S-1 1 sps1_june122009.htm S-1 sps1_june122009.htm
 
As filed with the Securities and Exchange Commission on June 12, 2009
Registration No. 333-    
   



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

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
2033
98-0222013
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)

SkyPeople Fruit Juice, Inc.
16F, National Development Bank Tower
No. 2 Gaoxin 1st Road, Xi’an, PRC 710075
011-86-29-88377216
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 

Yongke Xue
16F, National Development Bank Tower
No. 2 Gaoxin 1st Road, Xi’an, PRC 710075
011-86-29-88377216
 (Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Darren Ofsink, Esq.
Guzov Ofsink, LLC
600 Madison Avenue 14th Floor
New York, New York 10022
(212) 371-8008

 



 
 
Approximate date of commencement of proposed sale to public: as soon as practicable after this Registration Statement is 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 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 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. (Check one):
 
Large accelerated filer
o
  Accelerated filer
¨
Non-accelerated filer 
(Do not check if a smaller reporting company)
¨
 
Smaller reporting company 
 
x
 

 
CALCULATION OF REGISTRATION FEE
 
Title of Each Class of Securities
To Be Registered
 
Proposed Maximum
Aggregate Offering Price (1)
 
Amount of
Registration Fee (2)
Common Stock, $0.01 par value per share
 
$28,437,500
 
$1,586.82

 
(1)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
 
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
 
         
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 thereafter 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.

 
        
SUBJECT TO COMPLETION, DATED JUNE 12, 2009

PRELIMINARY PROSPECTUS
6,500,000 Shares


SkyPeople Fruit Juice, Inc.
 
Common Stock
 

This prospectus relates to the resale by Barron Partners LP and Eos Holdings, LLC (the “Selling Stockholders”) of up to 6,500,000 shares of our common stock, par value $0.01 per share (“Common Stock”), issuable upon exercise of warrants issued to the Selling Stockholders in a private placement (the “Private Placement”) pursuant to an Exchange Agreement dated as of May 28, 2009 (the “Exchange Agreement”).
 
All of the shares of Common Stock issuable to the Selling Stockholders upon exercise of their warrants may be sold by the Selling Stockholders. It is anticipated that the Selling Stockholders will sell these shares of Common Stock from time to time in one or more transactions, in negotiated transactions or otherwise, at prevailing market prices or at prices otherwise negotiated (see “Plan of Distribution” beginning on page 86). We will not receive any proceeds from the sales by the Selling Stockholders, but we may receive up to $11,050,000 of proceeds from the exercise of the warrants, if such warrants are exercised in cash.  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 will pay all of the registration expenses incurred in connection with this offering, but the Selling Stockholders will pay any selling commissions, brokerage fees and related expenses.
  
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.

Our Common Stock is listed on the OTC Bulletin Board and trades under the symbol SPFJ.  On May 1, 2009, the closing sale price of our Common Stock was $3.50.  We are applying to list our Common Stock on the NYSE Amex Equities on or promptly after the date of this prospectus.

Investing in our Common Stock involves risks. See “Risk Factors” on page 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. 
 

The date of this prospectus is ______, 2009
 
 

TABLE OF CONTENTS

 
Page
 
Prospectus Summary.......................................................................................................................................
1
Risk Factors.....................................................................................................................................................
9
Special Note Regarding Forward-Looking Statements................................................................................
26
Use of Proceeds..............................................................................................................................................
27
Price Range of Common Stock......................................................................................................................
27
Dividend Policy...............................................................................................................................................
28
Capitalization...................................................................................................................................................
29
Selected Consolidated Financial Data...........................................................................................................
30
33
Business...........................................................................................................................................................
54
Directors and Executive Officers..................................................................................................................
66
Compensation..................................................................................................................................................
70
Certain Relationships and Related Party Transactions.................................................................................
72
Selling Stockholders.......................................................................................................................................
77
Principal Stockholders....................................................................................................................................
79
Description of Capital Stock..........................................................................................................................
81
Plan of Distribution.........................................................................................................................................
86
Legal Matters...................................................................................................................................................
88
Experts..............................................................................................................................................................
88
Changes in and Disagreements With Accountants.............................................................................................. 88 
Where You Can Find More Information.......................................................................................................
91
Index to Consolidated Financial Statements.................................................................................................
F-1

_________________________________________


You should rely only on the information contained in this document and any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.


 
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 this entire prospectus carefully, especially the “Risk Factors” section beginning on page 9 and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.  Unless the context otherwise requires, we use the terms “SkyPeople,” “Company,” “we,” “us” and “our” in this prospectus to refer to SkyPeople Fruit Juice, Inc. and its consolidated subsidiaries.
 
Our Business
 
We are engaged in the production and sale of fruit concentrate, fruit juice beverages, and other fruit related products in and from the People’s Republic of China (“PRC” or “China”).  Our fruit concentrates, which include apple, pear, and kiwifruit, are primarily exported via distributors to North America, Europe and the Middle East.  We sell our Hedetang branded bottled beverages domestically primarily to supermarkets in certain regions of the PRC. At December 31, 2008 our fruit concentrate, fruit juice beverages, and other fruit related products represented 78%, 13%, and 9% of our sales, respectively.
 
We believe that we are currently one of the only companies able to produce specialty fruit juices in large scale in China and are recognized as a leading specialty fruit juice producer.  Specialty fruit juices are juices squeezed from fruits which are grown in a relatively low quantity and include kiwifruit juice, mulberry juice, strawberry juice, and pomegranate juice.
 
Our competitive advantages lie in our modern equipment and technology employed at our production factories in Shaanxi and Liaoning Provinces, which are located near regional fruit production centers.  Our equipment and technology help ensure product quality, processing cost control and allow us to meet international juice standards such as ISO9001, Hazard Analysis and Critical Control Points (“HACCP”) and Kosher. Our location near regional fruit production centers enables us to purchase directly from farmers and avoids the need to transport raw fruits over long distances to our processing facilities, both reducing our transportation expenses and helping us maintain high product quality by preserving freshness and helping us avoid damage to the raw fruit in transit.
 
During the year ended December 31, 2008, we produced 21,591 tons of fruit juice concentrate, 5,339 tons of fruit beverage and 5,833 tons of fresh and other fruit related products such as kiwifruit seeds and apple aroma. As we expand our current production facilities and acquire other companies in the fruit product industry, we expect our fruit processing capacity and our annual yield to grow to meet increasing customer demand.

 
Our Industry
 
The global market for processed fruit products has expanded rapidly in the last few years. The general consumption trend has begun to gradually shift from carbonated beverages to pure fruit juice products.  According to The Beverage Digest’s annual “Fact Book,” global demand for non-alcoholic single serve beverages was $106 billion in 2006 and increased 4.1% by volume from 2005 to 2006, while carbonated soft drinks declined in volume in 2005 and 2006 for the first time in 20 years. Likewise, global sales of noncarbonated drinks (tea, coffee, fortified water, juice, sports drinks, milk drinks, and energy drinks) increased by 15% from 2005 to 2006. According to the Beijing Business & Intelligence Consulting Co. Ltd., an independent research firm, projected total sales value of and net income with respect to processed fruit products in China will reach $37.2 billion and $2.5 billion, respectively, in 2010, or a compounded annual growth rate of 42.5% and 66.7%, respectively, during the four-year period from 2007 to 2010. Sales of processed fruit exported from China is expected to reach $10.9 billion in 2010, a 42.7% increase versus the amount of processed fruit exported in 2006. This indicates that, globally, consumers are becoming increasingly health conscious. Increasing disposable income combined with the already health conscious nature of Chinese consumers is a positive indicator for continued growth in the Chinese fruit juice beverage market as well. China currently accounts for only 10% of total global fruit juice consumption and the annual per capita fruit juice consumption in China is approximately 1 kilogram. Chinese consumption shows strong growth potential when it is considered that the average annual per capita fruit juice consumption is approximately 40 kilograms in developed international markets.
 
This rapid growth in the fruit processing industry in China and worldwide has placed significant pressure on producers to increase production capacities while managing increased costs associated with transport logistics and raw materials.  To respond effectively, producers must:
 
 
utilize modern processing technology to maximize processing capacity and annual yield without significantly increasing production costs;
 
 
utilize flexible production facilities to respond quickly to market supply and demand and quickly introduce new products to the market; and
 
 
build or acquire new production facilities near stable sources of raw material that can adequately meet planned processing capacities and annual yield.
 
 
Our Strengths
 
We believe that the following strengths enable us to compete effectively and capitalize on the rapid growth of the fruit product industry:
 
Raw Materials Control and Resources Advantages

We have located our production facilities in close proximity to large sources of apples and kiwifruit in Shaanxi and Liaoning Provinces. Our close proximity to the regional production centers ensures raw material availability and freshness and reduces our fruit purchasing and transportation costs.

Equipment, Technology, and Quality Advantages

We employ modern fruit processing equipment and have developed several unique production processes and technologies that have allowed us to gain market share in the fruit concentrate and fruit juice beverage industries, most notably in the kiwifruit market. We believe that our equipment helps us to maintain uniform and high product quality and keeps processing costs under control.

Product Diversity

Our products include fruit concentrate and fruit juice beverages from apples, pears, kiwifruit, and mulberries. We also sell organic fresh fruit, kiwifruit seed and apple aroma. Our diversified product lines help us compete in international markets, lessen commodity price risk as well as risks associated with seasonality and consumer preferences.

Operation Team

We have a professional, highly educated, and motivated business administration and technology development team. Our operating managers have an average of more than 10 years of experience in the fruit processing industry. We have established good relationships with several scientific research institutes and experienced consultants that we believe have been instrumental to our growth.
 
Chinese Government Support

The PRC government’s agricultural industrialization policy supports our business. Our indirect operating subsidiary, Shaanxi Tianren Organic Food Co., Ltd. (“Shaanxi Tianren”), was awarded the status of a nationally recognized High and New Technology Enterprise in December 2006.  As a result, in 2007 and 2008 we received subsidies from the local government of Shaanxi Province of approximately $500,000 and $316,000, respectively. The Shaanxi government has also approved the expansion of kiwifruit production in the province. We have submitted our kiwifruit industrialization development plan to the Shaanxi Province government, which has been approved by the related government department and may result in our receiving further subsidies.

 
Our Strategy
 
We intend to employ the following business strategies to capitalize on the rapidly growing fruit product market:
 
Increase Our Capacity

    We will continue to expand the production capacity of our three existing production facilities. We will also consider acquisition opportunities in order to further expand capacity.

Diversify Our Products

We hope to increase our fruit product offerings in order to further diversify our product mix. Our strategic focus will be on expanding into fruits with harvesting seasons complementary to our current fruits. This will enable us to expand our squeezing season, thus increasing our annual production of fruit concentrate.  In addition, we will enhance our research and development activities in order to develop and produce innovative high margin products like polyphenol (an antioxidant compound with beneficial effects on health) from concentrated fruit juice to further diversify our product mix, reduce risk and increase our revenue.

Enlarge Our Worldwide Customer Base

We will strive to expand our worldwide customer base by strengthening current relationships with distributors and end users in our existing markets and developing new relationships with strategic distributors and end users in markets we have not yet penetrated.

Focus on Improving Gross Margins

We plan to continue to focus on creating new high margin products in the future to supplement our current product offering.  In addition, we are making efforts to improve margins for our fruit juice beverage business segment by creating new products and shifting our fruit juice beverage distribution medium towards glass versus plastic bottles.
 
Increase Sales of Fruit Concentrate and Fruit Juice Beverages in China

We plan to execute our plan to sell our Hedetang brand over a broader geographic area in China by expanding our glass bottle production line to produce higher margin portable beverages targeting consumers in large Chinese cities and further developing our fruit vinegar beverage distribution and fruit juice sales networks.

Increase Focus on the Organic and Green Fruit Concepts

According to the Agricultural Marketing Resource Center (www.agmrc.org/markets), organic food production has grown at a rate of almost 20% per annum for the last 7 years and industry experts are continuing to forecast additional growth. We have set a target to transition Qinmei kiwifruit plantation to fully organic production within five years. We also plan to establish a fruit and vegetable organic research and development center and a training center by 2010 and to convert our apple production base to become partially organic.


Company Information

Our principal executive offices are located at 16F, National Development Bank Tower, No. 2 Gaoxin 1st Road, Xi’an, Shaanxi Province, PRC 710075, and our telephone number is 011-86-29-88377216.  Our website address is www.skypeoplefruitjuice.com.  The information contained on our website or that can be accessed through our website is not part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our Common Stock.
 

THE OFFERING
 
On February 25, 2008 the Company entered into a Series B Convertible Preferred Stock Purchase Agreement (the “Stock Purchase Agreement”) with the Selling Stockholders, pursuant to which the Company issued shares of its newly designated Series B Convertible Preferred Stock, par value $0.001 per share (“Series B Stock”) and five year warrants to purchase an aggregate of 7,000,000 shares of Common Stock for $3.00 per share (the “February 2008 Warrants”) to the Selling Stockholders in exchange for an aggregate cash payment of $3,400,000.  On June 2, 2009 the Company and the Selling Stockholders entered into and consummated an Exchange Agreement, dated as of May 28, 2009, pursuant to which the Selling Stockholders exchanged all of the February 2008 Warrants for warrants to purchase an aggregate of 6,500,000 shares of the Company’s Common Stock (the “New Warrants”) for $1.70 per share (which exercise price, in the case of warrants to purchase an aggregate of 1,000,000 shares of our Common Stock, shall be increased to $3.00 per share if the warrants are not exercised by September 30, 2009). See “Certain Relationships and Related Party Transactions – Series B Stock Purchase Agreement” and “Certain Relationships and Related Party Transactions – Exchange of February 2008 Warrants for New Warrants” for a complete description of the Stock Purchase Agreement and the Exchange Agreement.

This prospectus relates to the resale of the 6,500,000 shares of our Common Stock issuable to the Selling Stockholders upon exercise of the New Warrants.
 
Total shares of Common Stock outstanding prior to the Offering
    22,271,786  
         
Total shares of Common Stock offered by the Selling Stockholders
    6,500,000  
         
Total shares of Common Stock to be outstanding after the Offering
(assuming all New Warrants have been exercised in cash)
    28,771,786  
 

     
Use of Proceeds
 
We will not receive any proceeds from the sale of the shares of Common Stock underlying the New Warrants, but we may receive proceeds from the exercise of the New Warrants by the Selling Stockholders, if such New Warrants are exercised in cash.  There can be no assurance that any of the New Warrants will be exercised by the Selling Stockholders. In the event that all of the New Warrants to purchase the shares of Common Stock included in this prospectus were exercised in cash, we would receive $11,050,000 of gross proceeds, which we would use for expansions of our current production capacity, acquisitions, and other general corporate purposes. Under the terms of the New Warrants, cashless exercise is permitted in certain circumstances. We will not receive any proceeds from any cashless exercise of the New Warrants.
     
Our OTC Bulletin Board Trading Symbol
 
SPFJ. We are applying to list our Common Stock on the NYSE Amex Equities on or promptly after the date of this prospectus.
     
Risk Factors
 
You should read the “Risk Factors” section beginning on page 9 of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our Common Stock.
 
The number of shares of our Common Stock to be outstanding after this offering is based on 22,271,786 shares of our Common Stock outstanding as of June 3, 2009 and 6,500,000 shares of Common Stock issuable upon exercise of warrants outstanding as of June 3, 2009. It excludes an aggregate of 3,448,480 shares of Common Stock issuable upon the conversion of an aggregate of 3,448,480 outstanding shares of the Company’s Series B Stock. It also excludes an aggregate of 2,000,000 shares of Common Stock issuable upon the conversion of an aggregate of an additional 2,000,000 outstanding shares of Series B Stock (the "Make Good Escrow Stock") which have been deposited with an escrow agent pursuant to a Series B Convertible Preferred Stock Purchase Agreement, dated as of February 25, 2008 between the Company and the Selling Stockholders (the "Stock Purchase Agreement") which may be transferred to the Selling Stockholders upon the failure by the Company to achieve certain financial targets in 2009.
 

SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following tables summarize our consolidated financial data for the periods presented. You should read these tables together with the consolidated financial statements and related notes appearing at the end of this prospectus, as well as “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.  Our historical results are not necessarily indicative of the results to be expected in any future period.
 
   
Fiscal Year Ended
December 31,
   
Three Months Ended
March 31,
 
   
2008
   
2007
   
2006
   
2005
   
2009
   
2008
 
                                     
Revenue
  $ 41,648,605     $ 29,361,941     $ 17,427,204     $ 7,027,889     $ 6,671,061     $ 8,850,584  
Cost of Sale
    23,607,409       18,467,045       10,105,327       4,471,432       3,746,159       6,990,966  
Gross Margin
    18,041,196       10,894,896       7,321,877       2,556,457       2,924,902       1,859,618  
                                                 
Operating Expenses
                                               
General and Administrative Expenses
    2,830,739       1,158,759       405,253       488,948       411,904       566,714  
Selling Expenses
    1,453,461       686,819       664,717       448,346       273,588       241,345  
Research and Development Expenses
    449,695       30,878        -        -       275,510       7,477  
Liquidated Damages
    254,301        -        -        -       -       -  
Total Operating Expenses
    4,988,196       1,876,456       1,069,970       937,294       961,002       815,536  
                                                 
Income from Operations
    13,053,000       9,018,440       6,251,907       1,619,163       1,963,900       1,044,082  
                                                 
Other Income (Expenses)
                                               
Interest Income
    63,775       18,295       14,365       22,299       7,316       6,164  
Subsidy Income
    316,152       500,468       -       -       87,800       -  
Interest Expense
    (932,048 )     (400,517 )     (62,147 )     (2,504 )     (226,396 )     (59,028 )
Other Income (expense)
    353,698       (70,622 )     (79,616 )     50,119       (40 )     238,956  
Total Other Income (expenses)
    (198,423 )     47,624       (127,398 )     69,914       (131,320 )     186,092  
Income Before Income Tax
    12,854,577       9,066,064       6,124,509       1,689,077       1,832,580       1,230,174  
Income Tax Provision
    2,231,140       1,109,160       2,035,675       650,265       493,870       130,520  
Income Before Minority Interest
    10,623,437       7,956,904       4,088,834       1,038,812       1,338,710       1,099,654  
                                                 
Minority Interest
    613,135       360,501       243,564       3,428       99,274       47,835  
                                                 
Net Income
  $ 10,010,302     $ 7,596,403     $ 3,845,270     $ 1,035,384     $ 1,239,436     $ 1,051,819  
                                                 
Earnings per Share:
                                               
Basic Earnings per Share
  $ 0.37     $ 0.35     $ 0.17     $ 0.05     $ 0.04     $ 0.04  
Diluted Earnings per Share
  $ 0.37     $ 0.35     $ 0.17     $ 0.05     $ 0.04     $ 0.04  
                                                 
Weighted Average Shares Outstanding
                                               
Basic
    22,230,334       22,006,173       22,006,173       22,006,173       22,271,684       22,485,118  
Diluted
    26,831,961       22,006,173       22,006,173       22,006,173       28,394,863       27,907,889  
 

   
As of March 31, 2009 (unaudited)
 
Consolidated Balance Sheet Data:
     
Cash and Cash Equivalents
  $ 23,243,078  
Working Capital
    15,296,218  
Total Assets
    60,279,877  
Indebtedness, Long-term
    -  
Convertible Preferred Stock at $0.001 par Value
    3,448  
Total Stockholders’ Equity
    43,879,850  
 

RISK FACTORS
 
The following is a summary of certain material risks facing our business that should be carefully considered along with the other information contained or incorporated by reference in this prospectus. If any other material risks of which we are unaware later occur or become material, our business, financial condition, and operating results could be materially harmed.
 
Risks Related to our Business

Our revenues and profitability are heavily dependent on prevailing prices for our products and raw materials; if we are unable to pass cost increases along to our customers our margins and operating income may decrease.

As a producer of commodities, much of which are sold into global markets, our revenue, gross margins and cash flow from operations are substantially dependent on the prevailing prices we receive for our products and the cost of our raw materials, neither of which we control. 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. In 2008, over 69% of the Company’s concentrated fruit juice was exported directly or indirectly. Changes in foreign politics, law and the economies of supply and demand in international markets will have a significant impact on prices we may receive for our products.

The price of fresh fruits, our principal raw materials, are subject to market volatility as a result of numerous factors including, but not limited to, general economic conditions, governmental regulations, weather, transportation delays and other uncertainties that are beyond our control. Due to such market volatility, we generally do not, nor do we expect to, have long-term contracts with our fresh fruit suppliers. Other significant raw materials used in our business include packing barrels, pectic enzyme, amylase and auxiliary power fuels such as coal, electricity and water. Prices for these items may be volatile as well and we may experience shortages in these items. As a result, 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. In the event raw material prices increase materially, we may not be able to adjust our product prices, especially in the short-term, to recover such cost increases.  If we are not able to effectively pass these cost increases along to our customers, our margins will decrease and our operating income will suffer accordingly.
 
Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate and our annual performance will depend largely on results from two quarters.
 
 
Our business is highly seasonal, reflecting the harvest season of our primary source fruits during the months from August through April of the following year.  Typically, a substantial portion of our revenues are earned during our first and fourth quarters. We generally experience lower revenues during our second and third quarters. Sales in the first and fourth quarters accounted for approximately 67.4% of our revenues for fiscal year 2008. If sales in these quarters are lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on our annual operating results.

 
Weather and other environmental factors affect our raw material supply and a reduction in the quality or quantity of our fresh fruit supplies may have material adverse consequences on our financial results.

Our business may be adversely affected by weather and environmental factors beyond our control, such as adverse weather conditions during the squeezing season. We cannot assure you that the necessary raw materials will continue to be available to us in quantities and at prices currently in effect or acceptable to us. The prices for and availability of these raw materials have varied significantly and may affect the quantity and profitability of our products. For example, in 2007 the prices of apples, kiwifruit and pears temporarily significantly increased because of poor weather conditions in Shaanxi and Liaoning Provinces, which caused a sharp decrease in output of kiwifruit, apples and pears.  A significant reduction in the quantity or quality of fresh fruits harvested resulting from adverse weather conditions, disease or other factors could result in increased per unit processing costs and decreased production, with adverse financial consequences to the Company.

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 34%, 29%, and 57% of our net sales during the years ended December 31, 2008, 2007 and 2006, respectively.  Customer demand depends on a variety of factors including, but not limited to, our customers’ financial condition and general economic conditions. If our sales to any of our largest customers are reduced for any reason, such reduction may have a material adverse effect on our business, financial condition and results of operations.
 
Our inability to continue to market our existing fruit beverage products and develop new fruit beverage products to satisfy our consumers’ changing preferences could materially adversely affect our operations and revenues.
 
Revenue from our fruit beverages constituted 12.8% of our total revenue in 2008. We sell our fruit beverages under our brand name “Hedetang” only in the Chinese market. The beverage industry is subject to changing consumer preferences, and shifts in consumer preferences may adversely affect us if we misjudge such preferences. In addition, the sale of fruit beverages is substantially dependent upon awareness and market acceptance of our products and brand by our targeted consumers.  We may be unable to achieve volume growth in fruit beverages through product and packaging initiatives. We also may be unable to penetrate new markets. If our revenues from fruit beverages decline, our business, financial condition and results of operations will be adversely affected.


Economic conditions have had and may continue to have an adverse effect on consumer spending on our products.
 
The worldwide economy is currently undergoing significant turmoil.  The adverse effect of a sustained international economic downturn, including sustained periods of decreased consumer spending, high unemployment levels, or declining consumer or business confidence, along with continued volatility and disruption in the credit and capital markets, will likely result in reduced demand for our products as consumers turn to cheaper substitute goods or forego certain purchases altogether.  To the extent the international economic downturn continues or worsens, we could experience a further reduction in sales volume, and if our operating costs and expenses are not reduced accordingly, it would adversely affect our revenues and results of operations.

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 processing 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 you 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 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 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.

Intellectual property infringement claims may adversely impact our results of operations.

As we develop and introduce new products, we may be increasingly subject to claims of infringement.  If a claim for infringement is brought against us, such claim may require us to modify our products, cease selling certain products or engage in litigation to determine the validity and scope of such claims.  Any of these events may harm our business and results of operations.

 
Concerns over food safety and public health may affect our operations by increasing our costs and negatively impacting demand for our products.
 
We could be adversely affected by diminishing confidence in the safety and quality of certain food products or ingredients, even if our practices and procedures are not implicated. As a result, we may also elect or be required to incur additional costs aimed at increasing consumer confidence in the safety of our products. For example, a crisis in China over melamine-contaminated milk in 2008 has adversely impacted overall Chinese food exports since October 2008 as reported by the Chinese General Administration of Customs, even though most foods exported from China were not implicated in these issues. We believe that the contaminated milk crisis also had a negative effect on sales of our concentrated juices that were exported to international markets in fiscal year 2008.  Our concentrated fruit juices exported to foreign countries have to be in compliance with foreign quality standards.  Our success depends on our ability to maintain the product quality of our existing products and new products.  Product quality issues, real or imagined, or allegations of product contamination, even if false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products.

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 many other countries, product liability claims and lawsuits in the PRC are rare. However, we cannot guaranty that we would not face liability in the event of the failure of any of our products. Furthermore, we cannot guaranty that 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.
 
We may be required from time to time to recall products entirely or from specific co-packers, markets or batches.  Product recalls could adversely affect our profitability and our brand image.  We do not maintain recall insurance.
 
While we have not experienced any credible product liability litigation to date, there is no guaranty that we will not experience such litigation in the future.  In the event we do experience product liability claims or a product recall, our financial condition and business operations could be materially adversely affected.
 
Governmental regulations affecting the import or export of products could negatively affect our revenues.

    The United States and various foreign governments have imposed controls, export license requirements, and restrictions on the export of some of our products.  In 2008, over 69% of the Company’s concentrated fruit juice was exported directly or indirectly out of the PRC. Governmental regulation of exports, or our failure to obtain required export approval for our products, could harm our international and domestic sales and adversely affect our revenues.  In addition, failure to comply with such regulations could result in penalties, costs, and restrictions on export privileges.
 
Our success depends substantially on the continued retention of certain key personnel and our ability to hire and retain qualified personnel in the future to support our growth.

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. While we depend on the abilities and participation of our current management team generally, we have a particular reliance upon Mr. Hongke Xue, Chairman of the Board and Chief Executive Officer of Shaanxi Tianren, one of our operating subsidiaries, and Mr. Yongke Xue, the Company’s Chairman of the Board and Chief Executive Officer. The loss of the services of Mr. Hongke Xue or Mr. Yongke Xue for any reason could significantly impact our business and results of operations. Competition for senior management and senior technology personnel is intense and the pool of qualified candidates is very limited.  Accordingly, we cannot guaranty that the services of our senior executives and other key personnel will continue to be available to us, or that we will be able to find a suitable replacement for them if they were to leave.
 
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 (“Sarbanes-Oxley”). Aside from our Chief Financial Officer, 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 the increased legal, regulatory and reporting requirements associated with being a publicly traded company. 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.

 
We may not have adequate or effective internal accounting controls.
 
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, however, that any 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. 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.
 
Rules adopted by the Securities and Exchange Commission (the “SEC”) pursuant to Section 404 of Sarbanes-Oxley require annual assessment of our internal control over financial reporting, and attestation of this assessment by the Company’s independent registered public accountants. The requirement that management perform an assessment of internal controls over financial reporting first applied 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 relatively new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. Our lack of familiarity with Section 404 may unduly divert management’s time and resources, which could have a material adverse effect on our operating results. If, in the future, management identifies one or more material weaknesses in our internal controls over financial reporting, 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 and may be subject to sanctions for such violations.

Section 13(k) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provides that it is unlawful for a company such as ours, which has a class of securities registered under Section 12(g) of the Exchange Act, to directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the company. 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.
 
 
In February 2008, we purchased Pacific Industry Holding Group Co., Ltd. (“Pacific”), a Vanuatu corporation, which is a holding company for our operating subsidiary, Shaanxi Tianren.  At the time , Shaanxi Hede Investment Management Co., Ltd. (“Hede”), a PRC company owned by Yongke Xue, the Chairman of the Board and Chief Executive Officer of the Company, and Xiaoqin Yan, a director of the Company, was indebted to Shaanxi Tianren on account of previous loans and advances made by Shaanxi Tianren to Hede, including RMB 31,544,043 in the aggregate (approximately $4,318,281 based on the exchange rate as of December 31, 2007) made during the period from June 6, 2007 to December 29, 2007 that were used by Hede to pay a portion of the purchase price for Hede’s acquisition of Huludao Wonder Fruit Co., Ltd. (“Huludao Wonder”) (Huludao Wonder is a company which Shaanxi Tianren and Hede contemplated would be sold at Hede’s cost after a one year holding period). In May 2008, Shaanxi Tianren also assumed Hede’s obligation of RMB 18,000,000 (approximately $2,638,329 based on the exchange rate of December 31, 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 $99,564 based on the exchange rate as of December 31, 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 Pacific 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).
 
In addition, in May 2008 Pacific erroneously paid $4,916,617 to its former stockholders, 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 stockholders 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 erroneously paid funds associated with Pacific’s dividend declaration have been repaid to the Company in full, Xiaoqing Yan and Yongke Xue’s receipt of the erroneous dividend may also be deemed to be a violation of Section 13(k).
 
The Company has not concluded that either the advances Shaanxi Tianren made to Hede 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 involving an aggregate amount that 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 that would be considered to be a related party transaction in which such person is interested.  See “Certain Relationships and Related Party Transactions - Review, Approval or Ratification of Transactions with Related Persons.”

 
Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

Our limited operating history in the fruit product industry may not provide a meaningful basis for evaluating our business. Shaanxi Tianren entered into its current line of business in December 2003. Although Shaanxi Tianren’s revenues have grown rapidly since its inception, we cannot guaranty that we will maintain profitability or that we will not incur net losses in the future. We will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:
 
 
obtain sufficient working capital to support our expansion;
 
 
maintain our proprietary technology;
 
 
expand our product offerings and maintain the high quality of our products;
 
 
manage our expanding operations and continue to fill customers’ orders on time;
 
 
maintain adequate control of our expenses allowing us to realize anticipated revenue growth;
 
 
implement our product development, marketing, sales, and acquisition strategies and adapt and modify them as needed;
 
 
successfully integrate any future acquisitions;
 
 
anticipate and adapt to changing conditions in the fruit product industry resulting from changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.
 
If we are not successful in addressing any or all of the foregoing risks, our business may be materially and adversely affected.
 
We will encounter substantial competition in our business and any failure to compete effectively could adversely affect our results of operations.
 
There are currently a number of well-established companies producing products that compete directly with our product offerings, and some of those competitors have significantly more financial and other resources than we possess. We anticipate that our competitors will continue to improve their products and to introduce new products with competitive price and performance characteristics. Aggressive marketing or pricing by our competitors or the entrance of new competitors into our markets could have a material adverse effect on our business, results of operations and financial condition.
 
 
We may not be able to successfully introduce new products, which could decrease our profitability.

Our future business and financial performance depends, in part, on our ability to successfully respond to consumer preference by introducing new products and improving existing products. We incur significant development and marketing costs in connection with the introduction of new products. Successfully launching and selling new products puts pressure on our sales and marketing resources, and we may fail to invest sufficient funds in order to market and sell a new product effectively.  If we are not successful in marketing and selling new products, our results of operations could be materially adversely affected.
 
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, along with cash from operations and capital raised in this offering, will allow us to meet our working capital requirements for 2009.  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 from outside sources. Our ability to raise capital in the future will depend on a number of factors, including our financial condition and results of operations and the conditions in the relevant financial markets. In addition, pursuant to the terms of the Stock Purchase Agreement, we may not issue any preferred stock or convertible debt until February 26, 2011 so long as the Selling Stockholders collectively own 20% of the Series B Stock issued under the Stock Purchase Agreement.  We cannot assure you that additional capital, if required, will be available on acceptable terms, or at all. If we are unable to obtain financing on a timely basis and on acceptable terms, we may be required to reduce the scope of our planned expansions, product development and marketing efforts, and in turn our financial position, competitive position, growth and profitability may be adversely affected.
 
To the extent that we do raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities would result in dilution of the shares held by existing stockholders and could provide purchasers certain rights, preferences and privileges senior to our Common Stock.
 
We may not be able to effectively control and manage our growth in order to meet demand, and a failure to do so could adversely affect our operations and financial condition.
 
If our business and markets continue to grow and develop, it will be necessary for us to finance and manage our growth effectively in order to meet demand. In addition, we may face challenges in expanding our current facilities, integrating acquired businesses with our own, and managing expanding product offerings. We may not respond quickly enough to the increased demands caused by such growth on our existing management, workforce and facilities. Failure to effectively deal with such increased demands could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies.
 
We may engage in future acquisitions involving significant expenditures of cash, the incurrence of debt or the issuance of stock, all of which could have a materially adverse effect on our operating results.
 
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, 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 may expend significant cash, incur substantial debt and/or issue equity securities, diluting the percentage ownership of current stockholders, all of which could have a material adverse effect on our operating results and the price of our Common Stock. Other challenges involved with acquisitions and strategic investments include:
 
 
unanticipated costs;
 
 
the diversion of management’s attention from other business concerns;
 
 
potential adverse effects on existing business relationships with suppliers and customers;
 
 
challenges in retaining customers of acquired businesses;
 
 
the potential loss of key employees of acquired companies; and
 
 
accounting issues.
 
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. Additionally, 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.
 
Our business and results may be subject to disruption from work stoppages, terrorism or natural disasters.

Our operations may be subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, pandemics, fire, earthquake, flooding or other natural disasters. If a major natural disaster were to occur in either of the regions where our facilities or main offices are located, our facilities or offices could be damaged or destroyed. Such a disruption could result in the temporary or permanent loss of critical data, suspension of operations, delays in shipments of product, and disruption of business generally, which would adversely affect our revenue and results of operations.
 
 
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.

We conduct substantially all of our operations and generate most of our revenue in China.  Accordingly, economic, political and legal developments in China will significantly affect our business, financial condition, results of operations and prospects. The PRC economy is in transition from a planned economy to a market oriented economy subject to 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. While we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and that business development in the PRC will continue to follow market forces, 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:
 
•     changes in laws, regulations or their interpretation;
 
•     confiscatory taxation;
 
•     restrictions on currency conversion, imports or sources of supplies;
 
•     expropriation or nationalization of private enterprises; and
 
•     the allocation of resources.
 
Although the PRC government has been pursuing economic reform policies for more than two decades, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency, setting monetary policy and imposing policies that impact particular industries in different ways. We cannot assure you that the PRC government will continue to pursue policies favoring a market oriented economy or that existing policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the PRC.
 
PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such 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 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 cost 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 policies 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.
 
We could be restricted from paying dividends to stockholders due to PRC laws.

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. As a result of our holding company structure, we rely entirely on dividend payments from Shaanxi Tianren. PRC accounting standards and regulations currently permit payment of dividends only out of accumulated profits, a portion of which is required to be set aside for certain reserve funds. 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. Although we do not intend to pay dividends in the future, our inability to receive all of the revenues from Shaanxi Tianren’s operations may provide an additional obstacle to our ability to pay dividends if we so decide in the future.
 
Governmental control of currency conversion may affect the value of your investments.
 
The PRC government imposes controls on the convertibility of the PRC currency, the renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of the PRC. RMB is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to satisfy foreign currency 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 by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB 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 could restrict access to foreign currencies for current account transactions in the future. 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 RMB 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 could harm our business, financial condition and results of operations. Conversely, if we decide to convert our RMB into U.S. dollars for 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.
 
PRC regulations relating to mergers and the establishment of offshore special purpose companies by PRC residents, if applied to us, may limit our ability to operate our business as we see fit.

On August 8, 2006, six Chinese regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, governs the approval process by which a Chinese company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require Chinese parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions in China has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to us or sufficiently protective of our interests in a transaction.
 
In October 2005, China’s State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75. Circular 75 requires Chinese residents to register with an applicable branch of SAFE before establishing or acquiring control over an offshore special purpose company for the purpose of engaging in an equity financing outside of China that is supported by domestic Chinese assets originally held by those residents. Following the issuance of Circular 75, SAFE issued internal implementing guidelines for Circular 75 in June 2007. These implementing guidelines, known as Notice 106, effectively expanded the reach of Circular 75 by:
 
 
purporting to regulate the establishment or acquisition of control by Chinese residents of offshore entities which merely acquire “control” over domestic companies or assets, even in the absence of legal ownership;
 
 
adding requirements relating to the source of the Chinese resident’s funds used to establish or acquire the offshore entity;
 
 
regulating the use of existing offshore entities for offshore financings;
 
 
purporting to regulate situations in which an offshore entity establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China;
 
 
 
making the domestic affiliate of the offshore entity responsible for the accuracy of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use of proceeds; and
 
 
requiring that the registrant establish that all foreign exchange transactions undertaken by the offshore entity and its affiliates were in compliance with applicable laws and regulations.
 
No assurance can be given that our stockholders who are Chinese residents as defined in Circular 75, and who owned shares in the Company, have fully complied with, and will continue to comply with, all applicable registration and approval requirements of Circular 75 in connection with their equity interests in the Company and the Company’s acquisition of equity interests in its China based subsidiaries by virtue of our acquisition of Pacific. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to the Company following the Pacific acquisition, we cannot predict how it will affect our business operations or future strategies. For example, the ability of our present and prospective China subsidiaries to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our Chinese resident beneficial holders. In addition, such Chinese residents may not always be able to complete the necessary registration procedures required by Circular 75. We have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. If our Chinese stockholders or the Chinese stockholders of the target companies we acquired in the past or acquire in the future fail to comply with Circular 75, and if SAFE requires it, they may be subject to fines or legal sanctions, and Chinese authorities could restrict our investment activities in China, limit our subsidiaries’ ability to make distributions or pay dividends, or even unwind the transaction and revoke the right of our subsidiaries to do business in China.
 
An outbreak of avian influenza, a reoccurrence of Severe Acute Respiratory Syndrome (“SARS”), or another widespread public health problem, could adversely affect our operations.
 
A more widespread outbreak of avian influenza or a renewed outbreak of SARS or any other widespread public health problem in the PRC, where all of our operations are conducted, could have an adverse effect on our operations. If such an outbreak were to occur, 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.
 
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 President of Shaanxi Tianren and the brother of Yongke Xue, our director and Chief Executive Officer, is the voting trustee for the benefit of Fancylight Limited (“Fancylight”). As of June 3, 2009, Fancylight beneficially owned approximately 79% of our Common Stock.  Assuming the exercise for cash of the New Warrants and the sale of all the shares of Common Stock offered hereby,  Fancylight will beneficially own approximately 61.2%, of our Common Stock.  As a result, our officers and directors and their relatives are generally able to control the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions, such as 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.
 
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. Additionally, we may not issue any preferred stock or convertible debt until February 26, 2011 so long as the Selling Stockholders collectively own 20% of the Series B Stock issued under the Stock Purchase Agreement. Accordingly, we do not expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from Shaanxi Tianren. Shaanxi Tianren may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of RMB into U.S. dollars or other hard currency and other regulatory restrictions.
 
The release from escrow of the Make Good Escrow Stock due to our failure to achieve certain financial targets in 2009 would dilute the equity interests of existing stockholders.
 
Under the Stock Purchase Agreement, if our consolidated pre-tax income for the fiscal year ending December 31, 2009 is less than RMB 107,004,240 (approximately $15,660,150 based on the exchange rate as of March 31, 2009), then, depending on the amount of the shortfall from such targets, some or all of the Make Good Escrow Stock may be transferred to the Selling Stockholders. If we achieve our income targets in 2009, none of such shares shall be transferred to the Selling Stockholders and such shares will be cancelled. The transfer to the Selling Stockholders 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. The transfer of some or all of Make Good Escrow Stock to the Selling Stockholders could depress the market price of our Common Stock regardless of whether it is converted into Common Stock.

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 on the OTC Bulletin Board market. The trading volume of our Common Stock is 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 that is much less regulated than the major exchanges and our Common Stock is subject to abuses, volatility and shorting. As a result, there is currently no broadly followed or established trading market for our Common Stock and an established trading market may never develop or be maintained. 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. 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.
 
 
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, Shaanxi Tianren is located in the PRC and substantially all of its assets are located outside of the United States. Therefore, it may 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.
 
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 our 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 6,500,000 shares of our Common Stock, all of which (assuming the effectiveness of the registration statement of which this prospectus is a part and the exercise of the New Warrants) will be freely tradable. Future 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 in the future.
 
We are authorized to issue “blank check” preferred stock, which may be issued without stockholder approval and which 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 Amended and Restated 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. As of the date of this prospectus, our Board of Directors has designated and issued 1,000,000 shares of Series A Convertible Preferred Stock (the “Series A Stock”), of which no shares are currently issued or outstanding, and has designated 7,000,000 shares of Series B Stock, of which 3,448,480 shares of Series B Stock are currently issued or outstanding, excluding 2,000,000 shares of Series B Stock that constitute the Make Good Escrow Stock. 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 additional shares of 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements.  All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements.  In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words.
 
These forward-looking statements are only predictions.  These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  We have described in the “Risk Factors” section and elsewhere in this prospectus the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements.  Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.
 
The forward-looking statements in this prospectus represent our views as of the date of this prospectus.  We anticipate that subsequent events and developments will cause our views to change.  However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to update any forward-looking statement to reflect events or developments after the date on which the statement is made or to reflect the occurrence of unanticipated events except to the extent required by applicable law.  You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this prospectus.
 
This prospectus also contains estimates and other statistical data prepared by independent parties and by us relating to market size and growth and other data about our industry. These estimates and data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates and data. We have not independently verified the statistical and other industry data generated by independent parties and contained in this prospectus, and, accordingly, we cannot guarantee their accuracy or completeness. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.
 

USE OF PROCEEDS
 
We will not receive any proceeds from the sale of the shares of Common Stock underlying the New Warrants, but we may receive proceeds from the exercise of the New Warrants by the Selling Stockholders if they are exercised in cash. Under the terms of the New Warrants, cashless exercise is permitted in certain circumstances. We will not receive any proceeds from any cashless exercise of the New Warrants. There can be no assurance that any of the New Warrants will be exercised by the Selling Stockholders. In the event that all of the New Warrants to purchase the shares of Common Stock included in this prospectus are exercised in cash, we would receive $11,050,000 of gross proceeds, which we would use for expansions of our current production capacity, acquisitions, and other general corporate purposes.
 
PRICE RANGE OF COMMON STOCK
 
    Our Common Stock is listed on the OTC Bulletin Board under the symbol “SPFJ.” The following table sets forth the high and low inter-dealer prices, without mark-up, mark-down or commission, involving our Common Stock during each calendar quarter, and may not represent actual transactions.
 
2009
 
High
   
Low
 
First quarter
  $ 3.00     $ 2.50  
Second quarter (through June 9, 2009)
  $ 6.50     $ 2.75  
 
2008
 
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  

2007
 
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  

    At June 3, 2009, there were 22,271,786 shares of our Common Stock outstanding. Our shares of Common Stock are held by approximately 89 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.

We are applying to list our Common Stock on the NYSE Amex Equities on or promptly after the date of this prospectus.


DIVIDEND POLICY

We have never declared or paid any cash dividends on shares of our capital stock and are not authorized to do so until February 26, 2011 so as long as the Selling Stockholders collectively own 20% of the Series B Stock issued pursuant to the Stock Purchase Agreement. Furthermore, because we are a holding company, we rely entirely on dividend payments from Shaanxi Tianren, who may, from time to time, be subject to certain additional restrictions on its ability to make distributions to us. PRC accounting standards and regulations currently permit payment of dividends only out of accumulated profits, a portion of which must be set aside to fund certain reserve funds. Our inability to receive all of the revenues from Shaanxi Tianren’s operations may in turn provide an additional obstacle to our ability to pay dividends on our Common Stock in the future. Additionally, because the PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC, shortages in the availability of foreign currency may occur, which could restrict our ability to remit sufficient foreign currency to pay dividends.

We currently intend to retain any future earnings to finance the development and growth of our business and do not anticipate paying cash dividends on our Common Stock in the foreseeable future, but will review this policy as circumstances dictate. If in the future we are able to pay dividends and determine it is in our best interest to do so, such dividends will be paid at the discretion of the Board of Directors after taking into account various factors, including our financial condition, operating results, capital requirements, restrictions contained in any future financing instruments and other factors the Board deems relevant.

 
 
The following table describes our capitalization as of March 31, 2009.
 
You should read this table together with the consolidated financial statements and related notes appearing at the end of this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other financial information included elsewhere in this prospectus.

SHAREHOLDERS’ EQUITY
     
        Preferred B stock, $0.001 par value; 10,000,000 shares authorized, 3,448,480 shares issued and outstanding
  $ 3,448  
       Common stock, $0.01 par value; 100,000,000 shares authorized       22,271,786 shares issued and outstanding
    222,717  
        Paid-in capital
    13,791,724  
Accumulated retained earnings
    23,708,370  
Accumulated other comprehensive income
    4,479,718  
        Total stockholders’ equity
    42,205,977  
NONCONTROLLING INTEREST
    1,673,873  
       Equity
  $ 43,879,850  
 
    The table above does not include an aggregate of (i) 6,500,000 shares of Common Stock issuable upon exercise of warrants outstanding as of June 2, 2009, at a weighted average exercise or conversion price of $1.70 per share and an aggregate of 3,448,400 shares of Common Stock issuable upon conversion of an aggregate of 3,448,480 outstanding shares of the Company’s Series B Stock, or (ii) 2,000,000 Shares of Make Good Escrow Stock.

 
SELECTED CONSOLIDATED FINANCIAL DATA
 
The following statement of operations data for the fiscal years ended December 31, 2006, December 31, 2007 and December 31, 2008 and balance sheet data as of December 31, 2007 and December 31, 2008 have been derived from our audited consolidated financial statements and related notes that are included elsewhere in this prospectus.  The following statement of operations data for the fiscal years ended December 31, 2005 and balance sheet data as of December 31, 2005 and December 31, 2006 have been derived from our audited consolidated financial statements that do not appear in this prospectus.  The following statement of operations data for the three months ended March 31, 2008 and March 31, 2009 are unaudited. The financial data set forth below should be read in conjunction with our consolidated financial statements, the related notes, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.  Our historical results are not necessarily indicative of the results to be expected for any future period.

 
   
Fiscal Year Ended
December 31,
   
Three Months Ended
 March 31,
 
   
2008
   
2007
   
2006
   
2005
   
2009
   
2008
 
                                     
Revenue
  $ 41,648,605     $ 29,361,941     $ 17,427,204     $ 7,027,889     $ 6,671,061     $ 8,850,584  
Cost of Sale
    23,607,409       18,467,045       10,105,327       4,471,432       3,746,159       6,990,966  
Gross Margin
    18,041,196       10,894,896       7,321,877       2,556,457       2,924,902       1,859,618  
                                                 
Operating Expenses
                                               
General and Administrative Expenses
    2,830,739       1,158,759       405,253       488,948       411,904       566,714  
Selling Expenses
    1,453,461       686,819       664,717       448,346       273,588       241,345  
Research and Development Expenses
    449,695       30,878        -       -       275,510       7,477  
Liquidated Damages
    254,301        -        -        -       -       -  
Total Operating Expenses
    4,988,196       1,876,456       1,069,970       937,294       961,002       815,536  
                                                 
Income from Operations
    13,053,000       9,018,440       6,251,907       1,619,163       1,963,900       1,044,082  
                                                 
Other Income (Expenses)
                                               
Interest Income
    63,775       18,295       14,365       22,299       7,316       6,164  
Subsidy Income
    316,152       500,468       -       -       87,800       -  
Interest Expense
    (932,048 )     (400,517 )     (62,147 )     (2,504 )     (226,396 )     (59,028 )
Other Income (expense)
    353,698       (70,622 )     (79,616 )     50,119       (40 )     238,956  
Total Other Income (expenses)
    (198,423 )     47,624       (127,398 )     69,914       (131,320 )     186,092  
Income Before Income Tax
    12,854,577       9,066,064       6,124,509       1,689,077       1,832,580       1,230,174  
Income Tax Provision
    2,231,140       1,109,160       2,035,675       650,265       493,870       130,520  
Income Before Minority Interest
    10,623,437       7,956,904       4,088,834       1,038,812       1,338,710       1,099,654  
                                                 
Minority Interest
    613,135       360,501       243,564       3,428       99,274       47,835  
                                                 
Net Income
  $ 10,010,302     $ 7,596,403     $ 3,845,270     $ 1,035,384     $ 1,239,436     $ 1,051,819  
                                                 
Earnings Per Share:
                                               
Basic Earnings per Share
  $ 0.37     $ 0.35     $ 0.17     $ 0.05     $ 0.04     $ 0.04  
Diluted Earnings per Share
  $ 0.37     $ 0.35     $ 0.17     $ 0.05     $ 0.04     $ 0.04  
                                                 
Weighted Average Shares Outstanding
                                               
Basic
    22,230,334       22,006,173       22,006,173       22,006,173       22,271,684       22,485,118  
Diluted
    26,831,961       22,006,173       22,006,173       22,006,173       28,394,863       27,907,889  
 

   
As of December 31,
 
   
2008
   
2007
   
2006
   
2005
 
                         
Consolidated Balance Sheet Data:
                       
Cash and Cash Equivalents
  $ 15,274,171     $ 4,094,238     $ 2,135,173     $ 593,445  
Working Capital
    13,432,498       5,118,216       3,839,886       (2,496,889 )
Total Assets
    59,287,331       42,119,955       21,422,048       10,423,129  
Indebtedness, Long-term
    -       2,053,501       -       -  
Convertible Preferred Stock at $0.001 par Value
    3,448       -       -       -  
Total Stockholders' Equity
    41,059,966       26,245,867       16,300,181       5,777,652  
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. 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 below and elsewhere in this prospectus, particularly under the heading “Risk Factors.”
 
Overview
 
We are engaged in the production and sale of fruit concentrate, fruit juice beverages, and other fruit related products in and from the PRC.  We export most of the fruit concentrate products we produce, which include apple, pear, and kiwifruit, via distributors to North America, Europe and the Middle East. We also sell our Hedetang branded bottled beverages domestically primarily to supermarkets in certain regions of the PRC. Because the operations of Shaanxi Tianren, which we acquired on February 26, 2008 through our acquisition of Pacific, are the only significant operations of the Company and its affiliates, the business and financial results of Pacific and the Company 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 three month period ended March 31, 2009 with its results in the corresponding period of 2008, and its full-year 2008 results with those of 2007.
 
In the first quarter of 2009 our revenue decreased by 24.6% to $6,671,061 compared to $8,850,584 for the same period of last year.  We believe that this decrease was mainly due to a drop in consumer spending in the international market, which was mainly affected by the international financial crisis.

We believe that we will overcome the contraction in our revenues experienced in the first quarter of 2009 for the following reasons.

 First, we believe that the Chinese fruit juice beverages market will experience consistent growth. In 2008, sales in the Chinese fruit juice beverage market were about RMB50 billion (approximately $7.3 billion based on the exchange rate as of March 31, 2009), which represented an increase of approximately 10% over sales in 2007 according to China International Intelligence. Our revenue from the sales of our fruit juice beverages in the Chinese market increased 43.4% to $1,442,747 in 2008 compared to $1,006,158 in 2007. We believe that the fruit juice beverage market is a high-growth market in China because of growing personal income and an increase in health awareness.

  Secondly, we have plans for new acquisitions and further expansion of our current production capacity for the next two years. Planned expenditures for land and equipment are approximately $45.7 million for the next two years. Of this amount, $19.2 is for the expansion of Shaanxi Qiyiwangguo Modern Organic Agriculture Co., Ltd. ("Shaanxi Qiyiwangguo"), $10.8 is for the expansion of the factory owned by Huludao Wonder, $7.8 million is for the expansion of the Jingyang factory owned by Shaanxi Tianren, $3.3 million is for the acquisition of Yingkou Trusty Fruits Co., Ltd. (“Yingkou”), and $4.6 million is for the expansion of Yingkou’s facilities. Yingkou will specialize in the production of concentrated apple juice. It is located in Liaoning Province in China. Its factory is still in the process of construction and expansion and Yingkou has had no revenue to date. Our plans to acquire and expand Yinkou and expand the facilities owned by Huludao Wonder and Shaanxi Tianren are designed to increase our production of apple and pear related products. Our expansion of Shaanxi Qiyiwangguo’s facility is to increase our production of kiwifruit and mulberry related products.
 
Finally, we plan to continue to focus on creating new high margin products in the future to supplement our current product offering.   Our research and development expenses increased by $268,033 to $275,510 for the first quarter ended March 31, 2009 from $7,477 for the same period of fiscal 2008, as we entered into two contracts with an outside research institute to research and develop new products in fiscal year 2008.  We believe that the new products will provide us a higher margin because of less competition in these new product areas.

Comparison of three months ended March 31, 2009 and March 31, 2008

Results of Operations and Business Outlook

Revenues

The following table presents our consolidated net revenues for our main products for the three months ended March 31, 2009 and 2008, respectively:
   
Three Months Ended
March 31,
       
   
2009
   
2008
   
% Change
 
Concentrated pear juice
 
 $
2,658,642
   
 $
3,964,258
     
(32.9
)%
Fruit beverages
   
1,442,747
     
1,006,158
     
43.4
%
Concentrated kiwifruit juice and kiwifruit puree
   
1,428,195
     
1,489,907
     
(4.1
)%
Fresh kiwifruit
   
476,101
     
-
     
N/A
 
Fruit vinegar beverages
   
348,669
     
-
     
N/A
 
Concentrated apple juice and apple aroma
   
316,707
     
2,390,261
     
(86.8
)%
Consolidated
 
$
6,671,061
   
$
8,850,584
     
(24.6
)%
 
Revenue for the three months ended March 31, 2009 was $6,671,061, a decrease of $2,179,523, or 24.6%, when compared to the same sales period of the prior year. This decrease was primarily due to the decrease in sales of concentrated apple juice and pear juice, which was partially offset by an increase in sales of fruit beverages, fresh kiwifruit and fruit vinegar beverages in our Chinese market. Since 2008, we have focused more on kiwifruit concentrate and fruit beverages, which have a higher margin and less competition than our concentrated apple and pear juices. Due to their nutritional advantages and unique image and taste, the consumption of small breed fruits, such as kiwifruit and mulberry, and their processed products are on the rise worldwide.

Sales from concentrated pear juice decreased by $1,305,616, or 32.9%, in the first quarter of 2009 as compared to the same period of fiscal 2008. Sales from concentrated kiwifruit juice and kiwifruit puree also decreased slightly, by $61,712, or 4.1%, in the first quarter of 2009 as compared to the same period of fiscal 2008. We believe that the decrease in sales from concentrated pear juice and concentrated kiwifruit juice and kiwifruit puree was mainly caused by worsening economic conditions worldwide, which negatively affected consumer demand.

Sales from apple related products decreased by $2,073,554, or 86.8%, in the first quarter of 2009 as compared to the same period of fiscal 2008. Due to instability of the world financial markets and their influence on the global economy, the demand for concentrated apple juice in the international market decreased significantly in fiscal 2008 and such decrease in demand continued into the first quarter of 2009. Furthermore, the competition in apple-related products became stronger in China in 2008. As a result, we saw a large decrease in the price for apple-related products. In the first quarter of 2009, we did not produce any apple-related products. All our sales were from the balance of our previous inventories.

 
However, these decreases were partially offset by improved sales of our fruit beverages and fresh kiwifruit in the Chinese market. As compared with the first quarter of 2008, sales of fresh kiwifruit increased by $476,101, and sales of fruit beverages increased by $436,589, or 43.4%. The introduction of fruit vinegar beverages in the first quarter of 2009 also increased our sales by $348,669 in China.  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 the consolidated gross profit margin of our main products and the consolidated gross profit margin as a percentage of related revenues for the three months ended March 31, 2009 and 2008, respectively:

   
Three Months Ended
 March 31,
 
Gross Profit Margin
 
2009
   
2008
   
% Change
 
Concentrated pear juice
 
 $
1,276,156
   
 $
937,472
     
36.1
%
Fruit beverages
   
328,559
     
398,084
     
(17.5
)%
Concentrated kiwifruit juice and kiwifruit puree
   
740,118
     
404,038
     
83.2
Fresh  kiwifruit
   
297,728
     
-
     
N/A
 
Fruit vinegar beverages
   
174,002
     
-
     
N/A
 
Concentrated apple juice and apple aroma
   
108,339
     
120,024
     
(9.7
)%
Consolidated
 
$
2,924,902
   
$
1,859,618
     
57.3
%
                         
Gross Profit Margin as a % of Revenues
                       
Concentrated pear juice
   
48.0
%
   
23.6
%
   
103.0
%
Fruit beverages
   
22.8
%
   
39.6
%
   
(42.4
)%
Concentrated kiwifruit juice and  kiwifruit puree
   
51.8
%
   
27.1
%
   
91.1
%
Fresh  kiwifruit
   
62.5
%
   
-
     
N/A
 
Fruit vinegar beverages
   
49.9
%
   
-
     
N/A
 
Concentrated apple juice and apple aroma
   
34.2
%
   
5.0
%
   
581.2
%
Consolidated
   
43.8
%
   
21.0
%
   
108.7
%

Overall gross margin as a percentage of revenue increased by 108.7% for the three months ended March 31, 2009, from 21.0% to 43.8%, compared to the same period of fiscal 2008. In terms of dollar amount, gross margin in the three months ended March 31, 2009 was $2,924,902, an increase of $1,065,284, or 57.3%, compared to $1,859,618 in the same period of fiscal 2008, primarily due to favorable weather conditions and a resultant overabundance of fresh fruit, which resulted in a significant decrease in the purchase price of our raw materials.

The increase in gross margin as a percentage of revenue in the first quarter of fiscal 2009 was primarily due to an increase in the gross margin of concentrated pear juice, concentrated apple juice and apple aroma, concentrated kiwifruit juice and kiwifruit puree, which was partially offset by a decrease in the gross margin of fruit beverages.

 
The gross profit margin of concentrated pear juice was 48.0% in the first quarter of 2009, representing an increase of 103.0% as compared to the same period of fiscal year 2008. The increase in the gross profit margin of concentrated pear juice was primarily due to a large decrease in the general price of fresh pears during their squeezing season, which was from July or August until April 2009. As weather conditions in the beginning of this squeezing season were better than last year, there was an abundant harvest of pears in this squeezing season. As a result, the general price of pears decreased in the first quarter of fiscal year 2009, which in turn significantly improved our gross margin in pear-related products.

The gross profit margin of our fruit beverages decreased by 42.4% for the first quarter of 2009 as compared to the same period of last fiscal year. The decrease in the gross margin of fruit beverages was attributable to the decrease in the selling price. We lowered our selling price of fruit beverages during the approximately 30 day Chinese Lunar New Year holiday season in the first quarter as a promotion to boost sales. We did not conduct the same promotion in the same period last year.

The gross profit margin of concentrated kiwifruit juice and kiwifruit puree increased by 91.1% to 51.8% for the first quarter of 2009, as compared to 27.1% for the same period of fiscal year 2008. This increase was mainly due to the large decrease in the general price of fresh kiwifruit during this squeezing season, which was from September through December of 2008, as a result of abundant harvests of kiwifruit.

The gross profit margin of fresh kiwifruit was 62.5% for the first quarter of 2009. We did not sell any fresh kiwifruit in the same period last year.

We began sales of fruit vinegar beverages in the first quarter of fiscal 2009 in the Chinese market, which had a gross margin of 49.9%.  We believe that our new products enjoy a higher gross margin as a result of lower competition in the market.

The gross profit margin of concentrated apple juice and apple aroma increased by 581.2% to 34.2% for the first quarter of fiscal 2009, as compared to 5.0% for the same period of fiscal year 2008. Due to the heavy competition in the concentrated apple juice market, the instability of the financial markets and their influence on the global economy, the demand for concentrated apple juice in the international market continued to decrease. We only produced concentrated apple juice and apple aroma for one month in the apple squeezing season, which was from August 2008 to March 2009. Compared with the most recent apple squeezing season, the purchase price of apples was much higher in 2007-08 due to extremely cold weather conditions in the winter of 2007.  This resulted in a significant increase in the gross margin of apple-related products in the first quarter of 2009.

 
Operating Expenses
 
    The following table presents consolidated operating expenses as a percentage of net revenues for the three months ended March 31, 2009 and 2008, respectively:
   
Three Months Ended
March 31,
 
   
2009
   
2008
   
%
 
   
(Unaudited)
   
(Unaudited)
   
Change
 
General and administrative
 
$
411,904
   
$
566,714
     
(27.3
)%
Selling expenses
   
273,588
     
241,345
     
13.4
%
Research and development
   
275,510
     
7,477
     
3,584.8
%
Total operating expenses
 
$
961,002
   
$
815,536
     
17.8
%
                         
As a percentage of revenue
                       
General and administrative
   
6.2
%
   
6.4
%
   
(3.6
)%
Selling expenses
   
4.1
%
   
2.7
%
   
50.4
%
Research and development
   
4.1
%
   
0.1
%
   
4,788.6
%
Total operating expenses
   
14.4
%
   
9.2
%
   
56.3
%
 
Our operating expenses consist of general and administrative, selling expenses and research and development expenses. Operating expenses increased by 17.8% to $961,002 for the first quarter ended March 31, 2009 from $815,536 for the corresponding period in fiscal 2008.

General and administrative expenses decreased by $154,810, or 27.3%, to $411,904 for the first quarter ended March 31, 2009 from $566,714 for the same period of fiscal 2008. The decrease in general and administrative expenses was mainly due to a decrease of $176,147 in such expenses (primarily labor expenses) in our subsidiary, Huludao Wonder, which produces apple juice products and did not have any production in the first quarter of 2009 due to decreased global demand. As a result, there was a significant decrease in its general and administrative expenses in the first quarter of 2009.

Selling expenses increased by $32,243, or 13.4%, to $273,588 for the first quarter ended March 31, 2009 from $241,345 for the same period of fiscal 2008. This was mainly due to an increase in freight and transportation expenses as a result of the increase in sales of fruit beverages. Most of the freight and transportation expenses in the sales of fruit beverages are paid by the Company, not our customers. As a result, when the selling volumes increase, the freight and transportation expenses increase simultaneously.

Research and development expenses increased by $268,033 to $275,510 for the first quarter ended March 31, 2009 from $7,477 for the same period of fiscal 2008, as we entered into two contracts with an outside research institute to research and develop new products in fiscal year 2008.  These two contracts are from June 2008 to December 2009 with a monthly payment of RMB 600,000, or $87,800.

 
Income from Operations

In the first quarter of fiscal 2009, income from operations increased by $919,818, or 88.1%, to $1,963,900 from $1,044,082 for the first quarter of fiscal 2008. As a percentage of net sales, income from operations was approximately 29.4% for the first quarter of fiscal 2009, an increase of 17.6% as compared to 11.8% for the same quarter of fiscal 2008. The increase in income from operations in the first quarter of fiscal 2009 was primarily due to an increase in gross margins, which was partially offset by an increase in operating expenses, as previously discussed.
 
Interest Expense

Interest expense was $226,396 for the first quarter ended March 31, 2009, an increase of $167,368 as compared with the same period of fiscal 2008, primarily due to an increase in term loan facilities that we entered into after March 31, 2008 to support expansion plans and potential business opportunities. As of March 31, 2009, the balance of these short-term loans totaled RMB 76,800,000 ($11,239,737 based on the exchange rate as of March 31, 2009), with interest rates ranging from 5.58% to 9.83% per annum and maturity dates ranging from May 2009 to October 2009.

Income Tax

Our provision for income taxes was $493,870 for the first quarter ended March 31, 2009, compared to $130,520 for the corresponding period in 2008. The increase in tax provision for the first quarter of fiscal 2009 was due to an increase in the effective tax rate of Shaanxi Tianren. 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. Starting in 2009, Shaanxi Tianren is subject to the regular tax rate of 25% according to the new tax law in China, which was effective on January 1, 2008. In December 2007, the tax rate of our indirect PRC subsidiary, Shaanxi Qiyiwangguo was reduced from 33% to 25%, effective beginning January 2008. The tax rate of Huludao Wonder was also reduced to 25%, effective beginning January 2008. As a result, the Company’s income tax rate in the PRC is effectively 25%.

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on July 1, 2007 and had no material adjustment to our liabilities for unrecognized income tax benefits since its adoption.

Noncontrolling Interest

As of March 31, 2009, Shaanxi Tianren held a 91.15% interest in Shaanxi Qiyiwangguo, and Pacific held a 99% interest in Shaanxi Tianren. Net income attributable to noncontrolling interests (which is deducted in determining the Company’s net income) was $99,274 for the first quarter ended March 31, 2009, an increase of $51,439, compared to $47,835 for the same quarter of 2008.  The increase in the net income attributable to noncontrolling interests was mainly attributable to the increase in the net income generated from Shaanxi Tianren.

Net Income

Net income was $1,239,436 for the quarter ended March 31, 2009, an increase of $187,617, or 17.8%, compared to the same quarter of 2008. Such increase was primarily due to an increase in gross margin, as previously discussed.

 
Other Comprehensive Loss/Income

        Other comprehensive loss was $93,425 for the quarter ended March 31, 2009, an increase of $1,513,725, compared an income of $1,420,300 for the same quarter of 2008. Compared with March 31, 2008, the U.S. dollar weakened against the Chinese renminbi.  The weakening of the U.S. dollar against the Chinese renminbi also increased the value of our assets and liabilities denominated in U.S. dollars in the first quarter of 2009 as compared to the same period of last fiscal year.

Changes in Financial Condition

During the three months ended March 31, 2009, total assets increased $992,546, or 1.7%, from $59,287,331 at December 31, 2008 to $60,279,877 at March 31, 2009.  The majority of the increase was in cash and inventory, which was mainly offset by a decrease in accounts receivable, property, plant and equipment, and prepaid expenses and other assets.

For the three months ended March 31, 2009, cash and cash equivalents increased $7,698,907, or 52.2%, to $23,243,078 as compared to $15,274,171 for the fiscal year ended December 31, 2008.  The increase in cash was mainly due to an increase in collection of accounts receivable and an increase of $187,617 in net income in the three months ended March 31, 2009.

At March 31, 2009, the accounts receivable balance decreased by $6,599,463 from the balance at December 31, 2008 due primarily to the collection in the accounts receivable balance of fiscal year 2008 and a decrease in sales in the first quarter of fiscal 2009. The accounts receivable turnover was 114 days for the three months ended March 31, 2009, compared with 85 days for fiscal year 2008 and 109 days for the three months ended March 31, 2008. The increase in the accounts receivable turnover was mainly due to a downturn in collection of accounts receivable in Shaanxi Tianren. We usually experience a slow accounts receivable turnover in the first quarter of the fiscal year due to reduced sales when compared with the fourth quarter as a result of the seasonality of our industry. Due to the seasonality of fresh fruit, a substantial portion of our revenues are earned during the first and fourth fiscal quarters. We generally experience the lowest revenue during our second and third fiscal quarters.
  
Our inventory as of March 31, 2009 was $2,312,116, reflecting an increase of $467,719, or 25.4%, compared to inventory at December 31, 2008. Inventory consists of raw materials, packaging materials and finished products. The increase in inventory was mainly due to reduced sales in the first quarter of fiscal year 2009.
 
Prepaid expenses and other current assets at March 31, 2009 were $904,368, a decrease of $182,708 from the balance at December 31, 2008. The decrease in prepaid expenses was primarily due to a decrease in prepaid raw material of fresh fruits as a result of the end of the squeezing season for most of our products.

Property, plant and equipment decreased by $476,515, from $20,406,967 at December 31, 2008 to $19,930,452 at March 31, 2009. Construction in progress was $1,900,520 at March 31, 2009. Total capital expenditures were zero in the three months ended March 31, 2009.  The decrease in property, plant and equipment was mainly due to an increase in accumulated depreciation expenses in the first quarter of fiscal 2009 in the ordinary course of business.

 
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, $1,170,806 as of March 31, 2009. This research and development center is expected to be completed by June 30, 2009. Our estimated future capital expenditure for this project is $1,024,455. Once it is completed, it will allow our engineers to better conduct research and development toward the goal of innovating our product line.

In addition, Shaanxi Qiyiwangguo began construction on an industrial waste water processing facility and renovation of an employee building in the factory of Zhouzhi County in Shaanxi Province in fiscal year 2008.

Shaanxi Qiyiwangguo previously leased a waste-water processing facility at an annual fee of approximately $14,371. The Company is constructing a new 1,118 square meter industrial waste water processing facility. Once completed, the facility will process 1,200 cubic meters of waste water per day, which will meet the increasing production demands of Shaanxi Qiyiwangguo and will improve the use of recycled waste water. We capitalized $679,300 as construction in progress as of March 31, 2009. This project is expected to be operational by the end of the third quarter of fiscal 2009. Our estimated future input for this project is $110,994. The newly built water processing facility in Shaanxi Qiyiwangguo 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.  In the fourth quarter of fiscal 2008, Shaanxi Qiyiwangguo began renovation of an employee building. We capitalized $11,131 as construction in progress as of March 31, 2009. This project is expected to be completed by the second quarter of 2009. There will be no future capital expenditures required for this project.

Capitalized interest expenses of $39,283 are 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 was $487,158 for the first quarter of 2009, compared with $714,647 for the same quarter of the prior year.  The decrease in depreciation expenses was mainly because certain fixed assets in Shaanxi Qiyiwangguo were fully depreciated after the first quarter of 2008.

Other assets were $2,299,914 at March 31, 2009, representing a slight decrease of $62,135, or 2.6%, from the balance at December 31, 2008.


Liquidity and Capital Resources
 
As of March 31, 2009, we had cash of $23,243,078 as compared to $15,274,171 as of December 31, 2008. We believe that projected cash flows from operations, anticipated cash receipts, cash on hand, and trade credit will provide the necessary capital to meet our projected operating cash requirements for at least the next 12 months, with the exception of the acquisition Yingkou and the expansion of our current production capacity.

Our working capital has historically been generated from the operating cash flow, advances from our customers and loans from bank facilities. Our working capital was $15,296,218 as of March 31, 2009, representing an increase of $1,863,720, or 13.9%, compared to working capital of $13,432,498 as of December 31, 2008, mainly due to an increase in cash and a decrease in accounts receivable as discussed above.

The more significant source of working capital during the three months ended March 31, 2009 was $6,580,392 from the reduction of accounts receivable. The more significant uses of working capital during the three months ended March 31, 2009 was a cash payment in various taxes payable of $1,549,833.
 
Under the Stock Purchase Agreement with the Selling Stockholders, for a period of three years from the closing date of the agreement (February 26, 2008), so long as the Selling Stockholders collectively own 20% of the Series B Stock issued thereunder, we may not issue any preferred stock or any convertible debt, except for preferred stock issued to the Selling Stockholders.

Further, under the Stock Purchase Agreement with Selling Stockholders, 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 third 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 $45.7 million for the next two years.
 
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. The capital needed for our business in the next 12 months does not include the acquisition of Yingkou or the expansion of our current production capacity.
 
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 will 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.

The majority of our capital expenditures are for the expansion of our production capacity.  In the past three years, our annual capital expenditures ranged from $53,000 to $2.9 million.  We financed our capital expenditures and other operating expenses through operating cash flows and bank loans. As of March 31, 2009, the balance of short-term loans totaled RMB 76,800,000 (U.S. $11,239,737 based on the exchange rate on March 31, 2009), with interest rates ranging from 5.58% to 9.83% per annum. Of these loans, $5,239,357 are collateralized by land and buildings. These loans are due from May 2009 to October 2009.

 
Comparison of fiscal years ended December 31, 2008 and December 31, 2007
 
Results of Operations and Business Outlook
 
Revenue
 
The following table presents our consolidated net revenues for our main products for the years ended December 31, 2008 and December 31, 2007:
   
Year Ended December 31,
 
   
2008
   
2007
   
% Change
 
Concentrated kiwifruit juice and kiwifruit puree
 
 $
13,602,600
   
$
5,848,690
     
132.6
%
Concentrated pear juice
   
11,992,610
     
11,278,990
     
6.3
 
Concentrated apple juice and apple aroma
   
6,853,649
     
7,461,278
     
(8.1)
 
Fruit beverages
   
5,325,891
     
3,525,223
     
51.1
 
Fresh kiwifruit
   
2,315,392
     
1,247,760
     
85.6
 
Kiwifruit seeds
   
1,558,463
     
-
     
N/A
 
Consolidated
 
$
41,648,605
   
$
29,361,941
     
41.8
%
 
Revenue for the fiscal year 2008 was $41,648,605, an increase of $12,286,664, or 41.8%, when compared to the prior year. This increase was primarily due to an increase in sales of concentrated kiwifruit juice and kiwifruit puree, kiwifruit seeds, fresh kiwifruit and fruit beverages, which was partially offset by a decrease in sales of concentrated apple juice and apple aroma.
 
We believe that the increase in sales of concentrated kiwifruit juice and kiwifruit puree was due to the increase in market acknowledgement of our products in both the international and PRC markets and an increase in the market demand for small breed fruit products. Sales from kiwifruit related products was $17,476,455 in fiscal year 2008, an increase of $10,380,005, or 146.3%, compared to $7,096,450 for fiscal 2007. Due to their nutritional advantages and unique image and taste, the consumption of small breed fruits, such as kiwifruit and mulberry, and their processed products are on the rise worldwide. Our market share of fruit beverages in the Chinese market also showed improvement in fiscal 2008.  The net sales of fruit beverages increased by 51.1% to $5,325,891 as compared to $3,525,223 for fiscal year 2007 due to continuous marketing efforts from our sales people in Shaanxi Tianren and an increase in market demand for fruit juice in the Chinese 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.
 
Sales from apple-related products were $6,853,649 in fiscal year 2008, a decrease of $607,629, or 8.1%, compared to $7,461,278 for fiscal year 2007. The volume of concentrated apple juice exported from China in 2008 decreased by 34% as compared to 2007 primarily due to a decreased demand in the international market as a result of negative effects from the worldwide economic crisis. Furthermore, the competition in apple related products became stronger in China in 2008. Some small and mid-sized juice manufacturers sold their inventory of apple related products at a lower price in China due to the decrease in export volume. As a result, we experienced reduced demand for our apple related products.

 
Gross Margin

The following table presents the consolidated gross profit margin of our main products and the consolidated gross profit margin as a percentage of related revenues for the fiscal years 2008 and 2007, respectively:
 
   
Year Ended December 31,
 
Gross Profit Margin
 
2008
   
2007
 
% Change
 
Concentrated kiwifruit juice and kiwifruit puree
 
 $
7,338,762
   
 $
2,850,474
 
157.5
%
Concentrated pear juice
   
4,552,628
     
4,046,384
 
12.5
 
Concentrated apple juice and apple aroma
   
1,442,694
     
2,096,941
 
(31.2)
 
Fruit beverages
   
1,831,258
     
1,039,391
 
76.2
 
Fresh kiwifruit
   
1,491,896
     
861,706
 
73.1
 
Kiwifruit seeds
   
1,383,958
     
-
 
N/A
 
Consolidated
 
$
18,041,196
   
$
10,894,896
 
65.6
%
                     
Gross Profit Margin as a % of Revenues
               
 
 
Concentrated kiwifruit juice and  kiwifruit puree
   
54.0
 %
   
48.7
 %
10.7
%
Concentrated pear juice
   
38.0
     
35.9
 
5.8
 
Concentrated apple juice and apple aroma
   
21.1
     
28.1
 
(25.1)
 
Fruit beverages
   
34.4
     
29.5
 
16.6
 
Fresh kiwifruit
   
64.4
     
69.1
 
(6.7)
 
Kiwifruit seeds
   
88.8
     
 -
 
N/A
 
                     
Consolidated
   
43.3
%
   
37.1
%
16.7
%

Overall gross margin as a percentage of revenue increased by 16.7% for fiscal year 2008, from 37.1% to 43.3%, compared to fiscal 2007. In terms of dollar amount, gross margin for fiscal year 2008 was $18,041,196, an increase of $7,146,300, or 65.6%, compared to $10,894,896 in fiscal 2007, primarily due to a significant increase in sales.
 
The increase in gross margin as a percentage of revenue in fiscal 2008 was primarily due to an increase in the gross margin of concentrated kiwifruit juice and kiwifruit puree, concentrated pear juice and fruit beverages, which was partially offset by a decrease in the gross margin of concentrated apple juice and apple aroma and fresh kiwifruit.
 
The gross profit margin of concentrated kiwifruit juice and kiwifruit puree increased by 10.7% to 54.0% for fiscal year 2008, as compared to 48.7% for fiscal year 2007. This increase was mainly due to the large decrease in the general price of fresh kiwifruit in the kiwifruit squeezing season of fiscal 2008 as a result of abundant harvests of kiwifruit in 2008. The gross profit margin of fresh kiwifruit decreased by 6.7% for fiscal 2008 as compared to fiscal 2007, primarily due to a decrease in the price of fresh kiwifruit in the international market.

 
The gross profit margin of concentrated pear juice was 38.0% in fiscal year 2008, representing an increase of 5.8% as compared to fiscal year 2007. The increase in the gross profit margin of concentrated pear juice was primarily due to a large decrease in the general price of fresh pears during their squeezing season, which is from July or August until April of the following year. As weather conditions at the beginning of this squeezing season were better than last year, there was an abundant harvest of pears in fiscal 2008. As a result, the general price of pears decreased this year, which in turn improved our gross margin in pear related products.
 
The gross profit margin of our fruit beverages was 34.4% in fiscal year 2008, an increase of 16.6% compared to 29.5% for fiscal year 2007. This increase was primarily due to the change in our product mix. We sell two types of fruit beverages. One is in glass bottles, which contains more concentrated juice, and the other is in plastic polyethylene terephthalate (“PET”) bottles. Our gross margin for glass bottles was 38.6% for the fiscal year ended December 31, 2008 versus 14.4% for plastic PET bottles. We sold more fruit beverages in glass bottles for the fiscal year 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.
 
In fiscal 2008, we also had sales of $1,383,958 from kiwifruit seeds.  Kiwifruit seeds are the byproduct of kiwifruit juice. They are removed from the fresh kiwifruit 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 revenue in fiscal year 2008 was much higher than that of concentrated kiwifruit juice. The high margin of kiwifruit seeds in fiscal 2008 contributed to the improvement in gross margin for fiscal year 2008.
 
The gross profit margin of concentrated apple juice and apple aroma decreased by 25.1% to 21.1% for fiscal year 2008, as compared to 28.1% for fiscal year 2007, which was primarily due to a decrease in the price of apple-related products in the international market.

 
Operating Expenses
 
The following table presents consolidated operating expenses as a percentage of net revenues for the fiscal years 2008 and 2007, respectively:
 
   
Year Ended December 31,
 
   
2008
 
2007
   
% Change
 
General and administrative
 
$
2,830,739
 
$
1,158,759
     
144.3
%
Selling expenses
   
1,453,461
   
686,819
     
111.6
 
Research and development
   
449,695
   
30,878
     
1,356.4
 
Accrued liquidated damages
   
254,301
   
-
     
N/A
 
Total operating expenses
 
$
4,988,196
 
$
1,876,456
     
165.8
%
                       
As a percentage of revenue
                     
General and administrative
   
6.8
%
 
3.9
%
   
60.2
%
Selling expenses
   
3.5
   
2.3
     
38.8
 
Research and development
   
1.1
   
0.1
     
854.9
 
Accrued liquidated damages
   
0.6
   
0.0
     
N/A
 
Total operating expenses
   
12.0
%
 
6.3
%
   
74.3
%

Our operating expenses consist of general and administrative expenses, selling expenses and research and development expenses. Operating expenses increased by 165.8% to $4,988,196 for fiscal year 2008 as compared to $1,876,456 for fiscal year 2007.
 
General and administrative expenses increased by $1,671,980, or 144.3%, to $2,830,739 for fiscal year 2008, from $1,158,759 for fiscal year 2007. The increase in general and administrative expenses in fiscal 2008 compared with fiscal 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 were 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 $766,642, or 111.6%, to $1,453,461 for fiscal 2008 from $686,819 for 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 $418,817 to $449,695 for fiscal year 2008 from $30,878 for fiscal year 2007, as we entered two contracts with an outside research institute to research and develop new products in fiscal year 2008.  These two contracts are from June 2008 to December 2009 with a monthly payment of RMB 600,000, or $87,944.
 
We accrued $254,301 as liquidated damages in fiscal year 2008 due to a failure to meet the timetables provided for in the Registration Rights Agreement, dated February 24, 2008, with the Selling Stockholders (the “Registration Rights Agreement”) which we executed in connection with the Preferred Stock Purchase Agreement.  The registration statement filed pursuant to the Registration Rights Agreement was declared effective by the SEC on February 5, 2009.

 
Income from Operations
 
In fiscal year 2008, income from operations increased by $4,034,560, or 44.7%, to $13,053,000 from $9,018,440 for fiscal 2007. As a percentage of net sales, income from operations was approximately 31.3% for fiscal 2008, an increase of 2.0% as compared to 30.7% for fiscal 2007. The increase in the income from operations was mainly due to an increase in revenue, as previously discussed.
 
Interest Expense

Interest expense was $932,048 for fiscal year 2008, an increase of $531,531 as compared with fiscal 2007, primarily due to an increase in term loan facilities in 2008 to support expansion plans and potential business opportunities. In fiscal year 2008, the Company entered into nine short-term loan agreements with local banks in China. As of December 31, 2008, the balance of these short-term loans totaled RMB 76,800,000 ($11,256,871), with interest rates ranging from 5.58% to 9.83% per annum and maturity dates ranging from May 2009 to October 2009.
 
Income Tax
 
Our provision for income taxes was $2,231,140 for fiscal 2008, compared to $1,109,160 for fiscal 2007. The increase in tax provision for fiscal 2008 was due to a significant increase in net income for Shaanxi Qiyiwangguo in fiscal 2008, which was partially offset by a decrease in the effective tax rate for Shaanxi Qiyiwangguo. The tax rate for Shaanxi Qiyiwangguo was reduced from 33.0% to 25.0%, effective beginning January 2008.
 
Shaanxi Tianren was awarded the status of a nationally recognized High and New Technology Enterprise in December 2006. As a result, in 2007 and 2008 we received subsidies from the local government of Shaanxi Province of approximately $500,000 and $316,000, respectively.
 
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.
 
Noncontrolling Interest
 
As of December 31, 2008, Shaanxi Tianren held a 91.15% interest in Shaanxi Qiyiwangguo and Pacific held a 99% interest in Shaanxi Tianren. Net income attributable to noncontrolling interests (which is deducted in determining the Company’s net income) was $613,135 for fiscal 2008, an increase of $252,634 compared to $360,501 for fiscal 2007.  The increase in the net income attributable to noncontrolling interests was mainly due to the increase in the net income generated from Shaanxi Tianren.
 
Net Income
 
Net income was $10,010,302 for fiscal 2008, an increase of $2,413,899, or 31.8%, compared to fiscal 2007. Such increase was primarily due to an increase in sales, as previously discussed.

 
Changes in Financial Condition

During fiscal year 2008, total assets increased by $17,167,376 from $42,119,955 at December 31, 2007 to $59,287,331 at December 31, 2008. The majority of the increase was in cash and equivalents, accounts receivable, prepaid expenses and other current assets, property, plant and equipment and other assets.
 
Cash and cash equivalents reached $15,274,171 as of December 31, 2008, an increase of 273.1% from $4,094,238 as of December 31, 2007. The increase in cash and cash equivalents was mainly due to net proceeds of $3,115,072 received from certain accredited investors in a private placement transaction on February 26, 2008 and an increase of $12,286,664 in net revenue generated in fiscal year 2008.
 
Accounts receivable at December 31, 2008 were $11,610,506, an increase of $2,456,819, or 26.8%, compared to $9,153,687 at December 31, 2007. The increase was attributable mainly to an increase in sales in fiscal 2008. The turnover of accounts receivable was 85 days for fiscal 2008, a decrease of 3 days compared to 88 days for fiscal 2007. The decrease in the accounts receivable turnover was due primarily to improvement in collections in Shaanxi Tianren.
 
Inventory at December 31, 2008 was $1,844,397, a decrease of $2,615,752, or 58.6%, compared to $4,460,149 at December 31, 2007.  Our inventory as of December 31, 2007 consisted largely of concentrated apple juice produced by Huludao Wonder. 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 in fiscal year 2007. In addition, we reduced the inventory of apple related products in fiscal year 2008, which had a low gross margin due to the decrease in price in the international market.
 
Prepaid expenses and other current assets at December 31, 2008 were $1,087,076, an increase of $985,448 from that balance at December 31, 2007, due primarily to an increase of $580,314 in prepaid raw material of fresh apples. In the apple squeezing season in 2008, we saw a decrease in the price of fresh apples due to an abundant harvest of apples and the influence of the decrease in the sales price of apple related products in the international market. To ensure that we had enough fresh apples at the current low price during the squeezing season for our production needs, we prepaid a certain percentage of the estimated purchase amount to suppliers in the apple squeezing season. 
 
Property, plant and equipment increased by $2,842,820 from $17,564,147 at December 31, 2007 to $20,406,967 at December 31, 2008. The increase in property, plant and equipment was mainly due to an addition of $1,426,944 in buildings and $1,903,418 in construction in progress. In 2008, we built a new $193,324 facility in Shaanxi Qiyiwangguo for the expansion of kiwifruit production capacity. In Shaanxi Tianren, we completed a technology innovation and expansion project of $860,274 over its original industrial waste water processing facility located in the factory of Jingyang County in Shaanxi Province. 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. We also made a leasehold improvement of $373,346 in the newly leased office in Shaanxi Tianren. Construction in progress was $1,903,418 at December 31, 2008. Total capital expenditures were approximately $2,924,217 in fiscal year 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 capitalized, as construction in progress, $1,211,933 in fiscal year 2008. This research and development center is expected to be completed by June 30, 2009. Our estimated future input for this project is $1,026,017. Once it is completed, it will provide more space for our engineers to conduct research and development toward the goal of improving and diversifying our product line.
 
In addition, Shaanxi Qiyiwangguo began construction on an industrial waste water processing facility and renovation of an employee building in the factory of Zhouzhi County in Shaanxi Province. Shaanxi Qiyiwangguo 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 Shaanxi Qiyiwangguo and will improve the use of recycled waste water. We capitalized $680,336 as construction in progress during 2008. This project is expected to be operational by the end of the third quarter of fiscal 2009. Our estimated future input for this project is $111,163. The newly built water processing facility in Shaanxi Qiyiwangguo 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.  In the fourth quarter of fiscal 2008, Shaanxi Qiyiwangguo began renovation of the employee building. We capitalized $11,149 as construction in progress during 2008. This project has no economic profit to the Company and is expected to be completed by the first quarter of 2009.  There will be no future monetary input for this project.
 
We capitalized interest expenses of $39,473 in construction in progress in accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 34, Capitalization of Interest Cost, which is included in the amounts above. The source of the future investment in these three projects will be generated from our working capital and our current bank loans.
 
Land usage right was $6,404,771 as of December 31, 2008 as compared to $6,138,297 as of December 31, 2007. The increase in land usage right was mainly due to a decrease in exchange rate as of December 31, 2008 as compared to December 31, 2007. In Chinese currency, the land usage right decreased by RMB1,141,259, or approximately $164,005, based on the average exchange rate of fiscal year 2008,  due to an increase in amortization cost.
 
Depreciation and amortization was $1,903,117 for fiscal 2008, compared with $1,454,746 for fiscal 2007.  The increase in depreciation expenses was due mainly to an increase in property, plant and equipment acquired after December 31, 2007.
 
Other assets were $2,362,049 at December 31, 2008, an increase of $2,290,231 from the balance at December 31, 2007. The increase in other assets was primarily due to a down payment of $2,198,608 for the acquisition of 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 $2,198,608 based on the exchange rate as of December 31, 2008, to Dehao as a deposit for the purchase. The acquisition is targeted for completion in the second quarter of fiscal 2009 after the third party market value evaluation.
 
Total liabilities at December 31, 2008 were $16,681,046, an increase of $1,880,322, or 12.7%, compared to $14,800,724 at December 31, 2007.  The increase in liabilities was mainly due to the increase in notes payable and income tax payable, but partially offset by the decrease in accounts payable.
 
In fiscal year 2008, the Company paid off approximately $14,198,105 of short-term loans payable. The Company also entered into nine new short-term loan agreements with some local banks in China. As of December 31, 2008 the balance of these short-term loans totaled RMB 76,800,000 (U.S. $11,256,871 based on the exchange rate on December 31, 2008), with an interest rate ranging from 5.58% to 9.83% per annum. These loans are due from May 2009 to October 2009. Of these loans, $5,247,343 are collateralized by land and buildings.

 
Income tax payable increased by $1,335,524 to $1,450,433 at December 31, 2008 as compared to $114,909 at December 31, 2007. The increase in income tax payable was mainly due to an increase in net income generated by Shaanxi Qiyiwangguo in fiscal year 2008.
 
Accounts payable decreased by $2,334,648, from $2,997,740 at December 31, 2007 to $663,092 at December 31, 2008. The decrease in accounts payable was a result of the prompt payment to our vendors in fiscal year 2008. To ensure that we had sufficient fresh fruits and other materials for our production needs during the squeezing season, we expedited our payment term to our vendors and suppliers.
 
Related party payables decreased to $23,452 as of December 31, 2008 from $143,366 as of December 31, 2007, representing a decrease of 83.6%. Related party payables included the outstanding borrowing from its shareholders and related entities with common owners and directors. These loans bear no interest and have no fixed payment terms.
 
Critical Accounting Policies
 
Management’s discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our 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. We believe that the following reflects the more critical accounting policies that currently affect our financial condition and results of operations.
 
The share exchange transaction between the Company and Pacific resulted in Pacific’s stockholders obtaining a majority voting and controlling 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 Pacific Common Stock have been restated to reflect the equivalent numbers of SkyPeople equivalent shares.
 
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 RMB 300,000 (approximately $41,070 based on the exchange rate as of December 31, 2007), leased all the assets and operating facilities of Huludao Wonder, which was wholly-owned by Hede. 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.
 
Prior to the June 2008 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”). 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. The pooling method (entity under common control) is applied to the consolidation of Shaanxi Tianren with Huludao Wonder after the acquisition of Huludao Wonder.

 
Consolidation
 
The consolidated financial statements include the accounts of Shaanxi Tianren, Shaanxi Qiyiwangguo, 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, Shaanxi Qiyiwangguo 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 period 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 six months are allowed. 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 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 or 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 advances from customers, which are 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 receivable 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 of the PRC is the RMB. 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 recorded no deferred tax assets or liabilities as of March 31, 2009, 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.
 
Noncontrolling Interests
 
Noncontrolling interests represents the minority stockholders’ proportionate share of 1% of the
equity of Shaanxi Tianren and 8.85% of the equity of Shaanxi Qiyiwangguo.

 
Accounting Treatment of the February 26, 2008 Private Placement

The shares held in escrow as Make Good Escrow Stock 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 Stock is held in escrow, it 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 were accounted for in accordance with Financial Accounting Standard Board Staff Position EITF 00-19-2. Estimated damages at the time of closing were recorded as a liability and deducted from additional paid-in capital as costs of issuance. Liquidated damages determined later pursuant to the criteria for SFAS 5 were recorded as a liability and deducted from operating income.

Our failure to meet the timetables provided for in the Registration Rights Agreement resulted in the imposition of liquidated damages, which were payable in cash to the Selling Stockholders (pro rata based on the percentage of Series B Stock owned by the Selling Stockholders 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 New Warrants 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). On February 5, 2009, the registration statement was declared effective by the SEC.  We recorded liquidated damages of $254,301 in fiscal year 2008 for failure to meet the timetables provided for in the Registration Rights Agreement.

Pursuant to the Exchange Agreement, the Selling Stockholders have agreed to release the Company from its obligations to pay any liquidated damages incurred under the Registration Rights Agreement.



Business Overview

We are engaged in the production and sale of fruit concentrate, fruit juice beverages, and other fruit related products in the PRC.  Our fruit concentrates, which include apple, pear, and kiwifruit, are primarily exported via distributors to North America, Europe and the Middle East.  We sell our Hedetang branded bottled beverages domestically primarily to supermarkets in certain regions of the PRC. At December 31, 2008 our fruit concentrate, fruit juice beverages, and other fruit related products represented 78%, 13%, and 9% of our sales, respectively.
 
We believe that we are currently one of the only companies able to produce specialty fruit juices in large scale in China and are widely recognized as a leading specialty fruit juice producer.  Specialty fruit juices are juices squeezed from fruits which are grown in a relatively low quantity and include kiwifruit juice, mulberry juice, strawberry juice, and pomegranate juice.
 
Our competitive advantages lie in our modern equipment and technology employed at our production factories in Shaanxi and Liaoning Provinces, which are located near regional fruit production centers.  Our equipment and technology help ensure product quality, processing cost control and allow us to meet international juice standards such as ISO9001, HACCP and KOSHER. Our location near regional fruit production centers enables us to purchase directly from farmers and avoids the need to transport raw fruits over long distances to our processing facilities, both reducing our transportation expenses and helping us maintain high product quality by preserving freshness and helping us avoid damage to the raw fruit in transit.
 
During the year ended December 31, 2008, we produced 21,591 tons of fruit juice concentrate, 5,339 tons of fruit beverage and 5,833 tons of fresh and other fruit related products such as kiwifruit seeds and apple aroma. As we expand our current production facilities and acquire other companies in the fruit product industry, we expect our fruit processing capacity and our annual yield to grow to meet increasing customer demand.
 
Industry and Market Overview
 
We operate in China’s fast growing fruit juice beverage industry. Due to low labor costs and an abundant supply of fruit, most notably apples, pears, and kiwifruit, China is a large fruit juice concentrate producer and the largest apple juice concentrate producer in the world. Chinese fruit juice concentrates and juice beverage products produced by companies using high-quality equipment are trusted by large-scale international corporations and consumed throughout the world. In addition, marketing strategy and transportation technology improvements have enabled Chinese companies to more effectively market and distribute fruit juice concentrate and fruit juice beverages globally. For example, approximately 70% of apple juice drinks produced in the United States are based on Chinese produced apple juice concentrate.
 
The global market for processed fruit products has expanded rapidly in the last few years. The general consumption trend has begun to gradually shift from carbonated beverages to pure fruit juice products.  According to The Beverage Digest’s annual “Fact Book,” global demand for non-alcoholic single serve beverages was $106 billion in 2006 and increased 4.1% by volume from 2005 to 2006, while carbonated soft drinks declined in volume in 2005 and 2006 for the first time in 20 years. Likewise, global sales of noncarbonated drinks (tea, coffee, fortified water, juice, sports drinks, milk drinks, and energy drinks) increased by 15% from 2005 to 2006. According to the Beijing Business & Intelligence Consulting Co. Ltd., an independent research firm, sales of processed fruit exported from China is expected to reach $10.9 billion in 2010, a 42.7% increase versus the amount of processed fruit exported in 2006. This indicates that, globally, consumers are becoming increasingly health conscious.

 
Increasing disposable income combined with the health conscious nature of Chinese consumers is a positive indicator for continued growth in the Chinese fruit juice beverage market. China currently accounts for only 10% of total global fruit juice consumption and the annual per capita fruit juice consumption in China is approximately 1 kilogram. Chinese consumption shows strong growth potential when it is considered that the average annual per capita fruit juice consumption is approximately 40 kilograms in developed international markets.
 
This rapid growth in the fruit processing industry in China and worldwide has placed significant pressure on producers to increase production capacities while managing increased costs associated with transport logistics and raw materials.  To respond effectively, producers must:
 
 
utilize modern processing technology to maximize processing capacity and annual yield without significantly increasing production costs;
 
 
utilize flexible production facilities to respond quickly to market supply and demand and quickly introduce new products to the market; and
 
 
build or acquire new production facilities near stable sources of raw material that can adequately meet planned processing capacities and annual yield.
 
Competitive Advantages

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 Province’s yield of apples and kiwifruit accounted for approximately 62% and 25%, respectively, of the total output of China in 2008.  We have located our production facilities in Shaanxi Province and Liaoning Province, which also has a large yield of apples and produces the largest amount of high acidity apples in China. We have also assisted farmers located near our production facilities in building and managing their farms, thereby helping to increase output and quality of their products and generating goodwill. For example, we helped to build and provide ongoing assistance to the Qinmei Plantation, a plantation in Shaanxi Province from which we purchased all of our kiwifruit in 2008. Our close proximity to the regional production centers ensures raw material availability and freshness and reduces our fruit purchasing and transportation costs.
 
Equipment, Technology, and Quality Advantages

We purchase our key production equipment from top-ranking foreign equipment manufacturers, including Flottweg AG in Germany, FBR-ELPO S.P.A in Italy, Bertuzzi Food Processing SRL in Italy and APT Schmidt-Bretten GmbH&Co. KG in Germany. This high quality processing equipment helps ensure product quality, processing cost control and allows us to meet tougher international juice standards.
 
We have effectively combined two new pressing technologies, complete enzymolysis and multiple step digestive enzymolysis, which allows us to utilize numerous individual processes such as membrane filtration, resin absorption, and low temperature reverse osmosis membrane concentration to increase overall product quality.

 
We currently utilize seven production processes and technologies. Our processes and technologies are comprised of kiwifruit pulp removal, kiwifruit pulp concentration, cold breakdown, resin discoloration, low temperature reverse osmosis concentration, juice clarification, and pear juice concentration processes and technologies. These processes and technologies have allowed us to slowly gain market share in the fruit concentrate and fruit juice beverage industry, most notably in the kiwifruit market. The ability to remove kiwifruit hair and seeds has differentiated us from our peers.
 
Product Diversity

Our products include fruit concentrate and fruit juice beverages from apples, pears, kiwifruit, and mulberries. We also sell organic fresh fruit, kiwifruit seed and apple aroma. The ability to produce fruit juice beverages is important when fresh fruit is out of season and fruit concentrate cannot be produced.  Our range of products and production flexibility help us compete in international markets and lessen risks associated with commodity prices, seasonality and consumer preferences.

Operation Team

We have a professional, highly educated, and motivated business administration and technology development team. Our operating managers have an average of more than 10 years of experience in the fruit juice industry. We have established good relationships with several scientific research institutes and experienced consultants that we believe have been instrumental to our growth.  In total, we have more than 10 consultants with relevant industry experience.
 
Chinese Government Support

The PRC government’s agricultural industrialization policy supports our business. Shaanxi Tianren was awarded the status of a nationally recognized High and New Technology Enterprise in December 2006.  As a result, in 2007 and 2008 we received subsidies from the local government of Shaanxi Province of approximately $500,000 and $316,000, respectively. These subsidies were used to pay research and development expenses. In 2009, the Shaanxi Province government approved a plan to increase the kiwifruit plantation area in the province to 164,609 acres and increase kiwifruit production to 800,000 tons by 2015. In order to achieve this goal, the government plans to provide subsidies to local farmers to enable them to expand the kiwifruit plantation area and to provide to leading kiwifruit processing companies, such as us, rebates on interest paid by such companies on loans payable by them. We have submitted our kiwifruit industrialization development plan to the Shaanxi Province government, which has been approved by the related government department.

Growth Strategy

We have a multi-pronged growth plan to respond to market opportunities.

Increase Our Capacity

We will continue to expand the production capacity of our three existing production facilities. We will also consider acquisition opportunities in order to further expand capacity. We believe there are attractive acquisition opportunities which should allow us to further increase our fruit concentrate and fruit juice beverage market share.

 
Diversify Our Products

We hope to broaden our fruit product offerings in order to further diversify our product mix. Our strategic focus will be on expanding into fruits with harvesting seasons complementary to our current fruits. This will enable us to expand our squeezing season, thus increasing our annual production of fruit concentrate and fruit juice. In the first quarter of fiscal 2009 we introduced mulberry juice vinegar and kiwifruit juice vinegar in the Chinese market, generating revenue and a gross margin of $348,669 and over 49%, respectively, on these two new products. In addition, we will enhance our research and development activities in order to develop and produce innovative high margin products like polyphenol (an antioxidant compound with beneficial effects on health) from concentrated fruit juice to further diversify our product mix and increase our revenue.

We are continuously evaluating new trends in the markets we serve and the potential demand for new products. Utilizing our flexible production facilities, we can quickly evaluate the viability of new products from a production and profitability perspective.  Continuing to strategically diversify our product line will minimize risk by providing additional revenue and allowing us to allocate our production resources based on seasonal trends and market demand.

Enlarge Our Worldwide Customer Base

We will strive to expand our worldwide customer base by strengthening current relationships with distributors and end users in our existing markets. We also plan to expand upon our customer base by developing new relationships with strategic distributors and end users in markets we have not yet penetrated and adding direct customers in North America.  We have identified several markets in which we would like to increase our sales volume. We anticipate rapidly increasing demand for kiwifruit products in the foreseeable future. Strategic customers such as Cargill, N.V. have indicated interest in purchasing an increasing volume of some of our fruit concentrate. We believe that our relationships with companies such as Nongfu Spring Co. Ltd., HuiYuan Group Co. Ltd. and Lotte Huabang Beverage Co. Ltd. are also strong. We anticipate each of these customers will have higher order volumes in 2009.

Market research has identified several domestic and international markets that possess strong growth opportunities. We hope to slowly gain market share through marketing efforts in these areas. In 2009, we plan to set up a sales center in Los Angeles, California to facilitate the delivery of our products to our customers. We believe focusing on our existing customers while continuing to enter new markets will help us expand our customer base while minimizing business risk.

Focus on Improving Gross Margins

We plan to continue to focus on creating new high margin products in the future to supplement our current product offering. We introduced a new kiwifruit concentrate juice product to the market in the fourth quarter of 2008. The gross margin on our kiwifruit concentrate juice product was 40% in the fourth quarter of 2008 which we believe is higher than the average gross margin for the industry, our intellectual property rights on certain kiwifruit juice making processes. We sold 1,488 tons of kiwifruit concentrate juice in the fourth quarter of 2008.
 
In addition, we are making efforts to improve margins for our fruit juice beverage business segment. We are currently shifting our fruit juice beverage distribution medium towards glass versus plastic bottles. Our gross margin for glass bottles was 38.6% for the fiscal year ended December 31, 2008 versus 14.4% for PET bottles.  We also developed a fruit vinegar beverage in the first quarter of 2009 that has tested very well in the market and has a gross margin of over 49% versus an average gross margin of 20% for our pure fruit beverages.

 
Increase Sales of Fruit Concentrate and Fruit Juice Beverages in China

Currently, we only market our Hedetang brand fruit beverages in certain regions of the PRC market. In the first quarter of 2009 we began to execute our plan to expand the market presence of “Hedetang” over a broader geographic area in China. We plan to implement the following strategies: (1) focus on expanding our glass bottle production line to produce higher margin portable beverages targeting consumers in tier 2 (cities with a population over 4.5 million and a per capita gross domestic product of more than $3,000) and tier 3 (cities with a population between 1.5 and 4.5 million people or a per capita gross domestic product of $1,500 to $$3,000) Chinese cities; (2) further develop our fruit vinegar beverage distribution and continue to emphasize product innovation; and (3) expand our nationwide fruit juice sales network over the next 3 to 5 years by adding talented marketing and sales personnel.

Increase Focus on the Organic and Green Fruit Concepts

According to the Agricultural Marketing Resource Center (www.agmrc.org/markets), organic food production has grown at a rate of almost 20% per annum for the last 7 years and industry experts are continuing to forecast additional growth. Currently, a portion of the kiwifruit produced on the Qinmei plantation, which supplies our kiwifruit production facility, are organic. We have set a target to transition this kiwifruit plantation to fully organic production within five years. We also plan to establish a fruit and vegetable organic research and development center and a training center by 2010 and to convert our apple production base to become partially organic. We will carry out organic apple planting tests in Shaanxi Province and Liaoning Province in 2009 and 2010, with full conversion targeted within five years.

Products

Our core products are concentrated apple, pear, and kiwifruit juices and are produced from August to March of each year. The squeezing season for (i) apples is from August to March or April of the following year; (ii) pears is from July or August until April of the