UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
to
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended December 31, 2008
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)
011-86-536-6295802
(Issuer's
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer
¨
|
Accelerated
Filer
¨
|
Non-Accelerated
Filer
¨
|
Smaller
Reporting Company
x
|
|
|
(Do
not check if a smaller reporting company)
|
|
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
As of
January 31, 2009, there were outstanding 19,169,805 shares of common stock, par
value $0.001 per share, of the registrant.
EXPLANATORY
NOTE
The
purpose of this Amendment No.1 to the Quarterly Report on Form 10-Q is to
respond to the SEC comments which requested that we amend certain disclosures
regarding our internal control, management’s disclosure and analysis,
consolidated statements of cash flows, notes to the consolidated financial
statements and other sections and certification exhibits. This Amendment does
not modify or update disclosures in the original 10-Q affected by subsequent
events.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF
DECEMBER 31, 2008 AND JUNE 30, 2008
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
6,881,595
|
|
|
$
|
3,405,606
|
|
Restricted
cash
|
|
|
6,319,465
|
|
|
|
6,763,500
|
|
Accounts
receivable, net of allowance for doubtful accounts of $493,507 and
$440,701 as of December 31, 2008 and June 30, 2008,
respectively
|
|
|
6,192,651
|
|
|
|
7,614,236
|
|
Notes
receivable
|
|
|
703,206
|
|
|
|
458,630
|
|
Other
receivables
|
|
|
175,554
|
|
|
|
691,215
|
|
Inventories
|
|
|
6,773,059
|
|
|
|
5,039,278
|
|
Prepayments
|
|
|
217,503
|
|
|
|
310,381
|
|
Loan
to related party
|
|
|
440,100
|
|
|
|
-
|
|
Total
current assets
|
|
|
27,703,133
|
|
|
|
24,282,846
|
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
70,803,112
|
|
|
|
69,943,021
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Investment
in Changle Shengshi Redian Co., Ltd.
|
|
|
3,665,602
|
|
|
|
3,607,912
|
|
Loan
to related party - noncurrent
|
|
|
-
|
|
|
|
437,700
|
|
Intangible
assets - land use right, net of accumulated amortization
|
|
|
3,032,706
|
|
|
|
3,042,183
|
|
Total
other assets
|
|
|
6,698,308
|
|
|
|
7,087,795
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
105,204,553
|
|
|
$
|
101,313,662
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,377,921
|
|
|
$
|
7,669,728
|
|
Accounts
payable - related parties
|
|
|
1,104,312
|
|
|
|
714,776
|
|
Notes
payable - banks
|
|
|
10,767,780
|
|
|
|
10,942,500
|
|
Short
term loans
|
|
|
23,266,620
|
|
|
|
22,658,270
|
|
Accrued
liabilities
|
|
|
257,281
|
|
|
|
261,187
|
|
Other
payable
|
|
|
2,474,936
|
|
|
|
2,146,108
|
|
Employee
loans
|
|
|
1,080,531
|
|
|
|
1,382,287
|
|
Employee
loan - officer
|
|
|
53,871
|
|
|
|
53,605
|
|
Third
party loan
|
|
|
242,783
|
|
|
|
640,228
|
|
Customer
deposit
|
|
|
1,203,835
|
|
|
|
804,323
|
|
Taxes
payable
|
|
|
2,863,436
|
|
|
|
4,631,252
|
|
Current
portion of capital lease obligations
|
|
|
58,445
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
50,751,751
|
|
|
|
51,904,264
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Capital
lease obligation, net of current portion
|
|
|
5,076,055
|
|
|
|
-
|
|
Other
payable - noncurrent
|
|
|
1,859,323
|
|
|
|
2,653,995
|
|
Total
long term liabilities
|
|
|
6,935,378
|
|
|
|
2,653,995
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
57,687,129
|
|
|
|
54,558,259
|
|
|
|
|
|
|
|
|
|
|
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, 19,169,805 and
19,094,805 shares issued and outstanding as of December 31, 2008 and
June 30, 2008, respectively
|
|
|
19,170
|
|
|
|
19,095
|
|
Paid-in
capital
|
|
|
20,306,019
|
|
|
|
19,987,708
|
|
Statutory
reserves
|
|
|
3,003,993
|
|
|
|
2,894,902
|
|
Retained
earnings
|
|
|
19,183,395
|
|
|
|
19,136,577
|
|
Accumulated
other comprehensive income
|
|
|
5,004,847
|
|
|
|
4,717,121
|
|
Total
shareholders' equity
|
|
|
47,517,424
|
|
|
|
46,755,403
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
105,204,553
|
|
|
$
|
101,313,662
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
SALES
REVENUE
|
|
$
|
14,795,746
|
|
|
$
|
24,954,288
|
|
|
$
|
32,919,474
|
|
|
$
|
44,327,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
12,801,591
|
|
|
|
19,086,274
|
|
|
|
27,732,778
|
|
|
|
33,865,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,994,155
|
|
|
|
5,868,014
|
|
|
|
5,186,696
|
|
|
|
10,462,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
2,322,885
|
|
|
|
1,814,376
|
|
|
|
4,752,675
|
|
|
|
3,510,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
(328,730
|
)
|
|
|
4,053,638
|
|
|
|
434,021
|
|
|
|
6,951,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on equity investment
|
|
|
31,561
|
|
|
|
977
|
|
|
|
33,412
|
|
|
|
149,756
|
|
Other
income
|
|
|
43,312
|
|
|
|
69,962
|
|
|
|
55,181
|
|
|
|
109,709
|
|
Other
expense
|
|
|
(242,202
|
)
|
|
|
(26,495
|
)
|
|
|
(251,112
|
)
|
|
|
(203,844
|
)
|
Interest
expense and other charges
|
|
|
(41,667
|
)
|
|
|
(519,417
|
)
|
|
|
(63,506
|
)
|
|
|
(935,881
|
)
|
Interest
income
|
|
|
79,380
|
|
|
|
32,243
|
|
|
|
96,673
|
|
|
|
98,404
|
|
Other
income (expense), net
|
|
|
(129,616
|
)
|
|
|
(442,730
|
)
|
|
|
(129,352
|
)
|
|
|
(781,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(458,346
|
)
|
|
|
3,610,908
|
|
|
|
304,669
|
|
|
|
6,169,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
15,541
|
|
|
|
481,323
|
|
|
|
14
8,760
|
|
|
|
787,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
(473,887
|
)
|
|
|
3,129,585
|
|
|
|
155,909
|
|
|
|
5,382,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
123,453
|
|
|
|
140,556
|
|
|
|
287,726
|
|
|
|
1,412,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
(350,434
|
)
|
|
$
|
3,270,141
|
|
|
$
|
443,635
|
|
|
$
|
6,794,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
(LOSS) PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.17
|
|
|
$
|
0.01
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
|
$
|
0.01
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,123,338
|
|
|
|
18,961,992
|
|
|
|
19,109,149
|
|
|
|
18,918,496
|
|
Diluted
|
|
|
19,123,338
|
|
|
|
20,296,006
|
|
|
|
19,109,149
|
|
|
|
20,000,956
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
Accumulated other
|
|
|
|
|
|
|
Common
stock
|
|
|
Paid-in
|
|
|
Statutory
|
|
|
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
reserves
|
|
|
Unrestricted
|
|
|
income
|
|
|
T
otals
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,382,096
|
|
|
|
|
|
|
|
5,382,096
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,412,651
|
|
|
|
1,412,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007 (Unaudited)
|
|
|
19,069,805
|
|
|
$
|
19,070
|
|
|
$
|
19,669,847
|
|
|
$
|
1,735,484
|
|
|
$
|
15,267,766
|
|
|
$
|
2,239,649
|
|
|
$
|
38,931,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
warrants
|
|
|
25,000
|
|
|
|
25
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Option
issued to employees
|
|
|
|
|
|
|
|
|
|
|
317,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317,636
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,028,229
|
|
|
|
|
|
|
|
5,028,229
|
|
Transfer
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,159,418
|
|
|
|
(1,159,418
|
)
|
|
|
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,477,472
|
|
|
|
2,477,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2008
|
|
|
19,094,805
|
|
|
$
|
19,095
|
|
|
$
|
19,987,708
|
|
|
$
|
2,894,902
|
|
|
$
|
19,136,577
|
|
|
$
|
4,717,121
|
|
|
$
|
46,755,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
issued to employees
|
|
|
|
|
|
|
|
|
|
|
317,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317,636
|
|
New
shares issuance for warrants exchange
|
|
|
75,000
|
|
|
|
75
|
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,909
|
|
|
|
|
|
|
|
155,909
|
|
Transfer
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,091
|
|
|
|
(109,091
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287,726
|
|
|
|
287,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2008 (Unaudited)
|
|
|
19,169,805
|
|
|
$
|
19,170
|
|
|
$
|
20,306,019
|
|
|
$
|
3,003,993
|
|
|
$
|
19,183,395
|
|
|
$
|
5,004,847
|
|
|
$
|
47,517,424
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
SIX MONTHS ENDED DECEMBER 31, 2008 AND 2007
(UNAUDITED)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
155,909
|
|
|
$
|
5,382,096
|
|
Adjustments
to reconcile net income to cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,124,286
|
|
|
|
1,187,166
|
|
Amortization
|
|
|
26,110
|
|
|
|
23,820
|
|
Bad
debt expense
|
|
|
77,061
|
|
|
|
-
|
|
Stock
option expense
|
|
|
317,636
|
|
|
|
-
|
|
(Gain)
Loss on equipment disposal
|
|
|
201,766
|
|
|
|
(90,098
|
)
|
Loss
on disposal of land use right
|
|
|
-
|
|
|
|
5,955
|
|
Earnings
on equity investment
|
|
|
(33,412
|
)
|
|
|
(149,756
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,383,582
|
|
|
|
(311,689
|
)
|
Notes
receivable
|
|
|
(243,183
|
)
|
|
|
(772,571
|
)
|
Other
receivables
|
|
|
482,406
|
|
|
|
1,186,223
|
|
Inventories
|
|
|
(1,703,009
|
)
|
|
|
159,692
|
|
Prepayments
|
|
|
(1,549,571
|
)
|
|
|
(472,365
|
)
|
Accounts
payable
|
|
|
1,492,834
|
|
|
|
(1,668,080
|
)
|
Accounts
payable - related parties
|
|
|
(717,373
|
)
|
|
|
(293,176
|
)
|
Accrued
liabilities - related party
|
|
|
(61,824
|
)
|
|
|
-
|
|
Accrued
liabilities
|
|
|
1,102,279
|
|
|
|
(150,906
|
)
|
Other
payable
|
|
|
(2,538,294
|
)
|
|
|
(313,162
|
)
|
Customer
deposit
|
|
|
394,375
|
|
|
|
417,062
|
|
Payable
- officer
|
|
|
-
|
|
|
|
31,145
|
|
Taxes
payable
|
|
|
(1,789,911
|
)
|
|
|
1,671,334
|
|
Net
cash (used in) provided by operating activities
|
|
|
(878,333
|
)
|
|
|
5,842,690
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
(842,779
|
)
|
|
|
(5,893,680
|
)
|
Proceeds
from equipment disposal
|
|
|
5,125,050
|
|
|
|
34,733
|
|
Acquisition
of land use right
|
|
|
-
|
|
|
|
(317,183
|
)
|
Purchase
of software program
|
|
|
-
|
|
|
|
(5,343
|
)
|
Advances
on plant and equipment purchase
|
|
|
-
|
|
|
|
(5,226,396
|
)
|
Loan
repayment from related party
|
|
|
-
|
|
|
|
4,453,455
|
|
Net
cash provided by (used in) investing activities
|
|
|
4,282,271
|
|
|
|
(6,954,414
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
479,144
|
|
|
|
3,842,060
|
|
Borrowings
on notes payable - banks
|
|
|
10,747,962
|
|
|
|
1,335,900
|
|
Payments
on notes payable - banks
|
|
|
(10,982,250
|
)
|
|
|
(9,084,120
|
)
|
Borrowings
on short term loans
|
|
|
4,392,900
|
|
|
|
3,566,853
|
|
Payments
on short term loans
|
|
|
(3,909,682
|
)
|
|
|
(7,440,963
|
)
|
Borrowings
on employee loans
|
|
|
787,061
|
|
|
|
1,271,112
|
|
Payments
on employee loans
|
|
|
(1,095,828
|
)
|
|
|
(137,616
|
)
|
Borrowings
on third party loan
|
|
|
113,633
|
|
|
|
1,781,556
|
|
Payments
on long term loans
|
|
|
(513,852
|
)
|
|
|
-
|
|
Cash
proceeds from issuance of common stock
|
|
|
750
|
|
|
|
506,493
|
|
Net
cash provided by (used in) financing activities
|
|
|
19,838
|
|
|
|
(4,358,725
|
)
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
52,213
|
|
|
|
96,016
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
3,475,989
|
|
|
|
(5,374,433
|
)
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
3,405,606
|
|
|
|
6,420,439
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
6,881,595
|
|
|
$
|
1,046,006
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest, net of capitalized interest
|
|
$
|
40,819
|
|
|
$
|
788,221
|
|
Cash
paid for income tax
|
|
$
|
966,785
|
|
|
$
|
13,560
|
|
Non
cash reclassification transactions of plant and
equipments:
|
|
|
|
|
|
|
|
|
Acquisition
of plant and equipment through assets other than plant and
equipments
|
|
$
|
100,701
|
|
|
$
|
255,991
|
|
Reclassification
of advances on equipment purchase to plant and equipment upon receipt of
purchase
|
|
$
|
1,583,562
|
|
|
$
|
456,762
|
|
Acquisition
of plant and equipment through liabilities
|
|
$
|
5,412,822
|
|
|
$
|
1,328,089
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
(UNAUDITED)
Note
1 - Organization background and principal activities
Shengtai
Pharmaceutical Inc, (the “Company”), was incorporated in March 2004 in the State
of Delaware. The Company, through its direct and indirect subsidiaries,
manufactures and distributes raw drug materials (e.g., glucose, dehydrated
glucose) and drug supplements (e.g., starch, dextrin, polyacrylic acid resin).
The Company’s primary business operations are conducted in the People’s Republic
of China (“PRC”).
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 Shengtai Holding, Inc. (‘SHI”) and Weifang Shengtai Pharmaceutical
Co., Ltd (“Weifang Shengtai”). The Company recorded 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 2008 annual
report filed on Form 10-K.
Basis of
presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material inter-company transactions and balances have been eliminated in the
consolidation.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made in the preparation
of the Company’s consolidated financial statements relate to the assessment of
the fair value of share based compensation, and the collectability of accounts
receivable. Actual results could be materially different from these estimates
upon which the carrying values were based.
Foreign currency
translation
The
reporting currency of the Company is the US dollar. The Company uses the Chinese
Renminbi (“RMB”) as its functional currency. In accordance with Statement of
Financial Accounting Standards (“SFAS”) 52, “Foreign Currency Translation,”
results of operations and cash flows are translated at average exchange rates
during the period, and assets and liabilities are translated at the unified
exchange rates at the balance sheet dates, and equity is translated at the
historical exchange rates. As a result, amounts related to assets and
liabilities reported on the statements of cash flows will not
necessarily agree with changes in the corresponding accounts on the balance
sheets. Translation adjustments resulting from this process are included in
accumulated other comprehensive income in the statements of shareholders’
equity. Translation 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 $5,004,847 and $4,717,121 as of December 31, 2008 and
June 30, 2008, respectively. Assets and liabilities were translated at 6.82 RMB
to $1.00 at December 31, 2008. The equity accounts were stated at their
historical rate. The average translation rates applied to income statement for
the six months ended December 31, 2008 and 2007 were 6.83 RMB and 7.49 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 value-added tax (“VAT”), and estimated
returns of product from customers. Most of the Company’s products sold in the
PRC are subject to a VAT rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. 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 products and certain freight expenses. We allow our
customers to return products only if our product is later determined by us to be
ineffective. Based on our historical experience over the past three years,
product returns have been insignificant throughout all of our product lines.
Therefore, we do not estimate deductions or allowance for sales returns. Sales
returns are taken against revenue when products are returned from customers.
Sales are presented net of any discounts given to customers.
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 related to
costs of goods sold amounted to $903,194 and $1,188,561 for the three months
ended December 31, 2008 and 2007. Shipping and handling costs amounted to
$1,682,530 and $1,935,875 for the six months ended December 31, 2008 and 2007,
respectively.
Financial
instruments
SFAS 107,
“Disclosures about Fair Value of Financial Instruments” requires disclosure of
the fair value of financial instruments held by the Company. SFAS 107 defines
the fair value of financial instruments as the amount at which the instrument
could be exchanged in a current transaction between willing parties. The Company
considers the carrying amount of cash, accounts receivable, notes receivable,
other receivables, prepayments, accounts payable, other payables, accrued
liabilities, customer deposits, taxes payable, and loans to approximate their
fair values because of the short period of time between the origination of such
instruments and their expected realization and their current market rates of
interest.
On July
1, 2008, the Company adopted SFAS 157, “Fair Value Measurements”, which defines
fair value, establishes a three-level valuation hierarchy for disclosures of
fair value measurement and enhances disclosures requirements for fair value
measures. The carrying amounts reported in the balance sheets for current
receivables and payables, including short term loans, qualify as financial
instruments and are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization and their current market rate of interest. The carrying amount
reported in the balance sheet for capital lease obligation qualify as financial
instruments and is a reasonable estimate of fair value because it was just
originated as of December 2008 and it represents the fair market value the
Company can get by selling the equipments. The three levels are defined as
follows:
|
·
|
Level 1: inputs to the valuation
methodology are quoted prices (unadjusted) fo
r identical assets or liabilities
in active markets.
|
|
·
|
Level 2: inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either direct
ly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level 3: inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to SFAS 123R, “Share
Based Payment.” The Company estimates the fair value of the award using the
Black-Scholes option pricing model. Under SFAS 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-based
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. SFAS 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.
Earnings per
share
The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share." SFAS 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.
The
following is a reconciliation of the basic and diluted earnings per share
computation:
|
|
Three months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net
income (loss) for earnings per share
|
|
$
|
(473,887
|
)
|
|
$
|
3,129,585
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,123,338
|
|
|
|
18,961,992
|
|
Diluted
effect of warrants
|
|
|
-
|
|
|
|
1,334,014
|
|
Weighted
average shares used in diluted computation
|
|
|
19,123,338
|
|
|
|
20,296,006
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net
income (loss) for earnings per share
|
|
$
|
155,909
|
|
|
$
|
5,382,096
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,109,149
|
|
|
|
18,918,496
|
|
Diluted
effect of warrants
|
|
|
-
|
|
|
|
1,082,460
|
|
Weighted
average shares used in diluted computation
|
|
|
19,109,149
|
|
|
|
20,000,956
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.27
|
|
No
warrants were included in the three and six months ended December 31, 2008
calculation of diluted earnings per share because they are anti-dilutive because
average market price for the three and six months ended December 31, 2008 are
higher than the option exercise prices. At December 31, 2007, all outstanding
warrants were included in the three and six months ended December 31, 2007
calculation of diluted earnings per share.
Cash and cash
equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.
Restricted
cash
The
Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions. As of December 31, 2008 and
June 30, 2008, these amounts totaled $6,117,390 and $6,565,500,
respectively.
In
accordance with 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. This fund can only be disbursed when certain
criteria are met. As of December 31, 2008 and June 30, 2008, the
undisbursed amount was $202,075 and $198,000, respectively, and these are
included in restricted cash in the consolidated balance sheets.
Accounts
receivable
In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Each quarter, management
reviews it accounts receivable to identify payment problems with specific
customers, in order to estimate the allowance for potentially uncollectible
amounts. The Company estimates this allowance based on the aging of the accounts
receivable, historical collection experience, and other relevant factors, such
as changes in the economy and the imposition of regulatory requirements that can
have an impact on the industry. These factors continuously change, and can have
a material impact on collections and the Company’s estimation process. Certain
accounts receivable amounts are charged off against allowances after collection
efforts prove unsuccessful. Subsequent cash recoveries are recognized as income
in the period when they occur.
The
activity in the allowance for doubtful accounts for trade accounts receivable is
as follows:
|
|
Six months ended
December 31,
2008
|
|
|
Year ended
June 30,
2008
|
|
|
|
(U
naudited)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
440,701
|
|
|
$
|
431,178
|
|
|
|
|
|
|
|
|
|
|
Provision
for bad debt expense
|
|
|
366,254
|
|
|
|
93,557
|
|
|
|
|
|
|
|
|
|
|
Write-off
charged against the allowance
|
|
|
(315,864
|
)
|
|
|
(129,130
|
)
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
2,416
|
|
|
|
45,096
|
|
|
|
|
|
|
|
|
|
|
Ending
allowance for doubtful accounts
|
|
$
|
493,
507
|
|
|
$
|
440,701
|
|
Concentrations of
risk
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 associated with, among others, the political, economic and legal
environments and 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 others.
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. Cash includes cash on hand and demand
deposits in accounts maintained with state-owned banks within the PRC and the
United States of America. At December 31, 2008, the Company had an aggregate of
$12,104,083 on deposit with ten banks within the PRC and approximately
$876,627 on deposit with Bank of America in the United States. The cash deposits
at Bank of America exceed the amounts insured by the U.S. government by
approximately $626,627. Balances at financial institutions or state owned banks
within the PRC are not covered by insurance. Non-performance by these
institutions could expose the Company to losses for amounts in excess of insured
balances. At December 31, 2008 and June 30, 2008, the Company’s
bank balances exceeded government insured limits or not covered by
insurance by $12,730,710 and $10,175,000, respectively. The Company has not
experienced, nor does it anticipate, non-performance by these
institutions.
The
Company’s concentrations of credit risk are primarily in trade accounts
receivable and accounts payable. For the three and six months ended December 31,
2008 and 2007, there were no customers that individually comprised 10% or more
of the Company’s total revenues. For the three and six months ended December 31,
2008 and 2007, there were no vendors that individually accounted for over 10% or
more of the Company’s total purchases.
For
export sales, we frequently require significant down payments or letter of
credit by our customers prior to shipment. During the year, the Company
maintains export credit insurance to protect the Company against the risk that
the overseas customers may default on settlement.
The
following table summarizes financial concerning the Company’s revenues based on
geographic area:
For the
three months ended:
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
|
|
|
|
|
|
|
China
|
|
$
|
13,038,186
|
|
|
$
|
22,630,330
|
|
International
|
|
|
1,757
,560
|
|
|
|
2,323,958
|
|
Total
|
|
$
|
14,795,746
|
|
|
$
|
24,954,288
|
|
For the
six months ended,
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
|
|
|
|
|
|
|
China
|
|
$
|
28,998,936
|
|
|
$
|
39,805,419
|
|
International
|
|
|
3,920,538
|
|
|
|
4,521,938
|
|
Total
|
|
$
|
32,919,474
|
|
|
$
|
44,327,357
|
|
Inventories
Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:
|
|
December 31,
2008
|
|
|
June 30,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,438,971
|
|
|
$
|
1,409,577
|
|
|
|
|
|
|
|
|
|
|
Work-in-progress
|
|
|
2,324,471
|
|
|
|
1,688,161
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
2,009,617
|
|
|
|
1,941,540
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,773,059
|
|
|
$
|
5,039,278
|
|
The
Company reviews its inventory periodically for possible obsolete goods or to
determine if any reserves are necessary. As of December 31, 2008, the Company
has determined that no reserves are necessary.
Prepayments
Prepayments
represent partial payments or deposits for inventory purchases.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Maintenance,
repairs, and minor renewals are charged to expense as incurred while major
additions and betterments are capitalized. 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
|
|
5-20 Years
|
|
|
|
Machinery
and equipment
|
|
5-10 Years
|
|
|
|
Automobile
facilities
|
|
5-10 Years
|
|
|
|
Electronic
equipment
|
|
5-7 Years
|
Long-lived
assets of the Company are reviewed at least annually, more often if
circumstances dictate, to determine whether their carrying value has 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 subsequent
events and circumstances warrant revised estimates of useful lives. As of
December 31, 2008, the Company expects these assets to be fully
recoverable.
Investment in unconsolidated
affiliate
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 and
additional contributions made and distributions received. The Company recognizes
a loss if it is determined that other than temporary decline in the value of the
investment exists.
Intan
gible
assets
Intangible
assets are primarily comprised of land use rights. All land in the PRC is owned
by the Chinese government. However, the government grants “land use rights” for
terms ranging from 20 to 50 years. From March 2000 to June 2008, the Company
acquired various land use rights for approximately $3,291,000. The Company
amortizes the cost of land use rights over the usage terms using the
straight-line method.
Intangible
assets of the Company are reviewed at least annually, more often if
circumstances dictate, to determine whether their carrying value has 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 amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful lives. As of
December 31, 2008, the Company determined that there had been no impairment.
Total amortization expense for the six months ended December 31, 2008 and 2007
amounted to $26,110 and $23,820, respectively. Amortization expense for the
three months ended December 31, 2008 and 2007 amounted to $13,059 and $12,011,
respectively.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS 109, “Accounting for
Income Taxes.” Under the asset and liability method required by SFAS 109,
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS 109, the effect on deferred
income taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recognized if it is more
likely than not that some portion, or all of, a deferred tax asset will not be
realized. As of December 31, 2008 and June 30, 2008, the Company did not have
any deferred tax assets or liabilities because there are no material differences
between taxable income and financial income for Chinese tax reporting, and as
such, no valuation allowances were recorded at December 31, 2008 and June 30,
2008.
In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109," which clarifies the accounting and
disclosure for uncertain tax positions. This interpretation is effective for
fiscal years beginning after December 15, 2006, and the Company has implemented
this interpretation as of July 1, 2007. FIN 48 prescribes a recognition
threshold and measurement attribute for recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
The
adoption of FIN 48 at July 1, 2007, did not have a material effect on the
Company's consolidated 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, and as a result, the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.
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 standard value added tax rate is 17% of the gross sales price,
however, for the Company’s corn plumules products, the VAT rate is 13%. 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 VAT
paid on payment of freight expenses can be used to offset the VAT due on sales
of the finished products.
VAT on
sales and VAT on purchases amounted to $2,648,341 and $867,957 for the three
months ended December 31, 2008, and $3,756,399 and $2,647,096 for the three
months ended December 31, 2007, respectively. VAT on sales and VAT on purchases
amounted to $4,532,807 and $3,344,682 for the six months ended December 31,
2008, and $6,616,628 and $5,079,511 for the six months ended December 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 in the PRC.
Guarantees
From time
to time, the Company guarantees the debt of others unrelated to the Company.
Pursuant to FIN 45, “Guarantor’s Accounting for and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others,” the
Company must record guarantees at the fair value of the expected future
payments. However, the Company estimates that it will not be required to make
any payments under these guarantees based on past experience and the financial
condition of the companies to which the guarantees were made.
Recently issu
ed accounting
pronouncements
In
February 2007, the FASB issued SFAS 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
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 adopted SFAS 159 on July 1, 2008. The Company chose not to elect the
option to measure the fair value of eligible financial assets and
liabilities.
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. The Company currently uses
the “simplified” method to estimate the expected term for share option grants as
the Company does not have enough historical experience to provide a reasonable
estimate. The Company intends on using the “simplified” method until the Company
has enough historical experience to provide a reasonable estimate of expected
term in accordance with SAB 110. The Company adopted SAB 110 on January 1, 2008
which did not materially affect the company.
In
December 2007, the FASB issued SFAS 141(R) "Business Combinations". The
statement retains the purchase method of accounting for acquisitions, but
requires a number of changes, including changes in the way assets and
liabilities are recognized in purchase accounting as well as requiring the
expensing of acquisition-related costs as incurred. Furthermore, SFAS 141R
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS 141R is effective for fiscal years beginning
on or after December 15, 2008. Earlier adoption is prohibited. The Company is
evaluating the impact, if any, that the adoption of this statement will have on
its consolidated results of operations or financial position.
In
December 2007, the FASB issued SFAS 160), “Noncontrolling Interests in
Consolidated Financial Statements — An Amendment of ARB No. 51.” SFAS 160 amends
ARB No. 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It is intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160
also establishes a single method of accounting for changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation,
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption permitted, and it is to be applied
prospectively. SFAS 160 must be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirements, which must be applied retrospectively for all periods
presented. The Company has not yet evaluated the impact that SFAS 160 will have
on its consolidated financial position or results of operations.
In March
2008, the FASB issued SFAS 161, "Disclosures about Derivative Instruments and
Hedging Activities." SFAS 161 is intended to improve financial reporting of
derivative instruments and hedging activities by requiring enhanced disclosures
to enable financial statement users to better understand the effects of
derivatives and hedging on an entity's financial position, financial performance
and cash flows. The provisions of SFAS 161 are effective for interim periods and
fiscal years beginning after November 15, 2008. The Company does not
anticipate that the adoption of SFAS 161 will have a material impact on its
consolidated results of operations or financial position.
In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles." SFAS 162 is intended to improve financial reporting by identifying
a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements that are presented in conformity with
GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles." The adoption of SFAS 162 had no material impact
on the Company’s consolidated results of operations or financial position.
On May 9,
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)." FSP APB 14-1 clarifies that convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants." Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB14-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. The Company has not yet evaluated the impact that FSP APB
14-1 will have on its consolidated results of operations or financial
position.
In June
2008, the FASB issued EITF 07-5 “Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity’s Own Stock”. This Issue is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early application is not
permitted. Paragraph 11(a) of SFAS No 133 “Accounting for Derivatives and
Hedging Activities” (“SFAS 133”) specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to the
Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative
financial instrument. EITF 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a)
scope exception. This standard triggers liability accounting on all options and
warrants exercisable at strike prices denominated in any currency other than the
functional currency of the operating entity in China (Renminbi). EITF 07-5 is
effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the impact of adoption of EITF 07-5 on the Company’s
consolidated financial statements. All options warrants will get liability
accounting upon adoption and will be required to be marked to market each
accounting period.
In June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5”. The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios”, that result from EITF 00-27 “Application of Issue No. 98-5
to Certain Convertible Instruments”, and SFAS 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity”. This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. Management is currently
evaluating the impact of adoption of EITF 08-4 on the accounting for the
convertible notes and related warrants transactions.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active.
Management is currently evaluating the impact of adopting FSP 157-3on
accounting.
Note
3 - Plant and equipment
Plant and
equipment consist of the following:
|
|
December 31,
2008
|
|
|
June 30,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Buildings
|
|
$
|
14,299,046
|
|
|
$
|
6,343,954
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
47,713,139
|
|
|
|
37,239,847
|
|
|
|
|
|
|
|
|
|
|
Capitalized
equipment lease
|
|
|
5,134,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Automobile
facilities
|
|
|
589,885
|
|
|
|
562,039
|
|
|
|
|
|
|
|
|
|
|
Electronic
equipment
|
|
|
424,430
|
|
|
|
368,550
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
14,683,717
|
|
|
|
36,373,688
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
82,844,717
|
|
|
|
80,888,078
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation (including $0 on capitalized equipment lease)
|
|
|
(12,041,605
|
)
|
|
|
(10,945,057
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,803,112
|
|
|
$
|
69,943,021
|
|
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. Depreciation expense for the three months ended December
31, 2008 and 2007 amounted to $1,172,627 and $500,513, respectively. Interest
cost capitalized into construction in progress for the three months ended
December 31, 2008 and 2007 amounted to $780,397 and $93,513, respectively.
Depreciation expense for the six months ended December 31, 2008 and 2007
amounted to $2,124,286 and $1,187,166, respectively. Interest costs totaling
$1,439,493 and $286,060 was capitalized into construction in progress for the
six months ended December 31, 2008 and 2007, respectively.
Note
4 - Investment in unconsolidated affiliate
On
September 16, 2003, the Company entered into a joint venture partnership with
Weifang City Investment Company and Changle Century Sun Paper Industry Co., Ltd,
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated in Weifang City, Shandong Province, PRC. Changle
Shengshi’s principal activity is to produce and sell electricity and heat. The
Company accounts for this 20% investment under the equity method of
accounting.
Summarized
unaudited financial information of Changle Shengshi is as follows:
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
14,820,715
|
|
|
$
|
14,117,813
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
28,130,937
|
|
|
|
27,231,806
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
42,951,652
|
|
|
|
41,3
49,619
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
22,437,056
|
|
|
|
20,333,700
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
1,995,120
|
|
|
|
2,976,360
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
18
,519,476
|
|
|
|
18,039,559
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
42,951,652
|
|
|
$
|
41,349,619
|
|
Summarized
financial information of Changle Shengshi for the six months ended December 31,
2008 and 2007 is as follows:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
21,050,994
|
|
|
$
|
14,509,581
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
1,088,866
|
|
|
$
|
4,216,417
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
$
|
255,612
|
|
|
$
|
3,444,249
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
189,185
|
|
|
$
|
1,959,781
|
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
37,837
|
|
|
$
|
391,956
|
|
|
|
|
|
|
|
|
|
|
Elimination
of intercompany profit
|
|
|
4,425
|
|
|
|
239,222
|
|
|
|
|
|
|
|
|
|
|
Company’s
share of net income
|
|
$
|
33,412
|
|
|
$
|
152,734
|
|
Note
5 - Related party transactions
The
Company’s utilities are partially provided by Changle Shengshi (See Note 4). As
of December 31, 2008 and June 30, 2008, the Company’s payable due to Changle
Shengshi was approximately $1,104,312 and $714,776, respectively, which related
to a portion of the Company’s utilities being provided by Changle Shengshi. The
utilities expense for the three months ended December 31, 2008 and 2007 amounted
to $1,217,231 and $1,966,318, respectively. The utilities expense amounted to
approximately $2,893,562 and $4,035,084 for the six months ended December 31,
2008 and 2007, respectively.
The
Company’s receivables from one loan contract with Changle Shengshi are as
follows:
|
|
December
31,
2008
|
|
|
June
30,
|
|
|
|
(Unaudited)
|
|
|
2008
|
|
Due
on September 14, 2009, unsecured, 7.60% interest rate per
annum
|
|
$
|
440,100
|
|
|
$
|
437,700
|
|
Note
6 - Debt
Short term
loans
Short
term loans represent amounts due to various banks which are due within one year.
These loans can generally be renewed. The Company’s short term bank loans
consisted of the following:
|
|
December 31,
2008
(Unaudited)
|
|
|
June 30,
2008
|
|
Loan
from Bank of China, due various dates from January 2009 to June 2009;
monthly interest only payments; interest rates ranging from 7.47% to
8.964% per annum, guaranteed by an unrelated third party and secured by
certain properties.
|
|
$
|
13,731,120
|
|
|
$
|
13,656,240
|
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates from
January 2009 to May 2009; monthly interest only payments; interest rates
ranging from 7.47% to 8.964% per annum, guaranteed by an unrelated third
party and secured by certain properties.
|
|
|
2,934,000
|
|
|
|
3,895,530
|
|
|
|
|
|
|
|
|
|
|
Loan
from Agriculture Bank of China, due February 2009; monthly interest only
payments; interest rate of 8.96% per annum, guaranteed by an unrelated
third party and secured by certain properties.
|
|
|
2,200,500
|
|
|
|
2,188,500
|
|
|
|
|
|
|
|
|
|
|
Loan
from Commercial Bank, due June 2009; monthly interest-only payments;
interest rate at 9.711% per annum, guaranteed by an unrelated third party,
unsecured.
|
|
|
1,467,000
|
|
|
|
1,459,000
|
|
|
|
|
|
|
|
|
|
|
Loan
from ShangHai PuFa Bank, due November 2009; monthly interest-only
payments; interest rate of 6.66% per annum, guaranteed by an unrelated
third party, unsecured.
|
|
|
1,467,000
|
|
|
|
1,459,000
|
|
|
|
|
|
|
|
|
|
|
Loan
from Weifang Xingye Bank, due October 2009; monthly interest-only
payments; interest rate of 6.96% per annum, guaranteed by an unrelated
third party, unsecured.
|
|
|
1,467,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,266,620
|
|
|
$
|
22,658,270
|
|
The loans
are secured by peroperty and equipment, and land use rights with carrying values
as follows:
|
|
December 31, 2008
|
|
Buildings
and improvements
|
|
$
|
4,698,728
|
|
Machinery
and equipment
|
|
|
4,886,873
|
|
Land
use rights
|
|
|
4,173,087
|
|
Total
|
|
$
|
13,758,688
|
|
Notes pa
yable -
banks
Notes
payable 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:
|
|
December 31,
2008
(Unaudited)
|
|
|
June 30, 2008
|
|
Bank
of China, due November 2008, 0.05% transaction fee, restricted cash
required 100% of loan amount, guaranteed by an unrelated third
party.
|
|
$
|
-
|
|
|
$
|
729,500
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due in March 2009, 0.05% transaction fee,
restricted cash required 50% of loan amount, guaranteed by an unrelated
third party.
|
|
|
1,965,780
|
|
|
|
4,377,000
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due in March 2009, 0.05% transaction fee,
guaranteed by an unrelated third party.
|
|
|
733,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Shenzhen
Development Bank, due in June 2009, 0.05% transaction fee, restricted cash
required 66.66% of loan amount, guaranteed by an unrelated third
party.
|
|
|
6,601,500
|
|
|
|
4,377,000
|
|
|
|
|
|
|
|
|
|
|
Weifang
Xingye Bank, due in April 2009, 0.05% transaction fee, restricted cash
required 50% of loan amount, guaranteed by an unrelated third
party.
|
|
|
1,467,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Shenzhen
Development Bank, due in December 2008, 0.05% transaction fee, restricted
cash required 100% of loan amount, guaranteed by an unrelated third
party.
|
|
|
-
|
|
|
|
1,459,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,767,780
|
|
|
$
|
10,942,500
|
|
Employee
loans
From time
to time, the Company borrows monies from certain employees for cash flow
purposes of the Company. These loans do not require collateral and bear interest
at 7.2% for the first six months, and then 10.8% thereafter until the full
principal amounts are paid by the Company and the principal is due upon demand.
Employee loans amounted to $1,080,531 and $1,382,287 as of December 31,
2008 and June 30, 2008, respectively. These loans are payable upon
demand.
Employee loan -
officer
From time
to time, the Company borrows monies from Qingtai Liu for cash flow purposes of
the Company. The loan does not require collateral and bears interest at 7.2% for
the first six months, and then 10.8% until the full principal amount is paid by
the Company and the principal is due upon demand. Employee loan from officer
amounted to $53,871 and $53,605 as of December 31, 2008 and June 30, 2008,
respectively. Interest expense was not significant on this loan for the six
months ended December 31, 2008 and 2007, respectively.
Third party
loan
From time
to time, the Company borrows money from an unrelated individual for use in
operations. The loan does not require collateral and bears interest at 7.2% for
the first six months, and then 10.8% until the full principal amount is paid by
the Company. The principal is due upon demand. The balance of the loan as of
December 31, 2008 and June 30, 2008 amounted to $242,783 and $640,228,
respectively.
Interest
Interest
expense net of amounts capitalized into construction in progress for the three
months ended December 31, 2008 and 2007 on all debt amounted to $40,819 and
$494,413, respectively. Interest capitalized totaled $780,397 and $93,513 for
the three months ended December 31, 2008 and 2007, respectively. Total interest
expense, net of capitalized interest, for the six months ended December 31, 2008
and 2007 on all debt amounted to $40,819 and $886,021, respectively. Interest
capitalized into construction-in-progress totaled $1,439,496 and $286,060 for
the six months ended December 31, 2008 and 2007,
respectively.
Note
7 - Income taxes
The
Company is governed by the Income Tax Law of the PRC concerning Foreign
Investment Enterprises (“FIEs”) and Foreign Enterprises and various local income
tax laws (the “Income Tax Laws”). Under the Income Tax Laws, FIEs are generally
subject to an effective income tax 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, FIEs scheduled to operate for a period
of 10 years or more and engaged in manufacturing and production may be exempt
from income taxes for up to 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.
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 two years from September 2004 to August 2006, and 50%
exemption for years three to five from September 2006 to August 2009. In
addition, the Company is located in a Special Economic Zone and the PRC tax
authority has offered it with a special income tax rate of 24%. With the
approval of the local government, the Company is subject to income taxes at a
reduced rate of 12% from September 2006 to August 2009, after the two-year
exemption 24% for income taxes until its exemption and reduction periods expire
in August 2009.
Beginning
on January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
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
loca
l 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 taxed at the reduced rate as
described above until the tax holiday term is completed. Starting on September
1, 2009, the Company will be subject to a 25% income tax rate pursuant to the
new income tax laws.
During
the six months ended December 31, 2008 and 2007, the provision for income taxes
was $148,760 and $787,168, respectively. Income tax provision for the three
months ended December 31, 2008 and 2007 amounted to $15,541 and $481,323,
respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended December 31:
|
|
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
|
|
|
(13.0
|
)
|
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
|
Other
item (a)
|
|
|
36.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Applicable
income tax note
|
|
|
48.8
|
%
|
|
|
12.8
|
%
|
(a) The 36.8% represents expenses incurred by the Company and SHI
that are not deductible in PRC for the six months ended December 31, 2008. The
0.8% represents expense incurred by the Company and SHI that are not deductible
in PRC for the six months ended December 31, 2007 offset by special tax credits
received from the local government due to government enforced regulations.
The
estimated tax savings due to the tax exemption for the three months ended
December 31, 2008 and 2007 amounted to $0 and $842,315, 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 December 31, 2008
and 2007 by $0.00 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 December 31, 2008 and 2007 by $0.00 and $0.04,
respectively. The estimated tax savings due to the tax exemption for the six
months ended December 31, 2008 and 2007 amounted to $161,156 and $1,377,544,
respectively. The net effect on basic earnings per share if the income tax had
been applied would decrease basic earnings per share for the six months ended
December 31, 2008 and 2007 by $0.00 and $0.07, respectively. The net effect on
diluted earnings per share if the income tax had been applied would decrease
diluted earnings per share for the six months ended December 31, 2008 and 2007
by $0.00 and $0.07, respectively.
Shengtai
Pharmaceutical Inc. and Shengtai Holding Inc. was incorporated in the United
States and have incurred net operating losses for income tax purposes for the
period ended December 31, 2008. The net operating loss carry forwards for United
States income taxes is $20,786,713 which may be available to reduce future
years’ taxable income. These carry forwards will expire, if not utilized,
starting in 2027 through 2028. Management believes that the realization of the
benefits from these losses appears uncertain for United States income tax
purposes due to these two companies will remain as cost centers.
Accordingly, the Company has provided a 100% valuation allowance on the deferred
tax asset benefit to reduce the asset to zero. The valuation allowance at
December 31, 2008 was $6,859,615. Management reviews this valuation allowance
periodically and makes adjustments as warranted.
Taxes
payable
Taxes
payable consisted of the following:
|
|
December 31,
2008
(Unaudited)
|
|
|
June 30,
2008
|
|
|
|
|
|
|
|
|
VAT
payable
|
|
$
|
716,399
|
|
|
$
|
3,049,000
|
|
|
|
|
|
|
|
|
|
|
Individual
income tax withheld
|
|
|
620
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
Income
tax payable
|
|
|
706,672
|
|
|
|
1,518,278
|
|
|
|
|
|
|
|
|
|
|
Housing
property tax payable
|
|
|
9,957
|
|
|
|
9,903
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
1,429,788
|
|
|
|
53,304
|
|
|
|
|
|
|
|
|
|
|
Total
taxes payable
|
|
$
|
2,863,436
|
|
|
$
|
4,631,252
|
|
Note
8 - Commitments and Contingent liabilities
Guarantees
As of
December 31, 2008, the Company has guaranteed $7.3 million of short term loan
for an unrelated party, Shandong Kuangji Group, Inc. (“Shandong Kuangji”). The
Company is obligated to perform under the guarantee if Shandong Kuangji fails to
pay principal and interest payments when due. The maximum potential amount
of future undiscounted payments under the guarantee is about $8.0 million
including accrued interest. The Company did not record a liability for the
guarantee because management believes Shandong Kuangji is current in its payment
obligations, and the likelihood of the Company having to make good on the
guarantee is remote.
Detail of
guarantee amount to the unrelated parties as of December 31, 2008 is as
follows:
|
|
Short
Term
|
|
Company
|
|
Bank Loans
|
|
|
|
|
|
Shandong
Kuangji Group Inc.
|
|
$
|
7,335,000
|
|
|
|
|
|
|
Total
|
|
$
|
7,
335 ,000
|
|
Litigation
In the
Company’s ordinary course of business, the Company may be subject to certain
legal proceedings. After review and consultation with the Company’s legal
counsel, management believes that the outcome of the legal matters will not have
a materially adverse effect on the consolidated results of operations or
consolidated financial position of the Company.
Note
9 - Shareholders’ equity
Stock
issuance
In
November 2008, Chinamerica Fund, LP exercised 75,000 warrants at $0.01 per
share.
Warrants
In
connection with the Share Purchase Agreement, the 4,375,000 warrants issued
(“Investor Warrants”) carry an exercise price of $2.60 and a 5-year term. The
Investor Warrants are callable if the Company’s shares trade at or above $8.00
per share for 20 consecutive trading days and underlying shares are registered
for resale. The Investor Warrants contain standard adjustment provisions upon
stock dividend, stock split, stock combination, recapitalization, and a change
of control transaction.
Also in
connection with the Share Purchase Agreement, the Company issued 218,750
warrants (“Placement Agent Warrants”) to Brill Securities, the placement agent.
These Placement Agent Warrants have the same terms as the Investor Warrants.
These warrants were issued on August 8, 2007.
Concurrent
with the offering related to the Share Purchase Agreement, the Company issued
75,000 warrants to Chinamerica Fund, LP and 25,000 warrants to Jeff Jenson
(collectively as “Lead Investor Warrants”) to compensate Chinamerica Fund LP as
the lead investor and for Jeff Jenson in assisting in providing the shell of
West Coast Car Company. These warrants have the same terms as the Investor
Warrants except with an exercise price of $0.01 per share. In June 2008, Jeff
Jenson exercised the 25,000 warrants issued to him. In November 2008,
Chinamerica Fund, LP exercised the 75,000 warrants issued to the
fund.
All
Investor Warrants, Placement Agent Warrants, and Lead Investor Warrants meet the
conditions for equity classification pursuant to SFAS 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 for as common stock issuance
cost.
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Warrants
O
utstanding
|
|
|
Warrants
Exercisable
|
|
|
Average
Exercise Price
|
|
|
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2007
|
|
|
4,475,000
|
|
|
|
4,475,000
|
|
|
$
|
2.54
|
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
218,750
|
|
|
|
218,750
|
|
|
|
2.60
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
219,805
|
|
|
|
219,805
|
|
|
|
2.31
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2008
|
|
|
4,473,945
|
|
|
|
4,473,945
|
|
|
|
2.54
|
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2008 (unaudited)
|
|
|
4,398,945
|
|
|
|
4,398,945
|
|
|
$
|
2.60
|
|
|
|
3.39
|
|
Stock o
ptions
On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”). The Company believes that such
awards better align the interests of its employee with those of its
shareholders. Option awards are generally granted with an exercise price equal
to the fair value of the Company’s stock at the date of grant.
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 on
a quarterly basis from the date of grant.
The
Company uses the Black-Scholes option pricing model which was developed for use
in estimating the fair value of options. Option pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a
period equal to or greater than the expected life of the options. Because
changes in the subjective assumptions can materially affect the estimated value
of the Company’s employee stock options, it is management’s opinion that the
Black-Scholes option valuation model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using an
option pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option pricing model are as follows:
Weighted
average risk-free interest rate
|
|
|
3.22%
|
|
|
|
|
|
|
Expected
term
|
|
4
years
|
|
|
|
|
|
|
Expected
volatility
|
|
|
146%
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0%
|
|
|
|
|
|
|
Weighted
average grant-date fair value per option
|
|
$
|
3.34
|
|
The
volatility of the Company’s common stock was estimated by management based on
the historical volatility; 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 the current and expected dividend policy. The fair 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
sufficient applicable history of employee stock options activity, the Company
uses the simplified method to estimate the life of the options by 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:
|
|
Option
s
outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2007
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
660,000
|
|
|
$
|
3.34
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2008
|
|
|
660,000
|
|
|
$
|
3.34
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2008
|
|
|
660,000
|
|
|
$
|
3.34
|
|
|
$
|
-
|
|
Following
is a summary of the status of options outstanding at December 31, 2008:
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
Average
Exercise Price
|
|
Outstanding Options
|
|
|
Average Remaining
Contractual Life
|
|
|
Average
Exercise Price
|
|
|
Exercisable
Options
|
|
$
|
3.34
|
|
|
660,000
|
|
|
|
4.37
|
|
|
$
|
3.34
|
|
|
|
—
|
|
Compensation
expense from stock options recognized for the three and six months ended
December 31, 2008 was $158,818 and $317,636, respectively.
There were no such
expenses recognized for the three and six months ended December 31,
2007.
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.
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 three months ended December 31, 2008 and 2007, the Company
did not transfer any fund to this reserve. For the six months ended December 31,
2008, the Company transferred $109,091 to the reserve. For the six months ended
December 31, 2007, the Company did not transfer any fund to this reserve because
the Company has been transferring at the end of the fiscal year. 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 PRC 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 base salaries of all current permanent employees. The PRC government is
responsible for the administration and benefit liability to retired employees.
For the six months ended December 31, 2008 and 2007, the Company made
contributions in the amounts of $213,651 and $121,516, respectively to the
Company’s retirement plan. For the three months ended December 31, 2008 and
2007, the Company made contributions in the amounts of $78,615 and $63,676,
respectively.
Note
12 – Sale Leaseback
Capital
lease
On
December 10, 2008, the Company entered into a sale leaseback arrangement and
sold part of its equipments to an unrelated third party for $5,134,500. The
leaseback has been accounted for as a capital lease with the same third party to
lease the same equipments for 4 years, with total payments of $8,119,845. The
title of the equipments will be transferred back to the Company upon the last
payment and after the third party received one time payment of $44,010 from the
Company. A one time processing fee of $51,345 was paid by the Company. A loss of
$202,138 realized on this transaction has been recognized in non-operating
expense since the carrying value of the equipment sold exceeded its fair value.
The minimum payments for the next five years are as follows.
December
31, 2009
|
|
$
|
1,131,057
|
|
December
31, 2010
|
|
|
1,795,608
|
|
December
31, 2011
|
|
|
2,596,590
|
|
December
31, 2012
|
|
|
2,596,590
|
|
|
|
|
8,119,845
|
|
Less
amount representing interest
|
|
|
2,985,345
|
|
Present
value of minimum lease payments
|
|
$
|
5,134,500
|
|
Note
13 - Subsequent event
In
January 2009, the Company borrowed $2,649,840 loan from Bank of China, due
January 2010, with monthly interest-only payments and aninterest rate at 5.31%
per annum, and which is secured by certain properties. Also, in January 2009,
the Company paid the bank $3,176,880 in interest and principal for loans due in
January 2009.
In
January 2009, the company borrowed $1,464,000 loan from Industrial and
Commercial Bank of China, due January 2010, with monthly interest-only payments
and an interest rate at 6.372% per annum, and which is secured by certain
properties. Also in January 2009, the Company paid the bank $2,196,000 in
interest and principal for loans due in January 2009.
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") 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.
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 are a market leader and preferred domestic supplier
of pharmaceutical grade glucose with about 40% market share in China. We also
manufacture glucose, cornstarch and other products for the food and
beverage industry for the Chinese market.
Our
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 facility is close to our glucose production plants.
During
the six months ended December 31, 2008, we sold 25,587 metric tons of
cornstarch, and we also used 39,891 metric tons to satisfy our own glucose
production needs. The excess cornstarch was or will be then sold to outside
customers who are in the pharmaceutical, food and beverage, and industrial
industries. The cornstarch sales amounted to $7.208 million and accounted for
21.89% of our total sales revenue for the six months ended December 31,
2008.
Corn is
the principal raw material for our cornstarch. Since mid-2007 to September 2008,
corn and other food prices climbed at an annual inflation rate of 15% in China,
mostly due to the shortages of pork and grain and the development of alternative
energy industry. In order to maintain a stable corn price, the Chinese
government put restrictions to control the development of industrial use of
corn, such as the conversion of corn into ethanol. Also the Chinese government
has put its corn reserve into market to help to maintain the corn price. Since
September 2008, in a sharp reversal, corn prices have been decreasing due to
corn harvest and economic changes. Corn prices for the three months ended
December 31, 2008 are are approximately 11% lower than for the same period last
year. Corn prices for the six months ended December 31, 2008 are are
approximately 3% lower than for the same period last year. The price of our main
product, glucose, has remained stable.
Management
believes that stable or decreasing corn prices will help maintain the
availability of our raw materials and tend to stabilize our gross profit margin
over time, although market and economic conditions may continue to have negative
effects on our operations as described below. However, in the three months ended
December 31, 2008 our margin has fallen from 24% to 13% primarily because
the high per unit overhead cost from the partial utilization of our new glucose
production facility and reduced production of cornstarch. This trend
has continued through the end of calendar 2008, although cornstarch prices have
begun to rise somewhat at the beginning of 2009. We are still gradually
increasing our utilization of our new glucose facility, but only reached
approximately 34% of capacity in the three months ended December 31, 2008.
Therefore we expect to reach target margins until later in 2009 or 2010. In the
six months ended December 31, 2008 our margin has fallen from 24% to 16%.
The principal raw material for glucose is cornstarch. By using the cornstarch
manufactured from our own cornstarch production facility, we can ensure our
glucose products’ quality and consistency. Also, because our cornstarch
manufacturing facility is located next to our glucose manufacturing facilities,
we are able to eliminate shipping costs and lower glucose products’
manufacturing costs.
At the
end of July 2008, we completed construction of a new glucose manufacturing
facility to boost our production capacity. At the end of September 2008, the
facility passed its GMP inspection. The facility has a production capacity of
120,000 tons, and with our pre-existing glucose manufacturing facility, we now
have the production capacity of a total 180,000 tons (if necessary, can be
easily expandable to a total of 210,000 tons).
During
the six months ended December 31, 2008, we produced a total of 44,681 metric
tons of glucose, or approximately 25% of our 180,000 ton capacity, and our sales
of pharmaceutical-grade glucose and other glucose products were $17 million, or
53.04% of our revenues. We plan to continue to increase utilization of our
glucose facility, which should gradually increase operating margins over
time.
In
addition to our pharmaceutical glucose and cornstarch series of products,
we also produce other products such as dextrin, corn embryo, fibers, protein
powders, and phytin, which are used for food, beverage and industrial
production. The sales revenues generated from these products were $8.252
million, and constituted approximately 25.07% of our total sales revenues for
the six months ended December 31, 2008.
Management
believes that better living standards in China should lead to higher consumption
of our pharmaceutical glucose products in the PRC, especially the Dextrose
Monohydrate Transfusion Solution. In January 2009, the Chinese government
announced its medical stimulus plan to spend a total of 850 billion RMB (USD 123
billion) by 2011 to provide universal primary medical services. Over the next
three years, the multi-billion health care investment plan is aimed at expanding
the government sponsored medical insurance network to provide accessible
and affordable health care coverage to over 90% of the population. Under the
plan, each person covered by the system will receive a larger amount of annual
subsidy after the 2010 year. The focus of this plan is aimed at providing basic
healthcare to many more people—not expensive high tech
equipment. This should increase demand for glucose, since it is a
very basic and relatively low cost element of healthcare in clinics and
hospitals. In addition, the plan will also build hospitals and improve medical
services in the rural and under-developed areas. That is to say, more Chinese
especially more farmers in China can afford the expense of healthcare. At the
same time, despite the current deceleration in growth, we believe that the
continuing economic growth in China, the rising purchasing power of domestic
market, as well as the public awareness of quality health care products, will
resume as drivers in the demand for our pharmaceutical glucose
products.
We
believe that production capacity and product quality are key factors in
maintaining and improving our competitive position and enhancing 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)expansion of our production capacity.
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.
At the
end of September 2008, as set forth above, our new glucose production facility
passed its GMP inspection, and our facilities and many of our products are fully
certified for GMP, ISO9001:2000 and HACCP international quality standards, and
globally certified HALAL, KOSHER and NON-GMO IP.
Our sales
network presently covers almost all provinces of mainland China except Tibet
Autonomous Region. We have three representative offices in Chengdu, Guangzhou,
and Nanchang to strengthen our domestic sales network. We believe that these
offices will help us to better interact with our customers, reinforce our sales
force and improve our corporate image.
At the
same time, we have exported our products to over 70 countries, including Japan,
Singapore, Korea, Australia, Russia and India. For the six months ended December
31, 2008, our international sales comprised approximately 11.9% of our total
sales revenues.
The
target customers of our company are drug makers, medical supply companies,
medical supply exporters and food and beverage companies.
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
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 six months ended December 31, 2008, our top ten
customers accounted for 29% for our total sales revenue.
Results
of Operations
Three
Months Ended December 31, 2008 Compared with Three Months Ended December 31,
2007
The following table shows our
operating results for the three months ended December 31, 2008 and 2007
.
|
|
Three months
ended
December 31,
2008
|
|
Three months
ended
December 31,
2007
|
|
Sales
Revenue
|
|
|
14,795,746
|
|
|
24,954,288
|
|
Costs
of Goods Sold
|
|
|
12,801,591
|
|
|
19,086,274
|
|
Gross
Profit
|
|
|
1,994,155
|
|
|
5,868,014
|
|
Sales,
General and Administrative Expenses
|
|
|
2,322,885
|
|
|
1,814,376
|
|
Operating
Income (Loss)
|
|
|
(328,730)
|
|
|
4,053,638
|
|
Other
(Expense)
|
|
|
(129,616
|
)
|
|
(442,730
|
)
|
Income
(Loss) before Income Taxes
|
|
|
458,346
|
|
|
3,610,908
|
|
Provision
for Income Taxes
|
|
|
15,541
|
|
|
481,323
|
|
Net
income (Loss)
|
|
|
(473,887
|
)
|
|
3,129,585
|
|
The following table shows the
breakdown of production and sales by product categories, and between internal
use and external sales of cornstarch, for the three months ended December 31,
2008 and 2007
.
Pro
duct
|
|
Metric Tons
Three months ended
December 31, 2008
|
|
Metric Tons
Three months ended
December 31, 2007
|
|
Sales Revenue (%)
Three months ended
December 31, 2008
|
|
Sales Revenue (%)
Three months ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Glucose
–Sales
|
|
20,220
|
|
23,714
|
|
$9,252,853
(62.5%)
|
|
$9,110,957(36.5%)
|
|
Cornstarch-Internal
|
|
22,638
(67.8%)
|
|
20,011
(40.6%)
|
|
|
|
|
|
Cornstarch-Sales
|
|
10,764
(32.2%)
|
|
29,315
(59.4%)
|
|
$2,026,529
(13.7%)
|
|
$8,733,461
(35.0%)
|
|
Total
Cornstarch
|
|
33,402
(100%)
|
|
49,326
(100%)
|
|
|
|
|
|
Other
|
|
|
|
|
|
$3,516,364 (23.8%)
|
|
$7,109,870 (28.5%)
|
|
Total
|
|
|
|
|
|
$14,795,746
(100%)
|
|
$24,954,288
(100%)
|
|
Overview
|
o
|
After
our new cornstarch plant was completed in October 2007 we increased our
cornstarch production with the objective of producing our own cornstarch
raw material for our increasing production capacity for pharmaceutical
grade glucose. As our new glucose plant was only completed at the end
of July 2008 and is being put into service on a gradual basis, we
have been producing more cornstarch than we could use and selling the
excess to customers. In the fiscal year ended June 30, 2008 we used 37% of
our cornstarch production as raw materials in our glucose production and
sold the remaining 63% to customers. In the three months ended December
31, 2008, we used 67.8% of our cornstarch internally and sold 32.2% to
customers.
|
|
o
|
Demand
for cornstarch plummeted since August 2008, as food prices dropped sharply
amidst global financial turmoil. For example, pork prices dropped
approximately 40% in those months. The resulting excess inventories
(produced at very high corn prices in the cost of goods) led to aggressive
price-cutting in the cornstarch market, sharply reducing margins. Some
cornstarch companies are stopping cornstarch production in this
market.
|
|
o
|
Because
we have the ability to raise or lower our production of cornstarch, since
September 2008 we began to cut production to a level closer to our own
internal needs. However, the combination of high corn prices built into
our inventory and the much lower market prices led to a sharp reduction in
our sales, profit margin and net income for the three months ended
December 31, 2008.
|
|
o
|
Our
objective in adjusting our cornstarch production is to control potential
loss and improve our margins, as we ramp up glucose production in our new
plant.
|
|
o
|
We
plan to produce cornstarch to supply our own increasing needs and will
produce more for outside sales if future market prices of corn and
cornstarch make it profitable to do
so.
|
Sales
revenue for the three months ended December 31, 2008 was $14,795,746, a decrease
of $10,158,542, or 40.71% compared with the corresponding period in 2007. The
decrease in sales revenue resulted from the decrease of our domestic sales of
cornstarch and other products. However, Management believes that cornstarch
inventories are decreasing and will lead to higher prices in the future.
Management also believes that in the long run most of our cornstarch products
will be consumed internally to manufacture glucose.
Cost of
goods sold for the three months ended December 31, 2008 was $12,801,591, a
decrease of $6,284,683, or 32.93% compared with the corresponding period in
2007. The decrease in cost of goods sold primarily resulted from reduced
production and sales. The higher per unit costs resulted from decreased corn
starch production, and higher per unit costs resulted from allocating the cost
of the new glucose factory facilities over less than full capacity
production.
Gross
profit for the three months ended December 31, 2008 was $1,994,155, a decrease
of $3,873,859, or 66.02% compared with the corresponding period in 2007. The
decrease in gross profits resulted from the decrease in sales and the increase
in cost of goods sold compared with the same period in 2007.
Gross
profit margin for the three months ended December 31, 2008 was 13.48%, a
decrease from 23.52% for the same period in 2007. The reasons for the
decrease in gross profit margin were because of lower sales, increased raw
material costs, lower production, and higher production cost per
unit.
Selling,
General and Administrative expenses for the three months ended December 31, 2008
were $2,322,885, an increase of $508,509, or 28.03% compared with the
corresponding period in 2007. The increase in our Selling, General and
Administrative expenses was mainly the result of increased labor cost and
increased bad debt expenses, as well as more administrative expenses, such as
consulting fees, legal fees, audit fees, and investor relations expenses as a
reporting company. We incurred $158,818 in non-cash stock option expenses for
the three months ended December 31, 2008.
Net
income (loss) for the three months ended December 31, 2008 was $(473,887), a
decrease of $3,603,472 or 115% compared with the corresponding period in 2007.
The decrease in net income was primarily due to the decrease in our sales
volume, the increase of cost of goods sold, and increased selling, general, and
administrative expenses.
Six
Months Ended December 31, 2008 Compared with Six Months Ended December 31,
2007
The
following table shows our operating results for the six months ended December
31, 2008 and 2007.
|
|
Six months
ended
December 31,
2008
|
|
Six months
ended
December 31,
2007
|
|
Sales
Revenue
|
|
|
32,919,474
|
|
|
44,327,357
|
|
Costs
of Goods Sold
|
|
|
27,732,778
|
|
|
33,865,306
|
|
Gross
Profit
|
|
|
5,186,696
|
|
|
10,462,051
|
|
Sales,
General and Administrative Expenses
|
|
|
4,752,675
|
|
|
3,510,931
|
|
Operating
Income
|
|
|
434,021
|
|
|
6,951,120
|
|
Other
Net (Expense)
|
|
|
(129,352
|
)
|
|
(781,856
|
)
|
Income
before Income Taxes
|
|
|
304,669
|
|
|
6,169,264
|
|
Provision
for Income Taxes
|
|
|
148,760
|
|
|
787,168
|
|
Net
income
|
|
|
155,909
|
|
|
5,382,096
|
|
The
following table shows the breakdown
of production and sales by product categories, and between internal use and
external sales of cornstarch, for the six months ended December 31, 2008 and
2007
.
Product
|
|
Metric Tons
Six months ended
December 3
1, 2008
|
|
Metric Tons
Six months ended
December 31, 2007
|
|
Sales Revenue (%)
Six months ended
December 31, 2008
|
|
Sales Revenue (%)
Six months ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Glucose
–Sales
|
|
41,511
|
|
47,895
|
|
$17,459,853
(53.0%)
|
|
$18,125,723(41.1%)
|
|
Cornstarch-Internal
|
|
39,891
(60.9%)
|
|
31,175
(36.0%)
|
|
|
|
|
|
Cornstarch-Sales
|
|
25,587
(39.1%)
|
|
55,388
(64.0%)
|
|
$7,207,529
(21.9%)
|
|
$14,759,209
(33.5%)
|
|
Total
Cornstarch
|
|
65,478
(100%)
|
|
86,563
(100%)
|
|
|
|
|
|
Other
|
|
|
|
|
|
$8,252,092 (25.1%)
|
|
$11,442,425 (25.4%)
|
|
Total
|
|
|
|
|
|
$32,919,474
(100%)
|
|
$44,327,357
(100%)
|
|
Sales
revenue for the six months ended December 31, 2008 was $32,919,474, a decrease
of $11,407,883, or 25.74% compared with the corresponding period in 2007. The
decrease in sales revenue resulted from the decrease of our domestic sales of
cornstarch and other products. Our sales were impacted by government
restrictions on manufacturing and transportation during the Beijing Olympics in
August and sharply lower prices of cornstarch since August. However, Management
believes that cornstarch inventories are decreasing and will lead to higher
prices in the future. Management also believes that in the long run most of our
cornstarch products will be consumed internally to manufacture
glucose.
Costs of
goods sold for the six months ended December 31, 2008 was $27,732,778, a
decrease of $6,132,528, or 18.11% compared with the corresponding period in
2007. The increase in cost of goods sold primarily resulted from higher per unit
costs resulted from decreased corn starch productions, and higher per unit costs
resulted from higher overhead cost from not fully operated new glucose factory
facilities.
Gross
profit for the six months ended December 31, 2008 was $5,186,696, a decrease of
$5,275,355, or 50.42% compared with the corresponding period in 2007. The
decrease in gross profits resulted from the decrease in sales and the increase
in cost of goods sold compared with the same period in 2007.
Gross
profit margin for the six months ended December 31, 2008 was 15.76%, a decrease
from 23.60% for the same period in 2007. The reasons for the decrease in gross
profit margin were because of lower sales, lower production, and higher
production cost per unit.
Selling,
General and Administrative expenses for the six months ended December 31, 2008
were $4,752,675, an increase of $1,241,744, or 35.37% compared with the
corresponding period in 2007. The increase in our Selling, General and
Administrative expenses was mainly the result of increased labor cost and
increased bad debt expenses and in our China operation, as well as more
administrative expenses, such as consulting fees, legal fees, audit
fees, and investor relations expenses as a reporting company. We incurred
$317,636 in non-cash stock option expenses for the six months ended December 31,
2008.
Net
income for the six months ended December 31, 2008 was $155,909, a decrease of
$5,226,187 or 97.10% compared with the corresponding period in 2007. The
decrease in net income was primarily due to the decrease in our sales volume,
the increase of cost of goods sold, and increased selling, general, and
administrative expenses.
Liquidity and Capital
Resources
Operating
Activities
Six
Months Ended December 31, 2008 and 2007
Net cash
used in operating activities for the six months ended December 31, 2008 was
$(878,333), a decrease of 115.03%, or $6,721,023, from $5,842,690 provided by
operating activities for the same period in 2007. The decrease in net cash
provided by (used in) operations was principally due to the decrease in net
income and payments of tax payable and accounts payable. The average of $145,000
cash per month used in operations in the six months ended December 31, 2008
would exhaust our available cash of $6,881,595 in 47 months, assuming we are not
required to pay our short-term debt maturing in the next 12 months, of which
there can be no assurance (see “Loans” below). Notes receivable and other
receivables are classified as operating cash flows because these assets are used
for operating purposes. These assets are mainly used to purchase our raw
materials and fund our normal operations.
Investing
Activities
Six
Months Ended December 31, 2008 and 2007
Net cash
provided by investing activities for the six months ended December 31, 2008 was
$4,282,271, an increase of 161.58%, or $11,236,685 from $(6,954,414) used in
investing activities for the same period in 2007. The increase of net cash
provided by investing activities resulted from equipment sales and capital lease
back of some of the new glucose factories equipments in December 2008. During
the six months ended December 31, 2007, most of the cash had been spent on the
construction of the new glucose manufacturing complex and the construction of a
new dormitory. Less capital expenditure was spent during the six months ended
December 31, 2008. The new glucose manufacturing facility was completed in July
2008. Management believes that we will have limited capital expenditures
during the balance of the fiscal 2009 year.
Financing
Activities
Six
Months Ended December 31, 2008 and 2007
Net cash
provided by financing activities for the six months ended December 31, 2008 was
$19,838, an increase of 100.46%, or $4,378,563 from $(4,358,725) used in the
financing activities for the same period in fiscal 2007. The increase of net
cash provided by financing is mainly because the Company has less outflow of
restricted cash for the six months ended December 31, 2008 than for the six
months ended December 31, 2007.
Loans
Other
than our private placement financing in 2007, we have financed our operations
primarily through bank loans and operating income. We had a total of $23,266,620
short term bank loans outstanding as of December 31, 2008. The loans were
secured by our properties or guaranteed by unrelated third parties. The terms of
all these short term loans are for one year. We have never defaulted on any of
these loans. Although we have in the past renewed these loans on their due
dates, unless the lenders agree to continue this practice, we are obligated to
repay the $23,266,620 with interest, an amount substantially in excess of our
available cash.
We have
$6,935,378 non-current payables as of December 31, 2008 and $2,653,995 as of
June 30, 2008. In December 2008, we did a sale and leaseback of equipment, which
resulted in payables over a number of future years.
Guarantees
We have
guaranteed certain borrowings of other unrelated third parties including short
term bank loans. The total guaranteed amounts were $7,335,000 as of December 31,
2008. The total amount of guarantees provided to us by unrelated third parties
is $15,271,470.
Future
cash commitments
The final
cost of our new glucose facility was approximately $32 million, out of which the
building accounted for approximately $10 million and machinery and equipment
approximately $22 million. We have commenced operations in the new
facility in stages with small amounts first and would building up to larger
quantities in the coming quarters.
We
estimate the need for $6 million to $10 million per year to run the new glucose
facilities at full capacity. However we are ramping up our production gradually,
so the exact amount required will be determined based on both the market
demand of our products and the time needed for these facilities to run at full
capacity. We will carefully review our financial condition and consider
financing either with the cash internally generated, bank loans, or with
additional equity.
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
Receivable
Accounts
receivable 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.
Recently issued accounting
pronouncements
Included
in the Notes to the Financial Statements.
Item
4. Controls and Procedure s
(
a)
Disclosure Controls and Procedures.
Mr.
Qingtai Liu, our Chief Executive Officer, and Ms. Yiru Melody 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 due to the
material weaknesses in the internal control over financial reporting as
disclosed in the Section of “Management’s Report on Internal Control over
Financial Reporting,” in our annual report on Form 10-K for the year ended June
30, 2008, our disclosure controls and procedures were ineffective and are not
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.
Changes
in Internal Control Over Financial Reporting
(b) No
change in our internal control over financial reporting has occurred during the
quarter ended December 31, 2008 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
6. Exhibits
(a)
Exhibits
Exhibit No.
|
|
Description
|
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 Yiru Shi*
;
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. 1350**.
|
*Filed
herewith.
** Filed
on February 13, 2009 with our original Form 10-Q.
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:
August 7, 2009
|
/s/ Qingtai Liu
|
|
Qingtai
Liu
|
|
Chief
Executive Officer
|
|
|
Dated:
August 7, 2009
|
/s/ Yiru Shi
|
|
Yiru
Shi
|
|
Chief
Financial Officer
|
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