As filed
with the Securities and Exchange Commission on February 2, 2009
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 4 TO
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
(State or other jurisdiction of
incorporation or organization)
2033
(Primary Standard Industrial
Classification Code Number)
98-0222013
(I.R.S. Employer Identification
Number)
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16F,
National Development Bank Tower,
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Gaoxin
2nd Road, Xi’an, PRC
710075
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011-86-29-88386415
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(Address, including zip code,
and telephone number, including area code, of registrant’s principal
executive offices)
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Yongke
Xue
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16F,
National Development Bank Tower, Gaoxin 2nd
Road,
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Xi’an,
PRC 710075
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011-86-29-88386415
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(Name,
address, including zip code, and telephone number, including area code, of
agent for service)
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Copies to:
Darren
Ofsink, Esq.
GUZOV
OFSINK LLC
600
Madison Avenue, 14th
Floor,
New
York, NY 10022
Approximate date of commencement of
proposed sale to the public: From time to time after the Registration
Statement has been 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 effective 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 effective 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.
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o
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Large
accelerated filer
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o
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Accelerated
filer
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o
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Non-accelerated
filer
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x
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Smaller
reporting company
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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 hereafter 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.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND WE ARE NOT SOLICITING ANY OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT
TO COMPLETION, DATED FEBRUARY 2, 2009
PRELIMINARY
PROSPECTUS
SKYPEOPLE
FRUIT JUICE, INC.
2,833,333 Shares of Common
Stock
(underlying
Series B Preferred Stock)
7,000,000 Shares of Common
Stock
(underlying
warrants)
Offered
by Selling Stockholders
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 9,833,333 shares of our Common Stock, including (i)
2,833,333 shares issuable to them upon conversion of Series B Preferred Stock
issued to them in a private placement completed on February 26, 2008 (the
“Private Placement”) and (ii) 7,000,000 shares of Common Stock issuable to them
upon exercise of warrants issued to them in the Private Placement. The warrants
have an exercise price of $3.00 per share (subject to adjustment) and expire on
February 24, 2013.
The
selling stockholders may offer all or part of their shares for resale from time
to time through public or private transactions, at either prevailing market
prices or at privately negotiated prices. We will not receive any of the
proceeds from the sale of the shares by the selling stockholders. To the extent
the warrants are exercised for cash, if at all, we will receive the exercise
price for those warrants. Under the terms of the warrants, cashless exercise is
permitted in certain circumstances. We will not receive any proceeds from any
cashless exercise of warrants. We will pay all of the registration expenses
incurred in connection with this offering (estimated to be approximately
$236,000), but the selling stockholders will pay all of the selling commissions,
brokerage fees and related expenses.
We
changed our name from Entech Environmental Technologies, Inc. to SkyPeople Fruit
Juice, Inc. on May 23, 2008. Our Common Stock is quoted on the National
Association of Securities Dealers Over-the-Counter Bulletin Board under the
symbol “SPFJ.OB”. As of January 30, 2009, the last reported bid price for our
Common Stock was $2.50 per share and the last reported asked price was $3.00 per
share.
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.
Investing
in our Common Stock involves a high degree of risk. See “Risk Factors” beginning
on page 16 for a discussion of certain risk factors that you should
consider. You should read the entire prospectus before making an investment
decision.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is _____________
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F-1
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You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information other than that contained in
this prospectus. The selling stockholders are offering to sell and seeking
offers to buy shares of our Common Stock, including shares they acquire upon
exercise of their warrants, only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of its delivery or of any
sale of our Common Stock. This prospectus will be updated and, as updated, will
be made available for delivery to the extent required by federal securities
laws.
No person
is authorized in connection with this prospectus to give any information or to
make any representations about us, the selling stockholders, the securities
offered hereby or any matter discussed in this prospectus, other than the
information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
selling stockholder. This prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy the securities in any circumstance under which
the offer or solicitation is unlawful. Neither the delivery of this prospectus
nor any distribution of securities in accordance with this prospectus shall,
under any circumstances, imply that there has been no change in our affairs
since the date of this prospectus. This prospectus will be updated and updated
prospectuses will be made available for delivery to the extent required by the
federal securities laws.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND
OTHER
INFORMATION
CONTAINED IN THIS PROSPECTUS
This
prospectus contains some forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. Forward-looking statements involve risks and uncertainties.
Forward-looking statements include statements regarding, among other things, (a)
our projected sales, profitability, and cash flows, (b) our growth strategies,
(c) anticipated trends in our industries, (d) our future financing plans and (e)
our anticipated needs for working capital. They are generally identifiable by
use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,”
“potential,” “projects,” “continuing,” “ongoing,” “expects,” “management
believes,” “we believe,” “we intend” or the negative of these words or other
variations on these words or comparable terminology. These statements may be
found under “Management’s Discussion and Analysis of Financial Condition and
Plan of Operation” and “Business,” as well as in this prospectus generally. In
particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies such
as legal proceedings, and financial results.
Any or
all of our forward-looking statements in this report may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under “Risk Factors” and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
Currency
Unless
otherwise noted, all currency figures in this filing are in U.S. dollars.
References to “yuan” or “RMB” are to the Chinese yuan (also known as the
Renminbi). According to xe.com, as of January 30, 2009, $1 = 6.8402
yuan.
PROSPECTUS SUMMARY
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 the entire prospectus, including
“Risk Factors” (beginning on page 16) and the consolidated financial statements
(beginning on page F-1) and the related notes before making an investment
decision. Except as otherwise specifically stated or unless the context
otherwise requires, the terms “Company,” we,” “our” and “us” refer collectively
to SkyPeople Fruit Juice, Inc. (“SkyPeople”), Pacific Industry Holding Group
Co., Ltd. (“Pacific”), a wholly-owned subsidiary of SkyPeople organized under
the laws of Vanuatu, and Shaanxi Tianren Organic Food Co., Ltd. (“Shaanxi
Tianren”), a 99%-owned subsidiary of Pacific organized under the laws of the
People’s Republic of China (the “PRC”). All share and per share information
concerning our Common Stock reflects a 1-for -328.72898 reverse stock split
which became effective on May 23, 2008.
The
Company
Business
Overview
In a
series of transactions that closed on February 26, 2008, we acquired the
business and substantially all of the assets of Shaanxi Tianren Organic Food
Co., Ltd., a PRC company (“Shaanxi Tianren”). As a result of that acquisition,
Pacific Industry Holding Group Co., Ltd. (“Pacific”) a Vanuatu corporation,
became our wholly owned subsidiary. Pacific in turn owns 99% of the equity
interest of Shaanxi Tianren.
Through
Pacific and Shaanxi Tianren, we are engaged in the business of research and
development, production and sale of special concentrated fruit juices,
fast-frozen and freeze-dried fruits and vegetable and fruit juice
drinks.
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. On May 23,
2008 a 1-for-328.72898 reverse stock split of our outstanding shares of Common
Stock and a mandatory 1-for-22.006 conversion of Series A Preferred Stock into
our Common Stock, which had been approved by written consent of the holders of a
majority of the outstanding voting stock, also became effective.
Principal
Products
Our
principal products include concentrated apple juice, concentrated pear juice,
concentrated kiwifruit puree, fruit juice drinks, fresh fruits and organic fresh
fruits.
There are
two general categories of fruit and vegetable juices available in the market.
One is fresh juice that is canned directly after filtering and
sterilization upon being squeezed out of fresh fruits or vegetables. The other
general category is juice drinks made out of concentrated fruit and vegetable
juices. Concentrated fruit and vegetable juices are produced through pressing,
filtering, sterilization and evaporation of fresh fruits or vegetables. They are
used as the base material or ingredient for products such as drinks, fruit jams
and fruit wines, etc. Concentrated juices are not drinkable. Instead, they are
used as a basic ingredient for manufacturing.
Corporate
History
We were
initially incorporated in 1998 in Florida as Cyber Public Relations, Inc. for
the purpose of providing internet electronic commerce consulting services to
small and medium sized businesses. While we were operating under the name Cyber
Public Relations, Inc. we never had any material operations or revenues. On
January 21, 2004, pursuant to a Capital Stock Exchange Agreement between the
stockholders of Environmental Technologies, Inc., a Nevada corporation, the
Environmental Technologies stockholders transferred all of their shares of the
Environmental Technologies stock to us in exchange for approximately 29,051
shares of our Common Stock.
As a
result of the stock exchange discussed above, Environmental Technologies, Inc.
became our wholly-owned subsidiary and the Environmental Technologies
stockholders acquired approximately 97% of the issued and outstanding shares of
our Common Stock. We changed the Company’s name from “Cyber Public Relations,
Inc.” to “Entech Environmental Technologies, Inc.” Immediately following the
exchange, Barron Partners LP (“Barron Partners”) acquired approximately 6,084
shares of our Common Stock and warrants for the purchase of approximately 21,750
shares of our Common Stock. However, on September 30, 2004, Barron
Partners agreed to the cancellation of all such warrants.
After our
acquisition of Environmental Technologies, we operated, through our wholly owned
subsidiary, H.B. Covey, Inc., a business providing construction and maintenance
services to petroleum service stations in the southwestern part of the United
States of America and installation services for consumer home products in
Southern California.
During
July 2007, we entered into a Stock Sale and Purchase Agreement to sell H.B.
Covey, Inc. for an aggregate selling price of $100,000 in cash which we were to
receive by September 30, 2007, and approximately 5,475 shares of Company stock
which the Company was to receive or cancel from the then CEO and CFO, Burr
Northrop, by December 31, 2007. The sale of the business was for the book value
of the property and equipment assets resulting in a gain of approximately
$34,000. Under the terms of the sale, HB Covey, Inc. assumed certain
liabilities.
We
completed the sale during July 2007 and received the $100,000 in cash from Burr
Northrop by September 30, 2007 consistent with the Sale and Purchase Agreement.
As of September 30, 2007, the 5,475 shares were not received or cancelled and
the Company recorded a receivable for the fair value of these shares as of
September 30, 2007 in the amount of $120,000. The Company received and cancelled
the 5,475 shares during the quarter ended December 31, 2007 consistent with the
Sale and Purchase Agreement.
Organizational
History of Pacific Industry Holding Co., Ltd.
Pacific
was incorporated under the laws of the Republic of Vanuatu on November 30, 2006.
Until the consummation of the Share Exchange discussed in the section “Share
Exchange and Private Placement Financing” below, Winsun Limited owned 10% of the
outstanding capital stock of Pacific, China Tianren Organic Food Holding Company
Limited owned 10% of the outstanding capital stock of Pacific and Fancylight
Limited owned 80% of the outstanding capital stock of Pacific.
Organizational
History of Shaanxi Tianren
Shaanxi
Tianren Organic Food Co., Ltd. (“Shaanxi Tianren”) was formed on August 8, 2001
under PRC law under the original name of Xi’an Zhonglv Ecology Science and
Technology Industry Co., Ltd. On June 16, 2005, the name of Shaanxi Tianren was
changed to its current name, Shaanxi Tianren Organic Food Co., Ltd. In December
2003, Shaanxi Tianren switched from its original business of researching,
producing and distributing biodegradation starch resin aggregate to developing,
producing and distributing concentrated fruit juices.
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.
In
September 2007, Pacific acquired 99% of Shaanxi Tianren’s shares. Shaanxi
Tianren converted from a PRC domestic company to a foreign Joint Venture company
(the “JV”) by obtaining the approval of the PRC Ministry of
Commerce.
Shaanxi
Tianren’s current ownership structure is as follows:
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Stockholder
Name
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Percentage
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Pacific
Industry Holding Group Co., Ltd.
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99 | % | ||
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Yongke
Xue
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0.3 | % | ||
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Hongke
Xue
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0.3 | % | ||
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Xiaoqin
Yan
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0.2 | % | ||
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Yuan
Cui
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0.2 | % | ||
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.
Pacific’s
only business is acting as a holding company for Shaanxi Tianren, in which
Pacific holds a 99% ownership interest. Currently, Shaanxi Tianren is engaged in
the business of research and development, production and sale of special
concentrated fruit juices, fast-frozen and freeze-dried fruits and vegetables
and fruit juice drinks.
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 Terrence Leong 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 25, 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 $3,400,000 (the “Purchase Price”).
(The Warrants first became exercisable after the consummation of a
1-for-328.72898 reverse split of our outstanding Common Stock described under
“Covenants-Amendment of Articles of Incorporation” below, and the 7,000,000
shares issuable upon exercise of such Warrants were not adjusted as a result of
such reverse split.) Under the Stock Purchase Agreement, the Company also agreed
to deposit 2,000,000 shares of Series B Stock into an escrow account to be held
by an escrow agent as make good shares in the event the Company’s consolidated
pre-tax income and pre-tax income per share, on a fully-diluted basis, for the
years ended December 31, 2007, 2008 or 2009, are less than certain
pre-determined target numbers.
The Stock
Purchase Agreement provides for the purchase by the Investors referred to below,
who are also the selling stockholders, of the securities described
below.
|
Name
and Address
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Amount
of Investment
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Number
of Shares of
Series
B Preferred
Stock
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Number
of Shares of
Common
Underlying
Series
B Preferred
Stock
*
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Number
of Shares of
Common
Underlying
Warrants*
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Barron
Partners LP
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$
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3,300,000
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2,750,000
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2,750,000
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6,794,118
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Eos
Holdings, LLC
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100,000
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83,333
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83,333
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205,882
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Total
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$
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3,400,000
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2,833,333
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2,833,333
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7,000,000
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|||||
*Such
number of shares gives effect to the 1-for-328.72898 reverse split of our
outstanding Common Stock which became effective May 23, 2008.
Representations;
Warranties; Indemnification: The Stock Purchase Agreement
contains representations and warranties by us and the Investors which are
customary for transactions of this type. The Stock Purchase Agreement also
obligates us to indemnify the Investors for any losses arising out of any breach
of the agreement or failure by us to perform with respect to the
representations, warranties or covenants in the agreement.
Covenants:
The Stock Purchase Agreement contains certain covenants on our part, including
the following:
Preferred Stock: We
may not issue any preferred stock or convertible debt for three years following
February 26, 2008, the closing date of the Stock Purchase Agreement, for so long
as the Investors shall continue to beneficially own 20% of the Series B
Preferred Stock issued under the Stock Purchase Agreement.
Insider Selling: No
person who is an officer, director or affiliate of the Company on February 26,
2008 or who becomes our officer or director subsequent to February 26, 2008, may
sell any shares of our Common Stock in the public market prior to the earlier of
thirty six (36) months from the date the registration statement is filed
pursuant to the Registration Rights Agreement (as defined below) is deemed
effective. Andrew Barron Worden, Managing Partner of Barron Partners, and the
Investors are not subject to this covenant.
Use of Proceeds: We
must use the proceeds of the financing for acquisitions, working capital and
other general corporate purposes.
Debt: Our
debt-to-EBITDA ratio, at any given date, cannot exceed 3.5:1 for the most recent
12-month period until the expiration of two (2) years from February 26,
2008.
Independent
Directors: Prior to April 26, 2008, we were required to increase the size
of our Board of Directors to five or seven and cause the appointment of such
number of people to our Board of Directors so that upon such appointments a
majority of our Board of Directors would be “independent directors,” as defined
by the rules of the Nasdaq Stock Market. If we had breached this covenant,
we would have been required to pay the Investors liquidated damages equal to
fourteen percent (14%) of the Purchase Price (as defined in the Stock Purchase
Agreement to be $3,400,000) per annum, payable monthly in cash as calculated
based on the number of days that we were not in compliance with this covenant.
On April 7, 2008, Xiaoqin Yan and Guolin Wang were appointed as directors. On
April 25, 2008, Norman Ko and Robert B. Fields were appointed as directors and
as of the date this prospectus our Board of Directors is comprised of five
people, three of whom (Guolin Wang, Norman Ko and Robert Fields) are independent
directors.
Independent Directors on
Audit and Compensation Committees: We were required, prior to April 26,
2008, to appoint (i) an Audit Committee comprised solely of not less than three
independent directors and (ii) a Compensation Committee comprised of not less
than three directors, a majority of whom are independent directors. If we had
breached this covenant, we would have been required to pay the Investors
liquidated damages in an amount equal to fourteen percent (14%) of the Purchase
Price per annum, payable monthly in cash as calculated based on the number of
days that we were not in compliance with this covenant. On April 25, 2008, we
established an Audit Committee and Compensation Committee of our Board of
Directors. On such date Norman Ko, Robert Fields and Guolin Wang, each of whom
is an independent director, were elected as the sole members of the Audit
Committee and Norman Ko, Guolin Wang and Yongke Xue were elected as the
sole members of the Compensation Committee.
Chief Financial
Officer: We were required, prior to March 28, 2008, to hire a Chief
Financial Officer who speaks and understands both English and Chinese and is
familiar with United States Generally Accepted Accounting Principles (“U.S.
GAAP”). If we had breached this covenant, we would have been required to pay the
Investors liquidated damages in an amount equal to fourteen percent (14%) of the
Purchase Price per annum, payable monthly in cash as calculated based on the
number of days that we were not in compliance with this covenant. On March 18,
2008, Song Liu was appointed as our Chief Financial Officer. Effective April 14,
2008, Song Liu resigned from her position as Chief Financial Officer. On the
same date, in replacement of Song Liu, the Board of Directors appointed Spring
C. Liu as the Company’s Chief Financial Officer and principal financial and
accounting officer.
Listing, Securities Exchange
Act of 1934 and Rule 144: We are prohibited from taking any action to
terminate or suspend our reporting and filing obligations under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), or the Securities Act of
1933, as amended (the “Securities Act”), except as permitted under the
transaction documents for the Reverse Merger Transaction. We are required to
take all action necessary to continue the quotation or listing of our Common
Stock on the OTC Bulletin Board or other exchange or market on which the Common
Stock is trading or may be traded in the future. If we breach this covenant, we
are required to pay the Investors liquidated damages in an amount equal to
fourteen percent (14%) of the Purchase Price per annum, payable monthly in cash
as calculated based on the number of days that we are not in compliance with
this covenant.
Liquidated Damages and
Limitations: Our aggregated obligations to pay liquidated damages under
the Stock Purchase Agreement, the Warrants and the Registration Rights Agreement
which we entered into in connection with the Stock Purchase Agreement and which
is summarized below shall not exceed eighteen percent (18%) of the total
Purchase Price. If, pursuant to the Stock Purchase Agreement and the
Registration Rights Agreement, we incur liquidated damages and are required to
pay the Investors in cash and we fail to pay the Investors within fifteen (15)
days following the end of the month when such cash liquidated damages become
due, then, at the election of the Investors, we are required to deliver to each
Investor shares of Series B Preferred Stock as liquidated damages pro rata based
on the percentage that the number of Series B Preferred Stock beneficially owned
by such Investor bears to the total number of Series B Preferred Stock
outstanding at the time when the cash liquidated damages are due.
Employment and Consulting
Contracts: Until February 26, 2011, and for so long as the Investors
continue to beneficially own in the aggregate at least 20% of Series B Preferred
Stock issued under the Stock Purchase Agreement, we must obtain approval from
the majority of the independent directors of the Board of Directors that any
awards other than salary are customary, appropriate and reasonable for any
officer, director or consultant whose compensation is more than $100,000 per
annum.
Price Adjustments:
For so long as the Investors shall hold at least 20% of the Series B Preferred
Stock issued (except for certain exempt issuances not to exceed 5% of the
outstanding shares of our Common Stock for every two year period and certain
other issuances which do not apply pursuant to the Certificate of Designations),
if the Company closes on the sale or issuance of Common Stock at a sale price,
or warrants, options, convertible debt or equity securities with an exercise or
conversion price per share which is less than the Conversion Price (as defined
in the Certificate of Designation) then in effect, the Conversion Price in
effect from and after the date of such transaction shall be adjusted in
accordance with the terms of the Certificate of Designations.
Retention of Investor
Relations Firm: We were required to retain an investor relations firm
prior to April 26, 2008. On April 21, 2008, we retained CCG Elite as our
investor relations firm. On October 27, 2008, we replaced CCG Elite with
The Piacente Group, Inc. as our investor relations consulting firm.
Agreements Regarding Huludao
Wonder and YinKou Trusty Factory: Prior to March 26, 2008, we were
required to cause Shaanxi Tianren, our indirect subsidiary in the PRC, to (i)
extend the term of its current management and lease agreement with Huludao
Wonder Factory (the “Huludao Wonder Agreement”) to twenty (20) years under the
terms and conditions similar to those in the current management agreement, and
(ii) enter into an agreement with YinKou Trusty Factory under the terms and
conditions similar to those in the Huludao Wonder Agreement. On March 20, 2008,
Shaanxi Tianren extended the terms of the Huludao Wonder Agreement and entered
into an agreement with YinKou Trusty Factory under the terms and conditions
similar to those in the Huludao Wonder Agreement. In addition, we are required
to cause Shaanxi Tianren to make arrangements, including without limitation
acquisition arrangements, with Huludao Wonder Factory and YinKou Trusty Factory
so that after giving effect to such arrangements, the financial statements of
Huludao Wonder Factory and YinKou Trusty Factory can be consolidated into the
Company’s financial statements in accordance with the principles of U.S. GAAP.
On June 10, 2008, we completed the acquisition of Huludao
Wonder.
Amendment of Articles of
Incorporation: We were required to effect a 1-for-328.72898 reverse split
of our outstanding Common Stock. In the event the reverse split was not effected
prior to June 2, 2008, we would have been required to pay to the Investors, pro
rata, as liquidated damages, an amount equal to one percent (1%) of the Purchase
Price per month, payable monthly in cash as calculated based on the number of
days that we are not in compliance with this covenant. On May 23, 2008, we
completed a 1-for-328.72898 reverse stock split of Common Stock with a mandatory
1-for-22.006 conversion of Series A Stock into our Common Stock.
Right of First
Refusal: Prior to February 26, 2011 and for so long as the Investors
shall continue to beneficially own in the aggregate at least 20% of Series B
Preferred Stock or the Common Stock issued thereunder, the Investors have the
right to participate pro rata in any financing (other than certain exempt
issuances and issuances of the Company’s securities in a firm underwritten
IPO).
Delivery of up to
2,000,000 Additional Shares of Series B Preferred Stock from Escrow Based on
Pre-Tax Income and Pre-Tax Income Per Share: We delivered to an escrow
agent at the closing of the Stock Purchase Agreement 2,000,000 shares of Series
B Preferred Stock (the “Make Good Escrow Stock”). If our consolidated “pre-tax
income” for the year ended December 31, 2007 was less than RMB 67,400,000 (or
the required pretax income per share), or our consolidated pre-tax income for
the fiscal year ending December 31, 2008 is less than RMB 84,924,000 (or the
corresponding required pre-tax income per share), or our consolidated pre-tax
income for the fiscal year ending December 31, 2009 is less than RMB 107,004,240
(or the corresponding required pre-tax income per share), then the agreement
provides that if the percentage shortfall (determined by dividing the amount of
the shortfall by the applicable target number) for the fiscal year 2007 was
greater than 50%, then the escrow agent would have been required to deliver to
the Investors all of the Make Good Escrow Stock pro rata according to the
Investors’ ownership percentages. (Each Investor’s ownership percentage is the
ratio of such Investor’s initial purchase price to the total purchase paid under
the Stock Purchase Agreement.) If the percentage shortfall for 2007 was less
than fifty percent (50%), then an adjustment percentage (equal to the percentage
that the percentage shortfall bears to fifty percent (50%)) shall be determined
and the escrow agent shall deliver to an Investor according to such Investor’s
ownership percentage such number of shares of Series B Preferred Stock as is
determined by multiplying the adjustment percentage by the Make Good Escrow
Stock in escrow and the escrow agent shall retain the balance. If, after giving
effect to the adjustment and delivery to the Investors as described in the
foregoing, there are shares of Make Good Escrow Stock remaining, the same
procedures shall apply based on our pre-tax income for our fiscal years 2008 and
2009. Our pre-tax income for the year ended December 31, 2007 was RMB
68,939,855. Therefore, there was no shortfall for such year and no Make Good
Escrow Stock has been delivered to any Investor out of the escrow.
Subsequent
Transactions: As
long as any Investor holds any of the Series B Preferred Stock or Common Stock
issuable upon conversion of the Series B Preferred Stock or exercise of warrants
issued under the Stock Purchase Agreement, we are prohibited from effecting or
entering into an agreement to effect any transaction involving a variable rate
transaction or an MFN transaction. A “variable rate transaction” means a
transaction in which we issue or sell any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time after
the initial issuance of such debt or equity securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such debt or equity security or upon
the occurrence of specified or contingent events directly or indirectly related
to our business or the market for our Common Stock. An “MFN transaction” means a
transaction in which we issue or sell any securities in a capital raising
transaction (or series of related transactions) which grants an investor the
right to receive additional shares based upon future transactions of the Company
on terms more favorable than those granted to such investor in such offering.
Investors are entitled to obtain injunctive relief against us to preclude any
such issuance.
Registration
Rights Agreement
In
connection with the Stock Purchase Agreement, on February 26, 2008, the Company
entered into a Registration Rights Agreement with the Investors party to the
Stock Purchase Agreement (the “Registration Rights Agreement”), pursuant to
which the Company agreed to prepare and file one or more registration statements
to register for resale the shares of the Common Stock of the Company issuable
upon conversion of the Series B Stock and upon exercise of the warrants issued
to the Investors under the Stock Purchase Agreement, except for shares issued or
issuable as liquidated damages. Under the terms of the Registration Rights
Agreement we are required:
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with
respect to the initial registration statement, to prepare and file the
initial registration statement prior to March 26, 2008; provided, however,
that, if in the opinion of the counsel to the Company that the Company’s
audited financials for the fiscal year 2007 are required to be included in
the initial registration statement based on the applicable SEC rules, then
such filing date shall be delayed to the earliest date when the Company’s
audited financials for the fiscal year 2007 become available, but no later
than March 30, 2008, and with respect to any subsequent registration
statements, the later of (a) ninety (90) days after the Company receives a
demand for registration of additional registrable securities or (b) thirty
(30) days following the earliest practical date on which the Company
is permitted by the SEC to file such additional registration statement
related to the registrable securities (which is at least 180 days from the
effective date of the initial registration
statement);
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with
respect to the initial registration statement, to use our commercially
reasonable best efforts to have that registration declared effective on
the earlier of 150 days after the closing date (February 26, 2008);
however, if the filing date is delayed because the Company’s audited
financials for the fiscal year 2007 are required to be included in the
initial registration statement based on the applicable SEC rules, then 120
days following the filing date; and
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with
respect to the initial registration statement or any subsequent
registration statement, to use our commercially reasonable best efforts to
have that registration declared effective ten (10) days following receipt
of a no review or similar letter from the SEC or the third business day
following the day we receive notice from the SEC that the SEC has
determined that the registration statement is eligible to be declared
effective without further comments by the
SEC.
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Under the
Registration Rights Agreement, the Investors have also been granted demand
registration rights which require us, for so long as no more than eighty percent
(80%) of the Series B Preferred Stock and Common Stock issuable upon conversion
of such Series B Preferred Stock and issuable upon exercise of the warrants
issued under the Stock Purchase Agreement have been registered or sold, to use
our commercially reasonable best efforts to file such registration statement
under the Securities Act as promptly as practicable upon our receipt of the
Investors’ demand to register their registrable securities and cause such
registration statement to be declared effective. Under the agreement we are also
required to notify each Investor promptly when any such registration statement
has been declared effective.
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. In the event the SEC does not permit all of
the registrable securities to be included in a Registration Statement because of
its application of Rule 415, we will not incur any liquidated damages with
respect to any registrable securities that we were not permitted to include on
such registration statement and no liquidated damages will be payable for such
failure with respect to any warrant shares.
We
initially filed with the SEC the registration statement of which this prospectus
comprises a part 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). As of February 2, 2009 the
registration statement had not been declared effective by the SEC. Therefore, as
of such date, an aggregate of $251,693 in liquidated damages is due to the
Investors pursuant to the Registration Rights Agreement. Assuming the
registration statement will be declared effective by the SEC on February 6,
2009, an aggregate of $256,910 in liquidated damages will be due to the
Investors pursuant to the Registration Rights Agreement.
Make
Good Escrow Agreement
In
connection with the Stock Purchase Agreement, on February 26, 2008, we entered
into a Make Good Escrow Agreement, with Tri-State Title & Escrow, LLC as the
escrow agent, and the Investors (the “Make Good Escrow Agreement”), pursuant to
which 2,000,000 shares of our Series B Preferred Stock were issued in the name
of the escrow agent to be held by the escrow agent. These make good escrow
shares do not have any voting rights. The delivery and release of these make
good shares are subject to the terms of the Stock Purchase Agreement as
described above and the Make Good Escrow Agreement.
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. The rights and
preferences of the Series A Preferred 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.
Effective May 23, 2008, we completed a 1-for-328.72898 reverse stock split of
our Common Stock. Upon effectiveness of such reverse stock split, 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 became 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 “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 rights and
preferences of the Series B Preferred 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 were payable with respect to the Series A
Preferred Stock and no dividends can be paid on our Common Stock while the
Series B Preferred Stock is outstanding.
Voting
Rights. The Series B Preferred Stock shall have no voting rights, except
as required by Florida law. However, so long as any shares of Series B Preferred
Stock are outstanding, we cannot, without the affirmative approval of the
holders of 75% of the shares of the Series B Preferred Stock then
outstanding,
(a) alter
or change adversely the powers, preferences or rights given to the Series B
Preferred Stock or alter or amend the Certificate of Designations of the Series
B Preferred Stock;
(b)
authorize or create any class of stock (other than Series A Preferred Stock)
ranking as to dividends or distribution of assets upon a liquidation senior to
or otherwise pari passu with the Series B Preferred 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 Preferred Stock;
(c) amend
our certificate of incorporation or other charter documents in breach of any of
the provisions hereof; or
(d)
increase the authorized number of shares of Series B Preferred 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, each share of
Series B Preferred Stock became 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 Preferred Stock will be automatically converted into
Common Stock. A “change in control” means a consolidation or merger of us 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
are 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 Preferred Stock is subject to the 4.9%
limitation, with the result we shall not effect any conversion of the Series B
Preferred Stock, and the holder has no right to convert any portion of the
Series B Preferred 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 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 (3) 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.
Certain
Adjustments
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 Common Stock.
Price Adjustment;
Full Ratchet. From
and after February 26, 2008, and until such time as the investors hold less than
20% of the Series B Preferred Stock, except for certain exempt issuances not to
exceed 5% of the outstanding shares of 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.
Subsequent
Transactions. For so long as any Investor holds any of the Series B
Preferred Stock, we are prohibited from effecting or entering into an agreement
to effect any transactions involving a “Variable Rate Transaction” or an “MFN
Transaction.”
Subsequent Rights
Offerings. At any time while the Series B Preferred Stock is outstanding,
we are prohibited from issuing rights, options or warrants to holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the then applicable conversion price.
Pro Rata
Distributions. If we distribute to the holders of Common Stock evidence
of our indebtedness, assets, rights or warrants to subscribe for or purchase any
security, then in each case the conversion price shall be determined by
multiplying the conversion price by a fraction the numerator of which is the
VWAP minus the then fair market value at such record date of the portion of the
assets or evidence of indebtedness so distributed applicable to one outstanding
share as determined by the Board of Directors in good faith and the denominator
of which is the VWAP on the record date.
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 Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or we effect any reclassification of the
Common Stock or any compulsory share exchange pursuant to which the 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 A Preferred Stock, the holder has the right to receive, for each
share of 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.
The
Warrants
The
Warrants entitle the holders, upon the effectiveness of the Reverse Split, to
purchase up to an aggregate of 7,000,000 shares of Common Stock at an exercise
price of $3.00 per share, subject to adjustment. The Warrants expire in five
years following their issuance.
Cashless
Exercise. The
holders may make a cashless exercise, but not until February 26, 2009 and
only when the resale of the warrant shares by the holder is not covered by an
effective registration statement.
Maximum Exercise;
4.9% Limitation. The holder is not permitted to exercise the warrant to
the extent that on the date of exercise the exercise would result in beneficial
ownership by the holder and its affiliates of more than 4.9% of the outstanding
shares of Common Stock on such date. This provision may not be waived or amended
(the “4.9% Limitation”).
Adjustment for
Stock Splits, Stock Dividends, Recapitalizations, Etc. The exercise price of the
warrants and the number of shares of Common Stock issuable on exercise of the
warrants will 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.
Adjustment for
Reorganization, Consolidation, Merger, Etc. If we merge or consolidate
with or into any other person, or are a party to any other corporate
reorganization, and we are not the continuing or surviving entity, then, in each
case, the holder of the warrant (on exercise at any time after the consummation
of such transaction) will be entitled to receive the stock and other securities
and property (including cash) which the holder would have been entitled to
receive if the holder had exercised the warrant immediately prior to the
effectiveness of the transaction.
Sales of Common
Stock at Less than the Exercise Price; Weighted Average Adjustment.
Subject to certain exceptions (including certain exempt issuances),
if we sell or issue any Common Stock at a per share price, or warrants, options,
convertible debt or equity securities with an exercise or conversion price per
share, which is less than (i) $1.20, the Warrants’ exercise price will be
adjusted concurrently with such issue or sale, to such lower price, or (ii)
$2.00, but higher than $1.20 , the Warrants’ exercise price will be adjusted
according to a weighted average formula as follows:
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.
No
exception from price adjustment for exempt issuances will be 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.
Mandatory
Exercise. We
have the right to require the outstanding Warrants on at least 35 days notice
prior to the mandatory exercise date to exercise the Warrants, provided that (i)
the market price of our Common Stock equals or exceeds $6.00 on each trading day
in the 25 trading days period ending on the notice date, (ii) we have achieved
our pre-tax income target for the 2007 fiscal year, (iii) the “Trading Volume”
of our Common Stock equals or exceeds the 150,000 shares (which shall not be
adjusted with Reverse Split) “Target Volume” on each trading day in the twenty
five (25) trading days in the period ending on the notice date, and (iv) a
registration statement covering the sale by the holder of the shares of Common
Stock issuable upon exercise of the Warrant is current and effective for the 25
trading days prior to the notice date and our right to mandate exercise only
applies with respect to the warrant shares included in such registration
statement. In the event that our mandate exercise of the Warrants would result
in a violation of the 4.9% Limitation, we will not have the right to mandate
such exercise of the Warrants to the extent that the exercise of the Warrants
would result in such a violation.
As a
result of the above transactions, the Company ceased being a “shell company” as
defined in Rule 12b-2 under the Exchange Act.
Our
Corporate Structure
The
Company’s current structure is set forth in the diagram below:
* Xi’an
Qinmei Food Co., Ltd., an entity not affiliated with the Company, owns the other
8.85% of the equity interests in Xi’an Tianren.
Executive
Offices
Our
principal executive offices are located at Room 1404 and Room 1403, A-4F
Tongxinge, Xietong Building, Gaoxin 2nd Road, Hi-Tech Industrial Zone,
Xi’an, Shaanxi Province, PRC 710065, and our telephone number is
011-86-29-88386415.
The
Offering
Offering
by Selling Stockholders
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 9,833,333 shares of our Common Stock including (i) 2,833,333
shares issuable to them upon conversion of Series B Preferred Stock issued to
them in a private placement completed on February 26, 2008 (the “Private
Placement”) and (ii) 7,000,000 shares of Common Stock issuable to them upon
exercise of Warrants issued to the Investors in the Private Placement. The
Warrants have an exercise price of $3.00 per share (subject to adjustment) and
expire on February 24, 2013. The Warrants became exercisable on May 23, 2008
following a 1-for-328.72898 reverse split of our outstanding Common Stock which
became effective on that date. The 7,000,000 shares issuable upon exercise
of such Warrants and the initial exercise price of $3.00 thereof will not be
adjusted as a result of such reverse split. The following table gives effect to
the 1-for-328.72898 reverse split of our outstanding Common Stock.
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Total
shares of Common Stock outstanding prior to the Offering
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22,271,684
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Common
Stock offered by the Company
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Total
shares of Common Stock offered by the selling stockholders
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9,833,333
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Total
shares of Common Stock to be outstanding after the Offering (assuming all
Warrants have been exercised and all shares of Series B Preferred Stock
have been converted)
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32,720,164
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Use
of Proceeds
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We
will not receive any of the proceeds from the sales of the shares by the
selling stockholders. To the extent the warrants are exercised for cash,
if at all, we will receive the exercise price for those warrants. 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 intend to use any cash proceeds received from the
exercise of warrants for working capital and other general corporate
purposes. We cannot assure you that any of the warrants will ever be
exercised for cash or at all.
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Our
OTC Bulletin Board Trading Symbol
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SPFJ.OB
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Risk
Factors
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See
“Risk Factors” beginning on page 16 and other information included in this
prospectus for a discussion of factors you should consider before deciding
to invest in shares of our Common
Stock.
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Plan
of Distribution
This
offering is not being underwritten. The selling stockholders themselves
directly, or through their agents, or through their brokers or dealers, may sell
their shares from time to time, in: (i) privately negotiated transactions, or
(ii) in one or more transactions, including block transactions, on the OTC
Bulletin Board or on any stock exchange on which the shares may then be listed
in the future pursuant to and in accordance with the applicable rules of such
exchange. The selling price of the shares may be at market prices prevailing at
the time of sale, at prices related to the prevailing market prices or at
negotiated prices. To the extent required, the specific shares to be sold, the
names of the selling stockholders, the respective purchase prices and public
offering prices, the names of any agent, broker or dealer and any applicable
commission or discounts with respect to a particular offer will be described in
an accompanying prospectus. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than pursuant to this prospectus. We will keep this prospectus
current until the earlier to occur of: (y) all of the securities covered by the
registration statement of which this prospectus is a part have been publicly
sold, or (z) the time when all of the securities covered by that registration
statement can be sold, without volume restrictions, pursuant to Rule
144.
We will
pay all expenses of registration incurred in connection with this offering
(estimated to be approximately $236,000), but the selling stockholders will pay
all of the selling commissions, brokerage fees and related expenses. We have
agreed to indemnify the selling stockholders against certain liabilities,
including liabilities under the Securities Act.
The
selling stockholders and any broker-dealers or agents that participate with the
selling stockholders in the distribution of any of the shares may be deemed to
be “underwriters” within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of the shares purchased by them
may be deemed to be underwriting commissions or discounts under the Securities
Act.
The
selling stockholders may offer the Common Stock pursuant to this prospectus in
varying amounts and transactions so long as this prospectus is then current
under the rules of the SEC and we have not withdrawn the registration
statement.
The
offering of Common Stock may be through the facilities of the OTCBB or such
other exchange where our Common Stock may then be traded. Brokerage commissions
may be paid and discounts are allowed in connection with such sales. However, it
is anticipated that the discounts allowed or commissions paid will be no more
than the ordinary brokerage commissions paid on sales effected through brokers
or dealers. To our knowledge, as of the date hereof, no one has made any
arrangements with a broker or dealer concerning the offer or sale of the Common
Stock.
RISK FACTORS
An
investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our Common Stock.
If any of
the following risks, or any other risks not described below because they are
currently unknown to us or we currently deem such risks as immaterial, but they
later become material, actually occurs, it is likely that our business,
financial condition, and operating results could be seriously harmed. As a
result, the trading price of our Common Stock could decline and you could lose
part or all of your investment.
Risks
Related to our Business
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations and if we are not successful in addressing
risks and difficulties that we may likely encounter, our business may be
adversely affected.
Shaanxi
Tianren began its operations in 2001. Our limited operating history in the fruit
juice industry may not provide a meaningful basis on which to evaluate our
business. Although Shaanxi Tianren’s revenues have grown rapidly since its
inception, we cannot assure that we will maintain our profitability or that we
will not incur net losses in the future. We expect that our operating expenses
will increase as we expand. Any significant failure to realize anticipated
revenue growth could result in significant operating losses. We will continue to
encounter risks and difficulties frequently experienced by companies at a
similar stage of development, including potential failure to:
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maintain
our proprietary technology;
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expand
our product offerings and maintain the high quality of our
products;
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manage
our expanding operations, including the integration of any future
acquisitions;
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obtain
sufficient working capital to support our expansion and to fill customers’
orders in time;
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maintain
adequate control of our expenses;
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implement
our product development, marketing, sales, and acquisition strategies and
adapt and modify them as
needed;
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anticipate
and adapt to changing conditions in the fruit juice industry markets
in which we operate as well as the impact of any changes in government
regulation, mergers and acquisitions involving our competitors,
technological developments and other significant competitive and market
dynamics.
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If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.
We
may encounter substantial competition in our business and failure to compete
effectively may adversely affect our ability to generate revenue.
We
believe that existing and new competitors will continue to improve their
products and to introduce new products with competitive price and performance
characteristics. We expect that we will be required to continue to invest in
product development and productivity improvements to compete effectively in our
markets. Our competitors could develop a more efficient product or undertake
more aggressive and costly marketing campaigns than ours, which may adversely
affect our marketing strategies and could have a material adverse effect on our
business, results of operations and financial condition.
Our major
competitors may be better able to successfully endure downturns in our industry.
In periods of reduced demand for our products, we can either choose to maintain
market share by reducing our selling prices to meet competition or maintain
selling prices, which would likely sacrifice market share. Sales and overall
profitability would be reduced in either case. In addition, we cannot assure
that additional competitors will not enter our existing markets, or that we will
be able to compete successfully against existing or new
competition.
Our
inability to fund capital expenditure requirements may adversely affect our
growth and profitability and we are restricted from issuing any preferred stock
or convertible debt in certain circumstances.
Our
continued growth is dependent upon our ability to raise capital from outside
sources. Our ability to obtain financing will depend upon a number of factors,
including:
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our
financial condition and results of
operations;
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the
condition of the PRC economy and the environmental protection product
industry in the PRC; and
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conditions
in relevant financial markets.
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Under our
Stock Purchase Agreement with Barron Partners LLP and Eos Holdings, LLC, we may
not issue any preferred stock or convertible debt for three years following
February 26, 2008, the closing date of the Stock Purchase Agreement, for so long
as such investors shall continue to beneficially own 20% of the Series B
Preferred Stock issued under the Stock Purchase Agreement.
If we are
unable to obtain financing, as needed, on a timely basis and on acceptable
terms, our financial position, competitive position, growth and profitability
may be adversely affected.
We may not be
able to effectively control and manage our growth and a failure to
do so could adversely affect our operations and financial
condition.
Our sales
revenues have increased from approximately $7,027,889 for the fiscal year ended
December 31, 2005 to approximately $17,427,204 for the fiscal year ended
December 31, 2006, and have increased to $29,361,941 for the fiscal year ended
December 31, 2007. Our sales revenues for the nine months ended September 30,
2008 were $22,442,329, an increase of approximately 79.6% over our sales
revenues of $12,493,802 for the same period of 2007. If our business and markets
continue to grow and develop, it will be necessary for us to finance and manage
expansion in an orderly fashion. In addition, we may face challenges in managing
expanding product offerings and in integrating acquired businesses with our own.
These eventualities will increase demands on our existing management, workforce
and facilities. Failure to satisfy these kinds of increased demands could
interrupt or adversely affect our operations and cause production backlogs,
longer product development time frames and administrative
inefficiencies.
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
29%, 57% and 40% of our net sales during the years ended December 31, 2007, 2006
and 2005, respectively. We believe that revenue derived from current and future
large customers will continue to represent a significant portion of our total
revenue. Our inability to continue to secure and maintain a sufficient number of
large customers would have a material adverse effect on our business, operating
results and financial condition. Moreover, our success will depend in part upon
our ability to obtain orders from new customers, as well as the financial
condition and success of our customers and general economic
conditions.
Any
significant fluctuation in the price of our raw materials may have a material
adverse effect on the manufacturing cost of our products.
The
prices of fresh fruits, our principal raw materials, are subject to market
conditions and generally we do not, and do not expect to, have long-term
contracts with our suppliers for those items. While these raw materials are
generally available and we have not experienced severe raw material shortages in
the past, in 2007 the prices of apples, kiwifruits and pears temporarily
significantly increased because of a poor climate, which caused a sharp decrease
in fruit output. 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. The prices for these raw materials have varied significantly and may vary
significantly in the future. Numerous factors, most of which are beyond our
control, influence prices of our raw material. These factors include general
economic conditions, geographic conditions, climate condition, transportation
delays and other uncertainties.
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We may
not be able to adjust our product prices, especially in the short-term, to
recover cost increases in these raw materials. Our future profitability may be
adversely affected to the extent we are unable to pass on higher raw material
costs to our customers.
There
are risks that the sales price of our products will change, which will affect
our profits.
According
to financial analysis of Shaanxi Tianren, the operating income of Shaanxi
Tianren is very sensitive to the sales price of concentrated fruit juice. If the
sales price of concentrated fruit juice changes, it will directly influence the
continuity and stability of our gains.
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.
We
may engage in future acquisitions that could dilute the ownership interests of
our stockholders, cause us to incur debt and require us to assume contingent
liabilities.
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 or 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 could:
| ● issue equity securities which would dilute current stockholders’ percentage ownership; | |
| ● incur substantial debt; | |
| ● expend significant cash. |
These
actions could have a material adverse effect on our operating results or the
price of our Common Stock. Moreover, 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. Acquisitions and investment activities also entail
numerous risks, including:
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● difficulties
in the assimilation of acquired operations, technologies and/or
products;
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● unanticipated
costs associated with the acquisition or investment
transaction;
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● the
diversion of management’s attention from other business
concerns;
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● adverse
effects on existing business relationships with suppliers and
customers;
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● risks
associated with entering markets in which we have no or limited prior
experience;
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● the
potential loss of key employees of acquired
organizations;
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● accounting
issues that arise in connection with the acquisition or
investment;
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● challenges
in retaining customers of acquired businesses;
and
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● substantial charges for the
amortization of certain purchased intangible assets, deferred stock
compensation
or similar items.
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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.
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 process
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 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, use 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 the
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.
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 and cash available from operations
will enable us to meet our working capital requirements for at least the next 12
months. 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. The development and marketing of new products and the
expansion of distribution channels and associated support personnel requires a
significant commitment of resources. In addition, if the markets for our
products develop more slowly than anticipated, or if we fail to establish
significant market share and achieve sufficient net revenues, we may continue to
consume significant amounts of capital. As a result, we could be required to
raise additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing stockholders.
If additional funds are raised through the issuance of debt securities, such
securities may provide the holders certain rights, preferences, and privileges
senior to those of common stockholders, and the terms of such debt could impose
restrictions on our operations. We cannot assure that additional capital, if
required, will be available on acceptable terms, or at all. If we are unable to
obtain sufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.
We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be adequate.
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 that 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, as in modern
banking, computer and other control systems. 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. Therefore, we may, in turn, experience difficulties in implementing
and maintaining adequate internal controls as will be required under Section 404
of the Sarbanes Oxley Act of 2002 and complying with other U.S. securities
laws.
Our internal controls over financial
reporting may not be effective, and our independent auditors may not be able to
certify as to their effectiveness, which could have a significant and adverse
effect on our business.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by the Company’s independent registered public
accountants. The SEC extended the compliance dates for “non-accelerated filers,”
as defined by the SEC. During 2008 we changed our fiscal year end from September
30 to December 31 and in accordance with SEC rules, we filed a transition report
for the period from October 1, 2007 to December 31, 2007. The transition report
was on Form 10-Q and contained unaudited financial statements as permitted under
such rules. Accordingly, we believe that the annual assessment of our internal
controls requirement will first apply 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 new and complex, and
require significant documentation, testing and possible remediation to meet the
detailed standards. We have not yet evaluated our internal controls over
financial reporting in order to allow management to report on, and our
independent auditors to attest to, our internal controls over financial
reporting, as will be required by Section 404 of the Sarbanes-Oxley Act of 2002
and the rules and regulations of the SEC. We have never performed the system and
process evaluation and testing required in an effort to comply with the
management assessment and auditor certification requirements of Section 404,
which will initially apply to us as of December 31, 2009. Our lack of
familiarity with Section 404 may unduly divert management’s time and resources
in executing the business plan. If, in the future, management identifies one or
more material weaknesses, 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 as a result of advances we made to
a company controlled by our Chairman of the Board and Chief Executive Officer
and a director of one of our subsidiaries, as well as a distribution which one
of our subsidiaries erroneously paid to such persons; as a result, we may be
subject to civil and criminal sanctions which if imposed, could have a material
adverse effect upon us.
On
February 22, 2008 we consummated the Share Exchange Agreement (see “Prospectus
Summary – Share Exchange and Private Placement Financing” and “Prospectus
Summary – Share Exchange Agreement”) pursuant to which we acquired Pacific, a
Vanuatu corporation which in turn owns 99% of the equity interests in Shaanxi
Tianren. At such time Shaanxi Hede Investment Management Co., Ltd. (“Hede”), a
PRC company of which Yongke Xue, the Chairman of the Board, Chief Executive
Officer and a director of the Company, and Xiaoqin Yan, a director of the
Company, own 80% and 20%, respectively, of the equity interests, was indebted to
Shaanxi Tianren on account of previous loans made by Shaanxi Tianren to Hede,
including advances aggregating RMB 31,544,043 (approximately $4,318,381 based on
the exchange rate as of December 31, 2007) made during the period from June 6,
2007 to December 29, 2007 which were used by Hede to pay a portion of the
purchase price for Hede’s acquisition of Huludao Wonder (a company which Shaanxi
Tianren and Hede contemplated would be sold at Hede’s cost to the Company after
a one year holding period). In January 2008, Shaanxi Tianren paid rental
expense of RMB 11,038 (approximately $1,626 based on the exchange rate as of
September 30, 2008) to the landlord of Hede’s office space on behalf of Hede. In
May 2008, Shaanxi Tianren assumed Hede’s obligation of RMB 18,000,000
(approximately $2,650,996 based on the exchange rate of September 30, 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 $100,042 based on the exchange
rate as of September 30, 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
Shaanxi Tianren 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). Section 13(k)
provides that it is unlawful for a company, such as the Company, which has class
of securities registered under Section 12(g) of the Exchange Act, to directly or
indirectly, including through any subsidiary, to extend or maintain credit in
the form of a personal loan to or for any director or executive officer of the
company.
In
addition, in May 2008 Pacific erroneously paid $4,916,617 to its former
shareholders, 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 shareholders 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 money has been repaid to the Company in full, the receipt by
Xiaoqing Yan and Yongke Xue of the erroneous dividend may also be deemed to be a
violation of Section 13(k) of the Exchange Act.
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.
The
Company has not concluded that either the advances made to Hede by Shaanxi
Tianren 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, in which the aggregate amount
involved 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
which would be considered to be a related party transaction in which such person
is interested. See "Certain Relationships and Related Transactions -
Review, Approval or Ratification of Transactions with Related
Persons."
The
release from escrow of Make Good Escrow Stock due to our failure to achieve
certain financial targets in 2008 or 2009 would dilute the equity interests of
existing stockholders.
As more
particularly described in “Prospectus Summary-The Company-Stock Purchase
Agreement-Delivery of up to 2,000,000 Additional Shares of Series B Preferred
Stock from Escrow Based on Pre-Tax Income and Pre-Tax Income Per Share” on page
9 of this Prospectus, if our consolidated pre-tax income for the fiscal year
ending December 31, 2008 is less than RMB 84,924,000 or our consolidated pre-tax
income for the fiscal year ending December 31, 2009 is less than RMB
107,004,240, then, depending on the amount of the shortfall from such targets,
some or all of the 2,000,000 shares of our Series B Stock we have placed in
escrow (“Make Good Escrow Stock”) may be transferred to the Investors who
purchased Series B Stock from us in the financing transaction which closed in
February 2008. If we achieve our income targets in 2008 and 2009, none of such
shares shall be transferred to the Investors and such shares will be cancelled.
The transfer to Investors 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. Whether or not shares of Series B Stock which are
transferred to Investors are converted into Common Stock, the transfer of some
or all of Make Good Escrow Stock to the Investors could depress the market price
of our Common Stock.
We
do not have key man insurance on our Chairman and CEO, on whom we rely for the
management of our business; the loss of the services of our Chairman or CEO
could have a material adverse effect on our business.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Hongke Xue, Shaanxi
Tianren’s Chairman of the Board and CEO, and Mr. Yongke Xue, the Company’s
Chairman of the Board and CEO. The loss of the services of Mr. Hongke Xue or Mr.
Yongke Xue, for any reason, may have a material adverse effect on our business
and prospects. We cannot assure you that their services will continue to be
available to us, or that we will be able to find a suitable replacement for
either of them. We do not carry key man life insurance for any key
personnel.
We
may not be able to hire and retain qualified personnel to support our growth and
if we are unable to retain or hire such personnel in the future, our ability to
improve our products and implement our business objectives could be adversely
affected.
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. Competition for
senior management and senior technology personnel is intense, the pool of
qualified candidates is very limited, and we may not be able to retain the
services of our senior executives or senior technology personnel, or attract and
retain high-quality senior executives or senior technology personnel in the
future. Such failure could materially and adversely affect our future growth and
financial condition.
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 other countries, product liability claims and lawsuits are
extremely rare in the PRC. However, we cannot assure that we would not face
liability in the event of the failure of any of our products. We cannot assure
that, especially as the PRC’s domestic consumer economy and industrial economy
continues to expand, 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.
Except
for automobile insurance, we do not have other insurance such as business
liability or disruption insurance coverage for our operations in the
PRC.
We
may be adversely affected by changes in the international fruit juice market
because of our dependence on the international market.
In 2007,
over 69% of the Company’s concentrated fruit juice was exported directly or
indirectly. Because of our reliance on international markets, changes of foreign
politics, law, economy and demands in international markets will have big
influence on the operation of Shaanxi Tianren.
Shaanxi
Tianren’s operating income is very sensitive to the sales price of concentrated
fruit juice. A change in international demands will directly influence the sales
price.
If there
is large gap between the export price and the domestic price of concentrated
fruit juice and China exports in large scale, anti-dumping actions might apply
to Chinese concentrated fruit juice. As the majority of concentrated fruit juice
of Shaanxi Tianren is for exports, there is a potential risk for us to be
effected by any anti-dumping action.
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.
The PRC’s
economy is in transition from a planned economy to a market oriented economy
subject to five-year and annual 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. The PRC government has
confirmed that economic development will follow the model of a market economy,
such as the United States. Under this direction, we believe that the PRC will
continue to strengthen its economic and trading relationships with foreign
countries and business development in the PRC will follow market forces. While
we believe that this trend will continue, 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:
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changes
in laws, regulations or their
interpretation;
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confiscatory
taxation;
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restrictions
on currency conversion, imports or sources of
supplies;
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expropriation
or nationalization of private
enterprises.
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Although
the PRC government has been pursuing economic reform policies for more than two
decades, we cannot assure you that the government will continue to pursue such
policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption, or other
circumstances affecting the PRC’s political, economic and social
life.
The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC 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, and any future subsidiaries, 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 costs 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 an austere policy 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.
Shaanxi
Tianren is subject to restrictions on paying dividends and making other payments
to us. We might be unable to pay dividends to investors.
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, Pacific and Shaanxi Tianren. As a result of our
holding company structure, we rely entirely on dividend payments from Shaanxi
Tianren, our subsidiary in China. PRC regulations currently permit payment of
dividends only out of accumulated profits, as determined in accordance with PRC
accounting standards and regulations. Our subsidiary in the PRC also is required
to set aside a portion of its after-tax profits according to PRC accounting
standards and regulations to fund certain reserve funds. The PRC government also
imposes controls on the conversion of RMB into foreign currencies and the
remittance of currencies out of the PRC. We may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign
currency. 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. If we or Pacific are unable to receive all of the revenues
from Shaanxi Tianren’s operations, we may be unable to pay dividends on our
Common Stock.
Governmental
control of currency conversion may affect the value of your
investments.
The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
Renminbi is currently not a freely convertible currency. Shortages in the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends, or otherwise satisfy foreign currency
dominated 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 from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval from
appropriate governmental authorities is required where Renminbi 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 may also in the future restrict access to foreign currencies for
current account transactions. 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 Renminbi 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 this could
harm our business, financial condition and results of operations. Conversely, if
we decide to convert our RMB into U.S. dollars for the purpose of making
payments for dividends on our Common Stock or for other 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.
On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in significant appreciation of
the RMB against the U.S. dollar. There remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the RMB
against the U.S. dollar.
PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents, if applied to us, may subject the PRC resident shareholders of
us or our parent company to personal liability and limit our ability to acquire
PRC companies or to inject capital into our PRC subsidiary, limit our PRC
subsidiary’s ability to distribute profits to us or otherwise materially
adversely affect us.
In
October 2005, the PRC State Administration of Foreign Exchange (“SAFE”) issued a
public notice, the Notice on Relevant Issues in the Foreign Exchange Control
over Financing and Return Investment Through Special Purpose Companies by
Residents Inside China (the “SAFE Notice”), which requires PRC residents,
including both legal persons and natural persons, to register with the competent
local SAFE branch before establishing or controlling any company outside of
China, referred to as an “offshore special purpose company,” for the purpose of
overseas equity financing involving onshore assets or equity interests held by
them. In addition, any PRC resident that is the shareholder of an offshore
special purpose company is required to amend its SAFE registration with the
local SAFE branch with respect to that offshore special purpose company in
connection with any increase or decrease of capital, transfer of shares, merger,
division, equity investment or creation of any security interest over any assets
located in China. Moreover, if the offshore special purpose company was
established and owned the onshore assets or equity interests before the
implementation date of the SAFE notice, a retroactive SAFE registration is
required to have been completed before March 31, 2006. If any PRC shareholder of
any offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore special
purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. After the SAFE notice, an implementation rules on the SAFE notice
was issued on May 29, 2007 which provides for implementation guidance and
supplements the procedures as provided in the SAFE notice. For an offshore
special purpose company which was established and owned onshore assets or equity
interests before the implementation date of the SAFE notice, a retroactive SAFE
registration requirement is required.
Due to
lack of official interpretation, some of the terms and provisions of the SAFE
Notice and its implementation rules remain unclear, and the implementation of
the SAFE Notice by central SAFE and local SAFE branches has been inconsistent
since its adoption. Based on the advice of our PRC counsel, Global Law Offices,
located in Beijing, and after consultation with relevant SAFE officials, we
believe that the PRC resident shareholders of our parent company were required
to complete their respective SAFE registrations pursuant to the SAFE
Notice.
Moreover,
because of uncertainty over how the SAFE Notice will be interpreted and
implemented, and how or whether the SAFE Notice and implementation rules will
apply to us, we cannot predict how SAFE will affect our business operations or
future strategies. For example, our present and prospective PRC subsidiaries’
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE Notice by our or our parent company’s PRC resident
shareholders. In addition, such PRC residents may not always be able to complete
registration procedures required by the SAFE Notice. We also have little control
over either our present or prospective direct or indirect shareholders or the
outcome of such registration procedures. A failure by our or our parent
company’s PRC resident shareholders or future PRC resident shareholders to
comply with the SAFE Notice, if SAFE requires it, could subject us to fines or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary’s ability to make distributions or pay dividends or affect
our ownership structure, which could adversely affect our business and
prospects.
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.
A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of our revenue is derived, could have an adverse effect on our operations.
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.
Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
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, our operating
subsidiary, Shaanxi Tianren, is located in the PRC and substantially all of its
assets are located outside of the United States. It may therefore 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.
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. Aside from CFO 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 such increased legal, regulatory compliance and reporting
requirements. 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.
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 brother of one of our directors and our CEO, Yongke Xue, is the voting
trustee for the benefit of Fancylight Limited. Fancylight Limited owns
17,604,938 shares of Common Stock, which carry 17,604,938 votes upon all matters
submitted for a vote of stockholders. As a result, our officers and directors
and their relatives may be able to control the outcome of stockholder votes on
various matters, including the election of directors and extraordinary corporate
transactions, including 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.
Our
current ownership structure may affect the market price of our Common
Stock
Hongke
Xue, the brother of one of our directors and our CEO, Yongke Xue, is the voting
trustee for the benefit of Fancylight Limited. Fancylight Limited owns
17,604,938 shares of Common Stock, which is approximately 79% of our outstanding
Common Stock as of February 2, 2009. The substantial ownership of our Common
Stock by one stockholder reduces the public float and liquidity of our Common
Stock. The limited public float of our Common Stock may adversely 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. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary. In addition, our operating
subsidiary, Shaanxi Tianren, from time to time may be subject to restrictions on
its ability to make distributions to us, including restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions.
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 in the OTC Bulletin Board market and the trading
volume we will develop may be 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 much less regulated than the major
exchanges and our Common Stock is subject to abuses, volatility and shorting.
Thus there is currently no broadly followed and established trading market for
our Common Stock. An established trading market may never develop or be
maintained. 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 there.
The
trading volume of our Common Stock has been and may continue to be limited and
sporadic. As a result of such trading activity, 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.
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 the 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 9,833,333 shares of our Common Stock by the selling stockholders,
all of which (assuming the effectiveness of the registration statement of which
this prospectus is a part) are freely tradable. 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.
We
are authorized to issue “blank check” preferred stock, which, if issued without
stockholders approval, 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 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. Accordingly, our Board of Directors has designated
7,000,000 shares of Series B Convertible Preferred Stock (of which 5,448,480
shares of Series B Preferred Convertible Stock are issued or outstanding). 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 shares of our 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.
We are responsible for the
indemnification of our officers and directors.
Our
Bylaws provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against costs and expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on our behalf. Consequently, we may be required
to expend substantial funds to satisfy these indemnity obligations.
This
prospectus relates to the offer and sale of our Common Stock by the selling
stockholders identified in the table below. Each of the selling stockholders
acquired Series B Preferred Stock and warrants to purchase our Common Stock as
an Investor in our private placement transaction completed on February 26, 2008.
The Common Stock offered hereby is issuable to the selling stockholders upon
conversion of such Series B Preferred Stock and exercise of such warrants. All
of the selling stockholders are “accredited investors” within the meaning of
Rule 501 of Regulation D promulgated under the Securities Act.
-30-
The table
set forth below lists the names of the selling stockholders as well as the
number of shares of Common Stock underlying the securities acquired by the
selling stockholder in the February 26, 2008 private placement and its assignees
in connection with the private placement, all of which are being registered.
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 31.3% 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 65 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 is offering for sale all of the shares it will acquire upon
conversion of the Series B Preferred Stock and exercise of the warrants acquired
in the February 26, 2008 private placement.
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)
|
|||||||||||||||||||||
|
Barron
Partners LP
|
10,159,265 | (4) | 31.3 | % | 9,544,118 | 615,147 | 2.7 | % | ||||||||||||||||
|
EOS
Holdings, LLC
|
289,215 | (5) | 1.3 | % | 289,215 | — | 0 | % | ||||||||||||||||
|
(1)
|
As
of February 2, 2009, we had outstanding 22,271,684 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. We have assumed that each
selling stockholder beneficially owns all shares of Common Stock issuable
upon exercise of warrants and conversion of Series B Preferred 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)
|
Subject
to footnote (1), in determining the percent of Common Stock beneficially
owned by a selling stockholder on February 2, 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 22,271,684 shares of Common Stock deemed outstanding on February
2, 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 6,794,118 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 Preferred Stock. Andrew Worden, Chairman and CEO of
Barron Partners LP, has power to vote or to dispose of the securities
offered for resale by Barron Partners
LP.
|
|
(5)
|
Consists
of 205,882 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
|
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
|
|
•
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits investors;
|
|
|
•
|
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;
|
|
|
•
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
|
•
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
•
|
privately
negotiated transactions;
|
|
|
•
|
to
cover short sales made after the date that the registration statement of
which this prospectus is a part is declared effective by the
SEC;
|
|
|
•
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
|
|
•
|
a
combination of any such methods of sale;
and
|
|
|
•
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of Common Stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell shares of Common Stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon the Company being notified
in writing by a selling stockholder that any material arrangement has been
entered into with a broker-dealer for the sale of Common Stock through a block
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, a supplement to this prospectus will be filed,
if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i)
the name of each such selling stockholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such shares of Common Stock were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable, (v) whether or
not such broker-dealer(s) conducted any investigation to verify the information
set out or incorporated by reference in this prospectus, and (vi) other facts
material to the transaction. In addition, upon the Company being notified in
writing by a selling stockholder that a donee or pledgee intends to sell more
than 500 shares of Common Stock, a supplement to this prospectus will be filed
if then required in accordance with applicable securities law.
The Selling Stockholders also may
transfer the shares of Common Stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of the
securities will be paid by the selling stockholder and/or the purchasers. Each
selling stockholder has represented and warranted to the Company that it
acquired the securities subject to this registration statement in the ordinary
course of such selling stockholder’s business and, at the time of its purchase
of such securities, such selling stockholder had no agreements or
understandings, directly or indirectly, with any person to distribute any such
securities.
The
Company has advised each selling stockholder that it may not use shares
registered on the registration statement of which this prospectus forms a part
to cover short sales of Common Stock made prior to the date on which that
registration statement shall have been declared effective by the SEC. If a
selling stockholder uses this prospectus for any sale of Common Stock, it will
be subject to the prospectus delivery requirements of the Securities Act. The
selling stockholders will be responsible to comply with the applicable
provisions of the Securities Act and Exchange Act, and the rules and regulations
thereunder promulgated, including, without limitation, Regulation M, as
applicable to such selling stockholders in connection with re-sales of their
respective shares under that registration statement.
The
Company is required to pay all fees and expenses incident to the registration of
the shares, but the Company will not receive any proceeds from the sale of the
Common Stock. The Company has agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
USE
OF PROCEEDS
The
Company will not receive any of the proceeds from the sales of the shares by the
selling stockholders. To the extent the warrants are exercised for cash, if at
all, the Company will receive the exercise price for those warrants. Under the
terms of the warrants, cashless exercise is permitted in certain circumstances.
The Company intends to use any proceeds received from the exercise of warrants
for working capital and other general corporate purposes. The Company cannot
assure that any of the warrants will ever be exercised for cash or at all. If
all of these outstanding warrants are exercised for cash, the Company would
receive aggregate gross proceeds of approximately $21,000,000.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
Our
Common Stock is quoted on the OTC Bulletin Board under the symbol “
SPFJ.OB.”
The below
quotations reflect inter-dealer prices, without mark-up, mark-down or
commission, and may not represent actual transactions.
|
Year
ended 12/31/06
|
High
|
Low
|
|||||
|
First
quarter
|
$ | 29.59 | $ | 16.44 | |||
|
Second
quarter
|
$ | 26.30 | $ | 6.57 | |||
|
Third
quarter
|
$ | 13.15 | $ | 13.15 | |||
|
Fourth
quarter
|
$ | 16.44 | $ | 6.57 | |||
|
Year
ended 12/31/07
|
High
|
Low
|
|||||
|
First
quarter
|
$ | 13.15 | $ | 3.29 | |||
|
Second
quarter
|
$ | 19.72 | $ | 3.29 | |||
|
Third
quarter
|
$ | 23.01 | $ | 9.86 | |||
|
Fourth
quarter
|
$ | 9.86 | $ | 8.22 | |||
|
Year
ending 12/31/08
|
High
|
Low
|
||||
|
First
quarter
|
$
|
9.86
|
$
|
2.47
|
||
|
Second
quarter
|
$
|
6.58
|
$
|
3.29
|
||
|
Third
quarter
|
$
|
5.90
|
$
|
2.65
|
||
|
Fourth
quarter
|
$
|
3.25
|
$
|
2.25
|
||
At
February 2, 2009, there were 22,271,684 shares of our Common Stock outstanding.
Our shares of Common Stock are held by approximately 87 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.
Dividends
We have
not declared or paid any cash dividends on our Common Stock during our last two
fiscal years. On February 4, 2008, before the reverse merger transaction, the
Board of Directors of Xi’an Tianren declared a cash dividend of $2,899,855 to
its former shareholders. Since Shaanxi Tianren holds a 91.15% interest in Xi’an
Tianren, $2,643,218 was payable to Shaanxi Tianren and $256,637 was payable 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.
Since Pacific holds a 99% interest in Shaanxi Tianren, $4,916,617 was payable to
Pacific and $49,663 was payable to its minority interest holders. The
inter-company dividend was eliminated in the consolidated statement. The
dividend payable to minority interest holders was $306,300.
The
payment of dividends is at the discretion of the Board of Directors and is
contingent on the Company’s revenues and earnings, capital requirements,
financial condition and the ability of our operating subsidiary, Shaanxi
Tianren, to obtain approval to send monies out of the PRC. We currently intend
to retain all earnings, if any, for use in business operations. Accordingly, we
do not anticipate declaring any dividends in the near future.
-34-
The PRC’s
national currency, the yuan, is not a freely convertible currency. Please refer
to the risk factors “Governmental control of currency conversion may affect the
value of your investment,” “The fluctuation of the Renminbi may harm your
investment;” and “PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents, if applied to us, may subject the
PRC resident shareholders of us or our parent company to personal liability and
limit our ability to acquire PRC companies or to inject capital into our PRC
subsidiary, limit our PRC subsidiary’s ability to distribute profits to us or
otherwise materially adversely affect us.”
Securities
Authorized for Issuance Under Equity Compensation Plans
None
Penny
Stock Regulations
The SEC
has adopted regulations that generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share. The market price
of our Common Stock has been below $5.00 per share and we are subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000, or annual
incomes exceeding $200,000, or $300,000 together with their
spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such 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 Commission 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 the Common Stock and may affect the ability of investors to sell their
Common Stock in the secondary market.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of the consolidated financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes of the Company appearing elsewhere in
this report. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Actual results may differ
materially from those anticipated in these forward-looking
statements.
Overview
We are
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 through our indirect subsidiary, Shaanxi
Tianren, in the PRC. Shaanxi Tianren is wholly owned by Pacific. Previously, we
were a shell company with no significant business operations. As a result of the
consummation of the reverse merger transactions that are the subject of this
report, on February 26, 2008 we ceased to be a shell company and became an
indirect holding company for Shaanxi Tianren through Pacific. Pacific acquired a
99% ownership interest in Shaanxi Tianren in September 2007 through a
reorganization between entities under common control. Because Shaanxi Tianren’s
operations are the only significant operations of the Company and its
affiliates, the business and financial results of Pacific 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 nine month
period ended September 30, 2008 with its results in the corresponding period of
2007, and its full-year 2007 results with those of 2006.
Below is
our corporate structure:
* 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 Xi’an Tianren.
There are
two general categories of fruit and vegetable juices available in the market.
One is fresh juice that is canned directly after filtering and
sterilization upon being squeezed out of fresh fruits or vegetables. The other
general category is juice drinks made out of concentrated fruit and vegetable
juice. Concentrated fruit and vegetable juices are produced through pressing,
filtering, sterilization and evaporation of fresh fruits or vegetables. They are
used as the base material or ingredient for products such as drinks, fruit jam
and fruit wine, etc. Concentrated juices are not drinkable. Instead, they are
used as a basic ingredient for manufacturing juice drinks and as an additive to
fruit wine and fruit jam, cosmetics and medicines.
For
Shaanxi Tianren, the period between each July through April is our squeezing
season when fresh fruits are available in the market and concentrated fruit
juices are produced out of fresh fruits. The squeezing season for apples is
from August to March or April of the following year; the squeezing season for
pears is from July or August until March of the following year; and the
squeezing season for kiwifruit is from September through December of each
year. In 2008 we started our squeezing season in July with the
early initiation of machine maintenance. We produce and sell both concentrated
fruit juices and juice drinks. Compared to juice drinks, our concentrated juice
products generally achieve a higher gross margin than that of juice drinks.
Therefore, our core products are concentrated apple, pear and kiwifruit juices
and our production has strategically been focused on concentrated juice
products. We also produce juice drinks and other derivative products, especially
when we are not in squeezing season. Our wide range of product offerings and our
ability to shift focus among products based on supply and demand in the market
and seasonal factors help us to diversify our operational risks and supplement
our revenue generation.
Our main
products include concentrated apple juice, concentrated pear juice, concentrated
kiwifruit puree, fruit juice drinks, fresh fruits and organic fresh fruits. Our
raw materials mainly consist of apples, pears and kiwifruits, which we procure
in the PRC market and the cost of which typically represents over 65% of our
overall production cost. We source our pear and kiwifruit supply mainly from our
home province, Shaanxi Province, which is known for its pear and kiwifruit
production. Our kiwifruit processing facilities are located in Zhouzhi County,
Shaanxi Province, where 70% of the country’s kiwifruits are grown. We source our
apple supply mainly from Liaoning Province, where our newly acquired
subsidiary, Huludao Wonder Fruit Co., Ltd. (“Huludao Wonder”) is located. The
Company is committed to continual research and development in new products and
technologies. In June 2008, Shaanxi Tianren began the production of concentrated
peach juice in its Jingyang Branch Office. It uses low-temperature
pulp breaking technology and low-temperature concentration technology to produce
concentrated white peach pulp, optimizing the production parameters. The
production of peach juice helped the diversification of our products and
prolonged the squeezing season. Because of the seasonal nature in the
growing and harvesting of fruits and vegetables, our business is seasonal and
can be greatly affected by weather. In the squeezing season of 2007, the main
production areas of apples and pears in China suffered from poor weather, which
caused a lower yield in the apple and pear crops. As a result, our cost of raw
materials was higher in 2007.
To take
advantage of economies of scale and to enhance our production efficiency, each
of our manufacturing facilities has a focus on juice products centering around
one particular fruit according to the proximity of such manufacturing to the
supply center of that fruit. All concentrated juice products are manufactured
using the same type of production line with slight variations in processing
methods. Since June 2007, after we leased the production facilities of Huludao
Wonder, we have been operating our pear juice products business out of our
Jingyang Branch Office. Our business involving apple juice products is operated
out of the newly acquired facilities of Huludao Wonder, and our business
involving kiwifruit products is run out of Xi’an Tianren Modern Organic
Agriculture Co., Ltd. (“Xi’an Tianren”), in which we have held a 91.15%
ownership interest since May 2006.
The table
below shows the breakdown of our main products for the periods indicated and the
responsible production facilities:
|
Fiscal
year 2007
|
Fiscal
Year 2006
|
Fiscal
Year 2005
|
|||||||||||||||
|
Products
|
Responsible
Production Facility
|
Revenue
($)
|
%
of Total Revenue
|
Revenue
(%)
|
%
of Total Revenue
|
Revenue
($)
|
%
of Total Revenue
|
||||||||||
|
Concentrated
Apple Juice
|
Huludao
Wonder/Jingyang Branch Office, Liaoning Province/Shaanxi
Province
|
7,186,847
|
24.48
|
%
|
2,119,655
|
12.16
|
%
|
4,466,050
|
63.55
|
%
|
|||||||
|
Concentrated
Pear Juice
|
Jingyang
Branch Office, Shaanxi Province
|
11,184,212
|
38.09
|
%
|
4,983,145
|
28.59
|
%
|
2,561,839
|
36.45
|
%
|
|||||||
|
Kiwifruit
Virgin Puree
|
Xi’an Tianren,
Shaanxi Province
|
590,912
|
2.01
|
%
|
1,665,754
|
9.57
|
%
|
—
|
—
|
||||||||
|
Concentrated
Kiwi Fruit Juice
|
Xi’an Tianren,
Shaanxi Province
|
5,277,961
|
17.98
|
%
|
2,090,336
|
11.99
|
%
|
—
|
—
|
||||||||
|
Others:
|
All
of the above
|
5,122,009
|
17.44
|
%
|
6,568,314
|
37.69
|
%
|
—
|
—
|
||||||||
|
Total
|
29,361,941
|
100
|
%
|
17,427,204
|
100
|
%
|
7,027,889
|
100
|
%
|
||||||||
On May
27, 2006, Shaanxi Tianren purchased 91.15% of Xi’an Tianren’s ownership interest
for a purchase price in the amount of RMB 36,460,000 (or approximately U.S.
$4,573,221). The acquisition was accounted for using the purchase method, and
the financial statements of Shaanxi Tianren and Xi’an Tianren have been
consolidated on the purchase date and forward. During the two month period
immediately after we acquired Xi’an Tianren in May 2006, we temporarily
suspended production at the Xi’an Tianren facility to engage in extensive
technological and facility upgrades as well as personnel training. We resumed
production thereafter. Therefore, for fiscal year 2006, Xi’an Tianren generated
revenues only for the period between August and December.
On June
2, 2007, Shaanxi Tianren entered into a lease agreement with Shaanxi Hede
Investment Management Co., Ltd. (“Hede”), pursuant to which Shaanxi Tianren, for
a term of one year and for a monthly lease payment of RMB 300,000, leased all
the assets and operating facilities of Huludao Wonder, which was wholly-owned by
Shaanxi Hede. For accounting purposes, since June 1, 2007 Huludao Wonder has
been a variable interest entity of Shaanxi Tianren according to FASB
Interpretation No. 46: Consolidation of Variable Interest Entities, an
interpretation of ARB 51 (“FIN 46”). The financial statements of Shaanxi Tianren
and Huludao Wonder have been consolidated as of June 1, 2007 and forward. Due to
a delay in the processing of Huludao Wonder’s export permit, we did not book any
sales of apple juice products until November 2007, even though we continued
producing apple juice products and started receiving orders in July 2007. 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.
Besides
concentrated juice products, we generated other revenue in the amount of
$6,568,314 from sales of pear juice, apple juice, kiwifruit seeds, organic
kiwifruit and fresh kiwifruit for the fiscal year ended December 31, 2006, and
$5,122,009 from sales of kiwifruit, kiwifruit juice, mulberry juice, and apple
spice for the fiscal year ended December 31, 2007.
The
supply of our raw material fruits has traditionally been fragmented as we
generally purchase directly from farmers. In addition, because the prices of raw
material fruits change from season to season based on the output of the farms,
we do not have long-term supply agreements with our suppliers. To secure our
fruit supply and lower transportation costs, our processing facilities are
strategically located near the various centers of fruit supply.
Shaanxi
Tianren is permitted by the relevant governmental authorities to directly export
our products. More than 70% of our products are exported either through
distributors with good credit or to end-users directly. Our distributors are
generally domestic export companies. Although we generally renew our
distribution agreements with our distributors on a yearly basis, we maintain a
long-term relationship with our distributors. Our main export markets are the
U.S., Europe, Russia, and the Middle East.
Nine-month
Periods ended September 30, 2008 and September 30, 2007
Results of Operations and
Business Outlook
Revenue
The following table presents our
consolidated net revenues for our main products for the nine months ended
September 30, 2008 and 2007:
|
Nine
Months Ended September 30,
|
|||||||||||||
|
2008
|
2007
|
%
Change
|
|||||||||||
|
Concentrated
apple juice and apple aroma
|
|
$
|
4,636,488
|
$
|
38,766
|
11,860.1
|
%
|
||||||
|
Concentrated
pear juice
|
9,375,489
|
6,915,992
|
35.6
|
||||||||||
|
Concentrated
kiwifruit juice and kiwifruit puree
|
3,404,790
|
1,738,064
|
95.9
|
||||||||||
|
Kiwifruit
seeds
|
554,322
|
-
|
N/A
|
||||||||||
|
Fresh
kiwifruit
|
-
|
435,352
|
N/A
|
||||||||||
|
Fruit
beverage
|
4,471,240
|
3,365,628
|
32.9
|
||||||||||
|
Consolidated
|
|
$
|
22,442,329
|
$
|
12,493,802
|
79.6
|
%
|
||||||
Revenue for the nine months ended
September 30, 2008 were $22,442,329, an increase of $9,948,527, or 79.6%, when
compared to the same sales period of the prior year, primarily due to Shaanxi
Tianren’s consolidation of Huludao Wonder’s operating results beginning June 1,
2007. In the nine months ended September 30, 2008, Huludao Wonder
generated revenue of $4,636,488 from the sale of apple related products,
compared with $38,766 in the same period of last fiscal year.
Sales from pear related products
increased by $2,459,497, or 35.6%, in the nine months ended September 30, 2008
compared to the same period in 2007 as a result of increased consumer demand in
both China and internationally. Sales from kiwifruit related products increased
by $1,666,726, or 95.9%, as a result of continued sales of concentrated
kiwifruit juice and puree and kiwifruit seeds in the first two quarters of
fiscal year 2008. There was no revenue generated from sales of concentrated
kiwifruit juice and puree and kiwifruit seeds in the second quarter of fiscal
year 2007. Squeezing season for kiwifruit is from September to December of each
year. Generally, we do not produce or sell concentrated kiwifruit juice or
kiwifruit puree during the non-squeezing season. However, during the second
quarter of 2008, Xi’an Tianren continued to sell concentrated kiwifruit juice
and puree and kiwifruit seeds, which are a byproduct of kiwifruit juice puree.
As a result, we saw an increase in net sales of kiwifruit related products in
the nine months ended September 30, 2008. The net sales of fruit beverages also
increased by 32.9% to $4,471,240 as compared to the same period in fiscal 2007
due to an increase in market demand of fruit juice in the China
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.
Gross
Margin
The
following table presents gross margin by our main products as a percentage of
related revenue for the nine months ended September 30, 2008 and
2007:
|
Nine
Months Ended September 30,
|
||||||||||||
|
Gross
profit margin
|
2008
|
2007
|
%
Change
|
|||||||||
|
Concentrated
apple juice and apple aroma
|
$
|
978,905
|
$
|
25,755
|
3,700.8
|
%
|
||||||
|
Concentrated
pear juice
|
3,489,496
|
2,653,734
|
31.5
|
|||||||||
|
Concentrated
kiwifruit juice and kiwifruit puree
|
1,330,881
|
861,636
|
54.5
|
|||||||||
|
Kiwifruit
seeds
|
503,307
|
-
|
N/A
|
|||||||||
|
Fresh
fruits
|
-
|
320,280
|
N/A
|
|||||||||
|
Fruit
beverages
|
1,503,973
|
901,793
|
66.8
|
|||||||||
|
Consolidated
|
$
|
7,806,562
|
$
|
4,763,198
|
63.9
|
%
|
||||||
|
Gross
profit margin as a % of revenues
|
||||||||||||
|
Concentrated
apple juice and apple aroma
|
21.1
|
%
|
66.4
|
%
|
(68.2)
|
%
|
||||||
|
Concentrated
pear juice
|
37.2
|
38.4
|
(3.0
|
)
|
||||||||
|
Concentrated
kiwifruit juice and kiwifruit puree
|
39.1
|
49.6
|
(21.2
|
)
|
||||||||
|
Kiwifruit
seeds
|
90.8
|
-
|
N/A
|
|||||||||
|
Fresh
fruits
|
-
|
73.6
|
N/A
|
|||||||||
|
Fruit
beverages
|
33.6
|
26.8
|
25.5
|
|||||||||
|
Consolidated
|
34.8
|
%
|
38.1
|
%
|
(8.8)
|
%
|
||||||
Overall gross margin as a percentage of
revenue decreased by 8.8% for the nine months ended September 30, 2008, from
38.1% to 34.8%, compared to the same period of fiscal 2007. Gross margin in the
nine months ended September 30, 2008 was $7,806,562, an increase of $3,043,364,
or 63.9 %, compared to $4,763,198 for the same period of fiscal
2007.
The decrease in gross profit margin as
a percentage of revenue for the nine months ended September 30, 2008 was
primarily due to a decrease in gross margin in the sales of concentrated apple
and kiwifruit juice in the first two quarters of fiscal 2008. In the first two
quarters of fiscal 2008, the general price of raw apples and pears increased due
to a reduced available supply of fresh apples and pears, while the prices we
received for our apple and pear related products remained constant with the same
period of fiscal 2007, which resulted in a lower gross margin for our products
in fiscal 2008. During the fruit squeezing season in 2007 and early 2008, the
main production areas of apple, pear and kiwifruit in China suffered from bad
weather, resulting in output reduction.
In the first two
quarters of fiscal year 2008, the general price of raw kiwifruit increased as a
result of a reduced available supply of fresh kiwifruits, while the prices we
received for our kiwifruit related products, such as our beverage series,
remained constant. This in turn decreased our margin in kiwifruit related
products. During the fruit squeezing season in 2007 and early 2008, the main
production areas of apple, pear and kiwifruit in China suffered from bad
weather, resulting in output reduction. We believe that our gross margin on
kiwifruit related products may increase if the supply of fresh kiwifruit
increases in the future. In the second quarter of fiscal 2008, we
also had sales of $554,332 from kiwifruit seeds. Kiwifruit seeds are
the byproduct of kiwifruit juice. They are removed from the fresh
kiwifruits 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
revenues in the nine months ended September 30, 2008 was much higher than that
of concentrated kiwifruit juice. The high margin of kiwifruit seeds
in the second quarter of fiscal 2008 contributed to the improvement of kiwifruit
related products, helping to offset the decrease in overall gross margin for the
nine months ending September 30, 2008.
The gross profit margin of our fruit
beverages increased by 25.5% for the nine months ended September 30, 2008 as
compared to the same period in 2007. This increase was primarily due to the
change in our product mix. We sold more concentrated fruit beverages, which have
a higher margin, in the first three quarters of 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.
Operating
Expenses
The
following table presents the amounts of our operating expenses and the
percentage that our operating expenses comprise of net revenues for
the nine months ended September 30, 2008 and 2007:
|
Nine
Months Ended September 30,
|
||||||||||||
|
(Unaudited)
|
2008
|
2007
|
%
Change
|
|||||||||
|
General
and administrative
|
$
|
1,409,895
|
$
|
632,399
|
$
|
122.9
|
%
|
|||||
|
Selling
expenses
|
808,576
|
301,331
|
168.3
|
|||||||||
|
Research
and development
|
199,056
|
49,040
|
305.9
|
|||||||||
|
Accrued
liquidated damages
|
208,658
|
-
|
N/A
|
|||||||||
|
Total
operating expenses
|
$
|
2,626,185
|
$
|
982,770
|
$
|
167.2
|
%
|
|||||
|
As
a percentage of revenue
|
||||||||||||
|
General
and administrative
|
6.3
|
%
|
5.1
|
%
|
24.1
|
%
|
||||||
|
Selling
expenses
|
3.6
|
2.4
|
49.4
|
|||||||||
|
Research
and development
|
0.9
|
0.4
|
126.0
|
|||||||||
|
Accrued
liquidated damages
|
0.9
|
-
|
N/A
|
|||||||||
|
Total
operating expenses
|
11.7
|
%
|
7.9
|
%
|
48.8
|
%
|
||||||
Our operating expenses consist of
general and administrative, selling expenses and research and development
expenses. Operating expenses increased by 167.2% to $2,626,185 for the nine
months ended September 30, 2008, from $982,770 for the corresponding
periods in fiscal 2007.
General and administrative expenses
increased by $777,496, or 122.9%, to $1,409,895 for the nine months ended
September 30, 2008, from $632,399 for the same period of fiscal
2007.
The increase in general and
administrative expenses in the nine months ended September 30, 2008 compared
with the same period of fiscal year 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 was 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 $507,245,
or 168.3%, to $808,576 for the nine months ended September 30, 2008, from
$301,331 for the same period of 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 $150,016, or 305.9%, to $199,056 for the nine months ended
September 30, 2008, from $49,040 for the same period of fiscal year 2007. The
increase in research and development expenses was because we outsourced our
research and development of new fruit related products to a third party in the
third quarter of fiscal 2008.
We accrued $208,658 as of September 30,
2008 as liquidated damages due to the failure to meet the timetables provided
for in the Registration Rights Agreement. The accrued amount was based on
the estimate that our registration statement would become effective before
December 31, 2008. Since none of the estimates is better than the other, we have
booked an expense and a liability equal to the minimum estimated loss in
accordance with FIN 14.
As of February 2, 2009 the registration statement had not been declared
effective by the SEC. Therefore, as of such date, an aggregate of $251,693
in liquidated damages is due to the Investors pursuant to the Registration
Rights Agreement. Assuming the registration statement will be declared
effective by the SEC on February 6, 2009, an aggregate of $256,910 in liquidated
damages will be due to the Investors pursuant to the Registration Rights
Agreement.
Income
from Operations
In the nine months ended September 30,
2008, income from operations increased by $1,399,949, or 37.0%, to $5,180,377
from $3,780,428 for the corresponding period in 2007. As a percentage of net
sales, income from operations was approximately 23.1% for the nine months ended
September 30, 2008, a decrease of 23.7% as compared to 30.3% for the
corresponding period in fiscal 2007. The decrease in the percentage of net sales
was due to a decrease in gross margin and an increase in operating expenses, as
previously discussed.
Interest
Expense
Interest expense was $624,802 for the
nine months ended September 30, 2008, an increase of $605,041, as compared with
the same period of fiscal 2007, primarily due to an increase in term loan
facilities in 2008 to support expansion plans and potential business
opportunities. In the nine months ended September 30, 2008, the Company
entered into eight short-term loan agreements with local banks in China. As
of September 30, 2008, the balance of these short-term loans totaled RMB
65,000,000 ($9,573,042), with interest rates ranging from 5.28% to 9.83% per
annum and maturity dates ranging from January 2009 to September
2009.
Income Tax
Our provision for income taxes was
$525,585 for the nine months ended September 30, 2008, compared to $584,389 for
the corresponding period in 2007. The decrease in tax provision for the third
quarter of fiscal 2008 was due to a decrease in the effective tax rate of Xi’an
Tianren. The tax rate of Xi’an Tianren was reduced from 33% to 25%, effective
beginning January 2008. However, as the income of Xi’an Tianren increased
significantly in the third quarter of 2008, the income tax provision increased
by 10.1% in the third quarter, as compared to the same period of last fiscal
year.
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.
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.
Minority
Interest
As of September 30, 2008, Shaanxi
Tianren held a 91.15% interest in Xi’an Tianren and Pacific held a 99% percent
interest in Shaanxi Tianren. Minority interest in net income of subsidiaries was
$256,242 for the nine months ended September 30, 2008, an increase of $119,395
compared to a minority interest in the net income of $136,847 for the
corresponding period of fiscal 2007. The increase in the minority
interest was mainly attributable to the increase in the net income generated
from Shaanxi Tianren.
Net
Income
Net
income was $3,900,123 for the nine months ended September 30, 2008, an increase
of $891,791, or 29.6%, compared to the corresponding period of 2007. Such
increase was primarily due to an increase in sales, as previously
discussed.
Financial
Condition
During the nine months ended September
30, 2008, total assets increased $2,713,464, or 5.8%, from $46,610,128 at
December 31, 2007 to $49,323,592 at September 30, 2008. The majority
of the increase was in cash, prepaid expenses, property plant and equipment,
construction in progress and other assets. The increase in total assets was
offset by a decrease in accounts receivable, inventory, and related party
receivables.
For the nine months ended September 30,
2008, cash and cash equivalents increased $8,702,321, or 212.6%, to $12,796,559
as compared to $4,094,238 for the fiscal year ended December 31,
2007. The increase in cash was mainly due to net gross proceeds of
$3,115,072 received from certain accredited investors in a private placement
transaction on February 26, 2008 and an increase of $9,948,527 in net revenue in
the nine months ended September 30, 2008.
At September 30, 2008, the accounts
receivable balance decreased by $5,528,086 from the balance at December 31, 2007
due primarily to an improvement in accounts receivable collections in fiscal
2008. The accounts receivable turnover was 78 days for the nine months ended
September 30, 2008, compared with 88 days for fiscal year 2007. The decrease in
the accounts receivable turnover was due primarily to improvement in collections
in Shaanxi Tianren.
Our inventory as of September 30, 2008
was $1,860,384, reflecting a decrease of $2,599,765, or 58.3%, compared to
inventory at December 31, 2007. Inventory consists of raw materials, packaging
materials and finished products. The decrease in inventory was mainly from the
increase in sales in kiwifruit and apple related products in fiscal year 2008
which were produced in 2007 and January 2008.
Prepaid expenses and other current
assets at September 30, 2008 were $1,267,956, an increase of $1,166,328 from the
balance at December 31, 2007. The increase in prepaid expenses was primarily due
to an increase of $821,424 in prepaid raw material of fresh fruits. To ensure
that we have enough fresh fruits for our production needs, we usually pay 30% to
50% of the estimated purchase amount to suppliers before the start of squeezing
season.
Property, plant and equipment increased
by $211,226 from $17,564,147 at December 31, 2007 to $17,775,373 at September
30, 2008. Construction in progress was $2,711,753 at September 30, 2008. Total
capital expenditures were approximately $2,826,179 in the nine months ended
September 30, 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 have capitalized, as construction
in progress, $1,178,221 during the nine months ended September 30, 2008. This
research and development center is expected to be completed by June 30, 2009.
Our estimated future capital expenditure for this project is $44,183. 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 started a technology innovation and expansion project over its
original industrial waste water processing facility located in the factory of
Jingyang County in Shaanxi Province. This 600 square meter industrial waste
water processing facility will increase the capacity of waste water processing
and recycling from the current 100 cubic meters per day to 300 cubic meters per
day. We capitalized $810,027 as construction in progress during the nine months
ended September 30, 2008. This project is expected to be operational by the end
of the third quarter of fiscal 2009. Our estimated future capital
expenditure for this project is $1,030,943. 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. In
addition, Xi’an Tianren began construction on an industrial waste water
processing facility in the factory of Zhouzhi County in Shaanxi
Province.
Xi’an Tianren 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 Xi’an Tianren and will improve the
use of recycled waste water. We capitalized $659,804 as construction in progress
during the nine months ended September 30, 2008. This project is expected to be
operational by the end of the third quarter of fiscal 2009. Our estimated future
capital expenditure for this project is $135,495. The newly built water
processing facility in Xi’an Tianren 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. We also capitalized interest expenses of $63,701
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 were
$1,409,907 for the nine months ended September 30, 2008, compared with $827,945
for the same period of 2007. The increase in depreciation expenses was due
mainly to an increase in property, plant and equipment acquired after September
30, 2007.
The related party receivables of
$4,970,427 as of December 31, 2007 were fully collected as of September 30,
2008. The related party receivables as of December 31, 2007 consisted primarily
of two interest-free loans in the aggregate amount of approximately RMB
27,000,000 (approximately $3,971,495 based on the exchange rate as of September
30, 2008) that we advanced to Hede in June and July 2007 for Hede to
acquire Huludao Wonder. On June 10, 2008, Shaanxi Tianren completed the
acquisition of Huludao Wonder for a total purchase price of RMB 48,250,000, or
approximately $6,887,391 based on the average exchange rate for the nine months
ended September 30, 2008. The outstanding amount of the loan at the time of the
acquisition was applied to the purchase price.
Other assets were $2,749,985 at
September 30, 2008, an increase of $2,678,167 from the balance at December 31,
2007. The increase in other assets was primarily due to a down payment of
$2,209,164 for the acquisition of 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 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 $2,141,158 to Dehao as a deposit for the purchase.
The acquisition is targeted for completion in the first quarter of fiscal 2009
after the third party market value evaluation. In addition, we made a down
payment of $356,860 to a construction company for the remolding services that
they will provide for our newly leased office in Shaanxi
Tianren.
Liquidity and Capital
Resources
Our
working capital has historically been generated from the operating cash flow,
advances from our customers and loans from bank facilities.
Net cash provided by operating
activities increased by $7,583,005 to $12,003,155 for the nine months ended
September 30, 2008 from $4,420,150 in the same period of fiscal
2007. The increase in net cash provided by operating activities was
primarily due to (i) an increase of $891,791 in net income from $3,008,332 to
$3,900,123 during the nine months ended September 30, 2008 as compared to the
same period of the prior year, (ii) an increase of $702,631 of adjusting
non-cash items, and (iii) an increase of $11,416,914 in cash inflow from changes
in accounts receivables, inventory and tax payables. Primarily offsetting the
increase in cash provided by operating activities was a cash outflow from change
in prepaid expenses, accounts payable and advances from customers of
$5,733,986.
Net cash used in investing activities
increased by $3,590,723 to $7,023,992 for the nine months ended September 30,
2008 from $3,433,269 for the same period of fiscal 2007. The increase in cash
used in investing activities was mainly due to $2,141,158 in deposits paid to
Dehao for the acquisition of Yingkou, an increase of $3,857,216 in loans
advanced to related parties, an increase of $356,860 in prepayment for the lease
improvement and an increase of $2,715,577 in the capital expenditures in cash,
as previously discussed. Offsetting this increase in cash used in investing
activities was an increase of $5,475,092 in the repayment of loans from related
parties and an increase of $4,996 in the proceeds from the sale of property,
plant and equipment.
Net cash provided by financing
activities in the nine months ended September 30, 2008 was $3,112,471,
representing an increase of $3,731,366 compared to the net cash used in
financing activities of $618,895 during the same period of 2007. The increase
was mainly due to stock sales proceeds of $3,115,072 received from certain
accredited investors in a private placement transaction on February 26,
2008.
As of September 30, 2008, we had
several short-term loans outstanding. The balance of these loans totaled RMB
65,000,000 ($9,573,042), with interest rates ranging from 5.28% to 9.83% per
annum. These loans mature from January 2009 to September 2009. The
proceeds of these short-term loans are used as working capital in the Company’s
ordinary course of business.
Under our Preferred Stock Purchase
Agreement with Barron Partners, for a period of three years from the closing
date of the agreement (February 26, 2008), so long as Barron Partners shall
continue to beneficially own 20% of the Series B Preferred Stock issued
thereunder, we may not issue any preferred stock or any convertible debt, except
for preferred stock issued to Barron Partners.
Further, under the Preferred Stock
Purchase Agreement with Barron Partners, 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 first 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 $45.4 million for the period from October 2008 to
September 2009, and $1.34 million for the last quarter of fiscal year 2009. The
Company needs to purchase land to expand its current operations. Much of its
planned expenditures in the period from October 2008 to September 2009 represent
the purchase price of land and construction expenses of $10
million.
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.
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 would 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.
Fiscal
Years Ended December 31, 2007 and December 31, 2006
Results of Operations and
Business Outlook
As the
following table shows, Shaanxi Tianren’s revenue, gross profit, and income from
operations for fiscal year 2007 rose substantially as compared to fiscal year
2006. These increases were due in large part to the combination of Huludao
Wonder’s operating results on and after June 2007 with those of Shaanxi Tianren.
In addition, in 2007, Xi’an Tianren continued normal production and sales of its
kiwifruit beverage products throughout the non-squeezing season, while in June
and July of 2006, due to the transition of Xi’an Tianren as a result of our
acquisition of it in May 2006, its production and sales were temporarily
suspended for technological and facility upgrades and personnel training. These
factors contributed to the substantial increase of our net sales and income from
operations for fiscal year 2007 as compared to fiscal 2006.
|
Twelve
Months Ended December 31,
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Revenue
|
$ | 29,361,941 | $ | 17,427,204 | 68.48 | % | ||||||
|
Cost
of Goods Sold
|
$ | 18,467,045 | $ | 10,105,327 | 82.75 | % | ||||||
|
Gross
Profit
|
$ | 10,894,896 | $ | 7,321,877 | 48.80 | % | ||||||
|
Gross
Margin
|
37.11 | % | 42.01 | % | -11.68 | % | ||||||
|
Operating
Expenses
|
$ | 1,876,456 | $ | 1,069,970 | 75.37 | % | ||||||
|
Income
from Operations
|
$ | 9,018,440 | $ | 6,251,907 | 44.25 | % | ||||||
|
Net
Income
|
$ | 7,956,403 | $ | 3,845,270 | 97.55 | % | ||||||
Revenue
Revenue
for fiscal 2007 was $29,361,941, an increase of $11,934,737, or 68.48%, compared
to $17,427,204 for fiscal 2006. The increase was primarily due to Shaanxi
Tianren’s consolidation of Huludao Wonder’s operating results since June 1, 2007
and forward. In June 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, leased all the assets and operating
facilities of Huludao Wonder, which is wholly owned by Hede. This lease
arrangement resulted in the combination of Huludao Wonder’s operating results
with those of Shaanxi Tianren. In addition, Xi’an Tianren increased its
production of kiwifruit beverages in fiscal 2007. The kiwifruit beverage is
produced by the further processing of kiwifruit juice puree. Generally, we do
not produce or sell fruit juice puree or fruit juice during the non-squeezing
season between March or April and July. However, during part of the
non-squeezing season in 2007, between January and June, Xi’an Tianren continued
to produce kiwifruit juice from existing kiwifruit juice puree and to sell
kiwifruit juice during this period. As a result, we saw an increase in net sales
of kiwifruit juice for fiscal year 2007. A general price increase for fruit
juices in 2007 as compared to those in 2006 also contributed to the increase of
net sales in fiscal 2007.
Overall
Gross Margin
Overall
gross margin, as a percentage of revenue, dropped by 11.67%, from 42.01% for
fiscal 2006 to 37.11% for fiscal 2007. The lower margin was due primarily to an
increase in general price for fruits. In the squeezing season of 2007, the main
production areas of apples in China suffered from poor weather, which caused a
lower yield in the apple crop. As a result, our cost of raw materials was higher
in 2007. In terms of dollar amount, gross margin for fiscal 2007 was
$10,894,896, an increase of $3,573,019, or 48.80%, compared to $7,321,877 for
fiscal 2006, as the result of better sales performances, as previously
discussed.
Operating
Expenses
Operating
expenses for the years ended December 31, 2007 and 2006 were as
follows:
|
Twelve
Months Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
General
and administrative
|
$ | 1,189,637 | $ | 405,253 | |||
|
Selling
expense
|
686,819 | 664,717 | |||||
|
Total
|
$ | 1,876,456 | $ | 1,069,970 | |||
Our
operating expenses increased 75.37% to $1,876,456 for the fiscal year ended
December 31, 2007 from $1,069,970 for fiscal year 2006. Our operating expenses
consist of general and administrative and selling expenses. The increase in our
operating expenses was substantially attributable to the 193.55% increase in our
general and administrative expenses to $1,189,637 for fiscal year 2007 as
compared to $405,253 for fiscal year 2006. The increase was primarily due to the
consolidation of Huludao Wonder’s operating results with those of Shaanxi
Tianren since June 1, 2007 and forward. Huludao Wonder had a large amount of
general and administrative expenses, which attributed to the substantial
increase of Shaanxi Tianren’s operating expenses as a result of such
combination. The other contributing factor was a hike in payroll and related
expenses in Shaanxi Tianren to handle the rise in sales volume. Selling expenses
increased by $22,102, or 3.33%, to $686,819 for fiscal year 2007, from $664,717
for fiscal 2006, mainly due to an increase in freight and transportation
expenses as a result of the increase in sales.
Income
from Operations
Income
from operations increased 44.25% to $9,018,440 for fiscal year 2007, from
$6,251,907 for fiscal year 2006. As a percentage of revenue, income from
operations was approximately 30.71% for fiscal year 2007, a decrease of 14.39%
as compared to 35.87% for fiscal year 2006. The decrease in the percentage of
revenue was due to a decrease in gross margin and an increase in operating
expenses, as previously discussed.
Interest
Expense
Interest
expense increased by $338,370 for fiscal year 2007, from $62,147 to $400,517,
primarily due to new term loan facilities of $9,446,103 taken up in fiscal 2007
to support expansion plans and potential business opportunities.
Income
Tax
Our
income tax provision decreased by $926,515, or 45.51%, from $2,035,675 in fiscal
2006 to $1,109,160 in fiscal 2007. The decrease was due to Shaanxi Tianren’s new
preferential tax treatment effective as of January 2007. 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 Xi’an Tianren was reduced from 33% to 25%, effective beginning
January 2008.
Minority
Interest
As of
December 31, 2007, Shaanxi Tianren held a 91.15% interest in Xi’an Tianren, and
Pacific held a 99% interest in Shaanxi Tianren. The minority interest for fiscal
2007, in the net income of subsidiaries, was $360,501, an increase of $116,937
compared to the minority interest of $243,564 for fiscal 2006. The increase in
the minority interest was attributable to the improvement in the net income
generated from Shaanxi Tianren.
Net
Income
Net
income for fiscal year 2007 was $7,596,403, an increase of $3,751,133, or
97.55%, compared to $3,845,270 in fiscal year 2006. Such increase was primarily
due to an increase in revenue, as previously discussed.
Financial
Condition
During
fiscal year 2007, total assets increased by $25,188,080 from $21,422,048 at
December 31, 2006 to $46,610,128 at December 31, 2007. The increase was
primarily in cash, accounts receivable, inventory, property, plant and
equipment, land usage rights and related party receivables.
Cash and
cash equivalents reached $4,094,238 as of December 31, 2007, an increase of
91.75%, from $2,135,173 as of December 31, 2006. The increase in cash was mainly
the result of higher revenue generated in fiscal year 2007.
Accounts
receivable at December 31, 2007 were $9,153,687, an increase of $4,002,053, or
77.69%, compared to $5,151,634 at December 31, 2006. In 2007 we required advance
payment of 100% of the purchase price on 11% of our sales and we generally
delivered the products one to two months after payment. As our sales in 2007
increased by 68.5% compared to 2006, our accounts receivable also increased. The
turnover of accounts receivables was 89 days for fiscal 2007, a decrease of 25
days or 21.93%, compared to 114 days for fiscal 2006. The decrease in turnover
days of accounts receivable was primarily due to improvement in collection
efforts on the part of the staff in Shaanxi Tianren.
Our
inventory reached $4,460,149 as of December 31, 2007 from $765,711 at the
beginning of the year, representing an increase of 482.48%. Inventory consists
of raw materials, merchandise on hand, low-value consumables and packaging
materials and finished products. Our inventory as of December 31, 2007 consisted
largely of concentrated apple juice produced by Huludao Wonder. As discussed
above, 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, which contributed to the 482.48%
increase.
Related
party receivables increased to $4,970,427 as of December 31, 2007 from $419,523
as of December 31, 2006, representing an increase of 1,084.78%. The related
party receivables as of December 31, 2007 consisted primarily of two
interest-free loans in the aggregate amount of approximately RMB 27,000,000 (or
approximately $3,696,301) that we advanced to Hede in June and July 2007 for
Hede to acquire Huludao Wonder, a factory that produces apple juice products.
The total purchase price of Huludao Wonder by Hede was RMB 48,250,000 (or
approximately $6,605,427). Hede was 80% owned by Mr. Yongke Xue, our Chief
Executive Officer and director, and 20% owned by Ms. Xiaoqin Yan, a director of
Shaanxi Tianren. Prior to Hede’s acquisition of Huludao Wonder, Huludao Wonder
was identified by Shaanxi Tianren as a potential acquisition target whose
product offering and manufacturing capacity complemented the business of Shaanxi
Tianren. As part of Shaanxi Tianren’s strategic plan, it is intended that
Shaanxi Tianren will acquire Huludao Wonder from Hede at cost after operating
Huludao Wonder under a one-year lease and management arrangement entered into by
the parties in June 2007. The principal amount of one such loan was RMB
7,000,000 (or approximately $958,300), which matured on June 5, 2008. The
principal amount of the second loan was RMB 20,000,000 (or approximately
$2,738,001), which matured on July 1, 2008.
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 $6,952,450 based on the exchange rate as of May 31,
2008) which was the same purchase price which Hede paid for the acquisition of
Huludo Wonder in June 2007. The outstanding loan balance and cash advances to
Hede were offset by the purchase price when the sale was closed on June 10,
2008. The loan made to Hede in excess of the sales price of RMB 48,250,000 was
returned to the Company in the same month. Please refer to the section titled
“Certain Relationships and Related Party Transactions” of this prospectus for
more information about these related party transactions.
Property,
plant and equipment at December 31, 2007 were $17,564,147, an increase of
$7,482,172, or 74.21%, compared to $10,081,975 at December 31, 2006. The
increase was mainly due to the consolidation of the financial condition of
Huludao Wonder with that of Shaanxi Tianren in fiscal year 2007. The property,
plant and equipment of Huludao Wonder was $7,077,737 as of December 31,
2007.
Total
liabilities at December 31, 2007 were $12,982,306, an increase of $8,573,302, or
194.45%, compared to $4,409,004 at December 31, 2006. The increase in
liabilities was mainly due to the increase in accounts payable, notes payable
and advances from customers.
Advances
from customers were $708,291 as of December 31, 2007, while we did not have any
advances from customers at the beginning of the year. In 2007 we required
advance payment of 100% of the purchase price on 9% of our sales and we
generally delivered the products one to two months after payment. In 2006, our
sales were largely generated from sales to a few domestic export companies who
historically acted as our distributors and with whom we have long-term
relationships. We usually do not require advance payments from such
distributors.
As of
December 31, 2007, we had loans in the principal amount of $1,889,220 from China
Construction Bank, and $6,571,203 from China Commercial Bank, Suizhong, branch.
We intend to use these loans to support our expansion plans and potential
business opportunities.
Liquidity and Capital
Resources
Our
working capital has historically been generated from the operating cash flow,
advances from our customers and loans from bank facilities.
Net cash
provided by operating activities during fiscal 2007 was $6,153,078, an increase
of $4,035,484 as compared to $2,117,594 in fiscal 2006. Higher levels of cash
flows were primarily due to the swing in net income from $3,845,270 in fiscal
year 2006 to $7,596,403 in fiscal year 2007.
Net cash
used in investing activities decreased by $718,788 to $4,361,882 for fiscal 2007
from $5,080,670 for fiscal 2006. The fluctuation of net cash used in investing
activities was primarily caused by our acquisition in 2006 and the prices we
paid for such acquisition. During 2006, we paid $4,213,662 in cash for the
acquisition of Xi’an Tianren. Offsetting the decrease in cash used in investing
activities was an increase of $4,172,412 in loan advances to related
parties.
Net cash
used in financing activities in fiscal year 2007 was $50,854, reflecting an
increase of $4,504,526 compared to the net cash provided by financing activities
of $4,453,672 in fiscal year 2006. The increase was due mainly to the decrease
in capital contributions from stockholders in 2007. In 2006, our shareholders
made a capital contribution in the amount of approximately $6,271,558. However,
there was no such contribution in fiscal 2007. In fiscal 2007, we also paid off
an outstanding loan of $1,865,649 to our related parties, as compared to $28,524
in loan advances from related parties in 2006. The increase in net cash used in
financing activities was offset by an increase of $2,946,247 in proceeds from
bank loans and a decrease of $714,958 in dividend payments.
As of December 31,
2007, we had a long-term loan balance of RMB15,000,000, ($2,053,501 based on the
exchange rate as of December 31, 2007), on a RMB15,000,000 loan, which was
bearing interest at the lending bank’s floating prime rate. The loan has a term
of five years from the date of the loan. RMB 10,000,000 ($1,369,000) of
principal is due on July 10, 2009 and the balance of RMB 5,000,000 ($684,501) of
principal of the loan is due on September 20, 2009.
As of
December 31, 2007, we had several short-term loans outstanding which we intended
to pay back within a year. The balance of these loans totaled RMB 46,800,000
($6,406,922). The interest rates on these short-term loans range from 6.57% to
9.477% per annum. These loans were due from January 2008 to September
2008.
The
proceeds of these short-term loans were used as working capital in the Company’s
ordinary course of business.
We did
not have any contractual limitation on our ability to raise capital with any
bank or investor as of December 31, 2007.
The
Company plans to acquire Yingkou Trusty Fruits Co., Ltd. (“Yingkou”) in the
first quarter of fiscal year 2009. The Company also plans to expand its current
operations in the next two years. The planned capital expenditures are
approximately $5 million for fiscal 2008 and $41 million for fiscal year
2009. We believe that as of December 31, 2007 we had sufficient cash on
hand, combined with anticipated cash receipts, to fund our business for at least
the next 12 months.
In order
to fund our capital expenditures we will likely need to seek additional debt or
equity financing. We believe any such financing could come in the form of
additional corporate debt or straight equity issuance of our registered shares
through a private investment in public equity investor. However, there are no
assurances that such financing would 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.
Critical
Accounting Policies
Management’s
discussion and analysis of the Company's financial condition and results of
operations is based upon SkyPeople Fruit Juice, Inc. consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. SkyPeople’s
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. Pacific believes that the following reflects the more critical
accounting policies that currently affect SkyPeople’s financial condition and
results of operations.
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 its
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 was incorporated on August 8, 2001 in the People’s Republic of China
(“PRC”) and is located in Xi’an High-Tech Industrial Development Zone. The
Company is principally engaged in developing, manufacturing and selling mostly
concentrated pear and apple juices, juice concentrate, fruit beverages,
agricultural products and packing supplies in the PRC.
Xi’an
Tianren Modern Organic Company, Ltd. (“Xi’an Tianren”), formerly known as “Xi’an
Jiaoda Qinmei Modern Food Company Ltd.”, was incorporated on December 22, 2002
in the PRC. The Company is principally engaged in developing, manufacturing and
selling mostly concentrated kiwifruit and peach juices and fruit supplies in the
PRC.
On
May 27, 2006, Shaanxi Tianren purchased 91.15% of Xi’an Tianren for RMB
36,460,000 (U.S. $4,573,221). The acquisition was accounted for using the
purchase method and the financial statement was consolidated on the purchase
date and forward.
On June
2, 2007, Shaanxi Tianren entered into a lease agreement with Shaanxi Hede
Investment Management Co., Ltd. (“Hede”), pursuant to which Shaanxi Tianren, for
a term of one year and for a monthly lease payment of RMB 300,000, leased all
the assets and operating facilities of Huludao Wonder, which is wholly-owned by
Hede. For accounting purposes, since June 1, 2007 Huludao Wonder has been a
variable interest entity of Shaanxi Tianren according to FASB Interpretation No.
46: Consolidation of Variable Interest Entities, an interpretation of ARB 51
(“FIN 46”). The financial statements of Shaanxi Tianren and Huludao Wonder have
been consolidated as of June 1, 2007 and forward. 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.
Consolidation
The
consolidated financial statements include the accounts of Shaanxi Tianren, Xi’an
Tianren, 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,
Xi’an Tianren 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
periods, 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 6 months are allowed for. 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 (“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 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 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% 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:
|
Buildings
|
20-30
years
|
|
Machinery
and equipment
|
10
years
|
|
Furniture
and office equipment
|
5
years
|
|
Motor
vehicles
|
5
years
|
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 has recorded no deferred tax assets or liabilities as of
December 31, 2007, 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.
Minority Interest in
Subsidiary
Minority
interest represents the minority stockholders’ proportionate share of 1% of the
equity of Shaanxi Tianren and 8.85% of the equity of Xi’an Tianren.
Accounting
Treatment of the February 26, 2008 Private Placement
The
Company has issued shares and put them into escrow to protect the investor group
from a decline in value should the Company not meet certain income targets. If
the Company fails to achieve the income targets, the Make Good Escrow Shares
will be released to the investors. Since the investors have no relationship to
the Company other than as Investors, no compensation cost will be recognized. If
the Company achieves the income targets, the Make Good Escrow Shares will be
canceled, resulting in no income or expense recognition. During the time the
Make Good Escrow Shares are outstanding they will be accounted for as
contingently issuable shares in determining the EPS denominator in accordance
with SFAS 128.
Liquidated
damages potentially payable by the Company under the Stock Purchase Agreement
and the Registration Rights Agreement will be accounted for in accordance with
FSP EITF 00-19-2. Estimated damages at the time of closing will be recorded as a
liability and deducted from additional paid-in capital as costs of issuance.
Estimated damages determined later pursuant to the criteria for SFAS 5 will be
recorded as a liability and deducted from operating income.
Overview
of the Business
Products
Shaanxi
Tianren, with its subsidiaries and branches, is engaged in the business of
research and development, production and sales of special concentrated fruit
juice, fast-frozen and freeze-dried fruits and vegetables and fruit juice
drinks.
Certain
information concerning our operations since January 1, 2005 is set forth in the
following table:
Unit:
USD
|
Period
|
Operating
Revenue
|
Cost
of Sales
|
Operating
Profit
|
|||||
|
Calendar
Year 2007
|
29,361,941
|
18,467,045
|
9,018,440
|
|||||
|
Calendar
Year 2006
|
17,427,204
|
10,105,327
|
6,251,907
|
|||||
|
Calendar
Year 2005
|
7,027,889
|
4,471,432
|
1,619,163
|
|||||
There are
two general categories of fruit and vegetable juices available in the market.
One is fresh juice that is canned directly after filtering and
sterilization upon being squeezed out of fresh fruits or vegetables. The other
general category is juice drinks made out of concentrated fruits and vegetable
juices. Concentrated fruit and vegetable juices are produced through pressing,
filtering, sterilization and evaporation of fresh fruits or vegetables. It is
used as the base material or ingredient for products such as drinks, fruit jams
and fruit wines, etc. Concentrated juices are not drinkable. Instead, they are
used as a basic ingredient for manufacturing juice drinks and as an additive to
fruit wine and fruit jam, cosmetics and medicines.
For
Shaanxi Tianren, the period between each July through April is our squeezing
season when fresh fruits are available in the market and concentrated fruit
juices are produced out of fresh fruits. The squeezing season for apples is from
August to March or April of the following year; the squeezing season for pears
is from July or August until March of the following year; and the squeezing
season for kiwifruit is from September through December of each year. We produce
and sell both concentrated fruit juices and juice drinks. Compared to juice
drinks, sales of our concentrated juice products generally result in a higher
gross margin, averaging above 50%, while the gross margin for juice drinks is
slightly above 20%. Therefore, our core products are concentrated apple, pear
and kiwifruit juices and our production has strategically been focused on
concentrated juice products. We also produce juice drinks and other derivative
products, especially when we are not in squeezing season. Our wide range of
product offerings and our ability to shift focus among products based on supply
and demand in the market and seasonal factors help us to diversify our
operational risks and supplement our revenue generation.
Our main
products include concentrated apple juice, concentrated pear juice, concentrated
kiwifruit puree, fruit juice drinks, fresh fruits and organic fresh
fruits.
Shaanxi
Tianren is also engaged in the research and development, production and sales of
concentrated vegetable juice, fruit sugar, fruit pectin, fast-frozen and
freeze-dried fruit and vegetable, dehydrated fruit and vegetable, fruit and
vegetable juice drinks, fruit vinegar and organic food; storing and sales of
fresh fruit products and vegetable; deep processing and technological research
of organic agricultural and fruit industry.
At
present, the raw material processing capability of Shaanxi Tianren is 70
tons/hour and our annual yield of all kinds of concentrated fruit juice is
50,000 tons.
Certain
information concerning our sales of various products since January 1, 2005 is
set forth in the following table:
|
2007
|
2006
|
2005
|
||||||||||||||
|
Products
|
Amount
(tons)
|
Proportion
|
Amount
(tons)
|
Proportion
|
Amount
(tons)
|
Proportion
|
||||||||||
|
Apple
Clear Juice
|
7,186,847
|
24.48
|
%
|
2,119,655
|
12.16
|
%
|
4,466,050
|
63.55
|
%
|
|||||||
|
Pear
Clear Juice
|
11,184,212
|
38.09
|
4,983,145
|
28.59
|
2,561,839
|
36.45
|
||||||||||
|
Kiwifruit
Virgin Puree
|
590,912
|
2.01
|
1,665,754
|
9.57
|
—
|
|||||||||||
|
Concentrated
Kiwifruit Puree
|
5,277,961
|
17.98
|
2,090,336
|
11.99
|
—
|
|||||||||||
|
Others
|
5,122,009
|
17.44
|
6,568,314
|
37.69
|
—
|
|||||||||||
|
Total
|
29,361,941
|
100
|
%
|
17,427,204
|
100
|
%
|
7,027,889
|
100
|
%
|
|||||||
Organizational
Structure
The
following table contains certain information concerning companies owned directly
or indirectly by Shaanxi Tianren as of June 27, 2008.
|
No.
|
Company
Name
|
Incorporated
|
Main
Business
|
Stockholders
|
||||
|
1
|
Xi’an
Tianren
|
12/23/2002
|
kiwifruit
juice production and sales
|
Shaanxi
Tianren 91.15%;
|
||||
|
Xi’an
Qin Mei Food Co., Ltd. 8.85%
|
||||||||
|
2
|
Jingyang
subsidiary
|
9/26/2006
|
concentrated
pear juice process and sales
|
Shaanxi
Tianren 100%
|
||||
|
3
|
Zhouzhi
subsidiary
|
5/6/
2003
|
kiwi
juice production and sales
|
Xi’an
Tianren 100%
|
||||
|
4
|
Huludao
Wonder subsidiary
|
06/10/
2007
|
concentrated
apple juice process and sales
|
Shaanxi
Tianren 100%
|
Seasonality
Our
business experiences mild seasonal effects as sales of our products are
generally higher during the squeezing season from August through April of the
following year. Sales of our products during the months from March through July
generally tend to be lower due to a shortage of raw material of fresh fruits and
a lower level of production activity. As a result, our results of operations for
the third quarter and fourth quarter are generally stronger than those for our
first quarter and second quarter. However, we are trying to diversify our
products and prolong our squeezing season. There are also sales from inventory
during the non-squeezing season. In 2008, we started our squeezing season in
July with the early initiation of machine maintenance.
Industry
and Principal Markets
Global
Market
The fruit
and vegetable juice processing industry is an emerging industry that came into
being at the end of the 19th century. Due to the natural and healthy quality of
fruit and vegetable juice drinks in recent years the consumption of such
products has continued to grow and sales of pure fruit and vegetable juice and
fruit and vegetable juice drinks have increased rapidly.
In 2006,
according to Chengdu Lan Xin Information & Tech Co., as published on its
TJKX.com website, global sales of fruit juice and nectars were more than 37
billion liters, an increase of approximately 7 billion over sales in 2000.
According to China Chamber of Commerce for Import & Export of Foodstuffs, as
published on its Chinajuice.org website, in 2010 the global sales of fruit juice
and vegetable juice will reach 53 billion litters. North America and Europe are
the main markets for fruit juice, where the sales of fruit juice account for
approximately 60% of total beverage consumption.
According
to the data publicized by the United States Department of Agriculture (which
information may be obtained at htto://www.fas.usda.gov/htp/2007%20Apples.pdf),
in the marketing season (July to June for northern hemisphere countries) of
2006/2007, world apple juice production was approximately 1.5 million metric
tons.
The
processing and export of concentrated apple juice, concentrated pear juice and
concentrated kiwifruit puree are now the major operational fields of the Chinese
concentrated fruit and vegetable juice industry.
China Market
China is
a country with a large population, but the consumption of fruit juice is
relatively very low, with annual per capita consumption of no more than 1
kilogram, which only accounts for 10% of total world consumption. If calculated
based on annual world consumption rates, China’s market capacity for fruit juice
beverages would be 9.1 million tons, indicating that there is a great potential
market for the marketing of fruit juice beverages in China.
In China,
the output of fruit juice and drinks nationwide was approximately 4,816,824 tons
in 2004, an increase of 27.95% compared with that in 2003, and output increased
by 29.17 % to 6,000,000 tons in 2005. From January to October 2006, output was
approximately 7,196,692 tons, an increase of 27.96% compared with that of the
first 10 months of 2005.
Shaanxi
Tianren is located in Shaanxi Province. In 2006, the export volume of
concentrated apple juice by Shaanxi Province was 291,000 tons with a value
of $212 million, accounting for 44.9% and 46.3% of the total export volume and
value, respectively, of concentrated apple juice from all of the PRC. At
present, the output, output value and export volume of concentrated juice of
Shaanxi Province all rank first among other provinces and cities in
China.
Marketing
Only
those Chinese companies, such as Shaanxi Tianren, which maintain certain
standards set up by the PRC government, have been granted a certificate which
gives them the right to directly sell their products to foreign customers. The
certificate is issued by the Commercial Department of China. More than 70
percent of our products are directly and indirectly exported. One export channel
is via distributors with good credit, and the other is the direct sale to
end-users. In its main export markets (the U.S., Europe and Middle East),
Shaanxi Tianren has stable distributors and end-users.
Shaanxi
Tianren uses the following marketing methods: directly marketing with foreign
businesses via our sales department; attendance at various international farm
and sideline products sales exhibitions, at which we contact clients from abroad
to sell to them directly; and sales made through our trade
websites.
Sales of
fruit juice products are mainly made in Chinese markets. Most of the products
are sold through provincial level, city level and county level agents. The
Company also sells directly to hotels, supermarkets and similar
outlets.
Our sales
team is divided into teams focusing on the sale of concentrated fruit juice and
its derivative products and teams focusing on the sale of fruit juice
products.
Our
international trade department, which has 13 marketing personnel, is responsible
for our sales of concentrated fruit juice and its derivative
products.
Our sale
of fruit juice is conducted by a team of 28 personnel employed by our
subsidiary, Xi’an Tianren.
Our
target markets of kiwifruit pulp, kiwifruit concentrated pulp and kiwifruit
concentrated juice are mainly in Europe, Southeast Asia, South Korea, Japan, the
Middle East, mainland China and Taiwan. Our main target markets are concentrated
in mainland China, Taiwan and the Middle East. Export volume to other markets is
small.
Our
target markets of concentrated apple juice and pear juice are in North America
(especially in the U.S.), Europe and the Middle East.
|
1.
|
North
American market
|
The U.S.
market is a highly mature market with demand for concentrated apple juice, and
its demand increases year by year. Since prices in the North American market are
higher than in the European market, the U.S. market is always preferred by
manufacturers producing concentrated apple juice. Shaanxi Tianren started to
export to North America in 2004. We have increased our export volume to the U.S.
year by year since then and the North American market has become one of our
biggest target markets.
|
2.
|
European
market
|
The
European market has stable customer groups, complete requirements for product
quality standards and authoritative organizations for concentrated fruit juice.
In Europe, concentrated apple juice is used for producing beverages and fruit
wines.
The
European market has always been our main target market since Shaanxi Tianren
incorporated. More than half of our products are exported to
Europe.
Raw
Materials and Suppliers
Our raw
materials include:
|
|
•
|
Various
fresh fruits, the main raw materials for the processing of fruit juice,
which are mainly provided by local
farmers;
|
|
|
•
|
Packing
barrels, pectic enzyme and amylase, etc. and auxiliary power fuels and
sources such as coal, electricity and
water.
|
We
purchase raw materials at local markets and by fruit growers delivering directly
to our plants. The supply of our raw materials is highly fragmented. Because the
prices of raw fruits change frequently, processing enterprises of concentrated
fruit juice generally do not enter into fruit and vegetable purchasing
agreements with providers.
Fresh
fruits are the fundamental raw materials needed for the production of our
products and the purchase price of fresh fruits represents over 65% of the
production cost of Shaanxi Tianren. The adequate and continuous supply of fresh
fruits constitutes a necessary condition for the current and future continuous
expansion of Shaanxi Tianren. Shaanxi Tianren implements a plant plus farmer raw
material purchasing pattern, whereby the plant assigns its purchasing staff to
build purchasing centers in the areas rich in raw material resources so as to
shorten the distance and provide convenience for farmers to directly deliver the
raw material fruits to the plant. The quantity of the raw material fruits needed
by us for production depends on the yield of farmers, and the ability of our
purchasing staff to organize farmers for supply.
After
years of development and strategic deployment in the raw material production
areas, Shaanxi Tianren’s processing bases are relatively near to the regional
centers of our raw material suppliers. Shaanxi Tianren has established a
relatively mature purchasing pattern that can cope with the yield and price
changes of our raw materials.
The
source fruits used by Shaanxi Tianren are kiwifruit, pears and
apples.
Shaanxi Province
is a large agricultural and fruit producing province with sufficient resources
for our raw material needs. The main original production areas in the province
for kiwifruit are Zhouzhi County and Mei County where the production
of kiwifruit is about 600 thousand tons annually. This can completely meet our
production requirements. Shaanxi is also the main pear producing province with
adequate pear supply and high pear quality. The pear supply can completely meet
our production requirements.
One of
our factories is located in Liaoning Province, where high acid apples are
plentiful. The high acid apple production in Liaoning Province can meet our
production needs.
The
following sets forth certain information concerning our purchases of fresh
fruits since January 1, 2005:
|
Year
|
Fruit
|
Quantity
(ton)
|
Average
Price
(USD/ton)
|
Amount
(USD)
Paid
by Us
|
|||||||||
|
apple
|
46,199.773 | 40.53 | 1,872,439.92 | ||||||||||
|
2005
|
pear
|
32,049.834 | 26.7 | 855,651.14 | |||||||||
|
kiwifruit
|
— | — | — | ||||||||||
|
apple
|
18,273.146 | 42.06 | 768,640.07 | ||||||||||
|
2006
|
pear
|
85,404.389 | 25.2 | 2,151,818.80 | |||||||||
|
kiwifruit
|
33,116.177 | 50.24 | 1,663,806.67 | ||||||||||
|
apple
|
57,304.20 | 124.97 | 7,161,513.36 | ||||||||||
|
2007
|
pear
|
120,662.51 | 40.58 | 4,896,849.49 | |||||||||
|
kiwifruit
|
18,205.98 | 121.89 | 2,219,098.59 | ||||||||||
The
supply of packing barrels, pectic enzyme and amylase, etc. is available through
many suppliers. Tianren is not dependent on any supplier or group of suppliers.
Our largest packing barrel supplier is Shaanxi Haomai Drum Co., Ltd., which
accounted for 13% of our total purchases in 2006 and 5% of our total purchases
in 2007. Another larger supplier is Xi’an Changlong Drum Co., Ltd., which
accounted for 13% of our total purchases in 2006 and 2% in 2007.
Customers
The
following table sets forth certain information concerning sales of our
products since January 1, 2005 to our top five customers:
|
Year
|
Revenues
(USD)
|
Percentage
in Total Revenues
|
||||
|
2005
|
2,827,320
|
40.23
|
%
|
|||
|
2006
|
9,933,506
|
57.00
|
%
|
|||
|
2007
|
8,390,223
|
28.58
|
%
|
|||
|
2007
|
2006
|
2005
|
||||||||||||||
|
Sum
(USD)
|
%
of
Total
Revenue
|
Sum
(USD)
|
%
of
Total
Revenue
|
Sum
(USD)
|
%
of
Total
Revenue
|
|||||||||||
|
Export
Packers Co., Ltd.
|
2,606,396
|
8.88
|
%
|
—
|
—
|
—
|
—
|
|||||||||
|
Shaanxi
Jiedong Trade Co., Ltd.
|
1,637,502
|
5.58
|
%
|
2,788,353
|
16
|
%
|
—
|
—
|
||||||||
|
Dalian
Jack Foods Trading Co., Ltd.
|
1,449,948
|
4.94
|
%
|
—
|
—
|
—
|
||||||||||
|
Golden
Dragon Trading Gmbh
|
1,357,294
|
4.62
|
%
|
—
|
—
|
—
|
—
|
|||||||||
|
Yunan
Export & Import Co., Ltd.
|
1,339,083
|
4.56
|
%
|
2,091,264
|
12
|
%
|
—
|
—
|
||||||||
|
Shaanxi
Zhongdian Export & Import Co., Ltd.
|
—
|
—
|
2,439,809
|
14
|
%
|
—
|
—
|
|||||||||
|
Ruifeng
Company
|
—
|
—
|
—
|
—
|
702,787
|
10
|
%
|
|||||||||
|
Shaanxi
Xiguan Machinery Co., Ltd.
|
1,394,176
|
8
|
%
|
—
|
—
|
|||||||||||
|
Tonglian
International
|
—
|
—
|
1,219,904
|
7
|
%
|
—
|
—
|
|||||||||
|
Tongchan
Lvse Beverage
|
—
|
—
|
—
|
—
|
666,244
|
9.48
|
%
|
|||||||||
|
Xi’anyang
Dingjian Company
|
—
|
—
|
—
|
—
|
553,095
|
7.87
|
%
|
|||||||||
|
Tianwei
Beverage Company
|
—
|
—
|
—
|
—
|
570,665
|
8.12
|
%
|
|||||||||
|
Shaanxi
Menglv Food Co., Ltd.
|
—
|
—
|
—
|
—
|
334,528
|
4.76
|
%
|
|||||||||
|
Total
|
8,390,223
|
28.58
|
%
|
9,933,506
|
57
|
%
|
2,827,321
|
40.23
|
%
|
|||||||
|
Sales
Revenue
|
29,361,941
|
—
|
17,427,204
|
—
|
7,027,889
|
—
|
||||||||||
During
the normal course of business, we extend unsecured credit to our customers. Our
credit terms for customers with good credit history are from 30 days to 90 days.
For new customers, we usually require 100% advance payment for direct export
sales. Our terms with our customers generally do not include length and supply
requirements.
Competition
We
believe that Shaanxi Tianren’s major competitors in the industry include the
following companies:
|
Competitor
|
Market
Share
|
|
|
Sdic
Zhonglu Fruit Juice Co., Ltd.
|
Apple
17%
|
|
|
Yantainorth
Andre (Group) Juice Co., Ltd.
|
Apple
18%
|
|
|
Shaanxi
Hengxing Fruit Juice
|
Apple
22%
|
|
|
Shaanxi
Haisheng Juice Holdings Co., Ltd.
|
Apple
25%
|
We
believe that our advantages lie in our technology relating to the production of
concentrated fruit juice of small breeds, including mulberry juice, kiwifruit
juice and other types of juice with limited raw material and output. We can
produce concentrated apple juice with 4%--8% acidity at relatively low cost. As
all our factories are located near the production area of the raw material of
fresh fruits, we believe that our transportation and storage costs are
relatively lower than many of our competitors. At the same time, we believe we
are a leader in the production of concentrated clear pear juice and can produce
the highest quality products of concentrated clear pear juice in
China.
Competitive
Advantages
We
believe that we have the following eight competitive advantages:
(1) 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’s yield of kiwifruit accounts for about 50% of the total output
of China. The yields of pomegranates, pears, strawberries, peaches and cherries
are also very high in Shaanxi. Tianren has its own planting base of kiwifruit
raw-material fruits, so it can carry out quality control at the source of
production. Also, Shaanxi Tianren’s cost of product is relatively low. Our two
concentrated apple juice bases in Liaoning Province are located in the
largest production area of high acidity apples in China.
(2) Advantages
of Equipment and Technology
Our key
equipment for each production factory has been purchased by us from top-ranking
foreign equipment manufacturers such as Flottweg of Germany, ELPO of Italy,
Belducci of Italy and Schmitt of Germany. The high performance of such
processing equipment ensures the quality of product and the effectiveness of our
cost control procedures.
Shaanxi
Tianren has combined the new pressing technologies of “complete enzymolysis” and
“several times enzymolysises and digestions” self-developed with advanced
technologies such as “membrane filtration,” “resin absorption” and
low-temperature reverse osmosis membrane concentration.
(3) Processing
Scale and Integration Advantages
At
present, the raw material processing capability of Shaanxi Tianren is 70
tons/hour and our annual yield of all kinds of concentrated fruit juice is
50,000 tons. We use more than 110 machines in our production of fruit juice,
including equipment for storage, mixing of ingredients, emulsification,
fermentation, filtration, sterilization, concentration, CIP washing, liquid
transmission, water softening and treatment, and other procedures. We operate 3
production lines for the processing of fruit juice. We also have 3 sewage
disposal facilities conforming to the state discharge standards.
(4) Advantages
of Product Diversity and the Market Consumption Trend
Our
products include concentrated pear juice, concentrated clear pear juice,
concentrated kiwifruit fruit puree, fruit juice drinks and organic fresh fruit.
Our diversified product lines help us compete in international markets and
reduce risk. Due to their nutrition advantages and unique image and taste, the
consumption of small breed fruits and their processed products are on the rise
in the world.
(5) Quality
Advantages
Shaanxi
Tianren pays much attention to the quality of its products. In order to
accelerate the conversion to all-process control for the quality management,
Shaanxi Tianren has established a quality security system, implementing Hazard
Analysis Critical Control Point (“HACCP”) control and enacting and improving
each administrative system strictly pursuant to the requirements of ISO9001.
Shaanxi Tianren has earned ISO9001, HACCP and KOSHER certificates.
(6) Advantages
of Operation Team
Shaanxi
Tianren has a business administration and technology developing team which is
professional, highly educated and young, but with extensive experience in the
industry and business management. Also, we have established a good relationship
with several scientific research institutes, having more than 10 expert
consultants.
(7) Advantages
of Developing Strategy of Enterprise
We plan
to become a leading enterprise in the high-end modern special concentrated fruit
juice, fast-frozen and freeze-dried fruit and vegetable industries. Our
development strategy is to become the leader in the fruit juice drinks industry
with large-scale production and to become a leading producer of high-end modern
organic foods.
(8) Policy
Advantages
The PRC
government’s agricultural industrialization policy supports our business.
Shaanxi Tianren was awarded by the China Food Association as the National
Excellent Leading Food Enterprise in the Food Industry of Year 2005 - 2006, and
was recognized as the Hi-tech Enterprise in 2006. Xi’an Tianren, our subsidiary,
was recognized by the municipal government of Xi’an as the First Agricultural
Industrialization Operation Key Leading Enterprise. 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.
Intellectual
Property
1.
Patents
|
|
A.
|
Title:
Device for breaking up and separating fruit
peel
|
Patent
Number: ZL200620078461.1
Date of
Filing: Feb. 27, 2006 (Duration of the Patent: Ten Years)
Patent
Grant Date: Apr. 11, 2007
Granting
Unit: the State Intellectual Property Office of the People’s Republic of
China
Summary:
This utility model discloses a device for breaking up and separating fruit peel,
comprising of a body case, a feed port and a discharge port located on and under
the body case, respectively. This utility model breaks up fruit and then
squeezes the pulp out of the fruit peel by round rollers, thereby separating
pulp from the fruit peel. The traditional devices used by our competitors can
break the black seeds of the kiwifruit, affecting the purity of the resulting
fruit juice and lowering the amount of juice produced. We believe that our
utility model improves the purity and quality of the fruit juice. In addition,
the by-product of black seeds removed from the kiwifruit without breakage can be
sold, which increases our gross margin for kiwifruit related products. This
technique is unique to Shaanxi Tianren.
|
|
B.
|
Title:
Device for removing the filth on fruit peel and fruit
hair
|
Patent
Number: ZL200620078460.7
Date of
Filing: Feb. 27, 2006 (Duration of the Patent: Ten Years)
Date of
Issuing Granted: Apr. 11, 2007
Granting
Unit: the State Intellectual Property Office of the People’s Republic of
China
Summary:
This utility model discloses a device for removing material and fruit hair from
the peel of kiwifruits. It also enables us to adjust our machines to the
hardness and size of fresh kiwifruits. We believe that this utility model
improves the purity and quality of our fruit juice.
We
believe that our patented processes described above give us a competitive
advantage resulting from the improved purity and quality of our
products.
2.
Trademark
Shaanxi
Tianren registered the trademark of HEDETANG with the Trademark Bureau of
the State Administration for Industry and Commerce on Nov. 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. Shaanxi Tianren has authorized all its subsidiaries to use this
registered trademark for free on the related products.
The
specific scope of application of the trademark is as follows:
Category
29: meat, fish, poultry and venison, meat juice, pickled, dried or cooked fruits
and vegetables, jelly, jam, confect, eggs, milk and dairy products, edible oil
and grease.
Category
30: coffee, tea, cocoa, sugar, rice, edible starch, sago, coffee substitutes,
flour and cereal products, bread, pastry and candy, ice food, honey, syrup,
compressed yeast, yeast powder, salt, mustard, vinegar, sauce (condiment),
spice, drinking ice.
Category
31: agricultural, horticultural and forestry products and grains not included in
other categories, live animals, fresh fruits and vegetables, seeds, natural
plants and flowers, foodstuffs for animals, malt.
Category
32: beers, mineral and aerated waters and other non-alcoholic drinks, fruit
drinks and fruit juices, syrups and other preparations for making
beverages.
Category
5: pharmaceutical and veterinary preparations, sanitary preparations for medical
purposes, dietetic substances adapted for medical use, food for babies,
plasters, materials for dressings, material for stopping teeth, dental wax,
disinfectants, preparations for destroying vermin, fungicides and
herbicides.
Costs
of Environmental Compliance
Shaanxi
Tianren is subject to PRC regulations regarding sewage disposition. Under the
regulations issued by P.R.C. State Environmental Protection Administration (the
“SEPA”), discharged sewage must meet the following standards: PH between 6-9
mg/L, Chemical Oxygen Demand under 100 mg/L, Ammonia Nitrogen under 15 mg/L,
Biochemical Oxygen Demand under 20 mg/L and Suspended Solids under 70
mg/L.
To
satisfy the SEPA standards, in 2006 Shaanxi Tianren invested an aggregate of
$1,342,067 to build 2 sewage disposal projects as well as obtain a series of
monitors to control water quality, including a Chemical Oxygen Demand on-line
analyzer, an Ultrasonic Open-channel Flow meter, a PH meter and Portable
Dissolve Oxygen Meters. Shaanxi Tianren believes that it is in compliance with
the SEPA standards.
Employees
As of
June 27, 2008, Shaanxi Tianren had 369 full-time employees and 95 part-time
employees. Of that amount, 47 are in administration, 22 in finance, 41 in
research and development, 290 in production and 64 in marketing and
sales.
Research and
Development
Shaanxi
Tianren has established an R & D institution with nearly 40 R&D
personnel. Shaanxi Tianren also from time to time retains external experts and
research institutions.
We
believe that through continuous investment in research and development, our
product quality is always among the leaders in the industry and our market share
continues to increase. Our total R & D investment was about $1,027,350 over
the past four years.
The
following table discloses the amounts of our technology development investment
over the past four years.
|
2004
|
2005
|
2006
|
2007
|
Total
|
|||||||||||||
| $ | 70,079 | $ | 126,391 | $ | 358,575 | $ | 472,305 | $ | 1,027,350 | ||||||||
Shaanxi
Tianren currently owns 5 special production technologies, including technologies
relating to the production of kiwifruit pulp, kiwifruit concentrated pulp,
concentrated apple juice, concentrated pear juice and concentrated mulberry
juice. Shaanxi Tianren has also developed new production processes for fruit
juice products such as kiwifruit juice, guava juice and strawberry juice. Our
whole new pulp and juice production technology and process consist of methods
for membrane filtration, resin decolonization, hair removal, seed removal and
grinding pulp into juice. The Flow-Through Capacitor (“FTC”) membrane reverse
osmosis concentration and composite biological enzymolysis technology is for
clarification of pulp juice. We believe that these are leading technologies for
our industry.
New Products Under
Development
We are
conducting research on producing kiwifruit vinegar using submerged fermentation
technology. Submerged fermentation technology can help to preserve kiwifruit
polysaccharides and other nutrients to the greatest extent in the process of
producing kiwifruit vinegar.
Manufacturing
Process
Our
automated production line and strict quality control system ensure consistent
high quality.
The
following summarizes the production process for concentrated fruit and vegetable
juice.
At
present, our raw material processing capability is 70 tons/hour and our annual
yield of all kinds of concentrated fruit juice is 50,000 tons.
Inventory
Due to
the characteristics of seasonal production, we have many finished products and
semi-finished products at the end of each year, which have a significant impact
on the calculation of our inventory turnover rate. Inventories are stated at the
lower of cost, determined on a weighted average basis, and net realizable value.
Work-in-progress and finished goods are comprised of direct material, direct
labor and an attributable portion of manufacturing overhead. Net realizable
value is the estimated selling price, in the ordinary course of business, less
estimated costs to complete and dispose of finished products.
Government
Regulation
Our
products and services are subject to regulation by governmental agencies in the
PRC and Shaanxi Province. Business and company registrations, along with
the products, are certified on a regular basis and must be in compliance with
the laws and regulations of the PRC and provincial and local governments and
industry agencies, which are controlled and monitored through the issuance of
licenses. Our licenses include an operating license which enables us to sell
packaged food such as concentrated fruit and vegetable juice, fruit sugar, fruit
pectin, fast-frozen and freeze-dried fruits and vegetables, dehydrated fruits
and vegetables, fruit and vegetable juice drinks, fruit vinegar and organic
food. The registration No. is 610100400000601.
Principal Office and
Manufacturing Facilities
Our
principal executive offices are located at
16F, National Development Bank Tower, No.2 Gaoxin 1st Road,
Hi-Tech Industrial Zone, Xi’an, Shaanxi Province, PRC 710065, and our
telephone number is 011-86-29-88386415. The area of our office is approximately
1,400 square meters. We lease such offices from Zhonghai Trust Co., Ltd. under a
lease dated June 23, 2008, for a one-year term commencing July 1, 2008 at a
total annual rental of $110,219.
We also
own three factories through our subsidiaries. One is a factory located at
Sanqu Town, Jingyang County, Xianyang City, Shaanxi Province. The
factory occupies an aggregate of approximately 34,476.04 square meters of land
and contains a manufacturing facility. Another factory is located at
Siqun Village, Mazhao Town, Zhouzhi County, Xi’an City, Shaanxi
Province. That factory occupies an aggregate of approximately 57,934.83 square
meters of land and contains a manufacturing facility. The third factory is
located at Hujia Village, Gaotai Town, Suizhong County, Huludao,
Liaoning Province. The factory occupies an aggregate of approximately
86,325 square meters of land, factory buildings and machinery.
There is
no private ownership of land in China. All land ownership is held by the
government of the PRC, its agencies and collectives. Land use rights can be
transferred upon approval by the land administrative authorities of the PRC
(State Land Administration Bureau) upon payment of the required land transfer
fee. We own the land use rights for the 34,476.04 square meters of land at
Sanqu Town, which have a term of 49 years from 2007, and the 57,934.83
square meters of land at Siqun Village, which have a term of 41 years from
2007.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of
February 2, 2009, the only class of outstanding voting securities of the Company
was the Company’s Common Stock, par value $.01 per share. The Company also has a
class of Series B Convertible Preferred Stock, par value $.001 per share
(“Series B Stock”), but the holders of such class do not have the right to vote
in the election of directors and are thus not considered voting
securities.
The
following table sets forth certain information as of February 2, 2009 with
respect to the beneficial ownership of our Common Stock by (i) any person or
group owning more than 5% of each class of voting securities, (ii) each
director, (iii) each executive officer named in the Summary Compensation Table
in the section entitled “Executive Compensation” below and (iv) all executive
officers and directors as a group. The number of outstanding shares of Common
Stock and the number of shares of Common Stock used in calculating the
percentage of Common Stock beneficially owned has been adjusted to give effect
to (a) a 1-for-328.72898 reverse split of our outstanding Common Stock which
became effective May 23, 2008 and (b) the automatic conversion of the 1,000,000
outstanding shares of Series A Convertible Preferred Stock, par value $.001 per
share (“Series A Stock”) into an aggregate of 22,006,172 shares of Common Stock
which occurred simultaneously with the consummation of the reverse stock
split.
In
determining the percentage of Common Stock beneficially owned by a person on
February 2, 2009, we divided (a) the number of shares of Common Stock
beneficially owned by such person, by (b) the sum of the total number of shares
of Common Stock deemed outstanding on February 2, 2009, plus the number of
shares of Common Stock beneficially owned by such person which were not
outstanding, but which could be acquired by the person within 60 days after
February 2, 2009 upon the exercise of warrants or the conversion of convertible
securities.
|
Title
of Class
|
Name
and Address of
Beneficial
Owners
(1)
(2)
|
Amount
and Nature of
Beneficial
Ownership
|
Percent
of Class
|
||||
|
Common
Stock
|
Hongke
Xue (3)
|
17,604,938
|
79.1
|
%
|
|||
|
Common
Stock
|
Lin
Bai (4)
|
2,200,617
|
9.9
|
%
|
|||
|
Common
Stock
|
Sixiao
An (5)
|
2,200,617
|
9.9
|
%
|
|||
|
Common
Stock
|
Yongke
Xue
|
—
|
—
|
||||
|
Common
Stock
|
Spring
Liu
|
—
|
—
|
||||
|
Common
Stock
|
Xiaoqin
Yan
|
—
|
—
|
||||
|
Common
Stock
|
Guolin
Wang
|
—
|
—
|
||||
|
Common
Stock
|
Robert
B. Fields
|
—
|
—
|
||||
|
Common
Stock
|
Norman
Ko
|
—
|
—
|
||||
|
Common
Stock
|
Barron
Partners LP
730
Fifth Avenue, 9th Floor
New
York, New York 10019
|
10,159,265
|
(6)
|
31.3
|
%
|
||
|
Common
Stock
|
Joseph
Emas (7)
1224
Washington Avenue
Miami
Beach, Florida 33139
|
5,113
|
*
|
||||
|
Common
Stock
|
All
officers and directors as a group
(six
persons)
|
—
|
-
|
* Less
than 1%
|
(1)
|
Pursuant
to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of
any securities as to which such person, directly or indirectly, through
any contract, arrangement, undertaking, relationship or otherwise has or
shares voting power and/or investment power or as to which such person has
the right to acquire such voting and/or investment power within 60
days.
|
|
(2)
|
Unless
otherwise stated, each beneficial owner has sole power to vote and dispose
of the shares and the address of such person is c/o the Company, at 16F,
National Development Bank Tower, Gaoxin 2nd Road,
Hi-Tech Industrial Zone, Xi’an, Shaanxi Province, PRC
710075.
|
|
(3)
|
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.
|
|
(4)
|
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.
|
|
(5)
|
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.
|
|
(6)
|
Consists
of (a) 6,794,118 shares of Common Stock issuable upon exercise of warrants
and (b) an aggregate of 3,365,147 shares of Common Stock issuable upon
conversion of Series B Stock. The warrants held by Barron Partners LP
became exercisable upon the effectiveness of a 1-for-328.72898 reverse
stock split of the Company’s Common Stock on May 23, 2008, and the number
of shares for which the warrants are exercisable and the exercise price of
the warrants were not adjusted for such reverse stock
split.
|
|
(7)
|
Consists
of 5,000 shares of Common Stock issuable upon exercise of warrants which
were issued on May 23, 2008. Joseph I. Emas is a principal of Joseph I.
Emas Law Offices, which is the record owner of 113 shares of Common Stock.
He was a director of the Company from February 22, 2008 until he resigned
on April 7, 2008.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions
with Related Persons
During
the year ended 2006, the Company made sales aggregating $109,910 to Xi’an Qinmei
Food Co., Ltd., an entity which is an 8.85% shareholder of Xi’an Tianren. The
Company also purchased an automobile from Yongke Xue, the Chief Executive
Officer and Chairman of the Company, for a purchase price of $30,008. The sales
were made at the same prices and on other terms no less favorable to the Company
than it could obtain in arms length transactions.
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 to 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
“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
(approximately $44,183 based on the exchange rate as of September 30, 2008).
Upon execution of the lease, Shaanxi Tianren paid Hede RMB 1.8 million,
representing the first 6 months rent, and a refundable security deposit of RMB
1.2 million.
On June
5, 2007 Shaanxi Tianren loaned to Hede RMB 7 million (approximately $958,300
based on the exchange rate as of December 31, 2007) pursuant to a Loan Agreement
entered into by the parties on June 5, 2007. The entire principal of the loan
was due on June 5, 2008. The proceeds of such loan (as well an aggregate of RMB
3,000,000 received as a prepayment of rent and a security deposit on the Huludao
Lease) were used by Hede to pay a portion of the purchase price for its
acquisition of Huludao Wonder.
On August
1, 2007 Shaanxi Tianren loaned to Hede RMB 20 million (approximately $2,738,001
based on the exchange rate as of December 31, 2007) pursuant to a Loan Agreement
entered into by the parties on such date. The loan was due on August 1, 2008.
The loan agreement provides that no interest shall accrue on the outstanding
amount of the loan, but if Hede does not pay the outstanding loan when due, then
it shall be required to pay in addition to the principal of the loan liquidated
damages at the rate of 2% of the loan amount per day. Before August 27, 2007,
the total amount of RMB 20 million in cash was transferred to Hede.
In
December 2007, Shaanxi Tianren made additional advances aggregating RMB
4,544,043 (approximately $622,080 based on the exchange rate as of December 31,
2007) to Hede. These advances were unsecured and bore no interest. The advances
also had no fixed payment terms. The proceeds from these advances were
transferred to the shareholders of Huludao Wonder directly on behalf of Hede for
the purchase price of Huludao Wonder.
In
January 2008, Shaanxi Tianren paid rental expense of RMB 11,038 (approximately
$1,626 based on the exchange rate as of September 30, 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 $220,916 based on the exchange rate as of September 30, 2008) of
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 $2,650,996 based on the exchange rate of September 30,
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 as of June 1,
2008). 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 $100,042 based on the exchange rate of September 30,
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 working
capital loans made by Barron Partners to the Company 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 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. The oral agreement was approved by
the written consent of the then sole director of the Company in February
2008.
As of the
date of this prospectus, 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 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 which 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. The Company is not obligated to register
the resale of the 615,147 shares of Common Stock which are issuable upon
conversion of the Series B Preferred Stock and the resale of such shares is not
covered by this prospectus.
On
February 4, 2008, before the Share Exchange Transaction, the Board of Directors
of Xi’an Tianren declared a cash dividend of $2,899,855 to its former
shareholders. Since Shaanxi Tianren holds a 91.15% interest in Xi’an Tianren,
$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. Since Pacific holds
a 99% interest in Shaanxi Tianren, $4,916,617 was paid to Pacific and $49,663
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 $306,300.
In May
2008, Pacific erroneously paid $4,916,617 to its former shareholders as the
result of a dividend declaration 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 has been
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.
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”) under which the
Audit Committee shall review the material facts of all Interested Transactions
that require the Committee’s approval and either approve or disapprove of the
entry of the Company into the Interested Transaction, subject to certain
exceptions. If advance approval by the Audit Committee of an Interested
Transaction is not feasible, then the Interested Transaction shall be considered
and, if the Audit Committee determines it to be appropriate, ratified at the
Committee’s next regularly scheduled meeting. 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 Person’s interest in the transaction.
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 will
be 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).
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).
Each of
the following Interested Transactions shall be deemed to be pre-approved by the
Audit Committee, even if the aggregate amount involved will exceed
$50,000.
|
1.
|
Employment of executive
officers. Any
employment by the Company of an executive officer of the Company
if:
|
||||
|
a.
|
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
|
||||
|
b.
|
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.
|
||||
|
2.
|
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.
|
|
|
3.
|
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.
|
|
|
4.
|
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.
|
|
|
5.
|
Transactions where all
shareholders 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).
|
|
|
6.
|
Transactions involving
competitive bids. Any
transaction involving a Related Party where the rates or charges involved
are determined by competitive bids.
|
|
|
7.
|
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.
|
|
|
8.
|
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.
|
|
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth as of February 2, 2009 the names, positions and ages
of our current executive officers and directors. Our directors serve until the
next annual meeting of shareholders or until their successors are elected and
qualify. 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
|
Age |
Position(s)
with the Company
|
|
Yongke
Xue
|
42 |
Director,
Chief Executive Officer
|
|
Spring
Liu
|
35 |
Chief
Financial Officer, Secretary
|
|
Xiaoqin
Yan
|
30 |
Director
|
|
Guolin
Wang
|
45 |
Director
|
|
Robert
B. Fields
|
70 |
Director
|
|
Norman
Ko
|
44 |
Director
|
Yongke Xue. Mr. Xue has been
serving as our director since February 26, 2008 upon consummation of the
transactions under the Agreement. Mr. Xue has served as the Director at Shaanxi
Tianren Organic Food Co., Ltd. (“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 our director since April 7, 2008. Ms. Yan is the 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 our director since April 7, 2008. Mr. Wang has served as the 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’s Degree in Science. 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 our director since April 25, 2008. Mr. Fields has been a
Chairman and Executive Advisor of Actforex, Inc., a global management service
provider, since 2001. Mr. Fields currently serves on several boards including:
Reality Gap, Inc., Dorado Exploration, Inc., ActForex, Inc., Liberty Star
Uranium & Metals Corp. (LBSU.OB) and Statmon Technologies, Inc.
(STCA.OB)
Norman Ko. Mr. Ko has been
serving as our director and Chairman of the Audit Committee since April 25,
2008. Mr. Ko has been a Partner of Smith Mandel & Associates, LLP (“Smith
Mandel”), a certified public accountants 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.
Committees
of the Board of Directors
On April
25, 2008, the Company established an Audit Committee and Compensation Committee
of its Board of Directors. Norman Ko, Robert B. Fields and director Guolin Wang
were elected as members of the Audit Committee and Norman Ko was elected as the
Chairman of the Audit Committee. Norman Ko, director Guolin Wang and Chief
Executive Yongke Xue were elected as members of the Compensation
Committee.
The
Company believes that Guolin Wang, Norman Ko and Robert B. Fields are
independent directors within the meaning of such term as defined in Section 803
of the American Stock Exchange Company Guide.
DIRECTOR
AND OFFICER COMPENSATION
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.
Each of
our independent directors will be paid an annual fee of $25,000, which includes
each board meeting or committee meeting attended. We will also reimburse our
directors for actual, reasonable and customary expenses incurred in connection
with the performance of their duties as board members. The Chairman of our Audit
Committee, which shall be served by an “audit committee financial expert” as
defined in Item 407(d) of Regulation S-K, will also be paid an annual fee of
$25,000, which includes each audit committee meeting attended.
The
Company’s executive officers do not receive any compensation for serving as
executive officer of the Company or Pacific, but, except for the Chief Executive
Officer, are compensated by and through Shaanxi Tianren. The Company’s 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 Chief Executive Officer for each of the two fiscal years ended
December 31, 2007 and December 31, 2006. 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
($)
|
||||||
|
Yongke
Xue
|
12/31/2006
|
$
|
0.00
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
0.00
|
||||
|
CEO
|
12/31/2007
|
$
|
0.00
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
0.00
|
||||
Option
and Warrant Grants in Last Fiscal Year
No
options or warrants were granted in the Company’s last fiscal year (2007) and no
options or warrants are held by the Company’s Executive Officers.
Aggregate
Option and Warrant Exercises in the Last Fiscal Year and Fiscal Year-End Option
and Warrant Values
The
Company’s Executive Officers own no options or warrants of the
Company.
DESCRIPTION
OF OUR SECURITIES
Authorized Capital Stock. Our
authorized capital stock consists of: (i) 100,000,000 shares of Common Stock,
and (ii) 10,000,000 shares of Preferred Stock of which 1,000,000 shares of
Series A Stock and 7,000,000 shares of Series B Stock have been
designated.
The
following is a summary of the material terms of our capital stock. This summary
is subject to and is qualified in its entirety by the Company’s Amended and
Restated Articles of Incorporation, Certificates of Designation of the Series B
Stock, By-laws and the applicable provisions of Florida law.
Common
Stock
Holders
of shares of 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 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 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 Common
Stock are entitled to share pro rata all assets remaining after payment in full
of all liabilities. All of the outstanding shares of Common Stock are fully paid
and non-assessable.
Series
B Stock
In
connection with the Share Exchange, 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
Preferred 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 while the Series B Stock
is outstanding.
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. On 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 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
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.
Certain
Adjustments
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 Common Stock.
Price Adjustment;
Full Ratchet. From and after February 26, 2008 and until such time as the
investors hold less than 20% of the Series B Stock, except for certain exempt
issuances not to exceed 5% of the outstanding shares of 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.
Subsequent
Transactions. For so long as any investor holds any of the Series B
Stock, we are prohibited from effecting or entering into an agreement to effect
any transactions involving a “Variable Rate Transaction” or an “MFN
Transaction.”
Subsequent Rights
Offerings. We are prohibited from, at any time while the Series B Stock
is outstanding, issuing rights, options or warrants to holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the then applicable conversion price.
Pro Rata
Distributions. If we distribute to the holders of Common Stock evidences
of its indebtedness, assets, rights or warrants to subscribe for or purchase any
security, then in each case the conversion price shall be determined by
multiplying the conversion price by a fraction the numerator of which is the
VWAP minus the then fair market value at such record date of the portion of the
assets or evidence of indebtedness so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors in good faith
and the denominator of which is the VWAP on the record date.
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 Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or we effect any reclassification of the
Common Stock or any compulsory share exchange pursuant to which the 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 Preferred Stock, the holder has the right to receive, for each
share of 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 Preferred Stock, the terms
of which are summarized above. The Board of Directors has also designated
1,000,000 of such shares as Series A Preferred Stock. No shares of Series A
Stock are outstanding as of September 30, 2008. 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
issuance of shares of preferred stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For instance, the issuance of a series of preferred stock might impede a
business combination by including class voting rights that would enable the
holder to block such a transaction, or facilitate a business combination by
including voting rights that would provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power of the holders of the
Common Stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of our stockholders, the Board of Directors could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of such stock. 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.
LEGAL
MATTERS
Our
counsel, Guzov Ofsink, LLC, located at 600 Madison Avenue, 14th Floor, New York,
New York 10022, is passing upon the validity of the issuance of the Common Stock
that we are offering under this prospectus.
Child,
Van Wagoner & Bradshaw, PLLC, independent public accountants located at 5296
South Commerce Drive, Suite 300, Salt Lake City, Utah 84107, have audited
the financial statements of the Company included in this registration statement
to the extent and for the periods set forth in the reports. We have relied upon
such reports, given upon the authority of Child, Van Wagoner & Bradshaw,
PLLC as experts in accounting and auditing.
INTEREST
OF NAMED EXPERTS AND COUNSEL
No
“expert” or “counsel” as defined by Item 509 of Regulation S-K promulgated
pursuant to the Securities Act, whose services were used in the preparation of
this Form S-1, was hired on a contingent basis or will receive a direct or
indirect interest in the Company, nor was any of them a promoter, underwriter,
voting trustee, director, officer or employee of the Company.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR
SECURITIES ACT LIABILITIES
Our
Bylaws provide that we will indemnify our directors and officers from
liabilities incurred by them in connection with actions, suits or proceedings in
which they are involved by reason of their acting as our directors and
officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
informed that in the opinion of the SEC 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 such liabilities (other than
the payment by us of expenses incurred or paid by a director, officer or
controlling person 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, 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 in the Securities Act and will be governed by
the final adjudication of such issue.
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;
(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 & Bradshaw, PLLC (“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 Industry Holding Group Co.,
Ltd. (“Pacific”) on February 26, 2008 pursuant to a Share Exchange Agreement,
dated February 22, 2008 between the Company, Pacific and the shareholders of
Pacific, 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 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 which 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) (1)
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, and
(2) due to Mendoza Berger & Company LLP’s resignation (due to audit scope
limitations or otherwise) or dismissal, or for any other reason, the accountant
did not so expand the scope of its audit or conduct such further investigation;
or
(D) (1)
That information has 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), and (2)
the issue has not been resolved to Mendoza Berger & Company LLP’s
satisfaction prior to its termination.
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).
FINANCIAL
STATEMENTS
The
Company’s unaudited financial statements for the nine months ended
September 30, 2008 and 2007, the notes thereto, the Company’s audited
financial statements for the years ended December 31, 2007 and 2006, together
with the report of the independent certified public accounting firm thereon are
presented beginning at page F-1.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the U.S. Securities and Exchange Commission, 100 F Street, NE,
Washington, D.C. 20549, a registration statement on Form S-1 under the
Securities Act for the Common Stock offered by this prospectus. We have not
included in this prospectus all the information contained in the registration
statement and you should refer to the registration statement and its exhibits
for further information.
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.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
||||
|
F-2
|
||||
|
F-2
|
||||
|
F-3
|
||||
|
F-4
|
||||
|
F-5
|
||||
|
F-23
|
||||
|
F-23
|
||||
|
F-24
|
||||
|
F-25
|
||||
|
F-26
|
||||
|
F-27
|
||||
|
F-28
|
||||
F-1
SKYPEOPLE FRUIT JUICE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS, UNAUDITED
|
September
30,
|
||||||||
|
ASSETS
|
2008
|
December
31,
|
||||||
|
(Unaudited)
|
2007
|
|||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and equivalents
|
$
|
12,796,559
|
$
|
4,094,238
|
||||
|
Accounts
receivable
|
3,625,601
|
9,153,687
|
||||||
|
Other
receivables
|
45,075
|
55,737
|
||||||
|
Inventories
|
1,860,384
|
4,460,149
|
||||||
|
Prepaid
expenses and other current assets
|
1,267,956
|
101,628
|
||||||
|
Total
current assets
|
19,595,575
|
17,865,439
|
||||||
|
RELATED
PARTY RECEIVABLES
|
-
|
4,970,427
|
||||||
|
PROPERTY,
PLANT AND EQUIPMENT, Net
|
20,487,126
|
17,564,147
|
||||||
|
LAND
USAGE RIGHTS (Note 10)
|
6,490,906
|
6,138,297
|
||||||
|
OTHER
ASSETS
|
2,749,985
|
71,818
|
||||||
|
TOTAL
ASSETS
|
$
|
49,323,592
|
$
|
46,610,128
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts payable
|
$
|
1,525,893
|
$
|
2,997,740
|
||||
|
Accrued expenses
|
716,656
|
557,577
|
||||||
|
Accrued liquidated damages
|
208,658
|
-
|
||||||
|
Related party payables
|
-
|
143,366
|
||||||
|
Income taxes payable
|
217,426
|
114,909
|
||||||
|
Advances from customers
|
779,961
|
708,291
|
||||||
|
Short-term notes payable
|
9,573,042
|
6,406,922
|
||||||
|
Total
current liabilities
|
13,021,636
|
10,
928,805
|
||||||
|
NOTE
PAYABLE, net of current portion
|
-
|
2,053,501
|
||||||
|
-
|
||||||||
|
TOTAL
LIABILITIES
|
$
|
13,021,636
|
$
|
12,982,306
|
||||
|
MINORITY
INTEREST
|
1,019,710
|
1,073,364
|
||||||
|
MINORITY
INTEREST-Variable interest entity (Note 7)
|
-
|
6,308,591
|
||||||
|
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 22,271,684 and
22,006,173 shares issued and outstanding as of September 30,
2008 and December 31, 2007, respectively
|
222,717
|
220,062
|
||||||
|
Additional paid-in capital
|
13,791,724
|
10,682,755
|
||||||
|
Accumulated retained earnings
|
16,358,755
|
12,458,632
|
||||||
|
Accumulated other comprehensive income
|
4,905,602
|
2,884,418
|
||||||
|
Total
stockholders' equity
|
35,282,768
|
26,245,867
|
||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
49,323,592
|
$
|
46,610,128
|
||||
See
accompanying notes to condensed consolidated financial statements.
F-2
SKYPEOPLE FRUIT JUICE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME,
UNAUDITED
|
September
30,
|
September
30,
|
||||||
|
2008
|
2007
|
||||||
|
(Unaudited)
|
(Unaudited)
|
||||||
|
Revenue
|
$
|
22,442,329
|
$
|
12,493,802
|
|||
|
Cost
of Sales
|
14,635,767
|
7,730,604
|
|||||
|
Gross
Profit
|
7,806,562
|
4,763,198
|
|||||
|
Operating
Expenses
|
|||||||
|
General
and administrative
|
1,409,895
|
632,399
|
|||||
|
Selling
expenses
|
808,576
|
301,331
|
|||||
|
Research
and development
|
199,056
|
49,040
|
|||||
|
Accrued
liquidated damages
|
208,658
|
-
|
|||||
|
Total
operating expenses
|
2,626,185
|
982,770
|
|||||
|
Income
from Operations
|
5,180,377
|
3,780,428
|
|||||
|
Other
Income (Expense)
|
|||||||
|
Interest
expense
|
(624,802
|
)
|
(19,761
|
)
|
|||
|
Interest
income
|
41,342
|
11,855
|
|||||
|
Subsidy
income
|
52,206
|
-
|
|||||
|
Other
income (expense)
|
32,827
|
(42,954
|
)
|
||||
|
Total
other income (expense)
|
(498,427
|
)
|
(50,680
|
)
|
|||
|
Income
Before Income Taxes
|
4,681,950
|
3,729,568
|
|||||
|
Income Tax
Provision
|
525,585
|
584,389
|
|||||
|
Income
Before Minority Interest
|
4,156,365
|
3,145,179
|
|||||
|
Minority
interest
|
256,242
|
136,847
|
|||||
|
Net
Income
|
$
|
3,900,123
|
$
|
3,008,332
|
|||
|
Earnings
Per Share:
|
|||||||
|
Basic
earnings per share
|
$
|
0.15
|
$
|
0.14
|
|||
|
Diluted
earnings per share
|
$
|
0.14
|
$
|
0.14
|
|||
|
Weighted
Average Shares Outstanding:
|
|||||||
|
Basic
|
22,216,450
|
22,006,173
|
|||||
|
Diluted
|
22,217,043
|
22,006,173
|
|||||
|
Comprehensive
Income:
|
|||||||
|
Net
income
|
$
|
3,900,123
|
$
|
3,008,332
|
|||
|
Foreign
currency translation adjustment
|
2,021,184
|
709,104
|
|||||
|
Comprehensive
Income
|
$
|
5,921,307
|
$
|
3,717,436
|
|||
See
accompanying notes to condensed consolidated financial statements.
F-3
SKYPEOPLE FRUIT JUICE, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS, UNAUDITED
|
September
30,
|
September
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
Cash
Flow from Operating Activities
|
||||||||
|
Net
income
|
$
|
3,900,123
|
$
|
3,008,332
|
||||
|
Adjustments
to reconcile net income to net cash flow provided by operating
activities
|
||||||||
|
Depreciation
and amortization
|
1,409,907
|
827,945
|
||||||
|
Loss
on sale of property, plant and equipment
|
1,274
|
-
|
||||||
|
Minority
interest
|
256,242
|
136,847
|
||||||
|
Changes
in operating assets and liabilities, net of acquisition
effects
|
||||||||
|
Accounts
receivable
|
6,030,436
|
1,968,356
|
||||||
|
Other
receivables
|
13,759
|
(15,854
|
)
|
|||||
|
Prepaid
expenses and other current assets
|
(1,224,295
|
)
|
(257,043
|
)
|
||||
|
Inventories
|
2,847,423
|
(2,460,482
|
)
|
|||||
|
Accounts
payable
|
(1,662,730
|
)
|
44,602
|
|||||
|
Accrued
expenses and other current liabilities
|
114,013
|
46,629
|
||||||
|
Accrued
liquidated damages
|
208,658
|
-
|
||||||
|
Advances
from customers
|
17,425
|
3,076,827
|
||||||
|
Taxes payable
|
90,920
|
(1,956,009
|
)
|
|||||
|
Net
cash provided by operating activities
|
12,003,155
|
4,420,150
|
||||||
|
Cash
Flow from Investing Activities
|
||||||||
|
Prepayment
for lease improvement
|
(356,860
|
)
|
-
|
|||||
|
Deposits
to purchase target company
|
(2,141,158
|
)
|
-
|
|||||
|
Loan
repayment from related parties
|
5,475,092
|
-
|
||||||
|
Loan
advanced to related parties
|
(7,179,883
|
)
|
(3,322,667
|
)
|
||||
|
Additions
to property, plant and equipment
|
(2,826,179
|
)
|
(110,602
|
)
|
||||
|
Proceeds from sale of property, plant and equipment
|
4,996
|
-
|
||||||
|
Net
cash used in investing activities
|
(7,023,992
|
)
|
(3,433,269
|
)
|
||||
|
Cash
Flow from Financing Activities
|
||||||||
|
Proceeds
from stock issuance
|
3,115,072
|
-
|
||||||
|
Proceeds
from bank loans
|
14,988,105
|
1,305,074
|
||||||
|
Repayment
of bank loans
|
(14,531,324
|
)
|
-
|
|||||
|
Dividend
paid to minority interest
|
(309,896
|
)
|
-
|
|||||
|
Repayments
of related party loan
|
(149,486
|
)
|
(1,923,969
|
)
|
||||
|
Net
cash provided by (used in) financing activities
|
3,112,471
|
(618,895
|
)
|
|||||
|
Effect
of Changes in Exchange Rate
|
610,687
|
92,115
|
||||||
|
NET
INCREASE IN CASH
|
8,702,321
|
460,101
|
||||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
4,094,238
|
2,135,173
|
||||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
12,796,559
|
$
|
2,595,274
|
||||
|
Supplementary
Information of Cash Flows
|
||||||||
|
Cash
paid for interest
|
$
|
649,327
|
$
|
23,611
|
||||
|
Cash
paid for taxes
|
$
|
1,049,534
|
$
|
1,855,950
|
||||
|
Purchase
of Huludao, offset by related party receivables
|
$
|
6,887,391
|
$
|
-
|
||||
See
accompanying notes to condensed consolidated financial statements.
F-4
SKYPEOPLE
FRUIT JUICE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 its
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 Xi’an Tianren’s ownership interest
for a purchase price in the amount of RMB 36,460,000 (or approximately U.S.
$4,573,221). The acquisition was accounted for using the purchase method, and
the financial statements of Shaanxi Tianren and Xi’an Tianren 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. $6,807,472. 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:
*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 Xi’an Tianren.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Financial
Statements
The
accompanying unaudited interim condensed consolidated financial statements for
SkyPeople have been prepared in accordance with generally accepted accounting
principles accepted in the United States of America (“GAAP”) for interim
financial information and do not include all information and footnotes required
by generally accepted accounting principles for complete financial statements.
All significant inter-company balances have been eliminated in
consolidation.
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 balances on the Balance Sheet have been reclassified to conform to
the current presentation. The reclassification had no impact on net income for
the three months ended March 31, 2008 and 2007.
Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
SkyPeople, Pacific, Shaanxi Tianren, Xi’an Tianren and the newly acquired
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.
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
September 30, 2008, the cash balance in the financial institutions in the United
States was $10,891. Accounts at these financial institutions are insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. At September 30,
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 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:
|
Nine
Months Ended
|
||||||||
|
Sep.
30,
|
Sep.
30,
|
|||||||
|
2008
|
2007
|
|||||||
|
NUMERATOR
FOR BASIC AND DILUTED EPS
|
||||||||
|
Net
income (numerator for Diluted EPS)
|
$
|
3,900,123
|
$
|
3,008,332
|
||||
|
Net
income allocated to Preferred Stock
|
(634,550
|
)
|
-
|
|||||
|
Net
income to common stockholders (Basic)
|
$
|
3,265,573
|
$
|
3,008,332
|
||||
|
DENOMINATOR
FOR BASIC AND DILUTED EPS
|
||||||||
|
Common
Stock outstanding
|
22,216,450
|
22,006,173
|
||||||
|
DENOMINATOR
FOR BASIC EPS
|
22,216,450
|
22,006,173
|
||||||
|
Add: Weighted average preferred as if converted
|
4,317,282
|
-
|
||||||
|
Add: Weighted average stock warrants outstanding
|
683,311
|
-
|
||||||
|
DENOMINATOR
FOR DILUTED EPS
|
27,217,013
|
22,006,173
|
||||||
|
EPS
– Basic
|
$
|
0.15
|
$
|
0.14
|
||||
|
EPS
– Diluted
|
$
|
0.14
|
$
|
0.14
|
||||
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 $676,492 and
$260,337 for the nine months ended September 30, 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.
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. The
Company evaluates the credit risks of its customers utilizing historical data
and estimates of future performance. Based on the information available to
management, the Company believes that its allowance for doubtful accounts was
adequate as of September 30, 2008.
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.
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 70%
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 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 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 $164 and
$287 in advertising and promotional costs for the nine months ended September
30, 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 and equipment are depreciated
over their estimated useful lives as follows:
|
Buildings
|
20-30
years
|
|
Machinery
and equipment
|
10
years
|
|
Furniture
and office equipment
|
5
years
|
|
Motor
vehicles
|
5
years
|
|
September
30,
2008
|
December
31,
2007
|
|||||||
|
Machinery
and equipment
|
$ | 14,583,542 | $ | 13,672,861 | ||||
|
Furniture
and office equipment
|
228,001 | 200,266 | ||||||
|
Motor
vehicles
|
195,195 | 193,899 | ||||||
|
Buildings
|
7,322,908 | 6,489,513 | ||||||
|
Construction
in progress
|
2,711,753 | — | ||||||
|
Subtotal
|
25,041,399 | 20,556,539 | ||||||
|
Less:
accumulated depreciation
|
(4,554,273 | ) | (2,992,392 | ) | ||||
|
Net
property and equipment
|
$ | 20,487,126 | $ | 17,564,147 | ||||
Depreciation
expense included in general and administration expenses for the nine months
ended September 30, 2008 and 2007 was $302,175 and $45,478, respectively.
Depreciation expense included in cost of sales for the nine months ended
September 30, 2008 and 2007 was $998,504 and $739,212,
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, $1,178,221 during the nine months
ended September 30, 2008. This research and development center is expected to be
completed by June 30, 2009. Our estimated future capital expenditure for this
project is $44,183. 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 started a technology innovation
and expansion project over its original industrial waste water processing
facility located in the factory of Jingyang County in Shaanxi Province. This 600
square meter industrial waste water processing facility will increase the
capacity of waste water processing and recycling from the current 100 cubic
meters per day to 300 cubic meters per day. We capitalized $810,027 as
construction in progress during the nine months ended September 30, 2008. This
project is expected to be operational by the end of the third quarter of fiscal
2009. Our estimated future capital expenditure for this project is
$1,030,943. 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. In addition, Xi’an Tianren began
construction on an industrial waste water processing facility in the factory of
Zhouzhi County in Shaanxi Province.
Xi’an
Tianren 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
Xi’an Tianren and will improve the use of recycled waste water. We capitalized
$659,804 as construction in progress during the nine months ended September 30,
2008. This project is expected to be operational by the end of the third quarter
of fiscal 2009. Our estimated future capital expenditure for this project is
$135,495. The newly built water processing facility in Xi’an Tianren 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. We also capitalized
interest expenses of $63,701 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.
As of
September 30, 2008, we capitalized interest expense of $63,701 in construction
in progress in accordance with FASB Statement of Financial Accounting
Standards (“SFAS”) No.
34, Capitalization of Interest
Cost.
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
Subsidiary
Minority
interest represents the minority stockholders’ proportionate share of 1% of the
equity of Shaanxi Tianren and 8.85% of the equity of Xi’an Tianren.
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 will be accounted for in accordance with
Financial Accounting Standard Board Staff Position EITF 00-19-2. Estimated
damages at the time of closing will be recorded as a liability and deducted from
additional paid-in capital as costs of issuance. Estimated damages determined
later pursuant to the criteria for SFAS 5 will be 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). As of September 30, 2008, the Company had accrued $208,658 for the
liquidated damages pursuant to that agreement. This amount has been included in
liquidated damage expenses on the income statement in accordance with EITF
00-19-2. Since none of the estimates is better than the other, in accordance
with FIN14, the Company has booked an expense and a liability equal to the
minimum estimated loss, assuming the registration statement is effective
December 31, 2008.
Research and
Development
Shaanxi
Tianren established a research and development institution with nearly 30
research and development personnel as of September 30, 2008. Shaanxi Tianren
also from time to time retains external experts and research institutions. The
research and development expenses were $199,056 and $49,040 for the nine months
ended September 30, 2008 and September 30, 2007, respectively.
F-12
New Accounting
Pronouncements
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.
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. ACCQUISITION
OF A BUSINESS
On June
10, 2008, the Company completed the acquisition of Huludao Wonder 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 payment was made through the
offset of related party receivables from Shaanxi Hede Investment Management Co.,
Ltd. (“Hede”). Before the 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”), since June
2, 2007. 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.
Yongke
Xue, the Chairman of the Board and Chief Executive Officer of the Company, owns
80% of the equity interest of Hede, and Xiaoqin Yan, a director of Shaanxi
Tianren, owns the remaining 20% of Hede. 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 $44,183 based on the exchange rate on September 30,
2008). In 2007, Shaanxi Tianren loaned to Hede on an interest free basis an
aggregate of RMB 27 million (approximately $3,976,494 based on the exchange rate
on September 30, 2008) pursuant to a Loan Agreement entered into by the parties
on June 5, 2007. The loan was made to enable Hede to purchase Huludao Wonder.
The loan was due on August 1, 2008. On the date of the purchase, the outstanding
loan was deducted from the purchase price according to the Loan
Agreement.
The
contractual agreement with Hede was in effect on June 1, 2007. As a result of
the contractual arrangements, Shaanxi Tianren became the primary beneficiary of
Huludao Wonder. Accordingly, Shaanxi Tianren adopted the provisions of FIN 46R
and consolidated the financial results of Huludao Wonder from June 1,
2007.
The
Company accounted for the purchase as a reorganization of entities under common
control to consolidate Huludao Wonder with the assets and liabilities recorded
at their carrying values on the books of Hede. The book value of the acquired
net assets of Huludao Wonder was RMB 48,250,000 (approximately $6,308,591 based
on the exchange rate on June 1, 2008).
The
following table summarizes the fair value of Huludao Wonder’s assets and
liabilities as of June 1, 2007 (based on the exchange rate on June 1,
2007):
|
ASSETS
|
|||
|
Cash
|
$ | 7,567 | |
|
Accounts receivable, net
|
2,387,711 | ||
|
Other receivables
|
29,244 | ||
|
Inventory
|
57,948 | ||
|
Fixed assets
|
6,934,219 | ||
|
Intangible
asset
|
3,262,566 | ||
|
Other assets
|
27,486 | ||
|
TOTAL
ASSETS
|
$ | 12,706,741 | |
|
LIABILITIES
|
|||
|
A
Accounts payable
|
$ | 20,642 | |
|
Other payables
|
101,603 | ||
|
L
Loans payable
|
6,275,905 | ||
|
TOTAL
LIABILITIES
|
$ | 6,398,150 | |
|
NNET
ASSETS
|
$ | 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 nine months
ended September 30, 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.
F-16
PRO
FORMA STATEMENT OF OPERATIONS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007
|
Historical
Information of the Company(1)
|
Historical
Information of the Acquired Entity (2)
|
Pro
Forma
Adjustments
(3)
|
Pro
Forma
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||||||
|
Net
sales
|
$
|
12,493,802
|
$
|
1,763,361
|
$
|
--
|
$
|
14,257,163
|
||||||||
|
Net
income (loss)
|
$
|
3,100,882
|
$
|
(269,398
|
)
|
$
|
(34,202
|
)
|
$
|
2,797,282
|
||||||
|
Basic
earnings per share
|
$
|
0.14
|
$
|
0.13
|
||||||||||||
|
Diluted
earnings per share
|
$
|
0.14
|
$
|
0.13
|
||||||||||||
|
Basic
weighted average common shares outstanding
|
22,006,173
|
22,006,173
|
||||||||||||||
|
Diluted
weighted average common shares outstanding
|
22,006,173
|
22,006,173
|
||||||||||||||
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 nine months ended September 30,
2007.
|
|
(2)
|
The
nine months 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. INVENTORIES
Inventories
consisted of the following:
|
September
30,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
Raw
materials and packaging
|
$ | 536,766 | $ | 255,936 | |||
|
Finished
goods
|
1,323,618 | 4,204,213 | |||||
|
Inventories
|
$ | 1,860,384 | $ | 4,460,149 | |||
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 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 Xi’an Tianren 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
September 30, 2008.
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
$525,585 and $584,389 for the nine months ended September 30, 2008 and September
30, 2007, respectively. The Company had recorded no deferred tax assets or
liabilities as of September 30, 2008 and 2007, since nearly all differences in
tax basis and financial statement carrying values are permanent
differences.
|
Nine
Months Ended September 30,
|
||||||||
|
Income
Tax Expenses
|
2008
|
2007
|
||||||
|
Current
|
$ | 525,585 | $ | 584,389 | ||||
|
Deferred
|
— | — | ||||||
|
Total
|
$ | 525,585 | $ | 584,389 | ||||
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 is 20 to 50 years. The amortization expenses were $109,228 and
$43,255 for the nine months ended September 30, 2008 and 2007,
respectively.
11. AMOUNTS
DUE FROM (TO) RELATED PARTIES
As of
September 30, 2008, the Company had no outstanding loans to related entities
with common owners and directors. During the nine months ended September 30,
2008, Pacific erroneously paid RMB 34,848,000, or approximately $4,974,338 based
on the average rate of the nine months ended September 30, 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 14).
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 September 30, 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 $5,475,092.
During
the nine months ended September 30, 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
$149,486 of its loans payable to related parties in the nine months ended
September 30, 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
|
|||
|
Mr.
Andu Liu
|
$
|
22,177
|
Former
shareholder of Shaanxi Tianren
|
||
|
Mr.
Ke Lu
|
$
|
7,734
|
Manager
of Shaanxi Tianren
|
||
|
Shaanxi
Hede Investment Management Co., Ltd.
|
$
|
4,490,173
|
Former
shareholder of Shaanxi Tianren
|
||
|
Xi’an
Hede Investment Consultation Company Limited
|
$
|
101,286
|
The
Managing Director of Xi’an Hede is one of the family members of Shaanxi
Tianren
|
||
|
Shaanxi
Xirui Group Co., Ltd.
|
$
|
198,216
|
Shareholder
of Xi’an Tianren
|
||
|
Yingkou
Trusty Fruits Co., Ltd. (“Yingkou”)
|
$
|
77,212
|
Hede
is a shareholder of Yingkou
|
||
|
Shaanxi
Fruits Processing Co., Ltd.
|
$
|
73,629
|
Former
Shaanxi Tianren
|
||
|
Total
|
$
|
4,970,427
|
|||
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
|
|||||
|
Mr.
Guang Li
|
$
|
(137
|
)
|
Director
of Shaanxi Tianren
|
|||
|
Mr.
Yongke Xue
|
$
|
(32,308
|
)
|
Former
shareholder of Shaanxi Tianren
|
|||
|
Ms.
Yuan Cui
|
$
|
(62,387
|
)
|
Former
shareholder of Shaanxi Tianren
|
|||
|
Mr.
Hongke Xue
|
$
|
(48,397
|
)
|
President
of Shaanxi Tianren
|
|||
|
Ms.
Xiaoqin Yan
|
$
|
(137
|
)
|
Former
shareholder of Shaanxi Tianren
|
|||
|
Total
|
$
|
(143,366
|
)
|
||||
12. COMMON
STOCK
As of
September 30, 2008, the Company had 22,271,684 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
32,720,164.
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 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.
13. NOTE
PAYABLE
In the
nine months ended September 30, 2008, the Company paid off RMB 86,800,000, or
approximately $12,390,167 of short-term loans payable, and transferred RMB
15,000,000, or approximately $2,141,157 based on the average exchange rate for
the nine months ended September 30, 2008 from long-term loans payable to
short-term loans payable, which will be due in September 2009. The Company also
entered into eight new short-term loan agreements with some local banks in
China. As of September 30, 2008, the balance of these short-term loans totaled
RMB 65,000,000 (U.S. $9,573,042 based on the exchange rate on September 30,
2008), with an interest rate ranging from 5.28% to 9.83% per annum. These loans
are due from January 2009 to September 2009.
14. DIVIDEND
PAYMENT
On
February 4, 2008, before the Share Exchange Transaction, the Board of Directors
of Xi’an Tianren declared a cash dividend of RMB 20,553,592, or $2,933,899 based
on the average rate of nine months ended September 30, 2008, to its former
shareholders. Since Shaanxi Tianren holds a 91.15% interest in Xi’an Tianren,
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 minority interest holders. On the same date, the
Board of Directors of Shaanxi Tianren declared a cash dividend of RMB 35,200,000
(or $5,024,584 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 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 $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 (See Note
11).
15. RELATED
PARTY TRANSACTIONS
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 $44,183 based on the
exchange rate of September 30, 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
$1,626 based on the exchange rate as of September 30, 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 $220,916 based on the exchange rate as of September 30, 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 $2,650,996 based on the exchange rate as of September
30, 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 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 48,928,272 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 $100,042 based on the exchange rate as of September 30,
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 prospectus, 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.
The
Company is not obligated to register the resale of the 615,147 shares of Common
Stock that are issuable upon conversion of the Series B Preferred Stock, and the
resale of such shares is not covered by this prospectus.
16. 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
approximately $107,914. 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.
17. OTHER
ASSETS
Other
assets as of September 30, 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
$2,209,164 based on the exchange rate of September 30, 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 first quarter of fiscal
2009.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SKYPEOPLE FRUIT
JUICE, INC
FOR
THE YEARS ENDED DECEMBER 31, 2007 and 2006
Report
of Independent Registered Public Accounting
Firm
To the
Board of Directors
SkyPeople
Fruit Juice, Inc.
We have
audited the consolidated balance sheets of SkyPeople Fruit Juice, Inc. (the
Company) as of December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income, changes in stockholders’
equity, and cash flows for the years ended December 31, 2007 and 2006. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
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 audits to obtain reasonable assurance about whether the
consolidated 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.
as of December 31, 2007 and 2006, and the results of its operations and its cash
flows for the years ended December 31, 2007 and 2006, 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
May 15,
2008
SKYPEOPLE FRUIT JUICE,
INC.
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
December
31,
|
||||||
|
ASSETS
|
2007
|
2006
|
|||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and equivalents
|
$ | 4,094,238 | $ | 2,135,173 | |||
|
Accounts
receivable, net of allowance for doubtful accounts of $0 and
$423
|
9,153,687 | 5,151,634 | |||||
|
Other
receivables
|
55,737 | 22,429 | |||||
|
Inventories,
net
|
4,460,149 | 765,711 | |||||
|
Prepaid
expenses and other current assets
|
101,628 | 173,943 | |||||
|
Total
current assets
|
17,865,439 | 8,248,890 | |||||
|
RELATED
PARTY RECEIVABLE
|
4,970,427 | 419,523 | |||||
|
PROPERTY,
PLANT AND EQUIPMENT, Net
|
17,564,147 | 10,081,975 | |||||
|
LAND
USAGE RIGHTS (Note 4)
|
6,138,297 | 2,671,660 | |||||
|
OTHER
ASSETS
|
71,818 | — | |||||
|
TOTAL
ASSETS
|
$ | 46,610,128 | $ | 21,422,048 | |||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable
|
$ | 2,997,740 | $ | 631,019 | |||
|
Accrued
expenses
|
339,818 | 200,647 | |||||
|
Related
party payable
|
143,366 | 1,950,892 | |||||
|
VAT
Tax payable (Note 8)
|
114,909 | 1,583,884 | |||||
|
Other
payable
|
217,759 | 42,562 | |||||
|
Advances
from customers
|
708,291 | — | |||||
|
Current
portion of notes payable
|
6,406,922 | — | |||||
|
Total
current liabilities
|
10,928,805 | 4,409,004 | |||||
|
NOTE
PAYABLE, net of current portion
|
2,053,501 | ||||||
|
MINORITY
INTEREST
|
1,073,364 | 712,863 | |||||
|
MINORITY
INTEREST-Variable Interest Entity (V.I.E.)
|
6,308,591 | ||||||
|
STOCKHOLDERS’
EQUITY
|
|||||||
|
Common
Stock, $0.01 par value; 100,000,000 shares authorized 22,006,173 shares
issued and outstanding
|
220,062 | 220,062 | |||||
|
Additional
paid in capital
|
10,682,755 | 10,682,755 | |||||
|
Retained
earnings
|
12,458,632 | 4,862,229 | |||||
|
Accumulated
other comprehensive income
|
2,884,418 | 535,135 | |||||
|
Total
stockholders’ equity
|
26,245,867 | 16,300,181 | |||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 46,610,128 | $ | 21,422,048 | |||
See
accompanying notes to consolidated financial statements.
SKYPEOPLE FRUIT JUICE,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
|
For
the Year Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Revenue
|
$ | 29,361,941 | $ | 17,427,204 | ||||
|
Cost
of Sales
|
18,467,045 | 10,105,327 | ||||||
|
Gross
Margin
|
10,894,896 | 7,321,877 | ||||||
|
Operating
Expenses
|
||||||||
|
General
and administrative expenses
|
1,189,637 | 405,253 | ||||||
|
Selling
expenses
|
686,819 | 664,717 | ||||||
|
Total
operating expenses
|
1,876,456 | 1,069,970 | ||||||
|
Income
from Operations
|
9,018,440 | 6,251,907 | ||||||
|
Other
Income (Expenses)
|
||||||||
|
Interest
Income
|
18,295 | 14,365 | ||||||
|
Subsidy
Income
|
500,468 | — | ||||||
|
Other
Income (expenses)
|
(70,622 | ) | (79,616 | ) | ||||
|
Interest
expense
|
(400,517 | ) | (62,147 | ) | ||||
|
Total
other income (expense)
|
47,624 | (127,398 | ) | |||||
|
Income
Before Income Tax
|
9,066,064 | 6,124,509 | ||||||
|
Income
Tax Provision
|
1,109,160 | 2,035,675 | ||||||
|
Income
Before Minority Interest
|
7,956,904 | 4,088,834 | ||||||
|
Minority
interest
|
360,501 | 243,564 | ||||||
|
Net
Income
|
$ | 7,596,403 | $ | 3,845,270 | ||||
|
Earnings
Per Share:
|
||||||||
|
Basic
earnings per share
|
$ | 0.35 | $ | 0.17 | ||||
|
Diluted
earnings per share
|
$ | 0.35 | $ | 0.17 | ||||
|
Weighted
Average Shares Outstanding
|
||||||||
|
Basic
|
22,006,173 | 22,006,173 | ||||||
|
Diluted
|
22,006.173 | 22,006,173 | ||||||
|
Comprehensive
Income
|
||||||||
|
Net
income
|
$ | 7,596,403 | $ | 3,845,270 | ||||
|
Foreign
currency translation adjustment
|
2,349,283 | 394,668 | ||||||
|
Comprehensive
Income
|
$ | 9,945,686 | $ | 4,239,938 | ||||
See
accompanying notes to consolidated financial statements.
SKYPEOPLE FRUIT JUICE,
INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
Common
Stock
Shares
|
Common
Stock
|
Additional
Paid
in
Capital
|
Retained
Earnings
|
Other
Comprehensive
Income
|
Total
|
|||||||||||||||||||
|
Balance
December 31, 2005
|
22,006,173 | $ | 220,062 | $ | 4,400,164 | $ | 1,016,959 | $ | 140,467 | $ | 5,777,652 | |||||||||||||
|
Net
income
|
— | — | 6,282,591 | 3,845,270 | — | 10,127,861 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | — | 394,668 | 394,668 | ||||||||||||||||||
|
Balance
December 31, 2006
|
22,006,173 | $ | 220,062 | $ | 10,682,755 | $ | 4,862,229 | $ | 535,135 | $ | 16,300,181 | |||||||||||||
|
Net
income
|
— | — | — | 7,596,403 | — | 7,596,403 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | — | $ | 2,349,283 | $ | 2,349,283 | ||||||||||||||||
|
Balance
December 31, 2007
|
22,006,173 | $ | 220,062 | $ | 10,682,755 | $ | 12,458,632 | $ | 2,884,418 | $ | 26,245,867 | |||||||||||||
See
accompanying notes to consolidated financial statements.
SKYPEOPLE FRUIT JUICE,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
December
31,
2007
|
December
31,
2006
|
|||||||
|
Cash
Flow from Operating Activities
|
||||||||
|
Net
income
|
$ | 7,596,403 | $ | 3,845,270 | ||||
|
Adjustments
to reconcile net income to net cash flow provided by operating
activities
|
||||||||
|
Depreciation
and amortization
|
1,454,746 | 1,540,474 | ||||||
|
Minority
interest
|
360,501 | 243,564 | ||||||
|
Changes
in operating assets and liabilities
|
||||||||
|
Accounts
receivable
|
(1,101,307 | ) | (3,617,366 | ) | ||||
|
Other receivables
|
(1,369 | ) | (11,693 | ) | ||||
|
Advance
to suppliers
|
(164,389 | ) | 18,970 | |||||
|
Inventories
|
(3,439,851 | ) | 600,876 | |||||
|
Accounts
payable
|
2,100,393 | (1,736,923 | ) | |||||
|
Other payables
|
63,282 | 11,788 | ||||||
|
Accrued
expenses
|
120,387 | 63,320 | ||||||
|
Taxes payable or receivable
|
(1,516,106 | ) | 1,243,543 | |||||
|
Advances
from customers
|
680,388 | (84,229 | ) | |||||
|
Net
cash provided by operating activities
|
6,153,078 | 2,117,594 | ||||||
|
Cash
Flows from Investing Activities
|
||||||||
|
Purchase
of Xi’an Tianren, net of cash acquired
|
— | (4,213,662 | ) | |||||
|
Cash
from consolidation of variable interest entity
|
7,611 | — | ||||||
|
Additions
to property, plant and equipment
|
(53,328 | ) | (723,255 | ) | ||||
|
Loan
advanced to related parties
|
(4,316,165 | ) | (143,753 | ) | ||||
|
Net
cash used in investing activities
|
(4,361,882 | ) | (5,080,670 | ) | ||||
|
Cash
Flow from Financing Activities
|
||||||||
|
Capital
contribution from stockholders
|
— | 6,271,558 | ||||||
|
Repayment
of short-term loan
|
— | (1,131,452 | ) | |||||
|
Proceeds
from short-term loans
|
1,814,795 | — | ||||||
|
Prepayments
of related party loan
|
(1,865,649 | ) | — | |||||
|
Advanced
from related party
|
— | 28,524 | ||||||
|
Payment
of dividends
|
— | (714,958 | ) | |||||
|
Net
cash provided by (used in) financing activities
|
(50,854 | ) | 4,453,672 | |||||
|
Effect
of Changes in Exchange Rate
|
218,723 | 51,132 | ||||||
|
NET
INCREASE IN CASH
|
1,959,065 | 1,541,728 | ||||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
2,135,173 | 593,445 | ||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 4,094,238 | $ | 2,135,173 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$ | 400,517 | $ | 62,147 | ||||
|
Cash
paid for income taxes
|
$ | 2,018,534 | $ | 791,020 | ||||
See
accompanying notes to consolidated financial statements.
SKYPEOPLE FRUIT JUICE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE
INFORMATION
SkyPeople
Fruit Juice, Inc., (“SkyPeople” or the “Company”), formerly Entech Environmental
Technologies, 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 section 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.
Shaanxi
Tianren was incorporated on August 8, 2001 in the People’s Republic of China
(“PRC”) located in Xi’an High-Tech Industrial Development Zone. The Company is
principally engaged in developing, manufacturing and selling mostly concentrated
pear and apple juice, juice-vinegar concentrate, beverage, agricultural products
and packing supplies in the People’s Republic of China.
Xi’an
Tianren Modern Organic Company, Ltd. (“Xi’an Tianren”), former name Xi’an Jiaoda
Qinmei Modern Food Company Ltd., was incorporated on December 22, 2002 in the
People’s Republic of China (“PRC”). The Company is principally engaged in
developing, manufacturing and selling mostly concentrated kiwifruit and peach
juice and organic agricultural fruit supplies in the People’s Republic of
China.
On May
27, 2006, Shaanxi Tianren purchased 91.15% of Xi’an Tianren’s ownership interest
for a purchase price in the amount of RMB 36,460,000 (or approximately U.S.
$4,573,221). The acquisition was accounted for using the purchase method, and
the financial statements of Shaanxi Tianren and Xi’an Tianren have been
consolidated on the purchase date and forward.
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.
Consolidation
The
accompanying condensed consolidated financial statements include the accounts of
Pacific, Shaanxi Tianren, Xi’an Tianren, and its variable interest entity,
namely Huludao Wonder Fruit Co., Ltd. (“Huludao Wonder”) under the common
control of Shaanxi Hede Investment Management Co., Ltd. (“Hede”). All material
inter-company accounts and transactions have been eliminated in
consolidation.
On
January 17, 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46:
Consolidation of Variable Interest Entities (“V.I.E.”), an interpretation
of ARB 51 (“FIN 46”), which was superseded by a revised interpretation (“FIN
46R”). FIN 46R requires the primary beneficiary of the variable interest entity
to consolidate its financial results with the variable interest entity. The
primary beneficiary of a variable interest entity is the party that absorbs a
majority of the entity’s expected losses, receives a majority of its expected
residual returns, or both. The Company has evaluated our relationship with
Huludao Wonder and has concluded that Huludao Wonder is a variable interest
entity for accounting purposes.
Yongke
Xue, the Chairman of the Board and Chief Executive Officer of the Company, owns
80% of the equity interest of Hede, and Xiaoqin Yan, a director of Shaanxi
Tianren, owns the remaining 20% of Hede. Hede leases 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 is for a term of one year
from July 1, 2007 to June 30, 2008. The monthly rent under the lease is RMB
300,000 (approximately $41,070 according to the exchange rate as of December 31,
2007). In 2007, Shaanxi Tianren loaned to Hede an aggregate of RMB 27 million
(approximately $3,696,301) interest-free loan pursuant to a Loan Agreement
entered into by the parties on June 5, 2007. The loan was made to enable Hede to
purchase Huludao Wonder. The loan is due on August 1, 2008.
The
contractual agreement with Hede was in effect on June 1, 2007. As a result of
the contractual arrangements, Shaanxi Tianren become the primary beneficiary of
Huludao Wonder. Accordingly, the Company adopted the provisions of FIN 46R and
consolidated the financial results of Huludao Wonder from June 1,
2007.
The
Company accounted for the purchase as a reorganization of entities under common
control to consolidate Huludao Wonder with the assets and liabilities recorded
at their carrying values on the books of Hede. The book value of the
consolidated net assets of Huludao Wonder was RMB 48,250,000 (approximately
$6,308,591 based on the exchange rate of June 1, 2007).
The
following table summarizes the book value of Huludao Wonder’s assets and
liabilities as of June 1, 2007:
|
ASSETS
|
||||
|
Cash
|
$
|
7,567
|
||
|
Accounts receivable, net
|
2,387,711
|
|||
|
Other receivables
|
29,244
|
|||
|
Inventory
|
57,948
|
|||
|
Fixed assets
|
6,934,219
|
|||
|
Intangible
asset
|
3,262,566
|
|||
|
Other assets
|
27,486
|
|||
|
TOTAL
ASSETS
|
$
|
12,706,741
|
||
|
LIABILITIES
|
||||
|
Accounts payable
|
$
|
20,642
|
||
|
Other
payables
|
101,603
|
|||
|
Loans
payable
|
6,275,905
|
|||
|
TOTAL
LIABILITIES
|
$
|
6,398,150
|
||
|
NET
ASSETS (Minority Interest-V.I.E.)
|
$
|
6,308,591
|
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.
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.
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
|
Year
ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
NUMERATOR
FOR BASIC AND DILUTED EPS
|
||||||||
|
Net
income (numerator for Diluted EPS)
|
$ | 7,596,403 | $ | 3,845,270 | ||||
|
Net
income allocated to Preferred Stock
|
— | — | ||||||
|
Net
income to common stockholders (Basic)
|
$ | 7,596,403 | $ | 3,845,270 | ||||
|
DENOMINATORS
FOR BASIC AND DILUTED EPS
|
||||||||
|
Common
Stock outstanding
|
22,006,173 | 22,006,173 | ||||||
|
DENOMINATOR
FOR BASIC EPS
|
||||||||
|
Add:
Weighted average preferred as if converted
|
— | — | ||||||
|
DENOMINATOR
FOR DILUTED EPS
|
22,006,173 | 22,006,173 | ||||||
|
EPS
– Basic
|
$ | 0.35 | $ | 0.17 | ||||
|
EPS
– Diluted
|
$ | 0.35 | $ | 0.17 | ||||
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 $625,416 and
$491,519 for 2007 and 2006, 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.
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2007. 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,
2007
|
December
31,
2006
|
|||||||
|
Raw
materials and packaging
|
$ | 255,936 | $ | 438,414 | ||||
|
Finished
goods
|
4,204,213 | 327,297 | ||||||
|
Inventories
|
$ | 4,460,149 | $ | 765,711 | ||||
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 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 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 maintaining strict standards during the entire process. 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.
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Advertising and Promotional
Expense
Advertising
and promotional costs are expensed as incurred. The Company incurred $12,945,
and $5,431 in advertising and promotional costs for the years ended December 31,
2007 and 2006, 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 and equipment are depreciated
over their estimated useful lives as follows:
|
Buildings
|
20-30
years
|
|
Machinery
and equipment
|
10
years
|
|
Furniture
and office equipment
|
5
years
|
|
Motor
vehicles
|
5
years
|
|
December
31,
2007
|
December
31,
2006
|
|||||||
|
Machinery
and equipment
|
$ | 13,672,861 | $ | 8,386,700 | ||||
|
Furniture
and office equipment
|
200,266 | 57,006 | ||||||
|
Motor
vehicles
|
193,899 | 155,769 | ||||||
|
Buildings
|
6,489,513 | 2,990,250 | ||||||
|
Subtotal
|
20,556,539 | 11,589,725 | ||||||
|
Less:
accumulated depreciation
|
(2,992,392 | ) | (1,507,750 | ) | ||||
|
Net
property and equipment
|
$ | 17,564,147 | $ | 10,081,975 | ||||
Depreciation
expense included in general and administration expenses for the years ended
December 31, 2007 and 2006 was $188,100 and $162,123, respectively. Depreciation
expense included in cost of sales for the years ended December 31, 2007 and 2006
was $1,138,102 and $1,314,552, respectively.
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.
F-33
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Xi’an Tianren.
FIN 46R
requires the primary beneficiary of the variable interest entity to consolidate
its financial results with the variable interest entity. SkyPeople has evaluated
its relationship with Huludao Wonder and has concluded that Huludao Wonder is a
variable interest entity for accounting purposes.
New Accounting
Pronouncements
In March
2008, The Financial Accounting Standards Board (“FASB”) issued FASB Statement
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 has not completed its evaluation of the
potential impact, if any, of the adoption of SFAS No. 161 on its consolidated
financial position, results of operations and cash flows.
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 terms. The Company does not expect
that the adoption of this EITF 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, Non-controlling 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 non-controlling 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
non-controlling interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting for transactions
with non-controlling interest holders. SFAS No. 141(R) and SFAS
No. 160 are effective for our fiscal 2009. The Company believes the
adoption of SFAS No. 141(R) and SFAS No. 160 will have an impact on
the accounting for future acquisitions.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159
permits, but does not require, entities to choose to measure eligible items at
fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
that a company also elects to apply the provisions of SFAS No. 157, Fair Value Measurements.
Management is in the process of assessing if this statement will have a
material impact on the Company’s financial statements once adopted.
3. 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 Xi’an Tianren was reduced from 33% to 25%, effective beginning January
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
$1,109,160 and $2,035,675 for fiscal year 2007, and 2006, respectively. The
Company has recorded no deferred tax assets or liabilities as of December 31,
2007 and 2006, since nearly all differences in tax basis and financial statement
carrying values are permanent differences.
|
Income
Tax Expenses
|
December
31,
2007
|
December
31,
2006
|
||||||
|
Current
|
$ | 1,109,106 | $ | 2,035,675 | ||||
|
Deferred
|
— | — | ||||||
|
Total
|
$ | 1,109,106 | $ | 2,035,675 | ||||
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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 $128,544 and
$63,799 for fiscal year 2007 and 2006, respectively.
5. RELATED
PARTIES RECEIVABLES
During
the year, the Company had some outstanding loans to related entities with common
owners and directors. The loans are unsecured and bear no interest. These loans
have no fixed payment terms. The loans balance at December 31, 2007 and 2006
totaled $4,970,427 and $419,523, respectively.
|
Name
of Related Party to Whom Loans were Given
|
December
31,
2007
|
Relation
|
|||
|
Mr.
Andu Liu
|
$
|
22,177
|
Former
Shareholder of Shaanxi Tianren
|
||
|
Mr.
Ke Lu
|
$
|
7,734
|
Manager
of Shaanxi Tianren
|
||
|
Shaanxi
Hede Investment Management Co., Ltd. (“Hede”)
|
$
|
4,490,173
|
Former
shareholder of Shaanxi Tianren
|
||
|
Xi’an
Hede Investment Consultation Co., Ltd.
|
$
|
101,286
|
The
Managing Director of Xi’an Hede is one of the family members of the
Chairman of Shaanxi Tianren
|
||
|
Shaanxi
Xirui Group Co., Ltd.
|
$
|
198,216
|
Shareholder
of Xi’an Tianren
|
||
|
Yingkou
Trusty Fruits Co., Ltd. (“Yingkou”)
|
$
|
77,212
|
Hede
is one of the shareholders of Yingkou
|
||
|
Shaanxi
Fruits Processing Co., Ltd.
|
$
|
73,629
|
Former
shareholder of Shaanxi Tianren
|
||
|
Total
Loan to Related Parties
|
$
|
4,970,427
|
|||
|
Name
of Related Party to Whom Loans were Given
|
December
31,
2006
|
Relation
|
|||
|
Ms.
Yao Li
|
$ | 6,403 |
Former
Shareholder of Shaanxi Tianren
|
||
|
Shaanxi
Hede Investment Management Co., Ltd.
|
$ | 174,149 |
Former
Shareholder of Shaanxi Tianren
|
||
|
|
|||||
|
Xi’an
Qinmei Food Co., Ltd. (“Xi’an Qinmei”)
|
$ | 238,971 |
Shareholder
of Xi’an Tianren
|
||
|
Total
Loan (from) Related Parties
|
$ | 419,523 | |||
F-36
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. RELATED
PARTY PAYABLES
The
Company has the outstanding borrowing from its shareholders and related entities
with common owners and directors which amounted to $143,366 and $1,950,892 as of
December 31, 2007 and 2006, respectively. These loans bear no interest and have
no fixed payment terms.
|
Name
of Related Party from Whom Loans were Received
|
December
31, 2007
|
Relation
|
|||
|
Mr.
Guang Li
|
$
|
(137
|
)
|
Director
of Shaanxi Tianren
|
|
|
Mr.
Yongke Xue
|
$
|
(32,308
|
)
|
Former
Shareholder of Shaanxi Tianren
|
|
|
Ms.
Yuan Cui
|
$
|
(62,387
|
)
|
Former
Shareholder of Shaanxi Tianren
|
|
|
Mr.
Hongke Xue
|
$
|
(48,397
|
)
|
President
of Shaanxi Tianren
|
|
|
Ms.
Xiaoqin Yan
|
$
|
(137
|
)
|
Director
of the Company
|
|
|
Total
|
$
|
(143,366
|
)
|
||
|
Name
of Related Party from Whom Loans were Received
|
December
31, 2006
|
Relation
|
|||
|
Mr.
Hongke Xue
|
$
|
(1,233
|
)
|
President
of Shaanxi Tianren
|
|
|
Ms.
Yuan Cui
|
$
|
(135,197
|
)
|
Former
Shareholder of Shaanxi Tianren
|
|
|
Mr.
Yongke Xue
|
$
|
(30,223
|
)
|
Former
Shareholder of Shaanxi Tianren
|
|
|
Xi’an
Hede Investment Consultation Co., Ltd.
|
$
|
(1,464,108
|
)
|
The
Managing Director of Xi’an Hede is one of the family members of the
Chairman of Shaanxi Tianren
|
|
|
Mr.
Andu Liu,
|
$
|
(25,589
|
)
|
Shareholder
of Xi’an Tianren
|
|
|
Shaanxi
Xirui Group Co., Ltd.
|
$
|
(230,512
|
)
|
Shareholder
of Xi’an Tianren
|
|
|
Mr.
Xiujun Wang
|
$
|
(64,030
|
)
|
Shareholder
of Xi’an Tianren
|
|
|
Total
|
$
|
(1,950,892
|
)
|
||
7. LOANS
PAYABLE
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 as of 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-tem 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 of 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.
SKYPEOPLE FRUIT JUICE
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. VALUE
ADDED TAX
On
December 13, 1993, The State Council of China promulgated The Provisional Regulation of the
People’s Republic of China on Value Added Tax, which was put into effect
on January 1, 1994 and is currently effective in China. According to The
Provisional Regulation of the PRC on Value-Added Tax (“VAT”), VAT should be paid
by enterprises or individuals who sell merchandise, provide processing,
repairing, or assembling services, or import goods within the territory of the
People’s Republic of China on the added value derived from their production,
sales of merchandise, industrial repairing or assembling services. Exports from
China are not subject to value added tax. The VAT tax rate for the Company is
17%. At December 31, 2007 and 2006, unpaid taxes payable amounted to $114,909
and $1,583,884, respectively.
9. ACCQUISITION
OF XI’AN TIANREN
The
acquisition of the equity interest in Xi’an Tianren was effective on May 26,
2006 after the agreement was signed and consideration paid. The purchase price
of RMB 36,460,000 (U.S. $4,573,221) was determined by the parties based upon the
market value of the assets and business potential of Xi’an Tianren.
The fair
value of the Xi’an Tianren assets and liabilities at the date of acquisition are
presented below:
|
Cash
|
$
|
359,559
|
||
|
Accounts
receivable
|
1,147,265
|
|||
|
Inventories
|
101,945
|
|||
|
Advances
to suppliers
|
162,618
|
|||
|
Other
receivables
|
3,484
|
|||
|
Related
party receivables
|
260,879
|
|||
|
Property,
plant and equipment
|
3,634,559
|
|||
|
Prepaid
land leases
|
1,293,966
|
|||
|
Accounts
payable
|
(344,382
|
)
|
||
|
Accrued
payroll and welfare
|
(51,983
|
)
|
||
|
Related
party payables
|
(1,549,051
|
)
|
||
|
Other
payables
|
(1,612
|
)
|
||
|
Net
assets acquired
|
5,017,247
|
|||
|
Less
minority interest
|
(444,026
|
)
|
||
|
Purchase
price
|
4,573,221
|
|||
|
Less
cash acquired
|
(359,559
|
)
|
||
|
Net
cash paid
|
$
|
4,213,662
|
The
following pro forma information is presented on a consolidated basis as if the
acquisition took place at the beginning of the period presented.
|
Year
ended December 31,
|
||||
|
2006
|
||||
|
Revenues
|
$
|
19,793,060
|
||
|
Income
before extraordinary items and the cumulative effect of accounting
changes
|
$
|
4,310,695
|
||
|
Net
income
|
$
|
4,310,695
|
||
|
Earnings
per share
|
N/A
|
|||
SKYPEOPLE
FRUIT JUICE INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. 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.
11. CONCENTRATIONS,
RISKS AND UNCERTAINTIES
The
Company has the following concentrations of business with one customer
constituting greater than 10% of the Company’s revenue:
|
For
years ended December 31,
|
||||||
|
Major
Customer
|
2007
|
2006
|
||||
|
China
National Electronic Import and Export Shaanxi Co., Ltd.
|
N/A
|
14
|
%
|
|||
|
Shaanxi
Jiedong Trade Company, Ltd.
|
N/A
|
16
|
%
|
|||
|
Yunnan
Machinery Import and Export Company, Ltd.
|
N/A
|
12
|
%
|
|||
|
Hebei
Rifong Food Company
|
N/A
|
N/A
|
||||
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 $0 and
$424 during the years ended December 31, 2007 and 2006,
respectively.
The
Company has the following concentrations of business with two vendors
constituting greater than 10% of the Company’s purchases:
|
For
years ended December 31,
|
|||||||
|
Major
Vendors
|
2007
|
2006
|
|||||
|
Shaanxi
Longchang Steel Drum Production Co., Ltd.
|
N/A
|
13
|
%
|
||||
|
|
|
|
|||||
| Xi'an Steel Drum Production Factory of Shaanxi Haomai Industry and Trade Co., Ltd. |
N/A
|
13
|
%
|
||||
12. RELATED
PARTY TRANSACTIONS
During
the year ended December 31, 2006, the Company made sales of $109,910 to Xi’an
Qinmei Food Co., Ltd., which is an 8.85% shareholder of Xi’an, and purchased a
car for $30,008 from Yongke Xue, the CEO and Chairman of the Company. The sales
were made at the same prices and on other terms no less favorable to the Company
than it could obtain in arms length 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 former Xi’an
Tianren.
|
SKYPEOPLE
FRUIT JUICE INC.
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
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
“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
(approximately $42,367). 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.
On June
6, 2007 Shaanxi Tianren loaned to Hede RMB 7 million (approximately $958,300
based on the exchange rate as of December 31, 2007) pursuant to a Loan Agreement
entered into by the parties on June 5, 2007. The entire principal of the loan
was due on June 5, 2008. The proceeds of such loan (as well an aggregate of RMB
3,000,000 received as a prepayment of rent and a security deposit on the Huludao
Lease) were used by Hede to pay a portion of the purchase price for its
acquisition of Huludao Wonder.
On August
1, 2007 Shaanxi Tianren loaned to Hede RMB 20 million (approximately $2,738,001
based on the exchange rate as of December 31, 2007) pursuant to a Loan Agreement
entered into by the parties on such date. The loan was due on August 1, 2008.
The loan agreement provides that no interest shall accrue on the outstanding
amount of the loan, but if Hede does not pay the outstanding loan when due, then
it shall be required to pay in addition to the principal of the loan liquidated
damages at the rate of 2% of the loan amount per day. Before August 27, 2007,
the total amount of RMB 20 million in cash was transferred to Hede.
In
December 2007, Shaanxi Tianren made additional advances aggregating RMB
4,544,043 (approximately $622,800 based on the exchange rate as of December 31,
2007) to Hede. These advances are unsecured and bear no interest. These advances
also have no fixed payment terms. The proceeds from these loan advances were
transferred to Huludao Wonder directly on behalf of Hede for the purchase price
of Huludao Wonder.
13. MINORITY
INTEREST-VARIABLE INTEREST ENTITY
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
RMB300,000, leased all the assets and operating facilities of Huludao Wonder,
which is wholly-owned by Hede. This lease arrangement resulted in the
combination of Huludao Wonder’s operating results with those of Shaanxi Tianren
as of June 1, 2007 and forward.
FIN 46R
requires the primary beneficiary of the variable interest entity to consolidate
its financial results with the variable interest entity. SkyPeople has evaluated
its relationship with Huludao Wonder and has concluded that Huludao Wonder is a
variable interest entity for accounting purposes.
|
SKYPEOPLE
FRUIT JUICE INC.
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
Pro
Forma Financial Information
The
following pro forma information is presented on a consolidated basis as if the
acquisition took place at the beginning of the period presented.
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 at the beginning of the period
presented. 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.
|
Year
ended December 31,
|
||||
|
2006
|
||||
|
Revenues
|
$
|
22,156,425
|
||
|
Income
before extraordinary items and the cumulative effect of accounting
changes
|
$
|
3,860,134
|
||
|
Net
income
|
$
|
3,860,134
|
||
|
Earnings
per share
|
N/A
|
|||
Note: The
currency exchange rate is based on the average exchange rate of the related
period.
14.
SUBSEQUENT EVENT
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. 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, were also effective on May 23, 2008.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
Although
we will not receive any of the proceeds from the sale of the shares being
registered in this registration statement, we have agreed to bear the costs and
expenses of the registration of those shares. Our expenses in connection with
the issuance and distribution of the securities being registered, other than the
underwriting discount, are as follows:
|
SEC
Registration Fee
|
$
|
827.00
|
||
|
Professional
Fees and Expenses
|
$
|
225,000.00
|
*
|
|
|
Printing
and Engraving Expenses
|
$
|
5,000.00
|
*
|
|
|
Transfer
Agent’s Fees
|
$
|
2,500.00
|
*
|
|
|
Miscellaneous
Expenses
|
$
|
3,000.00
|
*
|
|
|
Total
|
$
|
236,327.00
|
*
|
*Estimates
Item
14. Indemnification of Directors and Executive Officers.
The
Florida Business Corporation Act 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. F.S. 607.0850(3)
Such act
also provides that the corporation may indemnify an officer or director and
advance expenses if such person 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. F.S. 607.0850(1)(2).
A court
may order indemnification of an officer or director if it determines that such
person is fairly and reasonably entitled to such indemnification in view of all
the relevant circumstances. F.S.607.0850(9).
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
By—laws 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 such liabilities (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, 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.
Under the
Share Exchange Agreement, on February 26, 2008, we issued 1,000,000 shares of
our Series A Stock in exchange for all of the outstanding shares of the Common
Stock of Pacific. At the completion of that share exchange, Pacific became the
Company’s wholly owned subsidiary. The Share Exchange was accomplished in
reliance upon Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”).
In
connection with the Share Exchange, on February 26, 2008, the Company issued
2,833,333 shares of Series B Stock and warrants to purchase 7,000,000 shares of
Common Stock (the “Warrants”) to two investors, in exchange for a cash payment
in the amount of $3,400,000. The issuance of the Series B Stock was accomplished
in reliance upon Section 4(2) of the Securities Act. Under the stock purchase
agreement relating to such sale, 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.
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 issuance of the Series B Stock was
accomplished in reliance upon Section 4(2) of the Securities Act. All the
Company’s outstanding convertible notes were converted into an aggregate of
615,147 shares of Series B Preferred Stock, which will be convertible into an
aggregate of 615,147 shares of Common Stock upon effectiveness of the Reverse
Split. The 615,147 shares of Common Stock issuable upon conversion of the Series
B Preferred Stock which were issued in satisfaction of the convertible notes
represents only approximately 2.4% of Common Stock post-reverse stock split.
Moreover, the Company is not obligated to register the resale of such 615,147
shares and has not included such shares in the S-1 it has filed.
On
February 22, 2008 the Company issued to the persons set forth in the table below
the number of shares of 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
|
|||
|
Grover
Moss
|
59,060 |
Cancellation
of indebtedness
|
|||
|
Joseph
I. Emas
|
37,098 |
Past
services
|
|||
|
Walker
Street Associates
|
37,098 |
Past
services
|
|||
|
Terence
Leong
|
2,890 |
Past
services
|
|||
|
Burr
Northrop
|
31,941 |
Past
services
|
|||
As part
of a settlement with its former Chairman and Chief Executive Officer, Steven
Rosenthal, the Company issued to him 913 shares of its Common Stock during
December 2007. The issuance of the 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 the Company’s Common Stock during December 2007. The
issuance of the Common Stock was accomplished in reliance upon Section 4(2) of
the Securities Act.
During the
year ended September 30, 2006, the Company issued 12,853 shares that were
previously subscribed. The issuance of the Common Stock was accomplished in
reliance upon Section 4(2) of the Securities Act.
As of
June 30, 2006, the Company sold units consisting of convertible notes that are
convertible into 190,735 shares of Common Stock and warrants that are
exercisable for 60,536 shares of 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 outstanding Common Stock
on the conversion or exercise date.
The offer
and sale of such shares of our Common Stock were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act of 1933, as amended (the
“Securities Act”) and in Section 4(2) of the Securities Act.
During the three months ended March 31,
2006, the Company cancelled 4,563 shares previously issued to a former employee
and issued 913 shares to replace the cancelled shares pursuant to an agreement
between the Company and the former employee. The Company issued 304 shares for
public relations services and recorded compensation expense of $5,000 based on
the closing market price of $16.45 on the date of issuance, April 4, 2006. The
issuance of the Common Stock was accomplished in reliance upon Section 4(2) of
the Securities Act.
During
the three months ended December 31, 2005, the Company entered into a settlement
agreement with a vendor to satisfy accounts payable totaling $162,935. Terms of
the agreement provided for payment in cash of $35,000, and the issuance of 3,042
shares of Common Stock. The Common Stock issued were valued at $90,000, or
$29.59 per share, which was the fair market value of the Common Stock on the
agreement date. The resulting gain on settlement totaling $37,935 was recorded
as other income. The issuance of the Common Stock was accomplished in reliance
upon Section 4(2) of the Securities Act.
In
December 2005, the Company entered into a settlement agreement with a law firm
in which the Company issued 684 shares of Common Stock. The services were
performed during the year ended September 30, 2005, legal expense of $36,000
($52.63 per share) was recorded during the year ended September 30, 2005 based
on the fair market value of the Common Stock, and the shares were subscribed for
issuance as of September 30, 2005.
During
the three months ended September 30, 2005, the Company subscribed 12,168 shares
of Common Stock to investors at $8.22 per share for cash, and received proceeds
of $100,001. The Company also issued 2,434 shares to a related party to convert
$50,000 of notes and $10,000 of interest payable when the fair market value of
the stock was $24.65 per share. The Company issued 608 shares as incentive
compensation to an employee when the fair market value of the stock was $24.67
and recorded $15,000 as compensation expense. The issuance of the Common Stock
was accomplished in reliance upon Section 4(2) of the Securities
Act.
During
the three months ended June 30, 2005, the Company issued 51 shares of Common
Stock to investors in an earlier sale of Common Stock as a goodwill
restructuring of the terms of the previous sale. The Company charged the amount
of $17 to additional paid-in capital. The issuance of the Common Stock was
accomplished in reliance upon Section 4(2) of the Securities Act.
During
the three months ended March 31, 2005, the Company issued 4,563 shares of Common
Stock to a former officer and director and recorded compensation expense of
$90,000. The shares were recorded at their market price of $19.72 per share as
of the date of the agreement pertaining to the issuance. The issuance of the
Common Stock was accomplished in reliance upon Section 4(2) of the Securities
Act.
Item
16. Exhibits and Financial Statement Schedules.
(a)
Exhibits
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.*
4.1
Warrants issued to Barron Partners LP, dated as of February 25, 2008.
Incorporated by reference to Exhibit 4.1 to the March 3, 2008
8-K.
4.2
Warrants issued to EOS Holdings LLC, dated as of February 25, 2008. Incorporated
by reference to Exhibit 4.2 to the March 3, 2008 8-K.
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 (the “June 5, 2008 8-K”).
10.11
Credit Facility Letter dated July 09, 2004 between Huludao Wonder Fruit Co.,
Ltd. and Industrial-Commercial Urban Credit Cooperative. *
10.12
Credit Facility Letter dated September 25, 2004 between Huludao Wonder Fruit
Co., Ltd. and Industrial-Commercial Urban Credit Cooperative. *
10.13
Credit Facility Letter dated April 30, 2006 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch, Huludao City Commercial Bank. *
10.14
Credit Facility Letter dated August 03, 2006 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch, Huludao City Commercial Bank. *
10.15
Credit Facility Letter dated September 25, 2006 between Huludao Wonder Fruit
Co., Ltd. and Suizhong Branch, Huludao City Commercial Bank. *
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. *
10.17
Credit Facility Letter dated September 24, 2007 between Shaanxi Tianren Organic
Food Co., Ltd. and Gaoxin Branch of China Construction Bank. *
10.18
Credit Facility Letter dated September 28, 2007 between Huludao Wonder Fruit
Co., Ltd. and Suizhong Branch, Huludao City Commercial Bank. *
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. *
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. *
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 .*
10.22
Credit Facility Letter dated June 27, 2008 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch, Huludao City
Commercial Bank .*
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
.*
10.24
Credit Facility Letter dated August 10, 2008 between Huludao Wonder Fruit Co.,
Ltd. and Suizhong Branch，Huludao City
Commercial Bank .*
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 .*
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 previously filed as Exhibit 5.1)
23.2
Consent of Child, Van Wagoner & Bradshaw, PLLC**
*
Previously Filed
** Filed
herewith
(b)
Financial Statement Schedules
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;
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 SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective
Registration Statement;
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, 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) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4)
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, 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 February 2,
2009.
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SkyPeople
Fruit Juice, Inc.
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/s/
Yongke Xue
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By:
Yongke Xue
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Chief
Executive Officer and
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Director
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(principal
executive officer)
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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.
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Name
and Title
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Date
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/s/
Yongke Xue
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February
2, 2009
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Yongke
Xue
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Chief
Executive Officer and Director
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(principal
executive officer)
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/s/
Spring Liu
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February
2, 2009
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Spring
Liu
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Chief
Financial Officer
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(principal
financial officer and accounting officer)
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/s/
Xiaoqing Yan
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February 2, 2009 | |
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Xaioqing
Yan, Director
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/s/
Guolin Wang
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February 2, 2009 | |
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Guolin
Wang, Director
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/s/
Robert B. Fields
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February 2, 2009 | |
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Robert
B. Fields, Director
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/s/
Norman Ko
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February 2, 2009 | |
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Norman
Ko, Director
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