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Future FinTech Group Inc. - Quarter Report: 2013 March (Form 10-Q)

spu10qmar3120130.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013

[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number: 001-34502

SKYPEOPLE FRUIT JUICE, INC.
(Exact name of registrant as specified in its charter)
 
Florida
 
98-0222013
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
 
16F, China Development Bank Tower, No. 2, Gaoxin 1st Road, Xi’an, PRC
710075
 
 
(Address of principal executive offices including zip code)
 
     
 
86-29-88377161
 
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]    No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]    No [   ]

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.
Large accelerated filer [   ]
Accelerated filer [   ]
Non-accelerated filer [   ]
Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]    No [X]
 
Class
 
Outstanding at May 14, 2013
Common Stock, $0.001 par value per share
 
26,661,499

 


 

 
 
TABLE OF CONTENTS
 
      Page
PART I. FINANCIAL INFORMATION   1
Item 1. Financial Statements   1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   13
Item 3. Quantitative and Qualitative Disclosures about Market Risk   23
Item 4. Controls and Procedures   24
PART II. OTHER INFORMATION   25
Item 1. Legal Proceedings   25
Item 1A. Risk Factors   26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   26
Item 3. Defaults upon Senior Securities   26
Item 4. (Removed and Reserved)   26
Item 5. Other Information   26
Item 6. Exhibits   27
Signatures    
 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
SKYPEOPLE FRUIT JUICE, INC.
CONSOLIDATED BALANCE SHEETS
 
  March 31, 2013     December 31, 2012  
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS
           
    Cash and cash equivalents
  $ 91,320,803     $ 77,560,278  
    Accounts receivables, net of allowance of $46,766 and $46,643 as of March 31, 2013 and December 31, 2012, respectively
    31,083,435       49,435,961  
    Other receivables
    465,725       201,417  
    Inventories
    7,582,226       7,278,191  
    Deferred tax assets
    147,126       90,576  
    Advances to suppliers and other current assets
    141,158       71,536  
TOTAL CURRENT ASSETS
    130,740,473       134,637,959  
                 
PROPERTY, PLANT AND EQUIPMENT, NET
    51,851,976       52,180,097  
LAND USE RIGHT, NET
    7,693,256       7,718,363  
OTHER ASSETS
    378,137       682,592  
TOTAL ASSETS
  $ 190,663,842     $ 195,219,011  
                 
LIABILITIES
               
                 
CURRENT LIABILITIES
               
    Accounts payable
  $ 7,127,984     $ 14,399,282  
    Accrued expenses
    1,540,894       2,050,675  
    Income tax payable
    1,347,111       3,127,245  
    Advances from customers
    127,861       530,437  
    Short-term loan - related party
    4,000,000       -  
    Short-term bank loans
    8,502,289       11,661,761  
TOTAL CURRENT LIABILITIES
  $ 22,646,139     $ 31,769,400  
                 
STOCKHOLDERS' EQUITY
               
                 
SkyPeople Fruit Juice, Inc, Stockholders' equity
               
    Series B Preferred stock, $0.001 par value, 10,000,000 shares authorized, Nil shares issued and     -       -  
    outstanding as of March 31, 2013 and December 31, 2012, respectively                
    Common stock, $0.001 par value; 66,666,666 shares authorized; 26,661,499 shares issued and outstanding as of March 31, 2013 and  December 31, 2012
    26,661       26,661  
    Additional paid-in capital
    59,189,860       59,189,860  
    Retained earnings
    86,611,733       82,793,585  
    Accumulated other comprehensive income
    14,874,872       14,500,860  
Total SkyPeople Fruit Juice, Inc. stockholders' equity
    160,703,126       156,510,966  
    Non-controlling interests
    7,314,577       6,938,645  
TOTAL STOCKHOLDERS' EQUITY
    168,017,703       163,449,611  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 190,663,842     $ 195,219,011  
 
The accompanying notes are an integral part of these consolidated financial statements.

SKYPEOPLE FRUIT JUICE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
   
For the Three Months Ended March 31,
 
   
2013
    2012  
Revenue
  $ 18,611,456     $ 14,993,500  
Cost of goods sold
    10,970,558       10,207,501  
Gross profit
    7,640,898       4,785,999  
                 
Operating Expenses
               
    General and administrative expenses
    1,305,914       1,477,604  
    Selling expenses
    741,166       525,334  
    Research and development expenses
    98,622       142,685  
Total operating expenses
    2,145,702       2,145,623  
                 
Income from operations
    5,495,196       2,640,376  
                 
Other income (expenses)
               
    Interest income
    71,579       69,689  
    Subsidy income
    350,974       433,504  
    Interest expenses
    (277,023 )     (154,812 )
    Others incomes
    -       (968 )
Total other income
    145,530       347,413  
                 
Income before income tax
    5,640,726       2,987,789  
    Income tax provision
    1,483,865       928,380  
Net income
    4,156,861       2,059,409  
                 
Less: Net income attributable to non-controlling interests
    338,713       140,251  
                 
NET INCOME ATTRIBUTABLE TO SKYPEOPLE FRUIT JUICE, INC.
  $ 3,818,148     $ 1,919,158  
                 
Earnings per share:
               
    Basic earnings per share
  $ 0.14     $ 0.07  
    Diluted earnings per share
  $ 0.14     $ 0.07  
                 
Weighted average number of shares outstanding
               
    Basic
    26,661,499       25,690,402  
    Diluted
    26,661,499       26,661,499  
                 
Comprehensive Income
               
Net income
  $ 4,156,861     $ 2,059,409  
Foreign currency translation adjustment
    411,231       156,571  
Total Comprehensive income
    4,568,092       2,215,980  
Comprehensive income attributable to non-controlling interests
    375,932       146,732  
Comprehensive income attributable to SkyPeople Fruit Juice, Inc.
  $ 4,192,160     $ 2,069,248  

The accompanying notes are an integral part of these consolidated financial statements.
SKYPEOPLE FRUIT JUICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
For the Three Months Ended
March 31,
 
    2013     2012  
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 4,156,861     $ 2,059,409  
Adjustments to reconcile net income to net cash provided by operating activities
               
    Depreciation and amortization
    863,343       706,064  
    Deferred income tax assets
    (56,550 )     60,515  
Changes in operating assets and liabilities
               
    Accounts receivable
    18,455,170       14,225,403  
    Other receivable
    (263,398 )     2,009  
    Advances to suppliers and other current assets
    (69,496 )     (109,276 )
    Inventories
    107,472       1,163,961  
    Accounts payable
    (7,298,251 )     (875,022 )
    Accrued expenses
    (513,157 )     (1,233,484 )
    Income tax payable
    (1,785,680 )     (1,055,393 )
    Advances from customers
    (403,363 )     (178,673 )
Net cash provided by operating activities
    13,192,951       14,765,513  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
    Additions to property, plant and equipment
    (428,692 )     (1,320,608 )
    Prepayment for other assets
    (9,600 )     (13,621 )
Net cash used in investing activities
    (438,292 )     (1,334,229 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Increased in restricted cash
    -       284,361  
Short-term notes payable
    -       (284,361 )
Proceeds from related party loan
    4,000,000       -  
Proceeds from short-term bank loans
    -       3,170,879  
Repayment of short-term bank loans
    (3,185,474 )     (1,139,578 )
Net cash provided by financing activities
    814,526       2,031,301  
                 
Effect of change in exchange rate
    191,340       96,897  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    13,760,525       15,559,482  
    Cash and cash equivalents, beginning of period
    77,560,278       61,154,007  
    Cash and cash equivalents, end of period
  $ 91,320,803     $ 76,713,489  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
    Cash paid for interest
  $ 250,722     $ 154,812  
    Cash paid for income taxes
  $ 3,326,095     $ 1,923,258  
                 
SUPPLEMENTARY DISCLOSURE OF SIGNIFICANT NON-CASH TRANSACTION
               
    Transferred from other assets to property, plant and equipment and construction in process
  $ 315,394     $ 5,158,425  
 
The accompanying notes are an intagral part of these consolidated financial statements.

SKYPEOPLE FRUIT JUICE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   1.  Basis of Presentation
 
The unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of March 31, 2013 and the results of operations and cash flows for the three month periods ended March 31, 2013 and 2012. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year ending December 31, 2013. The balance sheet at December 31, 2012 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2012 as included in our Annual Report on Form 10-K.
 
   2.  Business Description and Significant Accounting Policies
 
The principal activities of the Company consist of production and sales of fruit juice concentrates, fruit juice beverages, and other fruit-related products in the PRC and overseas markets. All activities of the Company are principally conducted by subsidiaries operating in the PRC.
 
Organizational Structure
 
Current organizational structure is set forth in the diagram below:
 

 
(1)  
Xi’an Qinmei Food Co., Ltd., an entity not affiliated with the Company, owns the other 8.85% of the equity interest in Shaanxi Qiyiwangguo.
(2)  
Formerly known as Shaanxi Tianren Organic Food Co. Ltd.
(3)  
SkyPeople Juice Group Yidu Orange Products Co., Ltd. was established on March 13, 2012. Its scope of business includes deep processing and sales of oranges.
(4)  
Hedetang Fruit Juice Beverages (Yidu) Co., Ltd. was established on March 13, 2012. Its scope of business includes production and sales of fruit juice beverages.
(5)  
SkyPeople (Suizhong) Fruit and Vegetable Products Co., Ltd. was established on April 26, 2012. Its scope of business includes initial processing, quick-frozen and sales of agricultural products and related by-products.
 
Principles of Consolidation
 
Our consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany 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 SkyPeople (China), Shaanxi Qiyiwangguo, Huludao Wonder, Yingkou, Hedetang Juice Beverages and Orange Products, SkyPeople Suizhong, 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.
 
Uses of estimates in the preparation of financial statements
 
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period. The significant areas requiring the use of management estimates include, but not limited to, the allowance for doubtful accounts receivable, estimated useful life and residual value of property, plant and equipment, provision for staff benefit, valuation of change in fair value of warrant liability, recognition and measurement of deferred income taxes and valuation allowance for deferred tax assets. 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.
 
Impairment of long-lived assets
 
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, or 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 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 of long-lived assets recognized.

 
Inventories
 
Inventories consist of raw materials, packaging materials (which include ingredients and supplies) and finished goods (which include finished juice in the bottling and canning operations). Inventories are valued at the lower of cost or market. We determine cost on the basis of the weighted average method. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are reserved or written off.
 
Revenue Recognition
 
The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. Revenue from sales of products is recognized upon shipment or delivery to customers, provided that persuasive evidence of sales arrangements exist, title and risk of loss have been transferred to the customers, the sales amounts are fixed and determinable and collection of the revenue is reasonably assured. Customers have no contractual right to return products. Historically, the Company has not had any returned products. Accordingly, no provision has been made for returnable goods. The Company is not required to rebate or credit a portion of the original fee if it subsequently reduces the price of its product and the distributor still has rights with respect to that product.
 
Shipping and Handling Costs
 
Shipping and handling amounts billed to customers in related sales transactions are included in sales revenues and shipping expenses incurred by the Company are reported as a component of selling expenses. The shipping and handling expenses of $306,149 and $279,812 for three months ended March 31, 2013 and 2012, respectively, are reported in the Consolidated Statement of Comprehensive Income as a component of selling expenses.
 
Foreign Currency and Other Comprehensive Income
 
The financial statements of the Company’s foreign subsidiaries are measured using the local currency as the functional currency; however, the functional currency and the reporting currency of the Company are the United States dollar (“USD”). Assets and liabilities of the Company’s foreign subsidiaries have been translated into USD using the exchange rate at the balance sheet date while equity accounts are translated using the historical exchange rate. The average exchange rate for the period has been used to translate revenues and expenses. Translation adjustments are reported separately and accumulated in a separate component of equity (cumulative translation adjustment).
 
Other comprehensive income for three months ended March 31, 2013 and 2012 represented foreign currency translation adjustments and were included in the consolidated statement of comprehensive income.
 
Income Taxes
 
We use the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

 
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
 
Earnings per share
 
Under ASC 260-10, Earnings Per Share, basic EPS excludes dilution for Common Stock equivalents and is calculated by dividing net income available to common stockholders by the weighted-average number of Common Stock outstanding for 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.
 
 
For the three month March 31,
 
 
2013
 
2012
 
NUMERATOR FOR BASIC AND DILUTED EPS
           
Net income (numerator for Diluted EPS)
$ 3,818,148       $ 1,919,158  
Net income allocated to Preferred Stock holders
  -  
 
    69,902  
Net income allocated to Common Stock holders
  3,818,148         1,849,256  
                 
DENOMINATORS FOR BASIC AND DILUTED EPS
               
Weighted average Common Stock outstanding
  26,661,499  
 
    25,690,402  
DENOMINATOR FOR BASIC EPS
  26,661,499         25,690,402  
                 
Add: Weighted average Preferred Stock, as if converted
            971,097  
Add: Weighted average stock warrants outstanding
  -  
 
 
 
 
DENOMINATOR FOR DILUTIVED EPS
  26,661,499  
 
    26,661,499  
                 
EPS - Basic
$ 0.14       $ 0.07  
EPS - Diluted
$ 0.14       $ 0.07  
 
The diluted earnings per share calculation for the three months ended March 31, 2013 and 2012 did not include the warrants to purchase up to 175,000 shares of common stock, because their effect was anti-dilutive.

 
   3.  Inventories
 
Inventories by major categories are summarized as follows:
             
   
March 31, 2013
   
December 31, 2012
 
Raw materials
  $ 973,657     $ 295,789  
Packaging materials
    868,757       677,350  
Finished goods
    5,739,812       6,305,052  
Total
  $ 7,582,226     $ 7,278,191  
  
   4.  Short-term Loan - Related Party
 
On February 18, 2013, SkyPeople (China) entered into a loan agreement with SkyPeople International Holdings Group Limited (the "Lender"). The Lender indirectly holds 50.2% interest in the Company. Mr. Yongke Xue ("Y. K. Xue"), the Chairman of the board of directors of the Company (the "Board"), and Mr. Hongke Xue, the newly elected Chief Executive Officer of the Company and director of the Board, indirectly and beneficially own 80.0% and 9.4% of equity interest in the Lender, respectively. Pursuant to the Agreement, the Lender agrees to extend to the Company a one-year unsecured term loan with a principal amount of $8.0 million at an interest rate of 6% per annum.
 
During first quarter of 2013, the Company received $4.0 million from the Lender. As of March 31, 2013, amount payable to SkyPeople International Holdings Group Limited was $4.0 million.
 
   5.  Short-term Bank Loans
 
Short-term bank loans consist of the following loans collateralized by assets of the Company:
 
   
March 31, 2013
   
December 31, 2012
 
Loan payable to Bank of Huludao, Suizhong branch due on June 28, 2013, bearing interest at 9.465% per annum, collateralized by the buildings, machinery and land use rights of Huludao Wonder
  $ 5,311,937     $ 5,297,907  
Loan payable to Xian Bank Jiankang Road Branch due on May 22, 2013, bearing interest at 8.528% per annum, guaranteed by Shaanxi Boai Pharmaceutical Technology Development Co., LTD.
    797,588       795,482  
Loan payable to China Construction Bank due on May 15, 2013, bearing interest at 6.56% per annum, collateralized by the buildings and machinery of SkyPeople (China).
    2,392,764       2,386,445  
Loan payable to Bank of Chongqing, due on March 20, 2013, bearing interest at 8.528% per annum, collateralized by the buildings and land use rights of SkyPeople (China).
    -       3,181,927  
Total
  $ 8,502,289     $ 11,661,761  
 
  
   6.  Related Party Transactions
 
The Company’s subsidiary sold fruit beverages to a related entity, Shaanxi Fullmart Convenient Chain Supermarket Co., Ltd. ("Fullmart") for approximately $481,000 and $3,000 for the three months ended March 31, 2013 and 2012, respectively. The accounts receivable balances were approximately $731,000 and $624,000 as of March 31, 2013 and December 31, 2012, respectively. Fullmart is a company indirectly owned by our Chairman, Mr. Yongke Xue.
 
   7.  Commitments and Contingencies
 
On April 20, 2011, plaintiff Paul Kubala (on behalf of his minor child N.K.) filed a securities fraud class action lawsuit in the United States District Court, Southern District of New York against the Company, certain of its individual officers and/or directors, and Rodman & Renshaw, LLC, the underwriter of the Company’s follow-on public offering consummated in August 2010, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. On June 20, 2011, plaintiff Benjamin Padnos filed a securities fraud class action lawsuit in the United States District Court, Southern District of New York against the Company, certain of its current and former officers and/or directors, the Company’s former independent auditors Child Van Wagner & Bradshaw, PLLC and BDO Limited, and Rodman & Renshaw, LLC, the underwriter of the Company’s follow-on public offering consummated in August 2010, alleging violations of Sections10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. On August 30, 2011, the Court consolidated the foregoing two actions and appointed Zachary Lewy as lead plaintiff. On September 30, 2011, pursuant to the Court’s order, Lead Plaintiff filed a consolidated complaint, which names the Company, Rodman & Renshaw, LLC, BDO Limited, Child Van Wagoner & Bradshaw PLLC and certain of the Company’s current and former directors and/or officers and majority shareholders as defendants, and alleges violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act, and the rules promulgated thereunder. The Consolidated Complaint seeks, among other things, compensatory damages, and reasonable costs and expenses incurred in the action. On December 21, 2011, the Company and certain of the individual defendants filed a motion to dismiss the Consolidated Complaint. On May 3, 2012, Lead Plaintiff voluntarily dismissed the claims against BDO Limited and Child Van Wagoner & Bradshaw PLLC. On September 10, 2012, the Court granted in part and denied in part the Company’s motion to dismiss the Consolidated Complaint. On January 11, 2013, defendant Rodman & Renshaw LLC filed for Chapter 11 bankruptcy protection, and, on January 18, 2013, the court imposed an automatic stay on Plaintiffs claims against Rodman pursuant to Section 326(a) of the Bankruptcy Code.  The Company believes the allegations against the Company are baseless and is contesting the case vigorously.  The Company has made no accrual for any potential contingencies.
 
On August 5, 2011, we received a shareholder demand letter from counsel for a purported shareholder. The letter was addressed to the Company’s Board of Directors and requested the Board of Directors to take a number of actions in order to repair the alleged “harm” caused to the Company by certain of its directors and officers, as well as its current and former auditors. The Board of Directors has been reviewing this shareholder demand letter and considering appropriate action that the Company should undertake. On November 7, 2011, Baosheng Lu and Tao Wang were appointed to serve as directors of the board and the independent directors of the board appointed them to serve as the members of the evaluation committee. The evaluation committee is in the process of evaluating the actions demanded by the shareholder and retaining counsel to respond to the shareholder inquiry. No formal shareholder derivative complaint has been filed to date on behalf of the Company. The Company believes any such suit would be without merit and would vigorously defend its position in this regard.  The Company has made no accrual for any potential contingencies.
 
On July 8, 2011, the Company brought suit against Absaroka Capital Management, LLC (“Absaroka”) and its principal Kevin Barnes in the U.S. District Court of Wyoming under the caption SkyPeople, Inc. v. Absaroka Capital Management, LLC, et al., No. 11-cv-238. Absaroka is a purported independent investment analyst who, while holding a short position in our stock, issued a so-called research report (the “Report”) asserting, inter alia, that the Company had inflated revenues. We brought suit alleging three causes of action for libel per se, libel per quod and intentional interference with a prospective business relationship. In or around November, 2011, Absaroka and Barnes brought counter claims against us for defamation per se, defamation per quod and abuse of process. On June 22, 2012, the Company and Absaroka reached an out-of-court settlement of litigation in the U.S. District Court for the District of Wyoming. The settlement includes a dismissal of all claims and counterclaims filed by the Parties, with neither party admitting any wrongdoing or liability. As part of the settlement agreement, Absaroka has agreed to remove the Report from its website, undertake best efforts to remove the Report from third-party sites, and refrain from issuing any further articles, public statements, or research reports concerning the Company.
 
Other than the above, from time to time we may be a party to various litigation proceedings arising in the ordinary course of our business, none of which, in the opinion of management, is likely to have a material adverse effect on our financial condition or results of operations.
 
   8.  Concentrations
 
(1)  
Concentration of customers
 
Sales to five largest customers accounted for approximately 22% and 28% of our net sales during the three months ended March 31, 2013 and 2012, respectively. No single customer represented over 10% of total sales for the three months ended March 31, 2013 and 2012.
 
(2)  
Concentration of suppliers
 
Our top two suppliers accounted for 18.4% and 10.8% of our purchases for the three months ended March 31, 2013, no other single supplier accounted for over 10% of our purchase. During the first quarter of 2012, top two of our suppliers accounted for 25.0% and 17.8% of our purchases, no other single supplier accounted for over 10% of our purchase.
 
   9.  Segment Reporting
 
The Company operates in six segments: concentrated apple juice and apple aroma, concentrated kiwifruit juice and kiwifruit puree, concentrated pear juice, fruit juice beverages and fresh fruits and vegetables, and others. Our concentrated apple juice and apple aroma is primarily produced by the Company’s Huludao Wonder factory; concentrated pear juice is primarily produced by the Company’s Jiangyang factory. However, as the Company use the same production line to manufacture concentrated apple juice and concentrated pear juice. In addition, both Shaanxi Province, where the factory of Jianyang factory is located, and Liaoning Province, where the factory of Huludao Wonder is located, are rich in fresh apple and pear supplies, Jinagyang factory also produces concentrated apple juice and Huludao Wonder factory also produces concentrated pear juice when necessary. Concentrated kiwifruit juice and kiwifruit puree is primarily produced by the Company’s Qiyiwangguo factory, and fruit juice beverages is primarily produced by the Company’s Qiyiwangguo factory. The Company’s other products include fructose, concentrated turnjujube juice, and other by products, such as kiwifruit seeds.


Concentrated fruit juice is used as a basic ingredient for manufacturing juice drinks and as an additive to fruit wine and fruit jam, cosmetics and medicines. The Company sells its concentrated fruit juice to domestic customers and exported directly or via distributors. The Company believes that its main export markets are the United States, the European Union, South Korea, Russia and the Middle East to North America, Europe, Russia, South Korea and the Middle East.  The Company sells its Hedetang branded bottled fruit beverages domestically primarily to supermarkets in the PRC. The Company sells its fresh fruit and vegetables to supermarkets and whole sellers in the PRC.
 
Some of these product segments might never individually meet the quantitative thresholds for determining reportable segments and we determine the reportable segments based on the discrete financial information provided to the chief operating decision maker. The chief operating decision maker evaluates the results of each segment in assessing performance and allocating resources among the segments. Since there is an overlap of services provided and products manufactured between different subsidiaries of the Company, the Company does not allocate operating expenses and assets based on the product segments. Therefore, operating expenses and assets information by segment are not presented.  Segment profit represents the gross profit of each reportable segment.
 
For the Three Months
Ended March 31, 2013
 
Concentrated apple juice and apple aroma
   
Concentrated kiwifruit juice and kiwifruit puree
   
Concentrated pear juice
   
Fruit juice beverages
   
Fresh fruits and vegetables
   
Total
 
Reportable segment revenue
  $ 733     $ 3,473     $ 5,184     $ 8,647     $ 798     $ 18,835  
Inter-segment revenue
    (97 )     (54 )     (11 )     (62 )     -       (224 )
Revenue from external customers
    636       3,419       5,173       8,585       798       18,611  
Segment gross profit
  $ 31     $ 2,114     $ 1,599     $ 3,512     $ 385     $ 7,641  
 
For the Three Months
Ended March 31, 2012
 
Concentrated apple juice and apple aroma
   
Concentrated kiwifruit juice and kiwifruit puree
   
Concentrated pear juice
   
Fruit juice beverages
   
Fresh fruits and vegetables
   
Total
 
Reportable segment revenue
  $ 3,226     $ 3,952     $ 4,829     $ 3,370     $ 588     $ 15,965  
Inter-segment revenue
    (718 )     (191 )     (62 )     -       -       (971 )
Revenue from external customers
    2,508       3,761       4,767       3,370       588       14,994  
Segment gross profit
  $ 414     $ 1,687     $ 1,534     $ 855     $ 296     $ 4,786  
 
 
The following table reconciles reportable segment profit to the Company’s condensed consolidated income before income tax provision for the three months ended March 31, 2013 and 2012:
 
    Three months ended March 31,  
   
2013
   
2012
 
Segment profit
  $ 7,640,898     $ 4,785,999  
Unallocated amounts:
               
Operating expenses
    2,145,702       2,145,623  
Other (income)/expenses
    (145,530 )     (347,413 )
Income before tax provision
  $ 5,640,726     $ 2,987,789  
 
   10.  Subsequent Events
 
Investment/Service Agreement with Mei County National Kiwi Fruit Wholesale Trading Center
 
On April 3, 2013, SkyPeople (China) entered into an Investment Agreement (the "Agreement") with the Managing Committee of Mei County National Kiwi Fruit Wholesale Trading Center (the "Committee").  The Committee has been authorized by the People’s Government of Mei County to be in charge of the construction and administration of the Mei County National Kiwi Fruit Wholesale Trading Center (the “Trading Center”).

Under the Agreement, the parties agreed to invest and establish a kiwi fruit comprehensive deep processing zone and kiwi fruit and fruit-related materials trading zone in Yangjia Village, Changxing Town of Mei County with a total planned area of total planned area of 286 mu (approximately 47 acres) (the “Project”).

Pursuant to the Agreement, the Company will be responsible for the construction and financing of the Project with a total investment of RMB 445.6 million (approximately $ 71.9 million) in buildings and equipment.  In addition, the Company agreed to pay for the land use rights for the Project land a fee of RMB 0.3 million per mu.  The Committee is responsible for financing and constructing the basic infrastructure surrounding the Project, such as the main water supply, main water drainage, natural gas, electricity, sewage, access roads to the Project, natural gas and communications networks.

On April 19, 2013, the Company established SkyPeople Juice Group (Mei County) Kiwi Fruit and Farm Products Trading Market Co., Ltd., with the scope of business to include preliminary processing of agricultural and subsidiary products; establishment of trading market, etc.

On April 19, 2013, the Company also established Shaanxi Guo Wei Mei Kiwi Deep Processing Co., Ltd. with the scope of business to include producing kiwi fruit juice, kiwi puree and cider beverages, etc.

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.
 
DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS
 
The following discussion and analysis of the condensed consolidated financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes in Item I above and with the audited consolidated financial statements and notes, and with the information under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed in this report and under the heading “Risk Factors” in our most recent Annual Report on Form 10-K.
 
Overview of Our Business
 
We are engaged in the production and sales of fruit juice concentrates (including fruit purees, concentrated fruit purees and concentrated fruit juices), fruit beverages (including fruit juice beverages and fruit cider beverages), and other fruit related products (including organic and non-organic fresh fruits) in and from the PRC. Our fruit juice concentrates, which include apple, pear and kiwifruit concentrates, are sold to domestic customers and exported directly or via distributors. We sell our Hedetang branded bottled fruit beverages domestically primarily to supermarkets in the PRC. For the three months ended March 31, 2013, sales of our fruit concentrates, fruit beverages, fresh fruits and other fruit related products represented 51%, 44% and 5% of our revenue, respectively, compared to 74%, 23% and 3%, respectively, for the same period of 2012.
 
We export our products as well as sell them domestically. We sell our products either through distributors with good credit or to end users directly. We believe that our main export markets are the Asia, North America, Europe, Russia and the Middle East. We sell our other fruit related products to domestic customers.
 
During the first quarter of 2013, we exported our Hedetang-branded fruit juice beverages to Mongolia and Canada. We currently market our Hedetang brand fruit beverages in only certain regions of the PRC. We plan to expand the market presence of Hedetang over a broader geographic area in the PRC. In particular, we plan to expand our glass bottle production line to produce higher margin portable fruit juice beverages targeting consumers in more populated Chinese cities. Currently we produce six flavors of fruit beverages in 280 ml glass bottles, 418 ml glass and 500 ml glass bottles and BIB package, including apple juice, pear juice, kiwifruit juice, mulberry juice, kiwifruit cider and mulberry cider.  We currently sell our fruit beverages to over 100 distributors and more than 20,000 retail stores in approximately 20 provinces. Our products are sold through distributors in stores such as Hualian Supermarket in Beijing, RT-Mart in Shenyang, Carrefour in Chongqing and Shenyang and Lianhua Supermarket in Shanghai, etc.
 
We plan to continue to focus on creating new products with high margins to supplement our current product offering.

 
We believe that continuous investment in research and development is a key component to being a leader in fruit juice concentrate and fruit beverage quality. As of March 31, 2013, we had an internal research and development team of approximately 30 employees, and we retain external experts and research institutions for additional consultation when necessary. In three months ended March 31, 2013 and 2012, our research and development expenses were $98,622 and $142,685, respectively. As part of our research and development efforts, we routinely make contractual arrangements with outside research R&D institutes. Currently, we have four new R&D contracts with outside institutes. The following table sets forth details of the four contracts that are currently in effect.
 
 
 
R&D expenses per year
 
 
Period of validity
 
Project
Research Institute
 
RMB
 
USD
 
 
From
 
To
 
 
Shaanxi Normal University
    2,705,760     431,616  
 
March 12, 2013
 
March 12, 2015
 
Development of composite fruit juice beverages
Northwest Agriculture & Forestry University
    3,224,640     514,387  
 
March 5, 2013
 
March 5, 2015
 
Beverages with specific functions.
Northwest Agriculture & Forestry University
    3,084,000     491,952    
March 20, 2013
 
March 20, 2015
 
Development of kiwi fruit products
Northwest Agriculture & Forestry University
    2,325,600     370,974    
April 5, 2013
 
April 5, 2015
 
Distill specific substance from fruit draff
Total
    11,340,000     1,808,930  
 
 
 
 
 
 
 
Our business is highly seasonal and can be greatly affected by weather because of the seasonal nature in the growing and harvesting of fruits and vegetables. Our core products are apple, pear and kiwifruit juice concentrates, which are produced from July or August to April of the following year. The squeezing season for (i) apples is from August to January or February; (ii) pears is from July or August until April of next year; and (iii) kiwifruit is from September through January. Typically, a substantial portion of our revenues is earned during our first and fourth quarters. To minimize the seasonality of our business, we make continued efforts in identifying new products with harvesting seasons complementary to our current product mix. Our goal is to lengthen our squeezing season, thus increasing our annual production of fruit juice concentrates and fruit beverages. In the first quarter of 2009, we introduced mulberry and kiwifruit cider beverages in the Chinese market. Unlike fruit juice concentrates, which can only be produced during the squeezing season, such fruit beverages are made out of fruit juice concentrates and can be produced and sold in all seasons. With continuous efforts in marketing of our beverages in domestic market, we believe that our seasonality will be reduced.
 
Fresh fruits are the primary raw materials needed for the production of our products. Our raw materials mainly consist of apples, pears and kiwifruits. Other raw materials used in our business include pectic enzyme, amylase, auxiliary power fuels and other power sources such as coal, electricity and water.

 
We purchase raw materials from local markets and fruit growers that deliver directly to our plants. We have implemented a fruit-purchasing program in areas surrounding our factories. In addition, we organize purchasing centers in rich fruit production areas, helping farmers deliver fruit to our purchasing agents easily and in a timely manner. We are then able to deliver the fruit directly to our factory for production. We have assisted local farmers in their development of kiwifruit fields to help ensure a high quality product throughout the production channel. Our raw material supply chain is highly fragmented and raw fruit prices are highly volatile in China. Fruit concentrate and fruit juice beverage companies generally do not enter into purchasing agreements. In addition to raw materials, we purchase various ingredients and packaging materials such as sweeteners, glass and plastic bottles, cans and packing barrels. We generally purchase our materials or supplies from multiple suppliers.
 
Shaanxi and Liaoning Provinces, where our manufacturing facilities are located, are large fruit producing provinces. We own and operate four manufacturing facilities in the PRC, all of which are strategically located near fruit growing centers so that we can better preserve the freshness of the fruits and lower our transportation costs. To take advantage of economies of scale and to enhance our production efficiency, generally, each of our manufacturing facilities has a focus on products made from one particular fruit according to the proximity of such manufacturing to the sources of supply for that fruit.  Our kiwifruit processing facilities are located in Zhouzhi County of Shaanxi Province, which has the largest planting area of apples and kiwifruit in the PRC. Our pear processing facilities are located in Shaanxi Province, which is the main pear-producing province in the PRC. Our apple processing facilities are located in Liaoning Province, a region that abounds with high acidity apples. As we use the same production line for concentrated apple juice and concentrated pear juice and both Shaanxi Province and Liaoning Province are rich in fresh apple and pear production, our Liaoning facilities also produced concentrated apple juice and our Shaanxi Province facilities also produced concentrated apple juice based on customer need. We believe that these regions provide adequate supply of raw materials for our production needs in the foreseeable future.
 
On August 30, 2010, we closed the public offering of 5,181,285 shares of our Common Stock at a price of $5.00 per share for approximately $25.9 million. We received an aggregate of approximately $24 million as net proceeds after deducting underwriting discounts and commissions and offering expenses. As of March 31, 2013, we had spent approximately $11 million on various capital projects in Huludao Wonder as described in projects (4) and (5) below. The following table presents the capital projects on which we currently plan to use the proceeds from this offering. We review these projects and capital expenditures on a quarterly basis based on the market conditions and associated costs of these projects.

 
Capital Wonder Projects
 
Subsidiary
 
No.
 
Priority Projects
 
Progress
 
Estimated capital expenditure
(in Millions)
SkyPeople Suizhong
 
(1)
 
Construction of a refrigeration storage unit for the storage of concentrated fruit juices and fresh fruits and vegetables
 
The design of the facility has been completed.
Construction has started during the third quarter of 2012. The Company suspended the construction of the refrigeration storage unit to apply land use right certificate from local government. It is expected that the certificate of land use right will be granted to the Company in the second quarter of 2013.
 
$
2.7
Huludao Wonder
 
(2)
 
Construction of concentrated fruit juice mixing center
 
The design of the facility has been completed.
The first stage of construction has started. During the fourth quarter of 2012, the civil work has been completed. The Company is currently in the process of purchasing equipment. It is expected the entire project will be completed within 2013.
   
1.9
Huludao Wonder
 
(3)
 
Construction of a 30 ton/hour comprehensive fruits and vegetables processing line
 
The construction of this 30 ton/hour comprehensive fruits and vegetables processing line was delayed. The installation and adjustment of machinery has been completed during the fourth quarter of 2012. The newly installed machinery are under acceptance check.
   
3
Huludao Wonder
 
(4)
 
Construction of a fruit juice beverage production line of 6,000 bottles/hour
 
The construction of the production line was completed and the production line commenced operation in the second quarter of 2012.
   
3
Huludao Wonder
 
(5)
 
Environmental project (waste water treatment facility for concentrated apple juice production line)
 
The construction of the environmental project was completed in the third quarter of 2012.
   
8
Total Capital Expenditure
             
$
18.6
 
 
(1)  
Our initial plan was to construct both the refrigeration storage (see Project (1) above) and fruit juice mixing center (see Project (2) above) in Huludao, Liaoning Province, for which the original estimated total capital expenditure was $4.4 million. We initially planned to start the construction of the refrigeration storage unit and a concentrated fruit juice-mixing center in the fourth quarter of 2011. However, the construction of the refrigeration storage unit has been delayed due to a change of plan. Management concluded that it is in the best interest of the Company to build the refrigeration storage unit in Suizhong, Liaoning Province, which is in close geographic proximity of Huludao Wonder in Liaoning Province. The total estimated capital expenditure for Projects (1) and (2) based on the changed plan is expected to be $4.6 million. The Company is now in the process of evaluating the new plan and in negotiation with the local government to acquire land use right for approximately 7.8 acres for consideration of approximately$290,000 per acre. In April 2012, the Company paid partial consideration of approximately $1,200,000. As of the date of this report, the certificate of land use right has not been granted to the Company. The Company suspended the construction of the refrigeration storage unit to apply land use right certificate from local government. It is expected that the certificate of land use right will be granted to the Company in the second quarter of 2013.
 
(2)  
The fruit juice-mixing center will be built in Huludao Wonder. The design of the fruit juice-mixing center has been completed. The first stage of construction has started. During the fourth quarter of 2012, the civil work has been completed. The Company is currently in the process of purchasing equipment. It is expected the entire project will be completed within 2013.
 
(3)  
Our initial plan was to construct a 50 ton/hour concentrated apple juice production line in Huludao Wonder. We later decided to cancel the plan due to certain amendment to the Catalogue of Industry Structure Adjustment effective in June 2011, which classified concentrated apple juice business in the category of Restricted Industry. To avoid exposure to potential government restrictions on the expansion of this industry by, among other things, putting limitations on the increase in production capacity, increasing the product quality standard, reducing government financial support, we decided to change our existing 30 ton/hour concentrated apple juice line into a 30 ton/hour comprehensive fruits and vegetables processing line by adding additional equipment and machinery. The 30 ton/hour comprehensive fruits and vegetables processing line is expected to process a variety of fruits and vegetables (including apple, pear, and other fruits and vegetables) into juices. The estimated investment for this project is $3.0 million. We believe that this project could provide us more flexibility. The newly installed machinery are under acceptance check.
 
(4)  
We started the construction of infrastructure for the fruit juice beverage production line on September 28, 2010. The construction of a fruit juice beverage production line with maximum production capacity of 6,000 bottles per hour has been substantially finished. Trail operation of the new production line has been conducted. On April 25, 2012, “China Food Production License” for production of Beverage (including fruit juice and vegetable juice) has been granted to Huludao Wonder by Liaoning Bureau of Quality and Technical Supervision. Huludao Wonder commenced operation of this new production line on April 28, 2012.
 
(5)  
The environmental project mainly consists of a wastewater processing facility that is required in our production of fruit and vegetable juice concentrates. The construction of the environmental project (waste water treatment facility for concentrated apple juice production line) has been completed in the third quarter of 2012.
 
 
Shaanxi Qiyiwangguo Projects
 
We previously identified several projects for our Shaanxi Qiyiwangguo factory, which we expected to finance by using our operating cash flow. These projects included a 24,000 PET bottle/hour fruit juice beverage aseptic cold-filling line, and a PET bottle blowing machine system. Based on the current market conditions and other potential opportunities, management has decided to delay these projects to a future date when appropriate.
 
Other Projects
 
Investment/Service Agreement with Yidu Municipal People’s Government
 
On October 29, 2012, SkyPeople (China) entered into an investment/service agreement (the “Investment Agreement”) with Yidu Municipal People’s Government in Hubei Province of China.
 
Under the Investment Agreement, the parties agree to invest and establish an orange comprehensive deep processing zone in Yidu.
 
The Company will be responsible for the establishment, construction and financing of the project with a total investment of RMB 300 million (approximately $48 million), in fixed assets and the purchase of land use rights, while Yidu government agrees to provide a parcel of land for the project that is approximately 280 mu in size located at Gaobazhou Town of Yidu for a fee payable by the Company. The consideration for transferring the land use right for the project land shall be RMB 0.3 million per mu.
 
The main scope of the Yidu project includes the establishment of:
 
1.  one modern orange distribution and sales center (the “distribution center”);
 
2.  one orange comprehensive utilization deep processing zone (the “deep processing zone”), including:
 
      a)     one 45 ton/hour concentrated orange juice and byproduct deep processing production line;
 
      b)     one bottled juice drink production line with a capacity to produce 6,000 glass bottles per hour;
 
     c)     one storage freezer facility with a capacity to store 20,000 tons of concentrated orange juice; and
 
     d)     general purpose facilities within the zone, office space, general research and development facilities, service area, living quarters and other ancillary support areas
 
3.
one research and development center for orange varietal improvement and engineering technology (the “R&D center”); and
 
4.  one standardized orange plantation (the “orange plantation”).
 
The total amount of RMB 300 million (approximately $48 million) will mainly be used to establish the distribution center and the deep processing zone on the project land of approximately 280 mu. SkyPeople and Yidu Municipal People’s Government agreed to discuss the investment amount and location for establishing the R&D center and the orange plantation in the future.
 
Yidu Municipal People’s Government is in the process of demolition buildings on project land. The Company is actively working with various bodies of Yidu Municipal People's Government making preparations for the start of the project.

 
Investment/Service Agreement with Mei County National Kiwi Fruit Wholesale Trading Center
 
On April 3, 2013, SkyPeople (China) entered into an Investment Agreement (the "Agreement") with the Managing Committee of Mei County National Kiwi Fruit Wholesale Trading Center (the "Committee").  The Committee has been authorized by the People’s Government of Mei County to be in charge of the construction and administration of the Mei County National Kiwi Fruit Wholesale Trading Center (the “Trading Center”).  

Under the Agreement, the parties agreed to invest and establish a kiwi fruit comprehensive deep processing zone and kiwi fruit and fruit-related materials trading zone in Yangjia Village, Changxing Town of Mei County with a total planned area of total planned area of 286 mu (approximately 47 acres) (the “Project”).  

Pursuant to the Agreement, the Company will be responsible for the construction and financing of the Project with a total investment of RMB 445.6 million (approximately $ 71.9 million) in buildings and equipment.  In addition, the Company agreed to pay for the land use rights for the Project land a fee of RMB 0.3 million per mu.  The Committee is responsible for financing and constructing the basic infrastructure surrounding the Project, such as the main water supply, main water drainage, natural gas, electricity, sewage, access roads to the Project, natural gas and communications networks.

Results of Operations
 
Comparison of Three Months ended March 31, 2013 and 2012:
 
Revenue
 
The following table presents our consolidated revenues for each of our main products for the three months ended March 31, 2013 and 2012, respectively (in thousands):
 
   
Three month ended March 31,
   
Change
 
   
2013
   
2012
   
Amount
   
%
 
Concentrated apple juice and apple aroma
  $ 636     $ 2,508     $ (1,872 )     (75 %)
Concentrated kiwifruit juice and kiwifruit puree
    3,419       3,761       (342 )     (9 %)
Concentrated pear juice
    5,173       4,767       406       9 %
Fruit juice beverages
    8,585       3,370       5,215       155 %
Fresh fruits and vegetables
    798       588       210       36 %
Total
  $ 18,611     $ 14,994     $ 3,617       24 %
 
Our gross revenue for the three months ended March 31, 2013 was $18.6 million, an increase of $3.6 million, or 24%, from $15.0 million for the same period of 2012. This increase was primarily due to an increase in sales of fruit juice beverages, concentrated pear juice and fresh fruits and vegetables, which was partially offset by a decrease in revenue generated from sales of the apple-related products and kiwi-related products.
 
Sales from apple related products decreased by $1.9 million, or 75%, to $0.6 million for the three months ended March 31, 2013, from $2.5 million for the same period of 2012. During the first quarter of 2013, the Company sold approximately 461 tons of concentrated apple juice decreased from approximately 1,200 tons of concentrated apple juice sold in the same period of 2012. Such decrease was coupled with a decrease in unit price of concentrated apple juice.

 
Sales from concentrated kiwifruit juice and kiwifruit puree were $3.4 million for the first quarter of 2013, a decrease of $0.4 million, or 9%, from $3.8 million in the same quarter of 2012, primarily due to decrease in both amount sold and unit price. During the three months ended March 31, 2013 and 2012, the Company sold approximately 2,800 and 2,900 tons of kiwi-related products, respectively.
 
Sales of concentrated pear juice increased to $5.2 million in the first quarter of 2013, an increase of $0.4 million, or 9%, from $4.8 million in the same quarter of 2012. During the first quarter of 2013, the unit selling price of concentrated pear juice decreased, which was partially offset by a increase of the amount of pear juice sold. During the first quarter of 2013 and 2012, the Company sold 3,400 and 2,900 tons of concentrated pear juice, respectively.
 
Revenue from our fruit juice beverages in the PRC increased to $8.6 million, an increase of $5.2 million or 155%, from $3.4 million for the same period of 2012, primarily due to bigger market share gained from our continuous efforts of expanding sales channel.
 
Revenue from our fresh fruits and vegetables in the PRC were $0.8 and $0.6 million for the first quarter of 2013 and 2012, respectively.
 
Gross Margin
 
The following table presents the consolidated gross profit of each of our main products and the consolidated gross profit margin, which is gross profit as a percentage of the related revenues, for the three months ended March 31, 2013 and 2012, respectively (in thousands for the gross profit):
 
    Three months ended March 31,  
   
2013
   
2012
 
   
Gross profit
   
Gross margin
   
Gross profit
   
Gross margin
 
Concentrated apple juice
and apple aroma
  $ 31       5 %   $ 414       16 %
Concentrated kiwifruit
juice and kiwifruit puree
    2,114       62 %     1,687       45 %
Concentrated pear juice
    1,599       31 %     1,534       32 %
Fruit juice beverages
    3,512       41 %     855       25 %
Fresh fruits and vegetables
    385       48 %     296       50 %
Total/Overall (for gross margin)
  $ 7,641       41 %   $ 4,786       32 %
 
The consolidated gross profit for the three months ended March 31, 2013 was $7.6 million, an increase of $2.8 million, or 60%, from $4.8 million for the same period of 2013, primarily due to adjustment of products mix.
 
During the first quarter of 2013, revenue generated from sales of fruit juice beverages accounted for 46% of total revenue, as compare to 22% during the same period of 2012. The gross margin of fruit juice beverages were 41% and 25% for first quarter of 2013 and 2012, respectively.
 
The Company sold 75% less concentrated apple juice during first quarter of 2013 as compare to same period of 2012. The gross margin of concentrated apple juice for the first quarter of 2013 and 2012 were 5% and 16%, respectively.

 
The consolidated gross profit margin for the three months ended March 31, 2013 was 41%, an increase of 9%, from 32% for the same period of 2012, primarily due to an increase in gross margin of all of the product lines, except concentrated apple juice, concentrated pear juice and fresh fruits and vegetable, which had decreased.
 
The gross margin of concentrated the apple juice and apple aroma decreased to 5% for the three months ended March 31, 2013 from 16% for the same period of 2012, primarily due to significantly lower selling price of concentrated apple juice.
 
The gross profit margin of the concentrated kiwifruit juice and kiwifruit puree increased from 45% for the three months ended March 31, 2012 to 62% for the same period of 2013, primarily due to lower cost of fresh kiwi purchased in three months ended March 31, 2013 as compared to the same period of 2012.
 
The gross margin of the concentrated pear juice decreased slightly from 32% to 31% for first quarter of 2012 to 2013.
 
The gross profit margin of our fruit juice beverages increased from 25% for the three months ended March 31, 2012, to 41% for the same period of 2013. The increase of gross margin of fruit juice beverages was primarily due to higher selling price our products.
 
Gross margin for the fruits and vegetables was 48% for the first quarter of 2013, similar to the gross profit margin of 50% for the same period of 2012.
 
Operating Expenses
 
The following table presents our consolidated operating expenses and operating expenses as a percentage of revenue for the three months ended March 31, 2013 and 2012, respectively:
 
  Three months ended March 31,
 
2013
 
2012
 
Amount
 
% of revenue
 
Amount
 
% of revenue
General and administrative
$
1,305,914
 
7%
 
$
1,477,604
 
10%
Selling expenses
 
741,166
 
4%
   
525,334
 
4%
Research and development
 
98,622
 
1%
   
142,685
 
1%
Total operating expenses
$
2,145,702
 
12%
 
$
2,145,623
 
15%
 
Our operating expenses consist of general and administrative expenses, selling expenses and research and development expenses. Operating expenses were at the same level for the three months ended March 31, 2013 compare to the corresponding period in 2012.
 
General and administrative expenses decreased by $171,690, or 12%, to $1,305,914 for the three months ended March 31, 2013, from $1,477,604 for the same period of 2012. The decrease in general and administrative expenses was mainly due to decreased amount of legal fees related to our current pending litigation.
 
Selling expenses increased by $215,832, or 41%, to $741,166 for the three months ended March 31, 2013 from $525,334 for the same period of 2012, mainly due to an increase in the payroll and related expenses as a result of an increase in our headcounts to the handle the increased sales work.

 
Research and development expenses decreased by $44,063, or 31%, to $98,622 for the three months ended March 31, 2013, from $142,685 for the same periods of fiscal 2012. Former research and development agreements the Company had with various institutions expired in January 2013. In 2013, the Company entered into four research and development agreements with research institutions. Thus the research and development expenses decreased in first quarter of 2013 as compared to same period of 2012.
 
Income from Operations
 
Income from operations increased to $5,495,196, an increase of 108% or $2,854,820, for the three months ended March 31, 2013 from $2,640,376 for the same period of 2012. The increase in the income from operations was mainly due to an increase in both revenue as well as gross margin and increase in the operating expenses.
 
Other Income (Expense)
 
Other income, net was $145,530 for the three months ended March 31, 2013, a decrease of $201,883 or 58% from other income of $347,413 in the same period of 2012, primarily due to a decrease of $82,530 or 19% in the subsidy income and $122,211 or 79% increase in the interest expense. The subsidy income was provided with respect to the value added tax rebates on our exports in the first quarters of 2013 and 2012.
 
Income Tax
 
Our provision for income taxes was $1,483,865 and $928,380 for the three months ended March 31, 2013 and 2012, respectively, an increase of $555,485, or 60%. The increase in tax provision was due to more income before taxes in the first quarter of 2013. Our consolidated income tax rates were 26% and 31% for the three months ended March 31, 2013 and 2012, respectively.
 
Net Income
 
Net income was $4,156,861 for the three months ended March 31, 2013, an increase of $2,097,452, or 102%, from $2,059,409 for same period of 2012, primarily due to the 60% increase in gross profit, which was partially offset by 58% decrease in other income, as previously discussed.
 
Noncontrolling Interests
 
As of March 31, 2013, SkyPeople (China) held a 91.15% interest in Shaanxi Qiyiwangguo and Pacific held a 99.78% interest in SkyPeople (China). Net income attributable to noncontrolling interests, which is deducted from our net income, was $338,713 and $140,251 for the three months ended March 31, 2013 and 2012, respectively. The increase in the net income attributable to noncontrolling interests was mainly due to the increase in the net income generated from SkyPeople (China).
 
Net Income Attributable to SkyPeople Fruit Juice, Inc.
 
Net income attributable to the Company was $3,818,148 for the three months ended March 31, 2013, a $1,898,990 or 99% increase from $1,919,158 for the same period of 2012 for the reasons described above.

 
Liquidity and Capital Resources
 
As of March 31, 2013, we had cash, cash equivalents and restricted cash of $91,320,803, an increase of $13,760,525, or 18%, from $77,560,278 as of December 31, 2012. We expect the projected cash flows from operation, anticipated cash receipts, cash on hand, and trade credit to provide necessary capital to meet our projected operating cash requirements at least for the next 12 months, which does not take into account any potential expenditures related to the potential expansion of our current production capacity.
 
Our working capital has historically been generated from our operating cash flows, advances from our customers and loans from bank facilities. Our working capital was $108,094,334 as of March 31, 2013, an increase of $5,225,775, from working capital of $102,868,559 as of December 31, 2012, mainly due to an increase in cash. During the first quarter of 2013, our operating activities generated net cash inflow of $13,192,951, a decrease of $1,572,562 or 11% from $14,765,513, net cash inflow from operating activities of same period of 2012.
 
During the three months ended March 31, 2013, our investing activities used net cash of $438,292, including $428,692 of additions to property, plant and equipment as compared to $1,334,229 in the same period of 2012.
 
During the three months ended March 31, 2013, our financing activities generated net cash inflow of $814,526, as compare to $2,031,301 in the same period of 2012.
 
On February 18, 2013, SkyPeople (China) entered into a loan agreement with SkyPeople International Holdings Group Limited (the "Lender"). The Lender indirectly holds 50.2% interest in the Company. Mr. Yongke Xue ("Y. K. Xue"), the Chairman of the board of directors of the Company (the "Board"), and Mr. Hongke Xue, the newly elected Chief Executive Officer of the Company and director of the Board, indirectly and beneficially own 80.0% and 9.4% of equity interest in the Lender, respectively. Pursuant to the Agreement, the Lender agrees to extend to the Company a one-year unsecured term loan with a principal amount of $8.0 million at an interest rate of 6% per annum. During first quarter of 2013, the Company received $4.0 million from the Lender.
 
During the first quarter of 2013, the Company repaid $3,185,474 bank loans; comparably, during the same period of 2012, the Company borrowed $3,170,879 and repaid $1,139,578 bank loans.
 
Off-balance sheet arrangements
 
As of March 31, 2013, we did not have any off-balance sheet arrangements.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable.


Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures
 
An evaluation was carried out by the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2013, the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2013, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures were completed, our disclosure controls and procedures were effective in providing reasonable assurance of achieving their objectives for the three months ended March 31, 2013.
 
Changes in Internal Controls Over Financial Reporting
 
There have been no changes to the Company’s internal control over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

 
PART II.  OTHER INFORMATION
 
Item 1.  
Legal Proceedings
 
On April 20, 2011, plaintiff Paul Kubala (on behalf of his minor child N.K.) filed a securities fraud class action lawsuit in the United States District Court, Southern District of New York against the Company, certain of its individual officers and/or directors, and Rodman & Renshaw, LLC, the underwriter of the Company’s follow-on public offering consummated in August 2010, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. On June 20, 2011, plaintiff Benjamin Padnos filed a securities fraud class action lawsuit in the United States District Court, Southern District of New York against the Company, certain of its current and former officers and/or directors, the Company’s former independent auditors Child Van Wagner & Bradshaw, PLLC and BDO Limited, and Rodman & Renshaw, LLC, the underwriter of the Company’s follow-on public offering consummated in August 2010, alleging violations of Sections10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. On August 30, 2011, the Court consolidated the foregoing two actions and appointed Zachary Lewy as lead plaintiff. On September 30, 2011, pursuant to the Court’s order, Lead Plaintiff filed a consolidated complaint, which names the Company, Rodman & Renshaw, LLC, BDO Limited, Child Van Wagoner & Bradshaw PLLC and certain of the Company’s current and former directors and/or officers and majority shareholders as defendants, and alleges violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act, and the rules promulgated thereunder. The Consolidated Complaint seeks, among other things, compensatory damages, and reasonable costs and expenses incurred in the action. On December 21, 2011, the Company and certain of the individual defendants filed a motion to dismiss the Consolidated Complaint. On May 3, 2012, Lead Plaintiff voluntarily dismissed the claims against BDO Limited and Child Van Wagoner & Bradshaw PLLC. On September 10, 2012, the Court granted in part and denied in part the Company’s motion to dismiss the Consolidated Complaint. On January 11, 2013, defendant Rodman & Renshaw LLC filed for Chapter 11 bankruptcy protection, and, on January 18, 2013, the court imposed an automatic stay on Plaintiffs claims against Rodman pursuant to Section 326(a) of the Bankruptcy Code.  The Company believes the allegations against the Company are baseless and is contesting the case vigorously.  The Company has made no accrual for any potential contingencies.
 
On August 5, 2011, we received a shareholder demand letter from counsel for a purported shareholder. The letter was addressed to the Company’s Board of Directors and requested the Board of Directors to take a number of actions in order to repair the alleged “harm” caused to the Company by certain of its directors and officers, as well as its current and former auditors. The Board of Directors has been reviewing this shareholder demand letter and considering appropriate action that the Company should undertake. On November 7, 2011, Baosheng Lu and Tao Wang were appointed to serve as directors of the board and the independent directors of the board appointed them to serve as the members of the evaluation committee. The evaluation committee is in the process of evaluating the actions demanded by the shareholder and retaining counsel to respond to the shareholder inquiry. No formal shareholder derivative complaint has been filed to date on behalf of the Company. The Company believes any such suit would be without merit and would vigorously defend its position in this regard.  The Company has made no accrual for any potential contingencies.

 
On July 8, 2011, the Company brought suit against Absaroka Capital Management, LLC (“Absaroka”) and its principal Kevin Barnes in the U.S. District Court of Wyoming under the caption SkyPeople, Inc. v. Absaroka Capital Management, LLC, et al., No. 11-cv-238. Absaroka is a purported independent investment analyst who, while holding a short position in our stock, issued a so-called research report (the “Report”) asserting, inter alia, that the Company had inflated revenues. We brought suit alleging three causes of action for libel per se, libel per quod and intentional interference with a prospective business relationship. In or around November, 2011, Absaroka and Barnes brought counter claims against us for defamation per se, defamation per quod and abuse of process. On June 22, 2012, the Company and Absaroka reached an out-of-court settlement of litigation in the U.S. District Court for the District of Wyoming. The settlement includes a dismissal of all claims and counterclaims filed by the Parties, with neither party admitting any wrongdoing or liability. As part of the settlement agreement, Absaroka has agreed to remove the Report from its website, undertake best efforts to remove the Report from third-party sites, and refrain from issuing any further articles, public statements, or research reports concerning the Company.
 
Other than the above, from time to time we may be a party to various litigation proceedings arising in the ordinary course of our business, none of which, in the opinion of management, is likely to have a material adverse effect on our financial condition or results of operations.
 
Item 1A.   Risk Factors
 
Not applicable.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3.
Defaults upon Senior Securities
 
None.
 
Item 4.
(Removed and Reserved)
 
Not applicable.
 
Item 5.
Other Information
 
None.

 
Exhibits
 
Exhibit No.
Description
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule15d-14(a) of the Securities Exchange Act of 1934, as amended*
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*
32.1
Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS
XBRL Instance Document*+
101.SCH
XBRL Schema Document*+
101.CAL
XBRL Calculation Linkbase Document*+
101.DEF
XBRL Definition Linkbase Document*+
101.LAB
XBRL Label Linkbase Document*+
101.PRE
XBRL Presentation Linkbase Document*+

*           filed herewith
+
As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
SKYPEOPLE FRUIT JUICE, INC.

By:
/s/Hongke Xue
 
 
Hongke Xue
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
May 14, 2013
 
     
By:
/s/ Xin Ma
 
 
Xin Ma
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)
 
 
May 14, 2013