UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
R ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2008
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Transition Period from ___ to ___
Commission
File Number 1-14523
SKYPEOPLE
FRUIT JUICE, INC.
(Exact
name of registrant as specified in its charter)
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Florida
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98-0222013
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
Number)
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16F,
National Development Bank Tower,
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No.
2, Gaoxin 1st.
Road, Xi’an, PRC
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710075
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
Telephone Number: 011-86-29-88386415
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001
per share
Indicate
by check mark if the registrant is a well-known
seasoned issuer, as defined in rule 405 of the Securities
Act. £Yes RNo
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the Act. £Yes R No
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. R Yes £
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
Accelerated Filer
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Accelerated
Filer
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Non-Accelerated
Filer
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Smaller
reporting company
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act). £Yes RNo
The
aggregate market value of voting stock held by non-affiliates of the registrant,
based upon the closing price of $5.90 per share for shares of the registrant’s
Common Stock on June 30, 2008, the last business day of the registrant’s most
recently completed second fiscal quarter as reported by the OTC Bulletin Board,
was approximately $1.6 million. In calculating such aggregate market value,
shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock (including outstanding shares with respect to
which a holder has the right to acquire beneficial ownership within 60 days)
were excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.
The
number of shares of Common Stock outstanding as of March 25, 2009 was
22,271,786.
Documents
Incorporated by Reference
Part III
of this Form 10-K incorporates by reference information from Registrant’s Proxy
Statement for its 2008 Annual Meeting of Shareholders to be filed with the
Commission under Regulation 14A within 120 days of the end of the fiscal year
covered by this Form 10-K.
SKYPEOPLE
FRUIT JUICE, INC.
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SKYPEOPLE
FRUIT JUICE, INC.
NOTE
CONCERNING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (“Annual
Report”) of SkyPeople Fruit Juice, Inc. (“we,” “us,” “our” or “the Company”)
includes forward-looking statements that involve risks and uncertainties within
the meaning of the Private Securities Litigation Reform Act of 1995. Other than
statements of historical fact, all statements made in this Annual Report are
forward-looking, including, but not limited to (a) our projected sales,
profitability, and cash flows, (b) our growth strategies, (c) anticipated trends
in our industry, (d) our future financing plans and (e) our anticipated needs
for working capital. They are generally identifiable by use of the words "may,"
"will," "should," "anticipate," "estimate," "plans," “potential," "projects,"
"continuing," "ongoing," "expects," "management believes," "we believe," "we
intend" or the negative of these words or other variations on these words or
comparable terminology. Forward-looking statements involve risks and
uncertainties that are inherently difficult to predict, which could cause actual
outcomes and results to differ materially from our expectations, forecasts and
assumptions. The following important factors, in addition to those discussed
above, could affect our future results and could cause those results to differ
materially from those expressed in such forward-looking statements:
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fluctuations
in the supply of raw material
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general
economic conditions and conditions which affect the market for our
products
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changes
in U.S. and global financial and equity markets, including market
disruptions and significant interest rate fluctuations, which may impede
our access to, or increase the cost of, external financing for our
operations and investments
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our
success in implementing our business strategy or introducing new
products
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our
ability to attract and retain
customers
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changes
in tastes and preferences for, or the consumption of, our
products
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impact
of competitive activities on our
business
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risks
associated with conducting business internationally and especially in
China, including currency fluctuations and devaluation, currency
restrictions, local laws and restrictions and possible social, political
and economic instability
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other
economic, financial and regulatory factors beyond the Company’s
control
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Any
or all of our forward-looking statements in this report may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under “Item 1A. Risk Factors” in this Form 10-K. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
We
undertake no obligation to update forward-looking statements to reflect
subsequent events, changed circumstances, or the occurrence of unanticipated
events.
Overview
We are
engaged in the business of production and sales of special concentrated fruit
juices, fast-frozen and freeze-dried fruits and vegetables and fruit juice
drinks through our indirect subsidiary, Shaanxi Tianren Organic Food Co., Ltd.
(“Shaanxi Tianren”), in the People’s Republic of China (“PRC”). We also are
conducting research and development relating to improvement of the quality of
our products as well as the development of new products. Shaanxi
Tianren is 99% owned by Pacific Industry Holding Group Co., Ltd. (“Pacific”), a
Vanuatu corporation. Previously, we were a shell company with no significant
business operations. As a result of the consummation of a reverse merger
transaction, on February 26, 2008 we ceased to be a shell company and became an
indirect holding company for Shaanxi Tianren through Pacific. Pacific acquired a
99% ownership interest in Shaanxi Tianren in September 2007 through a
reorganization between entities under common control. Because Shaanxi Tianren’s
operations are the only significant operations of the Company and its
affiliates, the business and financial results of Pacific reflect those of
Shaanxi Tianren.
Below is
the Company’s corporate structure:
*Xi’an Qinmei Food Co., Ltd.,
an entity which is not affiliated with the Company, owns the other 8.85% of the
equity interest in Shaanxi Qiyiwangguo Modern Organic Agriculture Co., Ltd. (a
PRC corporation which was formerly called Xi’an Tianren Organic Co.
Ltd.)
We own
and operate three manufacturing facilities in China. To take advantage of
economies of scale and to enhance our production efficiency, each of our
manufacturing facilities has a focus on juice products centering around one
particular fruit according to the proximity of such manufacturing to the supply
center of that fruit. All concentrated juice products are manufactured using the
same type of production line with slight variations in processing methods. Since
June 2007, after we leased the production facilities of Huludao Wonder Fruit
Co., Ltd. (“Huludao Wonder”), we have been operating our pear juice products
business out of our Jingyang Branch Office of Shaanxi Tianren. Our business
involving apple juice products is operated out of the facilities of Huludao
Wonder, and our business involving kiwifruit products is run out of Shaanxi
Qiyiwangguo Modern Organic Agriculture Co., Ltd. (“Shaanxi Qiyiwangguo”), in
which we have held a 91.15% ownership interest since May 2006.
On June
2, 2007, Shaanxi Tianren entered into a lease agreement with Shaanxi Hede
Investment Management Co., Ltd. (“Hede”), pursuant to which Shaanxi Tianren, for
a term of one year and for a monthly lease payment of RMB 300,000, leased all
the assets and operating facilities of Huludao Wonder, which was wholly-owned by
Shaanxi Hede. On June 10, 2008, we completed the acquisition of Huludao Wonder
for a total purchase price of RMB 48,250,000 or approximately U.S. $6,308,591
based on the exchange rate on June 1, 2007. The payment was made through the
offset of related party receivables.
Corporate
History
We were
initially incorporated in 1998 in Florida as Cyber Public Relations, Inc. for
the purpose of providing internet electronic commerce consulting services to
small and medium sized businesses. While we were operating under the name Cyber
Public Relations, Inc. we never had any material operations or
revenues.
Pursuant
to a Capital Stock Exchange Agreement between the stockholders of Environmental
Technologies, Inc., a Nevada corporation, and us, on January 21, 2004 the
Environmental Technologies stockholders transferred all of their shares of the
Environmental Technologies stock to us, Environmental Technologies, Inc. became
our wholly-owned subsidiary and we changed the Company’s name from “Cyber Public
Relations, Inc.” to “Entech Environmental Technologies, Inc.”
After our
acquisition of Environmental Technologies, we operated, through our wholly-owned
subsidiary, H.B. Covey, Inc., a business providing construction and maintenance
services to petroleum service stations in the southwestern part of the United
States of America and installation services for consumer home products in
Southern California.
During
July 2007, we entered into and consummated a Stock Sale and Purchase Agreement
pursuant to which we sold H.B. Covey, Inc.
Principal
Products
Our
principal products include concentrated apple juice, concentrated pear juice,
concentrated kiwifruit puree, fruit juice drinks, fresh fruits and organic fresh
fruits.
There are
two general categories of fruit and vegetable juices available in the market.
One is fresh juice that is canned directly after filtering and
sterilization upon being squeezed out of fresh fruits or vegetables. The other
general category is juice drinks made out of concentrated fruit and vegetable
juices. Concentrated fruit and vegetable juices are produced through pressing,
filtering, sterilization and evaporation of fresh fruits or vegetables. They are
used as the base material or ingredient for products such as drinks, fruit jams
and fruit wines, etc. Concentrated juices are not drinkable. Instead, they are
used as a basic ingredient for manufacturing juice drinks and as an additive to
fruit wine and fruit jam, cosmetics and medicines.
Research
and Development
We
believe that through continuous investment in research and development, our
product quality is always among the leaders in the industry and our market share
continues to increase. Shaanxi Tianren has established a research and
development institution with 41 research and development personnel. Shaanxi
Tianren also from time to time retains external experts and research
institutions. Research and development costs increased by $418,817 to $449,695
in fiscal year 2008 when compared to $30,878 for fiscal 2007, as we entered two
contracts with an outside research institute to research and develop new
products in fiscal year 2008. These two contracts are from June 2008
to December 2009 under which we are required to make a monthly
payment of RMB 600,000 or $87,944.
Shaanxi
Tianren currently possesses know how or other intellectual property related to 5
special production technologies, including technologies relating to the
production of kiwifruit pulp, kiwifruit concentrated pulp, concentrated apple
juice, concentrated pear juice and concentrated mulberry juice. Shaanxi Tianren
has also developed new production processes for fruit juice products such as
kiwifruit juice, guava juice and strawberry juice. Our whole new pulp and juice
production technology and process consist of methods for membrane filtration,
resin decolonization, hair removal, seed removal and grinding pulp into juice.
The Flow-Through Capacitor (“FTC”) membrane reverse osmosis concentration and
composite biological enzymolysis technology is for clarification of pulp juice.
We believe that these are leading technologies for our industry.
Industry
and Principal Markets
Global
Market
The fruit
and vegetable juice processing industry is an emerging industry that came into
being at the end of the 19th century. Due to the natural and healthy quality of
fruit and vegetable juice drinks, in recent years the consumption of such
products has continued to grow and sales of pure fruit and vegetable juices and
fruit and vegetable juice drinks have increased rapidly.
As
reported in the Beverage Digest annual “Fact Book” for 2007, the non-alcoholic
single serve beverage business is $106 billion in size and grew 4.1% by volume
in 2006. Carbonated soft drinks (“CSD’s”) declined in volume in 2005 and 2006
for the first time in 20 years. Emerging as leaders within the beverage industry
are single serve non-carbonated brands in tea, coffee, fortified water, juice,
sports drinks, milk drinks and energy drinks (carbonated). This “new age”
beverage category grew 15% to $25.9 billion in 2006.
China
Market
China is
a country with a large population, but the consumption of fruit juice is
relatively very low, with annual per capita consumption of no more than 1
kilogram, which only accounts for 10% of total world consumption. If calculated
based on annual world consumption rates, China’s market capacity for fruit juice
beverages would be 9.1 million tons, indicating that there is a great
potential market for the marketing of fruit juice beverages in
China.
In China,
the output of fruit juice and drinks nationwide was approximately 8,600,000 tons
in 2006, an increase of 29.02% compared with that in 2005. From January to
November 2007, output was approximately 9,851,806 tons, an increase of 21.92%
compared with that of the first eleven months of 2006. From January to February
2008, output was approximately 1,685,673 tons, an increase of 9.54% compared
with that of the first two months of 2007. Approximately 98% of the output of
concentrated juices in China is exported to foreign countries, but only
approximately 69% of the Company’s concentrated fruit juices were exported
during the fiscal year ended December 31, 2008.
Shaanxi
Tianren is located in Shaanxi Province. In 2007, the production volume of
concentrated apple juice by companies located in Shaanxi Province was
640,000 tons, accounting for 61% of the total volume of concentrated apple juice
from all of the PRC. At present, the output value and export volume of
concentrated juice of Shaanxi Province all rank first among other provinces
and cities in China.
Marketing
Shaanxi
Tianren is certified and permitted to directly export its products. The
certificate is issued by the Commercial Department of China. More than 69
percent of our concentrated juices are directly and indirectly exported. One
export channel is via distributors with good credit, and the other is the direct
sale to end-users. In its main export markets (the U.S., Europe and Middle
East), Shaanxi Tianren has stable distributors and end-users.
Sales of
fruit juice products are mainly made in Chinese markets. Most of the products
are sold through provincial level, city level and county level agents. The
Company also sells directly to hotels, supermarkets and similar outlets. Our
target markets for kiwifruit pulp, kiwifruit concentrated pulp and kiwifruit
concentrated juice are mainly in Europe, Southeast Asia, South Korea, Japan, the
Middle East, mainland China and Taiwan. Our target markets for concentrated
apple juice and pear juice are in North America (especially in the U.S.), Europe
and the Middle East.
Shaanxi
Tianren uses the following marketing methods: directly marketing with foreign
businesses via our sales department; attendance at various international farm
and sideline products sales exhibitions, at which we contact clients from abroad
to sell to them directly; and sales made through our trade
websites.
Competition
The
beverage industry is highly competitive. The principal areas of competition are
pricing, product quality, packaging, development of new products and flavors and
marketing campaigns. We believe that our advantages lie in our technology
relating to the production of concentrated fruit juice of small breeds,
including mulberry juice, kiwifruit juice and other types of juice with limited
raw material and output. We can produce concentrated apple juice with 4%--8%
acidity at relatively low cost. As all our factories are located near the
production area of the raw material of fresh fruits, we believe that our
transportation and storage costs are relatively lower than many of our
competitors. At the same time, we believe we are a leader in the production of
concentrated clear pear juice and can produce the highest quality products of
concentrated clear pear juice in China.
Our
ability to remain competitive will depend to a great extent upon our ongoing
performance in these areas. We cannot assure that we will continue to
compete favorably or that we will be successful in the face of increasing
competition from new products introduced and technologies employed by our
existing competitors or new companies entering the market.
Raw
Materials and Other Supplies
Our raw
materials mainly consist of apples, pears and kiwifruits, which we procure in
the PRC market and the cost of which represents over 51% of our overall
production cost in fiscal year 2008. We source our pear and kiwifruit supplies
mainly from our home province, Shaanxi Province, which is known for its pear and
kiwifruit production. Our kiwifruit processing facilities are located in Zhouzhi
County, Shaanxi Province, where 70% of the country’s kiwifruits are grown. We
source our apple supply mainly from Liaoning Province, where our subsidiary,
Huludao Wonder is located. The supply of our raw material fruits has
traditionally been fragmented as we generally purchase directly from farmers. In
addition, because the prices of raw material fruits change from season to season
based on the output of the farms, we do not have long-term supply agreements
with our suppliers. To secure our fruit supply and lower transportation costs,
our processing facilities are strategically located near the various centers of
fruit supply.
In
addition to the raw materials, we purchase various ingredients, packaging
materials and energy such as sweeteners, glass and plastic bottles, cans,
packing barrels, pectic enzyme, other packaging materials, electricity, natural
gas and motor fuel. We generally purchase our materials or supplies from
multiple suppliers. We are not dependent on any supplier or group of suppliers.
The Company does not have concentrations of business with vendors constituting
greater than 10% of the Company’s purchases in fiscal year 2008 and 2007. The
supply or cost of our materials could be adversely affected by various factors,
including price changes, economic conditions, weather conditions and
governmental controls.
Seasonality
Our
business experiences mild seasonal effects as sales of our products are
generally higher during the squeezing season from August through April of the
following year. Sales of our products during the months from March through July
generally tend to be lower due to a shortage of raw material of fresh fruits and
a lower level of production activity. As a result, our results of operations for
the third quarter and fourth quarter are generally stronger than those for our
first quarter and second quarter. However, we are trying to diversify our
products and prolong our squeezing season. There are also sales from inventory
during the non-squeezing season. In 2008, we started our squeezing season in
July with the early initiation of machine maintenance.
Government
Regulation
Our
products and services are subject to regulation by governmental agencies in the
PRC and Shaanxi Province. Business and company registrations, along with
the products, are certified on a regular basis and must be in compliance with
the laws and regulations of the PRC and provincial and local governments and
industry agencies, which are controlled and monitored through the issuance of
licenses. Our licenses include an operating license which enables us to sell
packaged food such as concentrated fruit and vegetable juice, fruit sugar, fruit
pectin, fast-frozen and freeze-dried fruits and vegetables, dehydrated fruits
and vegetables, fruit and vegetable juice drinks, fruit vinegar and organic
food. The registration No. is 610100400000601.
Intellectual
Property
The
Company possesses the patent for a device used to crush and remove fruit from
its peel (Patent No.: ZL200620078461.1), and a device for removing the filth on
fruit peel and fruit hair (Patent Number: ZL200620078460.7). These
two patents have been granted by the State Intellectual Property Office of the
People’s Republic of China.
Shaanxi
Tianren registered the trademark of HEDETANG with the Trademark Bureau of
the State Administration for Industry and Commerce of China on Nov. 4, 2005. The
trademark expires on November 3, 2015 and can be extended upon expiration.
Shaanxi Tianren has authorized all its subsidiaries to use this registered
trademark for free on related products.
Employees
As of
December 31, 2008, Shaanxi Tianren had 357 full-time employees and 95 part-time
employees. Of that amount, 47 are in administration, 22 in finance, 41 in
research and development, 280 in production and 62 in marketing and
sales.
Our
business and operations entail a variety of risks and uncertainties, including
those described below.
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations and if we are not successful in addressing
risks and difficulties that we may likely encounter, our business may be
adversely affected.
Shaanxi
Tianren began its operations in 2001. Our limited operating history in the fruit
juice industry may not provide a meaningful basis on which to evaluate our
business. Although Shaanxi Tianren’s revenues have grown rapidly since its
inception, we cannot assure that we will maintain our profitability or that we
will not incur net losses in the future. We expect that our operating expenses
will increase as we expand. Any significant failure to realize anticipated
revenue growth could result in significant operating losses. We will continue to
encounter risks and difficulties frequently experienced by companies at a
similar stage of development, including potential failure to:
● maintain
our proprietary technology;
● expand
our product offerings and maintain the high quality of our
products;
● manage
our expanding operations, including the integration of any future
acquisitions;
● obtain
sufficient working capital to support our expansion and to fill customers’
orders in time;
● maintain
adequate control of our expenses;
● implement
our product development, marketing, sales, and acquisition strategies and adapt
and modify them as needed;
● anticipate
and adapt to changing conditions in the fruit juice industry markets in
which we operate as well as the impact of any changes in government regulation,
mergers and acquisitions involving our competitors, technological developments
and other significant competitive and market dynamics.
If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.
We
may encounter substantial competition in our business and failure to compete
effectively may adversely affect our ability to generate revenue.
We
believe that existing and new competitors will continue to improve their
products and to introduce new products with competitive price and performance
characteristics. We expect that we will be required to continue to invest in
product development and productivity improvements to compete effectively in our
markets. Our competitors could develop a more efficient product or undertake
more aggressive and costly marketing campaigns than ours, which may adversely
affect our marketing strategies and could have a material adverse effect on our
business, results of operations and financial condition.
Our major
competitors may be better able to successfully endure downturns in our industry.
In periods of reduced demand for our products, we can either choose to maintain
market share by reducing our selling prices to meet competition or maintain
selling prices, which would likely sacrifice market share. Sales and overall
profitability would be reduced in either case. In addition, we cannot
assure that additional competitors will not enter our existing markets, or
that we will be able to compete successfully against existing or new
competition.
Our
inability to fund capital expenditure requirements may adversely affect our
growth and profitability and we are restricted from issuing any preferred stock
or convertible debt in certain circumstances.
Our
continued growth is dependent upon our ability to raise capital from outside
sources. Our ability to obtain financing will depend upon a number of factors,
including:
● our
financial condition and results of operations;
● the
condition of the PRC economy and the environmental protection product industry
in the PRC; and
● conditions
in relevant financial markets.
Under our
Series B Convertible Preferred Stock Purchase Agreement, dated February 25, 2008
with Barron Partners LLP and Eos Holdings, LLC (the “Stock Purchase Agreement”),
we may not issue any preferred stock or convertible debt for three years
following February 26, 2008, the closing date of the Stock Purchase Agreement,
for so long as such investors shall continue to beneficially own 20% of the
Series B Preferred Stock issued under the Stock Purchase Agreement.
If we are
unable to obtain financing, as needed, on a timely basis and on acceptable
terms, our financial position, competitive position, growth and profitability
may be adversely affected.
We may not be
able to effectively control and manage our growth and a failure to
do so could adversely affect our operations and financial
condition.
Our sales
revenues have increased from approximately $17,427,204 for the fiscal year ended
December 31, 2006 to approximately $29,361,941 for the fiscal year ended
December 31, 2007, to $41,648,605 for the fiscal year ended December 31, 2008.
If our business and markets continue to grow and develop, it will be necessary
for us to finance and manage expansion in an orderly fashion. In addition, we
may face challenges in managing expanding product offerings and in integrating
acquired businesses with our own. These eventualities will increase demands on
our existing management, workforce and facilities. Failure to satisfy these
kinds of increased demands could interrupt or adversely affect our operations
and cause production backlogs, longer product development time frames and
administrative inefficiencies.
We
depend on a concentration of customers, the loss of one or more of which could
materially adversely affect our operations and revenues.
Our
revenue is dependent, in large part, on significant orders from a limited number
of customers. Sales to our five largest customers accounted for approximately
34%, 29%, and 57% of our net sales during the years ended December
31, 2008,2007 and 2006, respectively.. We believe that revenue derived from
current and future large customers will continue to represent a significant
portion of our total revenue. Our inability to continue to secure and maintain a
sufficient number of large customers would have a material adverse effect on our
business, operating results and financial condition. Moreover, our success will
depend in part upon our ability to obtain orders from new customers, as well as
the financial condition and success of our customers and general economic
conditions.
Any
significant fluctuation in the price of our raw materials may have a material
adverse effect on the manufacturing cost of our products.
The
prices of fresh fruits, our principal raw materials, are subject to market
conditions and generally we do not, and do not expect to, have long-term
contracts with our suppliers for those items. While these raw materials are
generally available and we have not experienced severe raw material shortages in
the past, in 2007 the prices of apples, kiwifruits and pears temporarily
significantly increased because of a poor climate, which caused a sharp decrease
in fruit output. We cannot assure that the necessary raw materials will continue
to be available to us at prices currently in effect or acceptable to us. The
prices for these raw materials have varied significantly and may vary
significantly in the future. Numerous factors, most of which are beyond our
control, influence prices of our raw material. These factors include general
economic conditions, geographic conditions, climate condition, transportation
delays and other uncertainties.
We may
not be able to adjust our product prices, especially in the short-term, to
recover cost increases in these raw materials. Our future profitability may be
adversely affected to the extent we are unable to pass on higher raw material
costs to our customers.
There
are risks that the sales price of our products will change, which will affect
our profits.
According
to financial analysis of Shaanxi Tianren, the operating income of Shaanxi
Tianren is very sensitive to the sales price of concentrated fruit juice. If the
sales price of concentrated fruit juice changes, it will directly influence the
continuity and stability of our gains.
The
factors influencing the sales price of concentrated fruit juice include the
supply price of fresh fruit, supply and demand of our products in international
and domestic markets and competition in the fruit juice industry.
We
may engage in future acquisitions that could dilute the ownership interests of
our stockholders, cause us to incur debt and require us to assume contingent
liabilities.
As part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
augment our market coverage or enhance our technological capabilities, or
otherwise offer growth opportunities. From time to time we review investments in
new businesses and we expect to make investments in, and to acquire, businesses,
products, or technologies in the future. In the event of any future
acquisitions, we could:
● issue
equity securities which would dilute current stockholders’ percentage
ownership;
● incur
substantial debt;
● expend
significant cash.
These
actions could have a material adverse effect on our operating results or the
price of our Common Stock. Moreover, even if we do obtain benefits in the form
of increased sales and earnings, there may be a lag between the time when the
expenses associated with an acquisition are incurred and the time when we
recognize such benefits. Acquisitions and investment activities also entail
numerous risks, including:
● difficulties in the
assimilation of acquired operations, technologies and/or products;
● unanticipated
costs associated with the acquisition or investment transaction;
● the
diversion of management’s attention from other business concerns;
● adverse
effects on existing business relationships with suppliers and
customers;
● risks
associated with entering markets in which we have no or limited prior
experience;
● the
potential loss of key employees of acquired organizations;
● accounting
issues that arise in connection with the acquisition or investment;
● challenges
in retaining customers of acquired businesses; and
● substantial charges for the amortization
of certain purchased intangible assets, deferred stock compensation
or similar items.
We cannot
ensure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we might acquire in the future, and our failure
to do so could have a material adverse effect on our business, operating results
and financial condition.
We
may not be able to prevent others from unauthorized use of our patents, which
could harm our business and competitive position.
Our
success depends, in part, on our ability to protect our proprietary
technologies. We own two patents in the PRC covering our fruit process
technology. The process of seeking patent protection can be lengthy and
expensive and we cannot assure that our existing or future issued patents will
be sufficient to provide us with meaningful protection or commercial
advantages.
We also
cannot assure that our current or potential competitors do not have, and will
not obtain, patents that will prevent, limit or interfere with our ability to
make, use or sell our products in either the PRC or other
countries.
The
implementation and enforcement of PRC intellectual property laws historically
have not been vigorous or consistent, primarily because of ambiguities in the
PRC laws and a relative lack of developed enforcement mechanisms. Accordingly,
intellectual property rights and confidentiality protections in the PRC are not
as effective as in the United States and other countries. Policing the
unauthorized use of proprietary technology is difficult and expensive, and we
might need to resort to litigation to enforce or defend patents issued to us or
to determine the enforceability, scope and validity of our proprietary rights or
those of others. Such litigation will require significant expenditures of cash
and management efforts and could harm our business, financial condition and
results of operations. An adverse determination in any such litigation will
impair our intellectual property rights and may harm our business, competitive
position, business prospects and reputation.
We may need additional capital to
fund our future operations and, if it is not available when needed, we may need
to reduce our planned development and marketing efforts, which may reduce our
sales revenues.
We
believe that our existing working capital and cash available from operations
will enable us to meet our working capital requirements for at least the next 12
months. However, if cash from future operations is insufficient, or if cash is
used for acquisitions or other currently unanticipated uses, we may need
additional capital. The development and marketing of new products and the
expansion of distribution channels and associated support personnel requires a
significant commitment of resources. In addition, if the markets for our
products develop more slowly than anticipated, or if we fail to establish
significant market share and achieve sufficient net revenues, we may continue to
consume significant amounts of capital. As a result, we could be required to
raise additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing stockholders.
If additional funds are raised through the issuance of debt securities, such
securities may provide the holders certain rights, preferences, and privileges
senior to those of common stockholders, and the terms of such debt could impose
restrictions on our operations. We cannot assure that additional capital, if
required, will be available on acceptable terms, or at all. If we are unable to
obtain sufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.
We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be adequate.
We are
constantly striving to improve our internal accounting controls. We hope to
develop an adequate internal accounting control to budget, forecast, manage and
allocate our funds and account for them. There is no guarantee that such
improvements will be adequate or successful or that such improvements will be
carried out on a timely basis. The PRC historically has not adopted a Western
style of management and financial reporting concepts and practices, as in
modern banking, computer and other control systems. We may have difficulty
in hiring and retaining a sufficient number of qualified employees to work in
the PRC. As a result of these factors, we may experience difficulty in
establishing accounting and financial controls, collecting financial data,
budgeting, managing our funds and preparing financial statements, books of
account and corporate records and instituting business practices that meet
Western standards. Therefore, we may, in turn, experience difficulties in
implementing and maintaining adequate internal controls as will be required
under Section 404 of the Sarbanes Oxley Act of 2002 and complying with other
U.S. securities laws.
Our internal controls over financial
reporting may not be effective, and our independent auditors may not be able
to certify as to their effectiveness, which could have a significant and adverse
effect on our business.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by the Company’s independent registered public
accountants. The SEC extended the compliance dates for “non-accelerated filers,”
as defined by the SEC. During 2008 we changed our fiscal year end from September
30 to December 31 and in accordance with SEC rules, we filed a transition report
for the period from October 1, 2007 to December 31, 2007. The transition report
was on Form 10-Q and contained unaudited financial statements as permitted under
such rules. The annual assessment of our internal controls requirement applies
to this Annual Report on Form 10-K and the attestation requirement of
management’s assessment by our independent registered public accountants will
first apply to our Annual Report on Form 10-K for the fiscal year ending
December 31, 2009. The standards that must be met for management to assess the
internal control over financial reporting as effective are new and complex, and
require significant documentation, testing and possible remediation to meet the
detailed standards. Our lack of familiarity with Section 404 may unduly divert
management’s time and resources in executing the business plan. If, in the
future, management identifies one or more material weaknesses, or our external
auditors are unable to attest that our management’s report is fairly stated or
to express an opinion on the effectiveness of our internal controls, this could
result in a loss of investor confidence in our financial reports, have an
adverse effect on our stock price and/or subject us to sanctions or
investigation by regulatory authorities.
We
may have inadvertently violated Section 402 of the Sarbanes-Oxley Act of 2002
and Section 13(k) of the Exchange Act of 1934 as a result of advances we made to
a company controlled by our Chairman of the Board and Chief Executive Officer
and a director of one of our subsidiaries, as well as a distribution which one
of our subsidiaries erroneously paid to such persons; as a result, we may be
subject to civil and criminal sanctions which, if imposed, could have a material
adverse effect upon us.
On
February 22, 2008 we consummated a Share Exchange Agreement pursuant to which we
acquired Pacific, a Vanuatu corporation which in turn owns 99% of the equity
interests in Shaanxi Tianren. At such time Shaanxi Hede Investment Management
Co., Ltd. (“Hede”), a PRC company of which Yongke Xue, the Chairman of the
Board, Chief Executive Officer and a director of the Company, and Xiaoqin Yan, a
director of the Company, own 80% and 20%, respectively, of the equity interests,
was indebted to Shaanxi Tianren on account of previous loans made by Shaanxi
Tianren to Hede, including advances aggregating RMB 31,544,043 (approximately
$4,318,381 based on the exchange rate as of December 31, 2007) made during the
period from June 6, 2007 to December 29, 2007 which were used by Hede to pay a
portion of the purchase price for Hede’s acquisition of Huludao Wonder (a
company which Shaanxi Tianren and Hede contemplated would be sold at Hede’s cost
to the Company after a one year holding period). In January 2008, Shaanxi
Tianren paid rental expense of RMB 11,038 (approximately $1,618 based on the
exchange rate as of December 31, 2008) to the landlord of Hede’s office
space on behalf of Hede. In May 2008, Shaanxi Tianren assumed Hede’s
obligation of RMB 18,000,000 (approximately $2,638,329 based on the exchange
rate of December 31, 2008) for the balance of the purchase price for Huludao
Wonder.
On June
10, 2008 Hede sold Huludao Wonder to Shaanxi Tianren for a total price of RMB
48,250,000 (the same price which Hede paid for Huludao Wonder). As of May 31,
2008, Shaanxi Tianren had a related party receivable of RMB 48,929,272 from
Hede, which was credited against the purchase price (so that Shaanxi Tianren did
not pay any cash to Hede for the purchase) and the remaining balance of the
loans and advances of RMB 679,272 (approximately $99,564 based on the exchange
rate as of December 31, 2008) to Hede was repaid to the Company on June 11,
2008. No interest or other consideration was paid by Hede to the Company on
account of the time value of money with respect to the loans and advances made
by Shaanxi Tianren to Hede.
Notwithstanding
Hede’s repayment in full of loans made by Shaanxi Tianren to Hede, the existence
of indebtedness of Hede to Shaanxi Tianren at the time the Company acquired
Shaanxi Tianren and the continuation of such indebtedness thereafter until it
was fully repaid in June 2008 may constitute a violation of Section 13(k) of the
Exchange Act (Section 402(a) of the Sarbanes-Oxley Act of 2002). Section 13(k)
provides that it is unlawful for a company, such as the Company, which has a
class of securities registered under Section 12(g) of the Exchange Act, to
directly or indirectly, including through any subsidiary, extend or
maintain credit in the form of a personal loan to or for any director or
executive officer of the company.
In
addition, in May 2008 Pacific erroneously paid $5,007,850 to its former
shareholders, including Xiaoqing Yan and Yongke Xue, as the result of a dividend
declaration by Pacific in February 2008. Because the recipients of the money
were no longer shareholders of Pacific, the transaction has been treated for
accounting purposes as an interest free loan. In June 2008, the directors and
other related parties returned the monies they received, without interest.
Although the money has been repaid to the Company in full, the receipt by
Xiaoqing Yan and Yongke Xue of the erroneous dividend may also be deemed to
be a violation of Section 13(k) of the Exchange Act.
Issuers
violating Section 13(k) of the Exchange Act may be subject to civil sanctions,
including injunctive remedies and monetary penalties, as well as criminal
sanctions. The imposition of any of such sanctions on the Company may have a
material adverse effect on our financial position, results of operations or cash
flows.
The
Company has not concluded that either the advances made to Hede by Shaanxi
Tianren or the receipt of money by two of the Company’s directors as a result of
an erroneously paid dividend were personal loans within the meaning of Section
13(k) of the Exchange Act or that any violations of the Exchange Act have
occurred relating to such matters. The Company also has not received any notice
that the matters discussed herein are under investigation by any governmental
authority or that any proceeding relating to such matters has been initiated by
any person.
Partially
in response to the matters set forth herein, in September 2008, our Board of
Directors adopted a policy regarding approval of related party transactions.
Under the policy, any related party transaction in which the aggregate amount
involved is expected to exceed $50,000 must be approved by the Audit Committee
and no director shall participate in any discussion or approval of a transaction
which would be considered to be a related party transaction in which such person
is interested.
The
release from escrow of Make Good Escrow Stock due to our failure to achieve
certain financial targets in 2008 or 2009 would dilute the equity interests of
existing stockholders.
Under our
Stock Purchase Agreement dated February 25, 2008 with Barron Partners LLP and
EOS Holdings, LLC (collectively, the “Investors”), if our consolidated pre-tax
income for the fiscal years ended December 31, 2007 and December 31,
2008 was less than RMB 67,400,000 and RMB 84,924,000, respectively or our
consolidated pre-tax income for the fiscal year ending December 31, 2009 is less
than RMB 107,004,240, then, depending on the amount of the shortfall from such
targets, some or all of the 2,000,000 shares of our Series B Stock we have
placed in escrow (“Make Good Escrow Stock”) may be transferred to the Investors
who purchased Series B Stock from us in the financing transaction which closed
in February 2008. Our consolidated pre-tax income for the fiscal years ended
December 31, 2007 and December 31, 2008 were RMB 68,939,855 and RMB 91,227,389,
respectively Therefore, there was no Make Good Escrow Stock delivered
to the Investors out of the escrow in respect of the fiscal years ended December
31, 2007 and December 31, 2008. If we also achieve our income target in 2009,
none of such shares shall be transferred to the Investors and such shares will
be cancelled. The transfer to Investors of some or all of the Make Good Escrow
Stock and the subsequent conversion of such shares into common stock would
increase the number of outstanding shares of our common stock and dilute the
equity interests of existing stockholders. Whether or not shares of Series B
Stock which are transferred to Investors are converted into Common Stock, the
transfer of some or all of Make Good Escrow Stock to the Investors could depress
the market price of our Common Stock.
We
do not have key man insurance on our Chairman and CEO, on whom we rely for the
management of our business; the loss of the services of our Chairman or CEO
could have a material adverse effect on our business.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Hongke Xue, Shaanxi
Tianren’s Chairman of the Board and CEO, and Mr. Yongke Xue, the Company’s
Chairman of the Board and CEO. The loss of the services of Mr. Hongke
Xue or Mr. Yongke Xue, for any reason, may have a material adverse effect
on our business and prospects. We cannot assure you that their services will
continue to be available to us, or that we will be able to find a suitable
replacement for either of them. We do not carry key man life insurance for any
key personnel.
We
may not be able to hire and retain qualified personnel to support our growth and
if we are unable to retain or hire such personnel in the future, our ability to
improve our products and implement our business objectives could be adversely
affected.
If one or
more of our senior executives or other key personnel are unable or unwilling to
continue in their present positions, we may not be able to replace them easily
or at all, and our business may be disrupted and our financial condition and
results of operations may be materially and adversely affected. Competition for
senior management and senior technology personnel is intense, the pool of
qualified candidates is very limited, and we may not be able to retain the
services of our senior executives or senior technology personnel, or attract and
retain high-quality senior executives or senior technology personnel in the
future. Such failure could materially and adversely affect our future growth and
financial condition.
We
do not presently maintain product liability insurance, and our property and
equipment insurance does not cover the full value of our property and equipment,
which leaves us with exposure in the event of loss or damage to our properties
or claims filed against us.
We
currently do not carry any product liability or other similar insurance. Unlike
the United States and other countries, product liability claims and lawsuits are
extremely rare in the PRC. However, we cannot assure that we would not face
liability in the event of the failure of any of our products. We cannot assure
that, especially as the PRC’s domestic consumer economy and industrial economy
continues to expand, product liability exposures and litigation will
not become more commonplace in the PRC, or that we will not face product
liability exposure or actual liability as we expand our sales into international
markets, like the United States, where product liability claims are more
prevalent.
Our
concentrated fruit juices exported to foreign countries have to be incompliance
with foreign quality standards. The Company has obtained a number of globally
recognized quality certificates, including ISO9001 certification, HACCP (Hazard
Analysis and Critical Control Point) certification, kosher certification, and
Organic Food Quality System certification (OSA). In addition, our manufacturing
techniques and products comply with rigorous standards set forth by the FDA
(U.S. Food and Drug Administration), NFPA (U.S. National Food Processors
Association), KFL (U.S. Krueger Food Laboratories) and SGF (Market Control
System of Fruit Juice in Europe). Our success depends on our ability to maintain
the product quality of our existing products and new products. Product quality
issues, real or imagined, or allegations of product contamination, even if false
or unfounded, could tarnish the image of the affected brands and may cause
consumers to choose other products. We may be required from time to time
to recall products entirely or from specific co-packers, markets or
batches. Product recalls could adversely affect our profitability and our
brand image. We do not maintain recall insurance.
While we
have to date not experienced any credible product liability litigation, there is
no assurance that we will not experience such litigation in the future. In
the event we were to experience product liability claims or a product recall,
our financial condition and business operations could be materially adversely
affected.
We
may be adversely affected by changes in the international fruit juice market
because of our dependence on the international market.
In 2008,
over 69% of the Company’s concentrated fruit juice was exported directly or
indirectly. Because of our reliance on international markets, changes of foreign
politics, law, economy and demands in international markets will have a large
influence on the operation of Shaanxi Tianren.
Shaanxi
Tianren’s operating income is very sensitive to the sales price of concentrated
fruit juice. A change in international demands will directly influence the sales
price.
If there
is a large gap between the export price and the domestic price of concentrated
fruit juice and China exports on a large scale, anti-dumping actions might apply
to Chinese concentrated fruit juice. As the majority of concentrated fruit juice
of Shaanxi Tianren is for export, there is a potential risk for us to be
affected by any anti-dumping action.
Risks
Related to Doing Business in the PRC
We
face the risk that changes in the policies of the PRC government could have a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.
The PRC’s
economy is in transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on economic conditions in China. The PRC government has
confirmed that economic development will follow the model of a market economy,
such as the United States. Under this direction, we believe that the PRC will
continue to strengthen its economic and trading relationships with foreign
countries and business development in the PRC will follow market forces. While
we believe that this trend will continue, we cannot assure you that this will be
the case. Our interests may be adversely affected by changes in policies by the
PRC government, including:
● changes
in laws, regulations or their interpretation;
● confiscatory
taxation;
● restrictions
on currency conversion, imports or sources of supplies;
● expropriation
or nationalization of private enterprises.
Although
the PRC government has been pursuing economic reform policies for more than two
decades, we cannot assure that the government will continue to pursue such
policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption, or other
circumstances affecting the PRC’s political, economic and social
life.
The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may harm our
business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing our business, and the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We, and any future subsidiaries, are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These
laws and regulations are sometimes vague and may be subject to future changes,
and their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our business.
Inflation in the
PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth could lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may harm our
profitability.
In order
to control inflation in the past, the PRC government has imposed controls on
bank credit, limits on loans for fixed assets and restrictions on state bank
lending. Such an austere policy can lead to a slowing of economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. Repeated raises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products.
Shaanxi
Tianren is subject to restrictions on paying dividends and making other payments
to us. We might be unable to pay dividends to investors.
We are a
holding company incorporated in the State of Florida and do not have any assets
or conduct any business operations other than our investments in our
subsidiaries and affiliates, Pacific and Shaanxi Tianren. As a result of our
holding company structure, we rely entirely on dividend payments from Shaanxi
Tianren, our subsidiary in China. PRC regulations currently permit payment of
dividends only out of accumulated profits, as determined in accordance with PRC
accounting standards and regulations. Our subsidiary in the PRC also is required
to set aside a portion of its after-tax profits according to PRC accounting
standards and regulations to fund certain reserve funds. The PRC government also
imposes controls on the conversion of RMB into foreign currencies and the
remittance of currencies out of the PRC. We may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign
currency. Furthermore, if Shaanxi Tianren incurs debt on its own in the future,
the instruments governing the debt may restrict its ability to pay dividends or
make other payments. If we or Pacific are unable to receive all of the revenues
from Shaanxi Tianren’s operations, we may be unable to pay dividends on our
Common Stock.
Governmental
control of currency conversion may affect the value of your
investments.
The PRC
government imposes controls on the convertibility of renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
Renminbi is currently not a freely convertible currency. Shortages in the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends, or otherwise satisfy foreign currency
dominated obligations. Under existing PRC foreign exchange regulations, payments
of current accounting items, including profit distributions, interest payments
and expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval from
appropriate governmental authorities is required where renminbi is to be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign
currencies.
The PRC
government may also in the future restrict access to foreign currencies for
current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay certain of our expenses as they come due.
The
fluctuation of the renminbi may harm your investments.
The value
of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in the PRC’s political and economic
conditions. Any significant revaluation of the RMB may materially and adversely
affect our cash flows, revenues and financial condition. For example, to the
extent that we need to convert U.S. dollars we receive from an offering of our
securities into RMB for our operations, appreciation of the RMB against the U.S.
dollar would diminish the value of the proceeds of the offering and this could
harm our business, financial condition and results of operations. Conversely, if
we decide to convert our RMB into U.S. dollars for the purpose of making
payments for dividends on our Common Stock or for other business purposes and
the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of the
RMB we convert would be reduced. In addition, the depreciation of significant
U.S. dollar denominated assets could result in a charge to our income statement
and a reduction in the value of these assets.
On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in significant appreciation of
the RMB against the U.S. dollar. There remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the RMB
against the U.S. dollar.
PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents, if applied to us, may subject the PRC resident shareholders of
us or our parent company to personal liability and limit our ability to acquire
PRC companies or to inject capital into our PRC subsidiary, limit our PRC
subsidiary’s ability to distribute profits to us or otherwise materially
adversely affect us.
In
October 2005, the PRC State Administration of Foreign Exchange (“SAFE”) issued a
public notice, the Notice on Relevant Issues in the Foreign Exchange Control
over Financing and Return Investment Through Special Purpose Companies by
Residents Inside China (the “SAFE Notice”), which requires PRC residents,
including both legal persons and natural persons, to register with the competent
local SAFE branch before establishing or controlling any company outside of
China, referred to as an “offshore special purpose company,” for the purpose of
overseas equity financing involving onshore assets or equity interests held by
them. In addition, any PRC resident that is the shareholder of an offshore
special purpose company is required to amend its SAFE registration with the
local SAFE branch with respect to that offshore special purpose company in
connection with any increase or decrease of capital, transfer of shares, merger,
division, equity investment or creation of any security interest over any assets
located in China. Moreover, if the offshore special purpose company was
established and owned the onshore assets or equity interests before the
implementation date of the SAFE notice, a retroactive SAFE registration is
required to have been completed before March 31, 2006. If any PRC shareholder of
any offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore special
purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. After the SAFE notice, an implementation rule on the SAFE notice
was issued on May 29, 2007 which provides for implementation guidance and
supplements the procedures as provided in the SAFE notice. For an offshore
special purpose company which was established and owned onshore assets or equity
interests before the implementation date of the SAFE notice, a retroactive SAFE
registration requirement is required.
Due to
lack of official interpretation, some of the terms and provisions of the SAFE
Notice and its implementation rules remain unclear, and the implementation of
the SAFE Notice by central SAFE and local SAFE branches has been inconsistent
since its adoption. Based on the advice of our PRC counsel, Global Law Offices,
located in Beijing, and after consultation with relevant SAFE officials, we
believe that the PRC resident shareholders of our parent company were required
to complete their respective SAFE registrations pursuant to the SAFE
Notice.
Moreover,
because of uncertainty over how the SAFE Notice will be interpreted and
implemented, and how or whether the SAFE Notice and implementation rules will
apply to us, we cannot predict how SAFE will affect our business operations or
future strategies. For example, our present and prospective PRC subsidiaries’
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE Notice by our or our parent company’s PRC resident
shareholders. In addition, such PRC residents may not always be able to complete
registration procedures required by the SAFE Notice. We also have little control
over either our present or prospective direct or indirect shareholders or the
outcome of such registration procedures. A failure by our or our parent
company’s PRC resident shareholders or future PRC resident shareholders to
comply with the SAFE Notice, if SAFE requires it, could subject us to fines
or legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary’s ability to make distributions or pay dividends or affect
our ownership structure, which could adversely affect our business and
prospects.
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.
A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of our revenue is derived, could have an adverse effect on our operations.
Our operations may be impacted by a number of health-related factors, including
quarantines or closures of some of our offices that would adversely disrupt our
operations.
Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
Because
our principal assets are located outside of the United States, it may be
difficult for you to use the United States Federal securities laws to enforce
your rights against us and our officers and some directors in the United States
or to enforce judgments of United States courts against us or them in the
PRC.
All of
our present officers and directors (except directors Norman Ko, Robert B. Fields
and CFO and Corporate Secretary Spring Liu, who are residents of the United
States) reside outside of the United States. In addition, our operating
subsidiary, Shaanxi Tianren, is located in the PRC and substantially all of its
assets are located outside of the United States. It may therefore be difficult
for investors in the United States to enforce their legal rights based on the
civil liability provisions of the United States Federal securities laws against
us in the courts of either the United States or the PRC and, even if civil
judgments are obtained in courts of the United States, to enforce such judgments
in the PRC courts. Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement against
us or our officers and directors of criminal penalties, under the United States
Federal securities laws or otherwise.
The relative lack of public company
experience of our management team may put us at a competitive
disadvantage.
Our management team lacks
public company experience, which could impair our ability to comply with legal
and regulatory requirements such as those imposed by the Sarbanes-Oxley Act of
2002. Aside from CFO Spring Liu, the individuals who now constitute our senior
management have never had responsibility for managing a publicly traded company.
Such responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may not be able to
implement programs and policies in an effective and timely manner that
adequately respond to such increased legal, regulatory compliance and reporting
requirements. Our failure to comply with all applicable requirements could lead
to the imposition of fines and penalties and distract our management from
attending to the growth of our business.
Risks
Related to Our Common Stock.
Our
officers, directors and their relatives control us through their positions and
stock ownership and their interests may differ from other
stockholders.
Hongke
Xue, the brother of one of our directors and our CEO, Yongke Xue, is the voting
trustee for the benefit of Fancylight Limited. Fancylight Limited owns
17,604,938 shares of Common Stock, which carry 17,604,938 votes upon all matters
submitted for a vote of stockholders. As a result, our officers and directors
and their relatives may be able to control the outcome of stockholder votes on
various matters, including the election of directors and extraordinary corporate
transactions, including business combinations. The interests of our directors
and officers may differ from other stockholders. Furthermore, the current ratios
of ownership of our Common Stock reduce the public float and liquidity of our
Common Stock which can, in turn, affect the market price of our Common
Stock.
Our
current ownership structure may affect the market price of our Common
Stock.
Hongke
Xue, the brother of one of our directors and our CEO, Yongke Xue, is the voting
trustee for the benefit of Fancylight Limited. Fancylight Limited owns
17,604,938 shares of Common Stock, which is approximately 79% of our outstanding
Common Stock as of March 25, 2009. The substantial ownership of our Common Stock
by one stockholder reduces the public float and liquidity of our Common
Stock. The limited public float of our Common Stock may adversely affect the
market price of our Common Stock.
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary. In addition, our operating
subsidiary, Shaanxi Tianren, from time to time may be subject to restrictions on
its ability to make distributions to us, including restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions.
Our Common Stock is thinly traded, so
you may be unable to sell at or near asking prices or at all if you need to
sell your shares to
raise money or otherwise desire to liquidate your
shares.
Currently
our Common Stock is quoted in the OTC Bulletin Board market and the trading
volume we will develop may be limited by the fact that many major institutional
investment funds, including mutual funds, as well as individual investors follow
a policy of not investing in Bulletin Board stocks and certain major brokerage
firms restrict their brokers from recommending Bulletin Board stocks because
they are considered speculative, volatile and thinly traded. The OTC Bulletin
Board market is an inter-dealer market much less regulated than the major
exchanges and our Common Stock is subject to abuses, volatility and shorting.
Thus there is currently no broadly followed and established trading market for
our Common Stock. An established trading market may never develop or be
maintained. Active trading markets generally result in lower price volatility
and more efficient execution of buy and sell orders. Absence of an active
trading market reduces the liquidity of the shares traded
there.
The
trading volume of our Common Stock has been and may continue to be limited and
sporadic. As a result of such trading activity, the quoted price for our Common
Stock on the OTC Bulletin Board may not necessarily be a reliable indicator of
its fair market value. Further, if we cease to be quoted, holders would find it
more difficult to dispose of or to obtain accurate quotations as to the market
value of our Common Stock and as a result, the market value of our Common Stock
likely would decline.
Our
Common Stock is currently subject to the “penny stock” rules which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale.
Our
Common Stock is currently subject to regulations prescribed by the SEC relating
to “penny stocks.” The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in such
regulations) of less than $5.00 per share, subject to certain exceptions. These
regulations impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 and
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 (individually) or $300,000 (jointly with their spouse)). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of these securities and have
received the purchaser’s prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer’s presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the “penny stock” rules may
restrict the ability of broker-dealers to sell the Common Stock and may affect
the ability of investors to sell their Common Stock in the secondary
market.
Our
Common Stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our Common Stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our Common Stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our Common Stock.
A
large number of shares is eligible for future sale and this may depress our
stock price.
Pursuant
to a Registration Statement on Form S-1 which was declared effective by the
Securities and Exchange Commission on February 5, 2009, we have registered for
resale by two stockholders an aggregate of 9,833,333 shares of our Common Stock
which may be issued upon conversion of shares of our Series B Convertible
Preferred Stock and upon exercise of warrants to purchase Common Stock which are
held by such stockholders. Accordingly such shares, upon issuance would be
freely tradable. In addition, sales of our Common Stock not held by our
affiliates may be currently made under Rule 144. Sales of our Common
Stock, or a perception that such sales could occur, and the existence of
warrants to purchase shares of Common Stock at prices that may be below the then
current market price of the Common Stock, could adversely affect the market
price of our Common Stock and could impair our ability to raise capital through
the sale of our equity securities.
We
are authorized to issue “blank check” preferred stock, which, if issued without
stockholders approval, may adversely affect the rights of holders of our Common
Stock.
We are
authorized to issue 10,000,000 shares of preferred stock. Our Board of Directors
is authorized under our Articles of Incorporation to provide for the issuance of
shares of preferred stock by resolution, and by filing a certificate of
designations under Florida law, to fix the designation, powers, preferences
and rights of the shares of each such series of preferred stock and the
qualifications, limitations or restrictions thereof without any further vote or
action by the stockholders. Accordingly, our Board of Directors has designated
7,000,000 shares of Series B Convertible Preferred Stock (of which 5,448,480
shares of Series B Preferred Convertible Stock are issued or outstanding,
including 2,000,000 shares of Series B Preferred Convertible Stock that are in
an escrow account to be held by an escrow agent as make good shares in the event
the Company’s consolidated pre-tax income and pre-tax income per share, on a
fully-diluted basis, for the years ended December 31, 2007, 2008 or 2009, are
less than certain pre-determined target numbers.). Any shares of preferred stock
that are issued are likely to have priority over our Common Stock with respect
to dividend or liquidation rights. In the event of issuance, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control, which could have the effect of
discouraging bids for the Company and thereby prevent stockholders from
receiving the maximum value for their shares. We have no present intention to
issue any shares of our preferred stock in order to discourage or delay a change
of control or for any other reason. However, there can be no assurance that
preferred stock will not be issued at some time in the future.
We are responsible for the indemnification of our officers and
directors.
Our
Bylaws provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against costs and expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on our behalf. Consequently, we may be required
to expend substantial funds to satisfy these indemnity obligations.
ITEM 1B – UNRESOLVED STAFF
COMMENTS
Not
applicable.
Our
principal executive offices are located at
16F, National Development Bank Tower, No.2 Gaoxin 1st Road,
Hi-Tech Industrial Zone, Xi’an, Shaanxi Province, PRC 710065, and our
telephone number is 011-86-29-88386415. The area of our office is approximately
1,400 square meters. We lease such offices from Zhonghai Trust Co., Ltd. under a
lease dated June 23, 2008, for a one-year term commencing July 1, 2008 at a
total annual rental of RMB 674,000, or approximately $96,858, based on the
exchange rate as of December 31, 2009. The Company is planning to purchase the
leased offices from Zhonghai Trust Co., Ltd. The negotiation is still in process
as of the filing date of this Annual Report on Form 10-K.
We also
own three factories through our subsidiaries. One is a factory located at
Sanqu Town, Jingyang County, Xianyang City, Shaanxi Province. The
factory occupies an aggregate of approximately 34,476 square meters of land and
contains a manufacturing facility. Another factory is located at
Siqun Village, Mazhao Town, Zhouzhi County, Xi’an City, Shaanxi
Province. That factory occupies an aggregate of approximately 57,935 square
meters of land and contains a manufacturing facility. The third factory is
located at Hujia Village, Gaotai Town, Suizhong County, Huludao,
Liaoning Province. The factory occupies an aggregate of approximately
86,325 square meters of land, factory buildings and machinery.
There is
no private ownership of land in China. All land ownership is held by the
government of the PRC, its agencies and collectives. Land use rights can be
transferred upon approval by the land administrative authorities of the PRC
(State Land Administration Bureau) upon payment of the required land transfer
fee. We own the land use rights for the 34,476 square meters of land at
Sanqu Town, which have a term of 49 years from 2007, 57,935 square meters
of land at Siqun Village, which have a term of 41 years from 2007, and the
86,325 square meters of land at Suizhong County, which have a term of 50 years
from 2004.
We
believe that our current office is adequate to meet our needs, and that
additional facilities will be available for lease, if necessary, to meet our
future needs.
ITEM 3 – LEGAL PROCEEDINGS
From time
to time we are a party to various litigation proceedings arising in the ordinary
course of our business, none of which, in the opinion of management, is likely
to have a material adverse effect on our financial condition or results of
operations.
ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
|
|
ITEM 5
– MARKET FOR
REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Our
Common Stock is traded on the OTC Bulletin Board (ticker symbol SPFJ.OB) The
following table sets forth, for the periods indicated, the range of high and low
sales prices of our Common Stock as quoted by the OTC Bulletin
Board:
|
Quarter
Ended
|
|
High
|
|
|
Low
|
|
|
Fiscal
2007
|
|
|
|
|
|
|
|
March
31, 2007
|
|
$ |
13.15 |
|
|
$ |
3.29 |
|
|
June
30, 2007
|
|
$ |
19.72 |
|
|
$ |
3.29 |
|
|
September
30, 2007
|
|
$ |
23.01 |
|
|
$ |
9.86 |
|
|
December
31, 2007
|
|
$ |
9.86 |
|
|
$ |
8.22 |
|
| |
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
|
|
|
|
|
|
| March
31, 2008 |
|
$ |
9.86 |
|
|
$ |
2.47 |
|
| June
30, 2008 |
|
$ |
6.58 |
|
|
$ |
3.29 |
|
| September
30, 2008 |
|
$ |
5.90 |
|
|
$ |
2.65 |
|
| December
31, 2008 |
|
$ |
3.25 |
|
|
$ |
2.25 |
|
Stockholders
As of December 31, 2008, there were 22,271,786
shares of our Common Stock issued and outstanding,
and the Company had approximately 87 record holders of Common
Stock.
Dividend
Policy
We have
not declared or paid any cash dividends on our Common Stock during our last two
fiscal years. On February 4, 2008, before the reverse merger transaction, the
Board of Directors of Shaanxi Qiyiwangguo declared a cash dividend of $2,953,665
to its former shareholders. Since Shaanxi Tianren holds a 91.15% interest in
Shaanxi Qiyiwangguo, $2,692,266 was payable to Shaanxi Tianren and $261,399
was payable to its minority interest holders. On the same date, the Board of
Directors of Shaanxi Tianren declared a cash dividend of $5,058,434 to its
shareholders. Since Pacific holds a 99% interest in Shaanxi Tianren, $5,007,850
was payable to Pacific and $50,584 was payable to its minority interest holders.
The inter-company dividend was eliminated in the consolidated statement. The
dividend payable to minority interest holders was $311,983.
The
payment of dividends is at the discretion of the Board of Directors and is
contingent on the Company’s revenues and earnings, capital requirements,
financial condition and the ability of our operating subsidiary, Shaanxi
Tianren, to obtain approval to send monies out of the PRC. We currently
intend to retain all earnings, if any, for use in business operations.
Accordingly, we do not anticipate declaring any dividends in the near
future.
The PRC’s
national currency, the yuan, is not a freely convertible currency. Please refer
to the risk factors “Governmental control of currency conversion may affect the
value of your investment,” “The fluctuation of the renminbi may harm your
investment” and “PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents, if applied to us, may subject the
PRC resident shareholders of us or our parent company to personal liability and
limit our ability to acquire PRC companies or to inject capital into our PRC
subsidiary, limit our PRC subsidiary’s ability to distribute profits to us or
otherwise materially adversely affect us.”
ITEM 6 – SELECTED FINANCIAL DATA
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
December
31,
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
41,648,605 |
|
|
$ |
29,361,941 |
|
(2) |
|
$ |
17,427,204 |
|
(1) |
|
$ |
7,027,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations
|
|
|
13,053,000 |
|
|
|
9,018,440 |
|
|
|
|
6,251,907 |
|
|
|
|
1,619,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
10,010,302 |
|
|
|
7,596,403 |
|
|
|
|
3,845,270 |
|
|
|
|
1,035,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share:
|
|
|
0.37 |
|
|
|
0.35 |
|
|
|
|
0.17 |
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share :
|
|
|
0.37 |
|
|
|
0.35 |
|
|
|
|
0.17 |
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,230,334 |
|
|
|
22,006,173 |
|
|
|
|
22,006,173 |
|
|
|
|
22,006,173 |
|
|
Diluted
|
|
|
26,831,961 |
|
|
|
22,006,173 |
|
|
|
|
22,006,173 |
|
|
|
|
22,006,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$ |
30,113,544 |
|
|
$ |
17,865,439 |
|
|
|
$ |
8,248,890 |
|
|
|
$ |
2,138,090 |
|
|
Current
Liabilities
|
|
|
16,681,046 |
|
|
|
12,747,223 |
|
|
|
|
4,409,004 |
|
|
|
|
4,634,979 |
|
|
Working
Capital
|
|
|
13,432,498 |
|
|
|
5,118,216 |
|
|
|
|
3,839,886 |
|
|
|
|
(2,496,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
59,287,331 |
|
|
|
42,119,955 |
|
|
|
|
21,422,048 |
|
|
|
|
10,423,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
|
- |
|
|
|
2,053,501 |
|
|
|
|
- |
|
|
|
|
- |
|
|
Stockholders'
Equity
|
|
$ |
41,059,966 |
|
|
$ |
26,245,867 |
|
|
|
$ |
16,300,181 |
|
|
|
$ |
5,777,652 |
|
|
(1)
|
The
net sales included the sales from the business acquired in Shaanxi
Qiyiwangguo
|
|
(2)
|
The
net sales included the sales from the business acquired in Huludao
Wonder.
|
ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with our
disclaimer on “Forward-Looking Statements,” “Item 1. Business,” “Item
1A. Risk Factors,” “Item 6. Selected Financial Data” and Consolidated Financial
Statements, the notes to those statements and other financial information
contained elsewhere in this Annual Report on Form 10-K.
Overview
We are
engaged in the business of research and development, production and sales of
special concentrated fruit juices, fast-frozen and freeze-dried fruits and
vegetables and fruit juice drinks through our indirect subsidiary, Shaanxi
Tianren, in the PRC. Shaanxi Tianren is 99% owned by Pacific. Previously, we
were a shell company with no significant business operations. As a result of the
consummation of a reverse merger transaction, on February 26, 2008 we ceased to
be a shell company and became an indirect holding company for Shaanxi Tianren
through Pacific. Pacific acquired a 99% ownership interest in Shaanxi Tianren in
September 2007 through a reorganization between entities under common control.
Because Shaanxi Tianren’s operations are the only significant operations of the
Company and its affiliates, the business and financial results of Pacific
reflect those of Shaanxi Tianren. As a result, this discussion and analysis
focuses on the business results of Shaanxi Tianren comparing its results in the
fiscal year ended December 31, 2008 with its results in the corresponding period
of 2007.
Below is
the Company’s corporate structure:
*Xi’an Qinmei Food Co., Ltd.,
an entity which is not affiliated with the Company, owns the other 8.85% of the
equity interest in Shaanxi Qiyiwangguo Modern Organic Co., Ltd. (former Xi’an
Tianren Modern Organic Co. Ltd.)
There are
two general categories of fruit and vegetable juices available in the market.
One is fresh juice that is canned directly after filtering and
sterilization upon being squeezed out of fresh fruits or vegetables. The other
general category is juice drinks made out of concentrated fruit and vegetable
juice. Concentrated fruit and vegetable juices are produced through pressing,
filtering, sterilization and evaporation of fresh fruits or vegetables. They are
used as the base material or ingredient for products such as drinks, fruit jam
and fruit wine, etc. Concentrated juices are not drinkable. Instead, they are
used as a basic ingredient for manufacturing juice drinks and as an additive to
fruit wine and fruit jam, cosmetics and medicines.
For
Shaanxi Tianren, the period between each August through March or April is our
squeeze season when fresh fruits are available in the market and concentrated
fruit juices are produced out of fresh fruits. In 2008 we started our
squeezing season in July with the early initiation of machine maintenance. We
produce and sell both concentrated fruit juices and juice drinks. Compared to
juice drinks, our concentrated juice products generally achieve a higher gross
margin than that of juice drinks. Therefore, our core products are
concentrated apple, pear and kiwifruit juices and our production has
strategically been focused on concentrated juice products. We also produce juice
drinks and other derivative products, especially when we are not in squeeze
season. Our wide range of product offerings and our ability to shift focus among
products based on supply and demand in the market and seasonal factors help us
to diversify our operational risks and supplement our revenue
generation.
Our main
products include concentrated apple juice, concentrated pear juice, concentrated
kiwifruit puree, fruit juice drinks, fresh fruits and organic fresh fruits. Our
raw materials mainly consist of apples, pears and kiwifruits, which we procure
in the PRC market and the cost of which represents over 51% of our overall
production cost in fiscal year 2008. We source our pear and kiwifruit supplies
mainly from our home province, Shaanxi Province, which is known for its pear and
kiwifruit production. Our kiwifruit processing facilities are located in Zhouzhi
County, Shaanxi Province, where 70% of the country’s kiwifruits are grown. We
source our apple supply mainly from Liaoning Province, where our subsidiary,
Huludao Wonder Fruit Co., Ltd. (“Huludao Wonder”) is located. The Company is
committed to continual research and development in new products and
technologies. In June 2008, Shaanxi Tianren began the production of concentrated
peach juice in its Jingyang Branch Office. It uses low-temperature
pulp breaking technology and low-temperature concentration technology to produce
concentrated white peach pulp, optimizing the production parameters. The
production of peach juice helped the diversification of our products and
prolonged the squeeze season. Because of the seasonal nature in the
growing and harvesting of fruits and vegetables, our business is seasonal and
can be greatly affected by weather. In the squeezing season of 2007, the main
production areas of apples and pears in China suffered from poor weather, which
caused a lower yield in the apple and pear crops. As a result, our cost of raw
materials was higher in 2007.
To take
advantage of economies of scale and to enhance our production efficiency, each
of our manufacturing facilities has a focus on juice products centering around
one particular fruit according to the proximity of such manufacturing to the
supply center of that fruit. All concentrated juice products are manufactured
using the same type of production line with slight variations in processing
methods. Since June 2007, after we leased the production facilities of Huludao
Wonder, we have been operating our pear juice products business out of our
Jingyang Branch Office. Our business involving apple juice products is operated
out of the facilities of Huludao Wonder, and our business involving kiwifruit
products is run out of Shaanxi Qiyiwangguo Modern Organic Agriculture Co., Ltd.
(“Shaanxi Qiyiwangguo”), in which we have held a 91.15% ownership interest since
May 2006.
On June
2, 2007, Shaanxi Tianren entered into a lease agreement with Shaanxi Hede
Investment Management Co., Ltd. (“Hede”), pursuant to which Shaanxi Tianren, for
a term of one year and for a monthly lease payment of RMB 300,000, leased all
the assets and operating facilities of Huludao Wonder, which was wholly-owned by
Shaanxi Hede. On June 10, 2008, we completed the acquisition of Huludao Wonder
for a total purchase price of RMB 48,250,000, or approximately U.S. $6,308,591
based on the exchange rate on June 1, 2007. The payment was made through the
offset of related party receivables.
Besides
concentrated juice products, we generate other revenue from sales of pear juice,
apple juice, kiwifruit seeds, organic kiwifruit, fresh kiwifruit, kiwifruit
juice, mulberry juice, and apple spice.
The
supply of our raw material fruits has traditionally been fragmented as we
generally purchase directly from farmers. In addition, because the prices of raw
material fruits change from season to season based on the output of the farms,
we do not have long-term supply agreements with our suppliers. To secure our
fruit supply and lower transportation costs, our processing facilities are
strategically located near the various centers of fruit supply.
Shaanxi
Tianren is permitted by the relevant governmental authorities to directly export
our products. More than 69% of our products are exported either through
distributors with good credit or to end-users directly. Our distributors are
generally domestic export companies. Although we generally renew our
distribution agreements with our distributors on a yearly basis, we maintain a
long-term relationship with our distributors. Our main export markets are the
U.S., Europe, Russia, and the Middle East.
Fiscal
2008 Highlights
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·
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Total
revenue increased by $12,286,664, or 41.8%, from $29,361,941 for fiscal
2007 to $41,648,605.
|
|
·
|
Income
from operations increased by $4,034,560 to $13,053,000, compared to
$9,018,440 for fiscal 2007.
|
|
·
|
Gross
profit margins increased by 16.7% to 43.3% for fiscal 2008, compared with
gross profit margins of 37.1% for fiscal year
2007.
|
|
·
|
General
and administrative expenses as a percentage of revenue increased by 60.2%
from 3.9% of revenue for fiscal year 2007 to 6.3% of revenue for fiscal
year 2008.
|
|
·
|
Selling
expenses as a percentage of revenue increased by 38.8%, from 2.3% of
revenue for fiscal year 2007 to 3.2% of revenue for fiscal year
2008.
|
|
·
|
Research
and development expenses as a percentage of revenue increased by 854.9%,
from 0.1% of revenue for fiscal year 2007 to 1.0% of revenue for fiscal
year 2008.
|
|
·
|
Net
income increased by $2,413,899, or 31.8%, from $7,596,403 for fiscal 2007
to $10,010,302.
|
|
●
|
Total
assets increased 27.2% to $59,287,331 as compared to $46,610,128 in fiscal
2007.
|
|
·
|
Total
liabilities increased 12.7% to $16,681,046 as compared to $14,800,724 in
fiscal 2007.
|
|
·
|
Working
capital increased 162.4% to $13,432,498 as compared to $5,118,216 in
fiscal 2007.
|
|
·
|
Shareholders’
equity increased 56.4% to $41,059,966 as compared to $26,245,867 in fiscal
2007.
|
|
·
|
Between
February 22, 2008 and February 25, 2008, we entered into a series of
transactions whereby we acquired 100% of
the ownership interest in Pacific from a share exchange transaction and
raised $3,400,000 gross proceeds from certain accredited investors in a
private placement transaction. As a result of the consummation of these
transactions, Pacific is now a wholly-owned subsidiary of the Company.
Pacific acquired a 99% ownership interest in Shaanxi Tianren in September
2007. Because Shaanxi Tianren’s operations are the only significant
operations of the Company and its affiliates, the business and financial
results of Pacific reflect those of Shaanxi
Tianren.
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·
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In
April 2008, we increased the size of our Board of Directors to five, a
majority of whom are independent directors. On April 25, 2008, we
established an Audit Committee and Compensation Committee of our Board of
Directors.
|
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·
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On
May 23, 2008, we amended the Company’s Articles of Incorporation and
changed our name to SkyPeople Fruit Juice, Inc. to better reflect our
business.
|
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·
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On
June 10, 2008, we completed the acquisition of Huludao
Wonder.
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·
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On
June 1, 2008, Shaanxi Tianren entered into a memorandum agreement with
Xi’an Dehao Investment Consultation Co. Ltd. (“Dehao”). Under the terms of
the agreement, Dehao agreed to transfer 100% of the ownership interest of
Yingkou Trusty Fruits Co., Ltd. (“Yingkou”) to Shaanxi Tianren. Shaanxi
Tianren made a refundable down payment of RMB 15,000,000, or approximately
$2,198,608 based on the exchange rate of December 31, 2008, to Dehao as a
deposit for the purchase in August 2008. As of March 23, 2009 we were
still in the process of negotiating certain of the terms of the
acquisition with Dehao and also were seeking a third party
market value evaluation of Yingkou. We hope to complete the acquisition by
the end of the second quarter of fiscal
2009.
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|
·
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We
began the production of concentrated peach juice in at our Jingyang
production base in June 2008. We launched large-scale production of
concentrated mulberry juice at our Jingyang production base in September
2008.
|
The
highlights above are intended to identify some of our more significant events
and transactions during our fiscal year 2008, and recent events that occurred
after the fiscal year end. However, these highlights are not intended to be a
full discussion of our results for the year. These highlights should
be read in conjunction with the following discussion of “Results of Operations”
and “Liquidity and Capital Resources” and with our consolidated financial
statements and footnotes accompanying this Annual Report.
Subsequent
Events
Our
registration statement to register for resale an aggregate of 9,833,333 shares
of the Common Stock issuable upon conversion of our Series B Convertible
Preferred Stock and warrants to purchase common stock which we sold to two
Investors pursuant to a Stock Purchase Agreement on February 26, 2008 was
declared effective by the Securities and Exchange Commission (the “SEC”) on
February 5, 2009. We recorded liquidated damages of $254,301 in
fiscal year 2008 due to the failure to meet the timetables provided for in the
Registration Rights Agreement with such Investors which was entered into in
connection with the Stock Purchase Agreement.
General
Financial Information
During
fiscal year 2008, total assets increased by $17,167,376 from $42,119,955 at
December 31, 2007 to $59,287,331 at December 31, 2008. The majority of the
increase was in cash and equivalents, accounts receivable, prepaid expenses and
other current assets, property, plant and equipment and other
assets.
Cash and
cash equivalents reached $15,274,171 as of December 31, 2008, an increase of
273.1% from $4,094,238 as of December 31, 2007. The increase in cash and cash
equivalents was mainly due to net gross proceeds of $3,115,072 received from
certain accredited investors in a private placement transaction on February 26,
2008 and an increase of $15,418,864 in net revenue generated in fiscal year
2008.
Accounts
receivable at December 31, 2008 were $11,610,506, an increase of $2,456,819, or
26.8%, compared to $9,153,687 at December 31, 2007. The increase was
attributable mainly to an increase in sales in fiscal 2008. The turnover of
accounts receivable was 85 days for fiscal 2008, a decrease of 3 days, compared
to 88 days for fiscal 2007. The decrease in the accounts receivable turnover was
due primarily to improvement in collections in Shaanxi Tianren.
Inventory
at December 31, 2008 was $1,844,397, a decrease of $2,615,752, or 58.6%,
compared to $4,460,419 at December 31, 2007. Our inventory as of
December 31, 2007 consisted largely of concentrated apple juice produced by
Huludao Wonder. We started operating Huludao Wonder in June 2007 pursuant to a
lease and management arrangement with Hede. However, Huludao Wonder did not book
any sales until November 2007 due to the delay in obtaining an export permit. As
such, we accrued a large amount of inventory in fiscal year 2007. In addition,
we reduced the inventory of apple related products in fiscal year 2008, which
have a low gross margin due to the decrease in price in the international
market.
Prepaid
expenses and other current assets at December 31, 2008 were $1,087,076, an
increase of $985,448 from that balance at December 31, 2007, due primarily to an
increase of $580,314 in prepaid raw material of fresh apples. In the squeezing
season of apple in 2008, we saw a decrease in the price of fresh apples due to
an abundant harvest of apple and the influence of the decrease in the sales
price of apple related products in the international market of 2008. To ensure
that we have enough fresh apples at the current low price during the squeezing
season for our production needs, we prepaid certain percentage of the estimated
purchase amount to suppliers in the apple squeezing season.
Property,
plant and equipment increased by $2,842,820 from $17,564,147 at December 31,
2007 to $20,406,967 at December 31, 2008. The increase in property, plant and
equipment was mainly due to an addition of $1,426,944 in buildings and
$1,903,418 in construction in progress. In 2008, we built a new factory facility
of $193,324 in Shaanxi Qiyiwangguo for the expansion of kiwifruit production
capacity. In Shaanxi Tianren, we completed a technology innovation and expansion
project of $860,274 over its original industrial waste water processing facility
located in the factory of Jingyang County in Shaanxi Province. The expanded
industrial waste water processing facility will enable the Company to increase
its production capacity in the future and will be in compliance with local
environmental laws. We also made a leasehold improvement of $373,346 in the
newly leased office in Shaanxi Tianren. Construction in progress was $1,903,418
at December 31, 2008. Total capital expenditures were approximately $2,924,217
in fiscal year 2008.
During
2008, Shaanxi Tianren commenced construction on the expansion of its research
and development center. This project covers an area of 2,000 square meters and
will encompass additional space required for research and development
laboratories. The expansion is currently in progress on the existing site of the
factory in Jingyang County, Shaanxi Province. Related to this project, we have
capitalized, as construction in progress, $1,211,933 in the fiscal year
2008. This research and development center is expected to be completed by
June 30, 2009. Our estimated future input for this project is $1,026,017. Once
it is completed, it will provide more space for our engineers to conduct
research and development toward the goal of improving and facilitating our
product line.
In
addition, Shaanxi Qiyiwangguo began construction on an industrial waste water
processing facility and renovation of an employee building in the factory of
Zhouzhi County in Shaanxi Province. Shaanxi Qiyiwangguo previously leased a
waste water processing facility at an annual fee of approximately $11,600. This
1,118 square meter industrial waste water processing facility remains on
schedule and once completed will process 1,200 cubic meters of waste water per
day, which will meet the increasing production demand of Shaanxi Qiyiwangguo and
will improve the use of recycled waste water. We capitalized $680,336 as
construction in progress during 2008. This project is expected to be operational
by the end of the third quarter of fiscal 2009. Our estimated future input for
this project is $111,163. The newly built water processing facility in Shaanxi
Qiyiwangguo will help the Company save on leasing fees and also enable the
Company to increase its production capacity in the
future. Furthermore, it will be in compliance with local
environmental laws. In the fourth quarter of fiscal 2008, Shaanxi
Qiyiwangguo began renovation of the employee building. We capitalized $11,149 as
construction in progress during 2008. This project has no economic profit to the
Company and is expected to be completed by the first quarter of
2009. There will be no future monetary input for this
project.
We
capitalized interest expenses of $39,473 in construction in progress in
accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 34, Capitalization of Interest
Cost. The source of the future investment in these three projects will be
generated from our working capital and our current bank loans.
Land
usage right was $6,404,771 as of December 31, 2008 as compared to $6,138,297 as
of December 31, 2007. The increase in land usage right was mainly due to a
decrease in exchange rate as of December 31, 2008 as compared December 31, 2007.
In Chinese currency, the land usage right decreased by RMB1,141,259, or
approximately $164,005, based on the average exchange rate of fiscal year
2008, due to an increase in amortization cost.
Depreciation
and amortization was $1,903,117 for fiscal 2008, compared with $1,454,746 for
fiscal 2007. The increase in depreciation expenses was due mainly to
an increase in property, plant and equipment acquired after December 31,
2007.
Other
assets were $2,362,049 at December 31, 2008, an increase of $2,290,231 from the
balance at December 31, 2007. The increase in other assets was primarily
due to a down payment of $2,198,608 for the acquisition of Yingkou Trusty Fruits
Co., Ltd. (“Yingkou”). On June 1, 2008, Shaanxi Tianren entered into a
memorandum agreement with Xi’an Dehao Investment Consultation Co., Ltd.
(“Dehao”). Under the terms of the agreement, Dehao agreed to transfer 100% of
the ownership interest of Yingkou to Shaanxi Tianren. Shaanxi Tianren is
required to make a down payment of RMB 15,000,000, or approximately $2,198,608,
based on the exchange rate as of December 31, 2008 to Dehao as a deposit for the
purchase. The acquisition is targeted for completion in second quarter of fiscal
2009 after the third party market value evaluation.
Total
liabilities at December 31, 2008 were $16,681,046, an increase of $1,880,322, or
12.7%, compared to $14,800,724 at December 31, 2007. The increase in
liabilities was mainly due to the increase in notes payable and income tax
payable, but partially offset by the decrease in accounts payable.
In fiscal
year 2008, the Company paid off RMB 98,800,000, or approximately $14,198,105, of
short-term loans payable. The Company also entered into nine new short-term loan
agreements with some local banks in China. As of December 31, 2008, the balance
of these short-term loans totaled RMB 76,800,000 (U.S. $11,256,871 based on the
exchange rate on December 31, 2008), with an interest rate ranging from 5.58% to
9.83% per annum. These loans are due from May 2009 to October 2009. Of these
loans, $5,247,343 are collateralized by land and buildings.
Income
tax payable increased by $1,335,524 to $1,450,433 at December 31, 2008, as
compared to $114,909 at December 31, 2007. The increase in income tax payable
was mainly due to an increase in net income generated by Shaanxi Qiyiwangguo in
fiscal year 2008.
Accounts
payable decreased by $2,334,648 from $2,997,740 at December 31, 2007, to
$663,092 at December 31, 2008. The decrease in accounts payable was a result of
the prompt payment to our vendors in fiscal year 2008. To ensure that we have
sufficient fresh fruits and other materials for the production needs during the
squeezing season, we expedited our payment term to our vendors and
suppliers.
Related
party payables decreased to $23,452 as of December 31, 2008 from $143,366 as of
December 31, 2007, representing a decrease of 83.6%. Related party payables
included the outstanding borrowing from its shareholders and related entities
with common owners and directors. These loans bear no interest and have no fixed
payment terms.
Critical
Accounting Estimates & Policies
The
discussion and analysis of the Company’s financial condition presented in this
section are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. During the preparation of the consolidated financial
statements, we are required to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis,
we evaluate our estimates and judgments, including those related to sales,
returns, pricing concessions, bad debts, inventories, investments, fixed assets,
intangible assets, income taxes and other contingencies. We
base our estimates on historical experience and on various other assumptions
that we believe are reasonable under current conditions. Actual
results may differ from these estimates under different assumptions or
conditions.
We
consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for
management to determine, or that may produce materially different results when
using different assumptions. We consider the following accounting policies to be
critical:
Consolidation
The
consolidated financial statements include the accounts of Shaanxi Tianren,
Shaanxi Qiyiwangguo, Huludao Wonder and Pacific. All material inter-company
accounts and transactions have been eliminated in
consolidation.
The
consolidated financial statements are prepared in accordance with U.S. GAAP.
This basis differs from that used in the statutory accounts of Shaanxi Tianren,
Shaanxi Qiyiwangguo and Huludao Wonder, which were prepared in accordance with
the accounting principles and relevant financial regulations applicable to
enterprises in the PRC. All necessary adjustments have been made to present the
financial statements in accordance with U.S. GAAP.
Cash and Cash
Equivalents
For
purposes of the statements of cash flows, cash and cash equivalents include cash
on hand and demand deposits held by banks. Deposits held in financial
institutions in the PRC are not insured by any government entity or
agency.
Accounting for the
Impairment of Long-Lived Assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technological or other industrial changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. During the reporting
periods, there was no impairment loss.
Accumulated Other
Comprehensive Income
Accumulated
other comprehensive income represents foreign
currency translation adjustments.
Accounts
Receivable
Accounts
receivable and other receivables are recognized and carried at the original
invoice amount less an allowance for any uncollectible amount. Allowance is made
when collection of the full amount is no longer probable. Management reviews and
adjusts this allowance periodically based on historical experience, the current
economic climate as well as its evaluation of the collectability of outstanding
accounts. Receivable amounts outstanding more than 6 months are allowed for. The
Company evaluates the credit risks of its customers utilizing historical data
and estimates of future performance.
Inventory
Inventory
consists primarily of raw materials and packaging (which include ingredients and
supplies) and finished goods (which include finished juice in our bottling and
canning operations). Inventories are valued at the lower of cost or market. We
determine cost on the basis of first-in, first-out methods.
Revenue
Recognition
We
recognize revenue upon meeting the recognition requirements of Staff Accounting
Bulletin (“SAB”) No. 104, Revenue Recognition. Revenue
from sales of the Company’s products is recognized upon shipment or delivery to
its distributors or end users, depending upon the terms of the sales order,
provided that persuasive evidence of a sales arrangement exists, title and risk
of loss have transferred to the customer, the sales amount is fixed or
determinable and collection of the revenue is reasonably assured. More than 69%
of our products are exported either through distributors or to end-users.
Of this amount, 80% of the revenue is exported through distributors. Our general
sales agreement requires the distributors to pay us after we deliver the
products to them, which is not contingent on resale to end customers. Our credit
terms for distributors with good credit history are from 30 days to 90
days. For new customers, we usually require 100% advance payment for direct
export sales. Customer advances are recorded as unearned revenue, which is a
current liability. Our payment terms with distributors are not determined by the
distributor’s resale to the end customer. According to our past collection
history, the bad debt rate of our accounts receivable is less than 0.5% and
because of our strict quality standards during the production, storage and
transportation process we have experienced no returns based on the quality of
our products. Our customers have no contractual right to return our products and
historically we have not had any products returned. Accordingly, no provision
has been made for returnable goods. We are not required to rebate or credit a
portion of the original fee if we subsequently reduce the price of our product
and the distributor still has right with respect to that product.
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. The significant areas requiring the use of
management estimates include the provisions for doubtful accounts receivable,
useful life of fixed assets and valuation of deferred taxes. Although these
estimates are based on management’s knowledge of current events and actions
management may undertake in the future, actual results may ultimately differ
from those estimates.
Property, Plant and
Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the assets. Major renewals and betterments are capitalized and depreciated;
maintenance and repairs that do not extend the life of the respective assets are
charged to expense as incurred. Upon disposal of assets, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in income. Depreciation related to property and equipment used in
production is reported in cost of sales. Property and equipment are depreciated
over their estimated useful lives as follows:
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Furniture
and office equipment
|
|
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|
|
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in U.S. dollars. The functional
currency is the renminbi (“RMB”) of the PRC. The financial statements are
translated into U.S. dollars from RMB at year-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
On July
21, 2005, the PRC changed its foreign currency exchange policy from a fixed
RMB/USD exchange rate into a flexible rate under the control of the PRC’s
government. We use the closing rate method in currency translation of the
financial statements of the Company.
RMB is
not freely convertible into the currency of other nations. All such exchange
transactions must take place through authorized institutions. There is no
guarantee the RMB amounts could have been, or could be, converted into U.S.
dollars at rates used in translation.
Taxes
Income
tax expense is based on reported income before income taxes. Deferred income
taxes reflect the effect of temporary differences between assets and liabilities
that are recognized for financial reporting purposes and the amounts that are
recognized for income tax purposes. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No.109, Accounting for Income Taxes,
these deferred taxes are measured by applying currently enacted tax
laws.
The
Company has implemented SFAS No.109 Accounting for Income Taxes,
which provides for a liability approach to accounting for income taxes. Deferred
income taxes result from the effect of transactions that are recognized in
different periods for financial and tax reporting purposes. The Company had
recorded no deferred tax assets or liabilities as of December 31, 2008, since
nearly all differences in tax basis and financial statement carrying values are
permanent differences.
Restrictions on Transfer of
Assets Out of the PRC
Dividend
payments by Shaanxi Tianren and its subsidiaries are limited by certain
statutory regulations in the PRC. No dividends may be paid by Shaanxi Tianren
without first receiving prior approval from the Foreign Currency Exchange
Management Bureau. Dividend payments are restricted to 85% of profits, after
tax.
Minority Interest in
Subsidiary
Minority
interest represents the minority stockholders’ proportionate share of 1% of the
equity of Shaanxi Tianren and 8.85% of the equity of Shaanxi
Qiyiwangguo.
Accounting Treatment of the
February 26, 2008 Private Placement
The
Company has issued shares and put them into escrow to protect the investor group
from a decline in value should the Company not meet certain income targets. If
the Company fails to achieve the income targets, the Make Good Escrow Shares
will be released to the investors. Since the investors have no relationship to
the Company other than as Investors, no compensation cost will be recognized. If
the Company achieves the income targets, the Make Good Escrow Shares will be
canceled, resulting in no income or expense recognition. During the time the
Make Good Escrow Shares are outstanding, they will be accounted for as
contingently issuable shares in determining the EPS denominator in
accordance with SFAS 128.
Liquidated
damages potentially payable by the Company under the Stock Purchase Agreement
and the Registration Rights Agreement were accounted for in accordance with FSP
EITF 00-19-2. Estimated damages at the time of closing were recorded as a
liability and deducted from additional paid-in capital as costs of issuance.
Liquidated damages determined later pursuant to the criteria for SFAS 5 was
recorded as a liability and deducted from operating income.
Comparison of Operation
Results
Comparison
of Fiscal 2008 and 2007
The
following table presents our consolidated net revenues for our main products for
the fiscal year 2008 and 2007, respectively:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
Concentrated
apple juice and apple aroma
|
|
$ |
6,853,649 |
|
|
$ |
7,461,278 |
|
|
|
(8.1 |
%) |
|
Concentrated
pear juice
|
|
|
11,992,610 |
|
|
|
11,278,990 |
|
|
|
6.3 |
% |
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
13,602,600 |
|
|
|
5,848,690 |
|
|
|
132.6 |
% |
|
Kiwifruit
seeds
|
|
|
1,558,463 |
|
|
|
- |
|
|
|
N/A |
|
|
Fresh
kiwifruits
|
|
|
2,315,392 |
|
|
|
1,247,760 |
|
|
|
85.6 |
% |
|
Fruit
beverages
|
|
|
5,325,891 |
|
|
|
3,525,223 |
|
|
|
51.1 |
% |
|
Consolidated
|
|
$ |
41,648,605 |
|
|
$ |
29,361,941 |
|
|
|
41.8 |
% |
Revenue
for the fiscal year 2008 was $41,648,605, an increase of $12,286,664 or 41.8%,
when compared to the prior year. This increase was primarily due to an increase
in sales of concentrated kiwifruit juice and kiwifruit puree, kiwifruit seeds,
fresh kiwifruits and fruit beverages, which was partially offset by a decrease
in sales of concentrated apple juice and apple aroma.
We
believe that the increase in sales of concentrated kiwifruit juice and kiwifruit
puree was due to the increase in market acknowledgement of our products in both
the international and national markets and an increase in the market demand for
small breed fruit products. Sales from kiwifruit related products was
$17,476,455 in fiscal year 2008, an increase of $10,380,005, or 146.3%, compared
to $7,096,450 for fiscal 2007. Due to their nutritional advantages and unique
image and taste, the consumption of small breed fruits, such as kiwifruits and
mulberry, and their processed products are on the rise worldwide. Our market
share of fruit beverages in the Chinese market also showed improvement in the
fiscal 2008. The net sales of fruit beverages increased by 51.1% to
$5,325,891 as compared to $3,525,223 for fiscal year 2007 due to continuous
marketing efforts from our sales person in Shaanxi Tianren and an increase in
market demand for fruit juice in the Chinese market. We believe that the pure
juice market is a high-growth market in China because of growing personal income
and an increase in health awareness. Sales from pear related products
increased by $713,620, or 6.3%, in fiscal year 2008 compared to the prior year
as a result of increased consumer demand in both China and
internationally.
Sales
from apple related products decreased by $607,629, or 8.1%, in fiscal year 2008
as compared to fiscal year 2007. We believe that the decrease in sales from
apple related products was mainly due to instability of the financial markets
and their influence on the global economy, which in turn decreased the demand
for concentrated apple juice in the international market. In 2008, the volume of
concentrated apple juice exported from China decreased by 34% as compared to
2007. Furthermore, the competition in apple related products became stronger in
China in 2007. Some small and middle-sized juice manufacturer sold their
inventory of apple related products at a lower price to improve their cash flow
due to the decrease in export volume. As a result, it further reduced the demand
of our apple related products.
Gross
Margin
The
following table presents consolidated gross profit margin of our main products
and consolidated gross profit margin as a percentage of related revenues for the
fiscal years 2008 and 2007, respectively:
|
|
|
Year
Ended December 31,
|
|
|
Gross
profit margin
|
|
2008
|
|
|
2007
|
|
|
%
Change |
|
Concentrated
apple juice and apple aroma
|
|
$ |
1,442,694 |
|
|
$ |
2,096,941 |
|
|
|
(31.2 |
%) |
|
Concentrated
pear juice
|
|
|
4,552,628 |
|
|
|
4,046,384 |
|
|
|
12.5 |
% |
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
7,338,762 |
|
|
|
2,850,474 |
|
|
|
157.5 |
% |
|
Kiwifruit
seeds
|
|
|
1,383,958 |
|
|
|
- |
|
|
|
N/A |
|
|
Fresh
fruits
|
|
|
1,491,896 |
|
|
|
861,706 |
|
|
|
73.1 |
% |
|
Fruit
beverages
|
|
|
1,831,258 |
|
|
|
1,039,391 |
|
|
|
76.2 |
% |
|
Consolidated
|
|
$ |
18,041,196 |
|
|
$ |
10,894,896 |
|
|
|
65.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin as a % of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrated
apple juice and apple aroma
|
|
|
21.1 |
% |
|
|
28.1 |
% |
|
|
(25.1 |
%) |
|
Concentrated
pear juice
|
|
|
38.0 |
% |
|
|
35.9 |
% |
|
|
5.8 |
% |
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
54.0 |
% |
|
|
48.7 |
% |
|
|
10.7 |
% |
|
Kiwifruit
seeds
|
|
|
88.8 |
% |
|
|
- |
|
|
|
N/A |
|
|
Fresh
fruits
|
|
|
64.4 |
% |
|
|
69.1 |
% |
|
|
(6.7 |
%) |
|
Fruit
beverages
|
|
|
34.4 |
% |
|
|
29.5 |
% |
|
|
16.6 |
% |
|
Consolidated
|
|
|
43.3 |
% |
|
|
37.1 |
% |
|
|
16.7 |
% |
Overall
gross margin as a percentage of revenue increased by 16.7% for fiscal year 2008,
from 37.1% to 43.3% compared to fiscal 2007. In terms of dollar amount, gross
margin for fiscal year 2008 was $18,041,196, an increase of $7,146,300, or 65.6
%, compared to $10,894,896 in fiscal 2007, primarily due to a significant
increase in sales.
The
increase in gross margin as a percentage of revenue in fiscal 2008 was primarily
due to an increase in the gross margin of concentrated kiwifruit juice and
kiwifruit puree, concentrated pear juice and fruit beverages, which was offset
by a decrease in the gross margin of concentrated apple juice and apple aroma
and fresh fruits.
The gross
profit margin of concentrated kiwifruit juice and kiwifruit puree increased by
10% to 54.0% for fiscal year 2008, as compared to 48.7% for fiscal year 2007.
This increase was mainly due to the large decrease in the general price of fresh
kiwifruits in the kiwifruit squeezing season of fiscal 2008 as a result of
abundant harvests of kiwifruits in 2008. The gross profit margin of fresh
kiwifruits decreased by 6.7% for fiscal 2008 as compared to fiscal 2007,
primarily due to a decrease in the price of fresh kiwifruits in the
international market.
The gross
profit margin of concentrated pear juice was 38.0% in fiscal year 2008,
representing an increase of 5.8% as compared to fiscal year 2007. The increase
in the gross profit margin of concentrated pear juice was primarily due to a
large decrease in the general price of fresh pears during their squeezing
season, which is from July or August until March of the following year. As
weather conditions in the beginning of this squeezing season were better than
last year, there was an abundant harvest of pears in fiscal 2008. As a result,
the general price of pears decreased this year, which in turn significantly
improved our gross margin in pear related products.
The gross
profit margin of our fruit beverages increased by 16.6% for fiscal year 2008 as
compared to fiscal year 2007. This increase was primarily due to the change in
our product mix. We sold more concentrated fruit beverages in fiscal 2008, which
have a higher margin, as the result of a change in demand in the Chinese market.
As the middle class of China grows, we believe the demand for higher quality,
higher margin products will also increase.
In fiscal
2008, we also had sales of $1,558,463 from kiwifruit seeds. Kiwifruit
seeds are the byproduct of kiwifruit juice. They are removed from the fresh
kiwifruits when we process kiwifruit juice for purity. Initially, the Company
did not allocate any cost to kiwifruit seeds as there was no expected sales
value. In the second quarter of 2008, the Company began the sale of
kiwifruit seeds. As kiwifruit seeds are byproducts of concentrated kiwifruit
juice, the cost cannot be determined individually. For purposes of
determining our cost of goods sold we have applied the “relative sales value
costing” method in determining our cost for kiwifruit seeds. In calculating the
gross margin of kiwifruit seeds, the Company applied the average method to
simplify the calculation. In applying this method, we first
calculated the average sales values of kiwifruit seeds and kiwifruit juice that
can be produced from one ton of kiwifruit based on our estimate in a normal
production situation in the second quarter of 2008. This percentage was then
applied to actual cost for the production of kiwifruit juice to calculate the
actual cost of sales for kiwifruit seeds and concentrated kiwifruit juice in the
period covered by the financial statements. As the Company is using the first
in, first out inventory method, the kiwifruit seeds of zero cost allocation were
sold first, then the kiwifruit seeds of higher cost allocation. Hence, the gross
margin for kiwifruit seeds as a percentage of revenue in fiscal year 2008
was much higher than that of concentrated kiwifruit juice. The high margin of
kiwifruit seeds in fiscal 2008 contributed to the improvement in gross margin
for fiscal year 2008.
The gross
profit margin of concentrated apple juice and apple aroma decreased by 25.1% to
21.1% for fiscal year 2008, as compared to 28.1% for fiscal year 2007, which was
primarily due to a decrease in the price of apple related products in the
international market.
Operating
Expenses
The following table
presents consolidated operating expenses as a percentage of net revenues for the
fiscal year 2008 and 2007, respectively:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
|
General
and administrative
|
|
$ |
2,830,739 |
|
|
$ |
1,158,759 |
|
|
|
144.3 |
% |
|
Selling
expenses
|
|
|
1,453,461 |
|
|
|
686,819 |
|
|
|
111.6 |
% |
|
Research
and development
|
|
|
449,695 |
|
|
|
30,878 |
|
|
|
1,356.4 |
% |
|
Accrued
liquidated damages
|
|
|
254,301 |
|
|
|
- |
|
|
|
N/A |
|
|
|
