Business context and reporting period
This is an unaudited Form 10-Q for the quarter and six months ended June 30, 2014, filed August 14, 2014. The filing identifies the registrant as SkyPeople Fruit Juice, Inc., not Future Fintech Group Inc.; investors should verify that this is the intended filing. The company produces and sells fruit juice concentrates, beverages, and other fruit products, principally through subsidiaries in China.
Key financial results
Amounts are in U.S. dollars. Comparisons are with the corresponding 2013 period unless noted.
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | $11.98 million; up 16% | $23.76 million; down 18% |
| Gross profit / margin | $4.55 million / 38%, versus $3.35 million / 32% | $8.23 million / 35%, versus $10.99 million / 38% |
| Operating income | $2.17 million, versus $0.94 million | $3.79 million, down from $6.43 million |
| Net income | $156,816, versus $784,189 | $793,875, versus $4.94 million |
| Net income attributable to SkyPeople | $48,868, versus $680,042; reported EPS rounded to $0 | $552,540, versus $4.50 million; EPS $0.02 versus $0.17 |
| Operating cash flow | $22.35 million for the half-year, versus $29.82 million |
- Revenue mix: Beverage revenue rose 28% in Q2 and 7% for the half-year. Concentrates and other products declined overall; first-half concentrate revenue fell particularly for pear, kiwi, and apple products. Management said beverages represented 92% of first-half revenue, compared with 59% a year earlier.
- Cash flow: Investing activities used $2.48 million in the first half, compared with $38.49 million, largely reflecting prior-year land-use-right deposits. Financing activities used $6.40 million. Cash and cash equivalents increased $12.84 million to $79.72 million; restricted cash was another $20.07 million and is not freely available.
- Balance sheet and liquidity: At June 30, total assets were $267.41 million and total liabilities $90.79 million. Working capital was $60.80 million, down from $71.91 million at year-end 2013. Management expected operating cash flows, receipts, cash on hand, and trade credit to meet operating needs for at least 12 months, excluding potential production-capacity expansion.
- Borrowings and lease obligations: Current bank notes payable were $24.95 million and short-term bank loans $22.31 million; an $8.0 million related-party loan was extended for two years in February 2014. Capital-lease obligations totaled about $20.97 million. The five-year equipment lease had equipment costs of approximately $21 million, estimated quarterly payments of approximately $1.3 million, and related consulting and service fees.
Material changes, outlook, and risks
- Q2 revenue and gross margin improved, but higher interest expense and capital-lease consulting fees contributed to a swing from $167,747 of other income in Q2 2013 to $1.91 million of other expense in Q2 2014. First-half other expense was $2.66 million, versus $313,277 of other income.
- First-half net income fell 84%, reflecting lower revenue and gross profit and the deterioration in other income/expense. Interest expense for the half-year increased to $2.56 million from $628,056; capital-lease consulting fees were $882,700.
- No quantitative earnings or revenue guidance is provided. Management described plans to expand the Hedetang beverage market and develop higher-margin products. The company reported ongoing construction and investment plans, including projects in Yidu, Mei County, and Suizhong; the kiwi project’s trial production had been delayed until the second half of 2014.
- Management described the business as seasonal and weather-sensitive, with volatile fruit prices. Supplier concentration was notable: three suppliers each represented 10% or more of first-half 2014 purchases. Beverage operations were increasingly central to revenue.
- The filing reported that a securities class action was settled, with the $2.2 million settlement funded by insurance and the case dismissed with prejudice in January 2014. A separate shareholder-demand matter was settled in April 2014; the $100,000 payment was covered by insurance and corporate-governance measures were adopted.
- Management stated that disclosure controls were effective and reported no material changes to internal control over financial reporting. It reported no off-balance-sheet arrangements. The filing says results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for SkyPeople Fruit Juice, Inc., although the request metadata names Future Fintech Group Inc.
- Review the cash restrictions, bank-note collateral and maturities, lease payment schedule, and ability to fund planned projects without weakening liquidity.
- Assess whether beverage growth can offset declining concentrate sales and whether reported margins are sustainable given fruit-cost volatility and seasonality.
- Reconcile MD&A statements with the financial tables: Q2 operating expenses declined by about 1.4%, not the stated 14%; first-half beverage gross margin was 36% versus 39%, despite MD&A wording that says it increased.
- Evaluate related-party sales and the $8.0 million related-party loan, as well as the effect of the dividend to the noncontrolling shareholder.