Nutrastar International Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Nutrastar International Inc.	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - Nutrastar International Inc.	exhibit32-2.htm
EX-32.1 - EXHIBIT 32.1 - Nutrastar International Inc.	exhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - Nutrastar International Inc.	exhibit31-2.htm
EX-31.1 - EXHIBIT 31.1 - Nutrastar International Inc.	exhibit31-1.htm

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2011

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

For the transition period from ____________ to _____________

Commission File Number: 000-52899

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

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

7/F Jinhua Mansion
41 Hanguang Street
Nangang District, Harbin 150080
People’s Republic of China
(Address of principal executive offices, Zip Code)

(86) 451-82287746
(Registrant’s telephone number, including area code)

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

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

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

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

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

Yes [ ] No [X]

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 8, 2011 is as follows:

Class of Securities	Shares Outstanding
Common stock, $0.001 par value	14,940,131

TABLE OF CONTENTS

	PART I – FINANCIAL INFORMATION	Page

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	[Removed and Reserved]	46
Item 5.	Other Information	46
Item 6.	Exhibits	46

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)

		September 30,		December 31,
		2011		2010

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	47,975,656	$	40,758,848
Restricted cash		52,215		193,075
Accounts receivable		197,914		261,223
Inventories		1,674,851		867,761
Prepayments and other receivables		1,037,467		289,502
Total current assets		50,938,103		42,370,409
OTHER ASSETS
Intangible assets, net		2,125,468		2,379,435
Property, plant and equipment, net		12,238,646		10,248,989
Construction in process		4,821,997		-

Total assets	$	70,124,214	$	54,998,833

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable	$	6,285	$	125,843
Other payables and accruals		917,331		746,643
Taxes payable		2,170,883		696,519
Due to related parties		70,491		51,339
Preferred stock dividend payable		408,553		181,181
Warrants liabilities		168,394		1,198,273
Total current liabilities		3,741,937		2,999,798

Total liabilities		3,741,937		2,999,798

COMMITMENTS AND CONTINGENCIES (Note 19)

STOCKHOLDERS’ EQUITY

Preferred Stock, $0.001 par value, Authorized –1,000,000 shares (2010: 1,000,000 shares); Issued and outstanding 147,820 shares (2010:197,706 shares); aggregate liquidation preference amount: $4,138,960 and $5,535,768, plus accrued but unpaid dividend of $408,553 and $181,181, at September 30, 2011 and December 31, 2010, respectively		3,371,206		4,508,914
Common stock, $0.001 par value, 190,000,000 shares authorized 14,940,131 shares (2010: 14,332,731 shares) issued and outstanding		14,940		14,333
Additional paid-in capital		17,116,536		15,541,207
Statutory reserves		1,354,074		1,348,071
Retained earnings		39,917,754		28,326,896
Accumulated other comprehensive income		4,607,767		2,259,614
Total stockholders’ equity		66,382,277		51,999,035

Total liabilities and stockholders’ equity	$	70,124,214	$	54,998,833

See accompanying notes to condensed consolidated financial statements

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2011			2010			2011			2010
Revenue	$	9,558,282		$	6,461,523		$	23,037,815		$	16,688,070
Cost of goods sold		(2,193,504	)		(1,177,739	)		(5,299,920	)		(3,122,669	)
Gross profit		7,364,778			5,283,784			17,737,895			13,565,401
Selling expenses		(336,876	)		(305,151	)		(1,210,687	)		(710,179	)
General and administrative expenses		(595,599	)		(545,533	)		(1,931,016	)		(1,522,650	)
Income from operations		6,432,303			4,433,100			14,596,192			11,332,572
Other income (expenses):
Interest income		23,995			24,971			130,590			91,767
Foreign exchange differences		(12,504	)		(88,023	)		39,281			(103,292	)
Change in fair value of warrants		200,754			302,113			1,029,879			433,201
Total other income		212,245			239,061			1,199,750			421,676
Income before income tax		6,644,548			4,672,161			15,795,942			11,754,248
Provision for income tax		(1,664,065	)		(605,967	)		(3,906,071	)		(1,551,351	)
Net income		4,980,483			4,066,194			11,889,871			10,202,897
Other comprehensive income:
Foreign currency translation adjustment		1,121,422			541,692			2,348,153			719,779
Total comprehensive income	$	6,101,905		$	4,607,886		$	14,238,024		$	10,922,676
Earnings per share:
Basic	$	0.33		$	0.28		$	0.79		$	0.58
Diluted	$	0.30		$	0.25		$	0.73		$	0.58
Weighted average number of shares outstanding:
Basic		14,915,588			14,332,731			14,732,517			14,326,138
Diluted		16,516,910			16,435,334			16,322,356			14,383,936

See accompanying notes to condensed consolidated financial statements

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)

																		Accumulated
	Preferred Stock					Common Stock				Additional								Other
	Number					Number				Paid-in			Statutory		Retained			Comprehensive
	of Shares			Amount		of Shares		Amount		Capital			Reserves		Earnings			Income		Total
Balance at January 1, 2011	197,706		$	4,508,914		14,332,731	$	14,333	$	15,541,207		$	1,348,071	$	28,326,896		$	2,259,614	$	51,999,035
Net income	-			-		-		-		-			-		11,889,871			-		11,889,871
Foreign currency translation adjustment	-			-		-		-		-			-		-			2,348,153		2,348,153
Preferred stock converted into common stock	(49,886	)		(1,137,708	)	498,860		498		1,137,210			-		-			-		-
Preferred stock dividend converted into common stock	-			-		23,540		24		65,614			-		-			-		65,638
Preferred stock dividend	-			-		-		-		-			-		(293,010	)		-		(293,010	)
Appropriation of statutory reserves	-			-		-		-		-			6,003		(6,003	)		-		-
Restricted stock unit vesting	-			-		85,000		85		(85	)		-		-			-		-
Share-based compensation payment	-			-		-		-		351,515			-		-			-		351,515
Issuance of restricted shares to consultant	-			-		-		-		21,075			-		-			-		21,075
At September 30, 2011 (Unaudited)	147,820		$	3,371,206		14,940,131	$	14,940	$	17,116,536		$	1,354,074	$	39,917,754		$	4,607,767	$	66,382,277

See accompanying notes to condensed consolidated financial statements.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)

		For the Nine Months
		Ended September 30,
		2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,889,871		$	10,202,897
Adjustments to reconcile net income to cash provided by operating activities:
Change in fair value of warrants		(1,029,879	)		(433,201	)
IR warrants and consultant restricted stock expense		58,340			29,812
Share-based compensation expense		351,515			143,014
Depreciation and amortization		842,198			761,512
(Increase) decrease in assets:
Accounts receivable		72,686			(168,972	)
Inventories		(753,612	)		(130,463	)
Prepayments and other receivables		(762,258	)		(23,607	)
Increase (decrease) in liabilities:
Accounts payable		(122,121	)		117,579
Other payables and accruals		139,029			(4,862	)
Taxes payable		1,413,299			195,172
Net cash provided by operating activities		12,099,068			10,688,881

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(2,019,305	)		(9,984	)
Addition to construction in progress		(4,716,169	)		-
Net cash used in investing activities		(6,735,474	)		(9,984	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement		-			5,483,919
Decrease (increase) in restricted cash		140,860			(231,025	)
Repayment of payables for intangible assets		-			(881,459	)
Repayments to related parties		-			(41,966	)
Net cash provided by financing activities		140,860			4,329,469

Foreign currency translation adjustment		1,712,354			691,638
INCREASE IN CASH AND CASH EQUIVALENTS		7,216,808			15,700,004
CASH AND CASH EQUIVALENTS, at the beginning of the period		40,758,848			20,115,677
CASH AND CASH EQUIVALENTS, at the end of the period	$	47,975,656		$	35,815,681
NON-CASH ACTIVITIES:
Preferred stock and dividend converted into common stock	$	1,203,346		$	-
Preferred stock dividend payable		65,614			97,464
Share-based payment – IR warrants and consultant restricted stock		58,340			-
Share-based payments to officer and directors under equity incentive plan		351,515		$	143,014
SUPPLEMENTAL DISCLOSURE INFORMATION
Income taxes paid	$	2,475,207		$	1,540,789

See accompanying notes to condensed consolidated financial statements

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION

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

On May 19, 2009, the Company filed Amended and Restated Articles of Incorporation with the State of Nevada to amend the Company’s Articles of Incorporation to, among other things, (1) change the name of the Company from “YzApp International Inc.” to “Shuaiyi International New Resources Development Inc.” (2) increase the total number of shares of common stock that the Company has the authority to issue from 50,000,000 to 190,000,000 shares and (3) effect a one for 114.59 reverse split of the Company’s outstanding common stock. The detailed description of the amendment was provided in the Company’s Form 8-K filed on May 26, 2009.

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

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

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

Service Agreement

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

Option Agreement

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED)

Voting Rights Agreement

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

Pledge agreement

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

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION (CONTINUED)

As of September 30, 2011, details of the subsidiaries and affiliates of the Company are as follows:

	Domicile and		Percentage
	date of		of effective
Names	incorporation	Paid-up capital	ownership	Principal activities

Subsidiaries

New Zealand WAYNE’S New Resources Development Co., Ltd (“New Resources”)	British Virgin Islands, March 13, 2008	$50,000	100%	Holding company of the other subsidiaries
Oriental Global Holdings Limited (“Oriental Global”)	Hong Kong, May 28, 2010	HK$1	100%	Holding company of Harbin Baixin
Harbin Baixin Biotech Development Co., Ltd (“Harbin Baixin”)	People’s Republic of China (“PRC”), July 13, 2010	$3,000,000	100%	Chinese Golden Grass cultivation technology research and development, services and Chinese Golden Grass products wholesale

VIEs

Heilongjiang Shuaiyi New Energy Development Co., Ltd (“Heilongjiang Shuaiyi”)	PRC, July 11, 2006	RMB60,000,000	100%	Principally engaged in investment and property holding
Daqing Shuaiyi Biotech Co. Ltd. (“Daqing Shuaiyi”)	PRC, August 8, 2005	RMB50,000,000	100%	Growing and sales of Chinese Golden Grass, which is widely used for Chinese medicine, and functional health beverages
Harbin Shuaiyi Green and Specialty Food Trading LLC. (“Harbin Shuaiyi”)	PRC, May 18, 2001	RMB1,500,000	100%	Sales of organic and specialty food products

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

Basis of presentation

These interim condensed consolidated financial statements are unaudited. In the opinion of management, all material adjustments and disclosures necessary for a fair presentation of these interim condensed consolidated financial statements, which are of a normal and recurring nature, have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The (a) condensed consolidated balance sheet as of December 31, 2010, which was derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of the Company for the year ended December 31, 2010.

Principle of consolidation

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

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

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

Use of estimates

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Cash and cash equivalents

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

Accounts receivable

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

Inventories

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

Derivative financial instruments

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

Property, plant and equipment

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

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

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

Construction in progress

Construction in progress includes direct costs of construction of buildings, equipment and other assets. Interest incurred during the period of construction, if material, is capitalized. Construction in progress is not depreciated until such time as the assets are completed and put into service.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Intangible assets

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

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

The Company accounts for its intangible assets pursuant to FASB ASC Subtopic 350-30, “General Intangibles Other Than Goodwill”. Under ASC 350-30-35, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset’s estimated fair value with its carrying value, based on cash flow methodology.

Impairment of long-lived assets

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

Revenue recognition

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

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

Share-based payments

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

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Income taxes

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

Research and development costs

Research and development costs are expensed as incurred, and are charged to general and administrative expenses. Research and development costs were $111,377 and $45,087 for the nine months ended September 30, 2011 and 2010, respectively, and $56,110 and $15,110 for the three months ended September 30, 2011 and 2010, respectively.

Advertising costs

The Company expenses all advertising costs as incurred. Advertising costs charged to selling expenses were $66,159 and $38,416 for the nine months ended September 30, 2011 and 2010, respectively, and $6,690 and $15,355 for the three months ended September 30, 2011 and 2010, respectively.

Shipping and handling costs

Substantially all costs of shipping and handling of products to customers are included in selling expense. Shipping and handling costs for the nine months ended September 30, 2011 and 2010 were insignificant.

Foreign currency

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

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

	September 30, 2011	December 31, 2010
Balance sheet items, except for equity accounts	US$1=RMB 6.3549	US$1=RMB 6.6227

	Three months ended September 30,
	2011	2010
Items in the statements of income and cash flows	US$1=RMB 6.4176	US$1=RMB 6.7725

	Nine months ended September 30,
	2011	2010
Items in the statements of income and cash flows	US$1=RMB 6.4975	US$1=RMB 6.8069

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

Foreign currency (Continued)

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

Recent accounting pronouncements

In January 2011, the FASB issued ASU No. 2011-01- Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. This deferral will have no material impact on the Company’s consolidated financial statements.

In January 2011, the FASB issued ASU No. 2011-02- Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. Early application is permitted. The adoption of the provisions in ASU 2011-02 will have no material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 – Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.GAAP and IFRSs. The amendments in this update intend to converge requirements for how to measure fair value and for disclosing information about fair value measurements in US GAAP with International Financial Reporting Standards. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of the provisions in ASU 2011-04 will have no material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 – Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this update require (i) that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements (the current option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity is eliminated) and (ii) presentation of reclassification adjustments from OCI to net income on the face of the financial statements. For public entities, the amendments in this ASU are effective for years, and interim periods within those years, beginning after December 15, 2011. The amendments in this update should be applied retrospectively. Early adoption is permitted. The adoption of the provisions in ASU 2011-05 will have no material impact on the Company’s consolidated financial statements.

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3 FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

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

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

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

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

		Fair value measurement using inputs						Carrying amount at
Financial instruments		Level 1		Level 2		Level 3		September 30,		December 31,
								2011		2010

Liabilities:
Derivative instruments	$	—	$	168,394	$	—	$	168,394	$	1,198,273
– Warrants
Total	$	—	$	168,394	$	—	$	168,394	$	1,198,273

The carrying values of cash and cash equivalents, trade and other receivables and payables approximate their fair values due to the short maturities of these instruments.

There was no asset or liability measured at fair value on a non-recurring basis as of September 30, 2011 and December 31, 2010.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 4 RESTRICTED CASH

As of September 30, 2011, $52,215 in total was held in escrow according to the agreements in connection with the private placements consummated in September 2010, which is further disclosed in Note 12.

Restricted cash consisted of the following:

NOTE 5 ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following:

		September 30,		December 31,
		2011		2010

Accounts receivable	$	197,914	$	261,223
Less: Allowance for doubtful debts		-		-

Accounts receivable, net	$	197,914	$	261,223

No allowance was deemed necessary as of September 30, 2011 and December 31, 2010.

NOTE 6 INVENTORIES

Inventories by major categories are summarized as follows:

		September 30,		December 31,
		2011		2010

Raw materials	$	237,856	$	338,415
Work in progress		409,672		363,240
Finished goods		1,027,323		166,106

Total	$	1,674,851	$	867,761

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 7 PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consisted of the following:

		September 30,		December 31,
		2011		2010

Prepayments for raw material purchasing	$	1,025,980	$	-
Other prepayments		-		78,932
Other receivables, net of $nil allowance		11,487		210,570

	$	1,037,467	$	289,502

NOTE 8 INTANGIBLE ASSETS, NET

Intangible assets, net consisted of the following:

		September 30,			December 31,
		2011			2010

Computer software, cost	$	1,563		$	1,499
Exclusive right to use a secret process, cost		4,722,662			4,531,694
Less: Accumulated amortization		(2,598,757	)		(2,153,758	)

	$	2,125,468		$	2,379,435

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

Amortization expense was $346,463 and $330,715 for the nine months ended September 30, 2011 and 2010, and $117,027 and $110,830 for the three months ended September 30, 2011 and 2010, respectively. The estimated expense of the intangible assets over each of the next five years will be:-

Remainder of fiscal 2011	$	115,488
Fiscal 2012		461,950
Fiscal 2013		461,950
Fiscal 2014		461,950
Fiscal 2015		461,950
Fiscal 2016		162,180

	$	2,125,468

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 9 PROPERTY, PLANT AND EQUIPMENT, NET

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

		September 30,			December 31,
		2011			2010
Cost:
Buildings	$	14,592,470		$	12,075,666
Office equipment		28,027			25,732
Machinery		132,220			126,873
Motor vehicles		114,405			56,543
Total cost		14,867,122			12,284,814
Less: Accumulated depreciation		(2,628,476	)		(2,035,825	)
Net book value	$	12,238,646		$	10,248,989

Depreciation expense was $495,735 and $430,797 for the nine months ended September 30, 2011 and 2010, and $178,619 and $144,557 for the three months ended September 30, 2011 and 2010, respectively.

NOTE 10 CONSTRUCTION IN PROGRESS

Construction in progress consisted of the following:

		September 30,		December 31,
		2011		2010
Construction of:
Buildings (green houses)	$	4,821,997	$	-
	$	4,821,997	$	-

NOTE 11 OTHER PAYABLES, ACCRUALS AND TAXES PAYABLE

Other payables and accruals consisted of the following:

		September 30,		December 31,
		2011		2010
Accrued staff costs	$	814,792	$	627,791
Other payables		102,539		118,852
	$	917,331	$	746,643

Taxes payable consisted of the following:

		September 30,		December 31,
		2011		2010
Value added tax	$	438,282	$	349,585
Income tax		1,686,023		214,033
Others		46,578		132,901
	$	2,170,883	$	696,519

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 STOCKHOLDERS’ EQUITY

Private Placement in 2010

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

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

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

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

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

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

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 STOCKHOLDERS’ EQUITY (CONTINUED)

Escrow Agreement

In connection with the Securities Purchase Agreement, the Company entered into an escrow agreement (the "Escrow Agreement") pursuant to which the parties agreed to deposit the investment amount received from the investors into escrow to be released upon the occurrence of the events set forth in the Escrow Agreement. In addition, the Company agreed that $100,000 out of the investment amount will remain in escrow and will be disbursed to an investor relations firm hired by the Company, all of which was released to the investor relations firm during the third quarter of 2010. The Company also agreed that an additional $250,000 will remain in escrow and will be used as compensation for the Chief Financial Officer of the Company, of which $140,860 had been released in the nine months ended September 30, 2011 and the remainder will be released from escrow as the compensation is paid (See Note 4).

Allocation of Proceeds in the Private Placement

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

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

Proceeds of the private placement on June 7, 2010	$	3,524,342
Allocation of proceeds to Series C Warrants to investors		(718,698	)
Allocation of proceeds to beneficial conversion feature		(1,143,198	)
Amortization of discount resulting from the accounting for a beneficial conversion feature		1,143,198
Convertible Series A Preferred Stock (net of fees and expenses) at December 31, 2010	$	2,805,644
Preferred stock converted into common stock		(85,546	)
Convertible Series A Preferred Stock at September 30, 2011	$	2,720,098

Proceeds of the private placement on June 28, 2010	$	2,121,938
Allocation of proceeds to Series C Warrants to investors		(418,668	)
Allocation of proceeds to beneficial conversion feature		(644,532	)
Amortization of discount resulting from the accounting for a beneficial conversion feature		644,532
Convertible Series A Preferred Stock (net of fees and expenses) at December 31, 2010	$	1,703,270
Preferred stock converted into common stock		(1,052,162	)
Convertible Series A Preferred Stock at September 30, 2011	$	651,108

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 STOCKHOLDERS’ EQUITY (CONTINUED)

Allocation of Proceeds in the Private Placement (continued)

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

Preferred Stock

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

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

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

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

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

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

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 STOCKHOLDERS’ EQUITY (CONTINUED)

Preferred Stock (continued)

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

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

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

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

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

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

Accounting for Series A Preferred Stock

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

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

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 STOCKHOLDERS’ EQUITY (CONTINUED)

Accounting for Series A Preferred Stock (continued)

During the nine months ended September 30, 2011, 49,886 shares of Series A Preferred Stock were converted into 498,860 shares of common stock at a 1 for 10 ratio. In addition, during the nine months ended September 30, 2011, 23,540 shares of common stock were issued to the investors as settlement of stock dividends of $65,638.

Common Stock Purchase Warrants

Series C Warrants

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

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

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

Accounting for Series A, Series B and Series C Warrants

Series A and Series B Warrants issued to certain investors to purchase 500,000 shares of the Company’s common stock remained outstanding at September 30, 2011 had a term of three years and exercise prices of $3.25 and $4.00 per share, respectively. These warrants contain standard anti-dilution provisions for stock dividends, stock splits, stock combination, recapitalization and a change of control transaction. Because these warrants do not contain any contingent exercise provisions and their settlement amount will equal the difference between the fair value of a fixed number of the Company’s equity shares and a fixed strike price, these warrants, which are freestanding instruments, qualify for the scope exception under the guidance provided in ASC 815-40-15-5 through 815-40-15-8, and are considered indexed to the Company’s own stock. Accordingly, Series A and Series B Warrants have been classified as equity.

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 STOCKHOLDERS’ EQUITY (CONTINUED)

Accounting for Series A, Series B and Series C Warrants (continued)

As of September 30, 2011, the fair value of these outstanding Series C Warrants was determined to be $168,394, accordingly, the Company recorded $1,029,879 and $200,754 in other income related to the change in the fair value of the Series C Warrants in the nine months and three months ended September 30, 2011, respectively; and $433,201 and $302,113 in the nine months and three months ended September 30, 2010, respectively. There is no cash flow impact for the warrant liability until the Series C Warrants are exercised.

The following table presents a reconciliation of the warrant liabilities measured at fair value on a recurring basis using Level 2 from January 1, 2010 to September 30, 2011:

		Warrant liabilities
Balance at January 1, 2010	$	-
Issuance of warrants		1,182,860
Change in fair value included in earnings		15,413
Balance at December 31, 2010	$	1,198,273
Change in fair value included in earnings		(1,029,879	)
Balance at September 30, 2011	$	168,394

IR Warrants

On May 27, 2010, the Company entered into an investor relations agreement with a consultant in which the consultant would provide certain consulting services to the Company for a term of one year. In exchange for the consulting services provided, the consultant should receive (i) a cash fee of $100,000 and (ii) 100,000 warrants (the “IR Warrants”) at an exercise price of $3.80 and a term of three years from issuance date. The above 100,000 IR Warrants were issued on July 1, 2010. The grant date fair value of these IR warrants was estimated at $89,435 using Black-Scholes valuation model and $37,265 and $nil was charged as general and administrative expenses during the nine months and three months ended September 30, 2011, respectively, and $52,170 and $ 22,359 in the nine months and three months ended September 30, 2010, respectively.

Warrants issued and outstanding at September 30, 2011, and changes during the nine months then ended, are as follows:

			Weighted	Average
	Number of		Average	Remaining
	underlying		Exercise	Contractual Life
	shares		Price	(years)
Outstanding at December 31, 2010	1,588,501	$	3.50	2.29
Granted	-		-	-
Forfeited	-		-	-
Exercised	-		-
Outstanding at September 30, 2011	1,588,501	$	3.50	1.54

Exercisable at September 30, 2011	1,588,501	$	3.50	1.54

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12 STOCKHOLDERS’ EQUITY (CONTINUED)

On August 24, 2011, the Board of Directors approved a share repurchase program of up to $5 million of the Company’s common stock, pursuant to which the Company was authorized to repurchase its outstanding common stock from time to time, depending on market conditions, share price and other factors, on the open market or in privately negotiated transactions. Repurchased shares may be retired immediately and will resume the status of authorized but unissued shares or they may be held by the Company as treasury stock. The repurchase authorization was for twelve months and may be modified, suspended, or discontinued by the Board of Directors at any time. During the three and nine months ended September 30, 2011, the Company has not purchased any share.

On August 24, 2011, the Company also entered into a lock up agreement with ARC China (the Company and ARC China, which currently owns a majority of securities issued), pursuant to which ARC China agreed not to sell, transfer or dispose of, directly or indirectly, any shares of Company common stock or any securities convertible into or exercisable or exchangeable for shares of Company common stock that it beneficially owns without a prior written consent of the Company for a period of six months.

NOTE 13 STATUTORY RESERVES

In accordance with the PRC Companies Law, the Company’s PRC subsidiaries and VIEs were required to transfer 10% of their profits after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and a percentage of not less than 5%, as determined by management, of the profits after tax to the public welfare fund. However, the Company’s PRC subsidiaries and VIEs were not required to transfer any profit after tax to the statutory surplus reserve after the accumulated statutory surplus reserves reached 50% of registered capital of the Company’s PRC subsidiaries and VIEs. With the amendment of the PRC Companies Law which was effective from January 1, 2006, enterprises in the PRC were no longer required to transfer any profit to the public welfare fund. Any balance of the public welfare fund brought forward from December 31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable.

NOTE 14 SHARE-BASED COMPENSATION

Stock options granted to CFO

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

According to the stock option agreement, in the event Mr. Tick’s employment with the Company is terminated for any reason except for death or disability, he may exercise these options only to the extent that these options would have been exercisable on the termination date and no later than three months after the termination date. If Mr. Tick’s employment is terminated because of his death or disability, these options may be exercised only to the extent that these options would have been exercisable by Mr. Tick on the termination date and must be exercised by Mr. Tick no later than twelve months after the termination date. If the employment is terminated for Cause as defined in the stock option Agreement, these options will terminate immediately. In no event will these options be exercised later than December 31, 2015.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 14 SHARE-BASED COMPENSATION (CONTINUED)

Stock options granted to CFO (continued)

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

Summary of options issued and outstanding at September 30, 2011 and the movements during the nine months then ended are as follows:

			Weighted-
	Number of		Average		Aggregate	Weighted- Average
	Underlying		Exercise Price		Intrinsic	Contractual Life
	Shares		Per Share		Value ⁽¹⁾	Remaining in Years

Outstanding at December 31, 2010	150,000	$	6.00	$	-	5.00
Granted	-		-		-	-
Exercised	-		-		-	-
Expired	-		-		-	-
Forfeited	-		-		-	-
Outstanding at September 30, 2011 (Unaudited)	150,000	$	3.50	$	-	4.29

Exercisable at September 30, 2011 (Unaudited)	37,500	$	3.50	$	-	-

(1)	The market value of the Company’s common stock at September 30, 2011 was $2.03. The outstanding options to Mr. Tick had no intrinsic value at September 30, 2011.

In accordance with the guidance provided in ASC Topic 718, Stock Compensation, the compensation costs associated with these options are recognized, based on the grant-date fair values of these options, over the requisite service period, or vesting period. Also in accordance with ASC Topic 718, incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. Accordingly, the Company recognized compensation expense of $47,780 and $22,123 in relation to the options granted to the CFO for the nine months and three months ended September 30, 2011, respectively and $5,472 and $5,472 in the nine months and three months ended September 30, 2010, respectively.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 14 SHARE-BASED COMPENSATION (CONTINUED)

Restricted shares granted to CFO

On July 26, 2010, the Company also entered into a restricted shares grant agreement (the "Restricted Shares Grant Agreement") under the Company’s 2009 Equity Incentive Plan with Mr. Tick. Pursuant to the terms of the Restricted Shares Grant Agreement, the Company granted to Mr. Tick 150,000 restricted shares (the “Restricted Shares”) of the Company’s common stock subject to the vesting schedule therein. If Mr. Tick’s service with the Company ceases for any reason other than Mr. Tick’s (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company.

The Restricted Shares vest under the following schedule:

Number of Shares	Vesting Date
25,000	December 31, 2010
25,000	June 30, 2011
25,000	December 31, 2011
25,000	June 30, 2012
25,000	December 31, 2012
25,000	June 30, 2013

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

Accordingly, the Company recognized compensation expense of $113,750 and $38,333, related to the restricted shares granted to Mr. Tick for the nine months and three months ended September 30, 2011, respectively, and $31,667 and $31,667 in the nine months and three months ended September 30, 2010, respectively, based on the estimated grant-date fair value of the Company’s common stock of $3.00.

Restricted shares granted to independent directors

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

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 14 SHARE-BASED COMPENSATION (CONTINUED)

Restricted shares granted to independent directors (continued)

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

The restricted shares granted to independent directors will vest in equal installments on a semi-annual basis over a two-year period. If the independent director’s service with the Company ceases for any reason other than the independent director’s (a) death, (b) disability, (c) retirement, or (d) termination by the Company without cause, any unvested restricted shares will be automatically forfeited to the Company.

Accordingly, the Company recognized a total compensation expense of $189,984 and $109,487 related to the restricted shares granted to the directors for the nine months and three months ended September 30, 2011, respectively, based on the estimated grant-date fair values of the Company’s common stock of $2.98 on October 5, 2010 , $3.28 on January 24, 2011 and $2.41 on August 11,2011.

Restricted shares granted to consultant

On May 25, 2011, the Company entered into an investor relations agreement with a consultant in which the consultant would provide certain consulting services to the Company for a term of one year. In exchange for the consulting services provided, the consultant should receive 15,000 restricted shares, 7,500 of which shall vest on June 1, 2011 and 7,500 shall vest on December 1, 2011. The Company recognized a total compensation expense of $21,075 and$16,814 related to the restricted shares granted to the consultant during the nine months and three months ended September 30, 2011, based on the estimated grant-date fair values of the Company’s common stock of $2.81 on May 25, 2011.

NOTE 15 INCOME TAXES

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

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

Harbin Shuaiyi was subject to an EIT rate of 25% for the year ended December 31, 2010.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 15 INCOME TAXES (CONTINUED)

Daqing Shuaiyi, Harbin Shuayi and Heilongjiang Shuaiyi are subject to an EIT rate of 25% for the year ending December 31, 2011. No provision for PRC taxes was made for Heilongjiang Shuaiyi which had no taxable income in the PRC.

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

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

The Company’s income tax expense consisted of:

		For the Three Months				For the Nine Months
		Ended September 30,				Ended September 30,
		2011		2010		2011		2010

Current income tax – PRC	$	1,664,065	$	605,967	$	3,906,071	$	1,551,351
Deferred		-		-		-		-
Income tax expenses	$	1,664,065	$	605,967	$	3,906,071	$	1,551,351

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

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2011			2010			2011			2010
Pre-tax income	$	6,644,548		$	4,672,161		$	15,795,942		$	11,754,248
U.S. federal corporate income tax rate		34%			34%			34%			34%
Income tax computed at U.S. federal corporate income tax rate		2,259,146			1,588,535			5,370,620			3,996,444
Reconciling items:
Impact of tax holiday of Daqing Shuaiyi		-			(589,954	)		-			(1,515,874	)
Loss not recognized as deferred tax assets		94,283			123,184			215,860			100,475
Change in fair value of warrants		(68,256	)		(147,288	)		(350,159	)		(147,288	)
Rate differential for PRC earnings		(605,852	)		(229,659	)		(1,406,471	)		(895,409	)
Non-deductible expenses and non-taxable income		(15,256	)		(138,851	)		76,221			13,003
Effective tax expense	$	1,664,065		$	605,967		$	3,906,071		$	1,551,351

The Company had deferred tax assets as follows:

		September 30,			December 31,
		2011			2010
Net operating losses carried forward	$	745,400		$	529,540
Less: Valuation allowance		(745,400	)		(529,540	)
Net deferred tax assets	$	-		$	-

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 15 INCOME TAXES (CONTINUED)

As of September 30, 2011 and December 31, 2010, the U.S. entity had $2,192,354 and $1,557,472, net operating loss carryforwards available to reduce future taxable income, respectively, which will expire in various years through 2030. Management believe it is more-likely-than-not that the company will not realize these potential tax benefits as the Company’s U.S. operations will not generate any operating profits in the foreseeable future. Therefore, the Company recorded a full valuation allowance on its deferred tax assets.

As of September 30, 2011 and December 31, 2010, the Company has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the nine months ended September 30, 2011 and 2010, and no provision for interest and penalties is deemed necessary as of September 30, 2011 and December 31, 2010.

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

NOTE 16 EARNINGS PER SHARE

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

		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2011			2010			2011			2010

Income available to common stockholders:
- Net income	$	4,980,483		$	4,066,194		$	11,889,871		$	10,202,897
Less: Preferred stock dividend		(92,632	)		(83,716	)		(293,010	)		(97,464	)
Less: Beneficial conversion feature of convertible preferred stock		-			-			-			(1,742,239	)
Income available to common stockholders (Basic)	$	4,887,851		$	3,982,478		$	11,596,861		$	8,363,194
Add: Preferred stock dividend		92,632			83,716			293,010			-
Income available to common stockholders (Diluted)	$	4,980,483		$	4,066,194		$	11,889,871		$	8,363,194

Weighted average number of shares:
- Basic		14,915,588			14,332,731			14,732,517			14,326,138
- Effect of dilutive preferred stock		1,601,073			1,977,060			1,586,743			-
- Effect of dilutive restricted stock units		249			-			3,096			-
- Effect of dilutive warrants and options		-			125,543			-			57,798
- Diluted		16,516,910			16,435,334			16,322,356			14,383,936

Net income per share
- Basic	$	0.33		$	0.28		$	0.79		$	0.58
- Diluted	$	0.30		$	0.25		$	0.73		$	0.58

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 16 EARNINGS PER SHARE (CONTINUED)

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

The diluted earnings per share calculation for the nine months and three months ended September 30, 2011 did not include the warrants, CFO options and restricted shares to purchase up to 1,588,501 shares, 150,000 shares and 200,000 shares of common stock, respectively, because their effect was anti-dilutive.

NOTE 17 RELATED PARTY TRANSACTIONS

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

(a)

Due to related parties

		September 30,		December 31,
		2011		2010

Due to Ms. Lianyun Han, Chairperson, CEO and President of the Company	$	70,491	$	51,339

	The amount due to Ms. Han was non-interest bearing, unsecured and without a fixed repayment date.

(b)	Lease of land

	For the nine months ended September 30, 2011 and 2010, the Company paid rental expense of $7,099 and $6,776 for the land leased from Heilongjiang Shuaiyi Technology Development Co., Ltd. (“Shuaiyi Technology”), respectively.

	For the three months ended September 30, 2011 and 2010, the Company paid rental expense of $2,398 and $ 2,253 for land leased from Shuaiyi Technology, respectively.

(c)	Acquisition of corporate headquarter premise

	On April 15, 2011, Heilongjiang Shuaiyi entered into an asset transfer agreement (the “Transfer Agreement”) with Ms. Han. Pursuant to the Transfer Agreement, Heilongjiang Shuiayi acquired an office building located at 54-1 Ganshui Road, Xiangfang District, Harbin, with a construction area of 1854.1 square meters, from Ms. Han at a cash consideration of RMB 12.75 million (approximately $1.95 million including other incidental costs). , which was fully paid in April 2011. The purchase price was determined based on a real property valuation report issued by an independent appraisal firm, Harbin Guoxin Real Estate Appraisal and Consulting Co., Limited on November 11, 2010. Management believes the terms of the purchase transactions and the consideration that the Company paid in connection with this transaction were comparable to the terms available and the amounts that would be paid in an arm’s-length transaction.

	Management intends to move the corporate headquarters in China to this new office building in late 2011.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 18 CONCENTRATION RISK

(a)

Concentration of credit risk

As of September 30, 2011 and December 31, 2010, almost all of the Company’s cash included cash on hand and deposits in accounts maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

For the nine months ended September 30, 2011 and 2010, all of the Company’s sales arose in the PRC. In addition, all accounts receivable as of September 30, 2011 and December 31, 2010 also arose in the PRC.

Details of individual customers accounting for 10% or more of the Group’s revenues for the nine months ended September 30, 2011 and 2010:

	For the Three Months		For the Nine Months
	Ended September 30,		Ended September 30,
	2011	2010	2011	2010

Lai En Century Co. Ltd	23.06%	25.74%	28. 48%	34.29%

Individual customer amounts receivable consisted of 10% or more of total accounts receivable as of September 30, 2011 and December 31, 2010 were as follows:

	Percentage of accounts
	receivable as of
	September 30,	December 31,
	2011	2010

Xian Yizhiliu Pharmaceutical Co., Ltd	32%	25%
Si Chuan Ai Da Biotech Co. Ltd.	24%	12%
Beijing Borry Technology Development Co., Ltd	16%	-
Disha Pharmaceutical Co., Ltd	-	20%
Zhejiang Yinlong Trading Company	-	17%
Great Northern Wilderness Grain and Oil Warehouse Market	-	16%

(b)

Concentration of operating risk

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

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 19 COMMITMENTS AND CONTINGENCIES

(a)

Operating leases

The Company has entered into tenancy agreements for the leases of an exhibition hall and land with a third party and a related company, Shuaiyi Technology (see 16(b)), respectively, for the purposes of the operation of its VIEs. The Company’s commitments for minimum lease payments under these operating leases for the next five years and thereafter as of September 30, 2011 are as follows:

Remainder of fiscal year ending December 31, 2011	$	14,769
Fiscal year ending December 31, 2012		54,669
Fiscal year ending December 31, 2013		38,002
Fiscal year ending December 31, 2014		9,678
Fiscal year ending December 31, 2015		9,678
Thereafter		116,131
Total	$	242,927

During the nine months ended September 30, 2011 and 2010, rental expenses under operating leases amounted to $57,243 and $25,640, respectively.

During the three months ended September 30, 2011 and 2010, rental expenses under operating leases amounted to $19,335 and $9,706, respectively.

(b)

Capital commitments – contracted but not provided for:

		September 30,		December 31,
		2011		2010
Acquisition or construction of buildings - within one year	$	7,867,944	$	-
	$	7,867,944	$	-

(c)

PRC employee costs

According to the prevailing laws and regulations of the PRC, the Company’s subsidiaries and VIEs in the PRC are required to cover its employees with medical, retirement and unemployment insurance programs. Management believes that due to the transient nature of its employees, they do not need to provide all employees with such social insurances, and have not paid the social insurances for all employees.

In the event that any current or former employee files a complaint with the PRC government, the Company’s subsidiaries and VIEs may be subject to making up the social insurances as well as administrative fines. As the Company believes that these fines would not be material, no provision has been made in this regard.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 19 COMMITMENTS AND CONTINGENCIES (CONTINUED)

(d )	Indemnification agreement

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

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

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

NOTE 20 SEGMENT INFORMATION

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

During the nine months ended September 30, 2011 and 2010, all of the Company’s operations were carried out in one geographical segment - China.

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 20 SEGMENT INFORMATION (CONTINUED)

The Company’s segment revenue and results for the nine months ended September 30, 2011 and 2010 are as follows:

		Nine Months Ended September 30, 2011
						Organic and
		Chinese				Specialty Food		Corporate
		Golden Grass		Beverages		Products		Unallocated		Consolidated

Segment revenue from external customers	$	18,088,942	$	3,468,248	$	1,480,625	$	-	$	23,037,815

Segment profit	$	13,299,759	$	2,314,962	$	86,134	$	95,087	$	15,795,942
Income before income taxes									$	15,795,942

Other segment information:
Depreciation and amortization	$	780,525	$	9,446	$	9,448	$	42,779	$	842,198
Expenditure for segment assets	$	36,104	$	-	$	4,716,169	$	1,983,201	$	6,735,474

		Nine Months Ended September 30, 2010
				Organic and
		Chinese		Specialty Food		Corporate
		Golden Grass		Products		Unallocated			Consolidated

Segment revenue from external customers	$	15,379,058	$	1,309,012	$	-		$	16,688,070

Segment profit	$	12,126,991	$	89,897	$	(462,640	)	$	11,754,248
Income before income taxes								$	11,754,248

Other segment information:
Depreciation and amortization	$	754,176	$	4,412	$	2,924		$	761,512
Expenditure for segment assets	$	9,213	$	-	$	771		$	9,984

NUTRASTAR INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 20 SEGMENT INFORMATION (CONTINUED)

The Company’s segment revenue and results for the three months ended September 30, 2011 and 2010 are as follows:

		Three Months Ended September 30, 2011
						Organic and
		Chinese				Specialty Food		Corporate
		Golden Grass		Beverages		Products		Unallocated			Consolidated

Segment revenue from external customers	$	6,935,731	$	2,106,325	$	516,226	$	-		$	9,558,282

Segment profit	$	5,374,593	$	1,385,961	$	33,089	$	(149,095	)	$	6,644,548
Income before income taxes										$	6,644,548

Other segment information:
Depreciation and amortization	$	256,803	$	6,834	$	6,834	$	25,175		$	295,646
Expenditure for segment assets	$	34,936	$	-	$	4,716,169	$	33,921		$	4,785,026

		Three Months Ended September 30, 2010
				Organic and
		Chinese		Specialty Food		Corporate
		Golden Grass		Products		Unallocated			Consolidated

Segment revenue from external customers	$	6,070,466	$	391,057	$	-		$	6,461,523

Segment profit	$	4,732,660	$	16,872	$	(77,371	)	$	4,672,161
Income before income taxes								$	4,672,161

Other segment information:
Depreciation and amortization	$	503,713	$	2,952	$	1,955		$	508,620
Expenditure for segment assets	$	4,687	$	-	$	-		$	4,687

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

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; and any statements of belief or intention. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward looking statements. Such risks and uncertainties include any of the factors and risks mentioned in the “Risk Factors” sections of the Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2010 and subsequent SEC filings, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

Certain Terms

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

“BVI” refers to the British Virgin Islands;
“China,” “Chinese” and “PRC,” refer to the People’s Republic of China;
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended.
“Nutrastar,” “we,” “us,” “our company” and “our” refer to Nutrastar International Inc., a Nevada corporation, its subsidiaries, and, in the context of describing our operations and business and consolidated financial information, include our VIE Entities;
“Renminbi” and “RMB” refer to the legal currency of China;
“SEC” refers to the United States Securities and Exchange Commission;
“Securities Act” refers to the Securities Act of 1933, as amended;
“U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States; and
“VIE Entities” means our consolidated variable interest entities, including Heilongjiang Shuaiyi New Energy Development Co., Ltd. and its subsidiaries as depicted in our organizational chart included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview of Our Business

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

Our primary product is Chinese Golden Grass, also known as Cordyceps Militaris. Cordyceps Militaris is a species of parasitic fungus that is typically found in north-eastern China. Cordyceps Militaris is a precious ingredient in traditional Chinese medicine and widely believed in China to offer high medical and health benefits by nourishing the yin, boosting the yang, and invigorating the lungs and kidneys. After several years of laboratory tests, we developed the technology to commercially grow and produce Cordyceps Militaris in 2006. We generated 72.6% and 93.9% of our revenues from Cordyceps Militaris for the third quarter of 2011 and 2010, respectively. We plan to continue to focus on Cordyceps Militaris based consumer products, which is our primary and fastest growing product line with the greatest market demand and a significantly higher profit margin.

We also sell organic and specialty food products through our VIE Entity, Harbin Shuaiyi Green & Specialty Food Trading LLC, or Harbin Shuaiyi, which was formed in 2001. We believe that we have become the largest wholesale distributor of organic and specialty food in Heilongjiang Province, China.

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

Third Quarter Financial Performance Highlights

We continued to experience strong demand for our products and services during the third quarter of 2011, which resulted in continued growth in our revenues and net income.

The following are some financial highlights for the third quarter of 2011:

Revenues: Our revenues were approximately $9.56 million for the third quarter of 2011, an increase of 47.9% from the same quarter of last year.
Gross Margin: Gross margin was 77.0% for the third quarter of 2011, as compared to 81.8% for the same period in 2010.
Operating Profit: Operating profit was approximately $6.43 million for the third quarter of 2011, an increase of 45.1% from $4.43 million of the same period last year.
Net Income: Net income was approximately $4.98 million for the third quarter of 2011, an increase of 22.5% from the same period of last year.
Fully diluted earnings per share was $0.30 for the third quarter of 2011.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 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 revenue.

	Three Months Ended		Three Months Ended
	September 30, 2011		September 30, 2010
		As a		As a
		percentage of		percentage of
	In Thousands	revenues	In Thousands	revenues
Revenues	9,558	100 %	6,462	100%
Cost of goods sold	(2,194)	(23.0) %	(1,178)	(18.2)%

Gross Profit	7,365	77.0 %	5,284	81.8%

Selling expenses	(337)	(3.5) %	(305)	(4.7)%
General and administrative expenses	(596)	(6.2) %	(546)	(8.4)%

Income from operations	6,432	67.3%	4,433	68.6%

Other income and (expenses)
Interest income	24	0.3%	25	0.4%
Foreign exchange differences	(13)	(0.1)%	(88)	(1.4)%
Change in fair value of warrants	201	2.1%	302	4.7%
Total other income	212	2.2%	239	3.7%
Income before income tax	6,645	69.5%	4,672	72.3%
Provision for income tax	(1,664)	(17.4)%	(606)	(9.4)%
Net income	4,980	52.1%	4,066	62.9%

Revenues. We generate revenues from the sale of our Cordyceps Militaris products, functional health beverages and organic and specialty food products. Revenues increased approximately $3.10 million, or 47.9%, to approximately $9.56 million for the three months ended September 30, 2011, from approximately $6.46 million for the same period in 2010. This increase was mainly attributable to the higher sales volume resulting from increased demand for our core products, commercially cultivated Cordyceps Militaris, and sales of our functional health beverage products which were launched in the fourth quarter of 2010.

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

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

		Three Months Ended September 30,			Percent
		2011		2010	Change
Components of Sales Revenue
Chinese Golden Grass (Cordyceps Militaris)	$	6,936	$	6,071	14.3%
Functional Health Beverages		2,106		-	-
Organic and Specialty Food Products		516		391	32.0%
Total revenues	$	9,558	$	6,462	47.9%

Cost of Goods Sold. Our cost of goods sold is primarily comprised of the cost of raw materials, labor and overhead. Our cost of goods sold increased by $1.01 million, or 86.2%, to approximately $2.19 million for the three months ended September 30, 2011 from approximately $1.18 million during the same period in 2010. This increase was commensurate with increased sales of our core products and increased production costs associated with the launch of functional health beverages products. As a percentage of revenues, the cost of goods sold increased to 23.0% for the three months ended September 30, 2011 from 18.2% during the same period in 2010. This increase was mainly attributable to costs associated with the launch of our functional health beverages. Our functional health beverages generally have a lower margin than our Cordyceps Militaris products as we outsource the production of the beverages to a third party bottler.

Gross Profit. Our gross profit increased by approximately $2.08 million, or 39.4%, to approximately $7.36 million for the three months ended September 30, 2011 from approximately $5.28 million during the same period in 2010. Gross profit as a percentage of revenues, or gross margin, was 77.0% for the three months ended September 30, 2011, a decrease of 4.8% from 81.8% during the same period in 2010. Such percentage decrease was mainly due to a higher volume of sales of functional health beverages which have a lower gross margin than Cordyceps Militaris products.

Selling Expenses. Our selling expenses include sales commissions, cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, and other sales related costs. Selling expenses increased approximately $0.03 million, or 10.5%, to approximately $0.34 million for the three months ended September 30, 2011 from approximately $0.31 million during the same period in 2010. The increase in selling expenses in dollar terms was mainly attributable to the rollout of our functional health beverages product line to new distribution channels as well as costs associated with the opening of specialty stores which sell our products. As a percentage of revenues, selling expenses decreased to 3.5% for the three months ended September 30, 2011 from 4.7% for the same period in 2010. The percentage decrease was mainly due to the increase in revenue which outpaced the increase in selling expenses.

General and Administrative Expense. General and administrative expenses include the costs associated with staff and support personnel who manage our business activities, depreciation charge for fixed assets, and professional fees paid to third parties. General and administrative expenses increased approximately $0.05 million, or 9.2%, to approximately $0.60 million for the three months ended September 30, 2011 from approximately $0.55 million for the same period in 2010. The increase in general and administrative expenses in dollar terms was mainly attributable to the increase in fees for professional services. As a percentage of revenues, general and administrative expenses were 6.2% for the three months ended September 30, 2011 as compared to 8.4% for the same period of 2010. The percentage decrease was mainly due to the increase in the revenue which outpaced the increase in general and administrative expenses.

Income Before Income Tax. Income before income tax increased approximately $1.97 million, or 42.2%, to approximately $6.65 million during the three months ended September 30, 2011 from approximately $4.67 million during the same period in 2010. As a percentage of revenues, income before income tax decreased to 69.5% during the three months ended September 30, 2011 from 72.3% during the same period in 2010. The decrease of income before income tax as a percentage of revenue is mainly attributable to the increase in costs associated with production of our functional health beverages.

Income Taxes. Nutrastar International Inc. is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as Nutrastar International Inc. had no income taxable in the United States for the three months ended September 30, 2011. New Resources was incorporated in the BVI and under the current laws of the BVI, is not subject to income taxes. Oriental Global was formed in Hong Kong and under the current laws of Hong Kong, is not subject to income taxes. Our PRC subsidiary and the VIEs are subject to national and local income taxes within China at the applicable tax rate on the taxable income as reported in their PRC statutory financial statements in accordance with relevant income tax laws. China passed a new Enterprise Income Tax Law, or the New EIT Law, and its implementing regulations, both of which became effective on January 1, 2008.

The New EIT Law provides for a grandfathering on tax holidays which were granted under the then effective tax laws and regulations. Therefore, Daqing Shuaiyi had continued to be entitled to a three-year 50% income tax reduction until December 31, 2010. Daqing Shuaiyi had been subject to a 12.5% income tax rate in 2010 and Harbin Shuaiyi was subject to a tax rate of 25% in 2010. Both entities are subject to an income tax rate of 25% in 2011.

Income tax increased approximately $1.05 million to approximately $1.66 million for the three months ended September 30, 2011 from approximately $0.61 million for the same period in 2010. Income tax expense for the three months ended September 30, 2011 increased because of the increase in sales, taxable income and income tax rate as a result of the expiration of the income tax holidays on December 31, 2010 described above.

Net Income. Net income increased by approximately $0.91 million, or 22.5% to approximately $4.98 million for the three months ended September 30, 2011 from approximately $4.07 million for the same period of 2010, as a result of the factors described above.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 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 revenue.

	Nine Months Ended September		Nine Months Ended September
	30, 2011		30, 2010
		As a			As a
		percentage of			percentage of
	In Thousands	revenues		In Thousands	revenues
Revenues	23,038	100 %		16,688	100%
Cost of goods sold	(5,300)	(23.0) %		(3,123)	(18.7)%

Gross Profit	17,738	77.0 %		13,565	81.3%

Selling expenses	(1,211)	(5.3) %		(710)	(4.3)%
General and administrative expenses	(1,931)	(8.4) %		(1,522)	(9.1)%

Income from operations	14,596	63.4%		11,333	67.9%

Other income and (expenses)
Interest income	131	0.6%		92	0.6%
Foreign exchange differences	39	0.2%		(103)	(0.6)%
Change in fair value of warrants	1,030	4.5%		433	2.6%
Total other income (expenses)	1,200	5.2%		422	2.5%

Income before income tax	15,796	68.6%		11,754	70.4%

Provision for income tax	(3,906)	(17.0)%		(1,551)	(9.3)%

Net income	11,890	51.6%		10,203	61.1%

Revenues. Revenues increased approximately $6.35 million, or 38.0%, to approximately $23.04 million for the nine months ended September 30, 2011, from approximately $16.69 million for the same period in 2010. This increase was mainly attributable to the higher sales volume resulting from the increase in demand for our core products, Cordyceps Militaris products and sales of our newly launched functional health beverage products.

The following table illustrates the revenue from each of our three segments of products as well as the change of percentage for the periods indicated:

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

		Nine Months Ended September 30,			Percent
		2011		2010	Change
Components of Sales Revenue
Chinese Golden Grass (Cordyceps Militaris)	$	18,089	$	15,379	17.6%
Functional Health Beverages		3,468		-	-%
Organic and Specialty Food Products		1,481		1,309	13.1%
Total revenues	$	23,038	$	16,688	38.1%

Cost of Goods Sold. Our cost of goods sold increased by $2.18 million, or 69.7%, to approximately $5.30 million for the nine months ended September 30, 2011 from approximately $3.12 million during the same period in 2010. This increase was mainly due to the significant increase in both sales volume of commercially cultivated Cordyceps Militaris and production costs associated with the newly launched functional health beverages line. As a percentage of revenues, cost of goods sold increased to 23.0% for the nine months ended September 30, 2011 from 18.7% during the same period in 2010. Such increase of cost of goods sold as a percentage of sales was mainly attributable to the

increase in production costs associated with functional health beverages which have a lower margin than our Cordyceps Militaris products as we outsource the bottling process.

Gross Profit. Our gross profit increased by approximately $4.17 million, or 30.8%, to approximately $17.74 million for the nine months ended September 30, 2011 from approximately $13.57 million during the same period in 2010. Gross profit as a percentage of revenues, or gross margin, was 77.0% for the nine months ended September 30, 2011, a decrease of 4.3% from 81.3% during the same period in 2010. Such percentage decrease was mainly due to increased sales of functional health beverages which have a lower gross margin than Cordyceps Militaris products.

Selling Expenses. Selling expenses increased approximately $0.50 million, or 70.6%, to approximately $1.21 million for the nine months ended September 30, 2011 from approximately $0.71 million during the same period in 2010. As a percentage of revenues, selling expenses increased to 5.3% for the nine months ended September 30, 2011 from 4.3% for the same period in 2010. The increase in the amount and percentage of selling expenses was mainly attributable to selling and marketing expenses that we spent in establishing new distribution relationships for functional health beverages and the cost associated with opening of our retail stores.

General and Administrative Expense. General and administrative expenses increased approximately $0.41 million, or 26.9%, to approximately $1.93 million for the nine months ended September 30, 2011 from approximately $1.52 million for the same period in 2010. As a percentage of revenues, general and administrative expenses decreased to 8.4% for the nine months ended September 30, 2011 from 9.1% for the same period in 2010. The increase in general and administrative expenses in dollar terms was mainly attributable to the increase in remuneration payments to our CFO and independent directors and investor relations firm for services during the nine months ended September 30, 2011. The percentage decrease was mainly due to the increase in the revenue which outpaced the increase in general and administrative expenses.

Income Before Income Tax. Income before income tax increased approximately $4.05 million, or 34.4%, to approximately $15.80 million during the nine months ended September 30, 2011 from approximately $11.75 million during the same period in 2010. As a percentage of revenues, income before income tax decreased to 68.8% during the nine months ended September 30, 2011 from 70.4% during the same period in 2010. The decrease in income before income tax as a percentage of revenue is mainly attributable to the increase in production costs for our functional health beverages product line and the increase in selling expenses.

Income Taxes. Income tax increased approximately $2.36 million to approximately $3.91 million for the nine months ended September 30, 2011 from approximately $1.55 million for the same period in 2010. We paid more tax in 2011 because of the increase in sales and taxable income as well as the increase in effective tax rates for the nine months ended September 30, 2011 compared to 2010 due to the expiration of the tax holidays on December 31, 2010.

Net Income. Net income increased by approximately $1.69 million, or 16.5% to approximately $11.89 million for the nine months ended September 30, 2011 from approximately $10.20 million for the same period of 2010, as a result of the factors described above.

Business Segment Information

Our business operations can be categorized into three segments based on the type of products we manufacture and sell, specifically (i) Chinese Golden Grass (Cordyceps Militaris), (ii) functional health beverages and (iii) organic and specialty food products.

For the nine months ended September 30, 2011, our sales revenue from our Cordyceps Militaris products was approximately $18.09 million, while approximately $3.47 million came from sales of functional health beverages and approximately $1.48 million came from sales of organic and specialty food products.

We grow and sell our Cordyceps Militaris products as well as manufacture and distribute our functional health beverages through Daqing Shuaiyi. Harbin Shuaiyi is mainly engaged in the business of selling our organic and specialty food products.

We expect that majority of our revenue for 2011 will still be generated from our Cordyceps Militaris products, with an increase in percentage of revenue coming from the functional health beverages as we are expanding our distribution

channel of such products. We also expect to increase our business development activities in the organic and specialty food products on a going forward basis. We also expect that sales and marketing related costs associated with branding, marketing and advertising of the functional health beverages will increase as a percentage of revenue.

Additional information regarding our products can be found at Note 20, Segment Information in our unaudited condensed consolidated financial statements contained under Part I, Item I “FINANCIAL STATEMENTS” above.

Liquidity and Capital Resources

General

As of September 30, 2011, we had cash and cash equivalents (excluding restricted cash) of approximately $47.98 million. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.

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

	Nine Months Ended September 30,
	2011	2010
Net cash provided by operating activities	$12,099	$10,689
Net cash used in investing activities	(6,735)	(10)
Net cash provided by financing activities	141	4,329
Foreign currency translation adjustment	1,712	692
Net cash flow	$7,217	$15,700

Operating Activities

Net cash provided by operating activities was approximately $12.10 million for the nine-month period ended September 30, 2011, which is an increase of approximately $1.41 million from approximately $10.69 million net cash provided by operating activities for the same period of 2010. The increase in the cash provided by operating activities was mainly attributable to increase in our sales and net income.

Investing Activities

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

Net cash used in investing activities for the nine-month period ended September 30, 2011 was approximately $6.74 million, which is an increase of approximately $6.73 million from net cash used in investing activities of approximately $0.01 million for the same period of 2010. The increase of the cash used in investing activities was mainly due to the $4.72 million expenditures associated with the construction and purchase of property, plant and equipment mainly for the organic and specialty food business and the $1.95 million expense including other incidental costs (RMB 12.75 million) in connection with the purchase of a new corporate headquarter facility in Harbin during the second quarter 2011.

Financing Activities

Net cash provided by financing activities for the nine-month period ended September 30, 2011 was approximately $0.14 million, which is a decrease of approximately $4.19 million from approximately $4.33 million net cash provided by financing activities for the same period of 2010. The decrease of the cash provided by financing activities was mainly due to the net proceeds of approximately $5.48 million from the capital raising in June 2010. On June 7 and

June 28, 2010, we consummated two closings of a private placement transaction and issued in aggregate 197,700 units at a purchase price of $28.56 per unit for gross proceeds of approximately $5.65 million.

We believe that our cash on hand and cash flow from operations will meet our expected capital expenditure and working capital requirements for the next 12 months. We are in the process of significantly expanding our organic and specialty food consumer products business. We expect that the expansion will require capital expenditures of approximately $7.9 million over the next 12 to 18 months, which will be funded from our cash on hand and cash generated from operations. However, 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. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Effects of Inflation

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

Off Balance Sheet Arrangements

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

Seasonality

Our operating results and operating cash flows historically have not been subject to material seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

Critical Accounting Policies

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

Principle of consolidation

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

Topic 810 and related subtopics related to the consolidation of variable interest entities. We do not have any non-controlling interests in net income and accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we had a pecuniary interest in the VIEs that require consolidation of our and the VIEs’ financial statements.

Inventories

Derivative financial instruments

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

Revenue recognition

Share-based payments

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

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

Income taxes

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

Foreign currency

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

	September 30, 2011	December 31, 2010
Balance sheet items, except for equity accounts	US$1=RMB 6.3549	US$1=RMB 6.6227

	Three months ended September 30,
	2011	2010
Items in the statements of income and cash flows	US$1=RMB 6.4176	US$1=RMB 6.7725

	Nine months ended September 30,
	2011	2010
Items in the statements of income and cash flows	US$1=RMB 6.4975	US$1=RMB 6.8069

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, Ms. Lianyun Han and Mr. Robert Tick, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Ms. Lianyun Han and Mr. Robert Tick concluded that as of September 30, 2011, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting.

During the fiscal quarter ended September 30, 2011, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that would require disclosure under Item 103 of Regulation S-K. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

ITEM 1A. RISK FACTORS

Not applicable.

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

We have not sold any unregistered equity securities during the fiscal quarter ended September 30, 2011 that were not previously disclosed in a current report on Form 8-K that was filed during that period.

Purchases of Equity Securities By the Company

On August 24, 2011, the Board of Directors of the Company authorized a repurchase of up to $5 million of the Company’s common stock over twelve (12) months pursuant to a stock repurchase program (the “Repurchase Program”). Under the terms of the Repurchase Program, the Company may repurchase shares through open market, negotiated private or block transactions. The Repurchase Program does not obligate the Company to repurchase any dollar amount or number of shares of its common stock, and the program may be extended, modified, suspended or discontinued at any time.

During the three-month period ended September 30, 2011, there were no repurchases of our common stock pursuant to the Repurchase Program.

No repurchase plans expired or were terminated during the third quarter of fiscal 2011, nor do any plans exist under which the Company does not intend to make further purchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. [REMOVED AND RESERVED]

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

EXHIBITS.

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

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

32.1	Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following financial information from The Nutrastar International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) the Notes to Condensed Consolidated Financial Statements.

SIGNATURES

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

DATED: November 10, 2011

NUTRASTAR INTERNATIONAL INC.

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

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

EXHIBIT INDEX

Exhibit
Number	Description

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

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

32.1	Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following financial information from The Nutrastar International Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) the Notes to Condensed Consolidated Financial Statements.

September 30,

December 31,

Restricted cash - compensation for Chief Financial Officer

52,215 $

193,075