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SPU > SEC Filings for SPU > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for SKYPEOPLE FRUIT JUICE, INC

Form 10-Q for SKYPEOPLE FRUIT JUICE, INC


13-Nov-2013

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. We sell our Hedetang branded bottled fruit beverages domestically primarily to supermarkets in the PRC. For the three months ended September 30, 2013, sales of our fruit concentrates, fruit beverages, fresh fruits and other fruit related products represented 33%, 66% and 1% of our revenue, respectively, compared to 56%, 36% and 8%, respectively, for the same period of 2012.

We export our products as well as sell them domestically. We sell our products either through distributors with good credit or to end users directly. We believe that our main export markets are the Asia, North America, Europe, Russia and the Middle East. We sell our other fruit related products to domestic customers.

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During the nine months ended September 30, 2013, we exported our Hedetang-branded fruit juice beverages to Mongolia and Canada. We currently market our Hedetang brand fruit beverages in only certain regions of the PRC. We plan to expand the market presence of Hedetang over a broader geographic area in the PRC. In particular, we plan to expand our glass bottle production line to produce higher margin portable fruit juice beverages targeting consumers in more populated Chinese cities. Currently we produce six flavors of fruit beverages in 280 ml glass bottles, 418 ml glass and 500 ml glass bottles and BIB package, including apple juice, pear juice, kiwifruit juice, mulberry juice, kiwifruit cider and mulberry cider. We currently sell our fruit beverages to over 100 distributors and more than 20,000 retail stores in approximately 20 provinces. Our products are sold through distributors in stores such as Hualian Supermarket in Beijing, RT-Mart in Shenyang, Carrefour in Chongqing and Shenyang and Lianhua Supermarket in Shanghai, etc.

We plan to continue to focus on creating new products with high margins to supplement our current product offering.

We believe that continuous investment in research and development is a key component to being a leader in fruit juice concentrate and fruit beverage quality. As of September 30, 2013, we are in the process of building our internal research and development team, and we used to retain external experts and research institutions for additional consultation when necessary. During nine months ended September 30, 2013 and 2012, our research and development expenses were $18,980 and $427,447, respectively. During third quarter of 2013, the Company decided to suspend four research and development contracts that are currently in effect but concentrate on building up a research and development team of itself.

Our business is highly seasonal and can be greatly affected by weather because of the seasonal nature in the growing and harvesting of fruits and vegetables. 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 (i) apples is from August to January or February; (ii) pears is from July or August until April of next year; and (iii) kiwifruit is from September through January. Typically, a substantial portion of our revenues is earned during our first and fourth quarters. 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 increasing our annual production of fruit juice concentrates and fruit beverages. In the first quarter of 2009, we introduced mulberry and kiwifruit cider beverages in the Chinese market. Unlike fruit juice concentrates, which can only be produced during the squeezing season, such fruit beverages are made out of fruit juice concentrates and can be produced and sold in all seasons. With continuous efforts in marketing of our beverages in domestic market, we believe that our seasonality will be reduced.

Fresh fruits are the primary raw materials needed for the production of our products. Our raw materials mainly consist of apples, pears and kiwifruits. Other raw materials used in our business include pectic enzyme, amylase, auxiliary power fuels and other power sources such as coal, electricity and water.

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 fruit to our purchasing agents easily and in a timely manner. We are then able to deliver the fruit directly to our factory for production. We have assisted local farmers in their development of kiwifruit fields to help ensure a high quality product 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.

Shaanxi and Liaoning Provinces, where our manufacturing facilities are located, are large fruit producing provinces. We own and operate four manufacturing facilities in the PRC, all of which 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 has a focus on products made from one particular fruit according to the proximity of such manufacturing to the sources of supply for that fruit. Our kiwifruit processing facilities are located in Zhouzhi County of Shaanxi Province, which has the largest planting area of apples and kiwifruit 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 production line for concentrated apple juice and concentrated pear juice and both Shaanxi Province and Liaoning Province are rich in fresh apple and pear production, our Liaoning facilities also produced concentrated apple juice and our Shaanxi Province facilities also produced concentrated apple juice based on customer need. We believe that these regions provide adequate supply of raw materials for 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 offering expenses. As of September 30, 2013, we had spent approximately $12 million on various capital projects in Huludao Wonder as described in projects (4) and (5) below. The following table presents the capital projects on which we currently plan to use the proceeds from this offering. We review these projects and capital expenditures on a quarterly basis based on the market conditions and associated costs of these projects.

Capital Wonder Projects
                                                                                  Estimated
                                                                                   capital
                           Priority                                              expenditure
  Subsidiary     No.       Projects                    Progress                 (in Millions)
SkyPeople        (1)    Construction of   The design of the facility has       $            2.7
Suizhong                a refrigeration   been completed.
                        storage unit      Construction has started during
                        for the storage   the third quarter of 2012. The
                        of concentrated   Company suspended the construction
                        fruit juices      of the refrigeration storage unit
                        and fresh         to apply land use right
                        fruits and        certificate from local government.
                        vegetables        It is expected that the
                                          certificate of land use right will
                                          be granted to the Company in the
                                          second half of 2013.
Huludao Wonder   (2)    Construction of   The design of the facility has                    1.9
                        concentrated      been completed.
                        fruit juice       The first stage of construction
                        mixing center     has started. During the fourth
                                          quarter of 2012, the civil work
                                          has been completed. The Company is
                                          currently in the process of
                                          purchasing equipment. It is
                                          expected the entire project will
                                          be completed within 2013.
Huludao Wonder   (3)    Construction of   The construction of this 30                         3
                        a 30 ton/hour     ton/hour comprehensive fruits and
                        comprehensive     vegetables processing line was
                        fruits and        delayed. The installation and
                        vegetables        adjustment of machinery has been
                        processing line   completed during the fourth
                                          quarter of 2012. The newly
                                          installed machinery are under
                                          acceptance check.
Huludao Wonder   (4)    Construction of   The construction of the production                  3
                        a fruit juice     line was completed and the
                        beverage          production line commenced
                        production line   operation in the second quarter of
                        of 6,000          2012.
                        bottles/hour
Huludao Wonder   (5)    Environmental     The construction of the                             8
                        project (waste    environmental project was
                        water treatment   completed in the third quarter of
                        facility for      2012.
                        concentrated
                        apple juice
                        production
                        line)
Total Capital                                                                  $           18.6
Expenditure

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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. The Company suspended the construction of the refrigeration storage unit to apply land use right certificate from local government. It is expected that the certificate of land use right will be granted to the Company in the second half of 2013.

(2) The fruit juice-mixing center will be built in Huludao Wonder. The design of the fruit juice-mixing center has been completed. The first stage of construction has started. During the fourth quarter of 2012, the civil work has been completed. The Company is currently in the process of purchasing equipment. It is expected the entire project will be completed within 2013.

(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 newly installed machinery are under acceptance check.

(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 maximum production capacity of 6,000 bottles per hour has been substantially finished. Trail operation of the new production line has been conducted. On April 25, 2012, "China Food Production License" for production of Beverage (including fruit juice and vegetable juice) has been granted to Huludao Wonder by Liaoning Bureau of Quality and Technical Supervision. Huludao Wonder commenced operation of this 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.

Shaanxi Qiyiwangguo Projects

We previously identified several projects for our Shaanxi Qiyiwangguo factory, which we expected to finance by using our operating cash flow. These projects included a 24,000 PET bottle/hour fruit juice beverage aseptic cold-filling line, and a PET bottle blowing machine system. Based on the current market conditions and other potential opportunities, management has decided to delay these projects to a future date when appropriate.

Other Projects

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.

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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.

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.

Yidu Municipal People's Government is in the process of demolition buildings on project land. During the nine months ended September 30, 2013, the Company has made partial payment of RMB 75 million (approximately $12 million) the consideration to acquire the land use right. The Company is actively working with various bodies of Yidu Municipal People's Government making preparations for the start of the project.

Investment/Service Agreement with Mei County National Kiwi Fruit Wholesale Trading Center

On April 3, 2013, SkyPeople (China) entered into an Investment Agreement (the "Agreement") with the Managing Committee of Mei County National Kiwi Fruit Wholesale Trading Center (the "Committee"). The Committee has been authorized by the People's Government of Mei County to be in charge of the construction and administration of the Mei County National Kiwi Fruit Wholesale Trading Center (the "Trading Center").

Under the Agreement, the parties agreed to invest and establish a kiwi fruit comprehensive deep processing zone and kiwi fruit and fruit-related materials trading zone in Yangjia Village, Changxing Town of Mei County with a total planned area of total planned area of 286 mu (approximately 47 acres) (the "Project").

Pursuant to the Agreement, the Company will be responsible for the construction and financing of the Project with a total investment of RMB 445.6 million (approximately $ 71.9 million) in buildings and equipment. In addition, the Company agreed to pay for the land use rights for the Project land a fee of RMB 0.3 million per mu. The Committee is responsible for financing and constructing the basic infrastructure surrounding the Project, such as the main water supply, main water drainage, natural gas, electricity, sewage, access roads to the Project, natural gas and communications networks.

During the nine months ended September 30, 2013, the Company has made partial payment of RMB 98 million (approximately $16 million) the consideration to acquire the land use right and construction facilities. The Company is actively working with the Committee making preparations for the start of the project

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Suizhong Project

On July 15, 2011, SkyPeople entered into a Letter of Intent with the People's Government of Suizhong County, Liaoning Province, to establish a fruit and vegetable industry chain and further processing demonstration zone in Suizhong County, Liaoning Province (the "Suizhong project").

The Suizhong project may include one or more of the following: the construction and operation of fruit juice production lines, vegetable and fruit flash freeze facility, refrigeration storage facility and warehouse, a world class food safety testing center, fruit and vegetable modern supply chain and e-commerce platform, fruit and vegetable finished products processing center and exhibition center, etc. The implementation of the project is subject to government approval of the project.

During the nine months ended September 30, 2013, the Company finished the feasibility study and submitted detailed project proposal to local government. Both parties decided to continue the project. The Company paid RMB 52 million (approximately $8.5 million) as partial payment to acquire land use right from local government.

Results of Operations

Comparison of Three Months ended September 30, 2013 and 2012:

Revenue

The following table presents our consolidated revenues for each of our main
products for the three months ended September 30, 2013 and 2012, respectively
(in thousands):
                                             Three months ended September 30,                 Change
                                                2013                  2012            Amount            %
Concentrated apple juice and apple aroma   $            55       $         3,962     $  (3,907 )          (99 %)
Concentrated kiwifruit juice and
kiwifruit puree                                        269                   399          (130 )          (33 %)
Concentrated pear juice                              6,156                11,382        (5,226 )          (46 %)
Fruit juice beverages                               12,844                10,460         2,384             23 %
Fresh fruits and vegetables                              1                   707          (706 )         (100 %)
Other                                                  147                 1,653        (1,506  )         (91 %)
Total                                      $        19,472       $        28,563     $  (9,091  )         (32 %)

Our gross revenue for the three months ended September 30, 2013 was $19.5 million, a decrease of $9.1 million, or 32%, from $28.6 million for the same period of 2012. This decrease was primarily due to a decrease in sales of all product lines except fruit juice beverages, which generated more sales revenue during the third quarter of 2013 than same period of 2012.

Sales from apple related products decreased by $3.9 million, or 99%, to $0.055 million for the three months ended September 30, 2013, from $4.0 million for the same period of 2012. During the third quarter of 2013, the Company sold approximately 50 tons of concentrated apple juice decreased from approximately 2,050 tons of concentrated apple juice sold in the same period of 2012.

Sales from concentrated kiwifruit juice and kiwifruit puree were $0.269 million for the third quarter of 2013, a decrease of $0.13 million, or 33%, from $0.399 million in the same quarter of 2012. During the three months ended September 30, 2013, the Company sold approximately 221.2 tons of kiwi-related products. 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 decreased to $6.2 million in the third quarter of 2013, a decrease of $5.2 million, or 46%, from $11.4 million in the same quarter of 2012. During the second quarter of 2013 and 2012, the Company sold 3,802 and 6,000 tons of concentrated pear juice, respectively.

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Revenue from our fruit juice beverages in the PRC increased to $12.8 million, an increase of $2.3 million or 23%, from $10.5 million for the same period of 2012, primarily due to bigger market share gained from our continuous efforts of expanding sales channel.

Revenue from our fresh fruits and vegetables in the PRC were $0.001 million and $0.7 for the third quarter of 2013 and 2012, respectively.

Revenue from other products decreased to $0.1 million, a decrease of $1.6 million or 91%, from $1.7 million for the same period of 2012. The amount of sales of other products is expected to be unstable 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 the consolidated gross profit margin, which is gross profit as a
percentage of the related revenues, for the three months ended September 30,
2013 and 2012, respectively (in thousands for the gross profit):
                                                               Three months ended September 30,
                                                          2013                                   2012
                                            Gross profit         Gross margin       Gross profit      Gross margin
Concentrated apple juice and apple aroma   $         (20)                  (36 %)   $         679                17 %
Concentrated kiwifruit juice and
kiwifruit puree                                       187                   70 %              189                47 %
Concentrated pear juice                             2,213                   36 %            3,469                30 %
. . .
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