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Item 2.
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Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
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The
following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this
Form 10-Q. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in
Part I, Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our 2016 Form 10-K. All
references to the third quarter and first nine months of 2017 and 2016 mean the three and nine-month periods ended September 30,
2017 and 2016, respectively. In addition to historical information, the following discussion and other parts of this report
contain certain forward-looking information. When used in this discussion, the words, “believes,” “anticipates,”
“expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number
of risks, uncertainties and factors beyond our control. We do not undertake to publicly update or revise any of these forward-looking
statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers also are urged
to carefully review and consider our discussions regarding the various factors that affect the company’s business, which
are described in this section and elsewhere in this report. For more information, see our discussion of risk factors located at
Part I, Item 1A of our 2016 Form 10-K.
DISCLAIMER
REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange A
ct. We have based these forward-looking
statements on our current expectations and projections about future events. These forward-looking statements are subject to known
and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied
by such forward-looking statements. Words such as “may,” “will,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“continue,” the negatives of such terms and other terms of similar meaning typically identify forward-looking statements.
Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk
Factors” and those listed in our 2016 Form 10-K. The following discussion should be read in conjunction with our Financial
Statements and related Notes thereto included elsewhere in this report and in our 2016 Form 10-K. Unless the context otherwise
requires, references in this report to “we,” “us,” “FTFT,” “Future FinTech” or
the “Company” refer to Future FinTech Group Inc. and its subsidiaries.
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 outside of the PRC. We also conduct whole sale and online trading business in China. 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 and online platforms in the PRC. For
the three months ended September 30, 2017, sales of our fruit concentrates, fruit beverages, fresh fruits and other fruit related
products represented 17%, 83% and 0% of our revenue, respectively, compared to 51%, 44% and 6% respectively, for the same period
of 2016.
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 only in 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, the 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 to identify 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. Unlike fruit juice concentrates,
which can only be produced during the squeezing season, our fruit beverages are made out of fruit juice concentrates and can be
produced and sold in all seasons. With continuous efforts in marketing our beverages in the domestic market, we believe that our
seasonality can 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 can also produce concentrated pear juice and our Shaanxi Province facilities can
also produce concentrated apple juice based on customer need. According to the data provided by the Chinese Customs, the amount
of exported concentrated apple juice from China continued to drop in the past few years. As most of our concentrated apple juice
was sold directly or indirectly to the international market, our two facilities in Liaoning stopped operations in the past two
years. Our Huludao Wonder operation suffered continued operating losses in the three fiscal years ended December 31, 2016 and
the cash flows were minimal during the same three fiscal years. Thus, in December 2016, we established a restructuring plan to
close the Huludao Wonder Operation. In the nine months ended September 30, 2017, this discontinued operation reported a loss of
$96,708. Our Yingkou factory in Liaoning also did not produce any concentrated apple juice in the past two years. We believe that
these regions provide adequate supply of raw materials for our production needs in the foreseeable future.
On
August 3, 2016, Shaanxi Guoweimei Kiwi Deep Processing Company, an indirectly wholly-owned subsidiary of the Company, signed a
lease agreement for 20,000 mu (approximately 3,292 acres) of kiwifruits orchard located in Mei County, Shaanxi Province, with
the Di’erpo Committe of Jinqu Village, Mei County, Shaanxi for a term of 30 years, from August 5, 2016 to August 4, 2046.
On August 15, 2016, Hedetang Agricultural Plantations (Yidu) Co., Ltd., an indirectly wholly-owned subsidiary of the Company,
signed a lease agreement for 8,000 mu (approximately 1,317 acres) of orange orchard located in the city of Yidu, Hubei Province,
with the Yidu Sichang Farmers Association, Hubei Province, for a term of 20 years, from September 22, 2016 to September 21, 2036.
The Company believes that the leasing of the orchards will help ensure the quality and safety of its products and lower its costs.
On
April 12, 2017, the Company entered into a Securities Purchase Agreement with certain purchasers (the “Purchasers”),
pursuant to which the Company offered and sold to the Purchasers, in a registered direct offering, an aggregate of 862,097 shares
of common stock, par value $0.001 per share. The Shares were sold to the Purchasers at a negotiated purchase price of $3.10 per
share, for aggregate gross proceeds to the Company of $2,672,500,
before deducting fees to the placement agent and
other estimated offering expenses payable by the Company.
In
a concurrent private placement, the Company also issued to the each of the Purchasers a warrant to purchase one (1) share of the
Company’s Common Stock for each share purchased under the Purchase Agreement, pursuant to that certain Common Stock Purchase
Warrant, by and between the Company and each Purchaser (each, a “Warrant”, and collectively, the “Warrants”).
The Warrants will be exercisable beginning on the six month anniversary of the date of issuance at an initial exercise price of
$5.20 per share and will expire on the five and a half year anniversary of the date of issuance.
On
June 6, 2017, the Company filed a Certificate of Amendment with the Secretary of State for the State of Florida to amend and restate
its articles of incorporation to change its name from SkyPeople Fruit Juice, Inc. to Future FinTech Group Inc., effective immediately
(“the Name Change”). The Name Change was approved by the Company’s Board of Directors on March 30, 2017 and
by shareholders holding a majority of the Company’s issued and outstanding capital stock on March 31, 2017. In addition,
effective as of June 6, 2017, the Company’s bylaws were amended and restated to reflect the Name Change.
On August 30, 2010, we closed the public
offering of 5,181,285 shares of our Common Stock at a price of $5.00 per share for approximately $25.9 million. We received an
aggregate of approximately $24 million as net proceeds after deducting underwriting discounts and commissions and offering expenses.
As of September 30, 2017, we had spent approximately $18.6 million on various capital projects in Huludao Wonder and $5.4 million
on projects in SkyPeople Suizhong, as described in the projects below using the proceeds from our public offering.
The following descriptions present the
capital projects that the Company is currently carrying on. 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 (approximately 46 acres) 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 juice
drink bottling production line with a capacity to produce 6,000 glass-bottle drinks per hour;
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|
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c)
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one storage freezer
facility with a capacity to store 20,000 tons of concentrated orange juice; and
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|
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|
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d)
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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
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|
|
|
|
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. As the Chinese government recently tightened environment regulations, the Company is in
the process of adapting the new standards and the project has been delayed. Although the schedule for completion could change,
the Company plans to finish the construction of the infrastructure of an office building, R&D center, fruit juice production
facility and cold storage, and other areas in the second quarter of 2018.
Although the schedule for completion could
change, the distribution center is planned to be completed by the second quarter of 2018, and the orange plantation is planned
to be operational in the second quarter of 2018 due to an infrastructure delay.
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 responsible for the construction and administration of the Mei County National
Kiwi Fruit Wholesale Trading Center (the “Trading Center”).
Under
the Agreement, the parties agreed to invest and establish a kiwi fruit comprehensive deep processing zone and kiwi fruit and fruit-related
materials trading zone in Yangjia Village, Changxing Town of Mei County with a total planned area of total planned area of 286
mu (approximately 47 acres) (the “Project”).
Pursuant
to the Agreement, the Company is 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, which also includes a fee for the land use rights for
the Project land in the amount of RMB 0.3 million per mu. The Committee is responsible for financing and constructing the basic
infrastructure surrounding the Project, such as the main water supply, main water drainage, natural gas, electricity, sewage,
access roads to the Project, natural gas and communications networks. As of the date of this report, the Company is in the process
of building fruit juice production lines, a vegetable and fruit flash freeze facility, an R&D center and an office building.
Although the schedule for completion could change, the Company plans to complete the construction of these facilities in the fourth
quarter of 2017.
As
of the date of this report, Mei County National Kiwi Fruit Wholesale Trading Center has started normal operations. There are a
number of enterprises operating in the trading center including 12 express delivery companies, 4 logistic companies, four on-line
sales companies, two packing companies and three agriculture companies. In addition, all government departments that are relevant
to the operations of the Mei County National Kiwi Fruit Wholesale Trading Center have moved into the trading center. Currently,
Mei County National Kiwi Fruit Wholesale Trading is building a data platform for agricultural products in the western part of
China, an agricultural business incubator, and an online-to-offline agricultural products trading center. To meet this requirement,
the Company is upgrading its software and the project has been delayed. The Company expects to complete its investment in the
trading center in the fourth quarter of 2017, and believes that it will generate income from the trading center through various
means, such as rental income from cold storage and shops, and income from logistic services.
As
part of the Mei County National Kiwi Fruit Wholesale Trading Center project, on April 19, 2013, we established Shaanxi Guoweimei
Kiwi Deep Processing Co., Ltd. (“Guo Wei Mei”) to engage in the business of producing kiwi fruit juice, kiwi puree,
cider beverages, and related products. The total estimated investment was RMB 294 million. As the Chinese government recently
tightened environmental regulations, the Company is in the process of adapting to the new standards and the project has been delayed.
We are now building fruit juice production lines, a vegetable and fruit flash freeze facility, an R&D center and an office
building. Although the schedule for completion could change, we plan to complete construction in the second quarter of 2018.
Suizhong
Project
On
July 15, 2011, the Company 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 was intended to include one or more of the following: the construction and operation of fruit juice production
lines, a vegetable and fruit flash freeze facility, a refrigeration storage facility and warehouse, a world class food safety
testing center, a fruit and vegetable modern supply chain and e-commerce platform, and a 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.
As of date of this
report, the Company has finished construction of an office building, dormitory, refrigeration storage facility and warehouse.
However, due to heavy competition in the concentrated apple juice business in China, our Huludao Wonder and Yingkou
facilities in Liaonng have had no production in the past two years, and the construction work on Suizhong project is also
currently suspended.
Letter
of Intent for 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 (approximately 137 acres) of kiwifruits orchard in Mei County. The purchase price will be determined by a third party
valuation company appointed by both parties. As of the date of this report, the valuation has not been completed and the purchase
price has not been settled. The Company paid RMB 200 million (approximately $30 million) as a deposit in the second quarter of
2016. The purchase is subject to government approval, approval by the Company’s Board of Directors and a 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 fourth quarter of 2017. This deposit is recorded as other receivables
in the company’s balance sheet as of September 30, 2017.
Leasing
of Orchard
On
August 3, 2016, Shaanxi Guoweimei Kiwi Deep Processing Company, an indirectly wholly-owned subsidiary of the Company, signed a
lease agreement for 20,000 mu (approximately 3,292 square acres) of a kiwifruits orchard located in Mei County, Shaanxi Province,
with the Di’erpo Committe of Jinqu Village, Mei County, Shaanxi for a term of 30 years, from August 5, 2016 to August 4,
2046. The annual leasing fee is RMB 1,250 (approximately $189) per mu, and payment of 10 years’ of leasing fees shall be
made on each of September 25, 2016, 2026 and 2036. The Company made a payment of RMB 250 million (approximately $37.4 million)
for the first 10 years’ leasing fees on August 15, 2016, which is recorded as prepayment in the Company’s balance
sheet.
On
August 15, 2016, Hedetang Agricultural Plantations (Yidu) Co., Ltd., an indirectly wholly-owned subsidiary of the Company, signed
a lease agreement for 8,000 mu (approximately 1,317 square acres) of an orange orchard located in city of Yidu, Hubei Province,
with the Yidu Sichang Farmers Association, Hubei Province, for a term of 20 years, from September 22, 2016 to September 21, 2036.
The annual leasing fee is RMB 2,000 (approximately $306) per mu, and payment of 10 years’ of leasing fees shall be made
on each of September 25, 2016 and 2026. The Company made a payment of RMB 160 million (approximately $24.0 million) for the first
10 years’ of leasing fees on September 20, 2016, which is recorded as prepayment in the Company’s balance sheet.
Highlights
for the Three Months ended September 30, 2017
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●
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On August 9, 2017, the Board of Directors of the Company approved the acquisition of 90% of the equity shares of Shenzhen Aimoke Technologies Inc. for a purchase price is RMB9 million (approximately $1.3 million). The Company has made a prepayment of RMB [____] (approximately $0.3 million) and the transaction has not been completed as of the date of this report.
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●
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In September 6, 2017, Hedetang Food (China) Co. Ltd. signed an investment agreement with Shaanxi UnionPay Huijin Investment Management Co. Ltd, and jointly set up a company, Zhonglian Hengxin Assets Management Co., Ltd. (“Zhonglian Hengxin”). Hedetang Food (China) Co. Ltd. Holds 55% of the equity share of Zhonglian Hengxin. The registered capital of Zhonglian Hengxin is RMB 100 million (approximately $14.6 million) Its main business scope includes asset management (except for financial, securities, futures and other restricted items); asset acquisition, asset disposal and asset operation (except for financial, securities, futures and other restricted items); planning and advisory for corporate restructuring and mergers and acquisition; equity and real estate investment (except public offerings, and limited to owned assets investment
); financial business process outsourcing by financial institutions; financial information technology outsourcing entrusted by financial institutions
; financial knowledge process outsourcing (businesses requiring approval by governmental agencies shall only operate within the scope of the such approvals).
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●
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On September 20, 2017, the Company signed an exclusive sales agreement with Shaanxi Entai Biological Technology Co. Ltd, to sell IB-Live products through its on-line platform. On September 24, 2017, the Company signed agreements with sales agents from 20 provinces in China, for which the estimated sales amount is RMB 10 million for the first year
.
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●
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On September 27, 2017, Zeyao Xue, the son of Yongke Xue, a director of the Company, purchased from Yongke Xue in a private transaction all of the outstanding equity interests of Fancylight Limited for an aggregate purchase price of $50,000, which such amount was paid using personal funds (the “Share Purchase”). As a result of the Share Purchase, Zeyao Xue became the indirect beneficial owner of 2,337,155 shares of the Company’s common stock (the “Common Stock”), equal to approximately 45.2% of the issued and outstanding Common Stock.
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●
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On September 29, 2017, HedeJiachuan Holding Group Co. Ltd formed a subsidiary, Shenzhen Hedetang Industrial Co., Ltd. (“Shenzhen Hedetang”).
The registered capital of
Shenzhen Hedetang
is RMB 10 million (approximately $1.5 million).
Its main business scope includes industrial projects; domestic trade; and import and export businesses.
|
These
highlights are not intended to be a full discussion of our operating results for this quarter. These highlights should be read
in conjunction with the following discussion and with our un-audited consolidated financial statements and notes thereto accompanying
this Quarterly Report.
Results
of Operations
Comparison
of Three Months ended September 30, 2017 and 2016:
Revenue
The
following table presents our consolidated revenues for each of our main products for the three months ended September 30, 2017
and 2016, respectively (revenue in thousands):
|
|
|
Three month ended
September 30,
|
|
|
Change
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
|
Concentrated apple juice and apple aroma
|
|
$
|
562
|
|
|
$
|
348
|
|
|
$
|
214
|
|
|
|
61
|
%
|
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
184
|
|
|
|
107
|
|
|
|
77
|
|
|
|
72
|
%
|
|
Concentrated pear juice
|
|
|
13
|
|
|
|
4,897
|
|
|
|
(4,884
|
)
|
|
|
(100
|
%)
|
|
Fruit juice beverages
|
|
|
3,670
|
|
|
|
4,624
|
|
|
|
(954
|
)
|
|
|
(21
|
%)
|
|
Others
|
|
|
14
|
|
|
|
615
|
|
|
|
(601
|
)
|
|
|
(98
|
%)
|
|
Total
|
|
$
|
4,443
|
|
|
$
|
10,591
|
|
|
$
|
(6,148
|
)
|
|
|
(58
|
%)
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Sales
for the three months ended September 30, 2017 were $4.4 million, a decrease of $6.1 million, when compared to sales for the same
period of the prior year. As a percentage, sales decreased by 58% for the three months ended September 30, 2017, when compared
to total net sales for the same period of the prior year.
Sales from apple-related products as a
percentage of total sales were 13% for the three months ended September 30, 2017, as compared to 3% for the same period of the
prior year. The absolute amount of sales were $0.5 million for the three months ended September 30, 2017, an increase of $0.3
million, when compared to the sales of $0.3 million for the same period of the prior year, mainly because of an increase in the
amount sold during the three months ended September 30, 2017 as compared to the same period of last year. The Company sold approximately
738 tons of concentrated apple juice in the three months ended September 30, 2017, compared to 472 tons of concentrated apple
juice in the same period of 2016. Most of our concentrated apple juice was sold directly or indirectly to the international
market. In 2017, international demand of concentrated apple juice from China has continued to drop. According to the data provided
by Chinese Customs, the amount of exported concentrated apple juice from China declined by 7% in year 2016 as compared to 2015,
and the unit price of exported concentrated apple juice from China declined by 11.16% in July of 2017 as compared to the same
period of 2016. Over the past three years, the purchase price of fresh apples has increased, but the sales price of concentrated
apple related products has remained low. Because of the negative trends in the international market and estimated lower margins,
our YingKou and Huludao Wonder factories did not operate their concentrated apple juice production facilities in 2016 and the
nine months ended September 30, 2017, which caused a lower inventory of concentrated apple juice and required us to purchase supply
from third-party manufacturers to meet demand.
Sales
from concentrated kiwifruit juice and kiwifruit puree as a percentage of total sales were 4% and 1% for the three months ended
September 30, 2017, and September 30, 2016, respectively. The absolute amount of sales were $0.18 million for the three months
ended September 30, 2017, an increase of $0.07 million, when compared to the sales of $0.11 million the same period of the prior
year, primarily as a result of higher demand and an increase in the amount of products sold in the third quarter of 2017 as compared
to the same period of 2016.
Sales
from concentrated pear juice as a percentage of total sales were 0% and 46% for the three months ended September 30, 2017, and
September 30, 2016, respectively. The absolute amount of sales were $0.01 million for the three months ended September 30, 2017,
a decrease of $4.89 million, when compared to sales of $4.90 million for the same period of the prior year, mainly because of
a decrease in sales volume due to lower demand. We sold 16 tons and 5,967 tons of concentrated pear juice during the third quarters
of 2017 and 2016, respectively.
Sales
from our fruit juice beverages as a percentage of total sales were 83% and 44% for the three months ended September 30, 2017,
and September 30, 2016, respectively. The absolute amount of sales were $3.7 million for the three months ended September 30,
2017, a decrease of $0.9 million, when compared to the sales of $4.6 million for the same period of the prior year, primarily
due to a decrease in sales volume as a result of heavy competition in the China market.
Sales
from other products were $0.01 million for the three months ended September 30, 2017 as compared to $0.6 million for the same
period of prior year. We do not expect continued sales from other products as customers’ orders related to other products
are not stable.
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 September 30, 2017 and 2016, respectively
(gross profit in thousands):
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|
|
Three
months ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Gross profit
|
|
|
Gross margin
|
|
|
Gross
profit
|
|
|
Gross margin
|
|
|
Concentrated apple juice and apple aroma
|
|
$
|
(30
|
)
|
|
|
(5
|
%)
|
|
$
|
10
|
|
|
|
3
|
%
|
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
45
|
|
|
|
24
|
%
|
|
|
4
|
|
|
|
4
|
%
|
|
Concentrated pear juice
|
|
|
1
|
|
|
|
8
|
%
|
|
|
1,367
|
|
|
|
28
|
%
|
|
Fruit juice beverages
|
|
|
(99
|
)
|
|
|
(3
|
%)
|
|
|
1,360
|
|
|
|
29
|
%
|
|
Others
|
|
|
7
|
|
|
|
50
|
%
|
|
|
324
|
|
|
|
53
|
%
|
|
Total/Overall (for gross margin)
|
|
$
|
(76
|
)
|
|
|
(2
|
%)
|
|
$
|
3,065
|
|
|
|
29
|
%
|
The consolidated gross loss for the three
months ended September 30, 2017 was $0.08 million, a decrease of $3.1 million, from net profit of $3.1 million for the same period
of 2016, primarily due to a decrease of dollar amounts of sales.
The gross loss margin of concentrated
apple juice for the third quarter of 2017 was 5%, as compared to the gross profit margin of 3% for the same period of 2016. The
increase in gross margin was mainly due to a decrease in the sales price of concentrated apple juice in the international market.
The
gross profit margin of concentrated kiwifruit juice and kiwifruit puree increased from gross loss margin of 4% for the three months
ended September 30, 2016 to 24% gross profit margin for the same period of 2017, primarily due to an increase in the sales price
of concentrated kiwifruit juice and kiwifruit puree during the third quarter of 2017.
The
gross profit margin of the concentrated pear juice decreased from 28% to 8% for the third quarters of 2016 and 2017, respectively,
primarily due to the higher costs of raw materials.
The
gross profit margin of our fruit juice beverages decreased from 29% for the three months ended September 30, 2016, to a gross
loss margin of 3% for the same period of 2017. The decrease in profit margin was primarily due to lower production during the
third quarter of 2017, which resulted in a higher ratio of fixed expenses to the unit cost of our products. In addition, the unit
selling prices of our products decreased in the third quarter of 2017 as compared to the same period of 2016 as a result of heavy
market competition.
The
gross profit margin of other products was 53% and 50% for the three months ended September 30, 2017 and September 30, 2016, respectively.
Operating
Expenses
The
following table presents our consolidated operating expenses and operating expenses as a percentage of revenue for the three months
ended September 30, 2017 and 2016, respectively:
|
|
|
Third quarter of 2017
|
|
|
Third quarter of 2016
|
|
|
|
|
Amount
|
|
|
% of
revenue
|
|
|
Amount
|
|
|
% of
revenue
|
|
|
General and administrative
|
|
$
|
8,660,710
|
|
|
|
195
|
%
|
|
$
|
1,009,520
|
|
|
|
10
|
%
|
|
Selling expenses
|
|
|
221,684
|
|
|
|
5
|
%
|
|
|
1,107,677
|
|
|
|
10
|
%
|
|
Total operating expenses
|
|
$
|
8,882,394
|
|
|
|
200
|
%
|
|
$
|
2,117,197
|
|
|
|
20
|
%
|
Operating expenses increased for the three
months ended September 30, 2017 compared to the corresponding period in 2016, mainly due to an increase in general and administrative
expenses, which was partially offset by a decrease in selling expenses.
General and administrative expenses increased
by $7.7 million, from $1.0 million to $8.7 million for the three months ended September 30, 2017 compared to the same period of
last fiscal year. The increase was primarily attributable to expenses of $6.7 million recorded in the third quarter of 2017 as
a result of legal proceedings and an increase in the amortization of leasing expenses associated with the kiwi orchard that the
Company leased in Mei County and the city of Yidu. The Company has amortized $0.67 million as leasing expenses for the three months
ended September 30, 2017.
Selling
expenses decreased for the three months ended September 30, 2017 as compared to the same period in 2016, 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 income, net was $2.7 million for
the three months ended September 30, 2017, as compared to other expenses of and $753,630 for the same period of 2016. The increase
in other income was mainly due to an increase in subsidy income and other income and a decrease in interest expense.
Interest expense decreased from $688,904
for the third quarter of 2016 to $112,743 for the same period of 2017, representing a decrease of $576,161. The decrease was primarily
due to lower bank loan amounts and interest rates on our bank loans in the third quarter of 2017 as compared to the same period
of 2016.
Subsidy income was $573,040 for the third
quarter of 2017, which was mainly for our agriculture project in Mei County, Shaanxi province.
Income
Tax
Our
provision for income taxes was negative $1,825 for the three months ended September 30, 2017, a decrease of $252,278, as compared
to $250,453 for the same period of last year, due to lower income before taxes in the third quarter of 2017.
Non-controlling
Interests
As
of September 30, 2017, SkyPeople (China) held a 91.15% interest in Shaanxi Qiyiwangguo, and Hedetang Holding (HK) held a 73.42%
interest in SkyPeople (China). TSD held a 26.36% interest in SkyPeople (China). Net income attributable to non-controlling interests
increased mainly due to the increase in the net income generated from Shaanxi Qiyiwangguo and SkyPeople (China).
Comparison
of Nine Months ended September 30, 2017 and 2016:
Revenue
The
following table presents our consolidated revenues for each of our main products for the nine months ended September 30, 2017
and 2016, respectively (in thousands for the revenue):
|
|
|
Nine
months ended
September 30
|
|
|
Change
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
%
|
|
|
Concentrated apple juice and apple aroma
|
|
$
|
1,612
|
|
|
$
|
7,488
|
|
|
$
|
(5,876
|
)
|
|
|
(78
|
%)
|
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
495
|
|
|
|
553
|
|
|
|
(58
|
)
|
|
|
(10
|
%)
|
|
Concentrated pear juice
|
|
|
1,049
|
|
|
|
6,011
|
|
|
|
(4,962
|
)
|
|
|
(83
|
%)
|
|
Fruit juice beverages
|
|
|
6,996
|
|
|
|
10,083
|
|
|
|
(3,087
|
)
|
|
|
(31
|
%)
|
|
Others
|
|
|
27
|
|
|
|
2,122
|
|
|
|
(2,095
|
)
|
|
|
(99
|
%)
|
|
Total
|
|
$
|
10,179
|
|
|
$
|
26,257
|
|
|
$
|
(16,078
|
)
|
|
|
(61
|
%)
|
Sales for the nine months ended September
30, 2017 were $10.2 million, a decrease of $16.1 million, when compared to net sales for the same period of the prior year. As
a percentage, net sales decreased by 61% for the nine months ended September 30, 2017, when compared to total net sales for the
same period of the prior year.
Sales
from apple-related products as a percentage of total sales were 16% for the nine months ended September 30, 2017, as compared
to 29% for the same period of the prior year. The absolute amount of sales were $1.6 million for the nine months ended September
30, 2017, a decrease of $5.9 million, when compared to the sales of $7.5 million for same periods of the prior year, mainly because
of a sharp decrease in the unit price of the apple-related products in the international market and a decrease in sales volume
due to heavy competition. The Company sold approximately 2,359 tons of concentrated apple juice during the nine months ended September
30, 2107 compared to 6,487 tons of concentrated apple juice in the same period of 2016. Most of our concentrated apple
juice was sold directly or indirectly to the international market. In 2017, international demand of concentrated apple juice from
China has continued to drop. According to the data provided by Chinese Customs, the amount of exported concentrated apple juice
from China declined by 7% in year 2016 as compared to 2015, and the unit price of exported concentrated apple juice from China
declined by 11.16% in July of 2017 as compared to the same period of 2016. Over the past three years, the purchase price of fresh
apples has increased, but the sales price of concentrated apple related products remained low. Because of the negative trends
in the international market and estimated lower margins, our YingKou and Huludao Wonder factories did not operate their concentrated
apple juice production facilities in 2016 and the nine months ended September 30, 2017, which caused a lower inventory of concentrated
apple juice and required us to purchase supply from third-party manufacturers to meet demand. As a result, the margin of our sales
of concentrated apple juice was lower, and the sales volume also dropped significantly.
Sales
from concentrated kiwifruit juice and kiwifruit puree as a percentage of total sales were 5% and 2% for the nine months ended
September 30, 2017, and September 30, 2016, respectively. The absolute amount of sales were $0.50 million for the nine months
ended September 30, 2017, a decrease of $0.06 million, when compared to the sales of $0.56 million in the same period of the prior
year, primarily as a result of the decreased amount of products sold in the nine months ended September 30, 2017 as compared to
the same period of 2016 due to a decrease in market demand.
Sales
from concentrated pear juice as a percentage of total sales were 10% and 23% for the nine months ended September 30, 2017, and
September 30, 2016, respectively. The absolute amount of sales were $1.0 million for the nine months ended September 30, 2017,
a decrease of $5.0 million, when compared to the sales of $6.0 million for the same period of the prior year, mainly because of
a decrease in the amount of products sold due to a decrease in customer demand. We sold 2,318 and 7,480 tons of concentrated pear
juice during the nine months ended September 30, 2017 and September 30, 2016, respectively.
Sales
from our fruit juice beverages as a percentage of total sales were 69% and 38% for the nine months ended September 30, 2017, and
September 30, 2016, respectively. The absolute amount of sales were $7.0 million for the nine months ended September 30, 2017,
a decrease of $3.1 million, when compared to the sales of $10.1 million for the same period of the prior year, primarily due to
a decrease in sales volume as a result of heavy competition in the China market.
Sales
from other products were $0.01 million for the nine months ended September 30, 2017 as compared to $2.1 million for the same period
of the prior year. The sales from other products for the nine months ended September 30, 2016 were concentrated orange juice.
We do not expect continued sales from other products as customers’ orders related to other products are not stable.
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 nine months ended September 30, 2017 and 2016, respectively
(in thousands for the gross profit):
|
|
|
Nine months ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
Gross profit
|
|
|
Gross margin
|
|
|
Gross profit
|
|
|
Gross margin
|
|
|
Concentrated apple juice and apple aroma
|
|
$
|
2
|
|
|
|
-
|
|
|
$
|
375
|
|
|
|
5
|
%
|
|
Concentrated kiwifruit juice and kiwifruit puree
|
|
|
126
|
|
|
|
25
|
%
|
|
|
28
|
|
|
|
5
|
%
|
|
Concentrated pear juice
|
|
|
148
|
|
|
|
14
|
%
|
|
|
1,587
|
|
|
|
26
|
%
|
|
Fruit juice beverages
|
|
|
1,462
|
|
|
|
21
|
%
|
|
|
3,961
|
|
|
|
39
|
%
|
|
Others
|
|
|
13
|
|
|
|
48
|
%
|
|
|
368
|
|
|
|
17
|
%
|
|
Total/Overall (for gross margin)
|
|
$
|
1,751
|
|
|
|
17
|
%
|
|
$
|
6,319
|
|
|
|
24
|
%
|
The
consolidated gross profit for the nine months ended September 30, 2017 was $1.8 million, a decrease of $4.5 million, from $6.3
million for the same period of 2016, primarily due to a decrease of revenue for the reasons discussed above.
The
gross profit margin of concentrated apple juice for the nine months ended September 30, 2017 and 2016 were 0% and 5%, respectively.
The decrease in gross margin was mainly due to a decrease in the sales price of concentrated apple juice in the international
market.
The
gross profit margin of the concentrated kiwifruit juice and kiwifruit puree increased from 5% for the nine months ended September
30, 2016 to 25% for the same period of 2017, primarily due to an increase in production during the nine months ended September
30, 2017, which resulted in a lower ratio of fixed expenses to the unit cost of our products. In addition, there was a decrease
in the purchase prices of fresh kiwi purchased in the last squeezing season.
The
gross profit margin of the concentrated pear juice decreased from 26% for the nine months ended September 30, 2016 to 14% for
the same period of 2017, primarily due to the higher costs of raw material and the lower unit price.
The
gross profit margin of our fruit juice beverages decreased from 39% for the nine months ended September 30, 2016 to 21% for the
same period of 2017. The decrease in profit margin was primarily due to lower production during the third quarter of 2017, which
resulted in a higher ratio of fixed expenses to the unit cost of our products. In addition, the unit selling prices of our products
decreased in the third quarter of 2017 as compared to same period of 2016 as a result of heavy market competition.
The
gross profit margin of other products was 48% and 17% for the nine months ended September 30, 2017 and September 30, 2016, respectively.
Operating
Expenses
The following table presents our consolidated
operating expenses and operating expenses as a percentage of revenue for the nine months ended September 30, 2017 and 2016, respectively:
|
|
|
Nine months ended
September 30, 2017
|
|
|
Nine months ended
September 30, 2016
|
|
|
|
|
Amount
|
|
|
% of revenue
|
|
|
Amount
|
|
|
% of revenue
|
|
|
General and administrative
|
|
$
|
14,593,052
|
|
|
|
143
|
%
|
|
$
|
2,696,577
|
|
|
|
10
|
%
|
|
Selling expenses
|
|
|
727,641
|
|
|
|
7
|
%
|
|
|
2,719,507
|
|
|
|
11
|
%
|
|
Total operating expenses
|
|
$
|
15,320,693
|
|
|
|
150
|
%
|
|
$
|
5,416,084
|
|
|
|
21
|
%
|
Operating expenses increased for the nine
months ended September 30, 2017 compared to the corresponding period in 2016, mainly due to an increase in general and administrative
expenses.
General and administrative expenses increased
by $11.9 million, from $2.7 million to $14.6 million for the nine months ended September 30, 2017 compared to the same period
of the last fiscal year. The increase was primarily attributable to expenses of $6.7 million recorded in the third quarter of
2017 as a result of legal proceedings and an increase in the amortization of leasing expenses of kiwi orchard that the Company
leased in Mei County and city of Yidu. The Company has amortized $4.5 million as leasing expenses for the nine months ended
September 30, 2017.
Selling
expenses decreased for the nine months ended September 30, 2017 as compared to the same period in 2016, 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
income, net were $2.3 million for the nine months ended September 30, 2017 and other expenses, net were $993,443 for the same
period of 2016. The increase in other income for the nine months ended September 30, 2017 was mainly due to a decrease in interest
expense and an increase in subsidy income and other income.
Interest expense for the nine months
ended September 30, 2017 was $738,705, representing a decrease of $948,558 or 56%, as compared to interest expense of $1,688,263
for the same period of 2016. The decrease was primarily due to lower bank loan amounts and interest rates on our bank loans
in the nine months ended September 30, 2017 as compared to the same period of 2016. Subsidy income for the nine months ended
September 30, 2017 was $915,164, an increase of $373,934, as compared to $ 541,230 for the same period of prior year. The subsidy
income for the nine months ended September 30, 2017 mainly represents the value-added tax rebates provided on our exports and
agriculture project in Meixin, Shaanxi province and the subsidy income for the same period of the prior year was mainly related
to our Yidu Project.
Income
Tax
Our
provision for income taxes decreased for the nine months ended September 30, 2017 versus the same period of 2016, due to lower
income before taxes for the nine months ended September 30, 2017.
Non-controlling
Interests
As
of September 30, 2017, SkyPeople (China) held a 91.15% interest in Shaanxi Qiyiwangguo, and Hedetang Holding (HK) held a 73.42%
interest in SkyPeople (China). TSD held a 26.36% interest in Skypeople (China). Net income attributable to non-controlling interests
increased mainly due to the increase in the net income generated from Shaanxi Qiyiwangguo and SkyPeople (China).
Liquidity
and Capital Resources
As of September 30, 2017, we had cash and
cash equivalents of $4,545,501, an increase of $3,401,916, or 297%, from $1,143,585 as of December 31, 2016. The increase in cash,
cash equivalents and restricted cash was mainly due to cash received in our direct registered offering. On April 12, 2017, the
Company entered into a Securities Purchase Agreement with certain purchasers (the “Purchasers”), pursuant to which
the Company offered and sold to the Purchasers, in a registered direct offering, an aggregate of 862,097 shares of common stock
for aggregate gross proceeds to the Company of $2,672,500,
before deducting fees to the placement agent and other estimated
offering expenses payable by the Company. We expect that 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 potential expenditures related to the possible expansions 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 $15,178,013
as of September 30, 2017, an increase of $59.0 million, as compared to a negative working capital of $43,847,226 as of September
30, 2016, mainly due to an increase in current assets.
During the nine months ended September
30, 2017, net cash provided by our operating activities was $1.5 million compared to net cash provided by operating activities
of $34.1 million during the same period of 2016. The decrease in cash flow provided by operating activities was primarily due to
a decrease in net income of $13.4 million and a decrease in change in accounts receivables of $35.6 million.
During the nine months ended September 30, 2017 and September 30, 2016, our investing
activities used net cash of $190,897 and $91.6 million respectively. During the nine months ended September 30, 2016, we made
a refundable deposit about $30 million pursuant to the letter of intent to purchase the kiwifruits orchard, $37.4 million for
the lease of kiwifruits orchard in Mei County, and $24 million for the lease of orange orchard in Yidu city.
During the nine
months ended September 30, 2017, our financing activities generated net cash inflow of $6,409,150 as compared to net cash inflow
of $23,967,282 in the same period of 2016. The decrease in cash inflow from financing activities was mainly due to a decrease
in capital contributions of $11.5 million by TSD. During the nine months ended September 30, 2017, the Company borrowed $2.1
million in bank loans, and the Company repaid $3.3 million in bank loans for 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 September 30, 2017, we did not have any off-balance sheet arrangements.