Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
|
The
following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this
Form 10-Q.
DISCLAIMER
REGARDING FORWARD-LOOKING STATEMENTS
The
following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction
with the consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and
notes, and with the information under the headings “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially
from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed
in this report and under the heading “Risk Factors” in our most recent Annual Report on Form 10-K.
Overview
of Our Business
We
are engaged in the production and sales of fruit juice concentrates (including fruit purees, concentrated fruit purees and concentrated
fruit juices), fruit beverages (including fruit juice beverages and fruit cider beverages), and other fruit related products (including
organic and non-organic fresh fruits) in and out of the PRC. Our fruit juice concentrates, which include apple, pear and kiwifruit
concentrates, are sold to domestic customers and exported directly or via distributors. We sell our Hedetang branded bottled fruit
beverages domestically primarily to supermarkets in the PRC. For the three months ended June 30, 2016, sales of our fruit concentrates,
fruit beverages, fresh fruits and other fruit related products represented 32%, 53% and 15% of our revenue, respectively, compared
to 9%, 91% and 0% respectively, for the same period of 2015.
In
addition to our domestic sales, we also export our products. We sell our products either through distributors with good credit
or to end users directly. Our main export markets are Asia, North America, Europe, Russia and the Middle East. We sell our other
fruit related products to domestic customers.
We
currently market our Hedetang brand fruit beverages in only certain regions of the PRC. We plan to expand the market presence
of Hedetang over a broader geographic area in the PRC. In particular, we plan to expand our glass bottle production line to produce
higher margin portable fruit juice beverages targeting consumers in more populated Chinese cities. Currently we produce six flavors
of fruit beverages in 280 ml glass bottles, 418 ml glass and 500 ml glass bottles and BIB packages, including apple juice, pear
juice, kiwifruit juice, mulberry juice, peach juice and pomegranate juice. We currently sell our fruit beverages to over 100 distributors
and more than 20,000 retail stores in approximately 20 provinces. Our products are sold through distributors in stores such as
Hualian Supermarket in Beijing, RT-Mart in Shenyang, WOWO in Chengdu, Quanjia convenient store chain, Vanguard in Xi’an,
Carrefour in Chongqing and Shenyang and Lianhua Supermarket in Shanghai.
We
plan to continue to focus on creating new products with high margins to supplement our current product offering.
Our
business is highly seasonal and can be greatly affected by weather because of the seasonal nature in the growing and harvesting
of fruits and vegetables. Our core products are apple, pear and kiwifruit juice concentrates, which are produced from July or
August to April of the following year. The squeezing season for (i) apples is from August to January or February; (ii) pears is
from July or August until April of next year; and (iii) kiwifruit is from September through December. Typically, a substantial
portion of our revenues is earned during our first and fourth quarters. To minimize the seasonality of our business, we make continued
efforts in identifying new products with harvesting seasons complementary to our current product mix. Our goal is to lengthen
our squeezing season, thus increasing our annual production of fruit juice concentrates and fruit beverages. In the first quarter
of 2009, we introduced mulberry and kiwifruit cider beverages in the Chinese market. Unlike fruit juice concentrates, which can
only be produced during the squeezing season, such fruit beverages are made out of fruit juice concentrates and can be produced
and sold in all seasons. With continuous efforts in marketing of our beverages in domestic market, we believe that our seasonality
will be reduced.
Fresh
fruits are the primary raw materials needed for the production of our products. Our raw materials mainly consist of apples, pears
and kiwifruits. Other raw materials used in our business include pectic enzyme, amylase, auxiliary power fuels and other power
sources such as coal, electricity and water.
We
purchase raw materials from local markets and fruit growers that deliver directly to our plants. We have implemented a fruit-purchasing
program in areas surrounding our factories. In addition, we organize purchasing centers in rich fruit production areas, helping
farmers deliver fruit to our purchasing agents easily and in a timely manner. We are then able to deliver the fruit directly to
our factory for production. We have assisted local farmers in their development of kiwifruit fields to help ensure a high quality
product throughout the production channel. Our raw material supply chain is highly fragmented and raw fruit prices are highly
volatile in China. Fruit concentrate and fruit juice beverage companies generally do not enter into purchasing agreements with
raw fruit suppliers. In addition to raw materials, we purchase various ingredients and packaging materials such as sweeteners,
glass and plastic bottles, cans and packing barrels. We generally purchase our materials or supplies from multiple suppliers.
We are not dependent on any one supplier or group of suppliers.
Shaanxi
and Liaoning Provinces, where our manufacturing facilities are located, are large fruit producing provinces. We own and operate
four manufacturing facilities in the PRC, all of which are strategically located near fruit growing centers so that we can better
preserve the freshness of the fruits and lower our transportation costs. To take advantage of economies of scale and to enhance
our production efficiency, generally, each of our manufacturing facilities has a focus on products made from one particular fruit
according to the proximity of such manufacturing to the sources of supply for that fruit. Our kiwifruit processing facilities
are located in Zhouzhi County of Shaanxi Province, which has the largest planting area of apples and kiwifruit in the PRC. Our
pear processing facilities are located in Shaanxi Province, which is the main pear-producing province in the PRC. Our apple processing
facilities are located in Liaoning Province, a region that abounds with high acidity apples. As we use the same production line
for concentrated apple juice and concentrated pear juice and both Shaanxi Province and Liaoning Province are rich in fresh apple
and pear production, our Liaoning facilities also produced concentrated apple juice and our Shaanxi Province facilities also produced
concentrated apple juice based on customer need. We believe that these regions provide adequate supply of raw materials for our
production needs in the foreseeable future.
On
August 30, 2010, we closed the public offering of 5,181,285 shares of our Common Stock at a price of $5.00 per share for approximately
$25.9 million. We received an aggregate of approximately $24 million as net proceeds after deducting underwriting discounts and
commissions and offering expenses. As of December 31, 2015, we had spent approximately $18.6 million on various capital projects
in Huludao Wonder and $5.4 million on projects in SkyPeople Suizhong. Other capital investment projects as described below are
funded using the cash generated from our working capital and short-term bank loans. We review these projects and capital expenditures
on a quarterly basis based on the market conditions and associated costs of these projects.
Capital
Investment Projects
Investment/Service
Agreement with Yidu Municipal People’s Government
On
October 29, 2012, SkyPeople (China) entered into an investment/service agreement (the “Investment Agreement”) with
Yidu Municipal People’s Government in Hubei Province of China.
Under
the Investment Agreement, the parties agreed to invest and establish an orange comprehensive deep processing zone in Yidu.
The
Company is responsible for the establishment, construction and financing of the project with a total investment of RMB 300 million
(approximately $48 million), in fixed assets and the purchase of land use rights, while the Yidu government agreed to provide
a parcel of land for the project that is approximately 280 mu in size located at Gaobazhou Town of Yidu for a fee payable by the
Company. The consideration for transferring the land use right for the project land shall be RMB 0.3 million per mu.
The
main scope of the Yidu project includes the establishment of:
1.
|
one
modern orange distribution and sales center (the “distribution center”);
|
|
|
2.
|
one
orange comprehensive utilization deep processing zone (the “deep processing zone”), including:
|
|
a)
|
one
45 ton/hour concentrated orange juice and byproduct deep processing production line;
|
|
b)
|
one
bottled juice drink production line with a capacity to produce 6,000 glass bottles per hour;
|
|
c)
|
one
storage freezer facility with a capacity to store 20,000 tons of concentrated orange juice; and
|
|
d)
|
general
purpose facilities within the zone, office space, general research and development facilities, service area, living quarters
and other ancillary support areas
|
3.
|
one
research and development center for orange varietal improvement and engineering technology (the “R&D center”)
and
|
|
|
4.
|
one
standardized orange plantation (the “orange plantation”).
|
The
total amount of RMB 300 million (approximately $48 million) will mainly be used to establish the distribution center and the deep
processing zone on the project land of approximately 280 mu. The Company and Yidu Municipal People’s Government agreed to
discuss the investment amount and location for establishing the R&D center and the orange plantation in the future.
On
November 23, 2015, the Company started the construction of the Yidu project. The Company plan to finish the construction of the
infrastructure of office building, R&D center, fruit juice production facility and cold storage, and other areas in the second
quarter of 2017.
The
distribution center is planned to be completed by the last quarter of 2017, and the orange plantation is planned to be operational
in the second quarter of 2017.
Investment/Service
Agreement with Mei County National Kiwi Fruit Wholesale Trading Center
On
April 3, 2013, SkyPeople (China) entered into an Investment Agreement (the "Agreement") with the Managing Committee
of Mei County National Kiwi Fruit Wholesale Trading Center (the "Committee"). The Committee has been authorized by the
People’s Government of Mei County to be in charge of the construction and administration of the Mei County National Kiwi
Fruit Wholesale Trading Center (the “Trading Center”).
Under
the Agreement, the parties agreed to invest in and establish a kiwi fruit comprehensive deep processing zone and kiwi fruit and
fruit-related materials trading zone in Yangjia Village, Changxing Town of Mei County with a total planned area of total planned
area of 286 mu (approximately 47 acres) (the “Project”).
Pursuant
to the Agreement, the Company will be responsible for the construction and financing of the Project with a total investment of
RMB 445.6 million (approximately $71.9 million) in buildings and equipment. In addition, the Company agreed to pay for the land
use rights for the Project land a fee of RMB 0.3 million per mu. The Committee is responsible for financing and constructing the
basic infrastructure surrounding the Project, such as the main water supply, main water drainage, electricity, sewage, access
roads to the Project, natural gas and communications networks.
Mei
County National Kiwi Fruit Wholesale Trading Center, built by the Company, has started normal operations. There are 25 enterprises
operating in the trading center, which includes 12 logistic companies, 4 on-line sales companies, 2 packing companies, 3 agriculture
companies, and others. In addition, all related government departments of National Kiwi Fruit Wholesale Trading Center have moved
in. The trading center is expected to complete the promotion for the sale and lease of spaces of trading center in the second
quarter of 2017. The Company is expected to generate income from this trading center in various operations and maximize the Company’s
profit in agriculture trading area.
On
April 19, 2013, we established Shaanxi Guo Wei Mei Kiwi Deep Processing Co., Ltd. (“Guo Wei Mei”) as a part of National
Kiwi Fruit Wholesale Trading Center to engage in the business of producing kiwi fruit juice, kiwi puree and cider beverages, and
similar products. The total estimated investment was RMB 294 million (approximately $46 million). In 2015, the lack of a waste
water treatment center held up the project, and our project was delayed as well. In 2016, the government started building the
waste water treatment center and our project continued. We are now building fruit juice production lines, vegetable and fruit
flash freeze facility, R&D center and office building. We plan to complete the construction in the second quarter of 2017.
Suizhong
Project
On
July 15, 2011, SkyPeople entered into a Letter of Intent with the People’s Government of Suizhong County, Liaoning Province,
to establish a fruit and vegetable industry chain and further processing demonstration zone in Suizhong County, Liaoning Province
(the “Suizhong project”).
The
Suizhong project may include one or more of the following: the construction and operation of fruit juice production lines, vegetable
and fruit flash freeze facility, refrigeration storage facility and warehouse, a world class food safety testing center, fruit
and vegetable modern supply chain and e-commerce platform, fruit and vegetable finished products processing center and exhibition
center.
The
Company has made partial payment to acquire land use rights from the local government, purchase equipment and build facilities.
The Company is currently in the process of building up facilities and purchasing equipment. As of date of this report, the Company
has finished construction of an office building, dormitory, refrigeration storage facility and warehouse. Due to heavy competition
in the concentrated fruit juice business in China, the construction work on this project is currently suspended.
Letter
of Intent of Purchase of Biological Assets
In April 2016, the Company signed a
letter of intent with Mei County Kiwifruits Investment and Development Corporation to purchase 833.5 mu of kiwifruits orchard in
Mei County. The purchase price will be determined by a third party valuation company appointed by both parties. The Company paid
RMB 200 million (approximately $30 million) as a deposit (“Deposit”) in the second quarter of 2016. The purchase is
subject to government approval, approval by the Company’s Board of Directors and definitive agreement negotiated and signed
by the parties. Pursuant to the letter of intent, the Deposit shall be returned to the Company within 10 working days upon the
request of the Company if the kiwifruits orchard cannot be transferred to the Company according to the schedule. The Company expects
to complete the purchase process in the second quarter of 2017.
Results
of Operations
Comparison
of Three Months ended June 30, 2016 and 2015:
Revenue
The
following table presents our consolidated revenues for each of our main products for the three months ended June 30, 2016 and
2015, respectively (in thousands for the revenue):
|
|
Three month ended
June 30,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
Concentrated apple juice and apple aroma
|
|
$
|
1,880
|
|
|
$
|
50
|
|
|
$
|
1,830
|
|
|
|
3,660
|
%)
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
431
|
|
|
|
42
|
|
|
|
389
|
|
|
|
926
|
%
|
Concentrated pear juice
|
|
|
957
|
|
|
|
988
|
|
|
|
(31
|
)
|
|
|
(3
|
%)
|
Fruit juice beverages
|
|
|
5,457
|
|
|
|
11,085
|
|
|
|
(5,628
|
)
|
|
|
(51
|
%)
|
Fresh fruits and vegetables
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
1,504
|
|
|
|
-
|
|
|
|
1,504
|
|
|
|
(100
|
%)
|
Total
|
|
$
|
10,229
|
|
|
$
|
12,165
|
|
|
$
|
(1,936
|
)
|
|
|
(16
|
%)
|
The
decrease in gross revenue for the three months ended June 30, 2016 was primarily due to decreased sales in fruit juice beverages
that were partially offset by increased revenues from concentrated apple juice, apple aroma and other products.
Sales
from apple-related products increased for the three months ended June 30, 2016, as the Company sold approximately 1,219 tons of
concentrated apple juice compared to 11 tons of concentrated apple juice in the same period of 2015.
Sales
from concentrated kiwifruit juice and kiwifruit puree increased during the second quarter of 2016 as compared to net sales of
kiwi-related product line in the same quarter of 2015, primarily as a result of the increased amount of products sold in the second
quarter of 2016 as compare to same period of 2015.
Sales
of concentrated pear juice decreased slightly in the second quarter of 2016 mainly due to a decrease of unit price of our products
sold. We sold 1,314 and 578 tons of concentrated pear juice during the second quarters of 2016 and 2015, respectively.
Sales
from our fruit juice beverages decreased for the second quarter of 2016, primarily due to due to a decrease in the in-store demand
of our products as a result of heavy competition in China market, as consumers increased their fruit juice beverage purchases
through on-line home delivery of groceries instead of through the traditional in-store supermarkets in which we sell our products.
Gross
Margin
The
following table presents the consolidated gross profit of each of our main products and the consolidated gross profit margins,
which is gross profit as a percentage of the related revenues, for the three months ended June 30, 2016 and 2015, respectively
(in thousands for the gross profit):
|
|
Three
months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross profit
|
|
|
Gross margin
|
|
|
Gross profit
|
|
|
Gross margin
|
|
Concentrated apple juice and apple aroma
|
|
$
|
320
|
|
|
|
17
|
%
|
|
$
|
-
|
|
|
|
-
|
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
32
|
|
|
|
7
|
%
|
|
|
(10
|
)
|
|
|
(27
|
%)
|
Concentrated pear juice
|
|
|
216
|
|
|
|
23
|
%
|
|
|
324
|
|
|
|
33
|
%
|
Fruit juice beverages
|
|
|
2,600
|
|
|
|
48
|
%
|
|
|
4, 797
|
|
|
|
43
|
%
|
Fresh fruits and vegetables
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
Others
|
|
|
43
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
%
|
Total/Overall (for gross margin)
|
|
$
|
3,211
|
|
|
|
31
|
%
|
|
$
|
5,111
|
|
|
|
42
|
%
|
The
consolidated gross profit for the three months ended June 30, 2016 was $3.2 million, a decrease of $1.9 million, from 5.1 million
for the same period of 2015, primarily due to a decrease of profit margin in dollar amounts of our fruit juice beverages.
The
gross profit margin of concentrated apple juice for the second quarters of 2016 and 2015 were 17% and 0%, respectively. The improvement
in gross margin was mainly due to a decrease in the purchase price of concentrated apple juice from our suppliers during the second
quarter of 2016. Our YingKou factory did not operate its concentrated apple juice production facilities in 2016, which caused
a lower inventory of concentrated apple juice. We purchased the concentrated apple juice from our suppliers and sold to our customers
to satisfy our customers’ need.
The
gross profit margin of the concentrated kiwifruit juice and kiwifruit puree increased from gross loss margin of 27% for the three
months ended June 30, 2015 to 7% for the same period of 2016, primarily due to an increase in sales price of concentrated kiwifruit
juice and kiwifruit puree during the second quarter of 2016.
The
gross profit margin of the concentrated pear juice decreased from 33% to 23% for the second quarters of 2015 and 2016, respectively,
primarily due to the higher costs of raw materials.
The
gross profit margin of our fruit juice beverages increased from 43% for the three months ended June 30, 2015, to 48% for the same
period of 2016. The increase of gross margin of fruit juice beverages was primarily due to an increase in sales of our 3 liter
fruit juice beverages in the second quarter of 2016, which have a higher gross margin compared to other fruit beverage products.
Operating
Expenses
The
following table presents our consolidated operating expenses and operating expenses as a percentage of revenue for the three months
ended June 30, 2016 and 2015, respectively:
|
|
Second quarter of 2016
|
|
|
Second quarter of 2015
|
|
|
|
Amount
|
|
|
% of revenue
|
|
|
Amount
|
|
|
% of revenue
|
|
General and administrative
|
|
$
|
1,007,113
|
|
|
|
10
|
%
|
|
$
|
273,646
|
|
|
|
2
|
%
|
Selling expenses
|
|
|
750,690
|
|
|
|
7
|
%
|
|
|
1,271,227
|
|
|
|
11
|
%
|
Total operating expenses
|
|
$
|
1,757,803
|
|
|
|
17
|
%
|
|
$
|
1,544,873
|
|
|
|
13
|
%
|
Operating
expenses increased for the three months ended June 30, 2016 compared to the corresponding period in 2015, mainly due to an increase
in general and administrative expenses.
The
increase in general and administrative expenses for the three months ended June 30, 2016, as compared with same period of 2015,
was mainly due to a reverse of bad debt provisions during the second quarter of 2015. During the second quarter of 2015, the Company
executed stronger control over accounts receivables. Since the outstanding balance of account receivables decreased as compared
with of the balance as of the year end, based on management’s estimation of collectability of account receivables, the Company
reduced bad debt provisions from $837,200, as of the year end, to $34,002 the provision for doubtful accounts, which reduced the
general and administrative expenses by $802,998 during the second quarter of 2015.
Selling
expenses decreased for the three months ended June 30, 2016 as compared to the same period in 2015, mainly due to a decrease in
shipping and handling expenses as a result of a decrease in volume of sales.
Other
Income (Expense), Net
Other
expenses, net were $684,458 and $318,191 for the three months ended June 30, 2016 and 2015, respectively. The increase in other
expenses was mainly due to an increase in interest expense, which was partially offset by a decrease in interest income. Interest
expense increased from $598,090 for the second quarter of 2015 to $790,694 for the same period of 2016, representing an increase
of $192,604. The increase in interest expenses was mainly due to an adjustment of interest expenses during the second quarter
of 2015. The People’s Bank of China lowered the bench mark interest rate on November 22, 2014. All financial institutions
adjusted their lending rates, accordingly. The Company received notification of reducing interests in connection with financial
leasing obligations in the second quarter of 2015. Interest income decreased from $230,473 for the second quarter of
2015 to $15,599 for the same period of 2016, mainly due to a decrease in average cash balance during the second quarter of 2016
as compared to the same period of 2015.
Income
Tax
Our
provision for income taxes was $633,829 for the three months ended June 30, 2016, a decrease $436,342, as compared to $1,07,171
for the same period of last year, due to lower income before taxes in the second quarter of 2016.
Noncontrolling
Interests
As
of June 30, 2016, SkyPeople (China) held a 91.15% interest in Shaanxi Qiyiwangguo and Pacific held a 99.78% interest in SkyPeople
(China). TSD held a 26.36% interest in Skypeople China. Net income attributable to noncontrolling interests decreased mainly due
to the decrease in the net income generated from Shaanxi Qiyiwangguo and SkyPeople (China).
Comparison
of Six Months ended June 30, 2016 and 2015:
Revenue
The
following table presents our consolidated revenues for each of our main products for the six months ended June 30, 2016 and 2015,
respectively (in thousands for the revenue):
|
|
Six months ended
June 30,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
Concentrated apple juice and apple aroma
|
|
$
|
7,140
|
|
|
$
|
75
|
|
|
$
|
7,065
|
|
|
|
9,420
|
%)
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
447
|
|
|
|
1,929
|
|
|
|
(1,482
|
)
|
|
|
(77
|
%)
|
Concentrated pear juice
|
|
|
1,114
|
|
|
|
5,651
|
|
|
|
(4,537
|
)
|
|
|
(80
|
%)
|
Fruit juice beverages
|
|
|
5,459
|
|
|
|
21,080
|
|
|
|
(15,621
|
)
|
|
|
(74
|
%)
|
Fresh fruits and vegetables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
1,506
|
|
|
|
1
|
|
|
|
1,505
|
|
|
|
150,500
|
%
|
Total
|
|
$
|
15,666
|
|
|
$
|
28,736
|
|
|
$
|
(13,070
|
)
|
|
|
(45
|
%)
|
The
decrease in gross revenue for the six months ended June 30, 2016 was primarily due to decreased sales in most of our product lines
that was partially offset by increased revenues from concentrated apple juice and apple aroma.
Sales
from apple-related products increased for the six months ended June 30, 2016, as the Company sold approximately 6,015 tons of
concentrated apple juice versus 33 tons of concentrated apple juice in the same period of 2015. Such an increase was partially
offset by a decrease in unit price of concentrated apple juice. Most of our concentrated apple juice was sold directly or indirectly
to the international market. In 2016, international demand of concentrated apple juice from China continued to drop. According
to the data provided by the Chinese Customs, the amount of exported concentrated apple juice from China dropped by 11% in the
first half year of 2016 as compared to the same period of last year. Over the past three years, the purchase price of fresh apples
has increased, but the sales price of concentrated apple related products was low in 2016. Because of the negative trend of international
market and estimated lower margin, our YingKou factory did not operate its concentrated apple juice production facilities in 2016,
which caused a lower inventory of concentrated apple juice. During the six months ended June 30, 2016, due to increase demands
of concentrated apple juice from our customers, we purchased the concentrated apple juice from our suppliers and sold to our customers
to satisfy our customers’ need.
Sales
from concentrated kiwifruit juice and kiwifruit puree decreased during the six months ended June 30, 2016 as compared to net sales
of kiwi-related product line in the same period of 2015, primarily as a result of the decreased amount of products sold in the
six months ended June 30, 2016 as compare to same period of 2015.
Sales
of concentrated pear juice decreased during the six months ended June 30, 2016 as we sold 1,513 and 4,412 tons of concentrated
pear juice during the six months ended June 30, 2016 and 2015, respectively. The decrease in sales amount was mainly due to a
shortage in our inventory of concentrated pear juice. Due to unexpected weather conditions in the 2015 pear harvest season, the
amount of available raw material supplies was low in early 2016. As a result of the weather conditions, the squeezing season started
later than usual, and the production amount was lower.
Sales
from our fruit juice beverages decreased during the six months ended June 30, 2016, primarily due to a decrease in the in-store
demand of our products as a result of heavy competition in the Chinese market as consumers increased their fruit juice beverage
purchases through on-line home delivery of groceries instead of through the traditional in-store supermarkets in which we sell
our products.
Gross
Margin
The
following table presents the consolidated gross profit of each of our main products and the consolidated gross profit margin,
which is gross profit as a percentage of the related revenues, for the six months ended June 30, 2016, 2016 and 2015, respectively
(in thousands for the gross profit):
|
|
Six
months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross profit
|
|
|
Gross margin
|
|
|
Gross profit
|
|
|
Gross margin
|
|
Concentrated apple juice and apple aroma
|
|
$
|
365
|
|
|
|
5
|
%
|
|
$
|
8
|
|
|
|
11
|
%
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
24
|
|
|
|
5
|
%
|
|
|
675
|
|
|
|
35
|
%
|
Concentrated pear juice
|
|
|
220
|
|
|
|
20
|
%
|
|
|
2,210
|
|
|
|
39
|
%
|
Fruit juice beverages
|
|
|
2,601
|
|
|
|
48
|
%
|
|
|
9,376
|
|
|
|
44
|
%
|
Fresh fruits and vegetables
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
44
|
|
|
|
3
|
|
|
|
1
|
|
|
|
-
|
|
Total/Overall (for gross margin)
|
|
$
|
3,254
|
|
|
|
21
|
%
|
|
$
|
12,270
|
|
|
|
43
|
%
|
The
consolidated gross profit for the six months ended June 30, 2016, 2016 was $3.2 million, a decrease of $9.1 million, from $12.3
million for the same period of 2015, primarily due to a decrease of revenue for the reasons discussed above.
The
gross profit margin of concentrated apple juice for the six months ended June 30, 2016 and 2015 were 5% and 11%, respectively.
We did not have any inventory of concentrated apple juice during the six months ended June 30, 2016 and we were forced to purchase
concentrated apple juice to satisfy our customers’ demand, which caused a lower profit margin.
The
gross profit margin of the concentrated kiwifruit juice and kiwifruit puree decreased from 35% for the six months ended June 30,
2015 to 5% for the same period of 2016, primarily due to lower production during the first quarter of 2016, which resulted in
a higher ratio of fixed expenses to the unit cost of our products. In addition, due to the higher cost of fresh kiwi purchased
in the last squeezing season, we experienced a higher cost of concentrated kiwifruit juice and kiwifruit puree sold during the
current period as compared to the same period of 2015. We also reduced the sales prices of our products as a result of lower market
demand.
The
gross profit margin of the concentrated pear juice decreased from 39% for the six months ended June 30, 2015 to 20% for the same
period of 2016, primarily due to the higher costs of raw material.
The
gross profit margin of our fruit juice beverages increased from 44% for the six months ended June 30, 2015, to 48% for the same
period of 2016. The increase in the gross margin of fruit juice beverages was primarily due to an increase in sales of our 3 liter
fruit juice beverages in the second quarter of 2016, which have a higher gross margin compared to other fruit beverages products.
Operating
Expenses
The
following table presents our consolidated operating expenses and operating expenses as a percentage of revenue for the six months
ended June 30, 2016 and 2015, respectively:
|
|
First half of 2016
|
|
|
First half of 2015
|
|
|
|
Amount
|
|
|
% of revenue
|
|
|
Amount
|
|
|
% of revenue
|
|
General and administrative
|
|
$
|
1,687,057
|
|
|
|
11
|
%
|
|
$
|
3,258,128
|
|
|
|
11
|
%
|
Selling expenses
|
|
|
1,611,830
|
|
|
|
10
|
%
|
|
|
2,323,881
|
|
|
|
8
|
%
|
Total operating expenses
|
|
$
|
3,298,887
|
|
|
|
21
|
%
|
|
$
|
5,582,009
|
|
|
|
19
|
%
|
Operating
expenses decreased for the six months ended June 30, 2016 compared to the corresponding period in 2015.
The
decrease in general and administrative expenses for the six months ended June 30, 2016, as compared with same period of 2015,
was mainly due to a decrease in our employee headcount from 250 full-time employees as of December 31, 2015 to 233 employees as
of June 30, 2016, as a result of lower production and competitive market conditions in China. Salary and related expenses were
reduced in the first quarter of 2016 as a consequence of the lower employee headcount. We increased our headcount in the second
quarter of 2016 from 180 employees as of March 31, 2016, due to an increase in production.
Selling
expenses decreased for the six months ended June 30, 2016 as compared to the same period in 2015, mainly due to a decrease in
shipping and handling expenses as a result of a decrease in the volume of sales.
Other
Income (Expense), Net
Other
expenses, net were $239,813 for the six months ended June 30, 2016 and other expenses, net were $1,194,947 for same period of
2015. Subsidy income increased from $238,187 for the six months ended June 30, 2015 to $550,146 in the same period of 2016. Subsidy
income for the six months ended June 30, 2016 was mainly related to our Yidu project and subsidy income in the same period of
2015 mainly represents the value-added tax rebates provided on our exports.
Interest
expense for the six months ended June 30, 2016 was $999,359, representing a decrease of $697,801 or 41%, as compared to interest
expense of $1,697,160 for the same period of 2015. The decrease was primarily due to lower bank loan amounts and interest rates
on our bank loans in the first half of 2016 as compared to the same period of 2015. Consulting fees related to a capital lease
were $62,777 for the six months ended June 30, 2016 and there was no such expense in same period of 2015.
Income
Tax
Our
provision for income taxes decreased for the six months ended June 30, 2016 versus same period of 2015, due to lower income before
taxes in the first half 2015. Our consolidated income tax rates were 4% and 6% for the six months ended June 30, 2016 and 2015,
respectively.
Noncontrolling
Interests
As
of June 30, 2016, SkyPeople (China) held a 91.15% interest in Shaanxi Qiyiwangguo and Pacific held a 99.78% interest in SkyPeople
(China). TSD held a 26.36% interest in Skypeople China. Net income attributable to noncontrolling interests decreased mainly due
to the decrease in the net income generated from Shaanxi Qiyiwangguo and SkyPeople (China).
Liquidity
and Capital Resources
As
of June 30, 2016, we had cash, cash equivalents and restricted cash of $46,775,873, a decrease of $6,310,997, or 12%, from $53,086,870
as of December 31, 2015. We expect the projected cash flows from operations, anticipated cash receipts, cash on hand, and trade
credit to provide sufficient capital to meet our projected operating cash requirements at least for the next 12 months, which
does not take into account any expenditures related to the potential expansion of our current production capacity.
Our
working capital has historically been generated from our operating cash flows, advances from our customers and loans from bank
facilities. Our working capital was $25,939,021 as of June 30, 2016, a decrease of $14,115,207 from working capital of $40,054,228
as of June 30, 2015 mainly due to an increase in current liabilities. During the six months ended June 30, 2016, net cash provided
by our operating activities was $6,555,446 compared to $36,657,715 during the same period of 2015. The decrease was primarily
due to a decrease in net income of $4.8 million and a decrease of $21,531,987 in cash inflow from the decrease of account receivables
during the first half of 2016 as compared to the same period of 2015.
During
the six months ended June 30, 2016 and 2015, our investing activities used net cash of $32,319,879and $1,883,751, respectively.
During first half of 2016 and 2015, net cash used in investing activities included $1,336,259 and $2,036,888, respectively of
additions to property, plant and equipment. We also made a refundable deposit about $30 million pursuant to the letter of
intent to purchase kiwifruits orchard, as discussed above.
During
the six months ended June 30, 2016, our financing activities generated net cash inflow of $22,860,719 as compared to net cash
inflow of $365,910 in the same period of 2015. The increase in cash inflow from financing activities was mainly due to an increase
in capital contribution of $16,641,291.
During
the first half of 2016, the Company repaid $594,290 on bank loans as compared to repayment of $13,492,076 for the same period
of last year as there were more bank loans due during the same period of last year.
On
March 11, 2016, Skypeople HK, a wholly owned subsidiary of the Company and a 99.78% owner of Skypeople China entered into a Share
Transfer Agreement and a Capital Contribution (the “Agreements”) with Shenzhen TianShunDa Equity Investment Fund Management
Co., Ltd. (the “TSD”), a limited liability corporation registered in China. Pursuant to the Agreements, TSD paid $16,641,291
and acquired 112,809,100 shares of Skypeople China from Skypeople HK, resulting in TSD owning 112,809,100 shares, or 26.36%, of
Skypeople China.
Off-balance
sheet arrangements
As
of June 30, 2016, we did not have any off-balance sheet arrangements.