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SPU > SEC Filings for SPU > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for SKYPEOPLE FRUIT JUICE, INC

Form 10-Q for SKYPEOPLE FRUIT JUICE, INC


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

The following discussion and analysis of the condensed consolidated financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, and with the information under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed in this report and under the heading "Risk Factors" in our most recent Annual Report on Form 10-K.

Overview of Our Business

We are engaged in the production and sales of fruit juice concentrates (including fruit purees, concentrated fruit purees and concentrated fruit juices), fruit beverages (including fruit juice beverages and fruit cider beverages), and other fruit related products (including organic and non-organic fresh fruits) in and from the PRC. Our fruit juice concentrates, which include apple, pear and kiwifruit concentrates, are sold to domestic customers and exported directly or via distributors. For the nine months ended September 30, 2012, sales of our fruit juice concentrates, fruit beverages and other fruit related products represented 56%, 36% and 8% of our revenue, respectively, compared to 57%, 36.5% and 6.5%, respectively, for the same period of 2011. For the three months ended September 30, 2012, sales of our fruit juice concentrates, fruit beverages and other fruit related products represented 55%, 37% and 8% of our revenue, respectively, compared to 65%, 30% and 5%, respectively, for the same period of 2011.

We export our products as well as sell them domestically. The Company sells its fruit juice concentrates to domestic customers and exports directly or via distributors with good credit. We believe that our main export markets are the United States, the European Union, South Korea, Russia and the Middle East. We sell our Hedetang-brand bottled fruit beverages primarily to domestic supermarkets. We also sell our other fruit related products to domestic customers.

We currently market our Hedetang brand fruit beverages in certain regions of the PRC. During the second quarter of 2012, we began exporting beverage to the Republic of Mongolia. We plan to expand the market presence of our Hedetang brand over a broader geographic area in the PRC. In particular, we plan to increase the production of higher margin portable fruit juice beverages targeting consumers in more populated Chinese cities. Currently we produce eight flavors of fruit beverages in 280 ml, 418 ml and 500 ml glass bottles and 3 liter Bag-In-Box packaging, including apple juice, pear juice, kiwifruit juice, mulberry juice, peach juice, pomegranate juice, kiwifruit cider and mulberry cider. We sell our fruit beverages to distributors and retail stores in approximately 20 provinces. Our products are sold through distributors to stores such as Hualian, Aeon and Wal-Mart in Beijing; CR Vanguard, RenRenLe and Wal-Mart in Shaanxi; TESCO in Shanghai; and Wal-Mart in Liaoning.

Our strategy is to focus on creating new products with high margins to supplement our current product offering.

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In this regard, we believe that continuous investment in research and development to enhance the quality of fruit juice concentrates and fruit beverages is crucial. As of September 30, 2012, we had an internal research and development team of approximately 40 employees, and we retained external experts and research institutions for additional consultation when necessary. As compared to the corresponding periods of last year, our expenditure on research and development has been stable. For the nine months ended September 30, 2012 and 2011, our research and development expenses were $427,447 and $420,121, respectively. In the three months ended September 30, 2012 and 2011, our research and development expenses were $142,077 and $145,413, respectively.

Fresh fruits are the main raw material in our business. As such our business is highly seasonal and can be greatly affected by weather because of the seasonal nature in the fruit growing business. Our core products are apple, pear and kiwifruit juice concentrates, which are produced from July or August to April of the following year. The squeezing season for apples is from August to January or February of the following year, the squeezing season for pears is from July or August until April of next year, the squeezing season for kiwifruits is from September through December each year. Typically, a substantial portion of our revenues is earned during the first and fourth quarters of each year. To minimize the seasonality of our business, we make continued efforts in identifying new products with harvesting seasons complementary to our current product mix. Our goal is to lengthen our squeezing season, thus increase our annual production of fruit juice concentrates and fruit beverages. Since the first quarter of 2009, we have been selling fruit beverages in the Chinese market. Unlike fruit juice concentrates, which can only be produced during the squeezing season, fruit beverages are made out of fruit juice concentrates and can be produced and sold throughout the year. The addition of beverages to our product mix reduces the seasonality of our other products, which use fresh fruits as raw material.

We purchase raw materials from local markets and fruit growers that deliver directly to our plants. We have implemented a fruit-purchasing program in areas surrounding our factories. In addition, we organize purchasing centers in rich fruit production areas, helping farmers deliver fruits to our purchasing agents easily and in a timely manner. We are then able to deliver the fruits directly to our factory for production. We have assisted local farmers in their development of kiwifruit fields to help ensure high quality products throughout the production channel. Our raw material supply chain is highly fragmented and raw fruit prices are highly volatile in China. Fruit concentrate and fruit juice beverage companies generally do not enter into purchasing agreements. In addition to raw materials, we purchase various ingredients and packaging materials such as sweeteners, glass and plastic bottles, cans and packing barrels. We generally purchase our materials or supplies from multiple suppliers. We are not dependent on any one supplier or group of suppliers.

Shaanxi and Liaoning Provinces, where our manufacturing facilities are located, are large fruit producing provinces. All of our four manufacturing facilities in the PRC are strategically located near fruit growing centers so that we can better preserve the freshness of the fruits and lower our transportation costs. To take advantage of economies of scale and to enhance our production efficiency, generally, each of our manufacturing facilities focuses on certain products made from one particular fruit according to the proximity of such manufacturing facility to the sources of that fruit supply Our kiwifruit processing facilities are located in Zhouzhi County of Shaanxi Province, which has the largest planting area of apples and kiwifruits in the PRC. Our pear processing facilities are located in Shaanxi Province, which is the main pear-producing province in the PRC. Our apple processing facilities are located in Liaoning Province, a region that abounds with high acidity apples. As we use the same type of production line for both concentrated apple juices and concentrated pear juices and both Shaanxi Province and Liaoning Province are rich in production of fresh apples and pears, our Liaoning facilities also produce concentrated apple juices and our Shaanxi Province facilities also produce concentrated apple juices depending on customers' needs. We believe that these regions provide adequate supply of raw materials to meet our production needs in the foreseeable future.

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On August 30, 2010, we closed the public offering of 5,181,285 shares of our Common Stock at a price of $5.00 per share for approximately $25.9 million. We received an aggregate of approximately $24 million as net proceeds after deducting underwriting discounts and commissions and other offering expenses. The use of proceeds from the offering is described in the section entitled "Capital Projects" below. As of September 30, 2012, we had spent approximately $12 million on various capital projects, which are further described in Projects
(4) and (5), respectively, in the section entitled "Capital Projects" below. We review these projects and capital expenditures on a quarterly basis based on the market conditions and associated costs of these projects.

Recent Development

State Intellectual Property Office of the PRC Granted Four New Patents to the Company

In the third quarter of 2012, the Company was granted four new patents, each with a statutory patent period of 20 years, by the State Intellectual Property Office of the People's Republic of China ("SIPO"). Each of such patents is related to the Company's innovative production methods and techniques that can help more effectively produce a variety of fruit juice products. The Company received the patent certificates for these four patents in September 2012.

The Company received the following two patent certificates on September 12, 2012:

? A Kiwifruit cider beverage and its production method (Patent No. ZL 2009 1 0022739.1)

? A production technology for strawberry juice concentrates (Patent No. ZL 2010 1 0209900.9)

The Company received the following additional two patent certificates on September 26, 2012:

? A production technology for turnjujube juice concentrates (Patent No. ZL 2010 1 0108318.3)

? A production technology for cherry juice concentrates (Patent No. ZL 2010 1 0209899.X)

The Company filed the patent applications with respect to the above patents in 2009 and 2010, respectively, which were followed by a comprehensive review by SIPO. Upon being granted the new patents, the Company expects to secure market exclusivity for these innovative production methods and techniques for a period of 20 years. Including the foregoing four new patents, the Company now holds six active patents and has several patent applications in process.

Investment/Service Agreement with Yidu Municipal People's Government

On October 29, 2012, SkyPeople (China) entered into an investment/service agreement (the "Investment Agreement") with Yidu Municipal People's Government in Hubei Province of China.

Under the Investment Agreement, the parties agree to invest and establish an orange comprehensive deep processing zone in Yidu.

The Company will be responsible for the establishment, construction and financing of the project with a total investment of RMB 300 million (approximately $48 million), in fixed assets and the purchase of land use rights, while Yidu government agrees to provide a parcel of land for the project that is approximately 280 mu in size located at Gaobazhou Town of Yidu for a fee payable by the Company. The consideration for transferring the land use right for the project land shall be RMB 0.3 million per mu.

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The main scope of the Yidu project includes the establishment of:

1. one modern orange distribution and sales center (the "distribution center");

2. one orange comprehensive utilization deep processing zone (the "deep processing zone"), including:

a) one 45 ton/hour concentrated orange juice and byproduct deep processing production line;

b) one bottled juice drink production line with a capacity to produce 6,000 glass bottles per hour;

c) one storage freezer facility with a capacity to store 20,000 tons of concentrated orange juice; and

d) general purpose facilities within the zone, office space, general research and development facilities, service area, living quarters and other ancillary support areas

3. one research and development center for orange varietal improvement and engineering technology (the "R&D center"); and

4. one standardized orange plantation (the "orange plantation").

The total amount of RMB 300 million (approximately $48 million) will mainly be used to establish the distribution center and the deep processing zone on the project land of approximately 280 mu. SkyPeople and Yidu Municipal People's Government agreed to discuss the investment amount and location for establishing the R&D center and the orange plantation in the future.

Capital Projects

                                                                                Estimated
                                                                                 capital
                                                                               expenditure
  Subsidiary      No.    Priority Projects             Progress               (in Millions)
                         Construction of a   The design of the facility
                         refrigeration       has been completed.
                         storage unit for    Construction has started
                         the storage of      during the third quarter of
                         concentrated        2012. It is expected that the
                         fruit juices and    construction will be
SkyPeople                fresh fruits and    completed in the fourth
Suizhong          (1)    vegetables          quarter of 2012.                $            2.7
                                             The design of the facility
                                             has been completed.
                         Construction of     The first stage of
                         concentrated        construction has started. It
                         fruit juice         is expected that the
                         mixing center       construction work will be
                                             completed during the fourth
Huludao Wonder    (2)                        quarter of 2012.                             1.9
                         Construction of     The construction of this 30
                         a 30 ton/hour       ton/hour comprehensive fruits
                         comprehensive       and vegetables processing
                         fruits and          line was delayed. The Company
                         vegetables          is installing and adjusting
                         processing line     machinery and equipment for
Huludao Wonder    (3)                        the project.                                   3
                         Construction of a
                         fruit juice         The construction of the
                         beverage            production line was completed
                         production line     and the production line
                         of 6,000            commenced operation in the
Huludao Wonder    (4)    bottles/hour        second quarter of 2012.                        3
                         Environmental
                         project (waste      The construction of the
                         water treatment     environmental project was
                         facility for        completed in the third
                         concentrated        quarter of 2012.
                         apple juice
Huludao Wonder    (5)    production line)                                                   8
Total Capital
Expenditure                                                                  $           18.6

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(1) Our initial plan was to construct both the refrigeration storage (see Project (1) above) and fruit juice mixing center (see Project (2) above) in Huludao, Liaoning Province, for which the original estimated total capital expenditure was $4.4 million. We initially planned to start the construction of the refrigeration storage unit and a concentrated fruit juice-mixing center in the fourth quarter of 2011. However, the construction of the refrigeration storage unit has been delayed due to a change of plan. Management concluded that it is in the best interest of the Company to build the refrigeration storage unit in Suizhong, Liaoning Province, which is in close geographic proximity of Huludao Wonder in Liaoning Province. The total estimated capital expenditure for Projects (1) and (2) based on the changed plan is expected to be $4.6 million. The Company is now in the process of evaluating the new plan and in negotiation with the local government to acquire land use right for approximately 7.8 acres for consideration of approximately$290,000 per acre. In April 2012, the Company paid partial consideration of approximately $1,200,000. As of the date of this report, the certificate of land use right has not been granted to the Company.

(2) The fruit juice-mixing center will be built in Huludao Wonder. The design of the fruit juice-mixing center has been completed. First stage of construction has started. It is expected that the construction work will be completed during the fourth quarter of 2012.

(3) Our initial plan was to construct a 50 ton/hour concentrated apple juice production line in Huludao Wonder. We later decided to cancel the plan due to certain amendment to the Catalogue of Industry Structure Adjustment effective in June 2011, which classified concentrated apple juice business in the category of Restricted Industry. To avoid exposure to potential government restrictions on the expansion of this industry by, among other things, putting limitations on the increase in production capacity, increasing the product quality standard, reducing government financial support, we decided to change our existing 30 ton/hour concentrated apple juice line into a 30 ton/hour comprehensive fruits and vegetables processing line by adding additional equipment and machinery. The 30 ton/hour comprehensive fruits and vegetables processing line is expected to process a variety of fruits and vegetables (including apple, pear, and other fruits and vegetables) into juices. The estimated investment for this project is $3.0 million. We believe that this project could provide us more flexibility. The Company is installing and adjusting machinery and equipment.

(4) We started the construction of infrastructure for the fruit juice beverage production line on September 28, 2010. The construction of a fruit juice beverage production line with a maximum production capacity of 6,000 bottles per hour has been completed. On April 25, 2012, Huludao Wonder was granted a beverage production license (including fruit juice and vegetable juice) by Liaoning Bureau of Quality and Technical Supervision. Huludao Wonder commenced operation of the new production line on April 28, 2012.

(5) The environmental project mainly consists of a wastewater processing facility that is required in our production of fruit and vegetable juice concentrates. The construction of the environmental project (waste water treatment facility for concentrated apple juice production line) has been completed in the third quarter of 2012.

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Results of Operations

Comparison of Three Months ended September 30, 2012 and 2011:

Revenue

The following table presents our consolidated revenues for each of our main
products for the three months ended September 30, 2012 and 2011, respectively
(in thousands):

                                            Three Months Ended
                                              September 30,                     Change
                                           2012            2011          Amount           %
Concentrated apple juice and apple
aroma                                         3,962          8,782         (4,820 )          (55 )%
Concentrated kiwifruit juice and
kiwifruit puree                                 399            499           (100 )          (20 )%
Concentrated pear juice                      11,382          2,036          9,346            459 %
Fruit juice beverages                        10,460          5,188          5,272            102 %
Fresh fruits and vegetables                     707            897           (190 )          (21 )%
Other                                         1,653             35          1,618          4,623 %
Total                                        28,563         17,437         11,126             64 %

Our gross revenue for the three months ended September 30, 2012 was $28.6 million, an increase of $11.1 million, or 64%, from $17.4 million for the same period of 2011. This increase was primarily due to the increases in sales of concentrated pear juice, fruit juice beverages, as well as other products, which was partially offset by the decreases in revenue generated from sales of concentrated apple juice and apple aroma, as well as kiwi juice and kiwi puree.

Sales from apple related products decreased by $5.0 million, or 55%, to $4.0 million for the three months ended September 30, 2012, from $9.0 million for the same period of 2011. The decrease was primarily due to the decrease in sales volume for concentrated apple juice and apple aroma while the unit price for these products remained the same. During the third quarter of 2012, the Company sold approximately 2,050 tons of concentrated apple juice, a 55% decrease from 4,528 tons of concentrated apple juice sold in the same period of 2011. The decrease in sales volume was caused by a shorter squeezing season for concentrated apple juice and apple aroma in 2012, which started at the end of August in 2012, while it started at the beginning of August in 2011.

Sales from concentrated kiwifruit juice and kiwifruit puree were $0.4 million for the third quarter of 2012, a decrease of $0.1 million, or 20%, from $0.5 million in the same quarter of 2011. During the third quarter of 2012, the Company did not produce any concentrated kiwifruit juice and kiwifruit puree due to a shortage of fresh kiwi supply resulting from seasonal factors, and all sales of concentrated kiwifruit juice and kiwifruit puree were made out of the inventories.

Sales of concentrated pear juice increased to $11.4 million in the third quarter of 2012, an increase of $9.3 million, or 459%, from $2.0 million in the same quarter of 2011. The increase was primarily attributable to the 397% increase in the sales volume and a slight increase in the unit price of concentrated pear juice. During the third quarter of 2012 and 2011, the Company sold approximately 6,000 tons and 1,200 tons of concentrated pear juice, respectively.

Revenue from our fruit juice beverages in the PRC increased to $10.5 million, an increase of $5.3 million or 102%, from $5.2 million for the same period of 2011, primarily due to an increase in sales volume as a result of the downward pricing adjustment for our beverage products with an aim to improve our competitiveness and to gain more market shares. We implemented this pricing strategy since the third quarter of 2011.

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Sales of fresh fruits and vegetables decreased to $0.7 million in the third quarter of 2012, a decrease of $0.2 million, or 21%, from $0.9 million in the same quarter of 2011. The decrease of revenue generated from sales of fresh fruits and vegetables was primarily due to fewer supply of fresh fruits and vegetables in the third quarter of 2012 as compared to the corresponding period of last year due to seasonable factors.

Revenue from other products increased to $1.7 million, an increase of $1.7 million or 4,623%, from $0.04 million for the same period of 2011. Historically, revenue from other products only accounted for a small percentage of our total revenue. It accounted for 5.8% and 0.2% of our total revenue for the third quarter of 2012 and 2011, respectively. Revenue from other projects is expected to fluctuate and is generally not indicative of our future sales of other products.

Gross Margin

The following table presents the consolidated gross profit of each of our main
products and its consolidated gross profit margin, which is gross profit as a
percentage of the related revenues, for the three months ended September 30,
2012 and 2011, respectively (in thousands for the gross profit):

                                                            Three Months Ended September 30,
                                                       2012                                   2011
                                         Gross profit         Gross margin       Gross profit      Gross margin
Concentrated apple juice and apple
aroma                                   $          679                   17 %    $       2,045                23 %
Concentrated kiwifruit juice and
kiwifruit puree                                    189                   47 %              267                54 %
Concentrated pear juice                          3,469                   30 %              516                25 %
Fruit juice beverages                            3,951                   38 %            1,582                30 %
Fresh fruits and vegetables                        218                   31 %              424                47 %
Other                                               19                    1 %                7                20 %
Total Gross Profit/Average Gross
Margin                                  $        8,525                   30 %    $       4,841                28 %

The consolidated gross profit for the three months ended September 30, 2012 was $8.5million, representing an increase of $3.7 million, or 76%, from $4.8 million for the same period of 2011.

The consolidated gross profit margin for the three months ended September 30, 2012 was 30%, an increase of 2%, from 28% for the same period of 2011. The increase was primarily due to increases in gross profit margins of the concentrated pear juice and fruit juice beverages, which were slightly offset by slight decreases in gross profit margins of the concentrated apple juice and apple aroma, concentrated kiwifruit juice and kiwifruit puree, fresh fruits and vegetables.

The gross profit margin of the concentrated apple juice and apple aroma decreased to 17% for the three months ended September 30, 2012 from 23% for the same period of 2011, as the Company produced less concentrated apple juice and apple aroma available for sale during the third quarter of 2012 and also sold concentrated apple juice and apple aroma out of the 2011 inventories, whose cost of production was relatively high due to higher purchase price of fresh apple in 2011.

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The gross profit margin of the concentrated kiwifruit juice and kiwifruit puree . . .

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