As
filed with the Securities and Exchange Commission on June 12, 2009
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
SkyPeople
Fruit Juice, Inc.
(Exact
name of registrant as specified in its charter
)
Florida
|
2033
|
98-0222013
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
SkyPeople
Fruit Juice, Inc.
16F,
National Development Bank Tower
No.
2 Gaoxin 1st Road, Xi’an, PRC 710075
011-86-29-
88377216
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
Yongke
Xue
16F,
National Development Bank Tower
No.
2 Gaoxin 1st Road, Xi’an, PRC 710075
011-86-29-
88377216
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Darren
Ofsink, Esq.
Guzov
Ofsink, LLC
600
Madison Avenue 14th Floor
New
York, New York 10022
(212)
371-8008
|
Approximate date of commencement of
proposed sale to public:
as soon as practicable after this Registration
Statement is declared effective.
If any of the securities being registered on this
form are to be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, check the following box.
x
If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
__________
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier registration statement for the same
offering.
o
_________
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier registration statement for the same
offering.
o
__________
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated
filer
|
o
|
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
(Do
not check if a smaller reporting company)
|
¨
|
|
Smaller
reporting company
|
x
|
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities
To
Be Registered
|
|
Proposed
Maximum
Aggregate
Offering Price
(1)
|
|
Amount
of
Registration
Fee
(2)
|
Common
Stock, $0.01 par value per share
|
|
$28,437,500
|
|
$1,586.82
|
(1)
|
Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(o) under the Securities Act of 1933.
|
(2)
|
Calculated
pursuant to Rule 457(o) based on an estimate of the proposed maximum
aggregate offering price.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
|
SUBJECT TO COMPLETION, DATED
JUNE 12
,
2009
PRELIMINARY
PROSPECTUS
6,500,000
Shares
SkyPeople
Fruit Juice, Inc.
Common
Stock
This prospectus relates to the
resale by Barron Partners LP and Eos Holdings, LLC (the “Selling
Stockholders”) of up to 6,500,000 shares of our common stock, par value
$0.01 per share (“Common Stock”), issuable upon exercise of warrants
issued to the Selling Stockholders in a private placement (the “Private
Placement”) pursuant to an Exchange Agreement dated as of May 28, 2009
(the “Exchange Agreement”).
All of the shares of Common Stock
issuable to the Selling Stockholders upon exercise of their warrants may
be sold by the Selling Stockholders. It is anticipated that the Selling
Stockholders will sell these shares of Common Stock from time to time in
one or more transactions, in negotiated transactions or otherwise, at
prevailing market prices or at prices otherwise negotiated (see “Plan of
Distribution” beginning on page 86). We will not receive any proceeds from
the sales by the Selling Stockholders, but we may receive up to
$11,050,000 of proceeds from the exercise of the warrants, if such
warrants are exercised in cash. Under the terms of the
warrants, cashless exercise is permitted in certain circumstances. We will
not receive any proceeds from any cashless exercise of the warrants. We
will pay all of the registration expenses incurred in connection with this
offering, but the Selling Stockholders will pay any selling commissions,
brokerage fees and related expenses.
There is a limited market in our
Common Stock. The shares are being offered by the Selling Stockholders in
anticipation of the continued development of a secondary trading market in
our Common Stock. We cannot give you any assurance that an active trading
market in our Common Stock will develop, or if an active market does
develop, that it will continue.
Our Common Stock is listed on the
OTC Bulletin Board and trades under the symbol SPFJ. On May 1,
2009, the closing sale price of our Common Stock was $3.50. We
are applying to list our Common Stock on the NYSE Amex Equities on or
promptly after the date of this prospectus.
Investing in our Common Stock
involves risks. See “Risk Factors” on page 9.
Neither the Securities and
Exchange Commission nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is ______,
2009
|
|
Page
|
Prospectus Summary
.......................................................................................................................................
|
1
|
Risk Factors
.....................................................................................................................................................
|
9
|
|
26
|
Use of
Proceeds
..............................................................................................................................................
|
27
|
Price Range of Common
Stock
......................................................................................................................
|
27
|
Dividend
Policy
...............................................................................................................................................
|
28
|
Capitalization
...................................................................................................................................................
|
29
|
|
30
|
|
33
|
Business
...........................................................................................................................................................
|
54
|
|
66
|
Compensation
..................................................................................................................................................
|
70
|
|
72
|
Selling
Stockholders
.......................................................................................................................................
|
77
|
Principal
Stockholders
....................................................................................................................................
|
79
|
Description of Capital
Stock
..........................................................................................................................
|
81
|
Plan of
Distribution
.........................................................................................................................................
|
86
|
Legal
Matters
...................................................................................................................................................
|
88
|
Experts
..............................................................................................................................................................
|
88
|
Changes in and Disagreements With
Accountants
..............................................................................................
|
88
|
|
91
|
|
F-1
|
_________________________________________
You
should rely only on the information contained in this document and any free
writing prospectus prepared by or on behalf of us or to which we have referred
you. We have not authorized anyone to provide you with information that is
different. This document may only be used where it is legal to sell these
securities. The information in this document may only be accurate on the date of
this document.
This
summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you
should consider before investing in our Common Stock. You should read this
entire prospectus carefully, especially the “Risk Factors” section beginning on
page 9 and our consolidated financial statements and the related notes appearing
at the end of this prospectus, before making an investment
decision. Unless the context otherwise requires, we use the terms
“SkyPeople,” “Company,” “we,” “us” and “our” in this prospectus to refer to
SkyPeople Fruit Juice, Inc. and its consolidated subsidiaries.
Our
Business
We are
engaged in the production and sale of fruit concentrate, fruit juice beverages,
and other fruit related products in and from the People’s Republic of China
(“PRC” or “China”). Our fruit concentrates, which include apple,
pear, and kiwifruit, are primarily exported via distributors to North America,
Europe and the Middle East. We sell our Hedetang branded bottled
beverages domestically primarily to supermarkets in certain regions of
the PRC. At December 31, 2008 our fruit concentrate, fruit juice beverages, and
other fruit related products represented 78%, 13%, and 9% of our sales,
respectively.
We
believe that we are currently one of the only companies able to produce
specialty fruit juices in large scale in China and are recognized as a leading
specialty fruit juice producer. Specialty fruit juices are juices
squeezed from fruits which are grown in a relatively low quantity and include
kiwifruit juice, mulberry juice, strawberry juice, and pomegranate
juice.
Our
competitive advantages lie in our modern equipment and technology employed at
our production factories in Shaanxi and Liaoning Provinces, which are located
near regional fruit production centers. Our equipment and technology
help ensure product quality, processing cost control and allow us to meet
international juice standards such as ISO9001, Hazard Analysis and Critical
Control Points
(“
HACCP”) and Kosher. Our location near regional fruit production centers
enables us to purchase directly from farmers and avoids the need to transport
raw fruits over long distances to our processing facilities, both reducing our
transportation expenses and helping us maintain high product quality by
preserving freshness and helping us avoid damage to the raw fruit in
transit.
During
the year ended December 31, 2008, we produced 21,591 tons of fruit juice
concentrate, 5,339 tons of fruit beverage and 5,833 tons of fresh and other
fruit related products such as kiwifruit seeds and apple aroma. As we
expand our current production facilities and acquire other companies in the
fruit product industry, we expect our fruit processing capacity and our annual
yield to grow to meet increasing customer demand.
Our
Industry
The
global market for processed fruit products has expanded rapidly in the last few
years. The general consumption trend has begun to gradually shift from
carbonated beverages to pure fruit juice products. According to The
Beverage Digest’s annual “Fact Book,” global demand for non-alcoholic single
serve beverages was $106 billion in 2006 and increased 4.1% by volume from 2005
to 2006, while carbonated soft drinks declined in volume in 2005 and 2006 for
the first time in 20 years. Likewise, global sales of noncarbonated drinks (tea,
coffee, fortified water, juice, sports drinks, milk drinks, and energy drinks)
increased by 15% from 2005 to 2006. According to the Beijing Business &
Intelligence Consulting Co. Ltd., an independent research firm, projected total
sales value of and net income with respect to processed fruit products in China
will reach $37.2 billion and $2.5 billion, respectively, in 2010, or a
compounded annual growth rate of 42.5% and 66.7%, respectively, during the
four-year period from 2007 to 2010. Sales of processed fruit exported from China
is expected to reach $10.9 billion in 2010, a 42.7% increase versus the amount
of processed fruit exported in 2006. This indicates that, globally, consumers
are becoming increasingly health conscious. Increasing disposable income
combined with the already health conscious nature of Chinese consumers is a
positive indicator for continued growth in the Chinese fruit juice beverage
market as well. China currently accounts for only 10% of total global fruit
juice consumption and the annual per capita fruit juice consumption in China is
approximately 1 kilogram. Chinese consumption shows strong growth potential when
it is considered that the average annual per capita fruit juice consumption is
approximately 40 kilograms in
developed international
markets
.
This
rapid growth in the fruit processing industry in China and worldwide has placed
significant pressure on producers to increase production capacities while
managing increased costs associated with transport logistics and raw
materials. To respond effectively, producers must:
|
•
|
utilize
modern processing technology to maximize processing capacity and annual
yield without significantly increasing production
costs;
|
|
•
|
utilize
flexible production facilities to respond quickly to market supply and
demand and quickly introduce new products to the market;
and
|
|
•
|
build
or acquire new production facilities near stable sources of raw material
that can adequately meet planned processing capacities and annual
yield.
|
Our
Strengths
We
believe that the following strengths enable us to compete effectively and
capitalize on the rapid growth of the fruit product industry:
Raw
Materials Control and Resources Advantages
We have
located our production facilities in close proximity to large sources of apples
and kiwifruit in Shaanxi and Liaoning Provinces. Our close proximity to the
regional production centers ensures raw material availability and freshness and
reduces our fruit purchasing and transportation costs.
Equipment,
Technology, and Quality Advantages
We employ
modern fruit processing equipment and have developed several unique production
processes and technologies that have allowed us to gain market share in the
fruit concentrate and fruit juice beverage industries, most notably in the
kiwifruit market. We believe that our equipment helps us to maintain uniform and
high product quality and keeps processing costs under control.
Product
Diversity
Our
products include fruit concentrate and fruit juice beverages from apples, pears,
kiwifruit, and mulberries. We also sell organic fresh fruit, kiwifruit seed and
apple aroma. Our diversified product lines help us compete in international
markets, lessen commodity price risk as well as risks associated with
seasonality and consumer preferences.
Operation
Team
We have a
professional, highly educated, and motivated business administration and
technology development team. Our operating managers have an average of more than
10 years of experience in the fruit processing industry. We have established
good relationships with several scientific research institutes and experienced
consultants that we believe have been instrumental to our growth.
Chinese
Government Support
The PRC
government’s agricultural industrialization policy supports our business. Our
indirect operating subsidiary, Shaanxi Tianren Organic Food Co., Ltd. (“Shaanxi
Tianren”), was awarded the status of a nationally recognized High and New
Technology Enterprise in December 2006. As a result, in 2007 and 2008
we received subsidies from the local government of Shaanxi Province of
approximately $500,000 and $316,000, respectively. The Shaanxi government has
also approved the expansion of kiwifruit production in the province. We have
submitted our kiwifruit industrialization development plan to the Shaanxi
Province government, which has been approved by the related government
department and may result in our receiving further subsidies.
Our
Strategy
We intend
to employ the following business strategies to capitalize on the rapidly growing
fruit product market:
Increase
Our Capacity
We will
continue to expand the production capacity of our three existing production
facilities. We will also consider acquisition opportunities in order to further
expand capacity.
Diversify
Our Products
We hope
to increase our fruit product offerings in order to further diversify our
product mix. Our strategic focus will be on expanding into fruits with
harvesting seasons complementary to our current fruits. This will enable us to
expand our squeezing season, thus increasing our annual production of fruit
concentrate. In addition, we will enhance our research and
development activities in order to develop and produce innovative high margin
products like polyphenol (an antioxidant compound with beneficial effects on
health) from concentrated fruit juice to further diversify our product mix,
reduce risk and increase our revenue.
Enlarge
Our Worldwide Customer Base
We will
strive to expand our worldwide customer base by strengthening current
relationships with distributors and end users in our existing markets and
developing new relationships with strategic distributors and end users in
markets we have not yet penetrated.
Focus
on Improving Gross Margins
We plan
to continue to focus on creating new high margin products in the future to
supplement our current product offering. In addition, we are making
efforts to improve margins for our fruit juice beverage business segment by
creating new products and shifting our fruit juice beverage distribution medium
towards glass versus plastic bottles.
Increase
Sales of Fruit Concentrate and Fruit Juice Beverages in China
We plan
to execute our plan to sell our Hedetang brand over a broader geographic
area
in
China by expanding our glass bottle production line to produce higher margin
portable beverages targeting consumers in large Chinese cities and further
developing our fruit vinegar beverage distribution and fruit juice sales
networks.
Increase
Focus on the Organic and Green Fruit Concepts
According
to the Agricultural Marketing Resource Center (
www.agmrc.org/markets
),
organic food production has grown at a rate of almost 20% per annum for the last
7 years and industry experts are continuing to forecast additional growth. We
have set a target to transition Qinmei kiwifruit plantation to fully organic
production within five years. We also plan to establish a fruit and vegetable
organic research and development center and a training center by 2010 and to
convert our apple production base to become partially organic.
Company
Information
Our
principal executive offices are located at 16F, National Development Bank Tower,
No. 2 Gaoxin 1st Road, Xi’an, Shaanxi Province, PRC 710075, and our
telephone number is 011-86-29-88377216. Our website address is
www.skypeoplefruitjuice.com
. The
information contained on our website or that can be accessed through our website
is not part of this prospectus, and investors should not rely on any such
information in deciding whether to purchase our Common Stock.
THE
OFFERING
On February 25, 2008 the Company
entered into a Series B Convertible Preferred Stock Purchase Agreement (the
“Stock Purchase Agreement”) with the Selling Stockholders, pursuant to which the
Company issued shares of its newly designated Series B Convertible Preferred
Stock, par value $0.001 per share (“Series B Stock”) and five year warrants to
purchase an aggregate of 7,000,000 shares of Common Stock for $3.00 per share
(the “February 2008 Warrants”) to the Selling Stockholders in exchange for an
aggregate cash payment of $3,400,000. On June 2, 2009 the Company and
the Selling Stockholders entered into and consummated an Exchange Agreement,
dated as of May 28, 2009, pursuant to which the Selling Stockholders exchanged
all of the February 2008 Warrants for warrants to purchase an aggregate of
6,500,000 shares of the Company’s Common Stock (the “New Warrants”) for $1.70
per share (which exercise price, in the case of warrants to purchase an
aggregate of 1,000,000 shares of our Common Stock, shall be increased to $3.00
per share if the warrants are not exercised by September 30, 2009). See “Certain
Relationships and Related Party Transactions – Series B Stock Purchase
Agreement” and “Certain Relationships and Related Party Transactions – Exchange
of February 2008 Warrants for New Warrants” for a complete description of the
Stock Purchase Agreement and the Exchange Agreement.
This
prospectus relates to the resale of the 6,500,000 shares of our Common Stock
issuable to the Selling Stockholders upon exercise of the New
Warrants.
Total
shares of Common Stock outstanding prior to the Offering
|
|
|
22,271,786
|
|
|
|
|
|
|
Total
shares of Common Stock offered by the Selling Stockholders
|
|
|
6,500,000
|
|
|
|
|
|
|
Total
shares of Common Stock to be outstanding after the Offering
(assuming
all New Warrants have been exercised in cash)
|
|
|
28,771,786
|
|
|
|
|
Use
of Proceeds
|
|
We
will not receive any proceeds from the sale of the shares of Common Stock
underlying the New Warrants, but we may receive proceeds from the exercise
of the New Warrants by the Selling Stockholders, if such New Warrants are
exercised in cash. There can be no assurance that any of the
New Warrants will be exercised by the Selling Stockholders. In the event
that all of the New Warrants to purchase the shares of Common Stock
included in this prospectus were exercised in cash, we would receive
$11,050,000 of gross proceeds, which we would use for expansions of
our current production capacity, acquisitions, and other general
corporate purposes. Under the terms of the New Warrants, cashless exercise
is permitted in certain circumstances. We will not receive any proceeds
from any cashless exercise of the New Warrants.
|
|
|
|
Our
OTC Bulletin Board Trading Symbol
|
|
SPFJ.
We are applying to list our Common Stock on the NYSE Amex Equities on or
promptly after the date of this prospectus.
|
|
|
|
Risk
Factors
|
|
You
should read the “Risk Factors” section beginning on page 9 of this
prospectus for a discussion of factors to consider carefully before
deciding to invest in shares of our Common
Stock.
|
The
number of shares of our Common Stock to be outstanding after this offering is
based on 22,271,786 shares of our Common Stock outstanding as of June 3, 2009
and 6,500,000 shares of Common Stock issuable upon exercise of warrants
outstanding as of June 3, 2009
.
It excludes an aggregate of 3,448,480 shares of Common Stock issuable
upon the conversion of an aggregate of 3,448,480 outstanding shares of the
Company’s Series B Stock. It also excludes an aggregate of 2,000,000 shares of
Common Stock issuable upon the conversion of an aggregate of an additional
2,000,000 outstanding shares of Series B Stock (the "Make Good Escrow Stock")
which have been deposited with an escrow agent pursuant to a Series B
Convertible Preferred Stock Purchase Agreement, dated as of February 25, 2008
between the Company and the Selling Stockholders (the "Stock Purchase
Agreement") which may be transferred to the Selling Stockholders upon the
failure by the Company to achieve certain financial targets in
2009.
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following tables summarize our consolidated financial data for the periods
presented. You should read these tables together with the consolidated financial
statements and related notes appearing at the end of this prospectus, as well as
“Capitalization,” “Selected Consolidated Financial Data,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the other financial information included elsewhere in this
prospectus. Our historical results are not necessarily indicative of
the results to be expected in any future period.
|
|
Fiscal
Year Ended
December
31,
|
|
|
Three
Months Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
41,648,605
|
|
|
$
|
29,361,941
|
|
|
$
|
17,427,204
|
|
|
$
|
7,027,889
|
|
|
$
|
6,671,061
|
|
|
$
|
8,850,584
|
|
Cost
of Sale
|
|
|
23,607,409
|
|
|
|
18,467,045
|
|
|
|
10,105,327
|
|
|
|
4,471,432
|
|
|
|
3,746,159
|
|
|
|
6,990,966
|
|
Gross
Margin
|
|
|
18,041,196
|
|
|
|
10,894,896
|
|
|
|
7,321,877
|
|
|
|
2,556,457
|
|
|
|
2,924,902
|
|
|
|
1,859,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expenses
|
|
|
2,830,739
|
|
|
|
1,158,759
|
|
|
|
405,253
|
|
|
|
488,948
|
|
|
|
411,904
|
|
|
|
566,714
|
|
Selling
Expenses
|
|
|
1,453,461
|
|
|
|
686,819
|
|
|
|
664,717
|
|
|
|
448,346
|
|
|
|
273,588
|
|
|
|
241,345
|
|
Research
and Development Expenses
|
|
|
449,695
|
|
|
|
30,878
|
|
|
|
-
|
|
|
|
-
|
|
|
|
275,510
|
|
|
|
7,477
|
|
Liquidated
Damages
|
|
|
254,301
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Operating Expenses
|
|
|
4,988,196
|
|
|
|
1,876,456
|
|
|
|
1,069,970
|
|
|
|
937,294
|
|
|
|
961,002
|
|
|
|
815,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations
|
|
|
13,053,000
|
|
|
|
9,018,440
|
|
|
|
6,251,907
|
|
|
|
1,619,163
|
|
|
|
1,963,900
|
|
|
|
1,044,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
63,775
|
|
|
|
18,295
|
|
|
|
14,365
|
|
|
|
22,299
|
|
|
|
7,316
|
|
|
|
6,164
|
|
Subsidy
Income
|
|
|
316,152
|
|
|
|
500,468
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,800
|
|
|
|
-
|
|
Interest
Expense
|
|
|
(932,048
|
)
|
|
|
(400,517
|
)
|
|
|
(62,147
|
)
|
|
|
(2,504
|
)
|
|
|
(226,396
|
)
|
|
|
(59,028
|
)
|
Other
Income (expense)
|
|
|
353,698
|
|
|
|
(70,622
|
)
|
|
|
(79,616
|
)
|
|
|
50,119
|
|
|
|
(40
|
)
|
|
|
238,956
|
|
Total
Other Income (expenses)
|
|
|
(198,423
|
)
|
|
|
47,624
|
|
|
|
(127,398
|
)
|
|
|
69,914
|
|
|
|
(131,320
|
)
|
|
|
186,092
|
|
Income
Before Income Tax
|
|
|
12,854,577
|
|
|
|
9,066,064
|
|
|
|
6,124,509
|
|
|
|
1,689,077
|
|
|
|
1,832,580
|
|
|
|
1,230,174
|
|
Income
Tax Provision
|
|
|
2,231,140
|
|
|
|
1,109,160
|
|
|
|
2,035,675
|
|
|
|
650,265
|
|
|
|
493,870
|
|
|
|
130,520
|
|
Income
Before Minority Interest
|
|
|
10,623,437
|
|
|
|
7,956,904
|
|
|
|
4,088,834
|
|
|
|
1,038,812
|
|
|
|
1,338,710
|
|
|
|
1,099,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
613,135
|
|
|
|
360,501
|
|
|
|
243,564
|
|
|
|
3,428
|
|
|
|
99,274
|
|
|
|
47,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
10,010,302
|
|
|
$
|
7,596,403
|
|
|
$
|
3,845,270
|
|
|
$
|
1,035,384
|
|
|
$
|
1,239,436
|
|
|
$
|
1,051,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Diluted
Earnings per Share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,230,334
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
22,271,684
|
|
|
|
22,485,118
|
|
Diluted
|
|
|
26,831,961
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
28,394,863
|
|
|
|
27,907,889
|
|
|
|
As
of March 31, 2009 (unaudited)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
23,243,078
|
|
Working
Capital
|
|
|
15,296,218
|
|
Total
Assets
|
|
|
60,279,877
|
|
Indebtedness,
Long-term
|
|
|
-
|
|
Convertible
Preferred Stock at $0.001 par Value
|
|
|
3,448
|
|
Total
Stockholders’ Equity
|
|
|
43,879,850
|
|
The
following is a summary of certain material risks facing our business that should
be carefully considered along with the other information contained or
incorporated by reference in this prospectus. If any other material risks of
which we are unaware later occur or become material, our business, financial
condition, and operating results could be materially harmed.
Risks
Related to our Business
Our
revenues and profitability are heavily dependent on prevailing prices for our
products and raw materials; if we are unable to pass cost increases along to our
customers our margins and operating income may decrease.
As a
producer of commodities, much of which are sold into global markets, our
revenue, gross margins and cash flow from operations are substantially dependent
on the prevailing prices we receive for our products and the cost of our raw
materials, neither of which we control. 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. In 2008, over 69% of the Company’s concentrated fruit
juice was exported directly or indirectly. Changes in foreign politics, law and
the economies of supply and demand in international markets will have a
significant impact on prices we may receive for our products.
The price
of fresh fruits, our principal raw materials, are subject to market volatility
as a result of numerous factors including, but not limited to, general economic
conditions, governmental regulations, weather, transportation delays and other
uncertainties that are beyond our control. Due to such market volatility, we
generally do not, nor do we expect to, have long-term contracts with our fresh
fruit suppliers. Other significant raw materials used in our business include
packing barrels, pectic enzyme, amylase and auxiliary power fuels such as coal,
electricity and water. Prices for these items may be volatile as well and we may
experience shortages in these items. As a result, we cannot assure you that the
necessary raw materials will continue to be available to us at prices currently
in effect or acceptable to us. In the event raw material prices increase
materially, we may not be able to adjust our product prices, especially in the
short-term, to recover such cost increases. If we are not able to
effectively pass these cost increases along to our customers, our margins will
decrease and our operating income will suffer accordingly.
Because
we experience seasonal fluctuations in our sales, our quarterly results will
fluctuate and our annual performance will depend largely on results from two
quarters.
Our
business is highly seasonal, reflecting the harvest season of our primary source
fruits during the months from August through April of the following
year. Typically, a substantial portion of our revenues are earned
during our first and fourth quarters. We generally experience lower revenues
during our second and third quarters. Sales in the first and fourth quarters
accounted for approximately 67.4% of our revenues for fiscal year 2008. If sales
in these quarters are lower than expected, our operating results would be
adversely affected, and it would have a disproportionately large impact on our
annual operating results.
Weather
and other
environmental
factors affect our raw material supply and a reduction in the quality or
quantity of our fresh fruit supplies may have material adverse consequences on
our financial results.
Our
business may be adversely affected by weather and environmental factors beyond
our control, such as adverse weather conditions during the squeezing season. We
cannot assure you that the necessary raw materials will continue to be available
to us in quantities and at prices currently in effect or acceptable to us. The
prices for and availability of these raw materials have varied significantly and
may affect the quantity and profitability of our products. For example, in 2007
the prices of apples, kiwifruit and pears temporarily significantly increased
because of poor weather conditions in Shaanxi and Liaoning Provinces, which
caused a sharp decrease in output of kiwifruit, apples and pears. A
significant reduction in the quantity or quality of fresh fruits harvested
resulting from adverse weather conditions, disease or other factors could result
in increased per unit processing costs and decreased production, with adverse
financial consequences to the Company.
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. Customer demand depends on a variety of
factors including, but not limited to, our customers’ financial condition and
general economic conditions. If our sales to any of our largest customers are
reduced for any reason, such reduction may have a material adverse effect on our
business, financial condition and results of operations.
Our
inability to continue to market our existing fruit beverage products and develop
new fruit beverage products to satisfy our consumers’ changing preferences could
materially adversely affect our operations and revenues.
Revenue
from our fruit beverages constituted 12.8% of our total revenue in 2008. We sell
our fruit beverages under our brand name “Hedetang” only in the Chinese market.
The beverage industry is subject to changing consumer preferences, and shifts in
consumer preferences may adversely affect us if we misjudge such preferences. In
addition, the sale of fruit beverages is substantially dependent upon awareness
and market acceptance of our products and brand by our targeted consumers.
We may be unable to achieve volume growth in fruit beverages through product and
packaging initiatives. We also may be unable to penetrate new markets. If our
revenues from fruit beverages decline, our business, financial condition and
results of operations will be adversely affected.
Economic
conditions have had and may continue to have an adverse effect on consumer
spending on our products.
The
worldwide economy is currently undergoing significant turmoil. The adverse
effect of a sustained international economic downturn, including sustained
periods of decreased consumer spending, high unemployment levels, or declining
consumer or business confidence, along with continued volatility and disruption
in the credit and capital markets, will likely result in reduced demand for our
products as consumers turn to cheaper substitute goods or forego certain
purchases altogether. To the extent the international economic
downturn continues or worsens, we could experience a further reduction in sales
volume, and if our operating costs and expenses are not reduced accordingly, it
would adversely affect our revenues and results of operations.
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 processing
technology. The process of seeking patent protection can be lengthy and
expensive and we cannot assure you that our existing or future issued patents
will be sufficient to provide us with meaningful protection or commercial
advantages.
We also
cannot assure you 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 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 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.
Intellectual
property infringement claims may adversely impact our results of
operations.
As we
develop and introduce new products, we may be increasingly subject to claims of
infringement. If a claim for infringement is brought against us, such
claim may require us to modify our products, cease selling certain products or
engage in litigation to determine the validity and scope of such
claims. Any of these events may harm our business and results of
operations.
Concerns
over food safety and public health may affect our operations by increasing our
costs and negatively impacting demand for our products.
We could
be adversely affected by diminishing confidence in the safety and quality of
certain food products or ingredients, even if our practices and procedures are
not implicated. As a result, we may also elect or be required to incur
additional costs aimed at increasing consumer confidence in the safety of our
products. For example, a crisis in China over melamine-contaminated milk in 2008
has adversely impacted overall Chinese food exports since October 2008 as
reported by the Chinese General Administration of Customs, even though most
foods exported from China were not implicated in these issues. We believe that
the contaminated milk crisis also had a negative effect on sales of our
concentrated juices that were exported to international markets in fiscal year
2008. Our concentrated fruit juices exported to foreign countries have to
be in compliance with foreign quality standards. 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
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 many other countries, product liability claims and
lawsuits in the PRC are rare. However, we cannot guaranty that we would not face
liability in the event of the failure of any of our products. Furthermore, we
cannot guaranty that 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.
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 not experienced any credible product liability litigation to date, there is
no guaranty that we will not experience such litigation in the future. In
the event we do experience product liability claims or a product recall, our
financial condition and business operations could be materially adversely
affected.
Governmental
regulations affecting the import or export of products could negatively affect
our revenues.
The United
States and various foreign governments have imposed controls, export license
requirements, and restrictions on the export of some of our
products. In 2008, over 69% of the Company’s concentrated fruit juice
was exported directly or indirectly out of the PRC. Governmental regulation of
exports, or our failure to obtain required export approval for our products,
could harm our international and domestic sales and adversely affect our
revenues. In addition, failure to comply with such regulations could
result in penalties, costs, and restrictions on export privileges.
Our
success depends substantially on the continued retention of certain key
personnel and our ability to hire and retain qualified personnel in the future
to support our growth.
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. While we depend
on the abilities and participation of our current management team generally, we
have a particular reliance upon Mr. Hongke Xue, Chairman of the Board and Chief
Executive Officer of Shaanxi Tianren, one of our operating subsidiaries, and Mr.
Yongke Xue, the Company’s Chairman of the Board and Chief Executive Officer. The
loss of the services of Mr. Hongke Xue or Mr. Yongke Xue for any reason could
significantly impact our business and results of operations. Competition for
senior management and senior technology personnel is intense and the pool of
qualified candidates is very limited. Accordingly, we cannot guaranty
that the services of our senior executives and other key personnel will continue
to be available to us, or that we will be able to find a suitable replacement
for them if they were to leave.
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 (“Sarbanes-Oxley”). Aside from our Chief Financial Officer, 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 the
increased legal, regulatory and reporting requirements associated with being a
publicly traded company. 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.
We
may not have adequate or effective internal accounting controls.
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, however, that
any 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. 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.
Rules
adopted by the Securities and Exchange Commission (the “SEC”) pursuant to
Section 404 of Sarbanes-Oxley require annual assessment of our internal control
over financial reporting, and attestation of this assessment by the Company’s
independent registered public accountants. The requirement that management
perform an assessment of internal controls over financial reporting first
applied to our Annual Report on Form 10-K for the fiscal year ending December
31, 2008 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 relatively 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, which could have a material adverse effect on our operating results.
If, in the future, management identifies one or more material weaknesses in our
internal controls over financial reporting, 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 and may be subject to sanctions
for such violations.
Section
13(k) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
provides that it is unlawful for a company such as ours, 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.
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.
In
February 2008, we purchased Pacific Industry Holding Group Co., Ltd.
(“Pacific”), a Vanuatu corporation, which is a holding company for our operating
subsidiary, Shaanxi Tianren. At the time , Shaanxi Hede Investment
Management Co., Ltd. (“Hede”), a PRC company owned by Yongke Xue, the Chairman
of the Board and Chief Executive Officer of the Company, and Xiaoqin Yan, a
director of the Company, was indebted to Shaanxi Tianren on account of previous
loans and advances made by Shaanxi Tianren to Hede, including RMB 31,544,043 in
the aggregate (approximately $4,318,281 based on the exchange rate as of
December 31, 2007) made during the period from June 6, 2007 to December 29, 2007
that were used by Hede to pay a portion of the purchase price for Hede’s
acquisition of Huludao Wonder Fruit Co., Ltd. (“Huludao Wonder”) (Huludao Wonder
is a company which Shaanxi Tianren and Hede contemplated would be sold at Hede’s
cost after a one year holding period). In May 2008, Shaanxi Tianren also
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
Pacific 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).
In
addition, in May 2008 Pacific erroneously paid $4,916,617 to its former
stockholders, 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 stockholders 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 erroneously paid funds associated with
Pacific’s dividend declaration have been repaid to the Company in full, Xiaoqing
Yan and Yongke Xue’s receipt of the erroneous dividend may also be deemed to be
a violation of Section 13(k).
The
Company has not concluded that either the advances Shaanxi Tianren made to Hede
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 involving an aggregate amount
that 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
that would be considered to be a related party transaction in which such person
is interested. See “Certain Relationships and Related Party Transactions -
Review, Approval or Ratification of Transactions with Related
Persons.”
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
Our
limited operating history in the fruit product industry may not provide a
meaningful basis for evaluating our business. Shaanxi Tianren entered into its
current line of business in December 2003. Although Shaanxi Tianren’s revenues
have grown rapidly since its inception, we cannot guaranty that we will maintain
profitability or that we will not incur net losses in the future. We will
continue to encounter risks and difficulties that companies at a similar stage
of development frequently experience, including the potential failure
to:
|
•
|
obtain
sufficient working capital to support our
expansion;
|
|
•
|
maintain
our proprietary technology;
|
|
•
|
expand
our product offerings and maintain the high quality of our
products;
|
|
•
|
manage
our expanding operations and continue to fill customers’ orders on
time;
|
|
•
|
maintain
adequate control of our expenses allowing us to realize anticipated
revenue growth;
|
|
•
|
implement
our product development, marketing, sales, and acquisition strategies and
adapt and modify them as
needed;
|
|
•
|
successfully
integrate any future acquisitions;
|
|
•
|
anticipate
and adapt to changing conditions in the fruit product industry resulting
from changes in government regulations, 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 the foregoing risks, our business may
be materially and adversely affected.
We
will encounter substantial competition in our business and any failure to
compete effectively could adversely affect our results of
operations.
There are
currently a number of well-established companies producing products that compete
directly with our product offerings, and some of those competitors have
significantly more financial and other resources than we possess. We anticipate
that our competitors will continue to improve their products and to introduce
new products with competitive price and performance characteristics. Aggressive
marketing or pricing by our competitors or the entrance of new competitors into
our markets could have a material adverse effect on our business, results of
operations and financial condition.
We
may not be able to successfully introduce new products, which could decrease our
profitability.
Our
future business and financial performance depends, in part, on our ability to
successfully respond to consumer preference by introducing new products and
improving existing products. We incur significant development and marketing
costs in connection with the introduction of new products. Successfully
launching and selling new products puts pressure on our sales and marketing
resources, and we may fail to invest sufficient funds in order to market and
sell a new product effectively. If we are not successful in marketing
and selling new products, our results of operations could be materially
adversely affected.
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, along with cash from operations and
capital raised in this offering, will allow us to meet our working capital
requirements for 2009. 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 from outside sources. Our
ability to raise capital in the future will depend on a number of factors,
including our financial condition and results of operations and the conditions
in the relevant financial markets. In addition, pursuant to the terms of the
Stock Purchase Agreement, we may not issue any preferred stock or convertible
debt until February 26, 2011 so long as the Selling Stockholders collectively
own 20% of the Series B Stock issued under the Stock Purchase Agreement.
We cannot assure you that additional capital, if required, will be available on
acceptable terms, or at all. If we are unable to obtain financing on a timely
basis and on acceptable terms, we may be required to reduce the scope of our
planned expansions, product development and marketing efforts, and in turn our
financial position, competitive position, growth and profitability may be
adversely affected.
To the
extent that we do raise additional capital through the sale of equity or
convertible debt securities, the issuance of such securities would result in
dilution of the shares held by existing stockholders and could provide
purchasers certain rights, preferences and privileges senior to our Common
Stock.
We may not be
able to effectively control and manage our growth
in order to meet
demand,
and a failure to
do so could adversely affect our operations and financial
condition.
If our
business and markets continue to grow and develop, it will be necessary for us
to finance and manage our growth effectively in order to meet demand. In
addition, we may face challenges in expanding our current facilities,
integrating acquired businesses with our own, and managing expanding product
offerings. We may not respond quickly enough to the increased demands caused by
such growth on our existing management, workforce and facilities. Failure to
effectively deal with such increased demands could interrupt or adversely affect
our operations and cause production backlogs, longer product development time
frames and administrative inefficiencies.
We
may engage in future acquisitions involving significant expenditures of cash,
the incurrence of debt or the issuance of stock, all of which could have a
materially adverse effect on our operating results.
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, 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 may expend significant cash, incur substantial debt and/or
issue equity securities, diluting the percentage ownership of current
stockholders, all of which could have a material adverse effect on our operating
results and the price of our Common Stock. Other challenges involved with
acquisitions and strategic investments include:
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the
diversion of management’s attention from other business
concerns;
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potential
adverse effects on existing business relationships with suppliers and
customers;
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•
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challenges
in retaining customers of acquired
businesses;
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the
potential loss of key employees of acquired companies;
and
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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. Additionally, 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.
Our
business and results may be subject to disruption from work stoppages, terrorism
or natural disasters.
Our
operations may be subject to disruption for a variety of reasons, including work
stoppages, acts of war, terrorism, pandemics, fire, earthquake, flooding or
other natural disasters. If a major natural disaster were to occur in either of
the regions where our facilities or main offices are located, our facilities or
offices could be damaged or destroyed. Such a disruption could result in the
temporary or permanent loss of critical data, suspension of operations, delays
in shipments of product, and disruption of business generally, which would
adversely affect our revenue and results of operations.
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.
We
conduct substantially all of our operations and generate most of our revenue in
China. Accordingly, economic, political and legal developments in
China will significantly affect our business, financial condition, results of
operations and prospects. The PRC economy is in transition from a planned
economy to a market oriented economy subject to 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. While we believe that
the PRC will continue to strengthen its economic and trading relationships with
foreign countries and that business development in the PRC will continue to
follow market forces, 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; and
• the
allocation of resources.
Although
the PRC government has been pursuing economic reform policies for more than two
decades, the PRC government continues to exercise significant control over
economic growth in China through the allocation of resources, controlling
payment of foreign currency, setting monetary policy and imposing policies that
impact particular industries in different ways. We cannot assure you that the
PRC government will continue to pursue policies favoring a market oriented
economy or that existing policies will not be significantly altered, especially
in the event of a change in leadership, social or political disruption, or other
circumstances affecting political, economic and social life in the
PRC.
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain and any changes in such 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 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 cost 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 policies 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
rises 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.
We
could be restricted from paying dividends to stockholders due to PRC
laws.
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. As a result of our holding company structure, we
rely entirely on dividend payments from Shaanxi Tianren. PRC accounting
standards and regulations currently permit payment of dividends only out of
accumulated profits, a portion of which is required to be set aside for certain
reserve funds. 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. Although we do not intend to pay dividends in
the future, our inability to receive all of the revenues from Shaanxi Tianren’s
operations may provide an additional obstacle to our ability to pay dividends if
we so decide in the future.
Governmental
control of currency conversion may affect the value of your
investments.
The PRC
government imposes controls on the convertibility of the PRC currency, the
renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance
of currency out of the PRC. RMB is currently not a freely convertible currency.
Shortages in the availability of foreign currency may restrict our ability to
remit sufficient foreign currency to satisfy foreign currency 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 by
complying with certain procedural requirements. However, approval from
appropriate governmental authorities is required where RMB 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 could restrict access to foreign currencies for current account
transactions in the future. 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 RMB 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 could harm
our business, financial condition and results of operations. Conversely, if we
decide to convert our RMB into U.S. dollars for 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.
PRC
regulations relating to mergers and the establishment of offshore special
purpose companies by PRC residents, if applied to us, may limit our ability to
operate our business as we see fit.
On
August 8, 2006, six Chinese regulatory agencies, including the China
Securities Regulatory Commission, promulgated the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors, which became effective
on September 8, 2006. This new regulation, among other things, governs the
approval process by which a Chinese company may participate in an acquisition of
assets or equity interests. Depending on the structure of the transaction, the
new regulation will require Chinese parties to make a series of applications and
supplemental applications to the government agencies. In some instances, the
application process may require the presentation of economic data concerning a
transaction, including appraisals of the target business and evaluations of the
acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction must be
completed and reported to the government agencies. Compliance with the new
regulations is likely to be more time consuming and expensive than in the past
and the government can now exert more control over the combination of two
businesses. Accordingly, due to the new regulation, our ability to engage in
business combination transactions in China has become significantly more
complicated, time consuming and expensive, and we may not be able to negotiate a
transaction that is acceptable to us or sufficiently protective of our interests
in a transaction.
In
October 2005, China’s State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing and
Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75. Circular 75 requires Chinese residents to
register with an applicable branch of SAFE before establishing or acquiring
control over an offshore special purpose company for the purpose of engaging in
an equity financing outside of China that is supported by domestic Chinese
assets originally held by those residents. Following the issuance of Circular
75, SAFE issued internal implementing guidelines for Circular 75 in June 2007.
These implementing guidelines, known as Notice 106, effectively expanded the
reach of Circular 75 by:
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purporting
to regulate the establishment or acquisition of control by Chinese
residents of offshore entities which merely acquire “control” over
domestic companies or assets, even in the absence of legal
ownership;
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adding
requirements relating to the source of the Chinese resident’s funds used
to establish or acquire the offshore
entity;
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regulating
the use of existing offshore entities for offshore
financings;
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purporting
to regulate situations in which an offshore entity establishes a new
subsidiary in China or acquires an unrelated company or unrelated assets
in China;
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making
the domestic affiliate of the offshore entity responsible for the accuracy
of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas
financing and the use of proceeds;
and
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requiring
that the registrant establish that all foreign exchange transactions
undertaken by the offshore entity and its affiliates were in compliance
with applicable laws and
regulations.
|
No
assurance can be given that our stockholders who are Chinese residents as
defined in Circular 75, and who owned shares in the Company, have fully complied
with, and will continue to comply with, all applicable registration and approval
requirements of Circular 75 in connection with their equity interests in the
Company and the Company’s acquisition of equity interests in its China based
subsidiaries by virtue of our acquisition of Pacific. Moreover, because of
uncertainty over how Circular 75 will be interpreted and implemented, and how or
whether SAFE will apply it to the Company following the Pacific acquisition, we
cannot predict how it will affect our business operations or future strategies.
For example, the ability of our present and prospective China subsidiaries to
conduct foreign exchange activities, such as the remittance of dividends and
foreign currency-denominated borrowings, may be subject to compliance with
Circular 75 by our Chinese resident beneficial holders. In addition, such
Chinese residents may not always be able to complete the necessary registration
procedures required by Circular 75. We have little control over either our
present or prospective direct or indirect stockholders or the outcome of such
registration procedures. If our Chinese stockholders or the Chinese stockholders
of the target companies we acquired in the past or acquire in the future fail to
comply with Circular 75, and if SAFE requires it, they may be subject to fines
or legal sanctions, and Chinese authorities could restrict our investment
activities in China, limit our subsidiaries’ ability to make distributions or
pay dividends, or even unwind the transaction and revoke the right of our
subsidiaries to do business in China.
An
outbreak of avian influenza, a reoccurrence of Severe Acute Respiratory Syndrome
(“SARS”), or another widespread public health problem, could adversely affect
our operations.
A more
widespread outbreak of avian influenza or a renewed outbreak of SARS or any
other widespread public health problem in the PRC, where all of our operations
are conducted, could have an adverse effect on our operations. If such an
outbreak were to occur, 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.
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 President of Shaanxi Tianren and the brother of Yongke Xue, our
director and Chief Executive Officer, is the voting trustee for the benefit of
Fancylight Limited (“Fancylight”). As of June 3, 2009, Fancylight beneficially
owned approximately 79% of our Common Stock. Assuming the exercise
for cash of the New Warrants and the sale of all the shares of Common Stock
offered hereby, Fancylight will beneficially own approximately 61.2%,
of our Common Stock. As a result, our officers and directors and
their relatives are generally able to control the outcome of stockholder votes
on various matters, including the election of directors and extraordinary
corporate transactions, such as 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.
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. Additionally, we may not issue any preferred stock or
convertible debt until February 26, 2011 so long as the Selling Stockholders
collectively own 20% of the Series B Stock issued under the Stock Purchase
Agreement. Accordingly, we do not expect to pay any cash dividends in the
foreseeable future, but will review this policy as circumstances dictate. Should
we determine to pay dividends in the future, our ability to do so will depend
upon the receipt of dividends or other payments from Shaanxi Tianren. Shaanxi
Tianren may, from time to time, be subject to restrictions on its ability to
make distributions to us, including restrictions on the conversion of RMB into
U.S. dollars or other hard currency and other regulatory
restrictions.
The
release from escrow of the Make Good Escrow Stock due to our failure to achieve
certain financial targets in 2009 would dilute the equity interests of existing
stockholders.
Under the Stock Purchase Agreement, if
our consolidated pre-tax income for the fiscal year ending December 31, 2009 is
less than RMB 107,004,240 (approximately $15,660,150 based on the exchange rate
as of March 31, 2009), then, depending on the amount of the shortfall from such
targets, some or all of the Make Good Escrow Stock may be transferred to the
Selling Stockholders. If we achieve our income targets in 2009, none of such
shares shall be transferred to the Selling Stockholders and such shares will be
cancelled. The transfer to the Selling Stockholders 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. The transfer of some or all of
Make Good Escrow Stock to the Selling Stockholders could depress the market
price of our Common Stock regardless of whether it is converted into Common
Stock.
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 on the OTC Bulletin Board market. The trading volume
of our Common Stock is 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 that is much less regulated than the
major exchanges and our Common Stock is subject to abuses, volatility and
shorting. As a result, there is currently no broadly followed or established
trading market for our Common Stock and an established trading market may never
develop or be maintained. 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.
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.
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, Shaanxi Tianren is
located in the PRC and substantially all of its assets are located outside of
the United States. Therefore, it may 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.
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 our 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 will be eligible for future sale and may depress our
stock price.
This is
an offering of 6,500,000 shares of our Common Stock, all of which (assuming the
effectiveness of the registration statement of which this prospectus is a part
and the exercise of the New Warrants) will be freely tradable. Future sales of
substantial amounts of 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 in the
future.
We
are authorized to issue “blank check” preferred stock, which may be issued
without stockholder approval and which 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 Amended and Restated 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. As of the date of this prospectus,
our Board of Directors has designated and issued 1,000,000 shares of Series A
Convertible Preferred Stock (the “Series A Stock”), of which no shares are
currently issued or outstanding, and has designated 7,000,000 shares of Series B
Stock, of which 3,448,480 shares of Series B Stock are currently issued or
outstanding, excluding 2,000,000 shares of Series B Stock that constitute the
Make Good Escrow Stock. 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 additional shares of
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.
SPECIAL
NOTE REGARDING
FORWARD
-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. All statements other
than statements of historical facts contained in this prospectus, including
statements regarding our future results of operations and financial position,
business strategy and plans and objectives of management for future operations,
are forward-looking statements. In many cases, you can identify
forward-looking statements by terms such as “may,” “will,” “should,” “expects,”
“plans,” “anticipates,” “could,” “intends,” “target,” “projects,”
“contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue”
or the negative of these terms or other similar words.
These
forward-looking statements are only predictions. These statements
relate to future events or our future financial performance and involve known
and unknown risks, uncertainties and other important factors that may cause our
actual results, levels of activity, performance or achievements to materially
differ from any future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. We have
described in the “Risk Factors” section and elsewhere in this prospectus the
principal risks and uncertainties that we believe could cause actual results to
differ from these forward-looking statements. Because forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified, you should not rely on these forward-looking
statements as guarantees of future events.
The
forward-looking statements in this prospectus represent our views as of the date
of this prospectus. We anticipate that subsequent events and
developments will cause our views to change. However, while we may
elect to update these forward-looking statements at some point in the future, we
undertake no obligation to update any forward-looking statement to reflect
events or developments after the date on which the statement is made or to
reflect the occurrence of unanticipated events except to the extent required by
applicable law. You should, therefore, not rely on these
forward-looking statements as representing our views as of any date after the
date of this prospectus.
This
prospectus also contains estimates and other statistical data prepared by
independent parties and by us relating to market size and growth and other data
about our industry. These estimates and data involve a number of assumptions and
limitations, and you are cautioned not to give undue weight to these estimates
and data. We have not independently verified the statistical and other industry
data generated by independent parties and contained in this prospectus, and,
accordingly, we cannot guarantee their accuracy or completeness. In addition,
projections, assumptions and estimates of our future performance and the future
performance of the industries in which we operate are necessarily subject to a
high degree of uncertainty and risk.
We will
not receive any proceeds from the sale of the shares of Common Stock underlying
the New Warrants, but we may receive proceeds from the exercise of the New
Warrants by the Selling Stockholders if they are exercised in cash. Under the
terms of the New Warrants, cashless exercise is permitted in certain
circumstances. We will not receive any proceeds from any cashless exercise of
the New Warrants. There can be no assurance that any of the New Warrants will be
exercised by the Selling Stockholders. In the event that all of the New Warrants
to purchase the shares of Common Stock included in this prospectus are exercised
in cash, we would receive $11,050,000 of gross proceeds, which we would use
for expansions of our current production capacity, acquisitions, and
other general corporate purposes.
PRICE
RANGE OF COMMON STOCK
Our Common
Stock is listed on the OTC Bulletin Board under the symbol “SPFJ.” The following
table sets forth the high and low inter-dealer prices, without mark-up,
mark-down or commission, involving our Common Stock during each calendar
quarter, and may not represent actual transactions.
2009
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High
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Low
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$
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3.00
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$
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2.50
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Second
quarter (through June 9, 2009)
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$
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6.50
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$
|
2.75
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2008
|
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High
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Low
|
|
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$
|
9.86
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$
|
2.47
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|
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$
|
6.58
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$
|
3.29
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|
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$
|
5.90
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$
|
2.65
|
|
|
|
$
|
3.25
|
|
|
$
|
2.25
|
|
2007
|
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High
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Low
|
|
|
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$
|
13.15
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|
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$
|
3.29
|
|
|
|
$
|
19.72
|
|
|
$
|
3.29
|
|
|
|
$
|
23.01
|
|
|
$
|
9.86
|
|
|
|
$
|
9.86
|
|
|
$
|
8.22
|
|
At June 3,
2009, there were 22,271,786
shares of our Common
Stock outstanding. Our shares of Common Stock are held by approximately 89
stockholders of record. The number of record holders was determined from the
records of our transfer agent and does not include beneficial owners of Common
Stock whose shares are held in the names of various security brokers, dealers,
and registered clearing agencies.
We are
applying to list our Common Stock on the NYSE Amex Equities on or promptly after
the date of this prospectus.
We have
never declared or paid any cash dividends on shares of our capital stock and are
not authorized to do so until February 26, 2011 so as long as the Selling
Stockholders collectively own 20% of the Series B Stock issued pursuant to the
Stock Purchase Agreement. Furthermore, because we are a holding company, we rely
entirely on dividend payments from Shaanxi Tianren, who may, from time to time,
be subject to certain additional restrictions on its ability to make
distributions to us. PRC accounting standards and regulations currently permit
payment of dividends only out of accumulated profits, a portion of which must be
set aside to fund certain reserve funds. Our inability to receive all of the
revenues from Shaanxi Tianren’s operations may in turn provide an additional
obstacle to our ability to pay dividends on our Common Stock in the future.
Additionally, because the PRC government imposes controls on the convertibility
of RMB into foreign currencies and, in certain cases, the remittance of currency
out of the PRC, shortages in the availability of foreign currency may occur,
which could restrict our ability to remit sufficient foreign currency to pay
dividends.
We
currently intend to retain any future earnings to finance the development and
growth of our business and do not anticipate paying cash dividends on our Common
Stock in the foreseeable future, but will review this policy as circumstances
dictate. If in the future we are able to pay dividends and determine it is in
our best interest to do so, such dividends will be paid at the discretion of the
Board of Directors after taking into account various factors, including our
financial condition, operating results, capital requirements, restrictions
contained in any future financing instruments and other factors the Board deems
relevant.
The
following table describes our capitalization as of March 31, 2009.
You
should read this table together with the consolidated financial statements and
related notes appearing at the end of this prospectus, as well as “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the other financial information included elsewhere in this
prospectus.
SHAREHOLDERS’
EQUITY
|
|
|
|
Preferred
B stock, $0.001 par value; 10,000,000 shares authorized, 3,448,480 shares
issued and outstanding
|
|
$
|
3,448
|
|
Common
stock, $0.01 par value; 100,000,000 shares
authorized 22,271,786 shares
issued and outstanding
|
|
|
222,717
|
|
Paid-in
capital
|
|
|
13,791,724
|
|
Accumulated
retained earnings
|
|
|
23,708,370
|
|
Accumulated
other comprehensive income
|
|
|
4,479,718
|
|
Total
stockholders’ equity
|
|
|
42,205,977
|
|
NONCONTROLLING
INTEREST
|
|
|
1,673,873
|
|
Equity
|
|
$
|
43,879,850
|
|
The table
above does not include an aggregate of (i) 6,500,000 shares of Common Stock
issuable upon exercise of warrants outstanding as of June 2, 2009, at a weighted
average exercise or conversion price of $1.70 per share and an aggregate of
3,448,400 shares of Common Stock issuable upon conversion of an aggregate of
3,448,480 outstanding shares of the Company’s Series B Stock, or (ii) 2,000,000
Shares of Make Good Escrow Stock.
The
following statement of operations data for the fiscal years ended December 31,
2006, December 31, 2007 and December 31, 2008 and balance sheet data as of
December 31, 2007 and December 31, 2008 have been derived from our audited
consolidated financial statements and related notes that are included elsewhere
in this prospectus. The following statement of operations data for
the fiscal years ended December 31, 2005 and balance sheet data as of December
31, 2005 and December 31, 2006 have been derived from our audited consolidated
financial statements that do not appear in this prospectus. The
following statement of operations data for the three months ended March 31, 2008
and March 31, 2009 are unaudited. The financial data set forth below should be
read in conjunction with our consolidated financial statements, the related
notes, “Capitalization” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in this
prospectus. Our historical results are not necessarily indicative of
the results to be expected for any future period.
|
|
Fiscal Year Ended
December
31,
|
|
|
Three Months
Ended
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
41,648,605
|
|
|
$
|
29,361,941
|
|
|
$
|
17,427,204
|
|
|
$
|
7,027,889
|
|
|
$
|
6,671,061
|
|
|
$
|
8,850,584
|
|
Cost
of Sale
|
|
|
23,607,409
|
|
|
|
18,467,045
|
|
|
|
10,105,327
|
|
|
|
4,471,432
|
|
|
|
3,746,159
|
|
|
|
6,990,966
|
|
Gross
Margin
|
|
|
18,041,196
|
|
|
|
10,894,896
|
|
|
|
7,321,877
|
|
|
|
2,556,457
|
|
|
|
2,924,902
|
|
|
|
1,859,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expenses
|
|
|
2,830,739
|
|
|
|
1,158,759
|
|
|
|
405,253
|
|
|
|
488,948
|
|
|
|
411,904
|
|
|
|
566,714
|
|
Selling
Expenses
|
|
|
1,453,461
|
|
|
|
686,819
|
|
|
|
664,717
|
|
|
|
448,346
|
|
|
|
273,588
|
|
|
|
241,345
|
|
Research
and Development Expenses
|
|
|
449,695
|
|
|
|
30,878
|
|
|
|
-
|
|
|
|
-
|
|
|
|
275,510
|
|
|
|
7,477
|
|
Liquidated
Damages
|
|
|
254,301
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Operating Expenses
|
|
|
4,988,196
|
|
|
|
1,876,456
|
|
|
|
1,069,970
|
|
|
|
937,294
|
|
|
|
961,002
|
|
|
|
815,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations
|
|
|
13,053,000
|
|
|
|
9,018,440
|
|
|
|
6,251,907
|
|
|
|
1,619,163
|
|
|
|
1,963,900
|
|
|
|
1,044,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
63,775
|
|
|
|
18,295
|
|
|
|
14,365
|
|
|
|
22,299
|
|
|
|
7,316
|
|
|
|
6,164
|
|
Subsidy
Income
|
|
|
316,152
|
|
|
|
500,468
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,800
|
|
|
|
-
|
|
Interest
Expense
|
|
|
(932,048
|
)
|
|
|
(400,517
|
)
|
|
|
(62,147
|
)
|
|
|
(2,504
|
)
|
|
|
(226,396
|
)
|
|
|
(59,028
|
)
|
Other
Income (expense)
|
|
|
353,698
|
|
|
|
(70,622
|
)
|
|
|
(79,616
|
)
|
|
|
50,119
|
|
|
|
(40
|
)
|
|
|
238,956
|
|
Total
Other Income (expenses)
|
|
|
(198,423
|
)
|
|
|
47,624
|
|
|
|
(127,398
|
)
|
|
|
69,914
|
|
|
|
(131,320
|
)
|
|
|
186,092
|
|
Income
Before Income Tax
|
|
|
12,854,577
|
|
|
|
9,066,064
|
|
|
|
6,124,509
|
|
|
|
1,689,077
|
|
|
|
1,832,580
|
|
|
|
1,230,174
|
|
Income
Tax Provision
|
|
|
2,231,140
|
|
|
|
1,109,160
|
|
|
|
2,035,675
|
|
|
|
650,265
|
|
|
|
493,870
|
|
|
|
130,520
|
|
Income
Before Minority Interest
|
|
|
10,623,437
|
|
|
|
7,956,904
|
|
|
|
4,088,834
|
|
|
|
1,038,812
|
|
|
|
1,338,710
|
|
|
|
1,099,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
613,135
|
|
|
|
360,501
|
|
|
|
243,564
|
|
|
|
3,428
|
|
|
|
99,274
|
|
|
|
47,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
10,010,302
|
|
|
$
|
7,596,403
|
|
|
$
|
3,845,270
|
|
|
$
|
1,035,384
|
|
|
$
|
1,239,436
|
|
|
$
|
1,051,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Diluted
Earnings per Share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,230,334
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
22,271,684
|
|
|
|
22,485,118
|
|
Diluted
|
|
|
26,831,961
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
22,006,173
|
|
|
|
28,394,863
|
|
|
|
27,907,889
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
15,274,171
|
|
|
$
|
4,094,238
|
|
|
$
|
2,135,173
|
|
|
$
|
593,445
|
|
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
|
|
Indebtedness,
Long-term
|
|
|
-
|
|
|
|
2,053,501
|
|
|
|
-
|
|
|
|
-
|
|
Convertible
Preferred Stock at $0.001 par Value
|
|
|
3,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Stockholders' Equity
|
|
|
41,059,966
|
|
|
|
26,245,867
|
|
|
|
16,300,181
|
|
|
|
5,777,652
|
|
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis together with our consolidated
financial statements and the related notes appearing elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. 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 below and elsewhere in this
prospectus, particularly under the heading “Risk Factors.”
Overview
We are
engaged in the production and sale of fruit concentrate, fruit juice beverages,
and other fruit related products in and from the PRC. We export most
of the fruit concentrate products we produce, which include apple, pear, and
kiwifruit, via distributors to North America, Europe and the Middle East. We
also sell our Hedetang branded bottled beverages domestically primarily to
supermarkets in certain regions of the PRC. Because the operations of
Shaanxi Tianren, which we acquired on February 26, 2008 through our acquisition
of Pacific, are the only significant operations of the Company and its
affiliates, the business and financial results of Pacific and the Company
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
three month period ended March 31, 2009 with its results in the corresponding
period of 2008, and its full-year 2008 results with those of 2007.
In the
first quarter of 2009 our revenue decreased by 24.6% to $6,671,061 compared to
$8,850,584 for the same period of last year. We believe that this
decrease was mainly due to a drop in consumer spending in the international
market, which was mainly affected by the international financial crisis.
We
believe that we will overcome the contraction in our revenues experienced in the
first quarter of 2009 for the following reasons.
First,
we believe that the Chinese fruit juice beverages market will experience
consistent growth. In 2008, sales in the Chinese fruit juice beverage market
were about RMB50 billion (approximately $7.3 billion based on the exchange rate
as of March 31, 2009), which represented an increase of approximately 10% over
sales in 2007 according to China International Intelligence. Our revenue from
the sales of our fruit juice beverages in the Chinese market increased 43.4% to
$1,442,747 in 2008 compared to $1,006,158 in 2007. We believe that the fruit
juice beverage market is a high-growth market in China because of growing
personal income and an increase in health awareness.
Secondly,
we have plans for new acquisitions and further expansion of our current
production capacity for the next two years. Planned expenditures for land and
equipment are approximately $45.7 million for the next two years. Of this
amount, $19.2 is for the expansion of Shaanxi Qiyiwangguo Modern Organic
Agriculture Co., Ltd. ("Shaanxi Qiyiwangguo"), $10.8 is for the expansion of the
factory owned by Huludao Wonder, $7.8 million is for the expansion of the
Jingyang factory owned by Shaanxi Tianren, $3.3 million is for the acquisition
of Yingkou Trusty Fruits Co., Ltd. (“Yingkou”), and $4.6 million is for the
expansion of Yingkou’s facilities. Yingkou will specialize in the production of
concentrated apple juice. It is located in Liaoning Province in China. Its
factory is still in the process of construction and expansion and Yingkou has
had no revenue to date. Our plans to acquire and expand Yinkou and expand the
facilities owned by Huludao Wonder and Shaanxi Tianren are designed to increase
our production of apple and pear related products. Our expansion of Shaanxi
Qiyiwangguo’s facility is to increase our production of kiwifruit and mulberry
related products.
Finally,
we plan to continue to focus on creating new high margin products in the future
to supplement our current product offering. Our research and
development expenses increased by $268,033 to $275,510 for the first quarter
ended March 31, 2009 from $7,477 for the same period of fiscal 2008, as we
entered into two contracts with an outside research institute to research and
develop new products in fiscal year 2008. We believe that the new
products will provide us a higher margin because of less competition in these
new product areas.
Comparison
of three months ended March 31, 2009 and March 31, 2008
Results of Operations and
Business Outlook
Revenues
The
following table presents our consolidated net revenues for our main products for
the three months ended March 31, 2009 and 2008, respectively:
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Concentrated
pear juice
|
|
$
|
2,658,642
|
|
|
$
|
3,964,258
|
|
|
|
(32.9
|
)%
|
Fruit
beverages
|
|
|
1,442,747
|
|
|
|
1,006,158
|
|
|
|
43.4
|
%
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
1,428,195
|
|
|
|
1,489,907
|
|
|
|
(4.1
|
)%
|
Fresh
kiwifruit
|
|
|
476,101
|
|
|
|
-
|
|
|
|
N/A
|
|
Fruit
vinegar beverages
|
|
|
348,669
|
|
|
|
-
|
|
|
|
N/A
|
|
Concentrated
apple juice and apple aroma
|
|
|
316,707
|
|
|
|
2,390,261
|
|
|
|
(86.8
|
)%
|
Consolidated
|
|
$
|
6,671,061
|
|
|
$
|
8,850,584
|
|
|
|
(24.6
|
)%
|
Revenue
for the three months ended March 31, 2009 was $6,671,061, a decrease of
$2,179,523, or 24.6%, when compared to the same sales period of the prior year.
This decrease was primarily due to the decrease in sales of concentrated apple
juice and pear juice, which was partially offset by an increase in sales of
fruit beverages, fresh kiwifruit and fruit vinegar beverages in our Chinese
market. Since 2008, we have focused more on kiwifruit concentrate and fruit
beverages, which have a higher margin and less competition than our concentrated
apple and pear juices. Due to their nutritional advantages and unique image and
taste, the consumption of small breed fruits, such as kiwifruit and mulberry,
and their processed products are on the rise worldwide.
Sales
from concentrated pear juice decreased by $1,305,616, or 32.9%, in the first
quarter of 2009 as compared to the same period of fiscal 2008. Sales from
concentrated kiwifruit juice and kiwifruit puree also decreased slightly, by
$61,712, or 4.1%, in the first quarter of 2009 as compared to the same period of
fiscal 2008. We believe that the decrease in sales from concentrated pear juice
and concentrated kiwifruit juice and kiwifruit puree was mainly caused by
worsening economic conditions worldwide, which negatively affected consumer
demand.
Sales
from apple related products decreased by $2,073,554, or 86.8%, in the first
quarter of 2009 as compared to the same period of fiscal 2008. Due to
instability of the world financial markets and their influence on the global
economy, the demand for concentrated apple juice in the international market
decreased significantly in fiscal 2008 and such decrease in demand continued
into the first quarter of 2009. Furthermore, the competition in apple-related
products became stronger in China in 2008. As a result, we saw a large decrease
in the price for apple-related products. In the first quarter of 2009, we did
not produce any apple-related products. All our sales were from the balance of
our previous inventories.
However,
these decreases were partially offset by improved sales of our fruit beverages
and fresh kiwifruit in the Chinese market. As compared with the first quarter of
2008, sales of fresh kiwifruit increased by $476,101, and sales of fruit
beverages increased by $436,589, or 43.4%. The introduction of fruit vinegar
beverages in the first quarter of 2009 also increased our sales by $348,669 in
China. 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.
Gross
Margin
The
following table presents the consolidated gross profit margin of our main
products and the consolidated gross profit margin as a percentage of related
revenues for the three months ended March 31, 2009 and 2008,
respectively:
|
|
Three
Months Ended
March
31,
|
|
Gross
Profit Margin
|
|
2009
|
|
|
2008
|
|
|
%
Change
|
|
Concentrated
pear juice
|
|
$
|
1,276,156
|
|
|
$
|
937,472
|
|
|
|
36.1
|
%
|
Fruit
beverages
|
|
|
328,559
|
|
|
|
398,084
|
|
|
|
(17.5
|
)%
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
740,118
|
|
|
|
404,038
|
|
|
|
83.2
|
%
|
Fresh kiwifruit
|
|
|
297,728
|
|
|
|
-
|
|
|
|
N/A
|
|
Fruit
vinegar beverages
|
|
|
174,002
|
|
|
|
-
|
|
|
|
N/A
|
|
Concentrated
apple juice and apple aroma
|
|
|
108,339
|
|
|
|
120,024
|
|
|
|
(9.7
|
)%
|
Consolidated
|
|
$
|
2,924,902
|
|
|
$
|
1,859,618
|
|
|
|
57.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit Margin as a % of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrated
pear juice
|
|
|
48.0
|
%
|
|
|
23.6
|
%
|
|
|
103.0
|
%
|
Fruit
beverages
|
|
|
22.8
|
%
|
|
|
39.6
|
%
|
|
|
(42.4
|
)%
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
51.8
|
%
|
|
|
27.1
|
%
|
|
|
91.1
|
%
|
Fresh kiwifruit
|
|
|
62.5
|
%
|
|
|
-
|
|
|
|
N/A
|
|
Fruit
vinegar beverages
|
|
|
49.9
|
%
|
|
|
-
|
|
|
|
N/A
|
|
Concentrated
apple juice and apple aroma
|
|
|
34.2
|
%
|
|
|
5.0
|
%
|
|
|
581.2
|
%
|
Consolidated
|
|
|
43.8
|
%
|
|
|
21.0
|
%
|
|
|
108.7
|
%
|
Overall
gross margin as a percentage of revenue increased by 108.7% for the three months
ended March 31, 2009, from 21.0% to 43.8%, compared to the same period of fiscal
2008. In terms of dollar amount, gross margin in the three months ended March
31, 2009 was $2,924,902, an increase of $1,065,284, or 57.3%, compared to
$1,859,618 in the same period of fiscal 2008, primarily due to favorable weather
conditions and a resultant overabundance of fresh fruit, which resulted in a
significant decrease in the purchase price of our raw materials.
The
increase in gross margin as a percentage of revenue in the first quarter of
fiscal 2009 was primarily due to an increase in the gross margin of concentrated
pear juice, concentrated apple juice and apple aroma, concentrated kiwifruit
juice and kiwifruit puree, which was partially offset by a decrease in the gross
margin of fruit beverages.
The gross
profit margin of concentrated pear juice was 48.0% in the first quarter of 2009,
representing an increase of 103.0% as compared to the same period of fiscal year
2008. 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 was from July or August until April 2009. As
weather conditions in the beginning of this squeezing season were better than
last year, there was an abundant harvest of pears in this squeezing season. As a
result, the general price of pears decreased in the first quarter of fiscal year
2009, which in turn significantly improved our gross margin in pear-related
products.
The gross
profit margin of our fruit beverages decreased by 42.4% for the first quarter of
2009 as compared to the same period of last fiscal year. The decrease in the
gross margin of fruit beverages was attributable to the decrease in the selling
price. We lowered our selling price of fruit beverages during the approximately
30 day Chinese Lunar New Year holiday season in the first quarter as a promotion
to boost sales. We did not conduct the same promotion in the same period last
year.
The gross
profit margin of concentrated kiwifruit juice and kiwifruit puree increased by
91.1% to 51.8% for the first quarter of 2009, as compared to 27.1% for the same
period of fiscal year 2008. This increase was mainly due to the large decrease
in the general price of fresh kiwifruit during this squeezing season, which was
from September through December of 2008, as a result of abundant harvests of
kiwifruit.
The gross
profit margin of fresh kiwifruit was 62.5% for the first quarter of 2009. We did
not sell any fresh kiwifruit in the same period last year.
We began
sales of fruit vinegar beverages in the first quarter of fiscal 2009 in the
Chinese market, which had a gross margin of 49.9%. We believe that
our new products enjoy a higher gross margin as a result of lower competition in
the market.
The gross
profit margin of concentrated apple juice and apple aroma increased by 581.2% to
34.2% for the first quarter of fiscal 2009, as compared to 5.0% for the same
period of fiscal year 2008. Due to the heavy competition in the concentrated
apple juice market, the instability of the financial markets and their influence
on the global economy, the demand for concentrated apple juice in the
international market continued to decrease. We only produced concentrated apple
juice and apple aroma for one month in the apple squeezing season, which was
from August 2008 to March 2009. Compared with the most recent apple squeezing
season, the purchase price of apples was much higher in 2007-08 due to extremely
cold weather conditions in the winter of 2007. This resulted in a
significant increase in the gross margin of apple-related products in the first
quarter of 2009.
Operating
Expenses
The following
table presents consolidated operating expenses as a percentage of net revenues
for
the three
months ended March 31, 2009 and 2008, respectively:
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Change
|
|
General
and administrative
|
|
$
|
411,904
|
|
|
$
|
566,714
|
|
|
|
(27.3
|
)%
|
Selling
expenses
|
|
|
273,588
|
|
|
|
241,345
|
|
|
|
13.4
|
%
|
Research
and development
|
|
|
275,510
|
|
|
|
7,477
|
|
|
|
3,584.8
|
%
|
Total
operating expenses
|
|
$
|
961,002
|
|
|
$
|
815,536
|
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
6.2
|
%
|
|
|
6.4
|
%
|
|
|
(3.6
|
)%
|
Selling
expenses
|
|
|
4.1
|
%
|
|
|
2.7
|
%
|
|
|
50.4
|
%
|
Research
and development
|
|
|
4.1
|
%
|
|
|
0.1
|
%
|
|
|
4,788.6
|
%
|
Total
operating expenses
|
|
|
14.4
|
%
|
|
|
9.2
|
%
|
|
|
56.3
|
%
|
Our
operating expenses consist of general and administrative, selling expenses and
research and development expenses. Operating expenses increased by 17.8% to
$961,002 for the first quarter ended March 31, 2009 from $815,536 for the
corresponding period in fiscal 2008.
General
and administrative expenses decreased by $154,810, or 27.3%, to $411,904 for the
first quarter ended March 31, 2009 from $566,714 for the same period of fiscal
2008. The decrease in general and administrative expenses was mainly due to a
decrease of $176,147 in such expenses (primarily labor expenses) in our
subsidiary, Huludao Wonder, which produces apple juice products and did not
have any production in the first quarter of 2009 due to decreased global demand.
As a result, there was a significant decrease in its general and administrative
expenses in the first quarter of 2009.
Selling
expenses increased by $32,243, or 13.4%, to $273,588 for the first quarter ended
March 31, 2009 from $241,345 for the same period of fiscal 2008. This was mainly
due to an increase in freight and transportation expenses as a result of the
increase in sales of fruit beverages. Most of the freight and transportation
expenses in the sales of fruit beverages are paid by the Company, not our
customers. As a result, when the selling volumes increase, the freight and
transportation expenses increase simultaneously.
Research
and development expenses increased by $268,033 to $275,510 for the first quarter
ended March 31, 2009 from $7,477 for the same period of fiscal 2008, as we
entered into 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 with a monthly payment of RMB 600,000, or
$87,800.
Income
from Operations
In the
first quarter of fiscal 2009, income from operations increased by $919,818, or
88.1%, to $1,963,900 from $1,044,082 for the first quarter of fiscal 2008. As a
percentage of net sales, income from operations was approximately 29.4% for the
first quarter of fiscal 2009, an increase of 17.6% as compared to 11.8% for the
same quarter of fiscal 2008. The increase in income from operations in the first
quarter of fiscal 2009 was primarily due to an increase in gross margins, which
was partially offset by an increase in operating expenses, as previously
discussed.
Interest
Expense
Interest
expense was $226,396 for the first quarter ended March 31, 2009, an increase of
$167,368 as compared with the same period of fiscal 2008, primarily due to an
increase in term loan facilities that we entered into after March 31, 2008 to
support expansion plans and potential business opportunities. As of March 31,
2009, the balance of these short-term loans totaled RMB 76,800,000
($11,239,737 based on the exchange rate as of March 31, 2009), with interest
rates ranging from 5.58% to 9.83% per annum and maturity dates ranging from May
2009 to October 2009.
Income
Tax
Our
provision for income taxes was $493,870 for the first quarter ended March 31,
2009, compared to $130,520 for the corresponding period in 2008. The increase in
tax provision for the first quarter of fiscal 2009 was due to an increase in the
effective tax rate of Shaanxi Tianren. Shaanxi Tianren was awarded the status of
a nationally recognized High and New Technology Enterprise in December 2006,
which entitled Shaanxi Tianren to tax-free treatment for two years starting from
2007. Starting in 2009, Shaanxi Tianren is subject to the regular tax rate of
25% according to the new tax law in China, which was effective on January 1,
2008. In December 2007, the tax rate of our indirect PRC subsidiary, Shaanxi
Qiyiwangguo was reduced from 33% to 25%, effective beginning January 2008. The
tax rate of Huludao Wonder was also reduced to 25%, effective beginning January
2008. As a result, the Company’s income tax rate in the PRC is effectively
25%.
We
adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(“FIN 48”), on July 1, 2007 and had no material adjustment to
our liabilities for unrecognized income tax benefits since its
adoption.
Noncontrolling
Interest
As of
March 31, 2009, Shaanxi Tianren held a 91.15% interest in Shaanxi Qiyiwangguo,
and Pacific held a 99% interest in Shaanxi Tianren. Net income attributable to
noncontrolling interests (which is deducted in determining the Company’s net
income) was $99,274 for the first quarter ended March 31, 2009, an increase of
$51,439, compared to $47,835 for the same quarter of 2008. The
increase in the net income attributable to noncontrolling interests was mainly
attributable to the increase in the net income generated from Shaanxi
Tianren.
Net
Income
Net
income was $1,239,436 for the quarter ended March 31, 2009, an increase of
$187,617, or 17.8%, compared to the same quarter of 2008. Such increase was
primarily due to an increase in gross margin, as previously
discussed.
Other
Comprehensive Loss/Income
Other
comprehensive loss was $93,425 for the quarter ended March 31, 2009, an increase
of $1,513,725, compared an income of $1,420,300 for the same quarter of 2008.
Compared with March 31, 2008, the U.S. dollar weakened against the Chinese
renminbi. The weakening of the U.S. dollar against the Chinese
renminbi also increased the value of our assets and liabilities denominated in
U.S. dollars in the first quarter of 2009 as compared to the same period of last
fiscal year.
Changes
in Financial Condition
During
the three months ended March 31, 2009, total assets increased $992,546, or 1.7%,
from $59,287,331 at December 31, 2008 to $60,279,877 at March 31,
2009. The majority of the increase was in cash and inventory, which
was mainly offset by a decrease in accounts receivable, property, plant and
equipment, and prepaid expenses and other assets.
For the
three months ended March 31, 2009, cash and cash equivalents increased
$7,698,907, or 52.2%, to $23,243,078 as compared to $15,274,171 for the fiscal
year ended December 31, 2008. The increase in cash was mainly due to
an increase in collection of accounts receivable and an increase of $187,617 in
net income in the three months ended March 31, 2009.
At March
31, 2009, the accounts receivable balance decreased by $6,599,463 from the
balance at December 31, 2008 due primarily to the collection in the accounts
receivable balance of fiscal year 2008 and a decrease in sales in the first
quarter of fiscal 2009. The accounts receivable turnover was 114 days for the
three months ended March 31, 2009, compared with 85 days for fiscal year 2008
and 109 days for the three months ended March 31, 2008. The increase in the
accounts receivable turnover was mainly due to a downturn in collection of
accounts receivable in Shaanxi Tianren. We usually experience a slow accounts
receivable turnover in the first quarter of the fiscal year due to reduced sales
when compared with the fourth quarter as a result of the seasonality of our
industry. Due to the seasonality of fresh fruit, a substantial portion of our
revenues are earned during the first and fourth fiscal quarters. We generally
experience the lowest revenue during our second and third fiscal
quarters.
Our
inventory as of March 31, 2009 was $2,312,116, reflecting an increase of
$467,719, or 25.4%, compared to inventory at December 31, 2008. Inventory
consists of raw materials, packaging materials and finished products. The
increase in inventory was mainly due to reduced sales in the first quarter of
fiscal year 2009.
Prepaid
expenses and other current assets at March 31, 2009 were $904,368, a decrease of
$182,708 from the balance at December 31, 2008. The decrease in prepaid expenses
was primarily due to a decrease in prepaid raw material of fresh fruits as a
result of the end of the squeezing season for most of our products.
Property,
plant and equipment decreased by $476,515, from $20,406,967 at December 31, 2008
to $19,930,452 at March 31, 2009. Construction in progress was $1,900,520 at
March 31, 2009. Total capital expenditures were zero in the three months ended
March 31, 2009. The decrease in property, plant and equipment was
mainly due to an increase in accumulated depreciation expenses in the first
quarter of fiscal 2009 in the ordinary course of business.
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, $1,170,806 as of March 31, 2009.
This research and development center is expected to be completed by June 30,
2009. Our estimated future capital expenditure for this project is $1,024,455.
Once it is completed, it will allow our engineers to better conduct research and
development toward the goal of innovating 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 in fiscal year 2008.
Shaanxi
Qiyiwangguo previously leased a waste-water processing facility at an annual fee
of approximately $14,371. The Company is constructing a new 1,118 square meter
industrial waste water processing facility. Once completed, the facility will
process 1,200 cubic meters of waste water per day, which will meet the
increasing production demands of Shaanxi Qiyiwangguo and will improve the use of
recycled waste water. We capitalized $679,300 as construction in progress
as of March 31, 2009. 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
$110,994. 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 an employee building.
We capitalized $11,131 as construction in progress as of March 31, 2009. This
project is expected to be completed by the second quarter of 2009. There will be
no future capital expenditures required for this project.
Capitalized
interest expenses of $39,283 are 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.
Depreciation
and amortization was $487,158 for the first quarter of 2009, compared with
$714,647 for the same quarter of the prior year. The decrease in
depreciation expenses was mainly because certain fixed assets in Shaanxi
Qiyiwangguo were fully depreciated after the first quarter of 2008.
Other
assets were $2,299,914 at March 31, 2009, representing a slight decrease of
$62,135, or 2.6%, from the balance at December 31, 2008.
Liquidity and Capital
Resources
As of
March 31, 2009, we had cash of $23,243,078 as compared to $15,274,171 as of
December 31, 2008. We believe that projected cash flows from operations,
anticipated cash receipts, cash on hand, and trade credit will provide the
necessary capital to meet our projected operating cash requirements for at least
the next 12 months, with the exception of the acquisition Yingkou and the
expansion of our current production capacity.
Our
working capital has historically been generated from the operating cash flow,
advances from our customers and loans from bank facilities. Our working capital
was $15,296,218 as of March 31, 2009, representing an increase of $1,863,720, or
13.9%, compared to working capital of $13,432,498 as of December 31, 2008,
mainly due to an increase in cash and a decrease in accounts receivable as
discussed above.
The more
significant source of working capital during the three months ended March 31,
2009 was $6,580,392 from the reduction of accounts receivable. The more
significant uses of working capital during the three months ended March 31, 2009
was a cash payment in various taxes payable of $1,549,833.
Under the
Stock Purchase Agreement with the Selling Stockholders, for a period of three
years from the closing date of the agreement (February 26, 2008), so long as the
Selling Stockholders collectively own 20% of the Series B Stock issued
thereunder, we may not issue any preferred stock or any convertible debt, except
for preferred stock issued to the Selling Stockholders.
Further,
under the Stock Purchase Agreement with Selling Stockholders, until February 26,
2010, at all times our debt-to-EBITDA ratio shall not exceed 3.5:1 for the most
recent 12-month period.
The
Company plans to acquire Yingkou in the third quarter of fiscal year 2009. The
Company also plans to expand its current operations in the next two years.
Planned expenditures for land and equipment are approximately $45.7 million for
the next two years.
We believe that we currently have
sufficient cash on hand, combined with anticipated cash receipts, to fund our
business for at least the next 12 months. The capital needed for our business in
the next 12 months does not include the acquisition of Yingkou or the expansion
of our current production capacity.
For our
long term planned expenditures for equipment and land we will likely need to
seek additional debt or equity financing. We believe that any such financing
could come in the form of debt or the issuance of our Common Stock in a private
placement or public offering. However, there are no assurances that such
financing will be available or available on terms acceptable to us. To the
extent that we require additional financing in the future and are unable to
obtain such additional financing, we may not be able to fully implement our
growth strategy.
The
majority of our capital expenditures are for the expansion of our production
capacity. In the past three years, our annual capital expenditures
ranged from $53,000 to $2.9 million. We financed our capital
expenditures and other operating expenses through operating cash flows and bank
loans. As of March 31, 2009, the balance of short-term loans totaled RMB
76,800,000 (U.S. $11,239,737 based on the exchange rate on March 31, 2009), with
interest rates ranging from 5.58% to 9.83% per annum. Of these loans, $5,239,357
are collateralized by land and buildings. These loans are due from May 2009 to
October 2009.
Comparison
of fiscal years ended December 31, 2008 and December 31, 2007
Results of Operations and
Business Outlook
Revenue
The
following table presents our consolidated net revenues for our main products for
the years ended December 31, 2008 and December 31, 2007:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
%
Change
|
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
13,602,600
|
|
|
|
5,848,690
|
|
|
|
132.6
|
|
|
|
|
11,992,610
|
|
|
|
11,278,990
|
|
|
|
6.3
|
|
Concentrated
apple juice and apple aroma
|
|
|
6,853,649
|
|
|
|
7,461,278
|
|
|
|
(8.1)
|
|
|
|
|
5,325,891
|
|
|
|
3,525,223
|
|
|
|
51.1
|
|
|
|
|
2,315,392
|
|
|
|
1,247,760
|
|
|
|
85.6
|
|
|
|
|
1,558,463
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
|
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 kiwifruit 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 PRC 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 kiwifruit 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 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 people 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 apple-related products were $6,853,649 in fiscal year 2008, a decrease of
$607,629, or 8.1%, compared to $7,461,278 for fiscal year 2007. The volume of
concentrated apple juice exported from China in 2008 decreased by 34% as
compared to 2007 primarily due to a decreased demand in the international market
as a result of negative effects from the worldwide economic crisis. Furthermore,
the competition in apple related products became stronger in China in 2008. Some
small and mid-sized juice manufacturers sold their inventory of apple related
products at a lower price in China due to the decrease in export volume. As a
result, we experienced reduced demand for our apple related
products.
Gross
Margin
The
following table presents the consolidated gross profit margin of our main
products and the 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
kiwifruit juice and kiwifruit puree
|
|
|
7,338,762
|
|
|
|
2,850,474
|
|
157.5
|
|
|
|
|
4,552,628
|
|
|
|
4,046,384
|
|
12.5
|
|
Concentrated
apple juice and apple aroma
|
|
|
1,442,694
|
|
|
|
2,096,941
|
|
(31.2)
|
|
|
|
|
1,831,258
|
|
|
|
1,039,391
|
|
76.2
|
|
|
|
|
1,491,896
|
|
|
|
861,706
|
|
73.1
|
|
|
|
|
1,383,958
|
|
|
|
-
|
|
N/A
|
|
|
|
|
18,041,196
|
|
|
|
10,894,896
|
|
65.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit Margin as a % of Revenues
|
|
|
|
|
|
|
|
|
|
|
Concentrated
kiwifruit juice and kiwifruit puree
|
|
|
54.0
|
|
|
|
48.7
|
|
10.7
|
|
|
|
|
38.0
|
|
|
|
35.9
|
|
5.8
|
|
Concentrated
apple juice and apple aroma
|
|
|
21.1
|
|
|
|
28.1
|
|
(25.1)
|
|
|
|
|
34.4
|
|
|
|
29.5
|
|
16.6
|
|
|
|
|
64.4
|
|
|
|
69.1
|
|
(6.7)
|
|
|
|
|
88.8
|
|
|
|
-
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
partially offset by a decrease in the gross margin of concentrated apple juice
and apple aroma and fresh kiwifruit.
The gross
profit margin of concentrated kiwifruit juice and kiwifruit puree increased by
10.7% 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
kiwifruit in the kiwifruit squeezing season of fiscal 2008 as a result of
abundant harvests of kiwifruit in 2008. The gross profit margin of fresh
kiwifruit decreased by 6.7% for fiscal 2008 as compared to fiscal 2007,
primarily due to a decrease in the price of fresh kiwifruit 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 April of the following year. As
weather conditions at 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 improved our gross
margin in pear related products.
The gross
profit margin of our fruit beverages was 34.4% in fiscal year 2008, an increase
of 16.6% compared to 29.5% for fiscal year 2007. This increase was primarily due
to the change in our product mix. We sell two types of fruit beverages. One is
in glass bottles, which contains more concentrated juice, and the other is in
plastic polyethylene terephthalate (“PET”) bottles. Our gross margin for
glass bottles was 38.6% for the fiscal year ended December 31, 2008 versus 14.4%
for plastic PET bottles. We sold more fruit beverages in glass bottles for the
fiscal year 2008, 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 $1,383,958 from kiwifruit seeds. Kiwifruit
seeds are the byproduct of kiwifruit juice. They are removed from the fresh
kiwifruit 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 years 2008 and 2007, respectively:
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
|
%
Change
|
|
General
and administrative
|
|
|
2,830,739
|
|
|
|
|
|
|
144.3
|
|
|
|
|
1,453,461
|
|
|
|
|
|
|
111.6
|
|
|
|
|
449,695
|
|
|
|
|
|
|
1,356.4
|
|
Accrued
liquidated damages
|
|
|
254,301
|
|
|
|
|
|
|
N/A
|
|
|
|
|
4,988,196
|
|
|
|
|
|
|
165.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of revenue
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
6.8
|
|
|
3.9
|
|
|
|
60.2
|
|
|
|
|
3.5
|
|
|
2.3
|
|
|
|
38.8
|
|
|
|
|
1.1
|
|
|
0.1
|
|
|
|
854.9
|
|
Accrued
liquidated damages
|
|
|
0.6
|
|
|
0.0
|
|
|
|
N/A
|
|
|
|
|
12.0
|
|
|
6.3
|
|
|
|
74.3
|
|
Our
operating expenses consist of general and administrative expenses, selling
expenses and research and development expenses. Operating expenses increased by
165.8% to $4,988,196 for fiscal year 2008 as compared to $1,876,456 for fiscal
year 2007.
General
and administrative expenses increased by $1,671,980, or 144.3%, to $2,830,739
for fiscal year 2008, from $1,158,759 for fiscal year 2007. The increase in
general and administrative expenses in fiscal 2008 compared with fiscal 2007 was
mainly due to the consolidation of Huludao’s operating results with those of
Shaanxi Tianren since June 1, 2007 and forward and an increase in legal and
auditing expenses, which were primarily associated with the Company becoming a
public company. Huludao Wonder had a large amount of general and
administrative expenses, which contributed to the substantial increase of the
Company’s operating expenses as a result of the operating combination.
Management believes that our operating expenses will continue to increase in
the future compared to previous years due to the expansion of our
business.
Selling
expenses increased by $766,642, or 111.6%, to $1,453,461 for fiscal 2008 from
$686,819 for fiscal year 2007. This was mainly due to an increase in freight and
transportation expenses as a result of the increase in sales.
Research
and development expenses increased by $418,817 to $449,695 for fiscal year 2008
from $30,878 for fiscal year 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 with a
monthly payment of RMB 600,000, or $87,944.
We
accrued $254,301 as liquidated damages in fiscal year 2008 due to a failure to
meet the timetables provided for in the Registration Rights Agreement, dated
February 24, 2008, with the Selling Stockholders (the “Registration Rights
Agreement”) which we executed in connection with the Preferred Stock Purchase
Agreement. The registration statement filed pursuant to the
Registration Rights Agreement was declared effective by the SEC on February 5,
2009.
Income
from Operations
In fiscal
year 2008, income from operations increased by $4,034,560, or 44.7%, to
$13,053,000 from $9,018,440 for fiscal 2007. As a percentage of net sales,
income from operations was approximately 31.3% for fiscal 2008, an increase of
2.0% as compared to 30.7% for fiscal 2007. The increase in the income from
operations was mainly due to an increase in revenue, as previously
discussed.
Interest
Expense
Interest
expense was $932,048 for fiscal year 2008, an increase of $531,531 as compared
with fiscal 2007, primarily due to an increase in term loan facilities in 2008
to support expansion plans and potential business opportunities. In fiscal year
2008, the Company entered into nine short-term loan agreements with local
banks in China. As of December 31, 2008, the balance of these
short-term loans totaled RMB 76,800,000 ($11,256,871), with interest rates
ranging from 5.58% to 9.83% per annum and maturity dates ranging from May 2009
to October 2009.
Income
Tax
Our
provision for income taxes was $2,231,140 for fiscal 2008, compared to
$1,109,160 for fiscal 2007. The increase in tax provision for fiscal 2008 was
due to a significant increase in net income for Shaanxi Qiyiwangguo in fiscal
2008, which was partially offset by a decrease in the effective tax rate for
Shaanxi Qiyiwangguo. The tax rate for Shaanxi Qiyiwangguo was reduced from 33.0%
to 25.0%, effective beginning January 2008.
Shaanxi
Tianren was awarded the status of a nationally recognized High and New
Technology Enterprise in December 2006. As a result, in 2007 and 2008 we
received subsidies from the local government of Shaanxi Province of
approximately $500,000 and $316,000, respectively.
We
adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(“FIN 48”) on July 1, 2007, which required no material
adjustment to our liabilities for unrecognized income tax benefits since its
adoption.
Noncontrolling
Interest
As of
December 31, 2008, Shaanxi Tianren held a 91.15% interest in Shaanxi Qiyiwangguo
and Pacific held a 99% interest in Shaanxi Tianren. Net income attributable to
noncontrolling interests (which is deducted in determining the Company’s net
income) was $613,135 for fiscal 2008, an increase of $252,634 compared to
$360,501 for fiscal 2007. The increase in the net income
attributable to noncontrolling interests was mainly due to the increase in the
net income generated from Shaanxi Tianren.
Net
Income
Net
income was $10,010,302 for fiscal 2008, an increase of $2,413,899, or 31.8%,
compared to fiscal 2007. Such increase was primarily due to an increase in
sales, as previously discussed.
Changes
in Financial Condition
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 proceeds of $3,115,072 received from certain
accredited investors in a private placement transaction on February 26, 2008 and
an increase of $12,286,664 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 $4,460,149 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
had 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 apple
squeezing season in 2008, we saw a decrease in the price of fresh apples due to
an abundant harvest of apples and the influence of the decrease in the sales
price of apple related products in the international market. To ensure that we
had enough fresh apples at the current low price during the squeezing season for
our production needs, we prepaid a 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 $193,324
facility 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
capitalized, as construction in progress, $1,211,933 in 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 diversifying 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
, which is included in the amounts above. 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 to 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. 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 the 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 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 had
sufficient fresh fruits and other materials for our 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 Policies
Management’s
discussion and analysis of the Company’s financial condition and results of
operations is based upon the Company’s consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. Our financial statements
reflect the selection and application of accounting policies, which require
management to make significant estimates and judgments. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. We believe that
the following reflects the more critical accounting policies that currently
affect our financial condition and results of operations.
The share
exchange transaction between the Company and Pacific resulted in Pacific’s
stockholders obtaining a majority voting and controlling interest in the
Company. Generally accepted accounting principles require that the company whose
stockholders retain the majority controlling interest in a combined business be
treated as the acquirer for accounting purposes, resulting in a reverse
acquisition with Pacific as the accounting acquirer and SkyPeople as the
acquired party. Accordingly, the share exchange transaction has been accounted
for as a recapitalization of the Company. The equity sections of the
accompanying financial statements have been restated to reflect the
recapitalization of the Company due to the reverse acquisition as of the first
day of the first period presented. All references to Pacific Common Stock have
been restated to reflect the equivalent numbers of SkyPeople equivalent
shares.
On June
2, 2007, Shaanxi Tianren entered into a lease agreement with Hede, pursuant to
which Shaanxi Tianren, for a term of one year and for a monthly lease payment of
RMB 300,000 (approximately $41,070 based on the exchange rate as of December 31,
2007), leased all the assets and operating facilities of Huludao Wonder, which
was wholly-owned by 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. $6,807,472. The payment was made through the offset of related party
receivables from Hede.
Prior to
the June 2008 acquisition, Huludao Wonder was classified as a variable entity of
Shaanxi Tianren according to FASB Interpretation No. 46
: Consolidation of Variable Interest
Entities (“V.I.E.”)
, an interpretation of ARB 51 (“FIN 46”). FIN 46R
requires the primary beneficiary of the variable interest entity to consolidate
its financial results with the variable interest entity. The Company had
evaluated its relationship with Huludao and had concluded that Huludao Wonder
was a variable interest entity for accounting purposes after June 2007 and prior
to June 2008. The pooling method (entity under common control) is applied to the
consolidation of Shaanxi Tianren with Huludao Wonder after the acquisition of
Huludao Wonder.
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
period 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 six months are allowed. 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 the average cost or first-in, first-out
methods.
Revenue
Recognition
We
recognize revenue upon meeting the recognition requirements of Staff Accounting
Bulletin 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 70% 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
advances from customers, which are 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 of the PRC is the RMB. 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 recorded
no deferred tax assets or liabilities as of March 31, 2009, 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.
Noncontrolling
Interests
Noncontrolling
interests 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
shares held in escrow as Make Good Escrow Stock will not be accounted for on our
books until such shares are released from escrow pursuant to the terms of
the Make Good Escrow Agreement. During the time such Make Good Escrow Stock is
held in escrow, it will be accounted for as contingently issuable shares in
determining the diluted 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
Financial Accounting Standard Board Staff Position 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 were recorded as a liability and
deducted from operating income.
Our
failure to meet the timetables provided for in the Registration Rights
Agreement resulted in the imposition of liquidated damages, which were
payable in cash to the Selling Stockholders (pro rata based on the percentage of
Series B Stock owned by the Selling Stockholders at the time such liquidated
damages shall have incurred) equal to fourteen percent (14%) of the Purchase
Price per annum payable monthly based on the number of days such failure exists,
which amount of liquidated damages, together with all liquidated damages that
the Company may incur pursuant to the Registration Rights Agreement, the New
Warrants and the Stock Purchase Agreement, shall not exceed an aggregate of
eighteen percent (18%) of the amount of the Purchase Price.
We initially
filed with the SEC the registration statement on March 26, 2008, which date was
before the filing date deadline of March 30, 2008 in the Registration Rights
Agreement, because in the opinion of the counsel to the Company, the Company’s
audited financials for the fiscal year 2007 were required to be included in the
initial registration statement based on the applicable SEC rules. Therefore, we
were required to have the registration statement declared effective by the SEC
by July 24, 2008 (within 120 days after the initial filing date). On February 5,
2009, the registration statement was declared effective by the
SEC. We recorded liquidated damages of $254,301 in fiscal year 2008
for failure to meet the timetables provided for in the Registration Rights
Agreement.
Pursuant
to the Exchange Agreement, the Selling Stockholders have agreed to release the
Company from its obligations to pay any liquidated damages incurred under the
Registration Rights Agreement.
Business
Overview
We are
engaged in the production and sale of fruit concentrate, fruit juice beverages,
and other fruit related products in the PRC. Our fruit concentrates,
which include apple, pear, and kiwifruit, are primarily exported via
distributors to North America, Europe and the Middle East. We sell
our Hedetang branded bottled beverages domestically primarily to
supermarkets in certain regions of the PRC. At December 31, 2008 our
fruit concentrate, fruit juice beverages, and other fruit related products
represented 78%, 13%, and 9% of our sales, respectively.
We
believe that we are currently one of the only companies able to produce
specialty fruit juices in large scale in China and are widely recognized as a
leading specialty fruit juice producer. Specialty fruit juices
are juices squeezed from fruits which are grown in a relatively low
quantity and include kiwifruit juice, mulberry juice, strawberry juice, and
pomegranate juice.
Our
competitive advantages lie in our modern equipment and technology employed at
our production factories in Shaanxi and Liaoning Provinces, which are located
near regional fruit production centers. Our equipment and technology
help ensure product quality, processing cost control and allow us to meet
international juice standards such as ISO9001, HACCP and KOSHER. Our location
near regional fruit production centers enables us to purchase directly from
farmers and avoids the need to transport raw fruits over long distances to our
processing facilities, both reducing our transportation expenses and helping us
maintain high product quality by preserving freshness and helping us avoid
damage to the raw fruit in transit.
During
the year ended December 31, 2008, we produced 21,591 tons of fruit juice
concentrate, 5,339 tons of fruit beverage and 5,833 tons of fresh and other
fruit related products such as kiwifruit seeds and apple aroma. As we
expand our current production facilities and acquire other companies in the
fruit product industry, we expect our fruit processing capacity and our annual
yield to grow to meet increasing customer demand.
Industry
and Market Overview
We
operate in China’s fast growing fruit juice beverage industry. Due to low labor
costs and an abundant supply of fruit, most notably apples, pears, and
kiwifruit, China is a large fruit juice concentrate producer and the largest
apple juice concentrate producer in the world. Chinese fruit juice concentrates
and juice beverage products produced by companies using high-quality equipment
are trusted by large-scale international corporations and consumed throughout
the world. In addition, marketing strategy and transportation technology
improvements have enabled Chinese companies to more effectively market and
distribute fruit juice concentrate and fruit juice beverages globally. For
example, approximately 70% of apple juice drinks produced in the United States
are based on Chinese produced apple juice concentrate.
The
global market for processed fruit products has expanded rapidly in the last few
years. The general consumption trend has begun to gradually shift from
carbonated beverages to pure fruit juice products. According to The
Beverage Digest’s annual “Fact Book,” global demand for non-alcoholic single
serve beverages was $106 billion in 2006 and increased 4.1% by volume from 2005
to 2006, while carbonated soft drinks declined in volume in 2005 and 2006 for
the first time in 20 years. Likewise, global sales of noncarbonated drinks (tea,
coffee, fortified water, juice, sports drinks, milk drinks, and energy drinks)
increased by 15% from 2005 to 2006. According to the Beijing Business &
Intelligence Consulting Co. Ltd., an independent research firm, sales of
processed fruit exported from China is expected to reach $10.9 billion in 2010,
a 42.7% increase versus the amount of processed fruit exported in 2006. This
indicates that, globally, consumers are becoming increasingly health
conscious.
Increasing
disposable income combined with the health conscious nature of Chinese consumers
is a positive indicator for continued growth in the Chinese fruit juice beverage
market. China currently accounts for only 10% of total global fruit juice
consumption and the annual per capita fruit juice consumption in China is
approximately 1 kilogram. Chinese consumption shows strong growth potential when
it is considered that the average annual per capita fruit juice consumption is
approximately 40 kilograms in
developed international
markets
.
This
rapid growth in the fruit processing industry in China and worldwide has placed
significant pressure on producers to increase production capacities while
managing increased costs associated with transport logistics and raw
materials. To respond effectively, producers must:
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utilize
modern processing technology to maximize processing capacity and annual
yield without significantly increasing production
costs;
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•
|
utilize
flexible production facilities to respond quickly to market supply and
demand and quickly introduce new products to the market;
and
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•
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build
or acquire new production facilities near stable sources of raw material
that can adequately meet planned processing capacities and annual
yield.
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Competitive
Advantages
Raw
Materials Control and Resources Advantages
China has
the largest planting area of apples and kiwifruit in the world and
Shaanxi Province has the largest planting area of apples and kiwifruit in
China. Shaanxi Province’s yield of apples and kiwifruit accounted for
approximately 62% and 25%, respectively, of the total output of China in
2008. We have located our production facilities in Shaanxi Province
and Liaoning Province, which also has a large yield of apples and produces the
largest amount of high acidity apples in China. We have also assisted farmers
located near our production facilities in building and managing their farms,
thereby helping to increase output and quality of their products and generating
goodwill. For example, we helped to build and provide ongoing assistance to the
Qinmei Plantation, a plantation in Shaanxi Province from which we purchased all
of our kiwifruit in 2008. Our close proximity to the regional production centers
ensures raw material availability and freshness and reduces our fruit purchasing
and transportation costs.
Equipment,
Technology, and Quality Advantages
We
purchase our key production equipment from top-ranking foreign equipment
manufacturers, including Flottweg AG in Germany, FBR-ELPO S.P.A in Italy,
Bertuzzi Food Processing SRL in Italy and APT Schmidt-Bretten GmbH&Co. KG in
Germany. This high quality processing equipment helps ensure product quality,
processing cost control and allows us to meet tougher international juice
standards.
We have
effectively combined two new pressing technologies, complete enzymolysis and
multiple step digestive enzymolysis, which allows us to utilize numerous
individual processes such as membrane filtration, resin absorption, and low
temperature reverse osmosis membrane concentration to increase overall product
quality.
We
currently utilize seven production processes and technologies. Our processes and
technologies are comprised of kiwifruit pulp removal, kiwifruit pulp
concentration, cold breakdown, resin discoloration, low temperature reverse
osmosis concentration, juice clarification, and pear juice concentration
processes and technologies. These processes and technologies have allowed us to
slowly gain market share in the fruit concentrate and fruit juice beverage
industry, most notably in the kiwifruit market. The ability to remove kiwifruit
hair and seeds has differentiated us from our peers.
Product
Diversity
Our
products include fruit concentrate and fruit juice beverages from apples, pears,
kiwifruit, and mulberries. We also sell organic fresh fruit, kiwifruit seed and
apple aroma. The ability to produce fruit juice beverages is important when
fresh fruit is out of season and fruit concentrate cannot be produced. Our
range of products and production flexibility help us compete in international
markets and lessen risks associated with commodity prices, seasonality and
consumer preferences.
Operation
Team
We have a
professional, highly educated, and motivated business administration and
technology development team. Our operating managers have an average of more than
10 years of experience in the fruit juice industry. We have established good
relationships with several scientific research institutes and experienced
consultants that we believe have been instrumental to our growth. In
total, we have more than 10 consultants with relevant industry
experience.
Chinese
Government Support
The PRC government’s agricultural
industrialization policy supports our business. Shaanxi Tianren was awarded the
status of a nationally recognized High and New Technology Enterprise in December
2006. As a result, in 2007 and 2008 we received subsidies from the
local government of Shaanxi Province of approximately $500,000 and $316,000,
respectively. These subsidies were used to pay research and development
expenses. In 2009, the Shaanxi Province government approved a plan to increase
the kiwifruit plantation area in the province to 164,609 acres and increase
kiwifruit production to 800,000 tons by 2015. In order to achieve this goal, the
government plans to provide subsidies to local farmers to enable them to expand
the kiwifruit plantation area and to provide to leading kiwifruit processing
companies, such as us, rebates on interest paid by such companies on loans
payable by them. We have submitted our kiwifruit industrialization development
plan to the Shaanxi Province government, which has been approved by the related
government department.
Growth
Strategy
We have a
multi-pronged growth plan to respond to market opportunities.
Increase
Our Capacity
We will
continue to expand the production capacity of our three existing production
facilities. We will also consider acquisition opportunities in order to further
expand capacity. We believe there are attractive acquisition opportunities which
should allow us to further increase our fruit concentrate and fruit juice
beverage market share.
Diversify
Our Products
We hope
to broaden our fruit product offerings in order to further diversify our product
mix. Our strategic focus will be on expanding into fruits with harvesting
seasons complementary to our current fruits. This will enable us to expand our
squeezing season, thus increasing our annual production of fruit concentrate and
fruit juice. In the first quarter of fiscal 2009 we introduced mulberry juice
vinegar and kiwifruit juice vinegar in the Chinese market, generating revenue
and a gross margin of $348,669 and over 49%, respectively, on these two new
products. In addition, we will enhance our research and development activities
in order to develop and produce innovative high margin products like polyphenol
(an antioxidant compound with beneficial effects on health) from concentrated
fruit juice to further diversify our product mix and increase our
revenue.
We are
continuously evaluating new trends in the markets we serve and the potential
demand for new products. Utilizing our flexible production facilities, we can
quickly evaluate the viability of new products from a production and
profitability perspective. Continuing to strategically diversify our
product line will minimize risk by providing additional revenue and allowing us
to allocate our production resources based on seasonal trends and market
demand.
Enlarge
Our Worldwide Customer Base
We will
strive to expand our worldwide customer base by strengthening current
relationships with distributors and end users in our existing markets. We also
plan to expand upon our customer base by developing new relationships with
strategic distributors and end users in markets we have not yet penetrated and
adding direct customers in North America. We have identified several
markets in which we would like to increase our sales volume. We anticipate
rapidly increasing demand for kiwifruit products in the foreseeable future.
Strategic customers such as Cargill, N.V. have indicated interest in purchasing
an increasing volume of some of our fruit concentrate. We believe that our
relationships with companies such as Nongfu Spring Co. Ltd., HuiYuan Group Co.
Ltd. and Lotte Huabang Beverage Co. Ltd. are also strong. We anticipate each of
these customers will have higher order volumes in 2009.
Market
research has identified several domestic and international markets that possess
strong growth opportunities. We hope to slowly gain market share through
marketing efforts in these areas. In 2009, we plan to set up a sales center in
Los Angeles, California to facilitate the delivery of our products to our
customers. We believe focusing on our existing customers while continuing to
enter new markets will help us expand our customer base while minimizing
business risk.
Focus
on Improving Gross Margins
We plan
to continue to focus on creating new high margin products in the future to
supplement our current product offering. We introduced a new kiwifruit
concentrate juice product to the market in the fourth quarter of 2008. The gross
margin on our kiwifruit concentrate juice product was 40% in the fourth quarter
of 2008 which we believe is higher than the average gross margin for the
industry, our intellectual property rights on certain kiwifruit juice making
processes. We sold 1,488 tons of kiwifruit concentrate juice in the fourth
quarter of 2008.
In
addition, we are making efforts to improve margins for our fruit juice beverage
business segment. We are currently shifting our fruit juice beverage
distribution medium towards glass versus plastic bottles. Our gross margin for
glass bottles was 38.6% for the fiscal year ended December 31, 2008 versus 14.4%
for PET bottles. We also developed a fruit vinegar beverage in the
first quarter of 2009 that has tested very well in the market and has a gross
margin of over 49% versus an average gross margin of 20% for our pure fruit
beverages.
Increase
Sales of Fruit Concentrate and Fruit Juice Beverages in China
Currently,
we only market our Hedetang brand fruit beverages in certain regions of the PRC
market. In the first quarter of 2009 we began to execute our plan to expand the
market presence of “Hedetang” over a broader geographic area in China. We plan
to implement the following strategies: (1) focus on expanding our glass bottle
production line to produce higher margin portable beverages targeting consumers
in tier 2 (cities with a population over 4.5 million and a per capita gross
domestic product of more than $3,000) and tier 3 (cities with a population
between 1.5 and 4.5 million people or a per capita gross domestic product of
$1,500 to $$3,000) Chinese cities; (2) further develop our fruit vinegar
beverage distribution and continue to emphasize product innovation; and (3)
expand our nationwide fruit juice sales network over the next 3 to 5 years by
adding talented marketing and sales personnel.
Increase
Focus on the Organic and Green Fruit Concepts
According
to the Agricultural Marketing Resource Center (
www.agmrc.org/markets
),
organic food production has grown at a rate of almost 20% per annum for the last
7 years and industry experts are continuing to forecast additional growth.
Currently, a portion of the kiwifruit produced on the Qinmei plantation, which
supplies our kiwifruit production facility, are organic. We have set a target to
transition this kiwifruit plantation to fully organic production within five
years. We also plan to establish a fruit and vegetable organic research and
development center and a training center by 2010 and to convert our apple
production base to become partially organic. We will carry out organic apple
planting tests in Shaanxi Province and Liaoning Province in 2009 and 2010, with
full conversion targeted within five years.
Products
Our core
products are concentrated apple, pear, and kiwifruit juices and are produced
from August to March of each year. The squeezing season for (i) apples is from
August to March or April of the following year; (ii) pears is from July or
August until April of the following year; and (iii) kiwifruit is from September
through December of each year. Our non-concentrate products such as fruit juice
beverages are produced and sold in all seasons. The ability to produce fruit
juice beverages is important when fresh fruit is out of season and fruit
concentrate cannot be produced. Our range of products and production
flexibility allows us to diversify our operational risks and supplement our
revenue. Fruit concentrate comprised 78% of 2008 revenue, fruit juice
beverages made up 13% and the remaining 9% of revenue consisted of sales of
fresh fruit, fruit seeds, and other products.
Fruit
Concentrate
Fruit
concentrate is manufactured through a multi-stage process, which includes
pressing, filtering, sterilizing and evaporating fresh fruits and fruit juices.
Fruit concentrate is used as the base ingredient in juice beverages and is also
used in other products such as ice cream and fruit wine, and to a lesser extent
in cosmetics and medicine. Our fruit concentrate products are made up of three
different categories: fruit puree, fruit concentrate puree and concentrated
fruit juice. Fruit puree is prepared from clean, sound fruit that has
been washed and sorted prior to processing. The fruit
is crushed and pressed, and the pulp of the fruit is kept.
We then remove all of the water and some of the pulp from the fruit puree and
increase the sugar level in order to produce fruit concentrate puree. Advanced
technologies maintain the natural flavors and nutrients of the fruit
puree. Fruit puree and fruit concentrate puree are ideal raw
materials used in the production of juices, juice beverages, fruit ice
creams, smoothies and health care products. Concentrated fruit juice
is made from fruit concentrate puree by removing all of the remaining pulp.
Concentrated apple juice and concentrated pear juice are prepared from
fresh fruits directly. Concentrated fruit juice can also be combined with
other fruit juices for the production of blended fruit juices, canned
foods, confectionaries, fruit vinegar beverages and beverage
products. We currently sell apple, pear, and kiwifruit
concentrate.
Fruit
Juice
The
manufacturing process for fruit juice involves squeezing, filtering, sterilizing
and bottling fresh fruit. Our fruit juice beverages are divided into two
categories: pure fruit juice and fruit vinegar beverages. We currently produce
fruit juice products for kiwifruit and mulberry fruit. Pure fruit juice
beverages accounted for 12.8% of 2008 revenue. We tested and began marketing
fruit vinegar beverages in the first quarter of 2009 and, based on the results,
anticipate our fruit vinegar beverages will experience rapid growth in the
Chinese market. Fruit vinegar beverages consist of pure fruit juice and vinegar
formulated to meet local taste preferences.
Our fruit
juice beverages are distributed through two mediums: glass bottles and PET
bottles. Over the next three years we plan to fully eliminate PET bottles from
our product mix due to the higher production cost involved with PET
bottles.
While
typically lower margin, fruit juice products are an important business segment
as fruit juice beverages can be produced year round, versus our concentrate
business which experiences seasonality. Our focus on developing new, high margin
beverages distributed in glass bottles will allow us to earn gross margins
similar to that of our fruit concentrate products.
Other
We also
sell fresh fruit, kiwifruit seeds, apple aroma and other products.
The
following table contains information regarding the sales of various fruit
concentrate, fruit juice beverages and other products since January 1,
2007.
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2008
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2007
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Products
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Amount
(tons)
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Proportion
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Amount
(tons)
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Proportion
|
|
Fruit
puree
|
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1,322
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4%
|
|
591
|
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2%
|
|
Fruit
concentrate puree
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3,937
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12%
|
|
5,278
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18%
|
|
Fruit
concentrate
|
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15,963
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49%
|
|
18,371
|
|
|
62%
|
|
Fruit
juice
|
|
|
5,330
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|
16%
|
|
2,514
|
|
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9%
|
|
Fruit
vinegar beverages
|
|
|
-
|
|
|
|
-
|
|
|
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|
Fresh
fruits
|
|
|
5,821
|
|
18%
|
|
2,512
|
|
|
9%
|
|
Kiwifruit
seeds
|
|
|
160
|
|
0.5%
|
|
-
|
|
|
|
|
Other
|
|
|
160
|
|
0.5%
|
|
96
|
|
|
-
|
|
Total
|
|
|
32,693
|
|
100%
|
|
29,362
|
|
|
100%
|
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Competition
The
markets in which we operate are competitive, rapidly evolving, and subject to
shifting customer demands and expectations. We believe that a number
of companies are producing products that compete directly with our product
offerings, and some of our competitors have significantly more financial
resources than we possess.
Our apple
juice concentrate competitors include Sdic Zhounglu Fruit Juice Co., Ltd.,
Yantainorth Andre (Group) Juice Co., Ltd., Shaanxi Hengxing Fruit Juice, and
Shaanxi Haisheng Juice Holdings Co., Ltd. We also compete with fruit
juice companies such as Wahaha, Huiyuan, Nongfu Guoyuan, Tongyi, and
Meizhiyuan.
Our
competitive advantage is the production of small breed fruit concentrate, such
as kiwifruit concentrate. We can produce high quality juice concentrate at a
lower cost because of our proximity to fruit farms. Our storage costs are also
lower than that of our competitors; however, our low cost structure does not
affect our product quality.
Manufacturing
We own and
operate three manufacturing facilities in China; two facilities are located in
Shaanxi Province and one facility is located in Liaoning Province. Our three
facilities focus on producing single fruit based concentrates and beverages.
Producing multi-fruit concentrate and beverage blends is more costly and time
consuming. This strategy allows us to maximize our output and minimize our cost.
Our production lines use essentially the same processing method with a few
slight variations.
One
factory is located in Sanqu Town, Jingyang County, Xianyang City,
Shaanxi Province. This factory primarily produces pear concentrate products. The
factory occupies an aggregate of approximately 34,476 square meters of land and
contains a manufacturing facility. We have implemented the HACCP system,
achieved ISO 9001 compliance, and have been recognized with an award for
producing Kosher pear concentrate at this factory. We have 47 years
remaining on our land usage right at this facility. Our second factory located
in Shaanxi Province is located in Siqun Village, Mazhao Town,
Zhouzhi County, Xi’an City. Shaanxi Qiyiwangguo, in which we have a 91.15%
ownership interest, produces our kiwifruit products. The Shaanxi Qiyiwangguo
factory occupies an aggregate of approximately 57,935 square meters of land and
contains a manufacturing facility. We have 39 years remaining on our land usage
right at this facility. We have implemented the HACCP system, achieved ISO 9001
compliance, and have been recognized with an award for producing Kosher pear
concentrate at this factory. The third factory is located at
Hujia Village, Gaotai Town, Suizhong County, Huludao, Liaoning
Province. We produce apple concentrate at the Huludao Wonder
Fruit Co., Ltd. (“Huludao
Wonder”) facility.
The factory occupies an aggregate of approximately
86,325 square meters of land and contains factory buildings and machinery. We
have 45 years remaining on our land usage right at this facility. We are
ISO 9001 compliant and have implemented HACCP standards at this factory and
apple juice produced there has been recognized as Kosher.
Technology
in the Production Process
We have
recently adopted a number of new technologies for our production
processes.
Cold
Breakdown
The cold
breakdown process is also called cold extraction. In this process, whole fruit
is sent to the monomer pulping machine. The initial processing phase removes
skin, axis, seeds, and wood particles, after which the pulp is sent to a heat
exchanger for sterilization.
Resin
Discoloring
Traditional
fruit juice concentrating processes are not good at color protection. Color
additives affect the quality of the product and hinder sales in international
markets. After several rounds of exploratory tests, we developed the new resin
absorption discoloring procedure. This new process has a preventative affect on
discoloration. This process not only prevents discoloration, but it actually
helps improve the pulp and fruit juice color.
Kiwifruit
Hair Removal
If the
hair on kiwifruit skin is squeezed into pulp juice, it will affect the quality
of the pulp juice. Based on cooperation with Xi’an University of Technology, in
2003 and 2004 we developed a hair removal production line for kiwifruit. This
innovative production line completely resolved the fruit skin cleansing problem.
This technological solution solved a difficult marketing and processing
issue.
Kiwifruit
Pulp Concentration
Through
cooperation with Xi’an University of Technology, we developed a kiwifruit seed
removal process. This process resolved the issue of separating fruit flesh and
skin during production. Furthermore, valuable kiwifruit seeds, which account for
0.5% of kiwifruit weight, can be easily separated during production. We believe
this process is unique to China.
Low
Temperature Reverse Osmosis Concentration
Low
temperature reverse osmosis concentration is a process of membrane separation.
Semi-permeable membranes, such as acetate fiber membrane and polyamide fiber,
are most commonly used. Fruit juice can permeate the membrane while other
undesirable products are separated from the liquid. We are then able to further
increase juice concentration.
Clarification
Technology of Concentrated Clear Kiwifruit Juice
Clear
kiwifruit juice often becomes clouded. We have adopted a compound enzyme
technology to solve this problem.
Raw
Materials and Suppliers
China has
the largest planting area of apples and kiwifruit in the world.
Shaanxi Province, the location of two of our factories, has the largest
planting area of apples and kiwifruit in China. The apple and kiwifruit planting
area in Shaanxi Province is 1.2 million acres and 68,312 acres, respectively.
Pear, pomegranate, strawberry, peach, and cherry yields are also high in Shaanxi
Province. We have developed kiwifruit fields with local farmers to ensure a high
quality product throughout the production channel. Liaoning Province, the
location of our Huludao factory, produces the largest amount of high acidity
apples in China.
Our raw
materials include:
·
|
Various
fresh fruit, the main raw material for the processing of fruit juice,
which are primarily provided by local farmers;
and
|
·
|
Packing
barrels, 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. Our raw material supply chain is highly fragmented. Raw
fruit prices are highly volatile, therefore fruit concentrate and fruit juice
beverage companies generally do not enter into purchasing
agreements.
Fresh
fruit is the primary raw material needed for the production of our products. The
purchase of fresh fruit represents over 47% of our production cost in fiscal
2008. The continuous supply of high quality fresh fruit is necessary for our
current operations and our future business growth. We have implemented a fruit
purchasing program in areas surrounding our factories. In addition, we organize
purchasing centers in rich fruit production areas. This helps 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.
Shaanxi Province
is a large agricultural and fruit producing province with sufficient resources
to satisfy our raw material needs. The main kiwifruit producing counties are
Zhouzhi County and Mei County. The total combined kiwifruit output in these two
counties is approximately 300,000 tons per year. This supply adequately
satisfies our kiwifruit raw material needs. Shaanxi is also the main pear
producing province in China. The pear supply can meet our production
requirements. Liaoning Province, China’s epicenter for high acidity apples,
can supply enough apples to meet our Liaoning factory’s production
needs.
Packing
barrels, pectic enzyme and amylase are provided by several different suppliers.
We are not dependent on any one supplier or group of suppliers. The Company did
not purchase more than 10% of such supplies from any individual vendor in fiscal
year 2008 or 2007.
Marketing,
Sales, and Distribution
In 2008, over
69% of the Company’s concentrated fruit juice was exported directly or
indirectly. We utilize two channels for product export; distributors
with good credit and direct sale to end users. We have strong relationships with
our international distributors and end users in our large international markets
(U.S., Europe and the Middle East). We expect international sales will remain a
majority of our business in 2009.
We market
our products through three primary methods; direct contact with foreign
businesses, attendance at international exhibitions, and sales made through
trade websites. Our marketing and sales team work closely to maintain a
consistent message to our customers. The sales team is divided into three
subdivisions. One team focuses on the sale of concentrated fruit juice, another
on derivative products, and the last focuses on the sale of fruit juice
products.
Our
export segment is primarily made up of fruit juice concentrate products. Our
international trade department has 13 marketing personnel and is responsible for
our sales of fruit juice concentrate. The North American and European markets
are big apple and pear concentrate consumers. The U.S. market is a highly mature
market with stable growth for apple concentrate. Although we sell to
distributors in the PRC and therefore do not know where our exported fruit juice
concentrate products are ultimately sold, we believe that the volume of exports
to the U.S. of our fruit juice concentrate products has increased annually since
2004. The European market, which we believe has a generally stable consumer
base, has been a target market since our inception. Apple concentrate is used to
produce many beverages and wines consumed by Europeans. We believe that more
than half of our products are exported to Europe. The Middle East is also a
target market for our apple juice concentrate.
Fruit
juice beverage sales are driven by the Chinese market. Most beverages are sold
through provincial level, city level, and county level agents. We also sell
directly to hotels, supermarkets, and similar outlets in smaller quantities.
Fruit juice beverage sales are conducted by a team of 28 personnel employed by
our subsidiary, Shaanxi Qiyiwangguo.
Our
kiwifruit products (kiwifruit pulp, kiwifruit concentrate pulp, and kiwifruit
concentrate juice) are targeted at the European, Southeast Asian, South Korean,
Japanese, Middle Eastern, mainland Chinese and Taiwanese markets. The growth of
our kiwifruit concentrate and kiwifruit juice beverages has exceeded the growth
rate of any other product we offer.
Research
and Development
We
believe that continuous investment in research and development is a key
component to becoming a leader in fruit concentrate and fruit juice beverage
quality. As of March 31, 2009, we have an internal research and development team
of approximately 41 people, and we retain external experts and research
institutions for additional consultation. Our research and development effort
emphasizes the design and development of our processing technology with the goal
of decreasing processing costs and optimizing our production
capabilities. We intend to continue to invest in research and
development to respond to and anticipate customer needs. For the
years ended December 31, 2008 and 2007, our research and development
expenses were $449,695 and $30,878, respectively.
During
2008, we commenced construction on the expansion of our research and development
center in Xianyang, Shaanxi Province. This research and development
center is expected to be completed by June 30, 2009. Once it is completed, it
will provide additional space for our product engineers to conduct research and
development to improve the quality and volume of our product
lines.
Intellectual
Property
We
currently use the following seven special production processes and
technologies: kiwifruit pulp removal, kiwifruit pulp concentration,
cold breakdown, resin discoloring process, low temperature reverse osmosis
concentration, juice clarification, and pear juice concentration.
We have
developed a specialized procedure to process high seed content fruit. We are
able to remove seeds and hair and skin from the fruit. This is especially useful
in strawberry and kiwifruit processing. The removal of hair and seeds increases
juice quality and thus increases gross margins.
We have
also developed Flow-Through Capacitor membrane, reverse osmosis concentration,
and composite biological enzymolysis technology to clarify and remove murkiness
from fruit juice. We believe that these are leading technologies in our
industry.
We
believe that our continued success and competitive status depends largely on our
proprietary technology and ability to innovate. We have taken the required
measures to protect the confidentiality of our proprietary technologies and
processes. We rely on a combination of know-how, patent and trade secret laws,
as well as confidentiality agreements to protect our proprietary rights. We will
take the necessary action to seek remuneration if we believe our intellectual
property rights have been infringed upon. As of March 31, 2009, we held 2 active
patents granted by the State Intellectual Property Office of the People’s
Republic of China.
Title:
Device for breaking up and separating fruit peel
Patent
Number: ZL200620078461.1
Title:
Device for removing the filth or fruit peel and fruit hair
Patent
Number: ZL200620078460.7
In
addition to these 2 active patents, we are applying for another 3 scientific
patents for a process in the production of kiwifruit concentrate juice,
kiwifruit vinegar beverage and mulberry vinegar beverage. However, we do not
have patents on certain other items of intellectual property that we
possess.
We also
registered one trademark for our Hedetang brand with the Trademark Bureau
of the State Administration for Industry and Commerce on November 4, 2005 in the
following categories: Category 29, Category 30, Category 31, Category 32 and
Category 5. The trademark expires on November 3, 2015 and can be extended upon
expiration.
Environment
Protection
Each of
our three factories is equipped with an industrial waste water processing
facility. Our waste water processing facility at the Huludao factory has a 2,500
tons per day capacity. Over the past two years, we have increased our
Jingyang factory’s waste water processing capacity. The increased waste water
processing capacity will enable us to increase juice production capacity in the
future while remaining in compliance with the PRC federal and provincial
environmental laws.
We also
started a technology innovation and expansion project for the industrial waste
water processing facility in Zhouzhi County, Shaanxi Province to increase the
capacity of waste water processing and recycling. The expanded
industrial waste water processing facility will enable us to increase our
production capacity while remaining in compliance with local environmental
laws.
Regulation
Our
products and services are subject to central government regulation as well as
provincial government regulation in Shaanxi and Liaoning. Business and product
licenses must be obtained through application to the central, provincial, and
local governments. We are licensed to operate domestically and export product
under the laws and regulations set forth by the government of the
PRC.
Employees
As of
March 31, 2009, we had approximately 357 full-time employees and approximately
95 part-time employees, all of which are located in the PRC. None of our
employees are covered by a collective bargaining agreement. We believe that we
have a good relationship with our employees.
Company
Information
In
February 2008, we acquired 100% of the ownership interest in Pacific, an entity
incorporated under the laws of the Republic of Vanuatu
(“Pacific”). Pacific’s only business is acting as a holding company
for Shaanxi Tianren, one of our operating subsidiaries. Shaanxi
Tianren is also the majority owner of our two other operating subsidiaries,
Shaanxi Qiyiwangguo and Huludao Wonder. On May 23, 2008, we amended
our Articles of Incorporation and changed our name to SkyPeople Fruit Juice,
Inc. to better reflect our new business.
The
following chart reflects our organizational structure as of the date of this
prospectus:
* Xi’an
Qinmei Food Co., Ltd., an entity which is not affiliated with the Company, owns
the other 8.85% of the equity interests in Shaanxi Qiyiwangguo.
Our
principal executive offices are located at 16F, National Development Bank Tower,
No. 2 Gaoxin 1st Road, Xi’an, Shaanxi Province, PRC 710075, and our
telephone number is 011-86-29-88377216. Our website address is
www.skypeoplefruitjuice.com
. The
information contained on our website or that can be accessed through our website
is not part of this prospectus, and investors should not rely on any such
information in deciding whether to purchase our Common Stock.
The
following table sets forth as of May 31, 2009 the names, positions and ages of
our current executive officers and directors. Our directors serve until the next
Annual Meeting of Stockholders or until their successors are elected and
qualified. Our officers are elected by the Board of Directors and their terms of
office are, except to the extent governed by an employment contract, at the
discretion of the Board of Directors.
Name
of Current Director
and/or
Executive Officer
|
Age
|
Position(s)
with the Company
|
|
|
Director,
Chief Executive Officer of the Company
|
|
|
Chief
Financial Officer, Secretary of the Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
and President of Shaanxi
Tianren
|
________________________
(1)
Member of
Audit Committee.
(2)
Member of
Compensation Committee.
Yongke Xue
. Mr. Xue has been
serving as one of our directors since February 26, 2008 upon consummation of the
Reverse Merger Transactions. Mr. Xue has served as the Director of Shaanxi
Tianren since December 2005. Mr. Xue served as the general manager of Shaanxi
Hede Investment Management Co., Ltd. from December 2005 to June 2007. Prior to
that, he served as the business director of the investment banking division of
Hualong Securities Co., Ltd. from April 2001 to December 2005. He also acted as
the Vice General Manager of Shaanxi Huaye Foods Co., Ltd. from July 1998 to
March 2001. From July 1989 to June 1998, he worked at the Northwestern Materials
Bureau of the PLA General Logistics Department. Mr. Xue graduated from Xi’an
Jiaotong University with an MBA in 2000. Mr. Xue graduated from National
University of Defense Technology in July of 1989 and he majored in Metal
Material & Heat Treatment and received a Bachelor’s Degree.
Spring Liu.
Ms. Liu has been
serving as our CFO since April 14, 2008 and our Secretary since April 25, 2008.
Ms. Liu passed all sections of the Uniform Certified Public Accountants
Examination in California in March of 2006. Ms. Liu earned a Bachelor of Arts in
English degree from the Xi’an Foreign Languages University, China in 1996, and a
Bachelor of Science Degree in Accounting, California in 2004. Prior to her
appointment as Chief Financial Officer, Ms. Spring Liu served at Trio-Tech
International from February 2003 to April 2008 in the following
positions: Accountant, Accounting Manager, Financial Reporting Manager,
Assistant Corporate Secretary and Corporate Secretary. Her most recent position
with Trio-Tech International was Corporate Secretary and Financial Reporting
Manager. Ms. Spring Liu is experienced in corporate management and SEC
reporting. In addition, she is familiar with the compliance of the U.S. GAAP
standards to foreign subsidiaries’ accounting records, and is proficient in
adopting strong internal control methods according to the requirements of the
Sarbanes-Oxley Act of 2002.
Xiaoqin Yan.
Ms. Yan has been
serving as one of our directors since April 7, 2008. Ms. Yan is a director of
Shaanxi Tianren and has been with the Company since January 2006. From June 2005
to December 2005 Ms. Yan was not employed. From March 2004 to June 2005 Ms. Yan
held the position of Manager of Human Resources of Express Worldwide Ltd. Ms.
Yan served as the Manager of Logistics of Tianjin Dingyuan International Foods
Co., Ltd. from October 1999 to March 2004. Ms. Yan graduated from the Air Force
University of Engineering and majored in Computer Technology. In July of 2006
she graduated from PLA Military School and received a Bachelor’s
Degree in Business Management.
Guolin Wang.
Mr. Wang has
been serving as one of our directors since April 7, 2008. Mr. Wang has served as
a director of Shaanxi Tianren since October 2005. Since 1996 he has been a
professor at the Finance Department of the Management School and the
Economics and Finance School of Xi’an Jiaotong University. He previously served
as the Director and Chairman of Xi’an Changtian Environmental Protection
Engineering Co., Ltd. from February 2006 to June 2007. Mr. Wang acted as the
head of the Management School Graduate Office and Chinese-Singapore Management
Doctor Center Office of Xi’an Jiaotong University from 1988 to 1996. Mr. Wang
graduated from Xi’an Jiaotong University in July 1983. He majored in Electronics
& Telecommunication and attained a Bachelor of Science Degree. In July 1983,
he attained a Master’s Degree and majored in Management Science and Engineering.
Then, he graduated from the University’s School of Economics & Finance
in 2006. He majored in Management Science and Engineering and received a
Doctorate Degree.
Robert B. Fields.
Mr. Fields
has been serving as one of our directors since April 25, 2008. Mr. Fields served
on the Board of Directors of Dorado Exploration Inc. Since February 15, 2001,
Mr. Fields has served as the Chairman of ActForex, Inc., a New York fully hosted
management service provider of proprietary software for currency trading with
over 20,000 registered traders. From June 2005 through May 31, 2006, Mr. Fields
served on the Board of Directors and as Chairman of the Audit Committee of
Genoil Inc. (OTCBB: GNOLF.OB). From 1999 to 2002, Mr. Fields was Executive
Advisor to Laidlaw Global Corp. (AMEX). In June 2000 Mr. Fields was appointed to
the Board of Statmon Technologies, Inc. (OTCBB: STCA) and continues to serve on
that board as well as to serve as Chairman of Statmon’s Audit Committee. From
1997 to 1998, Mr. Fields served as Vice Chairman and, from 1997 to 1999, as a
director of Laidlaw Ship Funding Ltd. Mr. Fields is currently the President of
the Friars National Association Foundation, Inc., a philanthropy of the arts
based in New York, and since 1998 Mr. Fields has held various officer positions
with the organization. From 1995 to 1998 he was a director of Hospital Staffing
Services, Inc. (NYSE), and prior to that Mr. Fields also served as President and
CEO of L’Express Inc., a New Orleans based interstate regional airline, EVP of
American Finance Group in Boston, and as a director and on the Audit Committee
of Flight International Group of Newport News, Virginia, a public company.
Additionally, Robert Fields was managing director of Equifund, L.P. Since 1979
he has served as the President of Tradestar Ltd., his wholly owned consulting
firm that specializes in asset appreciation. Additionally, since 2006, Mr.
Fields has served as the managing member of Petrofields LLC, based in New York.
He has been a member of the board of directors for eight public companies and a
director of more than a dozen companies.
Norman Ko.
Mr. Ko has been
serving as one of our directors and Chairman of the Audit Committee and
Compensation Committee since April 25, 2008. Mr. Ko has been a Partner of Smith
Mandel & Associates, LLP (“Smith Mandel”), a certified public accounting
firm in Los Angeles, since July 2007. He was an Assurance Manager of Smith
Mandel for more than five years before he was appointed as a Partner of that
company. Mr. Ko earned a Master of Business Administration from the University
of San Francisco in 1989, and a Bachelor of Science Degree from York University,
Canada in 1987. He is a member of the American Institute of Certified Public
Accountants and a member of the California Society of Certified Public
Accountants.
Ke Lu.
Mr. Lu has
served as a director and President of Shaanxi Tianren since 2006. Mr. Lu was
General Manager of the Ningxia Business Division of Shaanxi Tongda Fruit Juice
& Beverage Group Co., Ltd. from October 2004 to March 2006. He was the
General Manager and director of Huludao Wonder Fruit Co., Ltd. from December
2003 to October 2004. He served as the General Manager and Deputy Board Chairman
of Dalian Purelove Fruit Juice Co., Ltd. from August 1995 to December 2003. Mr.
Lu graduated from Dalian Polytechnic University with a Bachelor’s Degree in July
1995, majoring in Food Science and Engineering.
We
currently have five directors. Three of our current directors,
Messrs. Wang, Ko, and Fields, are independent directors within the meaning
of such term as defined in Section 803 of the American Stock Exchange Company
Guide.
Our Board
of Directors has established an Audit Committee and a Compensation Committee,
each of which operates pursuant to a charter adopted by our Board of Directors.
The composition and functioning of all of our committees comply with all
applicable requirements of the Sarbanes-Oxley Act of 2002 and SEC rules and
regulations.
Audit Committee.
Messrs. Ko, Fields and Wang
currently serve on the
Audit Committee, which is chaired by Mr. Ko. Each member of the Audit
Committee is “independent” as that term is defined in the rules of the SEC and
within the meaning of such term as defined in Section 803 of the American Stock
Exchange Company Guide. Our Board of Directors has determined that each Audit
Committee member has sufficient knowledge in financial and auditing matters to
serve on the Audit Committee. Our Board of Directors has designated Mr. Ko
as an “audit committee financial expert,” as defined under the applicable rules
of the SEC. The Audit Committee’s responsibilities include:
·
|
reviewing
the financial reports provided by the Company to the SEC, the Company’s
stockholders or to the general
public;
|
·
|
reviewing
the Company’s internal financial and accounting
controls;
|
·
|
recommending,
establishing and monitoring procedures designed to improve the quality and
reliability of the disclosure of the Company
’
s financial
condition and results of
operations;
|
·
|
overseeing
the appointment, compensation, and evaluation of the qualifications and
independence of the Company’s independent
auditors;
|
·
|
overseeing
the Company’s compliance with legal and regulatory
requirements;
|
·
|
overseeing
the adequacy of the Company’s internal controls and procedures to promote
compliance with accounting standards and applicable laws and
regulations;
|
·
|
engaging
advisors as necessary; and
|
·
|
determining
the funding from the Company that is necessary or appropriate to carry out
the Committee
’
s
duties.
|
Compensation Committee.
Messrs. Ko, Wang, Xue and Yan currently serve on the
Compensation Committee, which is chaired by Mr. Ko. Each member of the
Compensation Committee, except Mr. Xue, is “independent” as that term is defined
in the rules of the SEC and within the meaning of such term as defined in
Section 803 of the American Stock Exchange Company Guide, a “non-employee
director” for purposes of Section 16 of the Exchange Act and an “outside
director” for purposes of Section 162(m) of the Internal Revenue Code of 1986,
as amended. The Compensation Committee’s responsibilities
include:
·
|
considering
and authorizing the compensation philosophy for the Company’s
personnel;
|
·
|
monitoring
and evaluating matters relating to the compensation and benefits structure
of the Company;
|
·
|
reviewing
and approving corporate goals and objectives relevant to the Chief
Executive Officer and other executive officers’
compensation;
|
·
|
evaluating
the Chief Executive Officer’s and other executive officers’ performance in
light of corporate goals and objectives and determining and approving the
Chief Executive Officer’s and other executive officers’ compensation based
on such evaluation;
|
·
|
reviewing
and approving all compensation for all the non-employee directors and
other employees of the Company and its subsidiaries with a base salary
greater than or equal to
$100,000;
|
·
|
reviewing
the terms of the Company’s incentive compensation plans, equity-based
plans, retirement plans, deferred compensation plans and welfare benefit
plans;
|
·
|
reviewing
and approving executive officer and director indemnification and insurance
matters;
|
·
|
reviewing
and discussing the Compensation Discussion and Analysis section proposed
for inclusion in the Company’s Annual Report on Form 10-K and annual proxy
statement with management and recommending to the Board whether such
section should be so
included;
|
·
|
preparing
and approving the Committee’s report to be included as part of the
Company’s annual proxy
statement;
|
·
|
evaluating
its own performance on an annual basis and reporting on such performance
to the Board;
|
·
|
reviewing
and reassessing the Compensation Committee Charter and submitting any
recommended changes to the Board for its consideration;
and
|
·
|
having
such other powers and functions as may be assigned to it by the Board from
time to time.
|
Compensation
Committee Interlocks and Insider Participation
None of
our executive officers currently serve as a member of the board of directors or
compensation committee, or other committee serving an equivalent function, of
any other entity that has one or more of its executive officers serving as a
member of our Board of Directors or Compensation Committee.
We have
adopted a code of business conduct and ethics that applies to all of our
employees, officers and directors, including those officers responsible for
financial reporting. Our code of business conduct and ethics will be available
on our website at
www.skypeoplefruitjuice.com
.
We intend to disclose any amendments to the code, or any waivers of its
requirements, on our website.
Compensation
of Named Executive Officers
The
Company’s executive officers do not receive any compensation for serving as
executive officers of the Company or Pacific, but, except for our Chief
Executive Officer, are compensated by and through Shaanxi
Tianren. Our Chief Executive Officer, Yongke Xue, has not received
any compensation from the Company or any of its subsidiaries for his services to
the Company and its subsidiaries in the past two years. The following table sets
forth information concerning cash and non-cash compensation paid by Shaanxi
Tianren to the Company’s named executive officers for each of the two fiscal
years ended December 31, 2008 and December 31, 2007. No executive officer of the
Company, Pacific or Shaanxi Tianren received compensation in excess of $100,000
for either of those two years.
Name
and
Principal
Position
|
Year
Ended
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
Non-Qualified
Deferred Compensation Earnings ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
58,192
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
58,192
|
|
(1)
Ms.
Liu was hired as Chief Financial Officer of the Company in April
2008.
Option
and Warrant Grants in Last Fiscal Year; Outstanding Equity Awards
No
options or warrants were granted in the last fiscal year and no options or
warrants are held by the Company’s executive officers.
Compensation
of Directors
The
Company’s directors did not receive compensation for their service on the Board
of Directors for the fiscal years ended December 31, 2006 and
2007. Starting in fiscal 2008, we began (i) paying each of our
non-employee directors an annual fee of $25,000, (ii) reimbursing our directors
for actual, reasonable and customary expenses incurred in connection with the
performance of their duties as Board members, and (iii) paying the Chairman of
our Audit Committee a fee of $25,000 for his or her service as
Chairman. The following table sets forth information concerning cash
and non-cash compensation paid by the Company to our directors during fiscal
2008.
Name
|
|
Fees
earned or paid in cash
($)
(1)
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
|
Non-Qualified
Deferred Compensation Earnings ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
$
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
25,000
|
|
|
|
$
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
25,000
|
|
(1)
Cash
compensation for Board and committee meeting attendance and service as a
committee chairman.
(2)
Mr.
Wang is a PRC resident and the Company’s policy is not to provide cash
compensation for director services to non-employee directors who are PRC
residents. The Company believes that this is a common practice for companies
with their primary operations in the PRC.
Transactions
with Related Persons, Promoters and Certain Control Persons
Acquisition
of Huludao Wonder
In May,
2007, Hede acquired Huludao Wonder for RMB 48,250,000, or approximately U.S.
$6,308,591 based on the exchange rate of June 1, 2007, which, based on a third
party valuation, was determined to be fair market value. Yongke Xue, the
Chairman of the Board and Chief Executive Officer of the Company, owns 80% of
the equity interest in Hede, and Xiaoqin Yan, a director of Shaanxi Tianren,
owns the remaining 20%. Immediately following the acquisition, Hede leased to
Shaanxi Tianren all of the assets and facilities of Huludao Wonder under a Lease
Agreement dated June 2, 2007 between Hede and Shaanxi Tianren (the “Huludao
Lease”). The Huludao Lease was for a term of one year from July 1, 2007 to June
30, 2008. The monthly rent under the Huludao Lease was RMB 300,000 per month
(approximately $43,972 based on the exchange rate on December 31, 2008).
Pursuant to the terms of the purchase agreement, Hede was required to pay the
purchase price in installments. Between June and December of 2007, Shaanxi
Tianren made various unsecured loans to Hede totaling RMB 31,544,043
(approximately $4,318,381 based on the exchange rate as of December 31, 2007) so
that Hede could make the necessary installment payments.
In May
2008, Shaanxi Tianren paid to Hede an aggregate amount of RMB 1,500,000
(approximately $219,861 based on the exchange rate on December 31, 2008) in rent
for the period from January to May 2008 pursuant to the Huludao Lease. In
the same month, Shaanxi Tianren assumed Hede’s obligation of RMB 18,000,000
(approximately $2,638,329 based on the exchange rate on December 31, 2008) for
the balance of the purchase price for Huludao Wonder.
On May
31, 2008, Shaanxi Tianren entered into a stock transfer agreement (the “Transfer
Agreement”) with Hede. Under the terms of the Transfer Agreement, Hede agreed to
transfer all its stock ownership of Huludao Wonder to Shaanxi Tianren for a
total price of RMB 48,250,000 (approximately $6,308,591 based on the exchange
rate as of June 1, 2007). The sale was closed on June 10, 2008. 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 on December 31, 2008) to Hede was repaid to the Company on June 11,
2008.
Barron
Partners
On
February 26, 2008, simultaneously with our acquisition of Pacific and our
related sale of Series B Stock, we entered into an oral agreement with Barron
Partners, pursuant to which we issued an aggregate of 615,147 shares of Series B
Stock to Barron Partners in exchange for the cancellation of (a) all
indebtedness of the Company to Barron Partners under certain outstanding
convertible promissory notes issued to Barron Partners during the period from
September 30, 2004 to February 2008; and (b) all liquidated damages payable (or
which would become payable) to Barron Partners as a result of the Company’s
failure to register for resale the shares of the Company’s Common Stock issuable
upon conversion of such convertible promissory notes (as called for under
certain registration rights agreements between the Company and Barron Partners).
The oral agreement was approved by the written consent of the then sole director
of the Company in February 2008.
The total
amount of principal and accrued interest under all convertible promissory notes
which were cancelled aggregated approximately $1,735,286 and the total amount of
accrued liquidated damages which were cancelled aggregated approximately
$3,320,132. All of the convertible promissory notes bore interest at the rate of
8% per annum and were convertible into shares of our Common Stock at a
conversion rate of one share of Common Stock for every $8.21822 of principal
converted. The registration rights agreements provided for liquidated damages to
accrue at the rate of 36% per annum of the note principal in the event that the
registration statements to register the underlying shares were not declared
effective by the required deadline.
The
number of shares of Series B Stock that were issued to Barron Partners pursuant
to the agreement was determined by dividing the aggregate indebtedness cancelled
($5,055,418) by $8.1822 per share (which was the rate at which one share of our
Common Stock was issuable for principal under the convertible promissory notes).
In lieu of issuing Common Stock, the Company and Barron Partners agreed that
Barron Partners would be issued Series B Stock (which upon consummation of a
1-for-328.72898 reverse stock split which became effective on May 23, 2008
became convertible into shares of our Common Stock on a share for share
basis).
Erroneous
Pacific dividend paid to certain directors of the Company
In May
2008, Pacific erroneously paid $4,916,617 to its former stockholders as the
result of a dividend declaration in February 2008. Following the erroneous
payment, the monies were then returned to the Company, without interest in June
2008. The recipients of the money were directors of the
Company.
On
February 4, 2008, the Board of Directors of Shaanxi Qiyiwangguo declared a cash
dividend of $2,899,855 to its former shareholders. Since Shaanxi Tianren holds a
91.15% interest in Shaanxi Qiyiwangguo, $2,643,218 was paid to Shaanxi Tianren
and $256,637 was paid to its minority interest holders. On the same date, the
Board of Directors of Shaanxi Tianren declared a cash dividend of $4,966,280 to
its shareholders. As a result, $4,916,617 was paid to Pacific and
$49,663 was paid to Shaanxi Tianren’s minority interest holders. The
inter-company dividend was eliminated in the consolidated statement. The
dividend paid to minority interest holders was $306,300.
In May
2008, Pacific erroneously paid $4,916,617 to its former shareholders as the
result of the dividend declaration by Shaanxi Tianren in February 2008. The
monies were then returned to the Company, without interest, in June 2008.
Because the recipients of the money were directors of the Company and the
erroneous dividend payment was treated as a loan for accounting purposes, the
Company may have inadvertently violated Section 13(k) of the Exchange Act in
connection with such erroneous dividend payment.
Series
B Stock Purchase Agreement
On February 25, 2008, the Company
entered into the Stock Purchase Agreement with the Selling Stockholders pursuant
to which the Company agreed to issue 2,833,333 shares of Series B Stock and five
year February 2008 Warrants to purchase 7,000,000 shares of the Company’s Common
Stock for $3.00 per share to the Selling Stockholders, in exchange for a cash
payment in the amount of $3,400,000. Pursuant to the Stock Purchase Agreement,
the Company also deposited the Make Good Escrow Stock into an escrow account
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. We achieved our target numbers
in 2007 and 2008. As a result, no shares of Make Good Escrow Stock
have been distributed to the Selling Stockholders.
Exchange
of February 2008 Warrants for New Warrants
On June 2, 2009 the Company and the
Selling Stockholders entered into and consummated the Exchange Agreement
pursuant to which the Selling Stockholders exchanged all of the February 2008
Warrants for the New Warrants to purchase an aggregate of 6,500,000 shares of
the Company’s Common Stock for $1.70 per share (which exercise price, in the
case of warrants to purchase an aggregate of 1,000,000 shares of our Common
Stock, shall be increased to $3.00 per share if the New Warrants are not
exercised by September 30, 2009). The New Warrants may be exercised at any time
through February 24, 2013. The Common Stock being offered by this prospectus are
the shares that are issuable to the Selling Stockholders upon exercise of the
New Warrants.
As additional consideration for the New
Warrants they received, the Selling Stockholders signed a Waiver and Release
pursuant to which they (a) released the Company from an obligation to pay them
an aggregate of $255,605 in liquidated damages relating to the Company’s failure
to have a registration statement covering the resale of shares of the Company’s
Common Stock issuable upon the exercise of the February 2008 Warrants and
conversion of Series B Stock declared effective by the Securities and Exchange
Commission on July 24, 2008 and (b) irrevocably waived their right to receive
any Make Good Escrow Stock solely as a result of, and to the extent that, such
would be deliverable to them because Pre-Tax Income Per Share for the Company’s
fiscal year ending December 31, 2009 (for purposes of determining whether the
Company has achieved its target number for such fiscal year) is reduced as a
result of any reduction in net income available to common stockholders for such
fiscal year and an increase in the weighted average number of shares of Common
Stock outstanding during the period due to the issuance and delivery to the
Selling Stockholders of the New Warrants in exchange for the February 2008
Warrants.
Review, Approval or Ratification of
Transactions with Related Persons
On
September 30, 2008, the Board of Directors of the Company approved a Statement
of Policies and Procedures with Respect to Related Party Transactions (the
“Policy Statement”) which requires the Audit Committee to review the material
facts of all Interested Transactions (defined below), unless an exception
applies, and either approve or disapprove of the Company’s entry into the
Interested Transaction. If the Audit Committee’s advance approval of an
Interested Transaction is not feasible, then the Interested Transaction shall be
considered at the Committee’s next regularly scheduled meeting and, if the Audit
Committee determines it to be appropriate, ratified.
In
determining whether to approve or ratify an Interested Transaction, the Audit
Committee will take into account, among other factors it deems appropriate,
whether the Interested Transaction is on terms no less favorable than terms
generally available to an unaffiliated third-party under the same or similar
circumstances and the extent of the Related Party’s interest in the transaction.
Pursuant to the Policy Statement, no director shall participate in any
discussion or approval of an Interested Transaction for which he or she is a
Related Party, except that the director shall provide all material information
concerning the Interested Transaction to the Committee. If an Interested
Transaction is ongoing, the Audit Committee may establish guidelines for the
Company’s management to follow in its ongoing dealings with the Related Party.
Thereafter, the Audit Committee, on at least an annual basis, shall review and
assess ongoing relationships with the
Related Party to see
that they are in compliance with the Audit Committee’s guidelines and that the
Interested Transaction remains appropriate.
For
purposes of the Policy Statement:
·
|
an
“Interested Transaction” is any transaction, arrangement or relationship
or series of similar transactions, arrangements or relationships
(including any indebtedness or guarantee of indebtedness) in which
(1) the aggregate amount involved will or may be expected to exceed
$50,000 in any calendar year, (2) the Company is a participant, and
(3) any Related Party has or will have a direct or indirect interest
(other than solely as a result of being a director or a less than 10
percent beneficial owner of another entity);
and
|
·
|
a
“Related Party” is any (a) person who is or was (since the beginning
of the last fiscal year for which the Company has filed a Form 10-K and
proxy statement, even if he or she does not presently serve in that role)
an executive officer, director or nominee for election as a director, (b)
greater than 5 percent beneficial owner of the Company’s Common
Stock, or (c) immediate family member of any of the foregoing.
Immediate family member includes a person’s spouse, parents, stepparents,
children, stepchildren, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law and anyone residing in
such person’s home (other than a tenant or
employee).
|
Notwithstanding
the foregoing, each of the following Interested Transactions shall be deemed to
be pre-approved by the Audit Committee, even if the aggregate amount involved
exceeds $50,000:
·
|
Employment of executive
officers.
Any
employment by the Company of an executive officer of the Company if either
(i) the related compensation is required to be reported in the Company’s
proxy statement under Item 402 of the SEC’s compensation disclosure
requirements (generally applicable to “named executive officers”); or (ii)
the executive officer is not an immediate family member of another
executive officer or director of the Company, the related compensation
would be reported in the Company’s proxy statement under Item 402 of
the SEC’s compensation disclosure requirements if the executive officer
was a “named executive officer”, and the Company’s Compensation Committee
approved (or recommended that the Board approve) such
compensation.
|
·
|
Director
compensation.
Any
compensation paid to a director if the compensation is required to be
reported in the Company’s proxy statement under Item 402 of the SEC’s
compensation disclosure
requirements.
|
·
|
Certain transactions with
other companies.
Any
transaction with another company at which a Related Person’s only
relationship is as an employee (other than an executive officer), director
or beneficial owner of less than 10% of that company’s shares, if the
aggregate amount involved does not exceed 2 percent of that company’s
total annual revenues.
|
·
|
Certain Company charitable
contributions.
Any
charitable contribution, grant or endowment by the Company to a charitable
organization, foundation or university at which a Related Person’s only
relationship is as an employee (other than an executive officer) or a
director, if the aggregate amount involved does not exceed the lesser of
$50,000, or 2 percent of the charitable organization’s total annual
receipts.
|
·
|
Transactions where all
stockholders receive proportional benefits.
Any
transaction where the Related Person’s interest arises solely from the
ownership of the Company’s Common Stock and all holders of the Company’s
Common Stock received the same benefit on a
pro rata
basis (
e
.
g
.
dividends).
|
·
|
Transactions involving
competitive bids.
Any
transaction involving a Related Party where the rates or charges involved
are determined by competitive bids.
|
·
|
Regulated
transactions.
Any
transaction with a Related Party involving the rendering of services as a
common or contract carrier, or public utility, at rates or charges fixed
in conformity with law or governmental
authority.
|
·
|
Certain banking-related
services.
Any
transaction with a Related Party involving services as a bank depositary
of funds, transfer agent, registrar, trustee under a trust indenture, or
similar services.
|
This
prospectus relates to the offering by the Selling Stockholders of shares of our
Common Stock underlying the New Warrants held by the Selling Stockholders
identified in the table below. Each of the Selling Stockholders acquired Series
B Stock and the February 2008 Warrants to purchase our Common Stock as an
investor in a private placement transaction completed on February 26, 2008. On
June 2, 2009 the Selling Stockholders and the Company entered into and
consummated an Exchange Agreement pursuant to which, among other things, the
Selling Stockholders were issued New Warrants to purchase an aggregate of
6,500,000 shares of our Common Stock. All of the Common Stock offered hereby is
issuable to the Selling Stockholders upon exercise of such New Warrants. All of
the Selling Stockholders are “accredited investors” within the meaning of Rule
501 of Regulation D promulgated under the Securities Act.
The table
set forth below lists the names of the Selling Stockholders as well as the
number of shares of Common Stock underlying the New Warrants acquired by the
Selling Stockholders pursuant to the Exchange Agreement, all of which are being
offered hereby. Neither of the Selling Stockholders is a broker-dealer or an
affiliate of a broker-dealer. Barron Partners LP, one of the Selling
Stockholders, beneficially owns approximately 30.3% of our Common Stock and has
engaged in certain transactions with the Company since 2004 which are described
in the section of this prospectus entitled “Certain Relationships and Related
Transactions” on page 72 of this Prospectus. Neither of the Selling Stockholders
has or has had within the past three years any position, office, or other
material relationship with the Company or any of its predecessors or
affiliates.
Each
selling stockholder may offer for sale all or part of the shares from time to
time. The table below assumes that the Selling Stockholders will sell all of the
shares offered for sale. A selling stockholder is under no obligation, however,
to sell any shares immediately pursuant to this prospectus, nor is a selling
stockholder obligated to sell all or any portion of its shares at any
time.
Name
of Selling Stockholder
|
|
Total
Number and Percentage of Shares of Common Stock Beneficially Owned Prior
to the Offering
(1)
(2)
|
|
|
Maximum
Number
of Shares to be Sold
|
|
|
Total
Number and
Percentage
of Shares
Beneficially
Owned After the
Offering
(2)(3)(6)
|
|
Barron
Partners LP
|
|
|
9,673,971
|
|
|
|
(4)
|
|
|
|
30.3
|
%
|
|
|
6,308,824
|
|
|
|
3,365,147
|
|
|
|
12.1
|
%
|
EOS
Holdings, LLC
|
|
|
274,509
|
|
|
|
(5)
|
|
|
|
1.2
|
%
|
|
|
191,176
|
|
|
|
83,333
|
|
|
|
.3
|
%
|
(1)
|
As
of June 3, 2009, we had outstanding 22,271,786 shares of Common Stock.
Under applicable SEC rules, a person is deemed to beneficially own
securities which he has the right to acquire within 60 days through the
exercise of any option or warrant or through the conversion of another
security, and also is deemed to be the “beneficial owner” of a security
with regard to which he directly or indirectly has or shares (a) voting
power (which includes the power to vote or direct the voting of the
security), or (b) investment power (which includes the power to dispose,
or direct the disposition, of the security), in each case irrespective of
the person’s economic interest in the security. All of the New Warrants
and the Stock Purchase Agreement under which the Series B Stock was issued
to the Selling Stockholders contain a limitation that the New Warrants or
the Series B Stock may not be exercised or converted by the selling
stockholder to the extent that upon exercise or conversion the number of
shares of the Company’s Common Stock beneficially owned by such selling
stockholder and its affiliates would exceed 4.9% of the outstanding shares
of Common Stock on such date. Therefore, for purposes of the Selling
Stockholder’s obligation to file a Statement on Schedule 13D pursuant to
Section 13(d) of the Exchange Act or reports of beneficial ownership or
changes in beneficial ownership under Section 16(a) of the Exchange Act,
neither Selling Stockholder is deemed to beneficially own more than 4.9%
of the Company’s Common Stock. However, for purposes of this prospectus,
we have assumed that each Selling Stockholder beneficially owns all shares
of Common Stock issuable upon exercise of the New Warrants and conversion
of Series B Stock held by such Selling Stockholder. Each Selling
Stockholder has the sole investment and voting power with respect to all
shares of Common Stock shown as beneficially owned by such Selling
Stockholder.
|
(2)
|
In
determining the percent of Common Stock beneficially owned by a Selling
Stockholder on June 3, 2009, (a) the numerator is the number of shares of
Common Stock beneficially owned by such selling stockholder, including
shares the beneficial ownership of which may be acquired within 60 days
through the exercise of the warrants, if any, held by that selling
stockholder, and (b) the denominator is the sum of (i) the 22,271,786
shares of Common Stock deemed outstanding on June 3, 2009, and (ii) the
aggregate number of shares of Common Stock that may be acquired by such
selling stockholder within 60 days upon the conversion of convertible
securities and the exercise of the warrants held by the selling
stockholder.
|
(3)
|
Assumes
the sale of all shares offered by the Selling
Stockholders.
|
(4)
|
Consists
of 6,308,824 shares of Common Stock issuable upon exercise of currently
exercisable warrants and 3,365,147 shares of Common Stock issuable upon
conversion of Series B Stock. Andrew Worden, Chairman and CEO of Barron
Partners, has power to vote or to dispose of the securities offered for
resale by Barron Partners.
|
(5)
|
Consists
of 191,176 shares of Common Stock issuable upon exercise of currently
exercisable warrants and 83,333 shares of Common Stock issuable upon
conversion of Series B Preferred Stock. Jon Carnes, the President of EOS
Holdings, LLC, has power to vote or to dispose of the securities offered
for resale.
|
(6)
|
Assumes
all New Warrants to purchase an aggregate of 6,500,000 shares of the
Company’s Common Stock are exercised and the shares of Common Stock issued
upon exercise of the New Warrants are sold by the Selling
Stockholders.
|
The
following table provides information concerning beneficial ownership of our
capital stock as of June 3, 2009, and as adjusted to reflect the sale of shares
of Common Stock in this offering, by:
·
|
each
stockholder, or group of affiliated stockholders, who owns more than 5% of
our outstanding capital stock;
|
·
|
each
of our named executive officers;
|
·
|
each
of our directors; and
|
·
|
all
of our directors and executive officers as a
group.
|
The
following table lists the number of shares and percentage of shares beneficially
owned based on 22,271,786 shares of Common Stock outstanding as of June 3, 2009
and 28,771,786 shares of Common Stock outstanding upon the completion of this
offering.
Beneficial
ownership is determined in accordance with the rules of the SEC, and generally
includes voting power and/or investment power with respect to the securities
held. Shares of Common Stock subject to options and warrants currently
exercisable or exercisable within 60 days of June 3, 2009 or issuable upon
conversion of convertible securities which are currently convertible or
convertible within 60 days of June 3, 2009 are deemed outstanding and
beneficially owned by the person holding those options, warrants or convertible
securities for purposes of computing the number of shares and percentage of
shares beneficially owned by that person, but are not deemed outstanding for
purposes of computing the percentage beneficially owned by any other person.
Except as indicated in the footnotes to this table, and subject to applicable
community property laws, the persons or entities named have sole voting and
investment power with respect to all shares of our Common Stock shown as
beneficially owned by them.
Unless
otherwise indicated in the footnotes, the principal address of each of the
stockholders below is c/o SkyPeople Fruit Juice, Inc., 16F, National Development
Bank Tower, No. 2 Gaoxin 1st Road, Xi’an, Shaanxi Province, PRC
710075.
|
|
Shares
Beneficially Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Hongke
Xue
(1)
|
|
|
17,604,938
|
|
|
|
79.0
|
%
|
|
|
61.2
|
%
|
Barron
Partners LP
(2)
|
|
|
9,673,971
|
|
|
|
30.3
|
%
|
|
|
12.1
|
%
|
Lin
Bai
(3)
|
|
|
2,200,617
|
|
|
|
9.9
|
%
|
|
|
7.9
|
%
|
Sixiao
An
(4)
|
|
|
2,200,617
|
|
|
|
9.9
|
%
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Yongke
Xue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Spring
Liu
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Yiaoqin
Yan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Guolin
Wang
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Norman
Ko
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Robert
B. Fields
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
All
current directors and executive officers as a
group (6 persons)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
(1)
|
Consists
of 17,604,938 shares owned of record by Fancylight Limited, a British
Virgin Islands company (“Fancylight”). Fancylight and Hongke Xue have
entered into a Call Option Agreement pursuant to which Mr. Xue has the
right to acquire all of such shares. Fancylight and Mr. Xue have also
entered a Voting Trust Agreement, dated as of February 25, 2008, under
which Mr. Xue has been appointed as voting trustee under a voting trust
created with respect to all of such shares. Therefore, Mr. Xue may be
deemed to be the sole beneficial owner of such
shares.
|
(2)
|
Consists
of 2,200,617 shares owned by China Shaanxi Tianren Organic Food Holding
Company Limited, as attorney-in-fact for certain persons. China Shaanxi
Tianren Organic Food Holding Company Limited (“Organic”) is a British
Virgin Islands company. Organic and Lin Bai have entered into a Voting
Trust and Escrow Agreement dated as of February 25, 2008 pursuant to which
Lin Bai has been appointed as voting trustee under a voting trust created
with respect to all of such shares. Therefore, Lin Bai may be deemed to be
the sole beneficial owner of such
shares.
|
(3)
|
Consists
of 2,200,617 shares owned by Winsun Limited, as attorney-in-fact for
certain persons. Winsun Limited (“Winsun”) is a British Virgin Islands
company. Winsun and Sixiao An have entered into a Voting Trust and Escrow
Agreement dated as of February 25, 2008 pursuant to which Sixiao An has
been appointed as voting trustee under a voting trust created with respect
to all of such shares. Therefore, Sixiao An may be deemed to be the sole
beneficial owner of such shares.
|
(4)
|
Consists
of (a) 6,308,824 shares of our Common Stock issuable upon exercise of
warrants and (b) an aggregate of 3,365,147 shares of our Common Stock
issuable upon conversion of Series B Stock. The address for Barron
Partners is 730 Fifth Avenue, 9
th
Floor, New York, New York 10019.
|
(5)
|
Assumes
all New Warrants to purchase an aggregate of 6,500,000 shares of the
Company’s Common Stock are exercised and the shares of Common Stock issued
upon exercise of the New Warrants are sold by the Selling
Stockholders.
|
General
Our
authorized capital stock consists of 100,000,000 shares of Common Stock, par
value $0.01 per share and 10,000,000 shares of preferred stock, 1,000,000 of
which have been designated as Series A Stock and 7,000,000 of which have been
designated as Series B Stock. The following description of our capital stock is
intended as a summary only and is qualified in its entirety by reference to our
Amended and Restated Articles of Incorporation, By-laws and the Certificates of
Designations, Preferences and Rights of the Series A Stock and the Series B
Stock, which are filed as exhibits to the registration statement, and applicable
provisions of Florida law.
As of
June 3, 2009, there were 22,271,786
shares of our Common
Stock outstanding held by approximately 89 stockholders of record, no shares of
our Series A Stock outstanding, 3,448,480 shares of our Series B Stock
outstanding (not including 2,000,000 shares deposited with an escrow agent as
Make Good Escrow Stock which shares are not considered to be outstanding for
financial statement purposes) held by two stockholders of record and outstanding
warrants to purchase 6,500,000 shares of our Common Stock.
Common
Stock
Holders
of shares of our Common Stock are entitled to one vote for each share on all
matters to be voted on by the stockholders. Except if a greater plurality is
required by the express requirements of law or the Company’s Amended and
Restated Articles of Incorporation, the affirmative vote of a majority of the
shares of voting stock represented at a meeting of stockholders at which there
shall be a quorum present shall be required to authorize all matters to be voted
upon by the stockholders of the Company. According to our charter documents,
holders of our Common Stock do not have preemptive rights and are not entitled
to cumulative voting rights. There are no conversion or redemption rights or
sinking funds provided for our stockholders. Shares of our Common Stock share
ratably in dividends, if any, as may be declared from time to time by the Board
of Directors in its discretion from funds legally available for distribution as
dividends. In the event of a liquidation, dissolution or winding up of the
Company, the holders of our Common Stock are entitled to share pro rata all
assets remaining after payment in full of all liabilities. All of the
outstanding shares of our Common Stock are fully paid and
non-assessable.
Series
A Convertible Preferred Stock
In
connection with the Share Exchange, we designated 1,000,000 shares of Series A
Stock out of our total authorized number of 10,000,000 shares of Preferred
Stock, par value $0.001 per share. The rights and preferences of the Series A
Stock are set forth in the Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock which we filed with the Secretary of
State of Florida on February 22, 2008. On May 23, 2008, in connection with a
1-for-328.72898 reverse stock split of our Common Stock, all of the outstanding
shares of Series A Stock were immediately and automatically converted into
shares of our Common Stock without any notice or action required by us or by the
holders of Series A Stock or Common Stock. In accordance with such mandatory
conversion, each holder of Series A Stock received 22.0062 shares of the
Company’s fully paid and non-assessable Common Stock for every one (1) share of
Series A Stock held by such holder. Accordingly, there are no longer
any shares of our Series A Stock outstanding or authorized for
issuance.
Series
B Convertible Preferred Stock
In
connection with the Share Exchange and Series B Stock Purchase Agreement, we
designated 7,000,000 shares of Series B Stock out of our total authorized number
of 10,000,000 shares of Preferred Stock, par value $0.001 per share. The rights
and preferences of the Series B Stock are set forth in the Certificate of
Designations, Preferences and Rights of Series B Convertible Preferred Stock,
which we filed with the Secretary of State of Florida on February 22, 2008. The
following is a summary of the rights and preferences:
No
Dividends
. No dividends are payable with respect to the Series B Stock
and no dividends can be paid on our Common Stock so long as the Selling
Stockholders collectively own at least 20% of Series B Stock issued pursuant to
the Series B Stock Purchase Agreement.
Voting
Rights
. The Series B Stock shall have no voting rights, except as
required by Florida law. However, so long as any shares of Series B Stock are
outstanding, we cannot, without the affirmative approval of the holders of 75%
of the shares of the Series B Stock then outstanding:
(a) alter
or change adversely the powers, preferences or rights given to the Series B
Stock or alter or amend the Certificate of Designations of the Series B
Stock;
(b)
authorize or create any class of stock (other than Series A Stock) ranking as to
dividends or distribution of assets upon a liquidation senior to or otherwise
pari passu with the Series B Stock, or any series of preferred stock possessing
greater voting rights or the right to convert at a more favorable price than the
Series B Stock;
(c) amend
our certificate of incorporation or other charter documents in breach of any of
the provisions hereof;
(d)
increase the authorized number of shares of Series B Stock or the number of
authorized shares of Preferred Stock.
Liquidation
Preference
. Upon liquidation, the holders are entitled to receive $1.20
per share (out of available assets) before any distribution or payment can be
made to the holders of any junior securities.
Conversion at
Option of Holder
. Upon effectiveness of the Reverse Split on May 23,
2008, each share of Series B Stock is convertible at any time into one share of
Common Stock at the option of the holder. If the conversion price (initially
$1.20) is adjusted, the conversion ratio will likewise be adjusted and the new
conversion ratio will be determined by multiplying the conversion ratio in
effect by a fraction, the numerator of which is the conversion price in effect
before the adjustment and the denominator of which is the new conversion
price.
Automatic
Conversion on Change of Control
.
In the event of a “change of
control,” the shares of Series B Stock will be automatically converted into
Common Stock. A “change in control” means a consolidation or merger of the
Company with or into another company or entity in which we are not the surviving
entity or the sale of all or substantially all of our assets to another company
or entity not controlled by our then existing stockholders in a transaction or
series of transactions.
4.9% Beneficial
Ownership Limitation
. Except in certain circumstances, the right of the
holder to convert the Series B Stock is subject to the 4.9% limitation, with the
result we shall not effect any conversion of the Series B Stock, and the holder
has no right to convert any portion of the Series B Stock, to the extent that
after giving effect to such conversion, the holder (together with the holder’s
affiliates) would beneficially own in excess of 4.9% of the number of shares of
our Common Stock outstanding immediately after giving effect to such conversion.
Beneficial ownership is determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13d-3 thereunder. The 4.9% limitation may not be
waived or amended.
Liquidated
Damages for Failing to Timely Deliver Certificates
. If we fail to deliver
the appropriate stock certificates within three trading days of the conversion
date, we are required to pay the holder, in cash, liquidated damages the amount
by which (x) the holder’s total purchase price (including brokerage commissions,
if any) for the Common Stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that such holder was entitled to
receive from the conversion at issue, multiplied by (2) the price at which the
sell order giving rise to such purchase obligation was executed.
Stock Dividends
and Stock Splits.
Appropriate adjustments will be made to the conversion
ratio in the event of a stock dividend, stock distribution, stock split or
reverse stock split or reclassification with respect to the outstanding shares
of our Common Stock.
Price Adjustment;
Full Ratchet.
From and after February 26, 2008 and until such time as the
Selling Stockholders collectively own less than 20% of the Series B Stock,
except for certain exempt issuances not to exceed 5% of the outstanding shares
of our Common Stock for every two year period, certain issuances as to which
price adjustment has already been made, in the event we issue Common Stock at a
price, or issue warrants, options, convertible debt or equity securities with an
exercise price per share or conversion price which is less than the conversion
price then in effect, then the conversion price will be reduced, concurrently
with such issue or sale, to such lower price.
Fundamental
Transaction
. If we effect a merger, sell all or substantially all of our
assets, any tender offer or exchange offer is completed pursuant to which
holders of our Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or we effect any reclassification of our
Common Stock or any compulsory share exchange pursuant to which our Common Stock
is effectively converted into or exchanged for other securities, cash or
property (each a “fundamental transaction”), then on subsequent conversion of
the Series B Stock, the holder has the right to receive, for each share of our
Common Stock that would have been issuable on such conversion absent such
fundamental transaction, the same kind and amount of securities, cash or
property as the holder would have been entitled to receive on the occurrence of
the fundamental transaction as if the holder had been, immediately prior to such
fundamental transaction, the holder of Common Stock.
Undesignated
Preferred Stock
Our Board
of Directors is authorized under our Amended and Restated Articles of
Incorporation to provide for the issuance of 10,000,000 shares of preferred
stock. The preferred stock may be issued from time to time in one or more
series. The Board of Directors has designated 7,000,000 of such shares as Series
B Stock, the terms of which are summarized above. The Board of Directors has
also designated 1,000,000 of such shares as Series A Stock. An
aggregate of 2,000,000 additional shares of authorized preferred stock may still
be designated by the Company’s Board of Directors by filing a certificate of
designations under Florida law to fix the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions thereof without any further vote or action by the stockholders. Any
shares of preferred stock so issued are likely to have priority over our Common
Stock with respect to dividend or liquidation rights.
The
existence of authorized but unissued shares of preferred stock may enable our
Board of Directors to render more difficult or to discourage an attempt to
obtain control of us by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary obligations, our
Board of Directors were to determine that a takeover proposal is not in the best
interests of our stockholders, our Board of Directors could cause shares of
preferred stock to be issued without stockholder approval in one or more private
offerings or other transactions that might dilute the voting or other rights of
the proposed acquirer or insurgent stockholder or stockholder group. In this
regard, our Amended and Restated Articles of Incorporation grant our Board of
Directors broad power to establish the rights and preferences of authorized and
unissued shares of preferred stock. The issuance of shares of preferred stock
could decrease the amount of earnings and assets available for distribution to
holders of shares of Common Stock. The issuance may also adversely affect the
rights and powers, including voting rights, of these holders and may have the
effect of delaying, deterring or preventing a change in control of us. The Board
of Directors does not at present intend to seek stockholder approval prior to
any issuance of currently authorized preferred stock, unless otherwise required
by law.
Transfer
Agent and Registrar
The
registrar and transfer agent for the Company’s capital stock is Holladay Stock
Transfer, 2939 North 67th Place, Scottsdale, Arizona 85251 and its main
telephone number is 480-481-3940.
Anti-Takeover
Effects of Florida Law and Provisions of Our Certificate of Incorporation and
Bylaws
Stockholders’
rights and related matters are governed by Florida corporate law, our Amended
and Restated Articles of Incorporation and our By-laws. Certain provisions that
may have the effect of delaying, deferring or preventing another party from
acquiring control of the Company are described below.
Florida
Law
Certain
provisions of the Florida Business Corporation Act may discourage or have the
effect of delaying or deferring potential changes in control of the
Company. Specifically, the Florida Control Share Act (the “FCSA”)
generally provides that shares acquired in a control share acquisition will not
possess any voting rights unless such voting rights are approved by a majority
of the corporation’s disinterested stockholders. A “control share acquisition”
is an acquisition, directly or indirectly, by any person of ownership of, or the
power to direct the exercise of voting power with respect to, issued and
outstanding control shares of a publicly held Florida corporation. “Control
shares” are shares which, except for the FCSA, would have voting power that,
when added to all other shares owned by a person or in respect to which such
person may exercise or direct the exercise of voting power, would entitle such
person immediately after acquisition of such shares, directly or indirectly,
alone or as part of a group, to exercise or direct the exercise of voting power
in the election of directors within any of the following ranges: (i) at
least 20% but less than 33.33% of all voting power; (ii) at least 33.33%
but less than a majority of all voting power; or (iii) a majority of all
voting power.
Under the
FCSA, a Florida corporation may expressly opt out of the application of the
terms of the FCSA in its bylaws, in which case the shares acquired in a control
share acquisition will automatically possess full voting rights without the
requirement of the approval of a majority of the corporation’s disinterested
stockholders. We have not opted out of the FCSA in our bylaws.
The
Selling Stockholders identified in this prospectus may offer and sell up to an
aggregate of 6,500,000 shares of our Common Stock issuable to them upon the
exercise of the New Warrants. The Selling Stockholders may sell all or a portion
of their shares through public or private transactions at prevailing market
prices or at privately negotiated prices.
The
Selling Stockholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
Common Stock are sold through underwriters or broker-dealers, the Selling
Stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
·
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;
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·
in
the over-the-counter market;
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·
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
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·
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
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·
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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·
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
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·
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
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·
an
exchange distribution in accordance with the rules of the applicable
exchange;
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·
privately
negotiated transactions;
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·
short
sales;
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sales
pursuant to Rule 144;
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·
broker-dealers
may agree with the selling securityholders to sell a specified number of
such shares at a stipulated price per share;
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·
a
combination of any such methods of sale; and
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·
any
other method permitted pursuant to applicable
law.
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If the
Selling Stockholders effect such transactions by selling shares of Common Stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the Selling Stockholders or commissions from
purchasers of the shares of Common Stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of Common Stock or otherwise, the Selling Stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of Common Stock in the course of hedging in positions they
assume. The Selling Stockholders may also sell shares of Common Stock short and
deliver shares of Common Stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. The
Selling Stockholders may also loan or pledge shares of Common Stock to
broker-dealers that in turn may sell such shares.
The
Selling Stockholders and any broker-dealer participating in the distribution of
the shares of Common Stock may be deemed to be “underwriters” within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of the
shares of Common Stock is made, a prospectus supplement, if required, will be
distributed which will set forth the aggregate amount of shares of Common Stock
being offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under the
securities laws of some states, the shares of Common Stock may be sold in such
states only through registered or licensed brokers or dealers. In addition, in
some states the shares of Common Stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There can
be no assurance that any Selling Stockholder will sell any or all of the shares
of Common Stock registered pursuant to the shelf registration statement of which
this prospectus is a part.
The
Selling Stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of Common Stock by the Selling Stockholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of Common Stock to engage in market-making activities
with respect to the shares of Common Stock. All of the foregoing may affect the
marketability of the shares of Common Stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
Common Stock.
We have
agreed to pay all expenses of the registration of the shares of Common Stock
including, without limitation, SEC filing fees and expenses of compliance with
state securities or “blue sky” laws; provided, however, that a Selling
Stockholder will pay all underwriting discounts and selling commissions, if any.
We will indemnify the Selling Stockholders against liabilities, including some
liabilities under the Securities Act, in accordance with our agreement to
register the shares, or the Selling Stockholders will be entitled to
contribution. We may be indemnified by the Selling Stockholders against civil
liabilities, including liabilities under the Securities Act, that may arise from
any written information furnished to us by the Selling Stockholder specifically
for use in this prospectus, in accordance with the related registration rights
agreements, or we may be entitled to contribution.
Once sold
under the registration statement of which this prospectus is a part, the shares
of Common Stock will be freely tradable in the hands of persons other than our
affiliates.
The
validity of the shares of Common Stock offered by this prospectus will be passed
upon for us by Guzov Ofsink, LLC, New York, New York.
The
financial statements appearing in this prospectus and registration statement
have been audited by Child, Van Wagoner & Bradshaw, PLLC (“Child, Van
Wagoner”), an independent registered public accounting firm, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
Dismissal
of Tarvaran Askelson & Company, LLP and Appointment of Child, Van Wagoner
& Bradshaw, PLLC
The
Company elected to terminate its engagement of Tarvaran Askelson & Company,
LLP (“Tarvaran”) as the independent registered public accounting firm
responsible for auditing the Company’s financial statements. The termination,
which was effective as of March 5, 2008, was approved by the Company’s Board of
Directors.
Tarvaran’s
report on the Company’s financial statements as of September 30, 2007 and year
then ended did not contain an adverse opinion or a disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope, or accounting
principles with the exception that Tarvaran’s audit report contained an
explanatory note which raised substantial doubt as to the ability of the Company
to continue as a going concern. During the two most recent fiscal years and any
subsequent interim period prior to the termination of Tarvaran, the Company did
not have any disagreements with Tarvaran on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Tarvaran, would have
caused it to make reference to the subject matter of the disagreements in
connection with its report.
During
the two most recent fiscal years and any subsequent interim period prior to the
termination of Tarvaran, Tarvaran did not advise the Company of any of the
following:
(a) that
the internal controls necessary for the Company to develop reliable financial
statements did not exist;
(b) that
information had come to Tarvaran’s attention that had led it to no longer be
able to rely on management’s representations or that had made it unwilling to be
associated with the financial statements prepared by management; or
(c) that
Tarvaran needed to expand significantly the scope of its audit, or that
information had come to Tarvaran’s attention that if further investigated may:
(i) materially impact the fairness or reliability of either a previously issued
audit report or the underlying financial statements, or the financial statements
issued or to be issued covering the fiscal period(s) subsequent to the date of
the most recent financial statements covered by an audit report (including
information that would have prevented it from rendering an unqualified audit
report on those financial statements), or (ii) cause it to be unwilling to rely
on management’s representations or be associated with the Company’s financial
statements.
The
Company has engaged Child, Van Wagoner to serve as the independent registered
public accounting firm responsible for auditing the Company’s financial
statements. The engagement, which was effective as of March 5, 2008, was
approved by the Company’s Board of Directors.
The
Company consulted with Child, Van Wagoner in connection with (a) the Company’s
acquisition of all of the capital stock of Pacific on February 26, 2008, and (b)
the filing by the Company on March 3, 2008 of a Current Report on Form 8-K to
report the acquisition and related matters, which Current Report contained
financial statements of Pacific (A) as of December 31, 2007 and 2006 and for the
years then ended, audited by Child, Van Wagoner and containing their report
thereon and (B) as of March 31, 2008 and the three months ended March 31, 2008
and March 31, 2007.
Except as
set forth in the immediately preceding paragraph, neither the Company nor anyone
on behalf of the Company consulted Child, Van Wagoner during the two most recent
fiscal years and any subsequent interim period prior to engaging Child, Van
Wagoner, regarding either: (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company’s financial statements, and
neither a written report was provided to the Company nor oral advice was
provided that the Company concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a
disagreement (as defined in paragraph (a)(1)(iv) and the related instructions of
Item 304 of Regulation S-K) or a reportable event (as described in paragraph
(a)(1)(v) of Item 304 of Regulation S-K).
Dismissal
of Mendoza Berger & Company LLP and Appointment of Tarvaran Askelson &
Company LLP
On May
15, 2007 the Company elected to terminate its engagement of Mendoza Berger &
Company LLP as the independent registered public accounting firm responsible for
auditing the Company’s financial statements. The termination was approved by the
Company’s Board of Directors.
Mendoza
Berger & Company LLP’s report on the Company’s financial statements for the
two years ended September 30, 2006 and 2005 did not contain an adverse opinion
or a disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles with the exception that Mendoza Berger
& Company LLP’s Audit Reports contained an explanatory note that raised
substantial doubt as to the ability of the Company to continue as a going
concern. During the Company’s two fiscal years ended September 30, 2006 and 2005
and the subsequent interim period ended December 31, 2006 which preceded the
termination of Mendoza Berger & Company LLP, the Company did not have any
disagreements with Mendoza Berger & Company LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Mendoza
Berger & Company LLP, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
During
the Company’s two fiscal years ended September 30, 2006 and 2005 and the
subsequent interim period ended December 31, 2006 which preceded the termination
of Mendoza Berger & Company LLP, other than as is set forth herein, Mendoza
Berger & Company LLP did not advise the Company of any of the
following:
(a) that
the internal controls necessary for the Company to develop reliable financial
statements did not exist;
(b) that
information had come to Mendoza Berger & Company LLP’s attention that had
led it to no longer be able to rely on management’s representations, or that had
made it unwilling to be associated with the financial statements prepared by
management;
(c) that
Mendoza Berger & Company LLP needed to expand significantly the scope of its
audit, or that information had come to Mendoza Berger & Company LLP’s
attention that if further investigated may: (i) materially impact the fairness
or reliability of either a previously issued audit report or the underlying
financial statements, or the financial statements issued or to be issued
covering the fiscal period(s) subsequent to the date of the most recent
financial statements covered by an audit report (including information that
would have prevented it from rendering an unqualified audit report on those
financial statements), or (ii) cause it to be unwilling to rely on management’s
representations or be associated with the Company’s financial statements;
or
(d) that
information had come to Mendoza Berger & Company LLP’s attention that it had
concluded materially impacted the fairness or reliability of either: (i) a
previously issued audit report or the underlying financial statements, or (ii)
the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to Mendoza Berger
& Company LLP’s satisfaction, would prevent it from rendering an unqualified
audit report on those financial statements, except as indicated
above).
On May
15, 2007, the Company engaged Tarvaran Askelson & Company, LLP to serve as
the independent registered public accounting firm responsible for auditing the
Company’s financial statements for the fiscal year ending September 30, 2007.
The engagement was approved by the Company’s Board of Directors.
Neither
the Company nor anyone on behalf of the Company consulted Tarvaran Askelson
& Company, LLP during the two prior fiscal years and any subsequent interim
period prior to engaging Tarvaran Askelson & Company, LLP, regarding either:
(i) the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company’s financial statements, and neither a written report was provided to
the Company nor oral advice was provided that the Company concluded was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement (as defined in paragraph (a)(1)(iv) and the
related instructions of Item 304 of Regulation S-K) or a reportable event (as
described in paragraph (a)(1)(v) of Item 304 of Regulation
S-K).
WHERE
YOU CAN
FIND
MORE INFORMATION
We have
filed with the SEC a registration statement on Form S-1 (File
No. 333-149896) under the Securities Act, as amended, with respect to the
shares of Common Stock we are offering by this prospectus. This prospectus does
not contain all of the information included in the registration statement. For
further information pertaining to us and our Common Stock, you should refer to
the registration statement and the exhibits and schedules filed with the
registration statement. Whenever we make reference in this prospectus to any of
our contracts, agreements or other documents, the references are not necessarily
complete, and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other
document.
The
registration statement and other information may be read and copied at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a web site
(HTTP://WWW.SEC.GOV) that contains the registration statements, reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC such as us.
You may
also read and copy any reports, statements or other information that we have
filed with the SEC at the addresses indicated above and you may also access them
electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document retrieval
services.
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|
|
|
|
|
|
F-26
|
|
|
|
|
|
|
|
|
|
F-27
|
|
|
|
|
|
|
|
|
|
F-28
|
SKYPEOPLE
FRUIT JUICE, INC. AND SUBSIDIARIES
|
|
March 31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
23,243,078
|
|
|
$
|
15,274,171
|
|
Accounts
receivable
|
|
|
5,011,043
|
|
|
|
11,610,506
|
|
Other
receivables
|
|
|
225,640
|
|
|
|
297,394
|
|
Inventories
|
|
|
2,312,116
|
|
|
|
1,844,397
|
|
Prepaid
expenses and other current assets
|
|
|
904,368
|
|
|
|
1,087,076
|
|
Total
current assets
|
|
|
31,696,245
|
|
|
|
30,113,544
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, Net
|
|
|
19,930,452
|
|
|
|
20,406,967
|
|
LAND
USAGE RIGHTS (Note 10)
|
|
|
6,353,266
|
|
|
|
6,404,771
|
|
OTHER
ASSETS
|
|
|
2,299,914
|
|
|
|
2,362,049
|
|
TOTAL
ASSETS
|
|
$
|
60,279,877
|
|
|
$
|
59,287,331
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,501,521
|
|
|
$
|
663,092
|
|
Accrued
expenses
|
|
|
1,341,469
|
|
|
|
1,657,437
|
|
Accrued
liquidated damages
|
|
|
254,301
|
|
|
|
254,301
|
|
Related
party payables
|
|
|
-
|
|
|
|
23,452
|
|
Income
taxes payable
|
|
|
658,700
|
|
|
|
1,450,433
|
|
Advances
from customers
|
|
|
1,404,299
|
|
|
|
1,375,460
|
|
Short-term
notes payable
|
|
|
11,239,737
|
|
|
|
11,256,871
|
|
Total
current liabilities
|
|
|
16,400,027
|
|
|
|
16,681,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
16,400,027
|
|
|
|
16,681,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
SkyPeople
Fruit Juice, Inc. stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value; 10,000,000 shares authorized
3,448,480
Series B Preferred Stock issued and outstanding as of
March
31, 2009 and December 31, 2008, respectively
|
|
|
3,448
|
|
|
|
3,448
|
|
Common
Stock, $0.01 par value; 100,000,000 shares authorized
22,271,786
shares issued and outstanding as of March 31, 2009
and
December 31, 2008, respectively
|
|
|
222,717
|
|
|
|
222,717
|
|
Additional
paid-in capital
|
|
|
13,791,724
|
|
|
|
13,791,724
|
|
Accumulated
retained earnings
|
|
|
23,708,370
|
|
|
|
22,468,934
|
|
Accumulated
other comprehensive income
|
|
|
4,479,718
|
|
|
|
4,573,143
|
|
Total
SkyPeople Fruit Juice, Inc. stockholders' equity
|
|
|
42,205,977
|
|
|
|
41,059,966
|
|
Noncontrolling
interests
|
|
|
1,673,873
|
|
|
|
1,546,319
|
|
TOTAL
EQUITY
|
|
|
43,879,850
|
|
|
|
42,606,285
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
60,279,877
|
|
|
$
|
59,287,331
|
|
See
accompanying notes to condensed consolidated financial
statements.
SKYPEOPLE
FRUIT JUICE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
AND COMPREHENSIVE
INCOME,
UNAUDITED
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,671,061
|
|
|
$
|
8,850,584
|
|
Cost of
Sales
|
|
|
3,746,159
|
|
|
|
6,990,966
|
|
Gross
Profit
|
|
|
2,924,902
|
|
|
|
1,859,618
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
411,904
|
|
|
|
566,714
|
|
Selling
expenses
|
|
|
273,588
|
|
|
|
241,345
|
|
Research
and development
|
|
|
275,510
|
|
|
|
7,477
|
|
Total
operating expenses
|
|
|
961,002
|
|
|
|
815,536
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations
|
|
|
1,963,900
|
|
|
|
1,044,082
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(226,396
|
)
|
|
|
(59,028
|
)
|
Interest
income
|
|
|
7,
316
|
|
|
|
6,164
|
|
Subsidy
income
|
|
|
87,800
|
|
|
|
-
|
|
Other
income (expense)
|
|
|
(40
|
)
|
|
|
238,956
|
|
Total
other income (expense)
|
|
|
(131,320
|
)
|
|
|
186,092
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
1,832,580
|
|
|
|
1,230,174
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Provision
|
|
|
493,870
|
|
|
|
130,520
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
1,338,710
|
|
|
|
1,099,654
|
|
Less:
Net income
attributable to noncontrolling interests
|
|
|
99,274
|
|
|
|
47,835
|
|
NET
INCOME ATTRIBUTABLE TO SKYPEOPLE FRUIT JUICE, INC.
|
|
$
|
1,239,436
|
|
|
$
|
1,051,819
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Diluted
earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,271,684
|
|
|
|
22,485,118
|
|
Diluted
|
|
|
28,394,863
|
|
|
|
27,907,889
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,338,710
|
|
|
$
|
1,099,654
|
|
Foreign
currency translation adjustment
|
|
|
(93,425
|
)
|
|
|
1,420,300
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
1,245,285
|
|
|
$
|
2,519,954
|
|
Comprehensive
income attributable to the noncontrolling interest
|
|
|
(127,554
|
)
|
|
|
(47,835
|
)
|
Comprehensive
Income Attributable to SkyPeople Fruit Juice, Inc.
|
|
$
|
1,117,731
|
|
|
$
|
2,472,119
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS, UNAUDITED
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
Flow from Operating Activities
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,239,436
|
|
|
$
|
1,051,819
|
|
Adjustments
to reconcile net income to net cash flow provided by operating
activities
|
|
|
|
|
|
|
|
|
Bad
debt expenses
|
|
|
1,130
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
487,158
|
|
|
|
714,647
|
|
D
Earnings attributable to noncontrolling interests
|
|
|
99,274
|
|
|
|
47,835
|
|
Changes
in operating assets and liabilities,
|
|
|
|
|
|
|
|
|
net
of acquisition effects
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
6,580,392
|
|
|
|
(2,470,381
|
)
|
Other
receivables
|
|
|
71,292
|
|
|
|
(158,285
|
)
|
Prepaid
expenses and other current assets
|
|
|
239,570
|
|
|
|
3,340
|
|
Inventories
|
|
|
(470,472
|
)
|
|
|
1,054,021
|
|
Accounts
payable
|
|
|
839,339
|
|
|
|
1,053,211
|
|
Accrued
expenses and other current liabilities
|
|
|
710,238
|
|
|
|
(239,362
|
)
|
Advances
from customers
|
|
|
30,929
|
|
|
|
(304,904
|
)
|
Taxes payable
|
|
|
(1,549,833
|
)
|
|
|
45,262
|
|
Net
cash provided by operating activities
|
|
|
8,278,453
|
|
|
|
797,203
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Investing Activities
|
|
|
|
|
|
|
|
|
Loan
advanced to related parties
|
|
|
-
|
|
|
|
(1,758,745
|
)
|
Additions
to property, plant and equipment
|
|
|
-
|
|
|
|
(154,458
|
)
|
Net
cash (used in) investing activities
|
|
|
-
|
|
|
|
(1,913,203
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flow from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from stock issuance
|
|
|
-
|
|
|
|
3,216,667
|
|
Proceeds
from bank loans
|
|
|
-
|
|
|
|
1,144,900
|
|
Repayments
of related party loan
|
|
|
-
|
|
|
|
(66,236
|
)
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
4,295,331
|
|
|
|
|
|
|
|
|
|
|
Effect
of Changes in Exchange Rate
|
|
|
(309,546
|
)
|
|
|
170,044
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
7,968,907
|
|
|
|
3,349,375
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
15,274,171
|
|
|
|
4,094,238
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
23,243,078
|
|
|
$
|
7,443,613
|
|
Supplementary
Information of Cash Flows
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
1,283,303
|
|
|
$
|
|
|
(1)
Cash
paid for taxes
|
|
$
|
226,396
|
|
|
$
|
|
|
(2)
Dividend
Payable to Noncontrolling Interests
|
|
$
|
-
|
|
|
$
|
303,118
|
|
(3)
(
Noncontrolling interest balance
was offset by the dividend payable)
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
SKYPEOPLE
FRUIT JUICE, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED
FINANCIAL
STATEMENTS
(UNAUDITED)
SkyPeople
Fruit Juice, Inc. (“SkyPeople” or the “Company”), formerly Entech Environment
Technology, Inc., was formed in June 1998 under the laws of the State of
Florida. From July 2007 until February 26, 2008, our operations consisted solely
of identifying and completing a business combination with an operating company
and compliance with our reporting obligations under federal securities
laws.
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
Industry Holding Group Co., Ltd. (“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.
This
share exchange transaction resulted in Pacific obtaining a majority voting and
control interest in the Company. Generally accepted accounting principles
require that the company whose stockholders retain the majority controlling
interest in a combined business be treated as the acquirer for accounting
purposes, resulting in a reverse acquisition with Pacific as the accounting
acquirer and SkyPeople as the acquired party. Accordingly, the share exchange
transaction has been accounted for as a recapitalization of the Company. The
equity sections of the accompanying financial statements have been restated to
reflect the recapitalization of the Company due to the reverse acquisition as of
the first day of the first period presented. All references to Common Stock of
Pacific Common Stock have been restated to reflect the equivalent numbers of
SkyPeople equivalent shares.
Pacific’s only business is acting as a holding company
for
Shaanxi Tianren Organic Food Co., Ltd.
(“Shaanxi Tianren”), a company organized under the laws
of the People’s Republic of China (“PRC”), in which Pacific holds a 99%
ownership interest.
Shaanxi Tianren is engaged in the business
of
producing and selling a wide variety of fruit
products, including fruit juice concentrates,
fruit juice drinks
, and fresh fruit and fruit seeds
.
Shaanxi
Tianren holds a 91.15% interest in Shaanxi Qiyiwangguo Modern Organic
Agriculture Co. Ltd. (“Shaanxi Qiyiwangguo”). The acquisition was accounted for
using the purchase method, and the financial statements of Shaanxi Tianren and
Shaanxi Qiyiwangguo have been consolidated on the purchase date of May 27, 2006
and forward.
Shaanxi
Tianren also holds a 100% interest in Huludao Wonder Fruit Co., Ltd. (“Huludao
Wonder”). The payment was made through the offset of related party receivables
from Shaanxi Hede Investment Management Co., Ltd. (“Hede”). Before the
acquisition, Huludao Wonder had been a variable interest entity of Shaanxi
Tianren for accounting purposes according to FASB Interpretation No. 46
: Consolidation of Variable Interest
Entities
, an interpretation of ARB 51 (“FIN 46”), since June 1, 2007, and
the financial statements of Shaanxi Tianren and Huludao Wonder have been
consolidated as of June 1, 2007 and forward. See Note 14-Related Party
Transactions.
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.
A
1-for-328.72898 reverse stock split of the outstanding
shares of Common Stock and a mandatory 1-for-22.006 conversion of Series A
Preferred Stock, which had been approved by written consent of the holders of a
majority of the outstanding voting stock, also became effective on May 23,
2008.
The
Company’s current structure is set forth in the diagram below:
*
Xi’an Qinmei Food Co., Ltd.,
an entity which is not affiliated with the Company, owns the other 8.85% of the
equity interests in Shaanxi Qiyiwangguo (formerly called Xi’an Tianren Modern
Organic Co., Ltd.).
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Financial
Statements
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). This basis differs from that used in the statutory accounts of our
subsidiaries in China, 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.
In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Due to the
seasonal nature of our business and other factors, interim results are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
Certain
prior year accounts have been reclassified to conform to the current
presentation because of the acquisition of Huludao Wonder. The reclassification
had no impact on net income for the quarters ended March 31, 2009 and
2008.
Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
SkyPeople, Pacific, Shaanxi Tianren, Shaanxi Qiyiwangguo and Huludao Wonder. All
material inter-company accounts and transactions have been eliminated in
consolidation.
The
pooling method (entity under common control) is applied to the consolidation of
Pacific with Shaanxi Tianren and Shaanxi Tianren with Huludao Wonder. The
reverse merger accounting is applied to the consolidation of SkyPeople with
Pacific.
Economic and Political
Risks
The
Company faces a number of risks and challenges as a result of having primary
operations and marketing in the PRC. Changing political climates in the PRC
could have a significant effect on the Company’s business.
Control by Principal
Stockholders
The
directors, executive officers and their affiliates or related parties own,
beneficially and in the aggregate, the majority of the voting power of the
outstanding shares of the Common Stock of the Company. Accordingly, the
directors, executive officers and their affiliates, if they voted their shares
uniformly, would have the ability to control the approval of most corporate
actions, including increasing the authorized capital stock of the Company and
the dissolution, merger or sale of the Company’s assets.
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.
As of
March 31, 2009, the cash balance in financial institutions in the United States
was $110,986. Accounts at these financial institutions are insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At March 31,
2009, the Company had no deposits that were in excess of the FDIC insurance
limit.
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. The
determination of recoverability of assets to be held and used is made 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 cost to sell. During the reporting
periods there was no impairment loss.
Earnings Per
Share
Basic
earnings per Common Stock (“EPS”) are calculated by dividing net income
available to common stockholders by the weighted average number of Common Stock
outstanding during the period. Our Series B Convertible Preferred Stock is a
participating security. Consequently, the two-class method of income allocation
is used in determining net income available to common stockholders.
Diluted
EPS is calculated by using the treasury stock method, assuming conversion of all
potentially dilutive securities, such as stock options and warrants. Under this
method, (i) exercise of options and warrants is assumed at the beginning of the
period and shares of Common Stock are assumed to be issued, (ii) the proceeds
from exercise are assumed to be used to purchase Common Stock at the average
market price during the period, and (iii) the incremental shares (the difference
between the number of shares assumed issued and the number of shares assumed
purchased) are included in the denominator of the diluted EPS computation. The
numerators and denominators used in the computations of basic and diluted EPS
are presented in the following table.
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
NUMERATOR
FOR BASIC AND DILUTED EPS
|
|
|
|
|
|
|
Net
income (numerator for Diluted EPS)
|
|
$
|
1,239,436
|
|
|
$
|
1,051,819
|
|
Net
income allocated to Preferred Stock
|
|
|
(243,673
|
)
|
|
|
(204,368
|
)
|
Net
income to common stockholders (Basic)
|
|
$
|
995,763
|
|
|
$
|
847,451
|
|
|
|
|
|
|
|
|
|
|
DENOMINATORS
FOR BASIC AND DILUTED EPS
|
|
|
|
|
|
|
|
|
|
|
|
22,271,684
|
|
|
|
22,485,118
|
|
DENOMINATOR
FOR BASIC EPS
|
|
|
22,271,684
|
|
|
|
22,485,118
|
|
|
|
|
|
|
|
|
|
|
Add: Weighted average preferred as if
converted
|
|
|
5,448,480
|
|
|
|
5,422,771
|
|
Add:
Weighted average stock warrants outstanding
|
|
|
674,699
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR
FOR DILUTED EPS
|
|
|
28,394,863
|
|
|
|
27,907,889
|
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Shipping and Handling
Costs
Shipping
and handling amounts billed to customers in related sales transactions are
included in sales revenues. The shipping and handling expenses of $251,180 and
$230,578 for the three months ended March 31, 2009 and 2008, respectively, are
reported in the Consolidated Statement of Income as a component of selling
expenses.
Accumulated Other
Comprehensive Income
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Trade Accounts
Receivable
During
the normal course of business, we extend unsecured credit to our customers.
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. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Based on the information available to management, the Company believed that its
allowance for doubtful accounts was adequate as of March 31, 2009. The Company
evaluates the credit risks of its customers utilizing historical data and
estimates of future performance.
Inventories
Inventories
consist 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 the average cost or first-in, first-out
methods.
Inventories
consisted of:
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
Raw
materials and packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets
The
Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible
Assets
(“SFAS 142”), effective January 1, 2002. Under SFAS 142, goodwill
and indefinite lived intangible assets are not amortized, but are reviewed
annually for impairment, or more frequently, if indications of possible
impairment exist. The Company has no indefinite lived intangible
assets.
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 and
determinable and collection of the revenue is reasonably assured. More than 69%
of our products are exported either through distributors with good credit or to
end-users directly. Of this amount, 80% of the revenue is exported through
distributors. Our general sales agreement requires distributors to pay us after
we deliver the products to them, which is not contingent on resale to end
customers. Our credit term for distributors with good credit history is from 30
days to 90 days. For new customers, we usually require 100% advance payment for
direct export sales. Advances from customers 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 receivables is less
than 0.5%. The problem of quality hardly occurred during production, storage and
transportation due to our maintenance of strict standards during the entire
process. Our customers have no contractual right of the return of products.
Historically, we have not had any returned products. 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 rights with respect to that product.
Advertising and Promotional
Expense
Advertising
and promotional costs are expensed as incurred. The Company incurred $293 and
zero in advertising and promotional costs for the three months ended March 31,
2009 and 2008, respectively.
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, plant and equipment are
depreciated over their estimated useful lives as follows:
|
|
|
|
Furniture
and office equipment
|
|
|
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
Furniture
and office equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
|
|
|
|
|
|
|
Depreciation
expense included in general and administration expenses for the three
months ended March 31, 2009 and 2008 was $80,969 and $188,100, respectively.
Depreciation expense included in cost of sales for the three months ended
March 31, 2009 and 2008 was $364,438 and $472,512, respectively.
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, $1,170,806 as of March 31, 2009. This
research and development center is expected to be completed by June 30, 2009.
Our estimated future capital expenditure for this project is $1,024,455. 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 in fiscal year 2008.
Shaanxi
Qiyiwangguo previously leased a waste-water processing facility at an annual fee
of approximately $14,371. 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
demands of Shaanxi Qiyiwangguo and will improve the use of recycled waste water.
We capitalized $679,300 as construction in progress as of March 31, 2009. 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 $110,994. 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 an employee building. We capitalized $11,131 as
construction in progress as of March 31, 2009. This project is expected to be
completed by the second quarter of 2009. There will be no future input for this
project.
Capitalized
interest expenses of $50,414 are 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.
Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets.
No impairment of assets was recorded in
the periods reported.
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in U.S. dollars. The functional
currency of SkyPeople and Pacific is the U.S. dollar and that of Shaanxi Tianren
and its subsidiary 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 no
material adjustments to its liabilities for unrecognized income tax benefits
according to the provisions of FIN 48.
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.
Noncontrolling
Interests
Noncontrolling
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
shares held in escrow as Make Good Escrow Shares will not be accounted for on
our books until such shares are released from escrow pursuant to the terms of
the Make Good Escrow Agreement. During the time such Make Good Escrow Shares are
held in escrow, they will be accounted for as contingently issuable shares in
determining the diluted 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
Financial Accounting Standard Board Staff Position 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 were recorded as a liability and
deducted from operating income.
Our
failure to meet the timetables provided for in the Registration Rights Agreement
have resulted in the imposition of liquidated damages, which are payable in
cash to the Investors (pro rata based on the percentage of Series B Preferred
Stock owned by the Investors at the time such liquidated damages shall have
incurred) equal to fourteen percent (14%) of the Purchase Price per annum
payable monthly based on the number of days such failure exists, which amount of
liquidated damages, together with all liquidated damages that the Company may
incur pursuant to the Registration Rights Agreement, the Warrant and the Stock
Purchase Agreement, shall not exceed an aggregate of eighteen percent (18%) of
the amount of the Purchase Price.
We
initially filed with the SEC the registration statement on March 26, 2008, which
date was before the filing date deadline of March 30, 2008 in the Registration
Rights Agreement, because in the opinion of the counsel to the Company, the
Company’s audited financials for the fiscal year 2007 were required to be
included in the initial registration statement based on the applicable SEC
rules. Therefore, we were required to have the registration statement declared
effective by the SEC by July 24, 2008 (within 120 days after the initial filing
date). On February 5, 2009, the registration statement was declared effective by
the SEC. We recorded liquidated damages of $254,301 in fiscal year
2008 for failure to meet the timetables provided for in the Registration Rights
Agreement.
Research and
Development
Shaanxi
Tianren established a research and development institution with nearly 41
research and development personnel as of March 31, 2009. Shaanxi Tianren also
from time to time retains external experts and research institutions. The
research and development expenses were $275,510 and $7,477 for the three months
ended March 31, 2009 and 2008, respectively.
New Accounting
Pronouncements
In April
2009, the FASB issued Staff Position (“FSP”) FAS 157-4,
Determining Fair Value When the
Volume or Level of Activity for the Asset or Liability Had Significantly
Decreased and Identifying Transactions That Are Not Orderly
(“FSP
FAS157-4”). FSP FAS 157-4 provides additional guidance for estimating fair value
in accordance with SFAS No. 157 when the volume or level of activity for
the asset or liability has significantly decreased and requires that companies
provide interim and annual disclosures of the inputs and valuation technique(s)
used to measure fair value. FSP FAS 157-4 is effective for interim and annual
reporting periods ending after June 15, 2009 and is to be applied
prospectively. The Company does not expect the adoption of FSP FAS 157-4 to have
a significant impact on its financial statements.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
. FSP FAS 115-2 and FAS 124-2 amend the
other-than-temporary impairment guidance to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. FSP FAS 115-2 and FAS 124-2 are effective for
interim and annual reporting periods ending after June 15, 2009. The
Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a
significant impact on its financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value
of Financial Instruments
. FSP FAS 107-1 and APB 28-1 require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. FSP FAS
107-1 and APB 28-1 are effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 will
have no impact on the Company’s financial statements.
In
February 2008, the FASB issued Staff Position No. FAS 157-2, which provides for
a one-year deferral of the effective date of SFAS No. 157,
Fair Value Measurements
, for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company is evaluating the impact of this standard as it
relates to the Company’s financial position and results of
operations.
3. SHARE
EXCHANGE AND PRIVATE PLACEMENT FINANCING
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
the shareholders of Pacific in a share exchange transaction and raised
$3,400,000 gross proceeds from certain accredited investors in a private
placement transaction. These transactions, collectively hereinafter referred to
as “Reverse Merger Transactions,” were consummated simultaneously on February
26, 2008, and as a result of the consummation of these transactions Pacific is
now a wholly-owned subsidiary of the Company.
The
following sets forth the material agreements that the Company entered into in
connection with the Reverse Merger Transactions and the material terms of these
agreements:
Share
Exchange Agreement
On
February 22, 2008, the Company and Terence Leong, the Company’s then Chief
Executive Officer, entered into a Share Exchange Agreement with Pacific and all
of the shareholders of Pacific (the “Share Exchange Agreement”). Pursuant to the
Share Exchange Agreement, the shareholders of Pacific agreed to exchange 100
ordinary shares of Pacific, representing a 100% ownership interest in Pacific,
for 1,000,000 shares of a newly designated Series A Convertible Preferred Stock
of the Company, par value $0.001 per share (the “Share Exchange” or the “Share
Exchange Transaction”).
Stock
Purchase Agreement
In
connection with the Share Exchange Transaction, on February 26, 2008, the
Company entered into a Series B Convertible Preferred Stock Purchase Agreement
(the “Stock Purchase Agreement”) with certain accredited investors (the
“Investors”), pursuant to which the Company agreed to issue 2,833,333 shares of
Series B Convertible Preferred Stock of the Company, par value $0.001 per share
(“Series B Stock”) and warrants to purchase 7,000,000 shares of the Company’s
Common Stock (the “Warrants”) to the Investors, in exchange for a cash payment
in the amount of $3,400,000. Under the Stock Purchase Agreement, the Company
also deposited 2,000,000 shares of the Series B Stock into an escrow account
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.
On May
23, 2008, we amended the Company’s Articles of Incorporation and changed its
name to SkyPeople Fruit Juice, Inc. to better reflect our business. A
1-for-328.72898 reverse stock split of the outstanding shares of Common Stock
and a mandatory 1-for-22.006 conversion of Series A Preferred Stock, which had
been approved by written consent of the holders of a majority of the outstanding
voting stock, also became effective on May 23, 2008.
4.
|
CONVERTIBLE
PREFERRED STOCK
|
The
Series A Convertible Preferred Stock
In
connection with the Share Exchange Transaction, we designated 1,000,000 shares
of Series A Convertible Preferred Stock out of our total authorized number of
10,000,000 shares of Preferred Stock, par value $0.001 per share. Upon
effectiveness of the 1-for-328.72898 reverse stock split of the outstanding
shares of Common Stock on May 23, 2008, all the outstanding shares of Series A
Preferred Stock were immediately and automatically converted into shares of
Common Stock without any notice or action required by us or by the holders of
Series A Preferred Stock or Common Stock (the “Mandatory Conversion”). In the
Mandatory Conversion, each holder of Series A Preferred Stock received twenty
two and 62/10,000 (22.0062) shares of fully paid and non-assessable Common Stock
for every one (1) share of Series A held (the “Conversion Rate”).
Series
B Convertible Preferred Stock
In
connection with the Share Exchange Transaction, we designated 7,000,000 shares
of Series B Convertible Preferred Stock out of our total authorized number of
10,000,000 shares of Preferred Stock, par value $0.001 per share. The Series B
Convertible Preferred Stock is a participating security. No dividends are
payable with respect to the Series B Preferred Stock and no dividends can be
paid on our Common Stock while the Series B Preferred Stock is outstanding. Upon
liquidation the holders are entitled to receive $1.20 per share (out of
available assets) before any distribution or payment can be made to the holders
of any junior securities.
The
Company also deposited 2,000,000 shares of the Series B Stock into 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.
Upon
effectiveness of the Reverse Split, each share of Series B Preferred Stock is
convertible at any time into one share of Common Stock at the option of the
holder. If the conversion price (initially $1.20) is adjusted, the conversion
ratio will likewise be adjusted and the new conversion ratio will be determined
by multiplying the conversion ratio in effect by a fraction, the numerator of
which is the conversion price in effect before the adjustment and the
denominator of which is the new conversion price.
The
warrants that were issued pursuant to the Stock Exchange Agreement became
exercisable after the consummation of a 1-for-328.72898 reverse split of our
outstanding Common Stock, which was effective on May 23, 2008, and the 7,000,000
shares issuable upon exercise of such Warrants were not adjusted as a result of
such reverse split.
6.
|
NOTE
PURCHASE AGREEMENT
|
On
February 26, 2008, the Company issued to Barron Partners, L.P. (“Barron
Partners”) an aggregate of 615,147 shares of Series B Stock in exchange for the
cancellation of all principal and accrued interest aggregating approximately
$5,055,418 on certain promissory notes of the Company held by Barron
Partners.
On
February 22, 2008, the Company issued to Grover Moss an aggregate of 59,060
shares of Common Stock (post split) in exchange for the conversion of principal
aggregating $398,000 evidenced by a promissory note dated February 22,
2008.
7.
|
ACCQUISITION OF HULUDAO WONDER
|
On June
10, 2008, the Company completed the acquisition of Huludao for a total purchase
price of RMB 48,250,000, or approximately U.S. $6,308,591 based on the exchange
rate of June 1, 2007. The acquisition is accounted for according to
FASB 141, appendix D, paragraphs 11
to 18, Transactions between Entities under Common Control.
When
accounting for a transfer of assets or exchange of shares between entities under
common control, the entity that receives the net assets or the equity interests
shall initially recognize the assets and liabilities transferred at their
carrying amounts in the accounts of the transferring entity at the date of
transfer and report results of operations for the period in which the transfer
occurs as though the transfer of net assets or exchange of equity interests had
occurred at the beginning of the period.
Prior to
the June 2008 acquisition, Huludao Wonder was classified as a variable entity of
Shaanxi Tianren according to FASB Interpretation No. 46
: Consolidation of Variable Interest
Entities (“V.I.E.”)
, an interpretation of ARB 51 (“FIN 46”). FIN 46R
requires the primary beneficiary of the variable interest entity to consolidate
its financial results with the variable interest entity. The Company had
evaluated its relationship with Huludao and had concluded that Huludao Wonder
was a variable interest entity for accounting purposes after June 2007 and prior
to June 2008.
The
following table summarizes the carrying value of Huludao Wonder’s assets and
liabilities transfer:
ASSETS
|
|
|
|
|
|
$
|
7,567
|
|
|
|
|
2,387,711
|
|
|
|
|
29,244
|
|
|
|
|
57,948
|
|
|
|
|
6,934,219
|
|
|
|
|
3,262,566
|
|
|
|
|
27,486
|
|
|
|
$
|
12,706,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,642
|
|
|
|
|
101,603
|
|
|
|
|
6,275,905
|
|
|
|
$
|
6,398,150
|
|
|
|
|
|
|
|
|
$
|
6,308,591
|
|
8.
INVENTORIES
As of
March 31, 2009 and December 31, 2008, inventories consisted of:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Raw
materials and packaging
|
|
$
|
964,364
|
|
|
$
|
611,755
|
|
Finished
goods
|
|
|
1,347,752
|
|
|
|
1,232,642
|
|
Inventories
|
|
$
|
2,312,116
|
|
|
$
|
1,844,397
|
|
9. INCOME
TAX
Prior to
2007, the Company was subject to a 33% income tax rate by the PRC. The Company
had no material adjustments to its liabilities for unrecognized income tax
benefits according to the provisions of FIN 48. Shaanxi Tianren was awarded the
status of a nationally recognized High and New Technology Enterprise in December
2006, which entitled Shaanxi Tianren to tax-free treatment for two years
starting from 2007. Starting from 2009, Shaaxin Tianren is subject to the
regular tax rate of 25% according to the new tax law in China, which was
effective on January 1, 2008. In December 2007, the tax rate of Shaanxi
Qiywangguo was reduced from 33% to 25%, effective beginning January 2008. The
tax rate of Huludao Wonder was also reduced to 25%, effective beginning January
2008. As a result, the Company’s income tax rate in the PRC is effectively
25%.
As the
Company had no income generated in the United States, there was no tax expense
or tax liability due to the Internal Revenue Service of the United States as of
March 31, 2009.
The
Company had no material adjustments to its liabilities for unrecognized income
tax benefits according to the provisions of FIN 48. The income tax expense was
$493,870 and $130,520 for the three months ended March 31, 2009 and March 31,
2008, respectively. The Company had recorded no deferred tax assets or
liabilities as of March 31, 2009 and 2008, since nearly
all differences in tax basis and financial statement carrying values are
permanent differences.
|
|
Three
Months Ended
March
31,
|
|
Income
Tax Expenses
|
|
2009
|
|
|
2008
|
|
Current
|
|
$
|
493,870
|
|
|
$
|
130,520
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
493,870
|
|
|
$
|
130,520
|
|
10. LAND
USAGE RIGHTS
According
to the laws of the PRC, the government owns all of the land in the PRC.
Companies or individuals are authorized to possess and use the land only through
land use rights granted by the PRC government. Accordingly, the Company paid in
advance for land use rights. Prepaid land use rights are being amortized and
recorded as lease expenses using the straight-line method over the use terms of
the lease, which were 20 to 50 years. The amortization expenses were $41,751 and
$54,035 for the three months ended March 31, 2009 and 2008,
respectively.
11. COMMON
STOCK
As of
March 31, 2009, the Company had 22,271,786 shares of Common Stock issued and
outstanding and 3,448,480 shares of Series B Preferred Stock issued and
outstanding (2,000,000 shares of the Series B Preferred Stock deposited in the
escrow account are not included). Assuming all five year warrants to purchase
7,000,000 shares of Common Stock with an exercise price of $3.00 per share are
exercised and all shares of Series B Preferred Stock are converted, the total
number of shares of Common Stock to be issued and outstanding will be
32,720,266.
In the
first quarter of 2008, the Company issued 31,941 shares of Common Stock as part
of the settlement with its prior Chief Executive Officer, Burr D. Northrop,
37,098 shares of Common Stock to Walker Street Associates and its prior
director, Joseph I. Emas, respectively, for the professional services that they
provided, and 59,060 shares of Common Stock to Grover Moss for the conversion of
principal owed by the Company pursuant to a promissaory note in the amount of
$398,000.
On
February 26, 2008, the Company issued to Barron Partners an aggregate of 615,147
shares of Series B Stock in exchange for the cancellation of all principal and
accrued interest aggregating approximately $5,055,418 on certain promissory
notes of the Company held by Barron Partners. The shares issued to Barron
Partners were not affected by the 1-for-328.72898 reverse split of our
outstanding Common Stock, which was effective on May 23, 2008.
In
connection with the Share Exchange Transaction in February 2008, the Company
designated 1,000,000 shares of Series A Convertible Preferred Stock out of its
total authorized number of 10,000,000 shares of Preferred Stock, par value
$0.001 per share. In the Mandatory Conversion, each holder of Series A Preferred
Stock was entitled to receive twenty two and 62/10,000 (22.0062) shares of fully
paid and non-assessable Common Stock for every one (1) share of Series A held.
The Company also agreed to issue 2,833,333 shares of a newly designated Series B
Convertible Preferred Stock of the Company, par value $0.001 per share and
warrants to purchase 7,000,000 shares of the Company’s Common Stock. Upon
effectiveness of the Reverse Split on May 23, 2008, all the outstanding shares
of Series A Preferred Stock were immediately and automatically converted into
22,006,173 shares of Common Stock. Each share of Series B Preferred Stock will
be convertible at any time into one share of Common Stock at the option of the
holder, and the Warrants became exercisable immediately after the Reverse Split.
The 2,833,333 shares of Series B Convertible Preferred Stock and 7,000,000
shares issuable upon exercise of such Warrants were not adjusted as a result of
the Reverse Split.
12. NOTES
PAYABLE
As of
March 31, 2009, the balance of the short-term loans totaled RMB 76,800,000 (U.S.
$11,239,737 based on the exchange rate on March 31, 2009), with interest rates
ranging from 5.58% to 9.83% per annum. Of these loans, $5,239,357 are
collateralized by land and buildings. These loans are due from May 2009 to
October 2009.
Effective
January 1, 2008, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 157,
Fair Value Measurements
(“SFAS 157”) as it relates to financial assets and financial liabilities. The
adoption of SFAS 157 did not have a material effect on our results of
operations, financial position or liquidity.
The
Company adopted SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement
No. 115
as of January 1, 2008. SFAS 159 permits entities
to elect to measure many financial instruments and certain other items at fair
value. We did not elect the fair value option for the Company’s loans payable.
Therefore, valuation of the Company’s loans payable is not affected by the
adoption of SFAS 157 and SFAS 159.
On
February 4, 2008, before the Share Exchange Transaction, the Board of Directors
of Shaanxi Qiyiwangguo declared a cash dividend of RMB 20,553,592, or $2,933,899
based on the average exchange rate for the nine months ended
September 30, 2008, to its former shareholders. Since Shaanxi Tianren holds a
91.15% interest in Shaanxi Qiyiwangguo, RMB 18,734,599 (or $2,674,249) was paid
to Shaanxi Tianren and RMB 1,818,993 (or $259,650) was paid to its
noncontrolling interest holders. On the same date, the Board of Directors of
Shaanxi Tianren declared a cash dividend of RMB 35,200,000 (or $5,024,584 based
on the average exchange rate for the nine months ended September 30, 2008) to
its shareholders. Since Pacific holds a 99% interest in Shaanxi Tianren, RMB
34,848,000 (or $4,974,338 based on the average exchange rate for the nine months
ended September 30, 2008) was paid to Pacific and RMB 352,000 (or $50,246 based
on the average exchange rate for the nine months ended September 30, 2008) was
paid to its noncontrolling interest holders. The inter-company dividend was
eliminated in the consolidated statement. The dividend paid to noncontrolling
interest holders was RMB 2,170,993 (or $309,896 based on the average exchange
rate for the nine months ended September 30, 2008).
In May
2008, Pacific erroneously paid RMB 34,848,000 (or $4,974,338 based on the
average exchange rate for the nine months ended September 30, 2008) to its
former shareholders as the result of a dividend declaration in February 2008.
The monies were then returned to the Company in June 2008.
14.
|
RELATED
PARTY TRANSACTIONS
|
Yongke
Xue, the Chairman of the Board, and Chief Executive Officer of the Company, owns
80% of the equity interest of Hede. Xiaoqin Yan, a director of Shaanxi Tianren,
owns the remaining 20% of Hede.
In
January 2008, Shaanxi Tianren paid rental expense of RMB 11,038 (approximately
$1,615 based on the exchange rate as of March 31, 2009) to the landlord of
Hede’s office space on behalf of Hede.
On
February 26, 2008, simultaneously with the consummation of the Share Exchange
Agreement and Stock Purchase Agreement described herein, pursuant to an oral
agreement with the Company and Barron Partners, the Company issued an aggregate
of 615,147 shares of Series B Preferred Stock to Barron Partners in exchange for
the cancellation of (a) all indebtedness of the Company to Barron Partners under
certain outstanding convertible promissory notes issued to Barron Partners
during the period from September 30, 2004 to February 2008 to evidence loans
made by Barron Partners to the Company for working capital needs in the ordinary
course of business, and (b) all liquidated damages payable to Barron Partners
(including all amounts as well as any amounts which would become payable in the
future as a result of continuing failures) as a result of the failure of the
Company to have registered under the Securities Act of 1933, as amended (the
“Securities Act”) for resale by Barron Partners the Common Stock of the Company
issuable upon conversion of such convertible promissory notes under various
registration rights agreements between the Company and Barron Partners entered
into in connection with the foregoing loans.
As of the
date of this Form 10-Q Report, Barron Partners beneficially owns 10,159,265
shares of the Company’s Common Stock (approximately 31.3% of the Common Stock).
The oral agreement with Barron Partners described in the preceding paragraph was
approved by the Chief Executive Officer of the Company.
The total
amount of principal and accrued interest under all convertible promissory notes
that were cancelled aggregated approximately $1,735,286 and the total amount of
accrued liquidated damages that were cancelled aggregated approximately
$3,320,132. All of the convertible promissory notes bore interest at the rate of
8% per annum and were convertible into shares of Common Stock at a conversion
rate of one share of Common Stock for every $8.21822 of principal converted. The
registration rights agreements provided for liquidated damages to accrue at the
rate of 36% per annum of the note principal in the event that the registration
statements to register the underlying shares were not declared effective by the
required deadline.
The
number of shares of Series B Stock that were issued to Barron Partners pursuant
to the agreement was determined by dividing the aggregate indebtedness cancelled
($5,055,418) by $8.1822 per share (which was the rate at which one share of
Common Stock was issuable for principal under the convertible promissory notes).
In lieu of issuing Common Stock, the Company and Barron Partners agreed that
Barron Partners would be issued Series B Stock (which upon consummation of the
Reverse Split became convertible into Common Stock on a share for share
basis).
The
issuance of the Series B Preferred Stock was accomplished in reliance upon
Section 4 (2) of the Securities Act.
Other
assets as of March 31, 2009 included RMB 15,000,000 of deposits to purchase
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 term of the agreement, Dehao agreed to transfer 100%
of the ownership interest of Yingkou to Shaanxi Tianren. Shaanxi Tianren is
required to make a refundable down payment of RMB 15,000,000, or approximately
$2,195,261 based on the exchange rate of March 31, 2009, to Dehao as a deposit
for the purchase. The acquisition is in the negotiating process with Dehao and
also a third party market value evaluation is in process. The acquisition
is targeted to be complete in the second quarter of fiscal 2009.
16. LIQUIDATED
DAMAGES
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 that we sold to the
Investors pursuant to the Stock Purchase Agreement was declared effective by the
Securities and Exchange Commission on February 5, 2009. We accrued
liquidated damages payable 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.
19.
LEASE AGREEMENT
On June
23, 2008, Shaanxi Tianren entered into a lease agreement for China office space.
The lease has a term of one year, with a commencement date of July 1, 2008 and
covers approximately 1,400 total rentable square meters. The annual rent
is RMB 674,000, or approximately $96,858. Our new address is
16F, National Development Bank Tower, No.2 Gaoxin 1st Road, Hi-Tech
Industrial Zone, Xi’an, Shaanxi Province, PRC 710075. Our phone number is
011-86-29-88377001. 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 Form 10-Q.
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF SKYPEOPLE FRUIT JUICE, INC
FOR
THE YEARS ENDED DECEMBER 31, 2008 and 2007
REPORT
OF INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING
FIRM
To the
Board of Directors
SkyPeople
Fruit Juice, Inc.
We have
audited the accompanying consolidated balance sheets of SkyPeople Fruit Juice,
Inc. (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive income, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
2008. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.
Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SkyPeople Fruit Juice, Inc.
at December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.
/s/
Child, Van Wagoner & Bradshaw, PLLC
CHILD,
VAN WAGONER & BRADSHAW, PLLC
Salt Lake
City, Utah
March 31,
2009
SKYPEOPLE FRUIT JUICE,
INC.
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
15,274,171
|
|
|
$
|
4,094,238
|
|
Accounts
receivable
|
|
|
11,610,506
|
|
|
|
9,153,687
|
|
Other
receivables
|
|
|
297,394
|
|
|
|
55,737
|
|
Inventories
|
|
|
1,844,397
|
|
|
|
4,460,149
|
|
Advances
to suppliers and other current assets
|
|
|
1,087,076
|
|
|
|
101,628
|
|
Total
current assets
|
|
|
30,113,544
|
|
|
|
17,865,439
|
|
|
|
|
|
|
|
|
|
|
RELATED
PARTY RECEIVABLES
|
|
|
-
|
|
|
|
480,254
|
|
PROPERTY,
PLANT AND EQUIPMENT, Net
|
|
|
20,406,967
|
|
|
|
17,564,147
|
|
LAND
USAGE RIGHTS (Note 11)
|
|
|
6,404,771
|
|
|
|
6,138,297
|
|
OTHER
ASSETS
|
|
|
2,362,049
|
|
|
|
71,818
|
|
TOTAL
ASSETS
|
|
$
|
59,287,331
|
|
|
$
|
42,119,955
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
663,092
|
|
|
$
|
2,997,740
|
|
Payable-acquisition
of a subsidiary (Note 8)
|
|
|
-
|
|
|
|
1,818,418
|
|
Accrued
expenses
|
|
|
1,657,437
|
|
|
|
557,577
|
|
Accrued
liquidated damages
|
|
|
254,301
|
|
|
|
-
|
|
Related
party payables
|
|
|
23,452
|
|
|
|
143,366
|
|
Income
taxes payable
|
|
|
1,450,433
|
|
|
|
114,909
|
|
Advances
from customers
|
|
|
1,375,460
|
|
|
|
708,291
|
|
Short-term
notes payable
|
|
|
11,256,871
|
|
|
|
6,406,922
|
|
Total
current liabilities
|
|
|
16,681,046
|
|
|
|
12,747,223
|
|
|
|
|
|
|
|
|
|
|
NOTE
PAYABLE, net of current portion
|
|
|
-
|
|
|
|
2,053,501
|
|
|
|
|
-
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
$
|
16,681,046
|
|
|
$
|
14,800,724
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
1,546,319
|
|
|
|
1,073,364
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value; 10,000,000 shares authorized
3,448,480
Series B Preferred Stock issued and outstanding
|
|
|
3,448
|
|
|
|
-
|
|
Common
Stock, $0.01 par value; 100,000,000 shares authorized
22,271,786
and 22,006,173 shares issued and outstanding as of
December
31, 2008 and December 31, 2007, respectively
|
|
|
222,718
|
|
|
|
220,062
|
|
Additional
paid-in capital
|
|
|
13,791,723
|
|
|
|
10,682,755
|
|
Accumulated
retained earnings
|
|
|
22,468,934
|
|
|
|
12,458,632
|
|
Accumulated
other comprehensive income
|
|
|
4,573,143
|
|
|
|
2,884,418
|
|
Total
stockholders' equity
|
|
|
41,059,966
|
|
|
|
26,245,867
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
59,287,331
|
|
|
$
|
42,119,955
|
|
See
accompanying notes to consolidated financial statements.
SKYPEOPLE FRUIT JUICE,
INC.
|
|
For
the Year Ended December 31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Minority Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
SKYPEOPLE FRUIT JUICE,
INC.
|
|
Preferred
Stock Shares
|
|
|
Preferred
Stock
|
|
|
Common
Stock
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid
in
Capital
|
|
|
Retained
Earnings
|
|
|
Other
Comprehensive
Income
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
22,006,173
|
|
|
$
|
220,062
|
|
|
$
|
10,682,755
|
|
|
$
|
4,862,229
|
|
|
$
|
535,135
|
|
|
$
|
16,300,181
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,596,403
|
|
|
|
—
|
|
|
|
7,596,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,349,283
|
|
|
$
|
2,349,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
22,006,173
|
|
|
$
|
220,062
|
|
|
$
|
10,682,755
|
|
|
$
|
12,458,632
|
|
|
$
|
2,884,418
|
|
|
$
|
26,245,867
|
|
|
|
|
—
|
|
|
|
|
|
|
|
——
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,010,302
|
|
|
|
—
|
|
|
|
10,010,302
|
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,688,725
|
|
|
$
|
1,688,725
|
|
Share
Exchange and Private Placement Financing
|
|
|
3,448,480
|
|
|
|
3,448
|
|
|
|
265,613
|
|
|
|
2,656
|
|
|
|
3,108,968
|
|
|
|
|
|
|
|
|
|
|
|
3,115,072
|
|
Balance
at December 31, 2008
|
|
|
3,448,480
|
|
|
$
|
3,448
|
|
|
|
22,271,786
|
|
|
$
|
222,718
|
|
|
$
|
13,791,723
|
|
|
$
|
22,468,934
|
|
|
$
|
4,573,143
|
|
|
$
|
41,059,966
|
|
See
accompanying notes to consolidated financial statements.
SKYPEOPLE FRUIT JUICE,
INC.
CONSOLIDATED
STATEMENTS OF CASH
FLOW
|
December
31,
2008
|
|
|
December
31,
2007
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash flow provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
Loss
on sale of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liquidated damages
|
|
|
|
|
|
|
|
Taxes payable or receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
off of Huludao Wonder's debt
|
|
|
|
|
|
|
|
Deposits
to purchase target company
|
|
|
|
|
|
|
|
Prepayment
for lease improvement
|
|
|
|
|
|
|
|
Additions
to fixed assets
|
|
|
|
|
|
|
|
Loan
repayment from related parties
|
|
|
|
|
|
|
|
Loan
advanced to related parties
|
|
|
|
|
|
|
|
Proceeds
from sale of property, plant and equipment
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Capital
contribution from stockholders
|
|
|
|
|
|
|
|
Proceeds
from stock issuance
|
|
|
|
|
|
|
|
Repayment
of short-term loan
|
|
|
|
|
|
|
|
Proceeds
from short-term loans
|
|
|
|
|
|
|
|
Prepayments
of related party loan
|
|
|
|
|
|
|
|
Advanced
from related party
|
|
|
|
|
|
|
|
Payment
of dividends to minority shareholders
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
Effect
of Changes in Exchange Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
|
|
|
|
|
|
Purchase
of Huludao, offset by related party receivables
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
YEARS
ENDED December 31, 2008 and 2007
1. CORPORATE
INFORMATION
SkyPeople
Fruit Juice, Inc.
SkyPeople
Fruit Juice, Inc. (“SkyPeople” or the “Company”), formerly Entech Environment
Technology, Inc. (“Entech”), was formed in June 1998 under the laws of the State
of Florida. From July 2007 until February 26, 2008, our operations consisted
solely of identifying and completing a business combination with an operating
company and compliance with our reporting obligations under federal securities
laws.
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
Industry Holding Group Co., Ltd. (“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
was incorporated under the laws of the Republic of Vanuatu on November 30, 2006.
Pacific’s only business is acting as a holding company for Shaanxi Tianren
Organic Food Co., Ltd. (“Shaanxi Tianren”), a company organized under the laws
of the People’s Republic of China (“PRC”), in which Pacific holds a 99%
ownership interest.
This
share exchange transaction resulted in Pacific obtaining a majority voting and
control interest in the Company. Generally accepted accounting principles
require that the company whose stockholders retain the majority controlling
interest in a combined business be treated as the acquirer for accounting
purposes, resulting in a reverse acquisition with Pacific as the accounting
acquirer and SkyPeople as the acquired party. Accordingly, the share exchange
transaction has been accounted for as a recapitalization of the Company. The
equity sections of the accompanying financial statements have been restated to
reflect the recapitalization of the Company due to the reverse acquisition as of
the first day of the first period presented. All references to Common Stock of
Pacific Common Stock have been restated to reflect the equivalent numbers of
SkyPeople equivalent shares.
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. The 1-for-328.72898 reverse stock split of the
outstanding shares of Common Stock and a mandatory 1-for-22.006 conversion of
Series A Preferred Stock, which had been approved by written consent of the
holders of a majority of the outstanding voting stock, also became effective on
May 23, 2008.
Shaanxi Tianren Organic Food
Co., Ltd.
Shaanxi
Tianren was formed on August 8, 2001 under PRC law. Currently, Shaanxi Tianren
is 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.
On May
27, 2006, Shaanxi Tianren purchased 91.15% of Shaanxi Qiyiwangguo’s ownership
interest for a purchase price in the amount of RMB 36,460,000 (or approximately
U.S. $4,213,662). The acquisition was accounted for using the purchase method,
and the financial statements of Shaanxi Tianren and Shaanxi Qiyiwangguo have
been consolidated on the purchase date and forward.
On June
10, 2008, Shaanxi Tianren completed the acquisition of Huludao Wonder Fruit Co.,
Ltd. (“Huludao Wonder”) for a total purchase price of RMB 48,250,000, or
approximately U.S. $6,308,591. The payment was made through the offset of
related party receivables from Shaanxi Hede Investment Management Co., Ltd.
(“Hede”). Before the acquisition, Huludao Wonder had been a variable interest
entity of Shaanxi Tianren for accounting purposes according to FASB
Interpretation No. 46
:
Consolidation of Variable Interest Entities
, an interpretation of ARB 51
(“FIN 46”), since June 1, 2007, and the financial statements of Shaanxi Tianren
and Huludao Wonder have been consolidated as of June 1, 2007 and
forward.
The
Company’s current structure is set forth in the diagram below:
SkyPeople
Fruit Juice, Inc.
*
Xi’an
Qinmei Food Co., Ltd., an entity which is not affiliated with the Company, owns
the other 8.85% of the equity interests in Shaanxi Qiyiwangguo Modern Organic
Co. Ltd.). (former Xi’an Tianren Modern Organic Co. Ltd.)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial
Statements
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). This basis differs from that used in the statutory accounts of our
subsidiaries in China, 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.
In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Due to the
seasonal nature of our business and other factors, interim results are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
Certain
prior year accounts have been reclassified to conform to the current
presentation because of the acquisition of Huludao Wonder. The reclassification
had no impact on net income for the year ended December 31, 2008 and
2007.
Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
SkyPeople, Pacific, Shaanxi Tianren, Shaanxi Qiyiwangguo and Huludao Wonder. All
material inter-company accounts and transactions have been eliminated in
consolidation.
The
pooling method (entity under common control) is applied to the consolidation of
Pacific with Shaanxi Tianren and Shaanxi Tianren with Huludao Wonder. The
reverse merger accounting is applied to the consolidation of SkyPeople with
Pacific.
Economic and Political
Risks
The
Company faces a number of risks and challenges as a result of having primary
operations and marketing in the PRC. Changing political climates in the PRC
could have a significant effect on the Company’s business.
Control by Principal
Stockholders
The
directors, executive officers and their affiliates or related parties own,
beneficially and in the aggregate, the majority of the voting power of the
outstanding shares of the Common Stock of the Company. Accordingly, the
directors, executive officers and their affiliates, if they voted their shares
uniformly, would have the ability to control the approval of most corporate
actions, including increasing the authorized capital stock of the Company and
the dissolution, merger or sale of the Company’s assets.
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.
As of
December 31, 2008, the cash balance in financial institutions in the United
States was $42,153. Accounts at these financial institutions are insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At December 31,
2008, the Company had no deposits which were in excess of the FDIC insurance
limit.
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. The
determination of recoverability of assets to be held and used is made 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 cost to sell. During the reporting
periods there was no impairment loss.
Earnings Per
Share
Basic
earnings per Common Stock (“EPS”) are calculated by dividing net income
available to common stockholders by the weighted average number of Common Stock
outstanding during the period. Our Series A Convertible Preferred Stock is a
participating security. Consequently, the two-class method of income allocation
is used in determining net income available to common stockholders.
Diluted
EPS is calculated by using the treasury stock method, assuming conversion of all
potentially dilutive securities, such as stock options and warrants. Under this
method, (i) exercise of options and warrants is assumed at the beginning of the
period and shares of Common Stock are assumed to be issued, (ii) the proceeds
from exercise are assumed to be used to purchase Common Stock at the average
market price during the period, and (iii) the incremental shares (the difference
between the number of shares assumed issued and the number of shares assumed
purchased) are included in the denominator of the diluted EPS computation. The
numerators and denominators used in the computations of basic and diluted EPS
are presented in the following table.
|
|
For
the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
NUMERATOR
FOR BASIC AND DILUTED EPS
|
|
|
|
|
|
|
Net
income (numerator for Diluted EPS)
|
|
$
|
10,010,302
|
|
|
$
|
7,596,403
|
|
Net
income allocated to Preferred Stock
|
|
|
(1,716,767
|
)
|
|
|
—
|
|
Net
income to common stockholders (Basic)
|
|
$
|
8,293,535
|
|
|
$
|
7,596,403
|
|
|
|
|
|
|
|
|
|
|
DENOMINATORS
FOR BASIC AND DILUTED EPS
|
|
|
|
|
|
|
|
|
|
|
|
22,230,334
|
|
|
|
22,006,173
|
|
|
|
|
22,230,334
|
|
|
|
22,006,173
|
|
DENOMINATOR
FOR BASIC EPS
|
|
|
|
|
|
|
|
|
Add: Weighted average preferred as if
converted
|
|
|
4,601,627
|
|
|
|
-
|
|
Add:
Weighted average stock warrants outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR
FOR DILUTED EPS
|
|
|
26,831,961
|
|
|
|
22,006,173
|
|
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
Shipping and Handling
Costs
Shipping
and handling amounts billed to customers in related sales transactions are
included in sales revenues. The shipping and handling expenses of $1,344,484 and
$625,416 for 2008 and 2007, respectively, are reported in the Consolidated
Statement of Income as a component of selling expenses.
Accumulated Other
Comprehensive Income
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Trade Accounts
Receivable
During
the normal course of business, we extend unsecured credit to our customers.
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. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Based on the information available to management, the Company believed that its
allowance for doubtful accounts was adequate as of December 31, 2008. The
Company evaluates the credit risks of its customers utilizing historical data
and estimates of future performance.
Inventories
Inventories
consist primarily of raw materials and packaging (which include ingredients and
supplies) and finished goods (which includes 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 the average cost or first-in, first-out
methods.
Inventories
consisted of:
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
Raw
materials and packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets
The
Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible
Assets
(“SFAS 142”), effective January 1, 2002. Under SFAS 142, goodwill
and indefinite lived intangible assets are not amortized, but are reviewed
annually for impairment, or more frequently, if indications of possible
impairment exist. The Company has no indefinite lived intangible
assets.
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 and
determinable and collection of the revenue is reasonably assured. More than 69%
of our products are exported either through distributors with good credit or to
end-users directly. Of this amount, 80% of the revenue is exported through
distributors. Our general sales agreement requires distributors to pay us after
we deliver the products to them, which is not contingent on resale to end
customers. Our credit term for distributors with good credit history is from 30
days to 90 days. For new customers, we usually require 100% advance payment for
direct export sales. Advances from customers 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 receivables is less
than 0.5%. The problem of quality hardly occurred during production, storage and
transportation due to our maintenance of strict standards during the entire
process. Our customers have no contractual right of the return of products.
Historically, we have not had any returned products. 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.
Advertising and Promotional
Expense
Advertising
and promotional costs are expensed as incurred. The Company incurred $32,835 and
$12,945 in advertising and promotional costs for the years ended December 31,
2008 and 2007, respectively.
Estimates
The
preparation of financial statements in conformity with United States’ Generally
Accepted Accounting Principles 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, plant and equipment are
depreciated over their estimated useful lives as follows:
|
|
|
|
Furniture
and office equipment
|
|
|
|
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Furniture
and office equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
|
|
|
|
|
|
|
Depreciation
expense included in general and administration expenses for the years ended
December 31, 2008 and 2007 was $600,084 and $188,100, respectively. Depreciation
expense included in cost of sales for the years ended December 31, 2008, and
2007 was $1,139,028 and $1,138,102, respectively.
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 during fiscal year 2008.
This research and development center is expected to be completed by June 30,
2009. Our estimated future capital expenditure 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. The Company also completed a technology innovation and expansion
project of $5,869,218 over its original industrial waste water processing
facility located in the factory of Jingyang County in Shaanxi Province during
the fiscal year 2008. This 600 square meter industrial waste water processing
facility increases the capacity of waste water processing and recycling from the
current 100 cubic meters per day to 300 cubic meters per day. The expanded
industrial waste water processing facility enables the Company to increase its
production capacity in the future and will be in compliance with local
environmental laws.
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
demands 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 an employee building. We capitalized $11,149 as
construction in progress during 2008. This project is expected to be completed
by the first quarter of 2009. There will be no future input for this
project.
Capitalized
interest expenses of $39,473 are 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.
Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in Statement of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets.
No impairment of assets was recorded in
the periods reported.
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 no
material adjustments to its liabilities for unrecognized income tax benefits
according to the provisions of FIN 48.
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
Subsidiaries
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
shares held in escrow as Make Good Escrow Shares will not be accounted for on
our books until such shares are released from escrow pursuant to the terms of
the Make Good Escrow Agreement. During the time such Make Good Escrow Shares are
held in escrow, they will be accounted for as contingently issuable shares in
determining the diluted 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
Financial Accounting Standard Board Staff Position 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 were recorded as a liability and
deducted from operating income.
Our
failure to meet the timetables provided for in the Registration Rights Agreement
have resulted in the imposition of liquidated damages, which are payable in
cash to the Investors (pro rata based on the percentage of Series B Preferred
Stock owned by the Investors at the time such liquidated damages shall have
incurred) equal to fourteen percent (14%) of the Purchase Price per annum
payable monthly based on the number of days such failure exists, which amount of
liquidated damages, together with all liquidated damages that the Company may
incur pursuant to the Registration Rights Agreement, the Warrant and the Stock
Purchase Agreement, shall not exceed an aggregate of eighteen percent (18%) of
the amount of the Purchase Price.
We
initially filed with the SEC the registration statement on March 26, 2008, which
date was before the filing date deadline of March 30, 2008 in the Registration
Rights Agreement, because in the opinion of the counsel to the Company, the
Company’s audited financials for the fiscal year 2007 were required to be
included in the initial registration statement based on the applicable SEC
rules. Therefore, we were required to have the registration statement declared
effective by the SEC by July 24, 2008 (within 120 days after the initial filing
date). On February 5, 2009, the registration statement was declared effective by
the SEC. We recorded liquidated damages of $254,301 in fiscal year
2008 for failure to meet the timetables provided for in the Registration Rights
Agreement.
Research and
Development
Shaanxi
Tianren established a research and development institution with 41 research and
development personnel as of December 31, 2008. Shaanxi Tianren also from time to
time retains external experts and research institutions. Research and
development expenses were $449,695 and $30,878 for the years ended December 31,
2008 and 2007, respectively.
New Accounting
Pronouncements
We
adopted Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standard (“SFAS”) No. 157,
Fair Value Measurements
(“SFAS 157”) on January 1, 2008 for financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. SFAS 157 defines fair value, establishes a framework for measuring fair
value as required by other accounting pronouncements and expands fair value
measurement disclosures. The provisions of SFAS 157 are applied prospectively
upon adoption and did not have a material impact on our consolidated financial
statements. The disclosures required by SFAS 157 are included in Note 14, “Note
Payable,” to these consolidated financial statements.
We
adopted SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
Amendment of FASB Statement No. 115
(“SFAS 159”) as of January 1,
2008. SFAS 159 permits entities to elect to measure many financial instruments
and certain other items at fair value. We did not elect the fair value option
for any assets or liabilities which were not previously carried at fair value.
Accordingly, the adoption of SFAS 159 had no impact on our consolidated
financial statements.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements that are presented in conformity with
generally accepted accounting principles in the United States. This Statement is
effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles
. The Company
does not expect the implementation of this statement to have an impact on its
results of operations or financial position.
In
April 2008, the FASB issued FASB Staff Position (“FSP”) No. SFAS
142-3,
Determination of the
Useful Life of Intangible Assets
(“FSP SFAS 142-3”). FSP SFAS 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142,
Goodwill and Other Intangible
Assets
(“SFAS 142”). The intent of FSP SFAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141R (revised 2007),
Business Combinations
and
other applicable accounting literature. FSP SFAS 142-3 is effective for
financial statements issued for fiscal years beginning after December 15,
2008 and must be applied prospectively to intangible assets acquired after the
effective date. The adoption of this statement is not expected to have a
material impact on our consolidated financial position or results of
operations.
In March
2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities.
The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company does not expect that the adoption of SFAS No. 161 will
have a material impact on its consolidated results of operations or financial
position.
In
February 2008, the FASB issued Staff Position No. FAS 157-2, which provides for
a one-year deferral of the effective date of SFAS No. 157,
Fair Value Measurements
, for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company is evaluating the impact of this standard as it
relates to the Company’s financial position and results of
operations.
In
December 2007, the SEC published Staff Accounting Bulletin (“SAB”)
No. 110, which amends SAB No. 107 by extending the usage of a
“simplified” method, as discussed in SAB No. 107, in developing an estimate
of expected term of “plain vanilla” share options in accordance with SFAS
No. 123 (revised 2004),
Share-Based Payment
. In
particular, the SEC indicated in SAB 107 that it will accept a company’s
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. The
Company does not expect that the adoption of this SAB will have a material
impact on its consolidated results of operations or financial
position.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
Business Combinations
, (“SFAS
No. 141(R)”), and SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements
, an amendment of ARB No. 51 (“SFAS
No. 160”). These new standards are the U.S. GAAP outcome of a joint project
with the International Accounting Standards Board (“IASB”). SFAS No. 141(R)
and SFAS No. 160 introduce significant changes in the accounting for and
reporting of business acquisitions and noncontrolling interests in a subsidiary.
SFAS No. 141(R) and SFAS No. 160 continue the movement toward the
greater use of fair values in financial reporting and increased transparency
through expanded disclosures. SFAS No. 141(R) changes how business
acquisitions are accounted for and will impact financial statements at the
acquisition date and in subsequent periods. SFAS No. 160 requires
noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting for transactions
with noncontrolling interest holders. SFAS No. 141(R) and SFAS No. 160
are effective for our fiscal 2009. The Company has not completed its evaluation
of the potential impact, if any, of the adoption of SFAS No. 141(R) and
SFAS No. 160 on its consolidated financial position, results of operations
and cash flows.
3. SHARE
EXCHANGE AND PRIVATE PLACEMENT FINANCING
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
the shareholders of Pacific in a share exchange transaction and raised
$3,400,000 gross proceeds from certain accredited investors in a private
placement transaction. These transactions, collectively hereinafter referred to
as “Reverse Merger Transactions,” were consummated simultaneously on February
26, 2008, and as a result of the consummation of these transactions Pacific is
now a wholly-owned subsidiary of the Company.
The
following sets forth the material agreements that the Company entered into in
connection with the Reverse Merger Transactions and the material terms of these
agreements:
Share
Exchange Agreement
On
February 22, 2008, the Company and Terence Leong, the Company’s then Chief
Executive Officer, entered into a Share Exchange Agreement with Pacific and all
of the shareholders of Pacific (the “Share Exchange Agreement”). Pursuant to the
Share Exchange Agreement, the shareholders of Pacific agreed to exchange 100
ordinary shares of Pacific, representing a 100% ownership interest in Pacific,
for 1,000,000 shares of a newly designated Series A Convertible Preferred Stock
of the Company, par value $0.001 per share (the “Share Exchange” or the “Share
Exchange Transaction”).
Stock
Purchase Agreement
In
connection with the Share Exchange Transaction, on February 26, 2008, the
Company entered into a Series B Convertible Preferred Stock Purchase Agreement
(the “Stock Purchase Agreement”) with certain accredited investors (the
“Investors”), pursuant to which the Company agreed to issue 2,833,333 shares of
Series B Convertible Preferred Stock of the Company, par value $0.001 per share
(“Series B Stock”) and warrants to purchase 7,000,000 shares of the Company’s
Common Stock (the “Warrants”) to the Investors, in exchange for a cash payment
in the amount of $3,400,000. Under the Stock Purchase Agreement, the Company
also deposited 2,000,000 shares of the Series B Stock into an escrow account
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.
On May
23, 2008, we amended the Company’s Articles of Incorporation and changed its
name to SkyPeople Fruit Juice, Inc. to better reflect our business. A
1-for-328.72898 reverse stock split of the outstanding shares of Common Stock
and a mandatory 1-for-22.006 conversion of Series A Preferred Stock, which had
been approved by written consent of the holders of a majority of the outstanding
voting stock, also became effective on May 23, 2008.
4. CONVERTIBLE
PREFERRED STOCK
The
Series A Convertible Preferred Stock
In
connection with the Share Exchange Transaction, we designated 1,000,000 shares
of Series A Convertible Preferred Stock out of our total authorized number of
10,000,000 shares of Preferred Stock, par value $0.001 per share. Upon
effectiveness of the 1-for-328.72898 reverse stock split of the outstanding
shares of Common Stock on May 23, 2008, all the outstanding shares of Series A
Preferred Stock were immediately and automatically converted into shares of
Common Stock without any notice or action required by us or by the holders of
Series A Preferred Stock or Common Stock (the “Mandatory Conversion”). In the
Mandatory Conversion, each holder of Series A Preferred Stock received twenty
two and 62/10,000 (22.0062) shares of fully paid and non-assessable Common Stock
for every one (1) share of Series A held (the “Conversion Rate”).
Series
B Convertible Preferred Stock
In
connection with the Share Exchange Transaction, we designated 7,000,000 shares
of Series B Convertible Preferred Stock out of our total authorized number of
10,000,000 shares of Preferred Stock, par value $0.001 per share. The Series B
Convertible Preferred Stock is a participating security. No dividends are
payable with respect to the Series B Preferred Stock and no dividends can be
paid on our Common Stock while the Series B Preferred Stock is outstanding. Upon
liquidation the holders are entitled to receive $1.20 per share (out of
available assets) before any distribution or payment can be made to the holders
of any junior securities.
The
Company also deposited 2,000,000 shares of the Series B Stock into 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.
Upon
effectiveness of the Reverse Split, each share of Series B Preferred Stock is
convertible at any time into one share of Common Stock at the option of the
holder. If the conversion price (initially $1.20) is adjusted, the conversion
ratio will likewise be adjusted and the new conversion ratio will be determined
by multiplying the conversion ratio in effect by a fraction, the numerator of
which is the conversion price in effect before the adjustment and the
denominator of which is the new conversion price.
5. WARRANTS
In
connection with the Share Exchange Transaction, on February 26, 2008, the
Company entered into a Series B Convertible Preferred Stock Purchase Agreement
(the “Stock Purchase Agreement”) with certain accredited investors (the
“Investors”), pursuant to which the Company agreed to issue 2,833,333 shares of
a newly designated Series B Convertible Preferred Stock of the Company, par
value $0.001 per share (“Series B Stock”) and warrants to purchase 7,000,000
shares of the Company’s Common Stock (the “Warrants”) to the Investors, in
exchange for a cash payment in the amount of $3,400,000.
The
Warrants became exercisable after the consummation of a 1-for-328.72898 reverse
split of our outstanding Common Stock, which was effective on May 23, 2008, and
the 7,000,000 shares issuable upon exercise of such Warrants were not adjusted
as a result of such reverse split.
6. NOTE
PURCHASE AGREEMENT
On
February 26, 2008, the Company issued to Barron Partners an aggregate of 615,147
shares of Series B Stock in exchange for the cancellation of all principal and
accrued interest aggregating approximately $5,055,418 on certain promissory
notes of the Company held by Barron.
On
February 22, 2008, the Company issued to Grover Moss an aggregate of 59,060
shares of Common Stock (post split) in exchange for the conversion of principal
aggregating $398,000.
7. ACQUISITION
OF HULUDAO WONDER
On June
10, 2008, the Company completed the acquisition of Huludao for a total purchase
price of RMB 48,250,000, or approximately U.S. $6,308,591. The acquisition
is accounted for according to
FASB 141, appendix D, paragraphs 11
to 18, Transactions between Entities under Common Control.
When
accounting for a transfer of assets or exchange of shares between entities under
common control, the entity that receives the net assets or the equity interests
shall initially recognize the assets and liabilities transferred at their
carrying amounts in the accounts of the transferring entity at the date of
transfer and report results of operations for the period in which the transfer
occurs as though the transfer of net assets or exchange of equity interests had
occurred at the beginning of the period. In this regard, some of the 2007
accounts have been reclassified to be comparable to the 2008
presentation.
Prior to
the June 2008 acquisition, Huludao Wonder was classified as a variable entity of
Shaanxi Tianren according to FASB Interpretation No. 46
: Consolidation of Variable Interest
Entities (“V.I.E.”)
, an interpretation of ARB 51 (“FIN 46”). FIN 46R
requires the primary beneficiary of the variable interest entity to consolidate
its financial results with the variable interest entity. The Company had
evaluated its relationship with Huludao and had concluded that Huludao Wonder
was a variable interest entity for accounting purposes after June 2007 and prior
to June 2008.
The
following table summarizes the carrying value of Huludao Wonder’s assets and
liabilities transfer:
ASSETS
|
|
|
|
|
|
$
|
7,567
|
|
|
|
|
2,387,711
|
|
|
|
|
29,244
|
|
|
|
|
57,948
|
|
|
|
|
6,934,219
|
|
|
|
|
3,262,566
|
|
|
|
|
27,486
|
|
|
|
$
|
12,706,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,642
|
|
|
|
|
101,603
|
|
|
|
|
6,275,905
|
|
|
|
$
|
6,398,150
|
|
|
|
|
|
|
|
|
$
|
6,308,591
|
|
Pro
Forma Financial Information
The
unaudited pro forma financial information presented below summarizes the
combined operating results of the Company and Huludao Wonder for the year ended
December 31, 2007 as if the acquisition had occurred on January 1,
2007.
The pro
forma financial information is presented for informational purposes only and is
not necessarily indicative of the results of operations that would have been
achieved had the acquisition taken place on January 1, 2007. The unaudited pro
forma combined statements of operations combine the historical results of the
Company and the historical results of the acquired entity for the periods
described above.
PRO
FORMA STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED DECEMBER 31, 2007
|
|
Historical
Information of the Company(1)
|
|
|
Historical
Information of the Acquired Entity (2)
|
|
|
Pro
Forma
Adjustments
(3)
|
|
|
Pro
Forma
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
(Unaudited)
|
|
|
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|
|
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|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
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|
|
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|
|
|
|
|
|
|
|
Note: The currency exchange rate is based on the average exchange
rate of the related period.
(1)
|
The
historical operating results of the Company were based on the Company’s
unaudited financial statements for the year ended December 31,
2007.
|
(2)
|
The
historical information of Huludao was derived from the books and the
records of Huludao for the five months ended May 30,
2007.
|
(3)
|
Pro
forma adjustment was based on the assumption that the fair value of the
fixed assets and intangible assets were amortized over the life of
the assets, assuming the acquisition took place on January 1,
2007
|
8. PAYABLE-ACQUISTION
OF HULUDAO WONDER
As of
December 31, 2007, payable of $1,818,418 represents balance owed to Huludao
Wonder’s former owners upon acquisition. Amount was paid off during
2008.
9. INVENTORIES
Inventories
consisted of the following:
|
December
31,
|
|
December
31,
|
|
2008
|
|
2007
|
Raw
materials and packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. INCOME
TAX
Prior to
2007, the Company was subject to a 33% income tax rate by the PRC. The Company
had no material adjustments to its liabilities for unrecognized income tax
benefits according to the provisions of FIN 48. Shaanxi Tianren was awarded the
status of a nationally recognized High and New Technology Enterprise in December
2006, which entitled Shaanxi Tianren to tax-free treatment for two years
starting from 2007, and thereafter reduced income taxes at 50% of its regular
income tax rate then effective from 2009 to 2010. In December 2007, the tax rate
of Shaanxi Qiyiwangguo was reduced from 33% to 25%, effective beginning January
2008.
As the
Company had no income generated in the United States, there was no tax expense
or tax liability due to the Internal Revenue Service of the United States as of
December 31, 2008.
The
Company had no material adjustments to its liabilities for unrecognized income
tax benefits according to the provisions of FIN 48. The current year tax was
$2,231,140 and $1,109,160 for fiscal year 2008 and 2007, respectively. The
Company has recorded no deferred tax assets or liabilities as of December 31,
2008 and 2007, since nearly all differences in tax basis and financial statement
carrying values are permanent differences.
Income
Tax Expenses
|
|
December
31,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. LAND
USAGE RIGHTS
According
to the laws of the PRC, the government owns all of the land in the PRC.
Companies or individuals are authorized to possess and use the land only through
land use rights granted by the PRC government. Accordingly, the Company paid in
advance for land use rights. Prepaid land use rights are being amortized and
recorded as lease expenses using the straight-line method over the use terms of
the lease, which is 20 to 50 years. The amortization expenses were $160,005 and
$128,544 for fiscal year 2008 and 2007, respectively.
12. RELATED
PARTIES RECEIVABLES AND PAYABLES
As of
December 31, 2008, the Company had no outstanding loans to related entities with
common owners and directors. During the year ended December 31, 2008, Pacific
erroneously paid RMB 34,848,000, or approximately $5,007,850 based on the
average rate of the year ended December 31, 2008, to its former shareholders,
the Company’s director Xiaoqing Yan and its CEO, Yongke Xue as the result of a
dividend declaration by Pacific in February 2008 (See Note 15). 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. As of
December 31, 2008, the directors and other related parties had returned the
monies they received (along with amounts loaned to related parties prior to
January 1, 2008) in cash in the amount of $5,506,229.
During
the year ended December 31, 2008, the related party loan and advances to Hede of
RMB 48,929,272 were credited against the purchase price that the Company paid
for Huludao on June 10, 2008. The Company also paid off approximately $121,752
of its loans payable to related parties in the year ended December 31, 2008. The
indebtedness of the Company to related entities with common owners and directors
as of December 31, 2007 totaled $4,970,427 as follows. The loans were unsecured
and bear no interest. These loans had no fixed payment terms.
Name
of Related Party to Whom Loans were Given
|
|
December
31,
2007
|
|
Relation
|
|
|
|
|
|
Former
shareholder of Shaanxi Tianren
|
|
|
|
|
|
Manager
of Shaanxi Tianren
|
Xi’an
Hede Investment Consultation Company Limited
|
|
|
|
|
The
Managing Director of Xi’an Hede is one of the family members of Shaanxi
Tianren
|
Shaanxi
Xirui Group Co., Ltd.
|
|
|
|
|
Shareholder
of Shaanxi Qiyiwangguo
|
Yingkou
Trusty Fruits Co., Ltd. (“Yingkou”)
|
|
|
|
|
Hede
is a shareholder of Yingkou
|
Shaanxi
Fruits Processing Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2008, the indebtedness of the Company to its shareholders and
related entities with common owners and directors was $23,452 as
follows:
Name of Related
Party
from
Whom Loans were
Received
|
|
December
31,
2008
|
|
Relation
|
|
|
|
|
|
Former
shareholder of Shaanxi Tianren
|
|
|
|
|
|
|
As of
December 31, 2007, the indebtedness of the Company to its shareholders and
related entities with common owners and directors was $143,366 as
follows:
Name of Related
Party
from
Whom Loans were
Received
|
|
December
31,
2007
|
|
Relation
|
|
|
|
|
|
Director
of Shaanxi Tianren
|
|
|
|
|
|
Former
shareholder of Shaanxi Tianren
|
|
|
|
|
|
Former
shareholder of Shaanxi Tianren
|
|
|
|
|
|
President
of Shaanxi Tianren
|
|
|
|
|
|
Former
shareholder of Shaanxi Tianren
|
|
|
|
|
|
|
13. COMMON
STOCK
As of
December 31, 2008, the Company had 22,271,786 shares of Common Stock issued and
outstanding and 3,448,480 shares of Series B Preferred Stock issued and
outstanding (2,000,000 shares of the Series B Preferred Stock deposited in the
escrow account are not included). Assuming all five year warrants to purchase
7,000,000 shares of Common Stock with an exercise price of $3.00 per share are
exercised and all shares of Series B Preferred Stock are converted, the total
number of shares of Common Stock to be issued and outstanding will be
32,720,266.
In the
first quarter of 2008, the Company issued 31,941 shares of Common Stock as part
of the settlement with its prior Chief Executive Officer, Burr D. Northrop,
37,098 shares of Common Stock to Walker Street Associates and its prior
director, Joseph I. Emas, for the professional services that they provided, and
59,060 shares of Common Stock to Grover Moss for the conversion of principal
under the obligation of $398,000 with the Company.
On
February 26, 2008, the Company issued to Barron Partners an aggregate of 615,147
shares of Series B Stock in exchange for the cancellation of all principal and
accrued interest aggregating approximately $5,055,418 on certain promissory
notes of the Company held by Barron. The shares issued to Barron Partners were
not affected by the 1-for-328.72898 reverse split of our outstanding Common
Stock which was effective on May 23, 2008.
In
connection with the Share Exchange Transaction in February 2008, the Company
designated 1,000,000 shares of Series A Convertible Preferred Stock out of its
total authorized number of 10,000,000 shares of Preferred Stock, par value
$0.001 per share. In the Mandatory Conversion, each holder of Series A Preferred
Stock was entitled to receive twenty two and 62/10,000 (22.0062) shares of fully
paid and non-assessable Common Stock for every one (1) share of Series A held.
The Company also agreed to issue 2,833,333 shares of a newly designated Series B
Convertible Preferred Stock of the Company, par value $0.001 per share and
warrants to purchase 7,000,000 shares of the Company’s Common Stock. Upon
effectiveness of the Reverse Split on May 23, 2008, all the outstanding shares
of Series A Preferred Stock were immediately and automatically converted into
22,006,173 shares of Common Stock. Each share of Series B Preferred Stock will
be convertible at any time into one share of Common Stock at the option of the
holder. The Warrants are exercisable after the Reverse Split. The 2,833,333
shares of Series B Convertible Preferred Stock and 7,000,000 shares issuable
upon exercise of such Warrants were not adjusted as a result of the Reverse
Split.
14. NOTE
PAYABLE
In the
year ended December 31, 2008, the Company paid off RMB 98,800,000, or
approximately $14,198,105 of short-term loans payable, and transferred RMB
15,000,000, or approximately $2,155,583 based on the average exchange rate for
the year ended December 31, 2008 from long-term loans payable to short-term
loans payable, which will be due in September 2009. 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. Of these loans, $5,247,343
are collateralized by land and buildings. These loans are due from May 2009 to
October 2009.
During
2007, the Company borrowed a short-term loan from a bank in the amount of RMB
54,000,000 ($7,392,602 based on the exchange rate on December 31, 2007) with an
interest rate ranging from 5.40% to 9.48% per annum due from January 2008 to
September 2008. During December 2007, a short-term loan of RMB 720,000
($985,680) was paid off. At December 31, 2007, the short -term loan balance was
$6,406,922.
During
2007, the Company borrowed a long-term loan from a bank in the amount of RMB
15,000,000 ($2,053,501 based on the exchange rate on December 31, 2007) at the
bank’s prime rate of 9.49% plus a floating rate per annum. The loan has a term
of two years from the date of draw down. The principal of RMB 10,000,000
($1,369,000) is due on July 10, 2009, and the balance of RMB 5,000,000
($684,501) is due on September 20, 2009. At December 31, 2007, the long-term
loan balance was $2,053,501.
Effective
January 1, 2008, the Company adopted Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 157,
Fair Value Measurements
(“SFAS 157”) as it relates to financial assets and financial liabilities. The
adoption of SFAS 157 did not have a material effect on our results of
operations, financial position or liquidity.
The
Company adopted SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement
No. 115
as of January 1, 2008. SFAS 159 permits entities
to elect to measure many financial instruments and certain other items at fair
value. We did not elect the fair value option for the Company’s loans payable.
Therefore, valuation of the Company’s loans payable is not affected by the
adoption of SFAS 157 and SFAS 159.
15. DIVIDEND
PAYMENT
On
February 4, 2008, before the Share Exchange Transaction, the Board of Directors
of Shaanxi Qiyiwangguo declared a cash dividend of RMB 20,553,592, or $2,953,665
based on the average rate for the year ended December 31, 2008, to its former
shareholders. Since Shaanxi Tianren holds a 91.15% interest in Shaanxi
Qiyiwangguo, RMB 18,734,599, (or $2,692,266) was paid to Shaanxi Tianren and RMB
1,818,993 (or $261,399) was paid to its minority interest holders. On the same
date, the Board of Directors of Shaanxi Tianren declared a cash dividend of RMB
35,200,000 (or $5,058,434 based on the average exchange rate for the year ended
December 31, 2008), to its shareholders. Since Pacific holds a 99% interest in
Shaanxi Tianren, RMB 34,848,000 (or $5,007,850 based on the average exchange
rate for the year ended December 31, 2008) was paid to Pacific and RMB 352,000
(or $50,584 based on the average exchange rate for the year ended December 31,
2008) was paid to its minority interest holders. The inter-company dividend was
eliminated in the consolidated statement. The dividend paid to minority interest
holders was RMB 2,170,993 (or $311,984 based on the average exchange rate for
the year ended December 31, 2008).
In May
2008, Pacific erroneously paid RMB 34,848,000 (or $5,007,850 based on the
average exchange rate for the year ended December 31, 2008) to its former
shareholders as the result of a dividend declaration in February 2008. The
monies were then returned to the Company in June 2008 (See Note
12).
16. RELATED
PARTY TRANSACTIONS
During
the year ended December 31, 2007, the Company made a loan of $198,216 to Shaanxi
Xirui Group Co. Ltd., which is a shareholder of the former Shaanxi
Qiyiwangguo.
Yongke
Xue, the Chairman of the Board, and Chief Executive Officer of the Company, owns
80% of the equity interest of Shaanxi Hede Investment Management Co., Ltd.
(“Hede”), a PRC company. Xiaoqin Yan, a director of Shaanxi Tianren, owns the
remaining 20% of Hede.
On May
31, 2007, Huludao Wonder was acquired by Hede at the fair market price of RMB
48,250,000, which was based on a third party valuation. At the time Hede
acquired Huludao Wonder, both Hede and Shaanxi Tianren intended that Huludao
Wonder would be sold to Shaanxi Tianren after a one-year holding period. The
management of Shaanxi Tianren wanted an affiliate to run Huludao Wonder first to
make sure there were no issues before it was conveyed to Shaanxi Tianren.
Shaanxi Tianren participated significantly in the design of this purchase
transaction, and the purchase price was agreed upon by the Board of Shaanxi
Tianren. The purchase agreement under which Hede acquired Huludao Wonder
required that installments of the purchase price be paid as follows: RMB
10,000,000 on June 10, 2007; RMB 20,000,000 before September 2007; and RMB
18,250,000 before March 31, 2008. Immediately following the acquisition, Hede
leased to Shaanxi Tianren all of the assets and facilities of Huludao Wonder
under a Lease Agreement dated June 2, 2007 between Hede and Shaanxi Tianren. The
lease was for a term of one year from July 1, 2007 to June 30, 2008. The monthly
rent under the lease was RMB 300,000 (approximately $43,972 based on the
exchange rate on December 31, 2008). Upon execution of the lease, Hede was paid
RMB 1.8 million, representing the first 6 months rent, and a refundable security
deposit of RMB 1.2 million.
In
January 2008, Shaanxi Tianren paid rental expense of RMB 11,038 (approximately
$1,618 based on the exchange rate on December 31, 2008) to the landlord of
Hede’s office space on behalf of Hede.
In May
2008, Shaanxi Tianren paid to Hede an aggregate amount of RMB 1,500,000
(approximately $219,861 based on the exchange rate on December 31, 2008) of rent
for the period from January to May 2008 pursuant to the Huludao Wonder Lease. In
the same month, Shaanxi Tianren assumed Hede’s obligation of RMB 18,000,000
(approximately $2,638,329 based on the exchange rate on December 31, 2008) for
the balance of the purchase price for Huludao Wonder.
On May
31, 2008, Shaanxi Tianren entered into a Stock Transfer Agreement with Hede.
Under the terms of the Stock Transfer Agreement, Hede agreed to transfer all its
stock ownership of Huludao Wonder to Shaanxi Tianren for a total price of RMB
48,250,000 (approximately $6,308,591 based on the exchange rate on June 1,
2007). The sale was closed on June 10, 2008. As of May 31, 2008, Shaanxi Tianren
had a related party receivable of RMB 48,928,272 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 on December 31, 2008)
to Hede was repaid to the Company on June 11, 2008.
On
February 26, 2008, simultaneously with the consummation of the Share Exchange
Agreement and Stock Purchase Agreement described herein, pursuant to an oral
agreement with the Company and Barron Partners, the Company issued an aggregate
of 615,147 shares of Series B Preferred Stock to Barron in exchange for the
cancellation of (a) all indebtedness of the Company to Barron Partners under
certain outstanding convertible promissory notes issued to Barron Partners
during the period from September 30, 2004 to February 2008 to evidence loans
made by Barron Partners to the Company for working capital needs in the ordinary
course of business, and (b) all liquidated damages payable to Barron Partners
(including all amounts as well as any amounts which would become payable in the
future as a result of continuing failures) as a result of the failure of the
Company to have registered under the Securities Act of 1933 as amended (the
“Securities Act”) for resale by Barron Partners the Common Stock of the Company
issuable upon conversion of such convertible promissory notes under various
registration rights agreements between the Company and Barron Partners entered
into in connection with the foregoing loans.
As of the
date of this Annual Report, Barron Partners beneficially owns 10,159,265 shares
of the Company’s Common Stock (approximately 31.3% of the Common Stock) and is a
selling stockholder herein. The oral agreement with Barron Partners was approved
by the Chief Executive Officer of the Company.
The total
amount of principal and accrued interest under all convertible promissory notes
which were cancelled aggregated approximately $1,735,286 and the total amount of
accrued liquidated damages which were cancelled aggregated approximately
$3,320,132. All of the convertible promissory notes bore interest at the rate of
8% per annum and were convertible into shares of Common Stock at a conversion
rate of one share of Common Stock for every $8.21822 of principal converted. The
registration rights agreements provided for liquidated damages to accrue at the
rate of 36% per annum of the note principal in the event that the registration
statements to register the underlying shares were not declared effective by the
required deadline.
The
number of shares of Series B Stock that were issued to Barron Partners pursuant
to the agreement was determined by dividing the aggregate indebtedness cancelled
($5,055,418) by $8.1822 per share (which was the rate at which one share of
Common Stock was issuable for principal under the convertible promissory notes).
In lieu of issuing Common Stock, the Company and Barron Partners agreed that
Barron Partners would be issued Series B Stock (which upon consummation of the
Reverse Split became convertible into Common Stock on a share for share
basis).
The
issuance of the Series B Preferred Stock was accomplished in reliance upon
Section 4 (2) of the Securities Act.
17. CONTINGENCIES
The
Company has not, historically, carried any property or casualty insurance and
has never incurred property damage or incurred casualty losses. Management feels
the chances of such an obligation arising are remote. Accordingly, no amounts
have been accrued for any liability that could arise from a lack of
insurance.
Deposits
in banks in the PRC are not insured by any government entity or agency, and are
consequently exposed to risk of loss. Management believes the probability of a
bank failure, causing loss to the Company, is remote.
18. CONCENTRATIONS,
RISKS AND UNCERTAINTIES
The
Company does not have concentrations of business with customers constituting
greater than 10% of the Company’s revenue in fiscal year 2008 and 2007.
Sales to our
five largest customers accounted for approximately 34% and 29% of our net sales
during the years ended December 31, 2008 and 2007, respectively.
The
Company has not experienced any significant difficulty in collecting its
accounts receivable in the past and is not aware of any financial difficulties
being experienced by its major customers. There was bad debt expense of $17,690
and $0 during the years ended December 31, 2008 and 2007,
respectively.
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.
19. NEW
LEASE AGREEMENT
On June
23, 2008, Shaanxi Tianren entered into a lease agreement for China office space.
The lease has a term of one year, with a commencement date of July 1, 2008 and
covers approximately 1,400 total rentable square meters. The annual rent
is RMB 674,000, or approximately $96,858. Our new address is
16F, National Development Bank Tower, No.2 Gaoxin 1st Road, Hi-Tech
Industrial Zone, Xi’an, Shaanxi Province, PRC 710075. Our phone number is
011-86-29-88377001. 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 Form 10-K.
20. OTHER
ASSETS
Other
assets as of December 31, 2008 included RMB 15,000,000 of deposits to purchase
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 term of the agreement, Dehao agreed to transfer 100%
of the ownership interest of Yingkou to Shaanxi Tianren. Shaanxi Tianren is
required to make 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. The acquisition is in the negotiating process with
Dehao and also a third party market value evaluation is in process. The
acquisition is targeted to be complete in the second quarter of fiscal
2009.
21.
SUBSEQUENT EVENT
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 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.
Part
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
expenses payable by us in connection with this offering are as
follows:
|
|
|
Securities
and Exchange Commission Registration fee
|
|
$
|
1,587
|
Accountants’
fees and
expenses
|
|
$
|
6,000
|
Legal
fees and
expenses
|
|
$
|
60,000
|
Blue
Sky fees and
expenses
|
|
$
|
2,500
|
Transfer
Agent’s fees and
expenses
|
|
$
|
1,000
|
Printing
and engraving
expenses
|
|
$
|
5,000
|
Miscellaneous
|
|
$
|
2,500
|
Total
Expenses
|
|
$
|
78,587
|
All
expenses are estimated except for the Securities and Exchange Commission
fee.
Item
14.
Indemnification of Directors and Officers.
The
statutes, charter provisions and other arrangements under which controlling
persons, directors or officers of the Company are insured or indemnified
against any liability which they may incur in such capacity are as
follows:
Florida
Business Corporation Act
Section
607.0850 of the Florida Business Corporation Act (the “Florida Act”) provides
that a corporation may indemnify directors officers, employees or agents of the
corporation serving at the request of the corporation against liability incurred
in connection with proceedings against such party, provided such party acted in
good faith and in a manner the person reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to a
criminal action, had no reasonable cause to believe his conduct was
unlawful.
The
Florida Act further provides that a person who is successful on the merits or
otherwise in defense of an action because of service as an officer or director
of a corporation, is entitled to indemnification of expenses actually and
reasonably incurred in such defense and that expenses incurred by an officer or
director in defending a civil or criminal proceeding may be paid to such officer
or director in advance of the final disposition of such
proceeding.
Charter
Provisions
Article
VIII of our Amended and Restated Articles of Incorporation authorizes us, among
other things, to indemnify our officers, directors, employees or agents against
expenses, including attorneys’ fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with certain
actions, suits or proceedings if they acted in good faith and in a manner in
which they reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, have no
reasonable cause to believe their conduct was unlawful.
Article
VII of our Bylaws authorizes us to indemnify our officers and directors to the
fullest extent authorized or permitted by the Florida Business Corporation
Act.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities
Act and
is therefore unenforceable. In the event that a claim for indemnification
against liabilities arising under the Securities Act (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed hereby in the
Securities Act and we will be governed by the final adjudication of such
issue.
Item
15. Recent Sales of Unregistered Securities.
On June
30, 2006, the Company sold units consisting of convertible notes, convertible
into 190,735 shares of the Company’s Common Stock, and warrants, exercisable for
60,536 shares of the Company’s Common Stock. Conversion of the convertible notes
and exercise of the warrants are limited such that the note holder cannot
convert notes or exercise warrants that would result in beneficial ownership by
the holder or its affiliates of more than 4.9% of the Company’s outstanding
Common Stock on the conversion or exercise date.
The offer and
sale of the convertible notes and warrants was effected in reliance on Section
4(2) and Rule 506 of the Securities Act.
During
the year ended September 30, 2006, the Company issued 12,853 shares of its
Common Stock that were previously subscribed. The issuance of such Common Stock
was accomplished in reliance upon Section 4(2) of the Securities
Act.
As part
of a settlement with our former registered accounting firm, RBSM, the Company
issued 138 shares of its Common Stock in December, 2007. The issuance of the
Company’s Common Stock was accomplished in reliance upon Section 4(2) of the
Securities Act.
As part
of a settlement with our former Chairman and Chief Executive Officer, Steven
Rosenthal, we issued Mr. Rosenthal 913 shares of our Common Stock in December,
2007. The issuance of the Company’s Common Stock was accomplished in reliance
upon Section 4(2) of the Securities Act.
On
February 22, 2008 the Company issued to the persons set forth in the table below
the number of shares of its Common Stock set forth opposite the name of such
person for the consideration set forth opposite the name of the person. All of
such shares were issued in reliance upon an exemption from registration pursuant
to Section 4(2) of the Securities Act.
Name
|
|
Number
of Shares Issued
|
|
Consideration
for Issuance
|
|
|
|
|
|
Cancellation
of indebtedness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant
to the Share Exchange Agreement, on February 26, 2008 we issued 1,000,000 shares
of our Series A Stock to the stockholders of Pacific in exchange for all of the
outstanding shares of Pacific’s common stock. At the completion of that Share
Exchange Transaction, Pacific became the Company’s wholly owned subsidiary. The
Share Exchange Transaction was accomplished in reliance upon Section 4(2) of the
Securities Act.
In
connection with the Share Exchange Agreement, and pursuant to the Series B Stock
Purchase Agreement, on February 26, 2008, the Company issued 2,833,333 shares of
its Series B Stock, along with the February 2008 Warrants to the Selling
Stockholders, in exchange for a cash payment in the amount of $3,400,000. The
issuance of Series B Stock was accomplished in reliance upon Section 4(2) of the
Securities Act. Under the Series B Stock Purchase Agreement, the Company also
deposited 2,000,000 shares of its Series B Stock into an escrow account to be
held by an escrow agent as make good shares issuable to the Selling Stockholders
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.
On
February 26, 2008, the Company also issued to Barron Partners an aggregate of
615,147 shares of Series B Stock in exchange for the cancellation of all
principal and accrued interest, aggregating approximately $5,055,418, on certain
convertible promissory notes of the Company held by Barron Partners. The
issuance of the Series B Stock was accomplished in reliance upon Section 4(2) of
the Securities Act.
On
June 2, 2009, the Company issued to the Selling Stockholders New Warrants to
purchase an aggregate of 6,500,000 shares of the Company’s Common Stock pursuant
to the Exchange Agreement. The issuance of the New Warrants was accomplished in
reliance upon Section 4(2) of the Securities Act.
Item
16.
Exhibits and Financial Statement
Schedules.
The
exhibits to the registration statement are listed in the Exhibit Index to
this registration statement and are incorporated herein by
reference.
Item
17. Undertakings.
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement;
and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide
offering
thereof;
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering;
(4) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in this registration statement, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Shaanxi, PRC on this 12th day of
June, 2009.
SkyPeople
Fruit Juice, Inc.
|
Chief
Executive Officer (Principal Executive Officer) and
Director
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
was signed by the following persons in the capacities and on the dates
indicated.
Name
and Title
|
|
Date
|
|
|
|
/s/
Yongke Xue
|
|
June
12, 2009
|
|
|
|
Yongke
Xue
|
|
|
Chief
Executive Officer and Director
|
|
|
(principal
executive officer)
|
|
|
|
|
|
/s/
Spring Liu
|
|
June
12, 2009
|
|
|
|
Spring
Liu
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer and Accounting Officer)
|
|
|
|
|
/s/
Xiaoqing Yan
|
|
June
12, 2009
|
|
|
|
Xaioqing
Yan, Director
|
|
|
|
|
|
/s/
Guolin Wang
|
|
June
12, 2009
|
|
|
|
Guolin
Wang, Director
|
|
|
|
|
|
/s/
Robert B. Fields
|
|
June
12, 2009
|
|
|
|
Robert
B. Fields, Director
|
|
|
|
|
|
/s/
Norman Ko
|
|
June
12, 2009
|
Norman
Ko, Director
|
|
|
Exhibit
Index
2.1 Share
Exchange Agreement, dated as of February 22, 2008 by and among Pacific Industry
Holding Group Co., Ltd. (“Pacific”), Terrence Leong, the Company and the
shareholders of Pacific. Incorporated by reference to Exhibit 2.1 to our Current
Report on Form 8-K filed with the Commission on February 28, 2008 (the “February
28, 2008 8-K”).
3.1
Amended and Restated Articles of Incorporation of the Company. Incorporated by
reference to Exhibit 3.2 to our Current Report on Form 8-K filed with the
Commission on March 3, 2008 (the “March 3, 2008 8-K”).
3.3
Certificate of Designations, Preferences and Rights of the Company’s Series A
Convertible Preferred Stock. Incorporated by reference to Exhibit 3.1 to the
February 28, 2008 8-K.
3.4
Certificate of Designations, Preferences, Rights and Limitations of the
Company’s Series B Convertible Preferred Stock. Incorporated by reference to
Exhibit 3.2 to the February 28, 2008 8-K.
3.5
Bylaws of Entech, Inc. Incorporated by reference to Exhibit 3.5 to the March 3,
2008 8-K.
3.6 Articles
of Amendment to the Articles of Incorporation of the Company filed with the
Department of State of Florida on May 23, 2008. Incorporated by reference
to Exhibit 3.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2008 (the "2008 10-K").
4.1
Warrants to purchase 5,338,236 shares of the Company’s Common Stock issued to
Barron Partners LP, dated June 2, 2009.*
4.2
Warrants to purchase 970,588 shares of the Company’s Common Stock issued to
Barron Partners LP, dated June 2, 2009.*
4.3
Warrants to purchase 161,764 shares of the Company’s Common Stock
issued to Eos Holdings, LLC, dated June 2, 2009.*
4.4
Warrants to purchase 29,412 shares of the Company’s Common Stock
issued to Eos Holdings, LLC, dated June 2, 2009.*
5.1 Legal
Opinion of Guzov Ofsink, LLC re: legality of the Common Stock being
registered.*
9.1
Voting Trust Agreement, dated as of February 25, 2008, by and among Fancylight
Limited and Hongke Xue. Incorporated by reference to Exhibit 9.1 to the March 3,
2008 8-K.
9.2
Voting Trust and Escrow Agreement, dated as of February 25, 2008, by and among
Winsun Limited and Sixiao An. Incorporated by reference to Exhibit 9.2 to the
March 3, 2008 8-K.
9.3
Voting Trust and Escrow Agreement, dated as of February 25, 2008, by and among
China Tianren Organic Food Holding Company Limited and Lin Bai. Incorporated by
reference to Exhibit 9.3 to the March 3, 2008 8-K.
10.1
Series B Convertible Preferred Stock Purchase Agreement by and among the
Company, Barron Partners LP and EOS Holdings, LLC, dated as of February 25,
2008. Incorporated by reference to Exhibit 10.1 to the March 3, 2008
8-K.
10.2
Registration Rights Agreement by and among the Company, Barron Partners LP and
EOS Holdings, LLC, dated as of February 25, 2008. Incorporated by reference to
Exhibit 10.2 to the March 3, 2008 8-K.
10.3
Escrow Agreement by and among Shaanxi Tianren Organic Food Co., Ltd., Barron
Partners LP, EOS Holdings, LLC and Tri-state Title & Escrow, LLC, dated as
of February 6, 2008. Incorporated by reference to Exhibit 10.3 to the March 3,
2008 8-K.
10.4 Make
Good Escrow Agreement by and among the Company, Barron Partners LP, EOS
Holdings, LLC and Tri-state Title & Escrow, LLC, dated as of February 25,
2008. Incorporated by reference to Exhibit 10.4 to the March 3, 2008
8-K.
10.5 Call
Option Agreement between Hongke Xue and Fancylight Limited, dated as of February
25, 2008. Incorporated by reference to Exhibit 10.5 to the March 3, 2008
8-K.
10.6
Share Transfer Agreement by and among Shaanxi Hede Investment Management Co.,
Ltd. Niu Hongling, Wang Qifu, Wang Jianping, Zhang Wei, Cui Youming and Yuan Ye,
dated as of May 31, 2007. Incorporated by reference to Exhibit 10.6 to the March
3, 2008 8-K.
10.7
Lease Agreement between Shaanxi Tianren Organic Food Co., Ltd. and Shaanxi Hede
Investment Management Co. Ltd., dated as of June 2, 2007. Incorporated by
reference to Exhibit 10.7 to the March 3, 2008 8-K.
10.8 Loan
Agreement between Shaanxi Tianren Organic Food Co., Ltd. and Shaanxi Hede
Investment Management Co., Ltd., dated as of June 5, 2007. Incorporated by
reference to Exhibit 10.8 to the March 3, 2008 8-K.
10.9 Loan
Agreement between Shaanxi Tianren Organic Food Co., Ltd. and Shaanxi Hede
Investment Management Co., Ltd., dated as of August 1, 2007. Incorporated by
reference to Exhibit 10.9 to the March 3, 2008 8-K.
10.10
Stock Transfer Agreement dated as of May 31, 2008, by and between Shaanxi
Tianren Organic Food Co., Ltd. and Shaanxi Hede Investment Management Co., Ltd.
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed with the Commission on June 5, 2008.
10.11
Credit Facility Letter dated July 9, 2004 between Huludao Wonder Fruit Co., Ltd.
and Industrial-Commercial Urban Credit Cooperative. Incorporated by reference to
Exhibit 10. 11 to Pre-Effective Amendment No. 2 to thee Company’s Registration
Statement on Form S-1 (File No.. 333-149896)(the “2008 S-1”).
10.12
Credit Facility Letter dated September 25, 2004 between Huludao Wonder Fruit
Co., Ltd. and Industrial-Commercial Urban Credit Cooperative. Incorporated by
reference to Exhibit 10.12 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.13
Credit Facility Letter dated April 30, 2006 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch, Huludao City Commercial Bank. Incorporated by
reference to Exhibit 10.13 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.14
Credit Facility Letter dated August 3, 2006 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch, Huludao City Commercial Bank. Incorporated by
reference to Exhibit 10.14 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.15
Credit Facility Letter dated September 25, 2006 between Huludao Wonder Fruit
Co., Ltd. and Suizhong Branch, Huludao City Commercial Bank. Incorporated by
reference to Exhibit 10.15 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.16
Credit Facility Letter dated August 10, 2007 between Shaanxi Tianren Organic
Food Co., Ltd. and Hi-tech Industrial Development Zone, Xi’an branch of China
Construction Bank. Incorporated by reference to Exhibit 10.16 to Pre-Effective
Amendment No. 2 to the 2008 S-1.
10.17
Credit Facility Letter dated September 24, 2007 between Shaanxi Tianren Organic
Food Co., Ltd. and Gaoxin Branch of China Construction Bank. Incorporated by
reference to Exhibit 10.17 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.18
Credit Facility Letter dated September 28, 2007 between Huludao Wonder Fruit
Co., Ltd. and Suizhong Branch, Huludao City Commercial Bank. Incorporated by
reference to Exhibit 10.18 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.19
Credit Facility Letter dated April 21, 2008 between Shaanxi Tianren Organic Food
Co., Ltd. and Hi-tech Industrial Development Zone, Xi’an branch of China
Construction Bank. Incorporated by reference to Exhibit 10.19 to Pre-Effective
Amendment No. 2 to the 2008 S-1.
10.20
Credit Facility Letter dated June 18, 2008 between Shaanxi Tianren Organic Food
Co., Ltd. and Hi-tech Industrial Development Zone, Xi’an branch of China
Construction Bank. Incorporated by reference to Exhibit 10.20 to Pre-Effective
Amendment No. 2 to the 2008 S-1.
10.21
Credit Facility Letter dated June 18, 2008 between Shaanxi Tianren Organic Food
Co., Ltd. and Hi-tech Industrial Development Zone, Xi’an branch of China
Construction Bank . Incorporated by reference to Exhibit 10.21 to Pre-Effective
Amendment No. 2 to the 2008 S-1.
10.22
Credit Facility Letter dated June 27, 2008 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch, Huludao City Commercial Bank . Incorporated by
reference to Exhibit 10.22 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.23
Credit Facility Letter dated June 27, 2008 between Shaanxi Tianren Organic Food
Co., Ltd. and Hi-tech Industrial Development Zone, Xi’an branch of China
Construction Bank . Incorporated by reference to Exhibit 10.23 to Pre-Effective
Amendment No. 2 to the 2008 S-1.
10.24
Credit Facility Letter dated August 10, 2008 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch
,
Huludao City
Commercial Bank . Incorporated by reference to Exhibit 10.24 to Pre-Effective
Amendment No. 2 to the 2008 S-1.
10.25
Real Estate Lease, dated June 23, 2008 between Zhonghai Trust Co., Ltd. and
Shaanxi Tianren Organic Food Co., Ltd. for the premises located at the 16th
floor of National Development Bank Tower in Xi’an, China . Incorporated by
reference to Exhibit 10.25 to Pre-Effective Amendment No. 2 to the 2008
S-1.
10.26 Credit
Facility Letter dated October 15, 2008 between Shaanxi Tianren Organic Food Co.,
Ltd. and Hi-tech Industrial Development Zone, Gaoxin branch of China
Construction Bank. Incorporated by reference to Exhibit 10.26 to the 2008
10-K.
10.27
Credit Facility Letter dated December 5, 2008 between Shaanxi Tianren Organic
Food Co., Ltd. and Hi-tech Industrial Development Zone, Xi'an branch of the
China Construction Bank. Incorporated by reference to Exhibit 10.27 of the
2008 10-K.
10.28 Exchange
Agreement, dated as of May 28, 2009 between the Company, Barron Partners LP and
Eos Holdings, LLC. Incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on
June 3, 2009 (the “June 2009 8-K”).
10.29 Waiver
and Release, dated as of May 28, 2009 by Barron Partners LP in favor of the
Company. Incorporated by reference to Exhibit 10.2 to the June 2009
8-K.
10.30 Waiver
and Release, dated as of May 28, 2009 by Eos Holdings, LLC in favor of the
Company. Waiver and Release, dated as of May 28, 2009 by Barron Partners LP in
favor of the Company. Incorporated by reference to Exhibit 10.3 to
the June 2009 8-K.
16.1
Letter from Tavarsan Askelson & Company LLP dated March 6, 2008.
Incorporated by reference to Exhibit 16.1 to our Current Report on Form 8-K
filed with the Commission on March 6, 2008.
21.1
Description of Subsidiaries of the Company. Incorporated by reference to Exhibit
21.1 to the March 3, 2008 8-K.
23.1
Consent of counsel to the use of the opinion annexed at Exhibit 5.1 (contained
in the opinion filed as Exhibit 5.1)
23.2
Consent of Child, Van Wagoner & Bradshaw, PLLC**
* Filed
herewith
Exhibit 4.3
NEITHER
THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES OF COMMON STOCK TO
BE ISSUED ON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “1933 ACT”), OR ANY STATE SECURITIES LAWS AND
NEITHER THE WARRANT NOR THE SUCH SHARES NOR ANY INTEREST THEREIN MAY BE OFFERED,
SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE 1933 ACT, OR (2) PURSUANT
TO AN EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE
SECURITIES LAWS AND THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY AS TO SUCH EXEMPTION.
---------------------------------------
|
SKYPEOPLE FRUIT JUICE,
INC.
|
COMMON STOCK PURCHASE
WARRANT
|
Number
of Shares: 161,764
|
Original
Issue Date: June 2, 2009
|
Expiration
Date: February 24, 2013
|
Exercise
Price per Share: $1.70
|
SKYPEOPLE FRUIT JUICE, INC.
, a
Florida corporation (the “
Company
”),
hereby certifies that, for value received,
Eos Holdings LLC,
or
registered assigns (the “
Warrant
Holder
”), is entitled, subject to the terms set forth below, to purchase
from the Company up to One Hundred Sixty-One Thousand Seven Hundred Sixty-Four
(161,764) shares (as adjusted from time to time as provided in Section 7 of this
Warrant, the “
Warrant
Shares
”) of common stock, $0.001 par value (the “
Common
Stock
”), of the Company at a price per share of $1.70 (as
adjusted from time to time as provided in Section 7, the “
Exercise
Price
”), at any time and from time to time from the date hereof and
through and including 5:00 p.m. New York City time on February 24, 2013 (the
“
Expiration
Date
”), subject to the following additional terms and
conditions:
1.
Registration
of Warrant
.
The
Company shall register this Warrant upon records to be maintained by the Company
for that purpose (the “
Warrant
Register
”), in the name of the record Warrant Holder hereof from time to
time. The Company may deem and treat the registered Warrant Holder of this
Warrant as the absolute owner hereof for the purpose of any exercise hereof or
any distribution to the Warrant Holder, and for all other purposes, and the
Company shall not be affected by notice to the contrary.
2.
Investment
Representation
.
The Warrant Holder, by accepting this Warrant, represents that the Warrant
Holder is acquiring this Warrant for its own account or the account of an
affiliate (that is an “accredited investor,” as defined under Regulation D
promulgated under the 1933 Act (an “
Accredited
Investor
”),
which has been identified to and approved by the Company (such approval not to
be unreasonably withheld or delayed)) for investment purposes and not with the
view to any offering or distribution and that the Warrant Holder will not sell
or otherwise dispose of this Warrant or the underlying shares (the “
Warrant
Shares
”) in violation of applicable securities laws. The Warrant Holder
acknowledges that the certificates representing any Warrant Shares will bear a
legend indicating that they have not been registered under the 1933 Act, and may
not be sold by the Warrant Holder except pursuant to an effective registration
statement or pursuant to an exemption from registration requirements of the 1933
Act and in accordance with federal and state securities laws. If this Warrant
was acquired by the Warrant Holder pursuant to the exemption from the
registration requirements of the 1933 Act afforded by Regulation S thereunder,
the Warrant Holder acknowledges and covenants that this Warrant may not be
exercised by or on behalf of a Person (as defined below) during the one year
distribution compliance period (as defined in Regulation S) following the date
hereof.
“
Person
”
means an individual,
partnership, firm, limited liability company, trust, joint venture, association,
corporation, or any other legal entity.
3.
Validity
of Warrant and Issue of Shares
.
The Company represents and
warrants that this Warrant has been duly authorized and validly issued and
warrants and agrees that all of the Common Stock that may be issued upon the
exercise of the rights represented by this Warrant will, when issued upon such
exercise, be duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof other
than those incurred by the Warrant Holder. The Company further warrants and
agrees that during the Exercise Period, the Company will at all times have
authorized and reserved a sufficient number of Common Stock to provide for the
exercise of the rights represented by this Warrant.
4.
Registration
of Transfers and Exchange of Warrants
.
a. Subject
to compliance with the federal and state securities laws, the Company shall
register the transfer of any portion of this Warrant in the Warrant Register,
upon surrender of this Warrant with the Form of Assignment attached hereto duly
completed and signed, to the Company at the office specified in or pursuant to
Section 13. Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new warrant, a
“
New
Warrant
”), evidencing the portion of this Warrant so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining portion of
this Warrant not so transferred, if any, shall be issued to the transferring
Warrant Holder. The acceptance of the New Warrant by the transferee thereof
shall be deemed the acceptance of such transferee of all of the rights and
obligations of a Warrant Holder of a Warrant.
b. This
Warrant is exchangeable, upon the surrender hereof by the Warrant Holder to the
office of the Company specified in or pursuant to Section 9 for one or more New
Warrants, evidencing in the aggregate the right to purchase the number of
Warrant Shares which may then be purchased hereunder. Any such New Warrant will
be dated the date of such exchange.
5.
Exercise
of Warrants
.
a. Upon
surrender of this Warrant with the Form of Election to Purchase attached hereto
duly completed and signed to the Company, at its address set forth in Section
13, and upon payment and delivery of the Exercise Price per Warrant Share
multiplied by the number of Warrant Shares that the Warrant Holder intends to
purchase hereunder, in lawful money of the United States of America, by wire
transfer or by certified or official bank check or checks, to the Company, all
as specified by the Warrant Holder in the Form of Election to Purchase, the
Company shall promptly (but in no event later than 7 business days after the
Date of Exercise (as defined herein)) issue or cause to be issued and cause to
be delivered to or upon the written order of the Warrant Holder and in such name
or names as the Warrant Holder may designate (subject to the restrictions on
transfer described in the legend set forth on the face of this Warrant), a
certificate for the Warrant Shares issuable upon such exercise, with such
restrictive legend as required by the 1933 Act. Any Person so designated by the
Warrant Holder to receive Warrant Shares shall be deemed to have become holder
of record of such Warrant Shares as of the Date of Exercise of this
Warrant.
b. A
“Date of Exercise” means the date on which the Company shall have received (i)
this Warrant (or any New Warrant, as applicable), with the Form of Election to
Purchase attached hereto (or attached to such New Warrant) appropriately
completed and duly signed, and (ii) payment of the Exercise Price for the number
of Warrant Shares so indicated by the Warrant Holder to be
purchased.
c. This
Warrant shall be exercisable at any time and from time to time during the
Exercise Period for such number of Warrant Shares as is indicated in the
attached Form of Election To Purchase. If less than all of the Warrant Shares
which may be purchased under this Warrant are exercised at any time, the Company
shall issue or cause to be issued, at its expense, a New Warrant evidencing the
right to purchase the remaining number of Warrant Shares for which no exercise
has been evidenced by this Warrant.
d. (i)
Notwithstanding anything
contained herein to the contrary, but subject to Section 5(e) and Section 6, the
holder of this Warrant may, at its election exercised in its sole discretion,
exercise this Warrant in whole or in part and, in lieu of making the cash
payment otherwise contemplated to be made to the Company upon such exercise in
payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the “
Net
Number
” of shares of Common Stock determined according to the following
formula (a “
Cashless
Exercise
”):
Net
Number = (A x (B - C))/B
(ii) For
purposes of the foregoing formula:
A= the
total number shares with respect to which this Warrant is then being
exercised.
B= the
last reported sale price (as reported by Bloomberg) of the Common Stock on the
trading day immediately preceding the date of the Exercise Notice.
C= the
Warrant Exercise Price then in effect at the time of such exercise.
e. The
holder of this Warrant may not make a Cashless if the resale of the Warrant
Shares by the Holder of the Warrant Shares is covered by an effective
registration statement.
6.
Maximum
Exercise
.
The
Warrant Holder shall not be entitled to exercise this
Warrant on a Date of
Exercise in connection with that number of shares of Common Stock which would be
in excess of the sum of (i) the number of shares of Common Stock beneficially
owned by the Warrant Holder and its affiliates on the Date of Exercise, and (ii)
the number of shares of Common Stock issuable upon the exercise of this Warrant
with respect to which the determination of this limitation is being made on the
Date of Exercise, which would result in beneficial ownership by the Warrant
Holder and its affiliates of more than 4.9% of the outstanding shares of Common
Stock on such date. This Section 6 may be waived or amended only with the
consent of the Holder and the consent of holders of a majority of the shares of
outstanding Common Stock of the Company who are not Affiliates. For the purposes
of the immediately preceding sentence, the term “Affiliate” shall mean any
person: (a) that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Company; or
(b) who beneficially owns (i) any shares of the Company’s Series B Stock, or
(ii) this Warrant. As used in this Warrant, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended (the “
Exchange Act
”), and
Regulation 13d-3 thereunder.
7.
Adjustment
of Exercise Price and Number of Shares
. The character of the shares of
stock or other securities at the time issuable upon exercise of this Warrant and
the Exercise Price therefor, are subject to adjustment upon the occurrence of
any of the following events which shall have occurred or which shall occur at
any time on or after the Closing Date, and all such adjustments shall be
cumulative:
a.
Adjustment
for Stock Splits, Stock Dividends, Recapitalizations, Etc.
The Exercise
Price of this Warrant and the number of shares of Common Stock or other
securities at the time issuable upon exercise of this Warrant shall be
appropriately adjusted to reflect any stock dividend, stock split, stock
distribution, combination of shares, reverse split, reclassification,
recapitalization or other similar event affecting the number of outstanding
shares of stock or securities.
b.
Adjustment
for Reorganization, Consolidation, Merger, Etc.
In case of any
consolidation or merger of the Company with or into any other corporation,
entity or person, or any other corporate reorganization, in which the Company
shall not be the continuing or surviving entity of such consolidation, merger or
reorganization (any such transaction being hereinafter referred to as a “
Reorganization
”),
then, in each case, the holder of this Warrant, on exercise hereof at any time
after the consummation or effective date of such Reorganization (the “
Effective
Date
”), shall receive, in lieu of the shares of stock or other securities
at any time issuable upon the exercise of the Warrant issuable on such exercise
prior to the Effective Date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon the
Effective Date if such holder had exercised this Warrant immediately prior
thereto (all subject to further adjustment as provided in this
Warrant).
c.
Certificate
as to Adjustments
.
In case of any adjustment or
readjustment in the price or kind of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the holder of
this Warrant in the form of a certificate, certified and confirmed by the
Secretary of the Company, setting forth such adjustment or readjustment and
showing in reasonable detail the facts upon which such adjustment or
readjustment is based.
8.
Sales of
Common Stock at less than the Exercise Price
.
From the date hereof
until such time as the Investors hold no securities except for (i) Exempt
Issuances (as hereinafter defined), (ii) issuances covered by Sections 7(a)
hereof or (iii) an issuance of Common Stock upon exercise or upon conversion of
warrants, options or other convertible securities for which an adjustment has
already been made pursuant to this Section 7, as to all of which this Section
does not apply, if the Company closes on the sale or issuance of Common Stock at
a price, or warrants, options, convertible debt or equity securities with an
exercise price per share or a conversion price ( such sales price, conversion or
exercise price, as the case may be, being referred to as the “
Lower
Price
”) which is less than
|
(i)
|
$1.20,
the Exercise Price shall be adjusted concurrently with such issue or sale,
to the Lower Price.
|
|
(ii)
|
$2.00,
but higher than $1.20 , the Exercise Price Shall be adjusted according to
the following formula:
|
EP(1) =
EP(1) x ((A+B) /(A+C))
EP(2) =
the Warrant Exercise Price immediately after the adjustment;
For
purposes of the foregoing formula:
EP(1) =
Exercise Price immediately prior to the adjustment;
A = the
total number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares, including the exercise or conversion of all
options, warrants and other convertible securities.
B = the
number of shares of Common Stock which the aggregate consideration received or
receivable for the issuance of such additional shares would purchase at the
Exercise Price immediately prior to the adjustment;
C = the
number of such additional shares to be issued.
Such
adjustment shall be made successively whenever such an issuance is made.
Notwithstanding the foregoing adjustments no exception for Exempt Issuances will
made if such Exempt Issuances exceed 5% of the outstanding shares of Common
Stock for every two year period or if such Exempt Issuances are employee /
consultant options only and exceed 7.5% of the outstanding shares of Common
Stock for every two year period.
For
purposes of this Section 8, “Exempt Issuances” means the issuance of (a) shares
of Common Stock or options to employees, officers, directors and consultants
(other than consultants whose services relate to the raising of funds) of the
Company pursuant to any stock or option plan that was or may be adopted by (i) a
majority of independent members of the Board of Directors or (ii) a majority of
the members of a committee of independent directors established for compensatory
purposes, (b) securities upon the exercise or conversion of any securities
issued hereunder or pursuant to the Series B Convertible Preferred Stock
Purchase Agreement, dated February 25, 2008 between the Company, Barron
Partners, LP and Eos Holdings, LLC and the documents and instruments executed in
connection therewith, (c), securities issued pursuant to acquisitions, licensing
agreements, or other strategic transactions provided, any such issuance shall
only be to a person which is, itself or through its subsidiaries, an operating
company in a business which the Board of Directors of the Company believes is
beneficial to the Company and in which the Company receives benefits in addition
to the investment of funds, but shall not include a transaction in which the
Company is issuing securities primarily for the purpose of raising capital or to
an entity whose primary business is investing in securities.
9.
Fractional
Shares
.
The
Company shall not be required to issue or cause to be issued fractional Warrant
Shares on the exercise of this Warrant. The number of full Warrant Shares that
shall be issuable upon the exercise of this Warrant shall be computed on the
basis of the aggregate number of Warrants Shares purchasable on exercise of this
Warrant so presented. If any fraction of a Warrant Share would, except for the
provisions of this Section 9, be issuable on the exercise of this Warrant, the
Company shall, at its option, (i) pay an amount in cash equal to the Exercise
Price multiplied by such fraction or (ii) round the number of Warrant Shares
issuable, up to the next whole number.
10.
Sale or
Merger of the Company
.
Upon a Change in Control (as defined below), the restriction contained in
Section 6 shall immediately be released and the Warrant Holder will have the
right to exercise this Warrant concurrently with such Change in Control event.
For purposes of this Warrant, the term “Change in Control” shall mean a
consolidation or merger of the Company with or into another company or entity in
which the Company is not the surviving entity or the sale of all or
substantially all of the assets of the Company to another company or entity not
controlled by the then existing stockholders of the Company in a
transaction or series of transactions
11.
Notice of
Intent to Sell or Merge the Company
.
The Company will give
Warrant Holder ten (10) business days notice in the event of a sale of all or
substantially all of the assets of the Company or the merger or consolidation of
the Company in a transaction in which the Company is not the surviving
entity.
12.
Issuance
of Substitute Warrant
.
In the event of a merger,
consolidation, recapitalization or reorganization of the Company or a
reclassification of Company shares of stock, which results in an adjustment to
the number of shares subject to this Warrant and/or the Exercise Price
hereunder, the Company agrees to issue to the Warrant Holder a substitute
Warrant reflecting the adjusted number of shares and/or Exercise Price upon the
surrender of this Warrant to the Company.
13.
Mandatory
Exercise
.
(a)
|
i.
|
The
Company shall have the right at any time, on written notice (the “
Mandatory Exercise Notice
”) given not less
than thirty five (35) trading days prior to the Mandatory Exercise Date
(as defined below), to require that the Warrant Holder exercise this
Warrant in whole or in part, provided the volume weighted average price of
one share of Common Stock on the OTC Bulletin Board or such other
securities exchange on which the Common Stock is then traded or included
for quotation (the “
Market Price
”)
shall equal or exceed the “
Target
Price
” for twenty five (25) consecutive trading days ending on the
Notice Date, and the “Trading Volume” shall equal or exceed the “Target
Volume” on each trading day in the twenty five (25) trading days in the
period ending on the Notice Date. Notice of Mandatory Exercise provided
hereunder shall be mailed by first class mail, postage prepaid or
overnight courier, and sent by telecopier or e-mail, and shall be deemed
given on the date of receipt of the notice by the Holder (the “
Notice Date
”). Upon receipt of the
Mandatory Exercise Notice, the Holder must (i) exercise this Warrant
within thirty five (35) days; or (ii) notify the Company of its intent to
transfer this Warrant pursuant to Section 4 of this Warrant. In the event
Holder elects to transfer this Warrant pursuant to Section 4 of this
Warrant, then the subsequent holder of this Warrant must exercise this
Warrant on or before the thirty-fifth (35) day after notification of
intent to transfer this
Warrant.
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ii.
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As
used in this Section 13, the following terms shall have the meanings set
forth below:
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1.
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“
Mandatory Exercise Date
” shall mean the
date on or prior to which the Warrant is to be exercised as set forth in
the Mandatory Exercise Notice from the Company to the Holder of the
Warrant, as the same may be extended pursuant to Section 13(b)(ii) of this
Warrant.
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2.
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“
Target Price
” shall mean (a) at all times
during which the Exercise Price of this Warrant (including as a result of
anti-dilution adjustments) shall be less than $2.00 per share, $3.00 and
(b) at all times during which the Exercise Price of this Warrant or any
portion thereof shall be $2.00 or more,
$5.00.
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3.
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“
Trading Volume
” shall mean the trading
volume of the Common Stock (as reported by Bloomberg L.P. or the Nasdaq
Stock Market or the New York or American Stock Exchange, as the case may
be).
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4.
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“
Target Volume
” shall mean one hundred fifty
thousand (150,000) shares.
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b.
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Notwithstanding
any other provision of this Section
13:
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i.
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The
Company may only mandate the Holder of the Warrant to exercise this
Warrant pursuant to Section 13(a)(i) of this Warrant if a registration
statement covering the sale by the Holder of the Warrant Shares of Common
Stock issuable upon exercise of this Warrant is current and effective for
the 25 trading days prior to the Notice Date and the right of the Company
to mandate exercise only applies with respect to the Warrant Shares
included in such registration
statement.
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ii.
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In
the event that, at any time subsequent to the Notice Date and before the
Mandatory Exercise Date, the resale of the Warrant Shares are not covered
by a current and effective registration statement, the Company’s right to
mandate the exercise of the Warrant shall terminate with respect to all
Warrants that have not then been exercised or converted. Nothing in the
preceding sentence shall be construed to prohibit or restrict the Company
from thereafter calling the Warrants for exercise in the manner provided
for, and subject to the provisions of, this Section
13.
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iii.
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In
the event that the exercise by the Company of its right of redemption
pursuant to this Section 13 would result in a violation of the 4.9%
maximum exercise limitation set forth in Section 6, the Company shall not
have the right to redeem the Holders’ Warrants to the extent that the
exercise of the Warrants as to which the redemption notice is given would
result in such a violation.
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c.
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The
Mandatory Exercise Notice shall specify (i) the number of Warrant Shares
with respect to which this Warrant is to be exercise if less than all of
the Warrant Shares are to be purchased in exercising the Warrant, (ii) the
exercise date (the “
Mandatory Exercise
Date
”), and (iii) the place where the Warrant shall be delivered
and the Exercise Price shall be paid. No failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity of
the proceedings for the Company’s right to mandate exercise of the Warrant
by the Holder except as to a Holder (x) to whom notice was not mailed or
(y) whose notice was defective. An affidavit of the Chief Financial
Officer of the Company that notice of redemption has been mailed shall, in
the absence of fraud, be prima facie evidence of the facts stated
therein.
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d.
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Upon
receipt of the Mandatory Exercise Notice, the Holder of the Warrant shall
exercise the Warrant to purchase such number of shares of Common Stock on
or prior to the Mandatory Exercise Date in accordance with the Mandatory
Exercise Notice and Sections 5 and 13(b)(iv) of this
Warrant.
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e.
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The
Company may, at its sole discretion, elect to terminate any right to
exercise or convert the Warrant to the extent that the Warrant was called
by the Company for exercise but had not been exercised by the Holder in
accordance with the Mandatory Exercise Notice at 5:30 p.m. (New York City
time) on the day following the Mandatory Exercise Date. After such time,
Holders of the Warrants shall have no further rights under the
Warrant.
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14.
Notice
.
All notices and other
communications hereunder shall be in writing and shall be deemed to have been
given (i) on the date they are delivered if delivered in person; (ii) on the
date initially received if delivered by facsimile transmission followed by
registered or certified mail confirmation; (iii) on the date delivered by an
overnight courier service; or (iv) on the third business day after it is mailed
by registered or certified mail, return receipt requested with postage and other
fees prepaid as follows:
If to the
Company
:
Skypeople
Fruit Juice, Inc.
Attn: Mr.
Yongke Xue, Chief Executive Officer
16F,
National Development Bank Tower
No. 2,
Gaoxin 1
st
. Road,
Xi’an, PRC
with a
copy to, which copy shall not constitute a notice:
Guzov
Ofsink, LLC
600
Madison
New York,
New York 10022
Attention:
Darren Ofsink
E-mail:
dofsink@golawintl.com
Fax:
(212) 688-7273
If to the Warrant
Holder:
Eos
Holdings LLC:
2560
Highvale Dr
Las
Vegas, NV 89134
Attn: Jon
R. Carnes
E-mail:
jcarnes@eosfunds.com
15.
Miscellaneous.
a. This
Warrant shall be binding on and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. This Warrant may be amended
only by a writing signed by the Company and the Warrant Holder.
b. Nothing
in this Warrant shall be construed to give to any person or corporation other
than the Company and the Warrant Holder any legal or equitable right, remedy or
cause of action under this Warrant; this Warrant shall be for the sole and
exclusive benefit of the Company and the Warrant Holder.
c. This
Warrant shall be governed by, construed and enforced in accordance with the
internal laws of the State of New York without regard to the principles of
conflicts of law thereof.
d. The
headings herein are for convenience only, do not constitute a part of this
Warrant and shall not be deemed to limit or affect any of the provisions
hereof.
e. In
case any one or more of the provisions of this Warrant shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Warrant shall not in any way be affected or
impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonably
substitute therefore, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
f. The
Warrant Holder shall not, by virtue hereof, be entitled to any voting or other
rights of a stockholder of the Company, either at law or equity, and the rights
of the Warrant Holder are limited to those expressed in this
Warrant.
IN
WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by the
authorized officer as of the date first above stated.
Date:
June 2,
2009 SKYPEOPLE
FRUIT JUICE, INC.
By:
/s/ Yonke
Xue
Yongke
Xue, Chief Executive Officer
FORM
OF ELECTION TO PURCHASE
(To be
executed by the Warrant Holder to exercise the right to purchase shares of
Common Stock under the foregoing Warrant)
To:
SKYPEOPLE FRUIT JUICE, INC.:
In
accordance with the Warrant enclosed with this Form of Election to Purchase, the
undersigned hereby irrevocably elects to purchase ______________ shares of
Common Stock (“Common Stock”), $.001 par value, of SKYPEOPLE FRUIT JUICE, INC.
and encloses the warrant and $____ for each Warrant Share being purchased or an
aggregate of $________________ in cash or certified or official bank check or
checks, which sum represents the aggregate Exercise Price (as defined in the
Warrant) together with any applicable taxes payable by the undersigned pursuant
to the Warrant.
The
undersigned requests that certificates for the shares of Common Stock issuable
upon this exercise be issued in the name of:
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(Please
print name and address)
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(Please
insert Social Security or Tax Identification
Number)
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If the
number of shares of Common Stock issuable upon this exercise shall not be all of
the shares of Common Stock which the undersigned is entitled to purchase in
accordance with the enclosed Warrant, the undersigned requests that a New
Warrant (as defined in the Warrant) evidencing the right to purchase the shares
of Common Stock not issuable pursuant to the exercise evidenced hereby be issued
in the name of and delivered to:
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(Please
print name and address)
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Dated:
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Name
of Warrant Holder:
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(Print)
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(By:)
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(Name:)
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(Title:)
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Signature
must conform in all respects to name of
Warrant
Holder as specified on the face of the
Warrant
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