products and $2.8 million of net sales from our blackcurrant and seabuckthorn concentrate juice products, respectively.

The following table sets forth percentage of net sales generated by each product for the fiscal years ended March 31, 2011 and 2010:

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

		Fiscal Year Ended			Fiscal Year Ended
		March 31, 2011			March 31, 2010
			As a			As a
		In	Percentage		In	Percentage
Product		Thousands	of Net Sales		Thousands	of Net Sales
Fresh fruit	$	2,243	2.6%	$	2,221	3.0%
Glazed fruit		22,289	25.6%		16,622	22.8%
Nectar		7,231	8.3%		6,961	9.5%
Concentrate juice		41,707	48.0%		34,671	47.6%
Concentrate pulp		13,484	15.5%		9,377	12.9%
Beverage		-	-		3,065	4.2%
Total	$	86,954	100.0%	$	72,917	100.0%

Cost of Sales

Cost of sales increased $6.5 million, or 16.3%, to $46.1 million in fiscal year 2011 from $39.7 million in fiscal year 2010. This increase was primarily due to, and consistent with, the increase in our sales volume. As a percentage of net sales, our cost of sales decreased to 53.1% in fiscal year 2011 from 54.4% in fiscal year 2010. The percentage decrease was mainly due to the change in product mix. We sold a higher percentage of glazed fruit products in fiscal year 2011, which generally had a lower per unit cost as compared to our concentrate juice and concentrated pulp products.

Gross Profit and Gross Margin

Gross profit increased $7.5 million to $40.8 million in fiscal year 2011 from $33.3 million in fiscal year 2010. Gross profit as a percentage of net sales was 46.9% and 45.6% for fiscal years 2011 and 2010, respectively. The modest increase in gross margin was mainly due to the change in product mix. In fiscal year 2011, a bigger percentage of our net sales was generated from sales of higher margin glazed fruit products.

The gross margins for concentrate juice, glazed fruit, nectar and concentrate pulp products for fiscal year 2011 were 42.8%, 54.0%, 67.5% and 37.1%, as compared to 43.4%, 52.6%, 68.3% and 31.8% for the same period last year, respectively. The average gross margin of our concentrate juice products decreased slightly as compared to fiscal year 2010 mainly because of the slightly lower average sales price of the blueberry concentrate juice products in fiscal year 2011. The gross margin for our glazed fruit products increased in fiscal year 2011 mainly because both of our glazed fruit production lines ran in full capacity during our harvest season in fiscal year 2011 and we were able to produce more glazed fruit products using fresh fruits which are generally cheaper than frozen fresh fruit. In contrast, in fiscal year 2010, we used more frozen fresh fruit for the production of glazed fruit products because our new glazed fruit production line started operation during the non-harvest season. We used frozen fresh fruit during the non-harvest season in order to maximize the utilization rate of our glazed fruit production line and increase sales volume. The gross margin for concentrate pulp products increased in fiscal year 2011 mainly because the sales price for pear concentrate pulp in the China market increased significantly during the 2011 fiscal year as compared to last fiscal year.

Selling and General and Administrative Expenses

Selling and general and administrative expenses decreased $69,774, or 0.9%, to $7.5 million in fiscal year 2011 from $7.5 million in fiscal year 2010 mainly due to the decrease of selling expenses as discussed below.

Selling expenses decreased $447,152, or 12.6%, to $3.1 million in fiscal year 2011 from $3.5 million in fiscal year 2010. As a percentage of net sales, our selling expenses decreased to 3.6% in fiscal year 2011 from 4.9% in fiscal year 2010. Due to well established relationships with our existing customers, we received repeat orders with higher volume from our existing clients, which led to lower sales related expenses for fiscal year 2011. In addition, we incurred less selling expenses due to the cessation of the production and sale of beverage products in fiscal year 2011.

General and administrative expenses increased $377,378, or 9.5%, to $4.4 million in fiscal year 2011 from $4.0 million in fiscal year 2010. As a percentage of net sales, general and administrative expenses decreased to 5.0% in fiscal year 2011, as compared to 5.5% in fiscal year 2010. The slight dollar increase in general and administrative expenses was mainly attributable to the increase in staff salary and benefits, and depreciation expenses incurred in connection with our new glazed fruit production line which became operational in December 2009. The percentage decrease was mainly attributable to economy of scales and effective cost control over our general and administrative expenses during the year.

Interest Expenses

We incurred $4,912 of interest expense for the fiscal year ended March 31, 2011. We had no interest expense in fiscal year 2010.

Income before Income Taxes

Income before income taxes increased $7.3 million, or 28.1%, to $33.4 million in fiscal year 2011 from $26.1 million in fiscal year 2010. Income before income taxes as a percentage of net sales increased from 35.8% in fiscal year 2010 to 38.5% in fiscal year 2011. The percentage increase was primarily attributed to the increase in sales volume and gross margin.

Provision for Income Taxes

Our provision for income taxes was $8.7 million and $6.9 million for the fiscal years ended March 31, 2011 and 2010, respectively. The increase was mainly due to an increase in net income before income tax. As a percentage of net sales, provision for income taxes increased from 9.4% for the 2010 fiscal year to 10.0% for the 2011 fiscal year.

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

All our business operations are done through our PRC subsidiaries and we may rely on dividends from our PRC operating subsidiaries. The EIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes. We expect that such 10% withholding tax will apply to dividends paid to us by our PRC subsidiaries, but this treatment will depend on our status as a non-resident enterprise. For a detailed discussion of PRC tax issues related to resident enterprise status, see Item 1A, “Risk factors—Risks Related to Doing Business in China— Under the Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”

Net Income

Net income increased $5.5 million, or 28.5%, to $24.7 million in 2011 from $19.3 million in 2010, as a cumulative effect of all of the factors discussed above.

Liquidity and Capital Resources

As of March 31, 2011, we had cash and cash equivalents of approximately $43.5 million. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.

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

		Fiscal Year Ended March 31,
		2011			2010
Net cash provided by operating activities	$	25,790		$	21,667
Net cash used in investing activities		(20,686	)		(1,701	)
Net cash provided by financing activities		1,066			11,283
Effect of exchange rate on cash and cash equivalents		1,378			(24	)
Cash and cash equivalents at beginning of the period		35,994			4,769
Cash and cash equivalents at end of period		43,542			35,994

Operating Activities

Net cash provided by operating activities was $25.8 million in fiscal year 2011, an increase of $4.1 million, or 19.0% from $21.7 million net cash provided by operating activities in fiscal year 2010. Net cash provided by operating activities for the 2011 fiscal year was mainly attributable to our net income of $24.7 million.

Investing Activities

Net cash used in investing activities was $20.7 million in fiscal year 2011, as compared to $1.7 million in fiscal year 2010. In fiscal year 2011, we spent approximately $5.9 million and $10.6 million in the construction of the new fruit and vegetable powder factory and as advance payment for assembling the fruit and vegetable powder production line, respectively. In addition, we spent approximately $4.3 million in upgrading our concentrate juice production line in the first quarter of fiscal year 2011.

Our cash used in investing activities during fiscal year 2010 was primarily for the purchase of a new glazed fruit production line in December 2009 for approximately $2.7 million, which was partially offset by the proceeds from disposal of the beverage production line of approximately $1.0 million.

Financing Activities

Net cash provided by financing activities was approximately $1.1 million in fiscal year 2011, as compared to $11.3 million in fiscal year 2010. In September 2010, we made a dividend payment in the aggregate amount of $809,550 to holders of our Series A Convertible Preferred Stock in accordance with its terms and received a return of $931,630 from the dividend holdback escrow account established in connection with the private placement of the Series A Convertible Preferred Stock. We also received an approximately $0.9 million advance from a director for the operating working capital for Daqing Senyang.

Net cash provided by financing activities in fiscal year 2010 was mainly attributable to the receipt of $12.2 million in net proceeds from a private placement financing transaction which closed in October 2009. On October 8, 2009, we completed a private placement of Series A Convertible Preferred stock and warrants and issued 403,418 units at a purchase price of $33.00 per unit for gross proceeds of $13,309,000. Each unit consists of one share of our newly-designated Series A Convertible Preferred Stock, par value $0.001 per share, and one warrant to purchase 2.5 shares of our common stock. The warrants are immediately exercisable at a per share price of $3.30 (subject to customary adjustments) and have a term of four years.

Capital Expenditures

Our capital expenditures were $20.7 million and $2.7 million for the fiscal years ended March 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 for upgrading existing production lines and expanding production capacity. However, our actual capital expenditure may differ depending on our cash flow status.

On February 23, 2010, we entered into a $0.96 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 $1.31 million revolving credit facility with the Longjiang Bank with a term of two years. This facility was 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 did not draw down on either facility and did not have any outstanding bank loan.

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 and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:

Use of estimates

The preparation of the 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.

Trade accounts receivable

In the normal course of business the Company extends credit to customers. Trade accounts receivable, less allowance for doubtful accounts, reflects the net realizable value of receivables, and their approximate fair value. On a regular basis, the Company 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 March 31, 2011 (2010: nil) was recorded.

Inventories

The cost of finished products inventories includes raw materials, direct labor and indirect production costs. Inventories are stated at the lower of cost or market. The Company 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 cost of sales.

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, fixtures and office equipment – 5 years; motor vehicles – 5 years. Depreciation of property and equipment was $2,372,023 and $1,590,023 for the years ended March 31, 2011 and 2010, respectively. During the idle period of the plant, depreciation is treated as current-period charges, which charge directly to general and administrative expense.

Revenue recognition

We recognize 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.

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 Company 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.

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 Company’s land located in the PRC is considered to be 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 agreements on a straight-line basis, which is 50 years.

Recent Accounting Pronouncements

In April 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-02 – Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This update to Receivables (Topic 310) clarifies the guidance for a creditor’s evaluation of whether a restructuring constitutes a troubled debt restructuring. This update clarifies, when evaluating a restructuring as a troubled debt restructuring, whether a creditor has granted a concession to a debtor and whether the debtor is experiencing financial difficulties. The objective of this amendment is to promote greater consistency in the application of US GAAP for debt restructurings from the creditor’s perspective. The effective date of this update is for the first interim period beginning after June 15, 2011, and should be applied retrospectively to the beginning of the current year. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.

Management believes other recent accounting pronouncements issued by the FASB and the SEC do not have a material impact on the Company’s present or future financial statements.

Effects of Inflation

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

Off Balance Sheet Arrangements

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

Seasonality

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The full text of our audited consolidated financial statements as of March 31, 2011 and 2010 begins on page F-1 of this annual report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. 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 and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 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.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2011. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our assessment we determined that, as of March 31, 2011, our internal control over financial reporting was effective at the reasonable assurance level based on those criteria.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

We have no information to disclose that was required to be disclosed in a report on Form 8-K during fourth quarter of fiscal year 2011, but was not reported.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

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

NAME	AGE	POSITION
Changjun Yu	39	Chairman, Chief Executive Officer, President
Jingfu Li	68	Director
Chun Wai (Tony) Chan	39	Director
William Haus	48	Director
Jizeng Zhang	63	Director
Colman Cheng	43	Chief Financial Officer, Treasurer and Secretary
Aijun Wang	46	Vice President of Sales

Changjun Yu. Mr. Yu is the founder of our subsidiary Longheda and has served as the chairman of our board of directors since the completion of the reverse acquisition of Fezdale on August 14, 2008. On July 3, 2010, Mr. Yu was elected as our chief executive officer and president. Mr. Yu has been the chairman of our subsidiary Longheda since its formation in 2004. From 2001 to 2003, Mr. Yu was the vice president of sales of Haerbin Shengjinlai Economic and Technology Development Co. Ltd. From 1997 to 2000, he served as the vice president of production and then vice president of sales of Shandong Qingzhou Dajinxing Aviation Beverage Co. Ltd. Mr. Yu has over 15 years of experience in the food industry. Mr. Yu was selected to serve as a director on the board in connection with his leadership, business management skills as well as vision and strategic experience, which he has acquired from his management roles in prior years. Mr. Yu has not held any other public company directorship during the past five years.

Jingfu Li. Mr. Li has over 40 years of teaching experience in the subject of horticulture. For the last 18 years, Mr. Li has been working as a professor and doctoral advisor at the Northeast Agricultural University in China. He has also served key roles in horticulture related organizations, such as chairman of the Horticultural Society of Heilongjiang Province, editor of Journal of Chinese Vegetables, member of Crop Varieties Validation Committee in Heilongjiang Province, executive director of the Horticultural Society of China, and chairman of Tomato Branch of the Society of Horticulture in China. Mr. Li graduated from Northeast Agricultural University (formerly known as Northeast Agricultural College) with a Bachelor’s in Science degree in Horticulture. His outstanding contributions have been well recognized by the government and he has been awarded with governmental allowance by the State Council and first prize in Scientific Technology Advancement for “export-oriented vegetables, new varieties of hybrid technology and breeding” in Heilongjiang Province. Mr. Li was appointed as our independent director on June 11, 2009. Mr. Li was selected to serve as a director on our board in connection with his knowledge and extensive experience of over 40 years in the horticulture industry. Mr. Li has not held any other public company directorship during the past five years.

Chun Wai (Tony) Chan. Mr. Chan has extensive experience in general assurance and business advisory services in both Hong Kong and China. Moreover, Mr. Chan has extensive experience in public listings in Hong Kong and Singapore, mergers and acquisition as well as corporate finance. Mr. Chan is a Certified Public Accountant in Hong Kong, Australia and an International Associate of American Institute of CPAs. Since 2004, Mr. Chan has been working as a director of a CPA practice. He holds a Master’s degree in business administration. Mr. Chan is the independent non-executive director of four public companies listed on the Hong Kong Stock Exchange: Hans Energy Company Limited, Honbridge Holdings Limited, Oriental City Group Holdings Limited and Wai Chun Mining Industry Group Company Limited. Mr. Chan was appointed as our independent director on June 11, 2009 and is the chairman of our Audit and Governance and Nominating Committee. Mr. Chan was selected to serve as a director on our board in connection with his substantial experience in general assurance and business advisory and experience as directors of several public companies, which provided him with a unique perspective on accounting and financial reporting expertise. Other than noted above, Mr. Chan has not held any other public company directorship during the past five years.

William P. Haus, CFA. Mr. Haus has extensive experience in business and finance for public companies as well as China-based companies. From August 2008 to February 2010, Mr. Haus was the Chief Executive Officer and director of CS China Acquisition Corporation, a special purpose acquisition corporation which completed a business combination with a China-based private company. Over the past 28 years, Mr. Haus has worked in a variety of roles in analyzing companies and evaluating companies as potential investments. From September 2005 to May 2008, Mr. Haus was an Analyst for The Pinnacle Fund & The Pinnacle China Fund, both of which were funds focused on investment opportunities in the United States and China. From March 2000 to September 2005, Mr. Haus was the Senior Equity Research Analyst covering the Healthcare Information Technology and Pharmaceutical Outsourcing industries, for Advest, Inc. and Stanford Financial Group, both securities brokerage firms. Currently, Mr. Haus is manager of Haus Capital Management, LLC, a Texas-based company focused on making equity investments in growth companies. Mr. Haus graduated from the State University of New York College at Fredonia with a B.S. in business administration and a B.A. in economics and received a Master of Business Administration (MBA) from Boston University. He is a Chartered Financial Analyst (CFA) and member of the CFA Institute. Mr. Haus is also independent director of China Valves Technology, Inc. (NASDAQ: CVVT) and THT Heat Transfer Technology, Inc. (NASDAQ: THTI). Mr. Haus’ experiences in analyzing, investing, and consulting with China-based, U.S. listed companies and other skills allow him to contribute to our company as an independent director of our company. Mr. Haus was appointed as the Company’s director on June 11, 2009 and he is the chairman of the Company’s Compensation Committee. Other than noted above, Mr. Haus has not held any other public company directorship during the past five years.

Jizeng Zhang. Mr. Zhang joined our subsidiary Longheda in 2004 as the administration supervisor and was subsequently promoted to be the administrative officer in 2005. He is responsible for the Company’s daily administrative duties. Mr. Zhang has over 24 years of experience as a police officer in Inner Mongolia where his most recent position was the Head of Police Department at Da Yang Shu County, Inner Mongolia. From the experience of being the Head of Police Department, Mr. Zhang provided a very effective administrative control to the Company. Mr. Zhang has not held any other public company directorship during the past five years.

Sing Kau (Colman) Cheng. Mr. Cheng has been our Chief Financial Officer, Treasurer and Secretary since the completion of the reverse acquisition of Fezdale on August 14, 2008 and the Chief Financial Officer of our subsidiary Longheda since August 2007. From August 2006 to June 2007, he served as an investment manager of KAB Asia Limited. From October 2004 to August 2006, he was a financial controller and company secretary of A&K Education Software Holdings Limited, a GEM listed company in Hong Kong. From February 2003 to October 2004, he was a senior auditor of CCIF CPA Limited.

Mr. Cheng received a bachelor’s degree in Accounting from Edith Cowan University in Australia and is an associate member of both the Hong Kong Institute of Certified Public Accountants and CPA Australia. Mr. Cheng has not held any public company directorship during the past five years.

Aijun Wang. Mr. Wang joined China Nutrifruit as a sales manager in July 2010 and became our vice president of sales in October 2010. Prior to joining China Nutrifruit, he served as general manager of sales at Mudanjiang Jianxin Cement Limited. Mr. Wang also worked at Mudanjiang Cement Lime Mining for approximately 20 years, most recently as mine manager, responsible for operations. He holds a bachelor’s degree in economics and management from the Chinese Central Communist Party University.

There are no agreements or understandings for any of our executive officers or director to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.

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

Family Relationships

There is no family relationship among any of our officers or directors.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Board Composition and Committees

The Company is governed by the board of directors that currently consists of five members: Changjun Yu, Jizeng Zhang, William Haus, Chun Wai (Tony) Chan and Jingfu Li. Since June 2009, the Board has established three Committees: the Audit Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee. Each of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee are comprised entirely of independent directors. From time to time, the Board may establish other committees. The Board has adopted a written charter for each of the Committees which is available on the Company’s website http://chinanutrifruit.com/CorporateGovernance.html. Printed copies of these charters may be obtained, without charge, by contacting the Corporate Secretary, China Nutrifruit Group Limited, 5th Floor, Chuangye Building, Chuangye Plaza, Industrial Zone 3, Daqing Hi-Tech Industrial Development Zone, Daqing, Heilongjiang, People’s Republic of China, 163316.

Audit Committee

Our Audit Committee consists of Chun Wai (Tony) Chan, William Haus, and Jingfu Li, each of whom is “independent” as that term is defined under the NYSE Amex Company Guide. Mr. Chan serves as the chairman of our Audit Committee. The Audit Committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. Our board of directors has determined that Mr. Chan qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC and that he is financially literate and independent in accordance with the requirements of the SEC and the NYSE Amex.

The Audit Committee is responsible for, among other things:

selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;
reviewing with our independent auditors any audit problems or difficulties and management’s response;
reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;
discussing the annual audited financial statements with management and our independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal control deficiencies;
meeting separately and periodically with management and our internal and independent auditors; and
such other matters that are specifically delegated to our Audit Committee by our Board from time to time.

Compensation Committee

Our Compensation Committee consists of Chun Wai (Tony) Chan, William Haus and Jingfu Li, each of whom is “independent” as that term is defined under the NYSE Amex Company Guide. Mr. Haus serves as the chairman of our Compensation Committee. Our Compensation Committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The Compensation Committee is responsible for, among other things:

approving and overseeing the compensation package for our executive officers;
reviewing and making recommendations to the board with respect to the compensation of our directors;
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and
reviewing periodically and making recommendations to the board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

The Compensation Committee has sole authority to retain and terminate outside counsel, compensation consultants retained to assist the Compensation Committee in determining the compensation of the Chief Executive Officer or senior executive officers, or other experts or consultants, as it deems appropriate, including sole authority to approve the firms’ fees and other retention terms. The Compensation Committee may also form and delegate authority to subcommittees and may delegate authority to one or more designated members of the Compensation Committee. The Compensation Committee may from time to time seek recommendations from the executive officers of the Company regarding matters under the purview of the Compensation Committee, though the authority to act on such recommendations rests solely with the Compensation Committee.

Governance and Nominating Committee

Our Governance and Nominating Committee consists of Chun Wai (Tony) Chan, William Haus, and Jingfu Li, each of whom is “independent” as that term is defined under the NYSE Amex Company Guide. Mr. Chan serves as the chairman of our Governance and Nominating Committee. The Governance and Nominating Committee assists the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The Governance and Nominating Committee is responsible for, among other things:

identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;
reviewing annually with the board the current composition of the board in light of the characteristics of independence, age, skills, experience and availability of service to us;
identifying and recommending to the board the directors to serve as members of the board’s committees; and
monitoring compliance with our code of business conduct and ethics.

Code of Ethics

Our board of directors has adopted a code of ethics that applies to all directors, officers and employees of the Company, including principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The code of ethics addresses, among other things, ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the code of ethics has been filed as Exhibit 14.1 to our Current Report on Form 10-K filed on June 15, 2009. The code of ethics is available on our website at http://www.chinanutrifruit.com/CorporateGovernance.html. During the fiscal year ended March 31, 2011, there were no waivers of our code of ethics.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table – 2011 and 2010

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

Name and Principal Position	Fiscal Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Changjun Yu CEO and President	2011	116,449	-	-	-	-	116,449
Changjun Yu CEO and President	2010	87,741	-	-	-	-	87,741
Jinglin Shi, CEO and President*	2011	22,394	-	-	-	-	22,394
Jinglin Shi, CEO and President*	2010	83,586	-	-	-	-	83,586

*	Mr. Shi resigned from all positions he held with the Company on July 3, 2010 due to personal reasons and our chairman Changjun Yu replaced Mr. Shi as the new chief executive officer and president of the Company.

Employment Agreements

On July 3, 2010, our subsidiary Fezdale entered into an employment agreement with Changjun Yu, our chairman and newly appointed Chief Executive Officer and President. Under the employment agreements, as amended, Mr. Yu will receive an annual salary of RMB 960,000. Mr. Yu is subject to customary confidentiality and non-competition covenants as provided in the employment agreement.

On July 30, 2008, our subsidiary Fezdale entered into an employment agreement with Jinglin Shi, our former Chief Executive Officer and President. Under the employment agreement, Fezdale agreed to pay Mr. Shi an annual salary of RMB 600,000 and Mr. Shi agreed to be subject to customary confidentiality and non-competition covenants. On July 3, 2010, Mr. Shi resigned from all positions he held with the Company due to personal reasons and our chairman Changjun Yu replaced Mr. Shi as the new chief executive officer and president of the Company. Mr. Shi did not receive any severance payment in connection with his resignation.

We have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or severance or change of control benefits to our named executive officer.

Compensation of Directors

The table below sets forth the compensation of our directors for the fiscal year ended March 31, 2011:

				Non-Equity
				Incentive Plan	All Other
	Fees Earned or	Stock	Option	Compensation	Compensation
Name	Paid in Cash ($)	Awards ($)	Awards ($)	($)	($)	Total ($)
Chun Wai (Tony) Chan	20,000	-	-	-	-	20,000
William Haus	24,000	-	-	-	-	24,000
Jingfu Li	8,958	-	-	-	-	8,958

Chun Wai (Tony) Chan, William Haus and Jingfu Li were appointed as our directors effective as of June 11, 2009. We entered into separate indemnification agreements with each of them. Under the terms of the indemnification agreements, we agreed to indemnify the independent directors against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the independent director in connection with any proceeding if the independent director acted in good faith and in our best interests. It is our practice to reimburse our directors for reasonable travel expenses related to attendance at board of directors and committee meetings.

On June 11, 2009, we entered into independent director agreement with each of Chun Wai (Tony) Chan, William Haus and Jingfu Li. Under the terms of the agreements, the Company agreed to pay Mr. Chan an annual fee of $20,000, Mr. Haus an annual fee of $24,000 and Mr. Li an annual fee of RMB 60,000, as compensation for the services provided by them as directors of the Company. The payment will be made on a quarterly basis.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial ownership of our common stock as of June 20, 2011 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of China Nutrifruit Group Limited, 5th Floor, Chuangye Building, Chuangye Plaza, Industrial Zone 3, Daqing Hi-Tech Industrial Development Zone, Daqing, Heilongjiang, China 163316.

Name and Address of Beneficial Owner	Office, If Any	Title of Class	Amount and Nature of Beneficial Ownership⁽¹⁾	Percent of Class⁽²⁾
Officers and Directors
Changjun Yu	Chairman, CEO, and President	Common stock, $0.001 par value	0	*
Jizeng Zhang	Director	Common stock, $0.001 par value	0	*
Jingfu Li	Director	Common stock, $0.001 par value	0	*
Tony Chan	Director	Common stock, $0.001 par value	0	*
William Haus	Director	Common stock, $0.001 par value	30,000 ⁽³⁾	*
Colman Cheng	Chief Financial Officer, Treasure and Secretary	Common stock, $0.001 par value	0	*
Aijun Wang	Vice President of Sales	Common stock, $0.001 par value	0	*
All officers and directors as a group (7 persons named above)		Common stock, $0.001 par value	30,000 ⁽³⁾	*
5% Security Holders
Yiu Fai Kung ⁽⁴⁾		Common stock, $0.001 par value	21,116,815	57.2%
Honouryear Limited ⁽⁵⁾		Common stock, $0.001 par value	15,517,217	42.0%
Bestsucceed Limited ⁽⁶⁾		Common stock, $0.001 par value	7,892,063	21.4%

* Less than 1%

(1)	Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the ordinary shares.

(2)	A total of 36,915,762 shares of Common Stock as of June 20, 2011 are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.

(3)	Includes 30,000 shares that vested on July 31, 2010.

(4)	Includes 15,517,217 shares owned by Honouryear Limited of which Yiu Fai Kung is the director and sole owner and has voting and investment control over the securities held by it.

(5)	Yiu Fai Kung is the director and sole owner of Honouryear Limited and has voting and investment control over the securities held by it.

(6)	Kwan Mo Ng is the director and sole owner of Bestsucceed Limited and has voting and investment control over the securities held by it.

Changes in Control

There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.

Securities Authorized for Issuance Under Equity Compensation Plans

Our board of directors approved the China Nutrifruit Group Limited 2010 Equity Incentive Plan on October 19, 2010 which was amended on December 10, 2010 and approved by our shareholders on January 12, 2011. We have not issued any securities under the plan as of the date of this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Except as set forth below, since the beginning of the 2010 fiscal year, there have not been any transaction, nor is there any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”).

On January 6 and 26, 2011, our chairman, CEO and president Changjun Yu loaned RMB 4,000,000 and RMB 2,200,000 (approximately $946,550 in total) to our subsidiary Daqing Senyang for working capital purpose, respectively. The loan is unsecured, interest free and payable on demand.

Promoters and Certain Control Persons

Since the beginning of the last fiscal year, there have not been any transaction, nor is there any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds $120,000, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”).

Director Independence

Our board of directors is currently composed of 5 members, of which Chun Wai (Tony) Chan, Jingfu Li and William Haus are “independent” as that term is defined by the rules and regulations of the NYSE Amex. All actions of the board of directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present. Our directors have a duty to act in good faith in our interest.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Independent Auditors’ Fees

The following is a summary of the fees billed to the Company by its principal accountants for professional services rendered for the fiscal years ended March 31, 2011 and 2010:

		Fiscal Year Ended March 31,
		2011		2010
Audit Fees	$	416,148	$	241,268
Audit-Related Fees		-		-
Tax Fees		-		-
All Other Fees		-		-
TOTAL	$	416,148	$	241,268

“Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided in connection with our statutory and regulatory filings or engagements.

“Audit Related Fees” consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.

“Tax Fees” consisted of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.

“All Other Fees” consisted of the aggregate fees billed for products and services provided and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.

Pre-Approval Policies and Procedures

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our board of directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our board of directors pre-approved the audit service performed by HLB Hodgson Impey Cheng, Certified Public Accountants for our financial statements as of and for the year ended March 31, 2011.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. Financial Statements and Schedules

The consolidated financial statements filed as part of this report are located as set forth in the index on page F-1 of this report. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

Exhibit List

The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference.

SIGNATURES

In accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereto duly authorized individual.

Date: June 22, 2011

	CHINA NUTRIFRUIT GROUP LIMITED

	By:	/s/ Changjun Yu
		Changjun Yu
		Chief Executive Officer and President

	By:	/s/ Colman Cheng
		Colman Cheng
		Chief Financial Officer

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Each person whose signature appears below hereby authorizes Changjun Yu and Colman Cheng, and each or any of them, as attorneys-in-fact to sign on his or her behalf, individually, and in each capacity stated below, and to file all amendments and/or supplements to this annual report on Form 10-K.

Signature	Title	Date

/s/ Changjun Yu	Chairman, Chief Executive Officer and President	June 22, 2011
Changjun Yu	(Principal Executive Officer)

/s/ Colman Cheng	Chief Financial Officer	June 22, 2011
Colman Cheng	(Principal Financial and Accounting Officer)

/s/Jizeng Zhang	Director	June 22, 2011
Jizeng Zhang

/s/ Chun Wai Chan	Director	June 22, 2011
Chun Wai Chan

/s/ William Haus	Director	June 22, 2011
William Haus

/s/ Jingfu Li	Director	June 22, 2011
Jingfu Li

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
China Nutrifruit Group Limited

We have audited the accompanying consolidated balance sheets of China Nutrifruit Group Limited and subsidiaries (the “Company”) as of March 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and comprehensive income, cash flows for each of the years in the two-year period ended March 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the two-year period ended March 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ HLB Hodgson Impey Cheng
Chartered Accountants
Certified Public Accountants

Hong Kong
June 22, 2011

F-1

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31,

		2011		2010

ASSETS
Current assets:
Cash and equivalents	$	43,542,075	$	35,994,443
Proceeds from private placement held in escrow account		-		931,630
Trade receivables, net of allowance		12,476,652		11,047,846
Inventory, net		6,419,152		4,179,910
Prepayments and deposits		264,878		114,732
Other current assets		1,527		1,464
Total current assets		62,704,284		52,270,025
Non-current assets:
Property and equipment, net		20,312,005		17,066,907
Prepayments and deposits		10,983,404		-
Construction in progress		5,915,395		-
Deferred tax assets		909,879		1,068,878
Land use rights, net		188,199		185,686
TOTAL ASSETS	$	101,013,166	$	70,591,496

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Other payables and accrued expenses	$	3,312,525	$	2,379,246
Due to a director		946,550		-
Trade payables		130,276		87,954
Income taxes payable		3,351,631		2,296,513
Total current liabilities		7,740,982		4,763,713


Commitments and Contingencies

Shareholders’ equity:
Preferred stock		331		365
Common stock		36,916		36,573
Additional paid-in-capital		36,492,566		36,492,875
Statutory reserves – restricted		6,850,422		4,564,345
Accumulated other comprehensive income		3,951,431		440,714
Retained earnings		45,940,518		24,292,911
TOTAL SHAREHOLDERS’ EQUITY		93,272,184		65,827,783
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	101,013,166	$	70,591,496

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

F-2

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

YEARS ENDED MARCH 31,

		2011			2010
Net sales	$	86,953,888		$	72,916,955
Cost of sales		(46,136,600	)		(39,655,534	)
Gross profit		40,817,288			33,261,421
Selling expenses		(3,100,084	)		(3,547,236	)
General and administrative expenses		(4,354,005	)		(3,976,627	)
Operating earnings		33,363,199			25,737,558
Other income (expenses)
Interest expense		(4,912	)		-
Other income		85,313			70,233
Gain on disposal of property and equipment		-			290,407
Total other income		80,401			360,640
Earnings before income taxes		33,443,600			26,098,198
Provision for income taxes		(8,700,366	)		(6,849,438	)
Net earnings		24,743,234			19,248,760
Other comprehensive income
Foreign currency translation		3,510,717			15,039
Total comprehensive income	$	28,253,951		$	19,263,799
Earnings per share
Basic	$	0.66		$	0.52
Diluted	$	0.62		$	0.51
Weighted average number of common stock outstanding
Basic		36,736,834			36,153,554
Diluted		40,056,599			38,051,749

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

F-3

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

YEARS ENDED MARCH 31, 2011 AND 2010

	Preferred stock					Common stock
																		Accumulat
																		ed other
										Additional			Statutory					Comprehe		Total
										paid-in			reserves -		Retained			nsive		shareholders’
	Shares			Amount		Shares		Amount		capital			restricted		earnings			income		equity


Balance at April 1, 2009	-		$	-		36,125,754	$	36,126	$	16,746,971		$	2,873,880	$	6,734,616		$	425,675	$	26,817,268
Share-based payment	-			-		30,000		30		116,970			-		-			-		117,000
Capital contribution	-			-		-		-		7,414,995			-		-			-		7,414,995
Preferred stocks issued in private placement	403,418			403		-		-		12,006,243			-		-			-		12,006,646
Warrants issued in private placement	-			-		-		-		1,302,354			-		-			-		1,302,354
Cost of raising capital	-			-		-		-		(1,094,279	)		-		-			-		(1,094,279	)
Conversion of preferred shares	(38,309	)		(38	)	383,090		383		(345	)		-		-			-		-
Conversion of warrants	-			-		34,428		34		(34	)		-		-			-		-
Transfer to reserve	-			-		-		-		-			1,690,465		(1,690,465	)		-		-
Comprehensive income:
Net earnings	-			-		-		-		-			-		19,248,760			-		19,248,760
Translation adjustments	-			-		-		-		-			-		-			15,039		15,039
Balance at March 31, 2010 and 1 April 2010	365,109		$	365		36,573,272	$	36,573	$	36,492,875		$	4,564,345	$	24,292,911		$	440,714	$	65,827,783
Conversion of preferred shares	(34,249	)		(34	)	342,490		343		(309	)		-		-			-		-
Payment of preferred shares dividend	-			-		-		-		-			-		(809,550	)		-		(809,550	)
Transfer to reserve	-			-		-		-		-			2,286,077		(2,286,077	)		-		-
Comprehensive income:
Net earnings	-			-		-		-		-			-		24,743,234			-		24,743,234
Translation adjustments	-			-		-		-		-			-		-			3,510,717		3,510,717
Balance at March 31, 2011	330,860		$	331		36,915,762	$	36,916	$	36,492,566		$	6,850,422	$	45,940,518		$	3,951,431	$	93,272,184

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

F-4

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED MARCH 31,

		2011			2010
Cash flows from operating activities:
Net earnings	$	24,743,234		$	19,248,760
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization		2,374,751			1,593,811
Gain on disposal of property and equipment		-			(290,407	)
Deferred income taxes		158,165			337,936
Share-based payments		-			117,000
Changes in operating assets and liabilities:
Trade receivables		(1,222,114	)		391,901
Inventories		(1,840,967	)		(481,732	)
Prepayments and deposits		(353,118	)		364,046
Other current assets		(15	)		1,463
Trade payables		32,580			(172,675	)
Other payables and accrued expenses		895,817			(319,909	)
Income taxes payable		1,001,321			877,429
Net cash provided by operating activities		25,789,654			21,667,623

Cash flows from investing activities:
Purchases of property and equipment		(4,333,519	)		(2,738,855	)
Addition of construction in progress		(5,808,400	)		-
Prepayment for purchase of land use right, property and equipment		(10,543,839	)		-
Proceeds from disposal of property and equipment		-			1,038,273
Net cash used in investing activities		(20,685,758	)		(1,700,582	)

Cash flows from financing activities:
Proceeds from private placement held in escrow account		-			(931,630	)
Proceeds from borrowings		15,217,689			-
Repayment of borrowings		(15,217,689	)		-
Amount due to a director		943,497			-
Proceeds from private placement		-			13,309,000
Release of proceeds from private placement held in escrow account		931,630			-
Dividend paid		(809,550	)		-
Cost of raising capital		-			(1,094,279	)
Net cash provided by financing activities		1,065,577			11,283,091

Increase in cash and equivalents		6,169,473			31,250,132

Effect of exchange rate on cash and equivalents		1,378,159			(24,231	)

Cash and equivalents at beginning of year		35,994,443			4,768,542

Cash and equivalents at end of year	$	43,542,075		$	35,994,443

Supplemental disclosure of cash flows information:
Cash paid for:
Interest	$	4,912		$	-
Income taxes	$	7,574,018		$	5,634,883

Supplemental disclosure of non-cash information:
Issuance of common stock by conversion of preferred stock	$	343		$	117,000
Issuance of warrant	$	-		$	367,155
Capital contribution	$	-		$	7,414,995

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

F-5

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 1. NATURE OF BUSINESS

Nature of Business

China Nutrifruit Group Limited (the “Company” or “CNGL”) was incorporated in the state of Utah on April 22, 1983 and changed its domicile from Utah to Nevada in April 1999. The Company was not engaged in any business and had no 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 (“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.

The Share Exchange Transaction resulted in Fezdale’s former shareholder obtaining a majority voting interest in the Company. 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”) pursuant to which Mr. Kung agreed to 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 ended March 31, 2009 was less than $13,919,707 and fiscal year ended March 31, 2010 was less than $18,495,315.

For fiscal year ended March 31, 2010, the return to Mr. Kung of any of the make good shares placed in escrow by him was considered to be a separate compensatory arrangement because Mr. Kung was a director of the Company’s subsidiary Fezdale. The net income target of $13,955,178 for fiscal year 2009 (before any charges related to the release of any shares from escrow) was met. Accordingly, the Company recorded a non-cash charge to compensation cost of $9,519,317 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 net income target of $18,495,315 was met. Accordingly, 2,799,799 shares were released to Mr. Kung from escrow. As Mr. Kung resigned from his position as Fezdale’s director and the release of the escrowed shares was not contingent upon Mr. Kung’s continuing employment with the Company, the Company did not recognize any compensation expenses relating to the release of the escrow shares to Mr. Kung in fiscal year ended March 31, 2010.

On September 4, 2009, the Company’s common stock started trading on the NYSE Amex.

F-6

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 1. NATURE OF BUSINESS (CONTINUED)

On September 30, 2009, the Company entered into a securities purchase agreement (the “Private Placement Transaction”) with certain accredited investors (“Investors”) and effected the initial closing of the purchase and sale of 359,502 units (the “Unit”) at $33.00 per Unit. Each Unit consists 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. 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 after the closing date. In connection with the initial closing of the offering, the Company raised approximately $11.86 million.

On October 8, 2009, the Company effected the second and final closing of the Private Placement Transaction and issued 43,916 additional Unit for gross proceeds of $1,449,000.

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

Fezdale Investments Limited

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

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

Solar Sun Holdings Limited

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

Daqing Longheda Food Company Limited

Longheda was incorporated in Heilongjiang province of Peoples’ Republic of China (the “PRC”) in June 2004. Longheda is primarily engaged in developing, processing, marketing and distributing a variety of food products processed primarily from premium specialty fruits grown in Northeast China, mainly including golden berry, crab apple, blueberry, raspberry, blackcurrant and seabuckthorn. Its primary product offering includes concentrate juice, nectar, glazed fruits, concentrate pulp as well as fresh fruits. 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.

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 Company Limited (“Senyang”).

Daqing Senyang Fruit and Vegetable Food Technology Company Limited

Senyang was incorporated in PRC in June 2010. Senyang has not generated any revenue and will engage in operating the new fruit and vegetable powder production.

F-7

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements include the accounts of China Nutrifruit Group Limited and its subsidiaries (the “Group”). The consolidated financial statements were prepared in accordance with the US GAAP. The consolidated financial statements of the Group include the accounts of CNGL, Fezdale, Solar Sun, Jumbo Gloss, Longheda and Senyang. All significant intercompany transactions and balances were eliminated in consolidation.

Use of estimates

Segment information

The Group identifies and classifies its operating segment based on the nature of the 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 sell of food products, which operations are located in the PRC and sales were predominately made to customers located in the PRC.

Economic and political risks

The Group’s operations are conducted in the PRC. Accordingly the Group’s business, financial position may be 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 shares outstanding and the dilutive effect of common stock equivalents.

Trade accounts receivable

In the normal course of business the Group extends credit to customers. Trade accounts receivable, less allowance for doubtful accounts, reflects the net realizable value of receivables, and their 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 March 31, 2011 (2010: nil) was recorded.

Cash and equivalents

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

F-8

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Inventories

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

Fair value of financial instruments

The carrying amount of certain of the Group’s financial instruments, including cash and cash equivalents, trade accounts receivable, accounts payable, other current assets, other payables and accrued expenses, approximates fair value due to their 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, fixtures and office equipment – 5 years; motor vehicles – 5 years. Depreciation of property and equipment was $2,372,023 and $1,590,023 for the years ended March 31, 2011 and 2010 respectively. During the idle period of the plant, depreciation is treated as current-period charges, which charge directly to general and administrative expense.

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 rata 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.

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 years ended March 31, 2011 and 2010 were $2,301,126 and $2,872,277, respectively.

F-9

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

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 period, no impairment on long-lived assets was recorded by the Group.

All land in the PRC is owned by the PRC government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specific period of time. Thus, all of the Group’s land located in the PRC is considered to be 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 agreements on a straight-line basis, which is 50 years.

Advertising costs

Advertising costs are expensed as incurred. The total advertising costs were $63,581 and $38,053 for the years ended March 31, 2011 and 2010, respectively.

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 discounts the estimated future cash receipts through the expected life of the loan to the loan’s net carrying amount.

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. The rates used were as follows:

March 31, 2011
Balance sheet	RMB6.55 to US$1.00
Statement of income and comprehensive income	RMB6.73 to US$1.00

March 31, 2010
Balance sheet	RMB6.84 to US$1.00
Statement of income and comprehensive income	RMB6.84 to US$1.00

As at March 31, 2011, RMB284,742,770 equalled to $43,471,515 (March 31, 2010: RMB236,619,999 equalled to $34,613,303) is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into $ at the rates used in translation.

F-10

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Statutory reserves

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

Surplus reserve fund

The Company’s subsidiaries in PRC are required to transfer 10 percent of their respective 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 in proportion to their equity holdings.

Common welfare fund

The Company’s subsidiaries in PRC are required to transfer 5 percent to 10 percent of their respective 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 for 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.

Share-based payment

The Company has adopted Accounting Standards Codification 718 (“ASC 718”), as amended and interpreted, for its share-based compensation which required the Company to record compensation expense for all awards based on their grant date fair value. The Company utilized the modified prospective method approach, pursuant to which the Company has recorded compensation for all awards granted based on their fair value.

Related party transactions

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

Income taxes

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

F-11

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Reclassifications

Certain financial statements line items were reclassified to conform to the current year presentation and have no impact on the previously reported consolidated net sales, operating earnings or financial position.

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

Other recent accounting pronouncements issued by the FASB, 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.

NOTE 4. CONCENTRATION OF RISK

Credit Risk

Financial instruments that potentially subject the Group to significant concentration of credit risk consist primarily of cash and equivalents. As of March 31, 2011, substantially all of the Group’s cash and equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality.

Group’s operations are in China

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

F-12

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 5. EARNINGS PER SHARE

The computation of basic and diluted earnings per share is as follows for the years ended March 31:

		2011			2010
Numerator:
Net earnings	$	24,743,234		$	19,248,760
Less: dividends on preferred stock		(446,008	)		(457,073	)
Net earnings for basic earnings per share	$	24,297,226		$	18,791,687

Net earnings for basic earnings per share	$	24,297,226		$	18,791,687
Add: dividends on preferred stock		446,008			457,073
Net earnings for diluted earnings per share	$	24,743,234		$	19,248,760


Denominator:
Weighted average common stock outstanding		36,736,834			36,153,554
Effect of dilutive preferred stock		3,308,600			1,815,893
Effect of dilutive warrant		11,165			82,302
Weighted average common stock and dilutive potential common stock		40,056,599			38,051,749


Basic net earnings per share	$	0.66		$	0.52

Diluted net earnings per share	$	0.62		$	0.51

As of March 31, 2011, the Company had warrants outstanding which are convertible into 1,344,498 (2010: 1,344,498) shares of the Company’s common stock. The potential dilutive effect of such warrant is 11,165 (2010: 82,302) shares of Company’s common stock.

NOTE 6. INVENTORY

Inventory by major categories at March 31 are summarized as follows:

		2011		2010
Finished goods	$	6,324,862	$	4,101,918
Raw material		94,290		77,992

	$	6,419,152	$	4,179,910

NOTE 7. PROCEEDS FROM PRIVATE PLACEMENT HELD IN ESCROW ACCOUNT

The balance represents the 7% of net proceeds raised in the Private Placement Transaction (Note 1), which was deposited in an escrow account and distributed to the Investors for the payment of dividend on September 1, 2010, subject to terms in the closing escrow agreement.

F-13

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 8. LAND USE RIGHTS, NET

Land use rights, net, at March 31 are summarized as follows:

		2011			2010
Land use rights, at cost	$	206,039		$	200,175
Less: accumulated amortization		(17,840	)		(14,489	)

	$	188,199		$	185,686

For each of the upcoming five years, estimated amortization is expected to be $2,728 per year.

As of March 31, 2011, land use rights, of $188,199 (2010: $185,686), were pledged to secure the unused banking facilities obtained by the Group (Note 17).

NOTE 9. PROPERTY AND EQUIPMENT, NET

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

		2011			2010
Buildings	$	5,652,084		$	4,673,420
Leasehold improvements		1,398,033			1,339,544
Machinery		19,190,848			14,616,662
Furniture, fixtures and office equipment		15,378			13,742
Motor vehicles		41,556			6,194
Total		26,297,899			20,649,562
Less: accumulated depreciation		(5,985,894	)		(3,582,655	)

	$	20,312,005		$	17,066,907

As of March 31, 2011, buildings, leasehold improvement and machinery, of $4,289,330 (2010: $3,781,058), $1,054,948 (2010: $1,137,405) and $942,218 (2010: $1,015,863) respectively, were pledged to secure the unused banking facilities obtained by the Group (Note 17).

NOTE 10. PROVISION FOR INCOME TAXES

The provision for income tax is as follows:

		For the year ended March 31,
		2011		2010

Current:
PRC	$	8,541,368	$	6,511,502
Deferred:
PRC		158,998		337,936
	$	8,700,366	$	6,849,438

F-14

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 10. PROVISION FOR INCOME TAXES (CONTINUED)

Deferred tax assets

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

		2011			2010
Deferred tax assets:
Difference between book and tax basis of land use right and property and equipment	$	909,879		$	1,068,878
Tax losses carryforwards		1,315,626			913,721
Less: valuation allowance		(1,315,626	)		(913,721	)
Net deferred tax assets	$	909,879		$	1,068,878

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

As of March 31, 2011 and 2010, the Company has valuation allowances of $1,315,626 and $913,721 for federal net operating loss and foreign unused tax loss carryforwards, respectively, which it does not expect to utilize. As of March 31, 2011, the Company has net operating loss of $2,699,300 (2010: $1,719,473).

The total valuation allowance between periods presented increased by $401,905 (2010: $368,853) and such increase was attributable to the tax effect on foreign tax losses incurred for the year ended March 31, 2011 of $52,734 (2010: $56,757) at enacted foreign profit tax rates and the tax effect on federal net operating loss incurred for the year ended March 31, 2011 of $349,171 (2010: $312,096) at the federal tax rate of 35%.

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 years ended March 31 is as follows:

		2011			2010
Provision for income taxes at statutory rate of 35%	$	11,705,260		$	9,134,370
Chinese tax rate difference		(3,356,804	)		(2,536,390	)
Non-deductible expenses and non-assessable profits		(208,993	)		(455,331	)
Changes in valuation allowance		401,905			368,853
Tax effect of non-deductible temporary difference recognized		158,998			337,936
Income taxes	$	8,700,366		$	6,849,438

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. As of March 31, 2011, the undistributed earnings of foreign subsidiaries were $59,867,240 (2010: $36,105,710). 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.

F-15

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 11. PREPAYMENTS AND DEPOSITS

Prepayments and deposits by major categories are summarized as follows at March 31:

		2011		2010

Classified as current assets:
Prepaid expenses	$	264,878	$	114,732

Classified as non-current assets:
Prepayment to acquire property and equipment		10,205,951		-
Prepayment to acquire land use rights		777,453		-
		10,983,404		-
	$	11,248,282	$	114,732

NOTE 12. OTHER PAYABLES AND ACCRUED EXPENSES

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

		2011		2010

Accruals	$	968,822	$	723,588
Value added tax payables		1,545,707		1,104,630
Other payables		797,996		551,028
	$	3,312,525	$	2,379,246

The other payables mainly comprised the amount payable to the suppliers of property and equipment, amounting to $431,612 (2010: $398,056) as of March 31, 2011.

NOTE 13. DUE TO A DIRECTOR

		2011			2010
Mr. Changjun Yu	$	946,550		$	-

The amount due to a director was unsecured, interest free and repayable on demand.

NOTE 14. SHAREHOLDERS’ EQUITY

General

The Company’s total authorized capital at March 31, 2011 and 2010, is 125,000,000 shares of which 120,000,000 shares are common stock, par value $0.001 and 5,000,000 shares are preferred stock, par value $0.001.

Additional paid-in capital

On September 7, 2009, Mr. Kung agreed to capitalize his loan, of HK$40,109,986, equivalent to $5,190,497, by issuing 7 fully paid shares of par value $1.00 in Fezdale to the Company.

On September 7, 2009, Mr. Kwan Ho Ng agreed to capitalize his loan, of HK$17,189,994, equivalent to $2,224,498, by issuing 3 fully paid shares of par value $1.00 in Fezdale to the Company.

F-16

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 14. SHAREHOLDERS’ EQUITY (CONTINUED)

Series A Preferred Stock

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

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

Ranking

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

Voting

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

Conversion

Shares of the Series A Preferred Stock are 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.

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 September 1, 2010 and any optional conversion date in cash.

F-17

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 14. SHAREHOLDERS’ EQUITY (CONTINUED)

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 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 the outstanding Series A Preferred Stock may also, upon the satisfaction of the foregoing conditions and at the option of such holder, request the Company to redeem all or any of its shares of Series A Preferred Stock at the same price.

Common stock

In connection with the Company’s private placement on August 14, 2008, the Company entered into two make good escrow agreements, under which 5,599,598 shares of the Company’s common stock held by Yiu Fai Kung, the Company’s major shareholder, were placed in escrow. For each of the calendar years 2009 and 2010, 2,799,799 shares will be released to the investors or Halter or returned to the shareholder, depending on the fulfillment of specified earnings targets. The specified earnings target for fiscal year 2009 was net income of $13,919,707 and for fiscal year 2010 the target was net income of $18,495,315. For 2009, the earnings target of net income of $13,919,707 (before any charges related to the release of any shares from escrow) was met and accordingly, the Company recorded a non-cash charge to compensation cost of $9,519,317 in the fourth quarter of 2009 related to the release from escrow to Mr. Kung of 2,799,799 shares. For 2010, the earnings target of net income of $18,495,315 was met and accordingly, 2,799,799 shares were released to Mr. Kung from escrow.

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

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

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

The Company’s Series A preferred shareholders converted 12,123 shares into 121,230 shares of the Company’s common stock at a conversion ratio of 1 Series A Preferred Stock to 10 shares of common stock. On January 3, 2011, March 14, 2011 and March 24, 2011, 15,160 and 90,910, 15,160 shares of common stock in connection to such Series A Preferred Stock conversion were issued.

The following is the movement of common stock during fiscal 2010:

The Company’s warrants holder, Wentworth Securities, Inc., converted its warrants into 34,428 shares of the Company’s common stock. On January 13, 2010, 34,428 shares of common stock in connection to such warrant conversion were issued.

F-18

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 14. SHAREHOLDERS’ EQUITY (CONTINUED)

On January 28, 2010, the Company issued 30,000 shares of common stock to a director, William Haus, under a restricted stock grant agreement.

The Company’s Series A preferred stockholders converted 38,309 shares into 383,090 shares of the Company’s common stock at a conversion ratio of 1 Series A Preferred Stock to 10 shares of common stock. On March 12, 2010, March 15, 2010, March 17, 2010, March 19, 2010 and March 26, 2010, 42,440 shares, 180,000 shares, 103,060 shares, 27,280 shares and 30,310 shares of common stock in connection to such Series A Preferred Stock conversion were issued.

Warrants

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

The following is the movement of warrants during fiscal 2010:

The Company’s warrants holder, Wentworth Securities, Inc., converted 95,781 warrants into 34,428 shares of the Company’s common stock by using the cashless exercise.

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

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

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

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

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

F-19

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 14. SHAREHOLDERS’ EQUITY (CONTINUED)

In connection with the first closing of Private Placement Transaction on September 30, 2009, WLT Brothers Capital, Inc. and Euro Pacific Capital, Inc., the Company’s placement agents received, 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.

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

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 following is the movement of warrants during fiscal 2011:

		Outstanding at		Granted during		Exercised during		Outstanding at
Date of grant		April 1, 2010		the year		the year		March 31, 2011		Exercise price
October 10, 2008		120,228		-		-		120,228	$	2.78
September 30, 2009		359,502		-		-		359,502	$	3.30
October 8, 2009		140,737		-		-		140,737	$	3.30
		620,467		-		-		620,467
Weighted average exercise price	$	3.20	$	-	$	-	$	3.20

F-20

CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010

NOTE 14. SHAREHOLDERS’ EQUITY (CONTINUED)

The following is the movement of warrants during fiscal 2010:

		Outstanding at		Granted during		Exercised during			Outstanding at
Date of grant		April 1, 2009		the year		the year			March 31, 2010		Exercise price
October 10, 2008		216,009		-		(95,781	)		120,228	$	2.78
September 30, 2009		-		359,502		-			359,502	$	3.30
October 8, 2009		-		140,737		-			140,737	$	3.30
		216,009		500,239		(95,781	)		620,467
Weighted average exercise price	$	2.78	$	3.30	$	2.78		$	3.20

NOTE 15. 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 $352,885 and $350,628 for the years ended March 31, 2011 and 2010 respectively.

NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES

Capital Commitments

As of March 31, 2011, the Group have the followings outstanding capital expenditure commitments.

Authorized and contracted, but not provide for:

Purchase of property and equipment

3,075,787

Operating Lease Commitments

As of March 31, 2011, the Group did not have any significant operating lease commitment.

Rent expense for the years ended March 31, 2011 and 2010 was $17,828 and $23,533 respectively.

NOTE 17. UNUSED SECURED CREDIT FACILITIES

As of March 31, 2011, the Group had $2,266,484 (2010: $2,756,791) of unused credit facilities granted by banks. Those banking facilities were secured by land use rights, buildings, leasehold improvement and machinery, of $188,199 (2010: $185,686), $4,289,330 (2010: $3,781,058), $1,054,948 (2010: $1,137,405) and $942,218 (2010: $1,015,863) respectively.

NOTE 18. SUBSEQUENT EVENTS

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

End of consolidated financial statements.

F-21

EXHIBIT INDEX

Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation of the registrant as filed with the Secretary of State of Nevada on August 14, 2008 [incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 20, 2008]
3.2		Certificate of Designation of Series A Convertible Preferred Stock [incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 1, 2009]
3.2		Amended and Restated Bylaws of the registrant adopted on June 19, 2008 [incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 20, 2008]
4.1		Form of Warrant [incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 1, 2009]
10.1		Form of Securities Purchase Agreement, dated September 30, 2009, by and among the Company and the investors named therein [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 1, 2009]
10.2		Form of Closing Escrow Agreement, dated September 30, 2009, by and among the Company, Securities Transfer Corporation and investors named therein [incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 1, 2009]
10.3		Employment Agreement, by and between the registrant and Aijun Wang, dated October 19, 2010 [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2010]
10.4		Employment Agreement, by and between the registrant and Changjun Yu, dated July 3, 2010 [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 6, 2010]
10.5		Employment Agreement, by and between the registrant and Colman Cheng, dated August 14, 2008 [incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on August 14, 2008]
10.6		Independent Director’s Contract, dated as of June 11, 2009, by and between the Company and Chun Wai Chan [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 15, 2009]
10.7		Independent Director’s Contract, dated as of June 11, 2009, by and between the Company and William Haus [incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 15, 2009]
10.8		Independent Director’s Contract, dated as of June 11, 2009, by and between the Company and Jingfu Li [incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 15, 2009]
10.9		Indemnification Agreement, dated as of June 11, 2009, by and between the Company and Chun Wai Chan [incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 15, 2009]
10.10		Indemnification Agreement, dated as of June 11, 2009, by and between the Company and William Haus [incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on June 15, 2009]
10.11		Indemnification Agreement, dated as of June 11, 2009, by and between the Company and Jingfu Li [incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on June 15, 2009]
10.12		English translation of Premises Lease Agreement, dated June 8, 2009, by and between Daqing Longheda Food Company Limited and Daqing Chuangye Plaza Co. Ltd. [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 11, 2009]

Exhibit No.		Description
10.13		China Nutrifruit Group Limited, 2010 Equity Incentive Plan, as amended [incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 16, 2009]
14		China Nutrifruit Group Limited Code of Ethics [incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K filed on June 15, 2009]
21		Subsidiaries of the Company.*
23.1		Consent of HLB Hodgson Impey Cheng. *
31.1		Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2		Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

Attached files

China Nutrifruit Group LTD Reports

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