By Jamie Lee

SINGAPORE - Celestial Nutrifoods - which made headlines last year for defaulting on convertible bonds worth more than $200 million - has posted what it called a 'negative revenue' for its second quarter, an item not often seen in financial statements.

The S-chip also duly delivered the 'huge losses' it had earlier warned of last week. This came after the China-based producer of soyabean food and beverages said yesterday that it had been hit by 'substantial sales returns' of 437 million yuan (S$87.7 million) for the three months ended June 30, 2010.

Celestial - which is still suspended from trading - said that customers' confidence in the company had been shaken by concerns about its liquidity problems and solvency status.

'This has resulted in the significant level of sales returns experienced by the group in the current quarter as customers were hesitant to promote the group's products and held back on repayments,' it said. The company did not state who its customers were.

'Due to the perishable nature of most of the group's products, the returned goods were written down as they were nearing expiration,' it said, without providing further details.

Usually, revenue relates only to amounts received from customers, so negative revenue generally should not occur. However, negative revenue might exist for a reporting period if, for example, a company underestimates the amount of returns it will receive on sales with return rights. It will then need to reverse some previously recognised revenue when the additional returns occur. This could have happened in Celestial's case.

In the event, Celestial posted a 'negative revenue' of 161 million yuan for the quarter, compared with sales of 223 million yuan a year ago. This, coupled with its 147 million yuan in cost of sales, led to a stark gross loss of 308 million yuan.

The 'negative revenue' also led the S-chip to widen its net loss to 673 million yuan for Q2 2010 from a net loss of 264 million yuan for the same period a year ago.

The company, which was listed in 2004, saw its stock running to as high as $1.95 in 2006, compared with its 28-cent offer price.

It also attracted the attention of US fund group Templeton, which in 2005 bought just over 5 per cent of the company in a share placement exercise, which sparked a re-rating of the stock.

Celestial's fortunes, however, fell in March 2009 when auditors PricewaterhouseCoopers (PwC) flagged the possibility that bondholders would seek an early redemption of its convertible bonds. The company subsequently received a notification from its convertible bond holders requiring the group to redeem bonds amounting to $234.8 million.

The group said then that it was unable to pay off its obligations without external funding, and since then, has been locked in talks with its creditors on a debt restructuring. The bonds were originally set to mature on June 12, 2011.

Celestial had issued the zero-coupon convertible bonds in 2006 at a conversion price of $2.57 per share - which was at a premium of more than 30 per cent to its share price then. Its last traded price before the suspension was 17 cents.

The company said yesterday that it continues to review strategic options to restructure its convertible bonds.

This article was first published in The Business Times.