UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
FOR
THE
QUARTERLY PERIOD ENDED MARCH 31, 2008
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934.
|
For
the
transition period from ____________ to ______________
Commission
File Number
0-51312
SHENGTAI
PHARMACEUTICAL, INC.
(Exact
name of small business issuer as specified in its charter)
|
DELAWARE
|
|
54-2155579
|
|
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
|
|
incorporation
or organization)
|
|
Identification
No.)
|
|
CHANGDA
ROAD EAST, DEVELOPMENT DISTRICT,
CHANGLE
COUNTY, SHANDONG,
PEOPLE’S
REPUBLIC OF CHINA 262400
(Address
of principal executive offices)
011-86-536-6295728
(Issuer's
telephone number)
Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past
90 days. Yes
x
No
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.
Large
accelerated filer
¨
Accelerated
filer
¨
Non-accelerated
filer
¨
Smaller
reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes
o
No
o
APPLICABLE
ONLY TO CORPORATE SSUERS
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 19,069,805 shares of Common Stock,
$.001 par value, were outstanding as of January 22, 2008.
PART
I - FINANCIAL INFORMATION
CONSOLIDATED
BALANCE SHEETS
AS
OF
MARCH 31, 2008 AND JUNE 30, 2007
ASSETS
|
|
March
31,
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
3,229,336
|
|
$
|
6,420,439
|
|
Restricted
cash
|
|
|
2,490,000
|
|
|
6,128,500
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$350,618
|
|
|
|
|
|
|
|
and
$431,178 as of March 31, 2008 and June 30, 2007,
respectively
|
|
|
7,530,395
|
|
|
5,779,967
|
|
Notes
receivable
|
|
|
567,571
|
|
|
984,675
|
|
Other
receivables
|
|
|
1,416,761
|
|
|
2,984,484
|
|
Other
receivables - related parties
|
|
|
-
|
|
|
2,491,656
|
|
Other
receivables - shareholder
|
|
|
-
|
|
|
1,229,625
|
|
Loan
to related party
|
|
|
-
|
|
|
657,500
|
|
Inventories
|
|
|
6,222,975
|
|
|
4,449,267
|
|
Prepayments
|
|
|
805,641
|
|
|
140,376
|
|
Total
current assets
|
|
|
22,262,679
|
|
|
31,266,489
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
41,998,981
|
|
|
30,178,074
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Investment
in Changle Shengshi Redian Co., Ltd.
|
|
|
3,395,183
|
|
|
2,675,678
|
|
Loan
to related party - non-current
|
|
|
428,400
|
|
|
394,500
|
|
Prepayments
- non-current
|
|
|
17,979,164
|
|
|
7,429,371
|
|
Intangible
assets - land use right, net of accumulated amortization
|
|
|
2,272,278
|
|
|
1,816,021
|
|
Total
other assets
|
|
|
24,075,025
|
|
|
12,315,570
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
88,336,685
|
|
$
|
73,760,133
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,224,288
|
|
$
|
3,807,997
|
|
Accounts
payable - related parties
|
|
|
507,612
|
|
|
949,992
|
|
Notes
payable - banks
|
|
|
4,284,000
|
|
|
8,942,000
|
|
Short
term loans
|
|
|
21,934,080
|
|
|
18,870,250
|
|
Accrued
liabilities
|
|
|
135,731
|
|
|
229,643
|
|
Other
payable
|
|
|
2,407,234
|
|
|
1,526,903
|
|
Employee
loans
|
|
|
1,651,578
|
|
|
596,516
|
|
Employee
loan - officer
|
|
|
52,572
|
|
|
-
|
|
Third
party loan
|
|
|
421,776
|
|
|
318,274
|
|
Dividends
payable
|
|
|
|
|
|
-
|
|
Customer
deposit
|
|
|
1,181,468
|
|
|
796,228
|
|
Long
term loan - current maturity
|
|
|
414,120
|
|
|
381,350
|
|
Taxes
payable
|
|
|
4,625,019
|
|
|
2,048,932
|
|
Total
current liabilities
|
|
|
42,839,478
|
|
|
38,468,085
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
Other
payable - noncurrent
|
|
|
2,965,162
|
|
|
3,661,472
|
|
Total
long term liabilities
|
|
|
2,965,162
|
|
|
3,661,472
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
45,804,640
|
|
|
42,129,557
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized,
|
|
|
|
|
|
|
|
no
shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized,
|
|
|
|
|
|
|
|
19,069,805
and 18,875,000 shares issued and outstanding as of
|
|
|
|
|
|
|
|
March
31, 2008 and June 30, 2007, respectively
|
|
|
19,070
|
|
|
18,875
|
|
Additional
paid-in capital
|
|
|
19,828,665
|
|
|
19,163,549
|
|
Statutory
reserves
|
|
|
1,735,484
|
|
|
1,735,484
|
|
Retained
earnings
|
|
|
17,154,919
|
|
|
9,885,670
|
|
Accumulated
other comprehensive income
|
|
|
3,793,907
|
|
|
826,998
|
|
Total
shareholders' equity
|
|
|
42,532,045
|
|
|
31,630,576
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
88,336,685
|
|
$
|
73,760,133
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
THREE AND NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
SALES
REVENUE
|
|
$
|
20,701,577
|
|
$
|
12,563,088
|
|
$
|
65,028,934
|
|
$
|
35,472,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
16,220,665
|
|
|
9,297,002
|
|
|
50,085,971
|
|
|
26,694,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
4,480,912
|
|
|
3,266,086
|
|
|
14,942,963
|
|
|
8,778,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,603,932
|
|
|
1,059,579
|
|
|
5,114,863
|
|
|
2,989,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
2,876,980
|
|
|
2,206,507
|
|
|
9,828,100
|
|
|
5,789,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on equity investment
|
|
|
43,070
|
|
|
83,182
|
|
|
192,826
|
|
|
105,389
|
|
Non-operating
income
|
|
|
67,451
|
|
|
1,704
|
|
|
177,160
|
|
|
98,867
|
|
Non-operating
expense
|
|
|
(96,191
|
)
|
|
(18
|
)
|
|
(300,035
|
)
|
|
(2,801
|
)
|
Interest
expense and other charges
|
|
|
(738,634
|
)
|
|
(323,688
|
)
|
|
(1,674,515
|
)
|
|
(692,326
|
)
|
Interest
income
|
|
|
55,697
|
|
|
42,396
|
|
|
154,101
|
|
|
86,041
|
|
Other
(expense), net
|
|
|
(668,607
|
)
|
|
(196,424
|
)
|
|
(1,450,463
|
)
|
|
(404,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
2,208,373
|
|
|
2,010,083
|
|
|
8,377,637
|
|
|
5,384,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
321,220
|
|
|
216,990
|
|
|
1,108,388
|
|
|
518,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,887,153
|
|
|
1,793,093
|
|
|
7,269,249
|
|
|
4,866,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
1,554,258
|
|
|
130,758
|
|
|
2,966,909
|
|
|
377,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
3,441,411
|
|
$
|
1,923,851
|
|
$
|
10,236,158
|
|
$
|
5,243,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.18
|
|
$
|
0.38
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.10
|
|
$
|
0.18
|
|
$
|
0.36
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,069,805
|
|
|
10,125,000
|
|
|
18,967,857
|
|
|
10,125,000
|
|
Diluted
|
|
|
19,845,195
|
|
|
10,125,000
|
|
|
19,959,689
|
|
|
10,125,000
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
Additional
|
|
Capital
|
|
Retained
earnings
|
|
Accumulated
other
|
|
|
|
|
|
Common
stock
|
|
Paid-in
|
|
contribution
|
|
Statutory
|
|
|
|
comprehensive
|
|
|
|
|
|
Shares
|
|
Par
value
|
|
capital
|
|
receivable
|
|
reserves
|
|
Unrestricted
|
|
income
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2006
|
|
|
10,125,000
|
|
$
|
10,125
|
|
$
|
3,915,871
|
|
$
|
(1,925,996
|
)
|
$
|
1,001,088
|
|
$
|
3,470,940
|
|
$
|
185,402
|
|
$
|
6,657,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,866,095
|
|
|
|
|
|
4,866,095
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377,729
|
|
|
377,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 31, 2007 (Unaudited)
|
|
|
10,125,000
|
|
$
|
10,125
|
|
$
|
3,915,871
|
|
$
|
(1,925,996
|
)
|
$
|
1,001,088
|
|
$
|
8,337,035
|
|
$
|
563,131
|
|
$
|
11,901,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
8,750,000
|
|
|
8,750
|
|
|
15,247,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,256,428
|
|
Capital
contribution received
|
|
|
|
|
|
|
|
|
|
|
|
1,925,996
|
|
|
|
|
|
|
|
|
|
|
|
1,925,996
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,283,031
|
|
|
|
|
|
2,283,031
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734,396
|
|
|
(734,396
|
)
|
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,867
|
|
|
263,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2007
|
|
|
18,875,000
|
|
$
|
18,875
|
|
$
|
19,163,549
|
|
$
|
-
|
|
$
|
1,735,484
|
|
$
|
9,885,670
|
|
$
|
826,998
|
|
$
|
31,630,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
warrants
|
|
|
194,805
|
|
|
195
|
|
|
506,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506,493
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,269,249
|
|
|
|
|
|
|
|
Option
issued to employees
|
|
|
|
|
|
|
|
|
158,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966,909
|
|
|
2,966,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March, 2008 (Unaudited)
|
|
|
19,069,805
|
|
$
|
19,070
|
|
$
|
19,828,665
|
|
$
|
-
|
|
$
|
1,735,484
|
|
$
|
17,154,919
|
|
$
|
3,793,907
|
|
$
|
42,532,045
|
|
The accompanying notes are an integral part of this
statement.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
NINE MONTHS ENDED March 31, 2008 AND 2007
(UNAUDITED)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
7,269,249
|
|
$
|
4,866,095
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,076,992
|
|
|
1,295,570
|
|
Amortization
|
|
|
38,263
|
|
|
31,992
|
|
Allowance
for bad debts
|
|
|
16,558
|
|
|
53,445
|
|
Gain
on equipment disposal
|
|
|
(91,480
|
)
|
|
-
|
|
Gain
on disposal of land use right
|
|
|
(24,783
|
)
|
|
-
|
|
Compensation
expense for options issued to employees
|
|
|
158,818
|
|
|
-
|
|
Earnings
on equity investment
|
|
|
(192,826
|
)
|
|
(105,389
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,108,695
|
)
|
|
(2,401,163
|
)
|
Notes
receivable
|
|
|
380,411
|
|
|
147,315
|
|
Other
receivables
|
|
|
1,987,660
|
|
|
473,493
|
|
Other
receivables - related parties
|
|
|
2,570,100
|
|
|
(575,729
|
)
|
Other
receivables - shareholder
|
|
|
1,273,495
|
|
|
(20,900
|
)
|
Inventories
|
|
|
(1,404,996
|
)
|
|
(1,175,968
|
)
|
Prepayments
|
|
|
(620,451
|
)
|
|
87,447
|
|
Prepayments
- related parties
|
|
|
-
|
|
|
(746,328
|
)
|
Accounts
payable
|
|
|
(595,474
|
)
|
|
2,756,521
|
|
Accounts
payable - related parties
|
|
|
(1,252,106
|
)
|
|
(467,190
|
)
|
Accrued
liabilities
|
|
|
(568,922
|
)
|
|
169,404
|
|
Accrued
liabilities - related party
|
|
|
482,160
|
|
|
-
|
|
Other
payable
|
|
|
362,035
|
|
|
105,702
|
|
Other
payable- equipment purchase
|
|
|
(1,241,003
|
)
|
|
-
|
|
Other
payable- discount on equipment purchase
|
|
|
626,370
|
|
|
-
|
|
Customer
deposit
|
|
|
297,543
|
|
|
1,128,506
|
|
Taxes
payable
|
|
|
2,261,984
|
|
|
316,605
|
|
Net
cash provided by operating activities
|
|
|
12,700,902
|
|
|
5,939,428
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of equity investment
|
|
|
-
|
|
|
(904,043
|
)
|
Purchases
of plant and equipment
|
|
|
(154,262
|
)
|
|
(497,603
|
)
|
Proceeds
from equipment disposal
|
|
|
35,266
|
|
|
-
|
|
Additions
to construction in progress
|
|
|
(7,725,153
|
)
|
|
(11,697,698
|
)
|
Acquisition
of land use right
|
|
|
(324,031
|
)
|
|
(10,747
|
)
|
Purchase
of software program
|
|
|
(5,426
|
)
|
|
-
|
|
Advances
on plant and equipment purchase
|
|
|
(9,876,385
|
)
|
|
(1,069,809
|
)
|
Loan
repayment from related party
|
|
|
678,200
|
|
|
-
|
|
Proceed
from land use right disposal
|
|
|
30,826
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(17,340,965
|
)
|
|
(14,179,900
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Decrease
(increase) in restricted cash
|
|
|
3,407,360
|
|
|
(1,518,640
|
)
|
Borrowings
on notes payable - banks
|
|
|
5,425,600
|
|
|
12,959,405
|
|
Payments
on notes payable - banks
|
|
|
(10,579,920
|
)
|
|
(11,431,445
|
)
|
Borrowings
on short term loans
|
|
|
12,750,160
|
|
|
17,100,419
|
|
Payments
on short term loans
|
|
|
(11,380,196
|
)
|
|
(7,550,669
|
)
|
Borrowings
on employee loans
|
|
|
1,412,554
|
|
|
627,960
|
|
Payments
on employee loans
|
|
|
(459,082
|
)
|
|
(378,336
|
)
|
Borrowings
on employee loan - officer
|
|
|
45,187
|
|
|
-
|
|
Borrowings
on third party loan
|
|
|
2,898,529
|
|
|
-
|
|
Payments
on third party loan
|
|
|
(2,826,195
|
)
|
|
-
|
|
Payments
on long term loans
|
|
|
-
|
|
|
(1,334,641
|
)
|
Cash
proceeds from issuance of common stock
|
|
|
506,493
|
|
|
-
|
|
Dividend
paid to shareholders
|
|
|
-
|
|
|
(395,838
|
)
|
Net
cash provided by financing activities
|
|
|
1,200,490
|
|
|
8,078,215
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
248,470
|
|
|
14,494
|
|
|
|
|
|
|
|
|
|
DECREASE
IN CASH
|
|
|
(3,191,103
|
)
|
|
(147,763
|
)
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
6,420,439
|
|
|
502,457
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
3,229,336
|
|
$
|
354,694
|
|
The accompanying notes are an integral part of this
statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
1 - Organization background and principal activities
Shengtai
Pharmaceutical Inc, (the “Company”), formerly known as West Coast Car Company
was
incorporated
in March 2004 in the State of Delaware.
On
May 15, 2007, the Company entered into a share exchange agreement (the “Share
Exchange Agreement”) with the shareholders of Shengtai Holding Inc. (“SHI”).
Pursuant to the Share Exchange Agreement, Qingtai Liu and Chenghai Du,
shareholders of all the issued and outstanding shares of common stock of
SHI,
exchanged all SHI’s common stock for 9,125,000 newly-issued shares of the
Company. As a result of the Share Exchange Agreement and the Share Purchase
Agreement, the Company acquired all of the outstanding capital stock of SHI.
Because SHI owns 100% of Weifang Shengtai Pharmaceutical Co., Ltd (hereinafter
known as “Weifang Shengtai”), Weifang Shengtai is now an indirect wholly-owned
subsidiary of the Company.
For
accounting purposes, t
he
acquisition of SHI has been treated as a recapitalization of SHI with SHI
as the
acquirer. The historical financial statements prior to May 15, 2007 are those
of
SHI.
In
addition, on May 15, 2007, the Company entered into and consummated a share
purchase agreement (the “Share Purchase Agreement”) with nineteen accredited
investors (the “Purchasers”). Pursuant to the Share Purchase agreement, the
Purchasers acquired 8,750,000 shares of common stock and 4,375,000 attached
warrants for $2.00 per unit (or an aggregate purchase price of $17,500,000)
and
for total net proceeds of $15,256,428. The exercise price of the warrants
$2.60
per share and the term of the warrants is five years.
In
conjunction with this Share Purchase Agreement, Mr. Qingtai Liu, the controlling
stockholder and chief executive officer, placed an aggregate 5,000,000 shares
of
common stock in an escrow account held with Tri-State Title & Escrow, LLC
upon closing of the Share Purchase Agreement. Pursuant to the Share Purchase
Agreement, one half of the shares in escrow are to be released to the Purchasers
on a pro-rated basis if the audited consolidated financial statements of
the
Company prepared in accordance with US generally accepted accounting principles
(GAAP) do not reflect at least after-tax net income of at least $7,000,000
or
fully diluted earnings per share of $0.33 for the fiscal year ended June
30,
2007; and if the audited consolidated financial statements of the Company
prepared in accordance with
US
GAAP
do not
reflect at least an after-tax net income of $9,000,000 or fully diluted earnings
per share of $0.43 for the fiscal year ending June 30, 2008, the second half
of
the escrow shares will be distributed on a pro-rated basis to the Purchasers.
The Company determined that the threshold for the year ended June 30, 2007
has
been met.
SHI
was incorporated in the state of New Jersey on February 27, 2006. The Company,
through its Chinese subsidiary,
Weifang
Shengtai, manufactures and distributes raw drug materials (glucose, dehydrate
glucose) and drug supplements (starch, dextrin, polyacrylic acid
resin).
Weifang
Shengtai was established in Changle County, Weifang City, Shandong Province,
People’s Republic of China on February 4, 1999. Mr. Qingtai Liu and his
management team were the original shareholders.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
On
December 25, 2003, Bio-One Corporation (referred to as “Bio-One”), a Nevada
corporation signed a joint venture agreement with Weifang Shengtai. Pursuant
to
the Joint Venture Agreement, Bio-One acquired a 51% interest in Weifang Shengtai
for $2,000,000 cash, to fund its share of the registered capital, and 2,090,000
shares of Bio-One’s Series A preferred stock issued to the former shareholders
of Weifang Shengtai. Weifang Shengtai’s business term was for 20 years with
registered capital of $3,920,000. Bio-One paid its $2,000,000 contribution
in
2004. The original shareholders contributed a total of $1,920,000 between
1999
and 2004.
On
April 19, 2006, pursuant to a shareholders’ resolution, 37 Chinese shareholders
of Weifang Shengtai transferred their 17.95% interest in Weifang Shengtai
to Mr.
Qingtai Liu for RMB 5,628,880 ($703,610). On June 3, 2006, the equity exchange
was approved by the local branch of the Ministry of Commerce (MOC) in
Weifang.
On
June 20, 2006, SHI signed an agreement to acquire a 100% ownership in Weifang
Shengtai from Bio-One Corporation which owned a 51% interest in Weifang Shengtai
and Mr. Qingtai Liu who owned the remaining 49% interest. Mr. Qingtai Liu,
a
founding shareholder of Weifang Shengtai, sold his 49% interest in Weifang
Shengtai to SHI for RMB 15 million (approximately $1,925,996), this amount
was
paid in May 2007. Bio-One sold its 51% interest in Weifang Shengtai to SHI
for
$1,000,000 in cash and the return of 4,180,000 Series A preferred shares
of
Bio-One owned by Mr. Qingtai Liu. Weifang Shengtai became a wholly foreign
owned
entity or “WFOE” and obtained the approval of the local branch of the Ministry
of Commerce (MOC) in the City of Weifang on June 21, 2006. The business term
is
20 years starting on February 10, 2004 when Bio-One acquired its 51% in Weifang
Shengtai. In accordance with laws governing foreign acquisitions of a Chinese
registered company, SHI contributed the $1,925,996 as required. As a result
of
this transaction, SHI exercised control over Weifang Shengtai.
On
May 26, 2007, Weifang Shengtai increased its registered capital from $3,920,000
to $15,000,000. In May and June 2007, SHI contributed $11,080,000 towards
the
additional registered capital. This transaction was approved by the local
branch
of the MOC in the City of Weifang and the Company obtained a new business
license on July 16, 2007.
Note
2 - Summary of significant accounting policies
The
reporting entity
The
consolidated financial statements of Shengtai Pharmaceutical Inc. and
Subsidiaries reflect the activities of the parent and its wholly owned
subsidiaries SHI and Weifang Shengtai. The purchase of SHI has been accounted
for as a reverse acquisition and a recapitalization. The assets and liabilities
of SHI were transferred at historical cost under the equity structure of
the
Company due to the reverse acquisition on May 15, 2007. The consolidated
financial statements have been presented as if the acquisition occurred at
June
30, 2006.
Management
has included all normal recurring adjustments considered necessary to give
a
fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2007 annual report filed on Form 10-K.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
In
the
opinion of management, the accompanying balance sheet, and related interim
statements of income, shareholders’ equity and cash flows include all
adjustments, consisting only of normal recurring items.
All
material inter-company transactions and balances have been eliminated in
the
consolidation.
Foreign
currency translation
The
reporting currency of the Company is the US dollar. The Company uses their
local
currency, Renminbi (RMB), as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period,
and
assets and liabilities are translated at the exchange rate as quoted by the
People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of shareholders’ equity. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in
a
currency other than the functional currency are included in the results of
operations as incurred.
Translation
adjustments amounted to $3,793,907 as of March 31, 2008 and $826,998 as of
June
30, 2007. Assets and liabilities were translated at 7.00 RMB and 7.60 RMB
to
$1.00 at March 31, 2008 and June 30, 2007, respectively. The equity accounts
were stated at their historical cost. The average translation rates applied
to
income statement for the nine months ended March 31, 2008 and 2007 were 7.37
RMB
and 7.85 RMB to $1.00. Cash flows are also translated at average translation
rates for the period; therefore, amounts reported on the statement of cash
flows
will not necessarily agree with changes in the corresponding balances on
the
balance sheet.
Revenue
recognition
The
Company recognizes revenue when the goods are delivered, title has passed,
pricing is fixed and collection is reasonably assured. Sales revenue represents
the invoiced value of goods, net of a value-added tax (VAT). Most of
the
Company’s
products sold in the PRC are subject to a Chinese value-added tax at a rate
of
17% of the gross sales price or at a rate approved by the Chinese local
government, except that 13% VAT applies to our products of corn plumules.
This
VAT may be offset by VAT paid by the Company on raw materials and other
materials included in the cost of producing their finished product and certain
freight expenses.
Shipping
and handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted
to
$2,647,833 and $1,479,144 for the nine months ended March 31, 2008 and 2007,
respectively. Shipping and handling costs related to costs of goods sold
amounted to $768,076 and $350,952 for the three months ended March 31, 2008
and
2007.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Use
of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management
to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example,
management estimates potential losses on outstanding receivables. Management
believes that the estimates used in preparing its financial statements are
reasonable and prudent. Actual results could differ from these
estimates.
Stock-based
compensation
The
Company records stock based compensation expense pursuant to FAS 123R. The
Company estimates the fair value of the award using the Black-Scholes Option
Pricing Model. Under FAS 123R, the Company’s expected volatility assumption is
based on the historical volatility of Company’s stock. The expected life
assumption is primarily based on historical exercise patterns and employee
post-vesting termination behavior. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at
the
time of grant.
Stock
compensation expense is recognized based on awards expected to vest, and
there
were no estimated forfeitures as the Company has a short history of issuing
options. FAS 123R requires forfeitures to be estimated at the time of grant
and
revised in subsequent periods, if necessary, if actual forfeitures differ
from
those estimates.
Cash
and concentration of risk
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People’s Republic of China and the United States of
America. Certain f
inancial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains cash balances at financial institutions which,
from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for the banks located in the Unites States. Balances at financial
institutions or state owned banks within the PRC are not covered by
insurance.
Total
cash (including restricted cash balances) in banks at March 31, 2008 and
June
30, 2007 amounted to $4,772,232 and $12,052,823 respectively of which
$100,000
is covered by insurance.
The
Company has not experienced any losses in such accounts and believes it is
not
exposed to any risks on its cash in bank accounts.
Earnings
per share
The
Company reports earnings per share in accordance with the provisions of SFAS
No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders
by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur
if
securities or other contracts to issue common stock were exercised and converted
into common stock.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
The
following is a reconciliation of the basic and diluted earnings per share
computation for the three and nine months ended
March
31,
2008 and 2007
:
|
|
Three
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
income for earnings per share
|
|
$
|
1,887,153
|
|
$
|
1,793,093
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,069,805
|
|
|
10,125,000
|
|
Diluted
effect of warrants
|
|
|
775,390
|
|
|
-
|
|
Weighted
average shares used in diluted computation
|
|
|
19,845,195
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.18
|
|
Diluted
|
|
$
|
0.10
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
income for earnings per share
|
|
$
|
7,269,249
|
|
$
|
4,866,095
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
18,967,857
|
|
|
10,125,000
|
|
Diluted
effect of warrants
|
|
|
991,832
|
|
|
-
|
|
Weighted
average shares used in diluted computation
|
|
|
19,959,689
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
At
March
31, 2008, 4,598,945,shares of outstanding warrants were included in the three
and nine months ended March 31, 2008 calculation of diluted earnings per
share.
At March 31, 2007, no shares of outstanding warrants were included in the
three
and nine months ended March 31, 2007 calculation of diluted earnings per
share.
Restricted
cash
The
Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions. As of March 31, 2008
and
June 30, 2007, these amounts totaled $2,187,947 and $5,628,500,
respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Under
the
Escrow Agreement and the Share Purchase Agreement signed by Shengtai Holding
Inc., West Coast Car Company, Chinamerica Fund LP, and Tri-State Title &
Escrow, LLC (the “Escrow Agent”), the Company was required to deposit with the
Escrow Agent $5,500,000 immediately on the Closing Date of the Share Purchase
Agreement. These funds can only be disbursed after certain criteria are met.
As
of March 31, 2008 and June 30, 2007, the amount not disbursed was $348,000
and
$500,000, respectively, and this balance is classified under restricted cash
in
the Company’s consolidated balance sheets.
Accounts
receivable
In
the
normal course of business, the Company extends unsecured credit to its
customers. Accounts receivable outstanding at March 31, 2008 and June 30,
2007
amounted to $7,881,013 and $6,211,145, respectively. Management reviews its
accounts receivable on a regular basis to determine if the allowance for
doubtful accounts is adequate. An estimate for doubtful account is recorded
in
the period of the related sales. The Company’s existing reserve is consistent
with its historical experience and considered adequate by
management.
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the periods ended March 31, 2008 and June 30, 2007 is as
follows:
|
|
Nine
months ended
|
|
Year
ended
|
|
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Beginning,
allowance for doubtful accounts
|
|
$
|
431,178
|
|
$
|
357,970
|
|
Additions
charged to bad debt expense
|
|
|
16,558
|
|
|
271,602
|
|
Write-off
charged against the allowance
|
|
|
(135,044
|
)
|
|
(217,838
|
)
|
Foreign
currency translation adjustments
|
|
|
37,926
|
|
|
19,444
|
|
Ending,
allowance for doubtful accounts
|
|
$
|
350,618
|
|
$
|
431,178
|
|
|
|
|
|
|
|
|
|
Concentrations
of risk
Management
believes the credit risk on bank deposits is limited because the counterparties
are banks with high credit-ratings assigned by international credit-rating
agencies, or state-owned banks in China. The Company has never experienced
any
losses in such accounts and believes it is not exposed to any significant
risks
on its cash in bank accounts, either in the People’s Republic of China or in the
United States.
The
Company’s concentrations of credit risk are primarily in trade accounts
receivable. Management conducts credit evaluations of customers but generally
has not required collateral or other security interests when granting credit.
Management estimates uncollectible accounts based primarily on the age of
the
receivables but also when payment problems with specific customers are
identified. For the nine months ended March 31, 2008 and 2007, the top ten
customers accounted for 35% and 33%, respectively, of total sales. Account
receivable from these customer amounted to $1,259,827 and $928,238 as of
March
31, 2008 and 2007.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
For
export sales, management frequently requires significant down payments or
letter
of credit prior to shipment. During the year, the Company maintains export
credit insurance to protect against the risk that the overseas customers
may
default on settlement.
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced
by the
political, economic and legal environments in the PRC, and by the general
state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks include
the
political, economic and legal environments as well as restrictions on foreign
currency exchange. The Company's results may be adversely affected by changes
in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods
of
taxation, among other things.
Inventories
Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Raw
materials
|
|
$
|
2,110,273
|
|
$
|
2,297,901
|
|
Work-in-progress
|
|
|
1,469,412
|
|
|
1,130,900
|
|
Finished
goods
|
|
|
2,643,290
|
|
|
1,020,466
|
|
Total
|
|
$
|
6,222,975
|
|
$
|
4,449,267
|
|
The
Company reviews its inventory periodically for possible obsolete goods in
order
to determine if any reserves are necessary. As of March 31, 2008 and June
30,
2007, management determined no reserves were necessary.
Plant
and equipment and depreciation
Plant
and
equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using the straight-line method over the estimated useful lives of
the
assets with 3% residual value.
Estimated
useful lives of the assets are as follows:
|
Estimated
Useful Life
|
Buildings
and improvements
|
5-20
|
Years
|
Machinery
and equipment
|
5-10
|
Years
|
Automobile
facilities
|
5-10
|
Years
|
Electronic
equipment
|
5-7
|
Years
|
Construction
in progress represents the costs incurred in connection with the construction
of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and placed into service.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Maintenance,
repairs and minor renewals are charged directly to expenses as incurred.
Major
additions and betterment to property and equipment are capitalized.
Long-lived
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether carrying values have become impaired. The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates
the
periods of depreciation to determine whether events and circumstances warrant
revised estimates of useful lives. As of March 31, 2008, the Company expects
these assets to be fully recoverable.
Plant
and
equipment consist of the following:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Buildings
and Improvements
|
|
$
|
6,258,427
|
|
$
|
5,272,190
|
|
Machinery
and equipment
|
|
|
36,459,236
|
|
|
22,257,978
|
|
Automobile
facilities
|
|
|
546,741
|
|
|
487,319
|
|
Electronic
equipment
|
|
|
343,172
|
|
|
307,391
|
|
Construction
in progress
|
|
|
8,290,131
|
|
|
9,055,482
|
|
Total
|
|
|
51,897,707
|
|
|
37,380,360
|
|
Accumulated
depreciation
|
|
|
9,898,726
|
|
|
7,202,286
|
|
Total
|
|
$
|
41,998,981
|
|
$
|
30,178,074
|
|
Depreciation
expense for the nine months ended March 31, 2008 and 2007 amounted to $2,076,992
and $1,295,570, respectively. Depreciation expense for the three months ended
March 31, 2008 and 2007 amounted to $889,826 and $492,804,
respectively.
Interest
costs totaling $413,928 and $572,687 were capitalized into construction in
progress for the nine months ended March 31, 2008 and 2007,
respectively
.
Interest
cost capitalized into construction in progress for the three months ended
March
31,
2008
and 2007 amounted to $127,868 and $180,738, respectively.
Investment
in Changle Shengshi Redian Co., Ltd.
The
Company entered into a joint venture partnership with Weifang City Investment
Company and Changle Century Sun Paper Industry Co., Ltd on September 16,
2003
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated in Weifang
City,
Shandong Province, People’s Republic of China. Changle Shengshi’s principal
activity is to produce and sell electricity and heat.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
On
April
12, 2005, the Company’s ownership percentage in Changle Shengshi was diluted
from 30% to 20% as a result of an additional investment to Changle Shengshi
by
another party. The Company accounts for this investment under the equity
method.
Equity method investments are recorded at original cost and adjusted to
recognize the Company’s proportionate share of the investee’s net income or
losses, additional contributions made and distributions received and
amortization of basis differences. The Company recognizes a loss if it is
determined that other than temporary decline in the value of the investment
exists.
Summarized
financial information of Changle Shengshi is as follows:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Current
assets
|
|
$
|
6,579,106
|
|
$
|
8,065,168
|
|
Non-current
assets
|
|
|
26,995,842
|
|
|
23,027,549
|
|
Total
assets
|
|
$
|
33,574,948
|
|
$
|
31,092,717
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
12,286,475
|
|
$
|
14,137,526
|
|
Non-current
liabilities
|
|
|
4,312,560
|
|
|
3,576,800
|
|
Shareholders'
equity
|
|
|
16,975,913
|
|
|
13,378,391
|
|
Total
liabilities and shareholders' equity
|
|
$
|
33,574,948
|
|
$
|
31,092,717
|
|
Summarized
financial information of Changle Shengshi for the nine months ended is as
follows:
|
|
March
31, 2008
|
|
March
31, 2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Net
sales
|
|
$
|
22,590,696
|
|
$
|
11,576,040
|
|
Gross
profit
|
|
$
|
5,211,473
|
|
$
|
2,198,452
|
|
Income
before taxes
|
|
$
|
4,021,604
|
|
$
|
1,319,949
|
|
Net
income
|
|
$
|
2,432,468
|
|
$
|
1,091,431
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
486,494
|
|
$
|
218,286
|
|
Elimination
of intercompany profit
|
|
|
272,206
|
|
|
112,897
|
|
Company’s
share of net income
|
|
$
|
214,288
|
|
$
|
105,389
|
|
Intangible
assets
All
land
in the People’s Republic of China is owned by the government. However, the
government grants “land use rights” for terms ranging from 20 to 50 years. From
March 2000 to June 2007, the Company acquired various land use rights for
approximately $2,242,859. The Company obtained another land use right in
July
2007 for $314,500. The Company amortizes the cost of land use rights over
their
term of the agreement using the straight-line method.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
On
June
30, 2007 the Company sold land use right at an auction due to relocation
in one
of the Company’s manufacturing plants. The net book value of the land use right
sold totaled $306,984. The sales price for the sale of the land use rights
was
$1,998,685.
As
of
March 31, 2008, total proceeds had been received.
Intangible
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying value has become impaired.
Management considers assets to be impaired if the carrying value exceeds
the
future projected cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether subsequent
events
and circumstances warrant revised estimates of useful lives. As of March
31,
2008, the Company expects these assets to be fully recoverable.
At
March
31, 2008 and June 30, 2007, accumulated amortization amounted to $167,007
and
$96,299, respectively. Total amortization expense for the nine months ended
March 31, 2008 and 2007 amounted to $36,278 and $31,992, respectively.
Amortization expense for the three months ended March 31, 2008 and 2007 amounted
to $14,443 and $10,833, respectively.
Income
taxes
The
Company reports income taxes under SFAS 109 which requires the recognition
of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist
of
taxes currently payable plus deferred taxes. There are no deferred tax amounts
at March 31, 2008 and June 30, 2007.
The
charge for taxation is based on the results for the year as adjusted for
items,
which are non-assessable or disallowed. It is calculated using tax rates
that
have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is accounted for using the balance sheet liability method in respect
of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding
tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period
when
the asset is realized or the liability is settled. Deferred tax is charged
or
credited in the income statement, except when it is related to items credited
or
charged directly to equity, in which case the deferred tax is also recorded
against equity.
Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current
tax
assets and liabilities on a net basis.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur.
The amount recognized is the largest amount of tax benefit that is greater
than
50% likely of being realized on examination. For tax positions not meeting
the
“more likely than not” test, no tax benefit is recorded. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosures, and transition. The adoption had no affect
on the
Company’s financial statements.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments
are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
The
Company does not anticipate any events which could cause change to these
uncertainties.
The
Company is subject to taxation in the U.S. and in the PRC jurisdictions.
There
are no ongoing examinations by taxing authorities at this time. The years
2005
to 2007 remain subject to examination by the United States tax authorities.
The
year 2007 remain subject to examination by the PRC tax authorities.
Value
Added Tax
Enterprises
or individuals who sell products, engage in repair and maintenance or import
and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales
price,
except that 13% VAT applies to our products of corn plumules. A credit is
available whereby VAT paid on the purchases of semi-finished products, raw
materials used in the production of the Company’s finished products, and payment
of freight expenses can be used to offset the VAT due on sales of the finished
product.
VAT
on
sales and VAT on purchases amounted to $10,071,774 and $7,909,022 for the
nine
months ended March 31, 2008, and $5,544,690 and $4,772,785 for the nine months
ended March 31, 2007, respectively. Sales and purchases are recorded net
of VAT
collected and paid as the Company acts as an agent for the government. VAT
taxes
are not impacted by the income tax holiday. VAT on sales and VAT on purchases
amounted to $3,455,146 and $2,829,511 for the three months ended March 31,
2008,
and $2,001,457 and $1,571,058 for the three months ended March 31, 2007,
respectively. Sales and purchases are recorded net of VAT collected and paid
as
the Company acts as an agent for the government. VAT taxes are not impacted
by
the income tax holiday.
Guarantees
From
time
to time, the Company guarantees the debt of others. Pursuant to Financial
Accounting Standards Board Interpretation 45, “Guarantor’s Accounting for and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others,” the Company records guarantees at the fair value of the
expected future payments. Management estimates they will not be required
to make
any payments under these guarantees based on past experience and the financial
condition of the companies (See note 8).
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Recently
issued accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which
addresses the measurement of fair value by companies when they are required
to
use a fair value measure for recognition or disclosure purposes under GAAP.
SFAS
No. 157 provides a common definition of fair value to be used throughout
GAAP
which is intended to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. SFAS No. 157 will
be
effective for an entity's financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect SFAS
No.
157 will have on its consolidated financial statements.
In
February 2007, the Financial Accounting Standards Board (‘‘FASB’’) issued
Statement of Financial Accounting Standards (‘‘SFAS’’) No. 159, The Fair Value
Option for Financial Assets and Financials Liabilities — Including an Amendment
of FASB Statement No. 115. This standard permits measurement of certain
financial assets and financial liabilities at fair value. If the fair value
option is elected, the unrealized gains and losses are reported in earnings
at
each reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument
in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS No. 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements.
The
standard is effective as of the beginning of the fiscal year that begins
after
November 15, 2007. The Company is currently evaluating the effect SFAS
No. 159 will have on its consolidated financial statements.
In
December 2007, the Securities and Exchange Commission (“
SEC
”)
issued
Staff Accounting Bulletin No. 110 (“
SAB
110
”).
SAB
110 amends and replaces Question 6 of Section D.2 of Topic 14,
Share-Based
Payment
of
the
Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007. We currently use the
“simplified” method to estimate the expected term for share option grants as we
do not have enough historical experience to provide a reasonable estimate.
We
will continue to use the “simplified” method until we have enough historical
experience to provide a reasonable estimate of expected term in accordance
with
SAB 110. SAB 110 is effective for the Company on January 1, 2008.
Note
3 - Supplemental disclosure of cash flow information
Income
taxes paid for the nine months ended March 31, 2008 and 2007 amounted to
$14,494
and $93,936, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Interest
paid net of capitalized amounts for the nine months ended March 31, 2008
and 2007 amounted to $990,105 and $413,037, respectively.
Note
4 - Related party transactions
In
connection with the Company’s purchase of Mr. Qingtai Liu’s 49% interest in
Weifang Shengtai as described in Note 1, and the 17.95% ownership interest
transfer transaction from the 37 Chinese original shareholders of Weifang
Shengtai (“Original Shareholders”) to Mr. Qingtai Liu on April 19, 2006, Mr.
Qingtai Liu has assumed the liabilities of the Original Shareholders’ capital
contribution and is entitled to contribute this amount as capital contribution
to the Company. On December 20, 2007 Mr. Qingtai Liu has fully repaid the
remaining balance of $1,229,625.
The
Company’s utilities are partially provided by Changle Shengshi, a related party,
as described in Note 2 under the caption “Investment in Changle Shengshi Redian
Co., Ltd”. The Company had a total of $507,612 and $949,992 of accounts payable
due to Changle Shengshi at March 31, 2008 and June 30, 2007, respectively.
The
utilities expense amounted to $5,516,287 and $2,308,729 for the nine months
ended March 31, 2008 and 2007, respectively. The utilities expense for the
three
months ended March 31, 2008 and 2007 amounted to $1,481,203 and $909,539,
respectively.
The
Company loaned money to Changle Shengshi and entered into two loan contracts
as
follows:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Due
on November 19, 2007, unsecured, 7.95% interest rate per
annum
|
|
$
|
-
|
|
$
|
657,500
|
|
|
|
|
|
|
|
|
|
Due
on September 14, 2009, unsecured, 7.6% interest rate per
annum
|
|
|
428,400
|
|
|
394,500
|
|
|
|
$
|
428,400
|
|
$
|
1,052,000
|
|
The
Company also loaned money to Changle Shengshi in June 2007, for temporary
cash
flow needs. This transaction is recurring in nature. The Company does not
charge
interest on these receivables and it is due on demand. As of June 30, 2007,
total receivable due from Changle Shengshi was $1,499,207. This balance was
repaid by Changle Shengshi in July 2007.
For
business convenience, the Company purchased starch from Shouguang Shengtai
Starch Co. Ltd. (“Shouguang Shengtai”), a company owned 40% by
Mr.
Qingtai Liu, the Company’s chief executive officer.
Since
the
Company initiated production of starch, no more purchases were made from
Shouguang Shengtai. Balance as of March 31, 2008 and June 30, 2007 was $0
and
$992,449, respectively. Total related party purchases from
Shouguang
Shengtai
for the
nine months ended March 31, 2008 and 2007 amounted to $0 and $12,839,488,
respectively, which represents approximately 0% and 53% of the Company’s
purchase of raw materials for the nine months ended March 31, 2008 and 2007,
respectively. Purchases for the three months ended March 31, 2008 and 2007
amounted to $0 and $5,728,548, respectively, which represents approximately
0%
and 19% of the Company’s purchase of raw material for the three months ended
March 31, 2008 and 2007.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
The
following table summarizes other receivable - related parties as of March
31,
2008 and June 30, 2007 are as follows:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Changle
Shengshi Redian Co., Ltd
|
|
$
|
-
|
|
$
|
1,499,207
|
|
|
|
|
|
|
|
|
|
Shouguang
Shengtai Starch Co. Ltd
|
|
|
-
|
|
|
992,449
|
|
|
|
$
|
-
|
|
$
|
2,491,656
|
|
Note
5 - Prepayments
Prepayments
represent partial payments or deposits on inventory purchases and amounted
to
$805,641 and $140,376 as of March 31, 2008 and June 30, 2007,
respectively.
Prepayments
- non-current represent partial payments or deposits on plant and equipment
purchases and amounted to $17,979,164 and $7,429,371 as of March 31, 2008
and
June 30, 2007, respectively.
Note
6 - Debt
Short
term loans
Short
term loans represent amounts due to various banks which are normally due
within
one year, and these loans can be renewed with the banks. The
Company’s
short term bank loans consisted of the follow
ing:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Loan
from Bank of China, due various dates from April 2008 to March
2009.
Monthly interest-only payments with interest rates ranging from
7.313% to
8.964% per annum, guaranteed by unrelated third party and secured
by
properties
|
|
$
|
13,366,080
|
|
$
|
10,993,400
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates
from April
2008 to January 2009 monthly interest-only payments with interest
rates
ranging from 8.307% to 8.964% per annum, guaranteed by unrelated
third
party and secured by properties
|
|
|
3,570,000
|
|
|
3,945,000
|
|
|
|
|
|
|
|
|
|
Loan
from Agriculture Bank of China, Due various dates from April 2008
to
February 2009. Monthly interest-only payments with interest at
8.964% per
annum, Guaranteed by unrelated third party and secured by
properties
|
|
|
2,142,000
|
|
|
1,959,350
|
|
|
|
|
|
|
|
|
|
Loan
from Communication Bank, due July 2007. Monthly interest-only payments
at
7.2% per annum, guaranteed by unrelated third party,
unsecured
|
|
|
-
|
|
|
1,972,500
|
|
|
|
|
|
|
|
|
|
Loan
from Commercial Bank, due July 2008. Monthly interest-only payments
at
8.019% per annum, guaranteed by unrelated third party,
unsecured
|
|
|
1,428,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Loan
from ShangHai PuFa Bank, due October 2008. Monthly interest-only
payments
at 8.384% per annum, guaranteed by unrelated third party,
unsecured
|
|
|
1,428,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,934,080
|
|
$
|
18,870,250
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Notes
payable - banks
Notes
payable - banks represent amounts due to various banks which are normally
due
within one year, and these notes can be renewed with the banks. The Company’s
notes payables consisted of the following:
|
|
March
31,
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Bank
of China, due in October 2007, restricted cash required 50% of
loan
amount, guaranteed by unrelated third party
|
|
$
|
-
|
|
$
|
4,997,000
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, $1,428,000 due in August 2008,
$2,856,000
due in September 2008, restricted cash required 50% of loan amount,
guaranteed by unrelated third party
|
|
|
4,284,000
|
|
|
3,945,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,284,000
|
|
$
|
8,942,000
|
|
Employee
loans
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
The
Company has borrowed monies from certain employees to fund the Company’s
operations. The loans bear interest at 7.2% for the first six months then
10.8%
thereafter and the principal is due upon demand. Employee loans amounted
to
$1,651,578 and $596,516
as
of March 31, 2008 and June 30, 2007, respectively.
Employee
loans - officer
The
Company has borrowed monies from Mr. Qingtai Liu to fund the Company’s
operations. The loans bear interest at 7.2% for the first six months then
10.8%
thereafter and the principal is due upon demand. Employee loans from officer
amounted to $52,572 and $0
as
of March 31, 2008 and June 30, 2007, respectively. Interest expense paid
is
immaterial on these loans.
Third
party loan
The
Company borrowed money from an unrelated individual for use in operations.
The
loan bears 7.2% interest and the principal is due upon demand. Balance of
the
loan as of March 31, 2008 and June 30, 2007 amounted to $421,776 and $318,274,
respectively.
Long
term loan - current maturity
Long
term
loan - current maturity represents amounts due to various banks and other
outside parties which are normally due within one year consisted of the
following:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
Agricultural
Credit Union, interest at 7.84% per annum, due May 2008
|
|
$
|
414,120
|
|
$
|
381,350
|
|
Total
|
|
|
414,120
|
|
|
381,350
|
|
The
remaining long term loan balance is expected to be repaid by May
2008.
Interest
expense net of amounts capitalized into construction in progress for the
nine
months ended March 31, 2008 and 2007 on all debt amounted to $1,533,256 and
$606,285, respectively. Interest expense net of amounts capitalized into
construction in progress for the three months ended March 31, 2008 and 2007
on
all debt amounted to $647,235 and $283,452, respectively.
Note
7 - Income taxes
The
Company is governed by the Income Tax Law of the People’s Republic of China
(PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws (the Income Tax Laws). Under the Income Tax
Laws,
foreign investment enterprises (FIE) generally are subject to an income tax
at
an effective rate of 33% (30% state income taxes plus 3% local income taxes)
on
income as reported in their statutory financial statements after appropriate
tax
adjustments unless the enterprise is located in specially designated regions
of
cities for which more favorable effective tax rates apply. Upon approval
by the
PRC tax authorities, FIE's scheduled to operate for a period of 10 years
or more
and engaged in manufacturing and production may by exempt from income taxes
for
two years, commencing with their first profitable year of operations, after
taking into account any losses brought forward from prior years, and thereafter
with a 50% exemption for the next three years.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
In
February 2004, the Company became a Sino-foreign joint venture. In August
2004,
the state government granted the Company income tax exemptions as follows:
100%
exemption for the first 2 years from September 2004 to August 2006 and 50%
exemption for the third to fifth years from September 2006 to August 2009.
In
addition, the Company is located in a Special Economic Zone and the PRC tax
authority has offered a special income tax rate of 24% for the company. With
the
approval of the local government, the Company is subject to income tax at
a
reduced rate of 12% from September 2006 to August 2009 after the two-year
24%
exemption for income taxes until its exemption and reduction periods expire
in
August 2009.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace existing
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The
key
changes are:
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs, except for High Tech companies
who pay a
reduced rate of 15%;
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of the
next 5
years or until the tax holiday term is completed, whichever is
sooner.
|
The
Company’s subsidiary, Weifang Shengtai, was established before March 16, 2007
and therefore is qualified to continue to be taxes at the reduced tax rate
as
described above until the tax holiday term is completed. Starting on September
1, 2009, the company will be subject to 25% income tax according to the newly
issued income tax regulation.
During
the nine months ended March 31, 2008 and 2007, the provision for income taxes
was $1,108,388 and 518,128, respectively. Income tax provision for the three
months ended March 31, 2008 and 2007 amounted to $321,220 and $216,990,
respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended March 31, 2008 and 2007:
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
34.0
|
%
|
Foreign
income not recognized in USA
|
|
|
(34.0
|
)
|
|
(34.0
|
)
|
China
income taxes
|
|
|
25.0
|
|
|
33.0
|
|
China
income tax exemption
|
|
|
(12.0
|
)
|
|
(23.4
|
)
|
Total
provision for income taxes
|
|
|
13.0
|
%
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
The
estimated tax savings due to the tax exemption for the nine months ended
March
31, 2008 and 2007 amounted to $1,699,248 and $1,258,666, respectively. The
net
effect on basic earnings per share if the income tax had been applied would
decrease basic earnings per share for the nine months ended March 31, 2008
and
2007 by $0.09 and $0.12, respectively. The net effect on diluted earnings
per
share if the income tax had been applied would decrease diluted earnings
per
share for the nine months ended March 31, 2008 and 2007 by $0.09 and $0.12,
respectively. The estimated tax savings due to the tax exemption for the
three
months ended March 31, 2008 and 2007 amounted to $321,704 and $364,215,
respectively. The net effect on basic earnings per share if the income tax
had
been applied would decrease basic earnings per share for the three months
ended
March 31, 2008 and 2007 by $0.02 and $0.04, respectively. The net effect
on
diluted earnings per share if the income tax had been applied would decrease
diluted earnings per share for the three months ended March 31, 2008 and
2007 by
$0.02 and $0.04, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Taxes
payable
Taxes
payable consisted of the following:
|
|
March
31, 2008
|
|
June
30, 2007
|
|
|
|
(Unaudited)
|
|
|
|
VAT
payable
|
|
$
|
2,509,391
|
|
$
|
1,273,390
|
|
Individual
income tax withheld
|
|
|
14,454
|
|
|
1,316
|
|
Income
tax payable
|
|
|
2,091,481
|
|
|
764,827
|
|
Housing
property tax payable
|
|
|
9,693
|
|
|
7,306
|
|
Others
|
|
|
-
|
|
|
2,093
|
|
Total
|
|
$
|
4,625,019
|
|
$
|
2,048,932
|
|
Note
8 - Commitments and Contingent liabilities
Guarantees
As
of
March 31, 2008, the Company guaranteed $8.1 million of short term loans for
unrelated parties. The Company is obligated to perform under the guarantee
if
these parties failed to pay principal and interest payments when due. The
maximum potential amount of future undiscounted payments under the guarantee
is
$8.7 million including accrued interest. The Company did not record a liability
for the guarantee because management believes the likelihood of that the
Company
will have to pay is remote. Detail of guarantee amount to the unrelated parties
as of March 31, 2008 is as follows:
Company
|
|
Short
Term Bank Loans
|
|
Chang
Le Century Sun Paper Industry Co.
|
|
$
|
999,600
|
|
Shangdong
Kuangji Group Inc.
|
|
|
7,140,000
|
|
Total
|
|
$
|
8,139,600
|
|
Note
9 - Shareholders’ equity
On
May 15, 2007, the Company entered into a share purchase agreement (the “Share
Purchase Agreement”) with nineteen accredited investors (the “Purchasers”).
Pursuant to the Share Purchase Agreement, the Purchasers acquired 8,750,000
shares of common stock and 4,375,000 warrants for $2.00 per unit for $17,500,000
(net proceeds of $15,256,428.)
In
connection with the offering, the Company paid a placement fee equal to 12%
of
gross proceeds in cash totaling $2,100,000 and issued 218,750 warrants.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Warrants
The
4,375,000 warrants (“Investor Warrants”) carry an exercise price of $2.60 and a
5-year term. They are callable if the Company’s shares trade at $8.00 for 20
consecutive trading days and underlying shares are registered for resale.
The
warrants contain a standard adjustment provisions upon stock dividend, stock
split, stock combination, recapitalization and a change of control transaction.
The
Company also issued 218,750 warrants (“Placement Agent Warrants”) to Brill
Securities, the Placement Agent. These warrants have the same terms as the
Investor Warrants. These warrants were issued on August 8, 2007.
Concurrent
with the offering, the Company issued Chinamerica Fund, LP 75,000 warrants
and
Jeff Jenson 25,000 warrants (collectively as “Lead Investor Warrants”) to
compensate the former as lead investor and the latter in assisting in providing
the shell of West Coast Car Company. These warrants have the same term as
the
Investor Warrant except with an exercise price of $0.01 per share.
All
Investor Warrants, Placement Agent Warrants, and Lead Investor Warrants meet
the
conditions for equity classification pursuant to FAS 133 “Accounting for
Derivatives” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock”. Therefore, these
warrants were classified as equity and accounted as common stock issuance
cost.
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
Warrants
Outstanding
|
|
Warrants
Exercisable
|
|
Exercise
Price
|
|
Contractual
Life
|
|
Outstanding,
June 30, 2007
|
|
|
4,475,000
|
|
|
4,475,000
|
|
$
|
2.54
|
|
|
4.13
|
|
Granted
|
|
|
218,750
|
|
|
218,750
|
|
|
2.60
|
|
|
3.63
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
194,805
|
|
|
194,805
|
|
|
2.60
|
|
|
-
|
|
Outstanding,
March 31, 2008
|
|
|
4,498,945
|
|
|
4,498,945
|
|
$
|
2.54
|
|
|
3.38
|
|
Stock
options
On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”).
On
May
14, 2008, the Company granted 500,000 stock options and 160,000 non-qualified
stock options pursuant to the Stock Incentive Plan. All options have an
exercise
price of $3.34, which is the closing price on the date of grant, and expire
five
years after the date of grant. All options vest over a period of three
years
from the date of grant.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option- pricing model are as follows:
Risk-free
interest rate
|
3.22%
|
Expected
life of the options
|
4 year
|
Expected
volatility
|
146%
|
Expected
dividend yield
|
0%
|
The
volatility of the Company’s common stock was estimated by management based on
the historical volatility of the Company’s common stock, the risk free interest
rate was based on Treasury Constant Maturity Rates published by the U.S.
Federal
Reserve for periods applicable to the estimated life of the options,
and the
expected dividend yield was based on our current and expected dividend
policy.
The value of the options was based on the Company’s common stock price on the
date the options were granted.
SFAS 123R allows use of the “simplified”
method to determine the term when other information is not available.
Because
the Company does not have a history of employee stock options, the Company
uses
the simplified method to estimate the life of the option taking the sum
of the
vesting period and the contractual life and then calculating the midpoint
which
is the estimated term of the options.
The
stock
option activity was as follows:
|
|
Options
outstanding
|
|
Weighted
Average Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Outstanding,
June 30, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
660,000
|
|
$
|
3.34
|
|
$
|
-
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
Outstanding
March 31, 2008
|
|
|
660,000
|
|
$
|
3.34
|
|
$
|
-
|
|
Following
is a summary of the status of options outstanding at March 31,
2008:
Outstanding
Options
|
Exercisable
Options
|
|
Exercise
Price
|
|
Outstanding
Options
|
|
Average
Remaining Contractual Life
|
|
Average
Exercise Price
|
|
Exercisable
Options
|
$
|
3.34
|
|
660,000
|
|
4.83
|
$
|
3.34
|
|
--
|
Compensation
expense recognized for the nine and three months ended March 31, 2008 was
$158,818.
Note
10 - Statutory reserves
The
laws
and regulations of the People’s Republic of China required that before a
Sino-foreign cooperative joint venture enterprise distributes profits to
its
partners, it must first satisfy all tax
liabilities,
provide for losses in previous years, and make allocations, in proportions
determined at the discretion of the board of directors, after the statutory
reserve. The statutory reserves include the surplus reserve fund, and the
enterprise fund. These statutory reserves represent restricted retained
earnings.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Surplus
reserve fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory
surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividends
to
shareholders. For the nine months ended March 31, 2008 and 2007, the Company
did
not transfer any funds to this reserve. The surplus reserve fund is
non-distributable other than during liquidation and can be used to fund previous
years’ losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders in proportion
to their shareholding or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue
is
not less than 25% of the registered capital.
Enterprise
fund
The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required and the Company has not made any contribution to
this
fund.
Note
11 - Retirement benefit plans
Regulations
in the People’s Republic of China require the Company to contribute to a defined
contribution retirement plan
for the
benefit of all permanent employees
.
The
Company is required to make contributions to the state retirement plan at
15% to
20% of the monthly basic salaries of all permanent current employees. The
PRC
government is responsible for the benefit liability to these retired employees.
For
the
nine
months
ended
March
31,
2008 and 2007, the Company made
pension
con
tribution
s
in the
amount of
$139,073
and $151,821, respectively.
For
the
three
months
ended
March
31,
2008 and 2007, the Company made
pension
con
tribution
s
in the
amount of
$47,558
and $37,118, respectively.
Note
12 - Revenue by geographic area
The
following table summarized financial information for the nine and three months
ended March 31, 2008 and 2007 concerning the Company’s revenues based on
geographic area:
For
the
nine months ended,
|
|
March
31, 2008
|
|
March
31, 2007
|
|
Revenue
|
|
(Unaudited)
|
|
(Unaudited)
|
|
China
|
|
$
|
58,498,996
|
|
$
|
32,363,834
|
|
International
|
|
|
6,529,938
|
|
|
3,109,064
|
|
Total
|
|
$
|
65,028,934
|
|
$
|
35,472,898
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
For
the
three months ended,
|
|
March
31, 2008
|
|
March
31, 2007
|
|
Revenue
|
|
|
(Unaudited
|
)
|
|
(Unaudited
|
)
|
China
|
|
$
|
18,693,577
|
|
$
|
11,468,189
|
|
International
|
|
|
2,008,000
|
|
|
1,094,899
|
|
Total
|
|
$
|
20,701,577
|
|
$
|
12,563,088
|
|
Note
13 - Subsequent event
Short
term loans
Loan
amount due to Bank of China in April 2008 amounted to $856,800 was subsequently
repaid in April 2008. Subsequent to the balance sheet date, the Company has
loan
from Bank of China and Industrial and Commercial Bank of China at $856,800
and
$428,400, respectively.
Stock
option
On
April
30, 2008, the Company hired Ms. Yiru Shi as Chief Financial Officer of the
Company. Ms. Shi’s compensation is set forth in an employment agreement between
Ms. Shi and the Company. Under that agreement, Ms. Shi is to be employed
by the
Company for three years, and is to receive compensation consisting of the
following: (i) a salary of $108,000 per year; (ii) options (or warrants) to
purchase 50,000 shares of common stock of the company at a strike price (or
exercise price) of $3.30 per share each time the Company completes a financing
transaction; (iii) if at the end of three years she has not received stock
options (or warrants) to purchase at least 150,000 shares of common stock
of the
Company, the difference between 150,000 and the number of such options (or
warrants) she has received; and (iv) in the discretion of management, additional
shares as a bonus.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Forward
looking statements
The
following is a discussion and analysis of the results of operations
of Shengtai Pharmaceutical, Inc. (the "Company", "we", "our" or
"us") and should be read in conjunction with our financial statements and
related notes contained in this Form 10-Q. This Form 10-Q contains forward
looking statements that involve risks and uncertainties. You can identify
these
statements by the use of forward-looking words such as "may", "will", "expect",
"anticipate", "estimate", "believe", "continue", or other similar words.
You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operation
or financial condition or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are unable to accurately
predict or control. Those events as well as any cautionary language in
this Form 10-Q provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations
we
describe in our forward-looking statements. You should be aware that the
occurrence of the events described in this Form 10-Q could have a material
adverse effect on our business, operating results and financial condition.
Actual results may differ materially from current expectations.
Overview
We
are,
through our wholly-owned subsidiary, Shengtai Holding Inc. and its wholly-owned
subsidiary in the People’s Republic of China (“PRC”), Weifang Shengtai
Pharmaceutical Co., Ltd, a leading manufacturer and supplier of pharmaceutical
grade glucose in the PRC. We also manufacture glucose, cornstarch and other
glucose-related products for the Chinese market.
During
the nine months ended March 31,2008, we produced a total of approximately
66,964
metric tons of glucose, and our sales for pharmaceutical grade glucose and
other
glucose products were $26 million, or 40.28% of our revenues. Because we
ceased
glucose production in our old facility in downtown Changle at the beginning
of
second quarter, the amount of glucose produced was lower than the corresponding
period last year.
Our
new
cornstarch production facility, which has a maximum capacity to produce 240,000
metric tons of cornstarch per year, was fully completed at the end
of October 2007. This new facility is close to our existing glucose
production plant and new glucose production complex that is currently near
completion of construction.
During
the nine months ended March 31,2008, we produced a total of 127,511.91 metric
tons of cornstarch, of which 44,943.56 metric tons were used to satisfy our
own
glucose production needs. Some excess cornstarch was then sold to outside
customers, resulting in 33.72% of our total sales revenue. Although cornstarch
had a lower gross profit margin than glucose, we nevertheless increased its
production which generated necessary working capital and funds for construction
of our new glucose complex. We believe that once we complete the upgrade
of our
existing facilities and complete our new glucose production complex in the
first
half of calendar 2008, we will utilize more cornstarch internally for the
production of pharmaceutical glucose and other higher value-added
products.
The
principal raw material for pharmaceutical glucose is cornstarch. By using
the
products from our own cornstarch production facilities, we can ensure their
quality and consistency. Also, because cornstarch is produced in house, we
are
able to eliminate shipping costs to transport the cornstarch to our glucose
production facility and operating costs resulting in lower manufacturing
costs.
Corn
is
the principal raw materials for our cornstarch. Since mid-2007 food prices
have
been climbing at double-digit annual inflation rates in China, mostly due
to the
shortages of pork and grain. Recently Chinese regulators reiterated publicly
that they intended to control the development of industrial use of corn,
such as
the conversion of corn into ethanol. Chinese leaders worried that industrial
demand for corn would raise the corn price and the government was determined
to
curb the use of corn for fuel.
At
the
same time, since December 11, 2007, Chinese regulators have been selling
corn
reserves to the open market on a weekly basis for approximately $240 per
metric
ton.
Management
believes that stable corn prices will help maintain the availability of our
raw
materials, and therefore stabilize our gross profit margin. We consider these
government policies have had and will continue to have positive effects on
our
operations.
In
addition to our pharmaceutical glucose series of products and cornstarch,
we also produce significant amount of other non-medicinal but glucose or
cornstarch related products such as syrup, starch, dextrin, corn embryo,
fibers,
protein powders Avermectins, and sodium gluconate, which are used for food,
beverage and other industrial purposes. Constituted approximately 26% of
our
total sales revenues for the nine months ended March 31, 2008.
During
the nine months ended March 31, 2008, we expanded our manufacturing of
Avermectins, which were a veterinary medicine derived from glucose. We have
greatly improved the efficiencies of Avermectins production over the past
year.
The monthly capacity has increased, resulting in monthly capacity increasing
from 700-800 kilograms to approximately 1000 kilograms. At the same time,
we
have increased yield coefficient from 90% to 93%. We believe that Avermectins
production will eventually become a substantial product line due to its high
market demand and considerable gross profit margin. However, we currently
do not
generate material profits from this product due to the small amounts we produce,
which is not yet sufficient to cover the associated overhead costs. In order
to
achieve economies of scale and profitability, we believe we will need to
produce
approximately 100 metric tons.
At
the
end of June 2007, we set up a new product line to manufacture sodium gluconate.
This non-corrosive, non-toxic and highly pure gluconate is gaining popularity
as
a chelating agent in the PRC and is widely used in pharmaceutical, construction
and chemical industries. Sodium gluconate is widely used as a retarder of
cement
in the construction industry. It efficiently prevents commercial cement from
concreting and agglomerating during transportation. It is also used as a
surface
cleaning agent of steel, a professional cleaning agent of glass bottles,
and an
antiscale and corrosion inhibitor. Accordingly, we are targeting construction
companies as our end customers since real estate construction is a booming
sector in the PRC economy.
Because
we have only a short production history with this product, we cannot predict
future profitability.
Management
strongly believes that through manufacturing innovative products to meet
market
demand, we would be able to command better profit margins, diversify our
product
lines and minimize our operating risks.
It
is our
understanding that better living standards would lead to higher consumption
of
our products in the PRC. The robust and continuing economic growth, the rising
purchasing power of domestic market, as well as the public awareness of quality
health care products, are all drivers in the demand for our products. The
strong
growth in the PRC pharmaceutical industry will also help increase the selling
prices of our major products, and enhance our revenues and increase our gross
profit margins.
We
believe that production capacity and product quality are key factors in
entrenching our market leadership position and to accomplishing our long
term competitiveness. As a result, we have been placing emphasis on (i) product
quality control, (ii) enhancement of operating efficiency and employee
competence, (iii) expansion of geographical coverage and diversification
of
customer base, and (iv) new product development.
Our
rate
of quality output (output conforming to pharmaceutical-grade glucose product
specifications) is maintained at 100%. We have a three-tier quality control
system and a well equipped quality inspection center to ensure timely detection
and then reprocessing of non-conforming products.
Recently
some national and local authorities carefully inspected our production lines
and
workshops, and then certified both the quality of our equipments and the
safety
of our production. Now all our production facilities have been fully certified
cGMP (Good Manufacturing Practice for Drugs), ISO9001 and HACCP. The State
Food
and Drug Administration certified our production facilities again and extended
the production permit to October 2010. Recently CCIC Conformity Assessment
Services Co. renewed our HACCP certificate. HACCP, or Hazard Analysis and
Critical Control Points, is a systematic preventive approach to food and
pharmaceutical safety which aims at identifying and eliminating or reducing
the
critical control points where risks might arise, rather than merely inspecting
the finished products.
At
the
same time, we have been striving to get our products recognized by international
authorities. Most of our products are also certified HALAL, KOSHER and IP
GMO,
which are recognized globally. We believe that helps our future expansion
in
oversea markets.
Our
production lines are vertically integrated. Our production facilities are
all
inter-connected by an enclosed pipeline system to enhance overall production
efficiency, minimize waste of water and raw materials, and avoid production
contamination. We constantly develop new production technology to recycle
our
waste water and byproducts. At the same time, we are improving overall
production efficiency by analyzing and ameliorating inefficient production
processes.
In
December 2006, the Changle local government negotiated with us to surrender
the
land use rights for our old factory in the downtown Changle for use in municipal
construction. The land we occupied was 27,396 square meters. We purchased
a
bigger parcel of land in Changle Economic and Technology Development Zone
with
85,880 square meters as described below.
After
acquiring the land, we began to develop it and build a new glucose production
complex with an anticipated production capacity of 120,000 tons per year.
The
new facility will be used to produce pharmaceutical grade glucose and other
value-added glucose products. We plan to equip this complex with
state-of-the-art machinery and technology, and employ strict quality control
standards over it. We have already ordered the machinery and equipment for
the
glucose production complex and are training our employees to run it.
We
commenced construction in early July 2007 and anticipate that construction
will
be completed in the first half of calendar year 2008.
We
continue to strengthen our domestic sales network, which presently covers
almost
all provinces of mainland China except Tibet Autonomous Region. We have
established four representative offices in Chengdu, Guangzhou, Hangzhou and
Nanchang to strengthen our domestic sales network. We believe that these
offices
help us to better interact with our customers, reinforce our sales force
and
improve our corporate image. Before the new glucose complex is put into use
next
year, the domestic market remains our focus and major customer
base.
At
the
same time, we witnessed a modest increase of global sales during the nine
months
ended March 31, 2008. We have been successful in exporting more dextrose
anhydrate and pharmaceutical grade oral glucose during the reporting period.
Currently we export to customers in over seventy countries. Our international
sales comprised approximately 10.04% of our total sales revenues during the
nine
months ended March 31, 2008, slightly higher than the percentage of the
corresponding period last year, although the volume and dollar amount both
increased.
We
are
however cautious about our expanding international sales. China has been
imposing more and more policies to discourage exports due to China’s trading
surplus, especially those related to food and natural resources processing.
Our
international marketing team would carefully analyze our profitability by
considering the effects of the gradual appreciation of
Renminbi
against
the U.S. dollar and production costs before committing to such transactions.
We
constantly strive to broaden and diversify our customer base. We believe
that a
broader customer base will mitigate our reliance on certain customers. We
also
believe a broader market for our products can increase demand for our products,
reduce our vulnerability to market changes, and provide additional areas
of
growth in the future. For the nine months ended March 31, 2007, Weifang Xingda
Feed Co. Ltd, our largest customer, accounted for 5.16% of our total sales
revenues; and Double Crane Pharmaceutical Co. Ltd, our largest pharmaceutical
glucose customer, accounted for 1.38% of our total sales revenues. Our top
ten
customers accounted for only 34.92% for our total sales for the nine months
ended March 31, 2008, as compared to 33.09% for the same period last
year.
Management
is not aware of any adverse trends that would materially affect our market
and
financial position. We will continue to identify and pursue innovative products
and technology to our increase market share and optimize our cost structure.
Barring unforeseen circumstances, we anticipate continued growth in our sales.
Our ability to meet increased customer demand and stay profitable will however
still depend on factors such as our production capacity and working
capital.
Results
of Operations
Three
Months Ended March 31, 2008 Compared with Three Months Ended March 31,
2007
The
following table shows our operating results for the three months ended March
31,
2007 and 2008
.
|
|
Three
months
ended
March
31, 2008
|
|
Three
months
ended
March
31, 2007
|
|
Sales
Revenue
|
|
|
20,701,577
|
|
|
12,563,088
|
|
Costs
of Goods Sold
|
|
|
16,220,665
|
|
|
9,297,002
|
|
Gross
Profit
|
|
|
4,480,912
|
|
|
3,266,086
|
|
Sales,
General and Administrative Expenses
|
|
|
1,603,932
|
|
|
1,059,579
|
|
Operating
Income
|
|
|
2,876,980
|
|
|
2,206,507
|
|
Other Income
(Expense)
|
|
|
(668,607
|
)
|
|
(196,424
|
)
|
Income
before Income Taxes
|
|
|
2,208,373
|
|
|
2,010,083
|
|
Provision
for Income Taxes
|
|
|
321,220
|
|
|
216,990
|
|
Net
income
|
|
|
1,887,153
|
|
|
1,793,093
|
|
Sales
revenue for the three months ended March 31, 2008 was $20,701,557, an increase
of $8,138,489, or 64.78% compared with the corresponding period in 2007.
The
increased sales revenues were principally due to our cornstarch production,
higher product prices, and the diversification of product lines and the
expansion of sales of higher-value products.
Costs
of
goods sold for the three months ended March 31, 2008 was $16,220,665, an
increase of $6,923,663, or 74.47% compared with the corresponding period
in
2007. The increase in cost of goods sold is primarily resulted from the increase
in sales of our products and the increase of the raw material.
Gross
profit for the three months ended March31, 2008 was $4,480,912, an increase
of
$1,214,826, or 37.20% compared with the corresponding period in 2007. The
increase in gross profit was principally attributable to the economies of
scale
resulting from the expansion of our production output and enhanced operating
efficiencies. At the same time, we were able to pass on raw material cost
increases to our customers on some product lines.
Gross
profit margin for the three months ended March 31, 2008 was 21.65%, a decrease
from 26.00% for the same period in 2007. This four percentage points decrease
of
overall gross profit margin was principally due to the increase price of
raw
material, and our increased sales of cornstarch, a product with lower profit
margin.
Selling,
General and Administrative expenses for the three months ended March 31,
2008
was $1,603,932, an increase of $544,353, or 51.37% compared with the
corresponding period in 2007. The increase in our Selling, General and
Administrative expenses was the result of stock option issued in Janunary
2008,
the expansion of our production output and domestic sales network. Larger
quantity of cornstarch also called for higher shipping costs.
Net
income for the three months ended March 31, 2008 was $1,887,153, an increase
of
94,060, or 5.25% compared with the corresponding period in 2007. The increase
of
net income was due to Sales increase.
Nine
Months Ended March 31, 2008 Compared with Nine Months Ended March 31,
2007
The
following table shows our operating results for the nine months ended March
31,
2007 and 2008
.
|
|
Nine
months
ended
March
31, 2008
|
|
Nine
months
ended
March
31, 2007
|
|
Sales
Revenue
|
|
|
65,028,934
|
|
|
35,472,898
|
|
Costs
of Goods Sold
|
|
|
50,085,971
|
|
|
26,694,321
|
|
Gross
Profit
|
|
|
14,942,963
|
|
|
8,778,577
|
|
Sales,
General and Administrative Expenses
|
|
|
5,114,863
|
|
|
2,989,524
|
|
Operating
Income
|
|
|
9,828,100
|
|
|
5,789,053
|
|
Other
Net Income (Expense)
|
|
|
(1,450,463
|
)
|
|
(404,830
|
)
|
Income
before Income Taxes
|
|
|
8,377,637
|
|
|
5,384,223
|
|
Provision
for Income Taxes
|
|
|
1,108,388
|
|
|
518,128
|
|
Net
income
|
|
|
7,269,249
|
|
|
4,866,095
|
|
Sales
revenue for the nine months ended March 31, 2008 was $65,028,934, an increase
of
$29,556,036, or 83.32% compared with the corresponding period in 2007.
Production
from our new cornstarch facility was the principal driver of our sales
performance. Sales of the excess cornstarch to outside customers constituted
33.72% of our total sales for these nine months. Higher product prices of
our
glucose products were also a driver of higher revenues. Unit prices for most
of
our glutose products increased an average of 0% from those in the same period
last year. Unit prices for most of our corn starch products increased an
average
of 5.20% from those in the same period last year. Unit prices for most of
our
products other than glutose and corn starch decreased an average of 65% from
those in the same period last year. Our efforts in diversifying product lines,
as well as in expanding the sales of higher-value products, were also an
important factor. Revenues from products other than glucose and cornstarch
amounted $16.84 million, or 3.84 times of the number for the corresponding
period last year.
Costs
of
goods sold for the nine months ended March 31, 2008 was $50,085,971, an increase
of $23,391,650, or 87.63% compared with the corresponding period in 2007.
The
increase in cost of goods sold primarily resulted from the increase in sales
of
our products.
Gross
profit for the nine months ended March 31, 2008 was $14,942,963, an increase
of
$6,164,386, or 70.22% compared with the corresponding period in 2007. The
increase in gross profit was primarily attributable to the economies of scale
resulting from the expansion of our production output and enhanced operating
efficiency. Production from our new cornstarch facility was the principal
driver
of the increase of the gross profit. Our corn starch products increased gross
profit of $655,760 and our products other than glutose and corn starch products
increased the gross profit of $4,714,169 for the nine months ended March
31,
2008 compared to the nine months ended March 31, 2007.
Gross
profit margin for the nine months ended March 31, 2008 was 22.98%, a slight
decrease from 24.75% for the same period in 2007. Sales of excess cornstarch
to
outside customers resulted in lower profit margins, because the gross profit
margin for cornstarch is much lower than the overall profit margins. We
anticipate that our gross profit margin will gradually improve as we increase
our glucose processing capacity and achieve greater economies of scale in
the
production of our new products in the coming months.
Selling,
General and Administrative expenses for the nine months ended March 31, 2008
was
$5,114,863, an increase of $2,125,339, or 71.09% compared with the corresponding
period in 2007. The increase in our Selling, General and Administrative expenses
was the result of the expansion of our production output and domestic sales
network. We have also incurred approximately $700,000 additional administrative
expenses, such as legal fees, audit fees, stock compensation expenses and
investor relation expenses as a reporting company. Higher worker insurance
requirements and environmental expenditures were also the causes of higher
general and administrative expenses.
Net
income for the nine months ended March 31, 2008 was $7,269,249, an increase
of
$2,403,154, or 49.39% compared with the corresponding period in 2007. Generally,
the increase of net income was due to the increase in our operating efficiency,
the increase in product prices and sales volume, as well as the introduction
of
new products.
Liquidity
and Capital Resources
Operating
Activities
Nine
Months Ended March 31, 2008 and 2007
Net
cash
provided by operating activities for the nine months ended March 31, 2008
was
$12,700,902, an increase of $6,761,474 from $5,939,428 provided in operating
activities for the same period in 2007. As our existing operations have matured,
they have been able to generate additional cash. The increase in net cash
provided by operations was principally derived from the collection of other
receivables.
Investing
Activities
Nine
Months Ended March 31, 2008 and 2007
Net
cash
used in investing activities for the nine months ended March 31, 2008 was
$17,340,965, compared to $14,179,900 used for the same period in 2007. Most
of
the cash had been spent on the advances for the purchase of machinery and
equipment for the new glucose manufacturing complex, as well as the associated
construction.
Our
preliminary budget for constructing our new glucose complex is approximately
$23
million. As of March 31, 2008, we have spent approximately $22.85 million
on
both construction and for the purchase of the machinery and equipment, taking
into account the accelerated appreciation of the
Renminbi
against
the US dollar and the increase in various costs due to the inflation from
a
robust PRC economy. After its completion, we anticipate the necessary working
capital will be at least $7.62 million, based on the projected sales and
ordinary business cycles. We anticipate that we will seek outside funding
from
banks or the equity markets in order to fund such capital requirements. There
can be no assurance, however, that the necessary funds will be available
to us,
or, if available, that they will be available on acceptable terms.
Financing
Activities
Significant
Events
On
May
15, 2007, we completed, at a price of $2 per share, a private placement of
8,750,000 shares and 4,375,000 attached five year warrants to purchase our
common stock at an exercise price of $2.60 per share, as adjusted. We received
net proceeds of $15,256,428 from that offering.
On
January 4, 2008 we granted options to purchase 660,000 shares of common stock
under our 2007 Stock Incentive Plan, with an exercise price of $3.30 per
share,
which was the closing price of a share of our common stock on the Over The
Counter Bulletin Board on the date of grant. The options are vested immediately
and no option can be exercised more than 10 years from the grant
date.
On
May
14, 2008, the directors of the Company have unanimously determined, in
their
discretion of the Plan that such options do not comply with the intent
of the
Compensation Committee or with the purpose of Incentive Stock Options in
that
they do not provide for a gradual vesting of the options and therefore
were
defective. The directors desire to correct this error and defect and to
assure
that Incentive Stock Options granted by the Corporation shall be consistent
with
the Plan. All of the 660,000 options purported to be issued on January
4, 2008
are rescinded pursuant to the Stock Incentive Plan. The Company granted
500,000
stock options and 160,000 non-qualified stock options pursuant to the Stock
Incentive Plan. All options are vested over a period of three years from
the
date of grant.
Nine
Months Ended March 31, 2008 and 2007
Net
cash
provided by financing activities for the nine months ended March 31, 2008
was
$1,200,490, compared to $8,078,215 provided for the same period in fiscal
2007.
We used part of the proceeds from our equity financing to repay our outstanding
debt, both long term notes and short term debts, focusing on those with high
interest rates or with less favorable terms. By lowering our debt to equity
ratio, we believe we successfully enhanced our financial standing.
In
addition to building the new glucose manufacturing complex, as well as the
acquisition of new machinery and equipment for our new plant, we plan to
upgrade
our existing glucose production facility by replacing our old machinery to
produce more “complex” glucose products such as anhydrous glucose transfusion,
monohydrate glucose transfusion and oral glucose.
After
the
construction and the upgrade, we anticipate that at least 70% (up from current
40%) of the cornstarch produced by the new cornstarch production plant will
be
used by us as raw material for the production of our glucose products. This
upgrade will not only allow for increased production of higher grade glucose,
but also facilitate the extension of our dextrose series of products. We
anticipate that this will result in higher profit margins and greater
revenues.
Loans
Before
our equity financing, our PRC operating subsidiary, Weifang Shengtai financed
its operations and capital expenditure requirements primarily through bank
loans
and operating income. Weifang Shengtai had a total of $21,934,080 and
$18,870,250 short term bank loans outstanding as of March 31, 2008 and June
30,
2007, respectively. The loans were secured by Weifang Shengtai’s properties. The
terms of all these short term loans were for one year. Weifang Shengtai has
never defaulted on any of these loans.
Weifang
Shengtai also had non-current payables, which are classified as long term
liabilities, of $2,965,162 and $3,661,472 as of March 31, 2008, and June
30,
2007, respectively.
We
have
focused on lowering our liabilities, short term or long term loans, in order
to
improve our financial position
Guarantees
We
have
guaranteed certain borrowings of other unrelated third parties including
short
term bank loans. The total guaranteed amounts were $8,139,600 and $8,560,650
as
of March 31, 2008, and June 30, 2007, respectively.
Future
cash commitments
We
anticipate the need of $7.62 million as working capital to run the new glucose
complex. The exact amount would be determined based on both the market demand
of
our products and the time needed for this complex to run at full capacity.
As
of
March 31, 2008, we have accumulated a total capital outlay of approximately
$23
million for the glucose manufacturing complex, including the cost for acquiring
the land, construction of plant, and the purchase of new machinery and
equipment.
We
also
estimate that the upgrade of our existing glucose production facility will
be
completed in the first half of calendar 2008. We anticipate the necessary
capital to be $7.2 million .
A
portion
of our capital requirements will be funded from the cash generated by operations
and the proceeds of our May 2007 private placement, and the remaining portion
can be financed, as set forth above.
Critical
Accounting Policies and Estimates
We
have
disclosed in the notes to our financial statements those accounting policies
that we consider to be significant in determining our results of operations
and
our financial position which are incorporating by reference herein. We believe
that the following reflect the more critical accounting policies that currently
affect our financial condition and results of operations.
Revenue
recognition
We
utilize the accrual method of accounting. Revenue is recognized when the
products are delivered, title has passed, and collectibility is reasonably
assured. Sales revenue represents the invoiced value of goods, net of
value-added tax (VAT).
Use
of estimates
In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management
makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates
of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets and the valuation
of
inventories. Actual results could differ from those estimates.
Accounts
Receivables
Accounts
receivables are stated at net realizable value. Any allowance for doubtful
accounts is established based on the management’s assessment of the
recoverability of accounts and other receivables. Management reviews our
accounts receivable on a regular basis to determine if the bad debt allowance
is
adequate. An estimate for doubtful accounts is made when collection of the
full
amount is no longer probable. Known bad debts are written off as incurred.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using straight-line method with a 3% residual value over the estimated
useful lives of the assets.
Foreign
currency translation
Our
functional currency is
Renminbi
(or
“RMB”). Foreign currency transactions are translated at the applicable rates of
exchange in effect at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated
at
the applicable rates of exchange in effect at that date. Revenues and expenses
are translated at the average exchange rates in effect during the reporting
period.
Translation
adjustments arising from the use of different exchange rates from period
to
period are included as a component of stockholders’ equity as “Accumulated Other
Comprehensive Income”. Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Credit
Risk
.
We are
exposed to credit risk from our cash at bank, fixed deposits and account
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Account
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the collectibility
of account receivables by assessing, among other factors, the customer’s
willingness or ability to pay, repayment history, general economic conditions
and our ongoing relationship with the customers.
Country
Risk.
Substantially all of our business, assets and operations are located and
conducted in the PRC. While the PRC’s economy has experienced significant growth
in the past twenty years, growth has been uneven, both geographically and among
various sectors of the economy. The PRC government has implemented various
measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall economy of the PRC, but may also
have
a negative effect on us. For example, our operating results and financial
condition may be adversely affected by government control over capital
investments or changes in regulations applicable to us. If there are any changes
in any policy by the PRC government and our business is negatively affected
as a
result, then our financial results, including our ability to generate revenues
and profits, will also be negatively affected.
Foreign
Currency Risk.
Substantially all of our operations are conducted in the PRC. Our sales and
purchases are conducted within the PRC in
Renminbi
.
Conversion of
Renminbi
into
foreign currencies is regulated by the People’s Bank of China through a unified
floating exchange rate system. Although the PRC government has stated its
intention to support the value of the
Renminbi
, there
can be no assurance that such exchange rate will not again become volatile
or
that the
Renminbi
will not
devalue significantly against the U.S. dollar. Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and income
derived from our operations in the PRC. In addition, the
Renminbi
is not
freely convertible into foreign currency and all foreign exchange transactions
must take place through authorized institutions.
Item
4. Controls and Procedure
(a)
Disclosure Controls and Procedures.
Mr.
Qingtai Liu, our Chief Executive Officer and Ms. Yiru Shi, our Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as of the end of the period covered by this Report.
Based on that evaluation, our officers concluded that our disclosure controls
and procedures were effective and adequately designed to ensure that the
information required to be disclosed by us in the reports we submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the applicable rules and forms and that such information
was accumulated and communicated to our chief executive officer and chief
financial officer, in a manner that allowed for timely decisions regarding
required disclosure.
(b)
Changes in Internal Control over Financial Reporting
During
the six months ended December 31, 2007, there has been no change in internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect our internal control over financial
reporting.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
Other
Information
The
certifications of our Chief Executive Officer and Chief Financial Officer
attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning our
disclosure controls and procedures and internal controls over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of the
matters covered by such certifications.
PART
II -
OTHER INFORMATION.
Item
1.
Legal
Proceedings.
We
know
of no material, active, pending or threatened proceeding against us
or our subsidiaries, nor are we, or any subsidiary, involved as a
plaintiff or defendant in any material proceeding or pending
litigation.
Item
1A. Risk Factors.
There
have been no material changes in our risk factors from those disclosed in our
Annual Report on Form 10-K filed with the SEC on September 28,
2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3.
Defaults
on Senior Securities.
Not
Applicable.
Item
4.
Submission
of Matters to a Vote of Security Holders.
None.
Item
5.
Other
Information.
None.
Item
6. Exhibits
Exhibit
Number
|
|
Exhibit Description
|
|
Form
|
|
Filing
Date/period
End
Date
|
|
Filed -
Furnished
Herewith*
|
3.1
|
|
Amended
and Restated Certificate of Incorporation
|
|
Form
10-SB
|
|
September 26, 2006
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
By
Laws
|
|
Form
10-SB
|
|
September
26, 2006
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Form
of Warrants to Investors
|
|
Form
8-K
|
|
May
21, 2007
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Share
Exchange Agreement dated May 15, 2007 by and among the Company and
Shengtai Holding, Inc.
|
|
Form
8-K
|
|
May
21, 2007
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Share
Purchase Agreement dated as of May 15, 2007 between the Company and
the
Purchasers
|
|
Form
8-K
|
|
May
21, 2007
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
Shengtai
Pharmaceutical, Inc. 2007 Stock Incentive Plan
|
|
Form
S-8
|
|
January
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Qingtai
Liu;
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification
pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Yizhao
Zhang;
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. 1350.
|
|
|
|
|
|
*
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Shengtai
Pharmaceutical, Inc.
(Registrant)
|
|
|
Dated:
May 15, 2008
|
/s/ Qingtai
Liu
|
|
Qingtai
LiuChief Executive Officer
|
|
|
Dated:
May 15, 2008
|
/s/
Yiru
Shi
|
|
Yiru
Shi
,
Chief Financial Officer
|
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