Future Fintech Group Inc. annual report, FY2014

Business context and reporting period

The supplied filing identifies the registrant as SkyPeople Fruit Juice, Inc., not Future Fintech Group Inc. It is a Form 10-K for the fiscal year ended December 31, 2014, rather than a quarterly filing. The company produces and sells fruit juice concentrates, bottled fruit beverages, fresh fruit and other fruit products, primarily through operations in China.

Financial performance and liquidity

Revenue grew 25%, driven principally by fruit beverages (+21%) and apple products (+102%); kiwi product revenue fell 24%. Gross margin contracted five percentage points, as higher fruit costs and lower selling prices reduced margins on several concentrate categories. Operating income declined 4%, while net income attributable to shareholders fell 35%, reflecting higher interest expense and lease-related consulting costs among other factors.

At year-end, cash and cash equivalents were $25.1 million, with another $6.5 million restricted as collateral. Working capital was $34.8 million, down from $71.9 million. Accounts receivable rose to $66.6 million from $34.2 million; $6.0 million was more than 120 days outstanding, versus $0.5 million in 2013. Cash used in investing was $40.6 million, largely for property, equipment and equipment deposits.

Reported obligations included $28.2 million in short-term bank loans, $8.2 million in bank notes payable, $18.6 million in capital lease obligations and a $8.0 million related-party loan. Total liabilities were $93.3 million. Interest expense was $4.5 million, compared with $2.0 million in 2013. The filing says projected operating cash flows, receipts, cash on hand and trade credit should cover operating requirements for at least 12 months, excluding potential production expansion spending.

Material changes, outlook and risks

• Fruit beverage sales reached $47.8 million and represented about 48% of revenue. Management plans to broaden distribution and develop higher-margin beverages, but provides no quantified revenue or earnings guidance.
• Gross margin declined to 30% from 35%; operating cash flow dropped sharply, largely due to a $33.0 million cash outflow from the increase in receivables.
• Capital investment continued: property, plant and equipment increased to $96.3 million. Equipment acquired through capital leases totaled $21.0 million. The Mei County kiwi project’s trial production was delayed to the first half of 2015; the Yidu project contemplated total investment of RMB 300 million (about $48 million).
• Environmental compliance is a material uncertainty: the pollution-emission permit for SkyPeople (China) had expired, and the company and certain subsidiaries were seeking permits. Management warned that noncompliance could result in fines or suspension or closure of operations.
• Other significant risks include seasonal production and weather-sensitive fruit supply, volatile raw-material prices, customer and distributor credit exposure, competition, food-safety regulation, PRC foreign-exchange and regulatory risks, and limited ability to transfer funds from China. The five largest customers accounted for 36% of sales, up from 24%; two suppliers represented 38% and 12% of purchases.
• Government subsidies were $0.7 million, down from $1.3 million. A $4.4 million dividend distribution to non-controlling interests appears in the equity and cash-flow statements; the company says it does not anticipate dividends on common stock.
• The company settled a securities class action; the insurer funded the $2.2 million settlement, and the court approved it in January 2014. The independent auditor issued an unqualified opinion on the 2014 financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal controls.
• The company replaced Paritz & Company with Armanino LLP at year-end. The filing reports no accounting disagreements or reportable events relating to the former auditor.

Important facts for investors to verify

• Confirm the filing belongs to the intended company: its registrant is SkyPeople Fruit Juice, Inc., not Future Fintech Group Inc.
• Assess collectability and aging of receivables, especially the $6.0 million outstanding over 120 days, and the effect of extended distributor credit on operating cash flow.
• Reconcile the filing’s bad-debt expense disclosures: MD&A and the cash-flow statement report $676,784 for 2014, while a financial-statement note reports $624,494.
• Verify the status of expired or pending pollution-emission permits, land-use certificates, and the timelines, funding needs and expected returns for major projects.
• Review debt maturities, collateral, capital-lease terms, related-party lending and sales, and the availability of restricted cash and cash held in China.
• Monitor gross-margin recovery, interest costs, and whether beverage growth can offset weaker concentrate margins and lower operating cash generation.