Business context and reporting period
The filing is a quarterly report for the three and nine months ended September 30, 2016, filed January 27, 2017. It identifies the registrant as SkyPeople Fruit Juice, Inc., not Future Fintech Group Inc.; investors should verify the filing-company and security identification. The company produces and sells fruit juice concentrates, fruit beverages, and other fruit products, principally in China. Its cover page marks “No” for having filed all required reports during the preceding 12 months.
Financial performance and position
| Metric | 2016 period/value | Comparable period/value |
|---|---|---|
| Revenue | Q3: $10.59 million; nine months: $26.26 million | Q3 2015: $10.55 million; nine months 2015: $39.28 million |
| Gross profit / margin | Q3: $3.07 million / 29%; nine months: $6.32 million / 17% | Q3 2015: $3.90 million / 37%; nine months 2015: $16.18 million / 41% |
| Operating income | Q3: $0.95 million; nine months: $0.90 million | Q3 2015: $1.46 million; nine months 2015: $8.15 million |
| Net income (loss) attributable to SkyPeople | Q3: loss of $0.42 million; nine months: loss of $1.10 million | Q3 2015: loss of $0.43 million; nine months 2015: income of $3.16 million |
| Operating cash flow | Nine months: $34.11 million | Nine months 2015: $38.21 million |
| Cash and cash equivalents | September 30: $2.53 million | December 31, 2015: $50.01 million; restricted cash then was $3.08 million |
| Liquidity and debt | Current assets $35.11 million; current liabilities $78.96 million; working capital deficit $43.85 million. Short-term bank loans $30.50 million, capital lease obligations $15.06 million, and notes payable $0.13 million. | Current liabilities at December 31, 2015: $70.72 million; short-term bank loans: $33.51 million; capital lease obligations: $16.72 million. |
Nine-month investing cash outflow was $92.93 million, principally associated with orchard purchase and lease deposits. Financing provided $23.97 million; the company reported a $47.47 million net decrease in cash and a $12.62 million adverse foreign-exchange effect. Total liabilities were $94.02 million at September 30, 2016, against total assets of $277.60 million.
Material changes versus the prior comparable period
- Nine-month revenue fell 33%, and gross profit declined about 61%; gross margin fell from 41% to 17%. Net income attributable to the company shifted from $3.16 million income to a $1.10 million loss.
- Fruit beverage revenue dropped 65% for the nine-month period, which management attributed to intense competition and consumers shifting purchases toward online grocery delivery. Concentrated kiwi and pear revenue also declined. Apple concentrate sales rose sharply from a low base, but margins were pressured by purchased product and weak market conditions.
- Q3 revenue was nearly flat year over year, but gross margin declined from 37% to 29%, mainly due to lower beverage margins and weaker pear margins. Q3 operating expenses decreased, while interest expense was lower than in 2015.
- Cash fell substantially as the company paid deposits and long-term orchard lease fees. Deposits rose to $134.91 million from $45.32 million at year-end 2015. These included about $30 million toward a proposed kiwi orchard purchase and about $61.4 million for initial-term kiwi and orange orchard leases.
Outlook, commentary, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management said operating cash flows, anticipated receipts, cash on hand, and trade credit were expected to cover projected operating requirements for at least 12 months, excluding potential production-capacity expansion. This outlook should be considered alongside the low cash balance and substantial working-capital deficit.
- Management described the business as seasonal and exposed to weather, volatile fruit prices, production costs, and competition. It reported one supplier accounted for 66% of Q3 purchases; the five largest customers accounted for 37% of Q3 sales.
- The company is pursuing major orchard and processing projects. The kiwi orchard purchase remained subject to approvals, valuation, and a definitive agreement; the company said it expected completion in Q2 2017. Management also planned to complete certain Yidu and kiwi-processing construction in 2017. Construction on the Suizhong project was suspended because of competition in concentrated fruit juice.
- A proposed transfer of 51% of a beverage subsidiary to Shaanxi New Silk Road Kiwifruit Group was terminated in January 2017 after required government approval and payment were not obtained. The company agreed not to seek compensation or penalties; the parties were to cooperate in returning the shares.
- A court proceeding remained pending over approximately RMB 39.6 million (about $6.1 million) in guarantees for supplier financing. The company disputed its repayment obligation, arguing the underlying financing arrangements were invalid.
- Management disclosed a material weakness in internal control over financial reporting due to insufficient personnel with U.S. GAAP and SEC-reporting expertise; disclosure controls were deemed ineffective. The company described hiring an assistant and plans for additional qualified staff and consultants.
- The filing reports a nine-month effective tax rate of negative 979%, attributing the unusual rate to profitable subsidiaries accruing tax while loss-making subsidiaries did not. It also reports a reverse 1-for-8 stock split in March 2016 and issuance of shares associated with a related-party loan cancellation.
Most important facts for investors to verify
- Confirm the registrant identity and filing history, including the cover-page “No” response regarding timely filing of required reports.
- Assess near-term liquidity, cash availability, the working-capital deficit, and the recoverability and terms of the large orchard-related deposits.
- Verify the status, approvals, costs, and expected returns of orchard leases, the proposed orchard purchase, and ongoing construction projects.
- Review the supplier guarantee litigation, the subsidiary share-transfer termination and share-return process, and any related financial exposure.
- Evaluate the internal-control material weakness and whether remediation has been implemented and independently validated.
- Reconcile unusual cash-flow classifications and equity changes, including the reported financing cash-flow item of $7.98 million labeled “payment for capital lease” against the related-party loan cancellation and share issuance disclosure.