UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended December 31, 2009
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from ______________ to _____________
Commission
file number:
000-51312
SHENGTAI
PHARMACEUTICAL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
54-2155579
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
Changda
Road East, Development District,
Changle
County, Shandong, The People’s
Republic
of China
|
|
262400
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
011-86-536-6295802
(Registrant’s
telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
|
|
|
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections
12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court. Yes
£
No
£
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate the number of shares
outstanding of each of the issuer’s classes of common equity, as of the latest
practicable date:
As of
February 9, 2010, there are 19,169,805 shares of $0.001 par value
common stock issued and outstanding.
FORM
10-Q
.UNIVERSAL
TRAVEL GROUP
INDEX
|
|
|
|
Page
|
|
|
|
|
|
PART
I.
|
|
Financial
Information
|
|
3
|
|
|
|
|
|
|
|
Item
1. Financial Statements (Unaudited)
|
|
3
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 (Unaudited) and June 30,
2009
|
|
3
|
|
|
|
|
|
|
|
Consolidated
Statements of Income for the Three Months and Six Months
Ended December 31, 2009 and 2008 (Unaudited)
|
|
4
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended December 31, 2009 and
2008 (Unaudited)
|
|
5
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements as of December 31, 2009
(Unaudited)
|
|
6
|
|
|
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition or
Plan of Operation
|
|
27
|
|
|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
|
|
35
|
|
|
|
|
|
|
|
Item
4. Controls and Procedures
|
|
35
|
|
|
|
|
|
PART
II.
|
|
Other
Information
|
|
37
|
|
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
37
|
|
|
|
|
|
|
|
Item
1A. Risk Factors.
|
|
37
|
|
|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
37
|
|
|
|
|
|
|
|
Item
3. Defaults Upon Senior Securities
|
|
37
|
|
|
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders.
|
|
37
|
|
|
|
|
|
|
|
Item
5. Other Information
|
|
37
|
|
|
|
|
|
|
|
Item
6. Exhibits
|
|
37
|
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited)
|
CONSOLIDATED
BALANCE SHEETS
|
(UNAUDITED)
|
|
|
DECEMBER
31,
|
|
|
JUNE
30,
|
|
|
|
2009
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
5,875,838
|
|
|
$
|
1,779,476
|
|
Restricted
cash
|
|
|
11,207,627
|
|
|
|
31,730,382
|
|
Notes
receivable
|
|
|
1,338,774
|
|
|
|
1,074,011
|
|
Accounts
receivable, net of allowance for doubtful accounts of $693,024 and
$946,207 as of September 30, 2009 and June 30, 2009,
respectively
|
|
|
5,314,008
|
|
|
|
6,922,982
|
|
Inventories
|
|
|
7,804,153
|
|
|
|
6,215,707
|
|
Other
receivables
|
|
|
307,280
|
|
|
|
79,598
|
|
Loan
to related party
|
|
|
440,100
|
|
|
|
439,500
|
|
Short
term loan receivable
|
|
|
837,684
|
|
|
|
-
|
|
Prepayments
|
|
|
398,684
|
|
|
|
211,793
|
|
Total
current assets
|
|
|
33,524,147
|
|
|
|
48,453,449
|
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
67,899,999
|
|
|
|
69,380,016
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Investment
in Changle Shengshi Redian Co., Ltd.
|
|
|
4,450,732
|
|
|
|
3,952,310
|
|
Advances
on equipment purchases and construction
|
|
|
5,519,526
|
|
|
|
-
|
|
Intangible
assets - land use right, net of accumulated amortization
|
|
|
3,165,142
|
|
|
|
3,145,590
|
|
Total
other assets
|
|
|
13,135,400
|
|
|
|
7,097,900
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
114,559,546
|
|
|
$
|
124,931,365
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES A N D SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,475,759
|
|
|
$
|
4,737,156
|
|
Accounts
payable and accrued liabilities - related party
|
|
|
592,744
|
|
|
|
437,112
|
|
Notes
payable - banks
|
|
|
13,203,000
|
|
|
|
35,218,600
|
|
Short
term loans
|
|
|
33,300,900
|
|
|
|
25,637,500
|
|
Accrued
liabilities
|
|
|
251,538
|
|
|
|
233,110
|
|
Other
payable
|
|
|
805,300
|
|
|
|
424,341
|
|
Employee
loans
|
|
|
464,399
|
|
|
|
730,502
|
|
Other
payable - officer
|
|
|
248,747
|
|
|
|
248,415
|
|
Third
party loan
|
|
|
330,075
|
|
|
|
248,336
|
|
Customer
deposit
|
|
|
2,698,701
|
|
|
|
1,906,177
|
|
Taxes
payable
|
|
|
3,095,164
|
|
|
|
2,066,878
|
|
Long
term loan-current
|
|
|
2,687,371
|
|
|
|
2,447,783
|
|
Total
current liabilities
|
|
|
63,153,698
|
|
|
|
74,335,910
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Other
payable - noncurrent
|
|
|
4,237,620
|
|
|
|
5,642,556
|
|
Total
long term liabilities
|
|
|
4,237,620
|
|
|
|
5,642,556
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
67,391,318
|
|
|
|
79,978,466
|
|
|
|
|
|
|
|
|
|
|
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
shares issued and outstanding
|
|
|
19,170
|
|
|
|
19,170
|
|
Additional
paid-in capital
|
|
|
20,941,291
|
|
|
|
20,623,655
|
|
Statutory
reserves
|
|
|
3,159,682
|
|
|
|
2,894,902
|
|
Retained
earnings
|
|
|
18,043,968
|
|
|
|
16,472,689
|
|
Accumulated
other comprehensive income
|
|
|
5,004,117
|
|
|
|
4,942,483
|
|
Total
shareholders' equity
|
|
|
47,168,228
|
|
|
|
44,952,899
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
114,559,546
|
|
|
$
|
124,931,365
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 AND
2008
|
(UNAUDITED)
|
|
|
|
|
THREE
MONTHS ENDED DECEMBER 31,
|
|
|
SIX
MONTHS ENDED DECEMBER 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
NET
SALES
|
|
$
|
28,508,859
|
|
|
$
|
14,795,746
|
|
|
$
|
51,635,916
|
|
|
$
|
32,919,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
24,039,512
|
|
|
|
12,801,591
|
|
|
|
43,845,213
|
|
|
|
27,732,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
4,469,347
|
|
|
|
1,994,155
|
|
|
|
7,790,704
|
|
|
|
5,186,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
2,195,676
|
|
|
|
2,322,885
|
|
|
|
4,280,364
|
|
|
|
4,752,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
2,273,671
|
|
|
|
(328,730
|
)
|
|
|
3,510,338
|
|
|
|
434,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on equity investment
|
|
|
200,963
|
|
|
|
31,561
|
|
|
|
347,109
|
|
|
|
33,412
|
|
Non-operating
income
|
|
|
(24,229
|
)
|
|
|
43,312
|
|
|
|
199,362
|
|
|
|
55,181
|
|
Non-operating
expense
|
|
|
(9,076
|
)
|
|
|
(242,202
|
)
|
|
|
(16,346
|
)
|
|
|
(251,112
|
)
|
Interest
expense and other charges
|
|
|
(913,532
|
)
|
|
|
(41,667
|
)
|
|
|
(1,642,318
|
)
|
|
|
(63,506
|
)
|
Interest
income
|
|
|
(607
|
)
|
|
|
79,380
|
|
|
|
775
|
|
|
|
96,673
|
|
Other
income (expense), net
|
|
|
(746,481
|
)
|
|
|
(129,616
|
)
|
|
|
(1,111,418
|
)
|
|
|
(129,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
1,527,190
|
|
|
|
(458,346
|
)
|
|
|
2,398,920
|
|
|
|
304,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
474,964
|
|
|
|
15,541
|
|
|
|
562,861
|
|
|
|
148,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,052,226
|
|
|
|
(473,887
|
)
|
|
|
1,836,059
|
|
|
|
155,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
332
|
|
|
|
123,453
|
|
|
|
61,634
|
|
|
|
287,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
$
|
1,052,558
|
|
|
$
|
(350,434
|
)
|
|
$
|
1,897,693
|
|
|
$
|
443,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,169,805
|
|
|
|
19,123,338
|
|
|
|
19,169,805
|
|
|
|
19,109,149
|
|
Diluted
|
|
|
19,169,805
|
|
|
|
19,123,338
|
|
|
|
19,169,805
|
|
|
|
19,109,149
|
|
The
accompanying notes are an integral part of this statement.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
FOR
THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
|
(UNAUDITED)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,836,059
|
|
|
$
|
155,909
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,830,468
|
|
|
|
2,124,286
|
|
Amortization
|
|
|
28,164
|
|
|
|
26,110
|
|
Allowance
for bad debts
|
|
|
(254,370
|
)
|
|
|
77,061
|
|
Share
based compensation to employees
|
|
|
317,636
|
|
|
|
317,636
|
|
Loss
on equipment disposal
|
|
|
-
|
|
|
|
201,766
|
|
Gain
on disposal of land use right
|
|
|
(739
|
)
|
|
|
-
|
|
Earnings
on equity investment
|
|
|
(347,109
|
)
|
|
|
(33,412
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,872,130
|
|
|
|
1,383,582
|
|
Notes
receivable
|
|
|
(263,189
|
)
|
|
|
(243,183
|
)
|
Other
receivables
|
|
|
(227,480
|
)
|
|
|
482,406
|
|
Inventories
|
|
|
(1,725,029
|
)
|
|
|
(1,703,009
|
)
|
Prepayments
|
|
|
(186,545
|
)
|
|
|
-
|
|
Prepayments
- related party
|
|
|
-
|
|
|
|
-
|
|
Deferred
assets
|
|
|
-
|
|
|
|
(1,549,571
|
)
|
Accounts
payable
|
|
|
739,842
|
|
|
|
1,492,834
|
|
Accrued
liabilities
|
|
|
18,125
|
|
|
|
1,102,279
|
|
Accounts
payable - related party
|
|
|
146,971
|
|
|
|
(717,373
|
)
|
Accrued
liabilities - related party
|
|
|
-
|
|
|
|
(61,824
|
)
|
Other
payable
|
|
|
1,134,035
|
|
|
|
(2,538,294
|
)
|
Customer
deposit
|
|
|
789,599
|
|
|
|
394,375
|
|
Taxes
payable
|
|
|
1,025,045
|
|
|
|
(1,789,911
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
8,733,614
|
|
|
|
(878,333
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Advances-
short term loan receivable
|
|
|
(837,341
|
)
|
|
|
-
|
|
Acquisition
of plant and equipment
|
|
|
(2,258,175
|
)
|
|
|
(1,033
|
)
|
Proceeds
from equipment disposal
|
|
|
2,535
|
|
|
|
5,125,050
|
|
Additions
to construction in progress
|
|
|
-
|
|
|
|
(841,746
|
)
|
Advances
on equipment purchases and construction
|
|
|
(5,517,268
|
)
|
|
|
-
|
|
Acquisition
of land use right
|
|
|
(43,415
|
)
|
|
|
-
|
|
Net
cash (used in) provided by investing activities
|
|
|
(8,653,664
|
)
|
|
|
4,282,271
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
20,557,383
|
|
|
|
479,144
|
|
Borrowings
on notes payable - banks
|
|
|
13,197,600
|
|
|
|
10,747,962
|
|
Payments
on notes payable - banks
|
|
|
(35,252,256
|
)
|
|
|
(10,982,250
|
)
|
Borrowings
on short term loans
|
|
|
14,018,784
|
|
|
|
4,392,900
|
|
Payments
on short term loans
|
|
|
(6,393,504
|
)
|
|
|
(3,909,682
|
)
|
Borrowings
on employee loans
|
|
|
-
|
|
|
|
787,061
|
|
Payments
on employee loans
|
|
|
(266,991
|
)
|
|
|
(1,095,828
|
)
|
Borrowings
on third party loan
|
|
|
11,986
|
|
|
|
113,633
|
|
Payments
on long term loans
|
|
|
-
|
|
|
|
(513,852
|
)
|
Payments
on third party loan
|
|
|
69,381
|
|
|
|
-
|
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
750
|
|
Payment
on capital lease obligation
|
|
|
(1,929,709
|
)
|
|
|
-
|
|
Net
cash provided by provided by financing activities
|
|
|
4,012,675
|
|
|
|
19,838
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
3,737
|
|
|
|
52,213
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
4,096,362
|
|
|
|
3,475,989
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS , beginning of period
|
|
|
1,779,476
|
|
|
|
3,405,606
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
5,875,838
|
|
|
$
|
6,881,595
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE
|
|
|
|
|
|
|
|
|
Cash
paid for Interest, net of capitalized interest
|
|
$
|
1,827,539
|
|
|
$
|
40,819
|
|
Cash
paid for Income taxes
|
|
$
|
-
|
|
|
$
|
965,005
|
|
Non-cash
investing and financing activities
|
|
|
|
|
|
|
|
|
Acquisition
of plant and equipment through advances on plant and equipments
purchase
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of plant and equipment in exchange for note receivable
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
DECEMBER
31, 2009
(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 pharmaceutical raw 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
consolidated financial statements of Shengtai Pharmaceutical Inc. and its
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 2009 annual
report filed on Form 10-K. The results of the six month period ended
December 31, 2009 are not necessarily indicative of the results to be expected
for the full fiscal year ending June 30, 2010.
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 ASC 830
(Originally issued Statement of Financial Accounting Standards (“SFAS”) No.
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.
Assets
and liabilities were translated at 6.82 RMB and 6.83 RMB to $1.00 at December
31, 2009 and June 30, 2009, respectively. The equity accounts were stated at
their historical rate. The average translation rates applied to income statement
for the six months ended December 31, 2009 and 2008 were 6.82 RMB and 6.83
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, 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 amounted to
$1,123,730 and $903,194 for the three months ended December 31, 2009 and 2008,
respectively. Shipping and handling costs amounted to $2,273,694 and $1,682,530
for the six months ended December 31, 2009 and 2008, respectively.
Financial
instruments
Pursuant
to ASC 825 (Originally issued SFAS 107, “Disclosures about Fair Value of
Financial Instruments”) defines financial instruments and requires disclosure of
the fair value of those instruments. ASC 820 (Originally issued SFAS 157,
“Fair Value Measurements”), adopted July 1, 2008, 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, their expected realization and, if
applicable, the stated rate of interest is equivalent to rates currently
available. The three levels are defined as follows:
|
·
|
Level 1: inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
·
|
Level 2: inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
acti
ve markets, and
inputs that are observable for the assets or liability, either directly 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 ASC 820
(Originally issued SFAS 157).
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to ASC 718 (Originally
issued SFAS 123R, “Share Based Payment.”) The Company uses the
Black-Scholes option pricing model which requires 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 pricing 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.
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. ASC 718 (Originally issued 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 ASC 260
(Originally issued SFAS No. 128 (“SFAS 128”), "Earnings Per
Share.") ASC 260 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:
|
|
Three
months ended
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net
income for earnings per share
|
|
$
|
1,052,225
|
|
|
$
|
(473,887)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,169,805
|
|
|
|
19,123,338
|
|
|
|
|
|
|
|
|
|
|
Diluted
effect of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in diluted computation
|
|
|
19,169,805
|
|
|
|
19,123,338
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
|
$
|
(0.02)
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.05
|
|
|
$
|
(0.02)
|
|
|
|
Six
months ended
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net
income for earnings per share
|
|
$
|
1,836,059
|
|
|
$
|
155,909
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,169,805
|
|
|
|
19,109,149
|
|
|
|
|
|
|
|
|
|
|
Diluted
effect of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in diluted computation
|
|
|
19,169,805
|
|
|
|
19,109,149
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
For the
three and six months ended December 31, 2009 and 2008, no warrants or stock
options were included in the calculation of diluted earnings per share because
there are no diluted effects for the three and six months ended December 31,
2009.
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, 2009 and
June 30, 2009, these amounts totaled $11,207,627 and $31,730,382,
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 until certain
criteria are met. As of December 31, 2009 and June 30, 2009, the amount not
disbursed was $205,127 and $203,582, 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. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. 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 an impact on collections and the Company’s estimation
process. These impacts may be material. Certain accounts receivable amounts are
charged off against allowances after designated period of collection efforts.
Subsequent cash recoveries are recognized as income in the period when they
occur. The allowance for doubtful accounts amounted to $693,024 and $946,207 as
of December 31, 2009 and June 30, 2009, respectively.
Short term loan
receivable
Short
term loan receivable represents a loan the Company lent to the local finance
bureau for cash flow purposes; the nature of the loan is short term and
non-interest bearing. The term of the loan is due upon demand. As of December
31, 2009 and June 30, 2009, short term loan receivable amounted to $837,684 and
$0, respectively.
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. The cash deposits in U.S. financial institutions
exceed the amounts insured by the U.S. government. 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, 2009 and June 30, 2009,
the Company’s bank balances exceeded government insured limits or not covered by
insurance by approximately $16,875,391 and $32,880,229, respectively. The
Company has not experienced, nor does it anticipate, nonperformance 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,
2009 and 2008, 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,
2009 and 2008, 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 information for the three and six months
ended December 31, 2009 and 2008, concerning the Company’s revenues based on
geographic area:
For the
three months ended:
|
|
December 31,
2009
|
December
31,
2008
|
|
|
|
(Unaudited)
|
(Unaudited)
|
|
|
|
|
|
|
China
|
|
$
|
21,363,310
|
|
$
|
13,038,186
|
|
|
|
|
|
|
|
|
|
International
|
|
|
7,145,549
|
|
|
1,757,560
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,508,859
|
|
$
|
14,795,746
|
|
For the
six months ended:
Revenue
|
|
December
31,
2009
|
|
December
31,
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
China
|
|
$
|
41,402,386
|
|
|
$
|
28,998,936
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
10,233,530
|
|
|
|
3,920,538
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,635,916
|
|
|
$
|
32,919,474
|
|
Inventories
Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:
|
|
December 31,
2009
|
|
|
June
30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,524,255
|
|
|
$
|
1,523,654
|
|
|
|
|
|
|
|
|
|
|
Work-in-progress
|
|
|
3,592,684
|
|
|
|
1,709,595
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
1,687,214
|
|
|
|
2,982,458
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,804,153
|
|
|
$
|
6,215,707
|
|
The
Company reviews its inventory periodically for possible obsolete goods or to
determine if any reserves are necessary. As of December 31, 2009, the Company
has determined that no reserves are necessary.
Prepayments
Prepayments
represent partial payments or deposits for inventory purchases. These advances
are interest free and unsecured.
Advance for
construction
Advance
for construction represent advance for construction. As of December 31, 2009 and
June 30, 2009, the advance for construction amounted to $5,519,526 and $0.
Advance for construction are paid to unrelated parties, interest free, and with
no collateral and no guarantee.
Plant and
equipment
Plant and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to property and equipment accounts are recorded at cost.
Maintenance, repairs, and minor renewals are charged directly to expense as
incurred. Major additions and betterments to property and equipment accounts 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 or 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, 2009, 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.
Intangib
le
assets
Intangible
assets consist of the following:
|
|
December 31,
2009
|
|
|
June 30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Land
use rights:
|
|
$
|
3,370,644
|
|
|
$
|
3,346,110
|
|
Less:
accumulated amortization
|
|
|
(211,121
|
)
|
|
|
(206,407
|
)
|
Land
use rights, net
|
|
|
3,159,523
|
|
|
|
3,139,703
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
7,335
|
|
|
|
7,325
|
|
Less:
accumulated amortization
|
|
|
(1,715
|
)
|
|
|
(1,438
|
)
|
Software,
net
|
|
|
5,620
|
|
|
|
5,887
|
|
Total
intangible assets, net
|
|
$
|
3,165,143
|
|
|
$
|
3,145,590
|
|
Intangible
assets are primarily comprised of land use rights which are pledged as
collateral for bank loans as of December 31, 2009. 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. From July 2008 to
March 2009, the Company acquired various land use rights for approximately
$480,520. The Company amortizes the cost of land use rights over the usage terms
using the straight-line method.
In April
2009, the Company sold a land use right. At the time of the sale, the net book
value of the land use right was $348,491, and the sale price for the land use
right was $879,000, for a gain of approximately $530,509. As of December 31,
2009, total proceeds had been received.
In August
2009, the Company increased one land use right by paying to the government
approximately $43,434 for expenses related to processing the land
certificate.
Intangible
assets are reviewed at least annually, and 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, 2009, the Company
determined that there had been no impairment. Total amortization expense for the
six months ended December 31, 2009 and 2008 amounted to $28,164 and $26,110
respectively. Total amortization expense for the three months ended December 31,
2009 and 2008 amounted to $14,257 and $13,059
respectively.
The
following table consists of the expected amortization expenses for the next five
years:
Years ended December 31,
|
|
Amount
|
|
2010
|
|
$
|
56,460
|
|
2011
|
|
|
56,460
|
|
2012
|
|
|
56,460
|
|
2013
|
|
|
56,460
|
|
2014
|
|
|
56,460
|
|
Thereafter
|
|
|
2,882,843
|
|
Total
|
|
$
|
3,165,143
|
|
Income
taxes
The
Company accounts for income taxes in accordance with ASC 740 (Originally
issued SFAS 109, “Accounting for Income Taxes.”) Under the asset and
liability method as required by ASC 740 (Originally issued 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 ASC 740, 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, 2009 and June 30, 2009, the Company did not have
any deferred tax assets or liabilities, and as such, no valuation allowances
were recorded at December 31, 2009 and June 30, 2009.
ASC 740
(Originally issued FIN 48) clarifies the accounting and disclosure for
uncertain tax positions and 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. ASC 740 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
Under ASC
740, 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
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, 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 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 $2,969,214 and $2,954,912 for the three
months ended December 31, 2009, and $2,648,341 and $867,957 for the
three months ended December 31, 2008, respectively. VAT on sales and VAT on
purchases amounted to $6,398,113 and $6,225,475 for the six months ended
December 31, 2009, and $4,532,807 and $3,344,682 for the six months
ended December 31, 2008, 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 ASC 460 (Formerly 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 the past experience and the
financial condition of the companies to which the guarantees were
made.
Recently issued accounting
pr
onouncements
In June
2009, the FASB issued ASC 105 (previously SFAS No. 168,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
("GAAP") - a replacement of FASB Statement No. 162
), which will become
the source of authoritative accounting principles generally accepted in the
United States recognized by the FASB to be applied to nongovernmental entities.
The Codification is effective in the fourth quarter of 2009, and accordingly,
the Quarterly Report on Form 10-Q for the quarter ending December 31, 2009
and all subsequent public filings will reference the Codification as the sole
source of authoritative literature. The Company does not believe that this will
have a material effect on its consolidated financial
statements.
In June
2009, the FASB issued ASC 855 (previously SFAS No. 165,
Subsequent Events
), which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date but before the financial statements are
issued or available to be issued. It is effective for interim and annual periods
ending after June 15, 2009. There was no material impact upon the adoption of
this standard on the Company’s consolidated financial statements.
In
June 2009, the FASB issued ASC 860 (previously SFAS No. 166,
“Accounting for Transfers of Financial Assets”) , which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. SFAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS 166 is effective for
fiscal years beginning after November 15, 2009. The Company does not
believe this pronouncement will impact its financial statements.
In
June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for
determining whether to consolidate a variable interest entity. These amended
standards eliminate a mandatory quantitative approach to determine whether a
variable interest gives the entity a controlling financial interest in a
variable interest entity in favor of a qualitatively focused analysis, and
require an ongoing reassessment of whether an entity is the primary beneficiary.
These amended standards are effective for us beginning in the second quarter of
fiscal year 2010 and we are currently evaluating the impact that adoption will
have on our consolidated financial statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820,
Measuring
Liabilities at Fair Value
, which provides additional guidance on the
measurement of liabilities at fair value. These amended standards clarify that
in circumstances in which a quoted price in an active market for the identical
liability is not available, we are required to use the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities, or quoted prices for similar liabilities when traded as assets. If
these quoted prices are not available, we are required to use another valuation
technique, such as an income approach or a market approach. These amended
standards are effective for us beginning in the fourth quarter of fiscal year
2009 and are not expected to have a significant impact on our consolidated
financial statements.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”,
(“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted.
Management is currently evaluating the potential impact of ASU2009-13 on our
financial statements.
In
October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”,
now codified under FASB ASC Topic 470 “Debt”, (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of issuance, a
share-lending arrangement entered into on an entity’s own shares should be
measured at fair value in accordance with Topic 820 and recognized as an
issuance cost, with an offset to additional paid-in capital. Loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs. The amendments also require several
disclosures including a description and the terms of the arrangement and the
reason for entering into the arrangement. The effective dates of the amendments
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15, 2009. Management is
currently evaluating the potential impact of ASU 2009-15 on our financial
statements.
In
December, 2009, under FASB ASC Topic 860, “Transfers and Servicing.” New
authoritative accounting guidance under ASC Topic 860, “Transfers and
Servicing,” amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial assets.
The new authoritative accounting guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010 and
is not expected to have a significant impact on the Company’s financial
statements.
Note 3 - Plant and equipment
Plant and
equipment consist of the following:
|
|
December 31,
2009
|
|
|
June
30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Buildings
|
|
$
|
21,655,458
|
|
|
$
|
21,612,750
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
64,369,170
|
|
|
|
62,209,134
|
|
|
|
|
|
|
|
|
|
|
Automobile
facilities
|
|
|
504,068
|
|
|
|
519,560
|
|
|
|
|
|
|
|
|
|
|
Electronic
equipment
|
|
|
480,191
|
|
|
|
446,399
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
151,459
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
87,160,346
|
|
|
|
84,787,843
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
(19,260,347
|
)
|
|
|
(15,407,827
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,899,999
|
|
|
$
|
69,380,016
|
|
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, 2009 and 2008 amounted to $1,912,106 and $1,172,627, respectively. Interest
costs totaling $65,371 and $780,397 were capitalized into
construction-in-progress for the three months ended December 31, 2009 and 2008,
respectively. Depreciation expense for the six months ended December 31, 2009
and 2008 amounted to $3,830,468 and $2,124,286, respectively. Interest costs
totaling $78,468 and $1,439,493 were capitalized into
construction-in-progress for the six months ended December 31, 2009 and 2008,
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,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Current
assets
|
|
$
|
15,457,882
|
|
|
$
|
12,116,940
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
42,198,544
|
|
|
|
34,455,506
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
57,656,426
|
|
|
|
46,572,446
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
34,179,030
|
|
|
|
24,818,492
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
997,560
|
|
|
|
1,992,400
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
22,479,836
|
|
|
|
19,761,554
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
57,656,426
|
|
|
$
|
46,572,446
|
|
Summarized
financial information of Changle Shengshi for the six months ended December 31,
2009 and 2008 is as follows:
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unauditd)
|
|
|
(unaudited)
|
|
Net
sales
|
|
$
|
24,602,890
|
|
|
$
|
21,050,994
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
4,435,025
|
|
|
$
|
1,088,866
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
$
|
3,295,270
|
|
|
$
|
255,612
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,464,121
|
|
|
$
|
189,185
|
|
|
|
|
|
|
|
|
|
|
Percentage
of ownership
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
492,824
|
|
|
$
|
37,837
|
|
|
|
|
|
|
|
|
|
|
Elimination
of intercompany profit
|
|
$
|
(145,715
|
)
|
|
$
|
4,425
|
|
|
|
|
|
|
|
|
|
|
Company’s
share of net income
|
|
$
|
347,109
|
|
|
$
|
33,412
|
|
Note
5 - Related party transactions
The
Company’s utilities are partially provided by Changle Shengshi (See Note 4). As
of December 31, 2009 and June 30, 2009, the Company’s accounts payable due to
Changle Shengshi was approximately $592,744 and $437,112, respectively, which
related to a portion of the Company’s utilities being provided by Changle
Shengshi. The utilities expense amounted to approximately $2,664,024 and
$1,217,231 for the three months ended December 31, 2009 and 2008, respectively.
The utilities expense amounted to approximately $7,242,471 and $2,893,562 for
the six months ended December 31, 2009 and 2008,
respectively.
The
Company’s receivables from one loan contract with Changle Shengshi are as
follows:
|
|
December 31,
2009
|
|
|
June
30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Due
on September 14, 2009, unsecured, 7.60% interest rate per
annum
|
|
$
|
440,100
|
|
|
$
|
439,500
|
|
This
amount was not collected as of December 31, 2009. The Company has the right to
apply the balance to the future utilities purchases from this party.
Note 6 - Debt
Short term l
oans
Short
term loans represent amounts due to various banks which are normally due within
one year, and these loans can be renewed with the banks. The Company’s short
term bank loans consisted of the following:
|
|
December 31,
2009
|
|
|
June
30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Loans
from Bank of China, due various dates from January 2010 to June 2010;
monthly interest only payments; interest rates ranging from 5.0445% to
5.31% per annum, secured by certain properties.
|
|
$
|
12,674,880
|
|
|
$
|
13,185,000
|
|
|
|
|
|
|
|
|
|
|
Loans
from Industrial and Commercial Bank of China, due various dates from
January 2010 to June 2010; monthly interest only payments; interest rates
are 6.372% per annum, guaranteed by an unrelated third party and secured
by certain properties.
|
|
|
8,890,020
|
|
|
|
6,592,500
|
|
|
|
|
|
|
|
|
|
|
Loan
from Agriculture Bank of China, due from June to September 2010; monthly
interest only payments; interest rates ranging from 5.56% to 5.841% per
annum, guaranteed by an unrelated third party, unsecured
|
|
|
8,802,000
|
|
|
|
2,930,000
|
|
|
|
|
|
|
|
|
|
|
Loan
from Qingdao Bank, due December 2010, monthly interest only payments;
interest rate of 5.31% per annum, guaranteed by an unrelated third party,
unsecured
|
|
|
2,934,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan
from Xingye Bank, due October 2009; monthly interest only payments;
interest rate of 7.9695% per annum, guaranteed by an unrelated third
party, unsecured.
|
|
|
-
|
|
|
|
1,465,000
|
|
|
|
|
|
|
|
|
|
|
Loan
from ShangHai PuDong Development Bank, due November 2009; monthly
interest-only payments; interest rate of 6.66% per annum, guaranteed by an
unrelated third party, unsecured.
|
|
|
-
|
|
|
|
1,465,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,300,900
|
|
|
$
|
25,637,500
|
|
The loans are secured by buildings and improvements, and land use rights with
carrying values as follows:
|
|
December
31,
2009
|
|
Buildings
and improvements
|
|
$
|
21,655,458
|
|
|
|
|
|
|
Land
use rights
|
|
|
3,159,523
|
|
Total
|
|
$
|
24,814,981
|
|
Notes
payable - 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,
2009
|
|
|
June
30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
China
Agriculture Bank, due in August 2009, 0.05% transaction fee, restricted
cash required 100% of loan amount, guaranteed by an unrelated third party.
|
|
$
|
-
|
|
|
$
|
1,465,000
|
|
|
|
|
|
|
|
|
|
|
Shanghai
PuDong Development Bank, due in October 2009, 0.05% transaction fee,
restricted cash required 100% of loan amount, guaranteed by an unrelated
third party.
|
|
|
-
|
|
|
|
1,465,000
|
|
|
|
|
|
|
|
|
|
|
Bank
of China, due on various dates from November 2009 to April 2010, 0.05%
transaction fee, and restricted cash required 50% to 100% of loan amount,
guaranteed by an unrelated third party.
|
|
|
11,736,000
|
|
|
|
23,440,000
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due on various dates from August to October
2009, 0.05% transaction fee, restricted cash required 50% of loan amount,
guaranteed by an unrelated third party.
|
|
|
-
|
|
|
|
7,383,600
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due in June 2010, 0.05% transaction fee,
restricted cash required 100% of loan amount, guaranteed by an unrelated
third party.
|
|
|
1,467,000
|
|
|
|
1,465,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,203,000
|
|
|
$
|
35,218,600
|
|
Employee
loans
From time
to time, the Company borrows monies from certain employees for cash flow
purposes. These loans do not require collateral, and the principal is due upon
demand. Before January 1, 2009, the interest rate was at 7.2% for the first six
months, and then 10.8% thereafter until the full principal amounts are paid by
the Company. After January 1, 2009, the interest rate was changed to 7.2% for
the loan period. Employee loans amounted to $464,399 and $730,502 as of December
31, 2009 and June 30, 2009, respectively. Interest expense related to these
loans amounted to $18,700 and $70,466 for the six months ended December 31,
2009, and 2008, respectively. Interest expense related to these loans amounted
to $9,351 and $35,233 for the three months ended December 31, 2009, and 2008,
respectively.
Employee loan -
officer
From time
to time, the Company borrows monies from Qingtai Liu, The Company’s CEO and
President for cash flow purposes of the Company. The loan does not require
collateral and the principal is due upon demand. Before January 1, 2009, the
interest rate was at 7.2% for the first six months, and then 10.8% thereafter
until the full principal amounts are paid by the Company. After January 1, 2009,
the interest rate was changed to 7.2% for the loan period. Employee loan from
officer amounted to $248,747 and $248,415 as of December 31, 2009 and June 30,
2009, respectively. Interest expense related this loan was de minimis for the
three and six months ended December 31, 2009, and
2008, 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. Before January 1, 2009, the
interest rate was at 7.2% for the first six months, and then 10.8% thereafter
until the full principal amounts are paid by the Company. After January 1, 2009,
the interest rate was changed to 7.2% for the loan period. The principal is due
upon demand. Balance on this loan as of December 31, 2009 and June 30, 2009 was
$330,075 and $248,336, respectively. Interest expense related this loan was de
minimis for the three and six months ended December 31, 2008, and 2009,
respectively.
Interest
Total
interest expense and financial charges, net of capitalized interest, for the
three months ended December 31, 2009 and 2008 on all debt, amounted to $913,532
and $40,819, respectively. Interest capitalized into construction-in-progress
totaled $0 and $780,397 for the three months ended December 31, 2009 and 2008,
respectively. Total interest expense and financial charges, net of
capitalized interest, for the six months ended December 31, 2009 and 2008 on all
debt, amounted to $1,642,318 and $40,819, respectively. Interest capitalized
into construction-in-progress totaled $13,097 and $1,439,496 for the six months
ended December 31, 2009 and 2008, respectively.
Note
7 - Income taxes
Before
January 1, 2008, 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.
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 three years from September 2006 to August 2009. In addition, the
Company is located in a Special Economic Zone and the PRC tax authority has
offered 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 24% exemption 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 Investment
Enterprises.
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 pays a
reduced rate of 15%;
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of the next 5
years or until the tax holiday term is completed, whichever is
sooner.
|
The
Company’s subsidiary, Weifang Shengtai was established before March 16, 2007,
and therefore is qualified to continue to be taxed at the reduced rate as
described above until the tax holiday term is completed. Starting on September
1, 2009, the Company was subject to a 25% income tax rate pursuant to the new
income tax laws. During the six months ended December 31, 2009 and 2008, the
provision for income taxes was $562,862 and $148,760, respectively. During the
three months ended December 31, 2009 and 2008, the provision for income taxes
was $474,964 and $15,541, respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended December 31:
|
|
2009
|
|
2008
|
|
|
|
(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
|
|
25.0
|
|
|
|
|
|
|
|
|
China
income exemption (a)
|
|
|
(7.0)
|
|
(13.0)
|
|
|
|
|
|
|
|
|
Other
items (b)
|
|
|
5.0
|
|
36.8
|
|
|
|
|
|
|
|
|
Total
provision for income taxes
|
|
|
23.0
|
%
|
48.8
|
%
|
|
(a)
|
The
7% represents the special tax credits from the local government due to
government enforced regulation that expired in September
2009.
|
|
(b)
|
The
5% represents certain expenses incurred by the Company and Shengtai
Holding, Inc. and stock option expense, which are not deductible in PRC
for the six months ended December 31,
2009.
|
The
estimated tax savings due to the tax exemption for the three months ended
December 31, 2009 and 2008 amounted to $0 and $0, 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, 2009
and 2008 by $0.00 and $0.00, 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, 2009 and 2008 by $0 and $0.00,
respectively. The estimated tax savings due to the tax exemption for the six
months ended December 31, 2009 and 2008 amounted to $239,803 and $161,156,
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, 2009 and 2008 by $0.01 and $0.00, 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, 2009 and 2008
by $0.01 and $0.00, respectively.
Shengtai
Pharmaceutical, Inc. and Shengtai Holding, Inc. were incorporated in the United
States and have incurred estimated accumulated net operating losses of $2,
304,360 as of December 31, 2009 and $262,604 for income tax purposes for
the six months ended December 31, 2009 respectively. The
estimated net operating loss carry forwards for United States income taxes
amounted to $783,482 which may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilized, from 2027 through
2030. Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax
purposes. Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax benefit to reduce the asset to zero. The net
change in the valuation allowance for the period ended December 31, 2009 was
$89,285 and the valuation allowance as of December 31, 2009 amounted to
$783,482.
The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $25,016,055 as of December 31, 2009, is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if the Company concluded that such earnings will be remitted in the
future.
Tax
es
payable
Taxes
payable consisted of the following:
|
|
December 31,
2009
|
|
|
June
30,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
VAT
payable
|
|
$
|
2,085,603
|
|
|
$
|
1,622,859
|
|
|
|
|
|
|
|
|
|
|
Individual
income tax withheld
|
|
|
864
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
Income
tax payable
|
|
|
950,921
|
|
|
|
387,299
|
|
|
|
|
|
|
|
|
|
|
Housing
property tax payable
|
|
|
10,189
|
|
|
|
10,098
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
47,587
|
|
|
|
46,199
|
|
|
|
|
|
|
|
|
|
|
Total
taxes payable
|
|
$
|
3,095,164
|
|
|
$
|
2,066,878
|
|
Note
8 - Commitments and Contingent liabilities
Guarantees
As of
December 31, 2009, the Company has guaranteed $4.4 million short term loans for
an unrelated party, Yuanli Chemical Engineering Inc. (“Yuanli”).
The
Company is obligated to perform under the guarantee if Yuanli fails to pay
principal and interest payments when due. The maximum potential amount of future
undiscounted payments under the guarantee are about $4.8 million for Yuanli,
including accrued interests. The Company did not record a liability for the
guarantee because management knows Yuanli 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 party as of December 31, 2009 is as
follows:
|
|
Short
Term
|
|
Company
|
|
Bank
Loans
|
|
|
|
|
|
Yuanli
Chemical Engineering Inc.
|
|
$
|
4,401,000
|
|
|
|
|
|
|
Total
|
|
$
|
4,401,000
|
|
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
Warrants
On May
15, 2007, in connection with the Share Purchase Agreement, the 4,375,000
warrants (“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. During the year ended
June 30, 2008, a total of 194,805 warrants were exercised from three
shareholders.
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, LLP and 25,000 warrants to Jeff Jenson
(collectively, the “Lead Investor Warrants”) to compensate Chinamerica Fund LLP
as the lead investor and for Jeff Jenson in assisting in providing the
shell company, West Coast Car Company. These Lead Investor Warrants have the
same terms as the Investor Warrants except that they have 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, LLP 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 ASC 815 (Originally
issued SFAS No. 133 “Accounting for Derivatives”) and ASC 815
(Originally issued 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.
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average Remaining Contractual
Life
|
|
Outstanding,
June
30,
2008
|
|
|
4,473,945
|
|
|
|
4,473,945
|
|
|
$
|
2.54
|
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2009
|
|
|
4,398,945
|
|
|
|
4,398,945
|
|
|
$
|
2.60
|
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2009 (unaudited)
|
|
|
4,398,945
|
|
|
|
4,
398,945
|
|
|
$
|
2.60
|
|
|
|
2.47
|
|
Stock
options
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 employees 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. ASC 718 (Originally issued 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:
|
|
Options
outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding,
June 30, 2008
|
|
|
660,000
|
|
|
$
|
3.34
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2009
|
|
|
660,000
|
|
|
$
|
3.34
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2009
|
|
|
660,000
|
|
|
$
|
3.34
|
|
|
$
|
-
|
|
Following
is a summary of the status of options outstanding at December 31, 2009:
Outstanding
Options
|
|
|
Exercisable
Option
s
|
|
Average
Exercise
Price
|
|
Outstanding
Options
|
|
|
Average
Remaining
Contractual
Life
|
|
|
Average
Exercise
Price
|
|
|
Exercisable
Options
|
|
$
|
3.34
|
|
|
660,000
|
|
|
|
3.37
|
|
|
$
|
3.34
|
|
|
|
330,000
|
|
Compensation
expense from stock options recognized for the three and six months ended
December 31, 2009 and 2008 were both $158,818 and $317,636,
respectively. As of December 31, 2009, approximately $926,765 of estimated
expense with respect to unvested stock-based awards has yet to be recognized and
will be recognized as an expense over the employee’s remaining weighted average
service period.
Note
10 - Statutory reserves
The laws
and regulations of the PRC require 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 reserves. 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, 2009 and 2008, the Company
transferred $142,055 and $0 to this reserve respectively. For the six months
ended December 31, 2009 and 2008, the Company transferred $264,780 and $109,091
to this reserve respectively. 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.
Pursuant
to the Company’s articles of incorporation, the Company is to appropriate 10% of
its net profits as statutory surplus reserve up to $7,500,000. As of December
31, 2009 the Company had appropriated to the statutory reserve approximately
$3,200,000. The Company plans to contribute $4,300,000 in the
future.
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 – Sale Leaseback
Capital
lease
On
December 10, 2008, the Company entered into a sale leaseback arrangement and
sold part of its equipment to an unrelated third party for approximately
$5,134,500. The leaseback has been accounted for as a capital lease with the
same third party to lease the same equipment for 4 years, with total payments of
approximately $8,119,845 The title of the equipment will be transferred back to
the Company upon the last payment and after the third party receives a one time
payment of $44,010 from the Company. A one time processing fee of $51,345 was
paid by the Company related to this lease. 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 used as the sale price. The
minimum payments for the remaining lease term of 36 months from January 2010 to
December 2012 and are as follows.
Total
lease payment
|
|
$
|
6,988,788
|
|
Less
imputed interest
|
|
|
1,912,733
|
|
Total
capital lease obligation as of December 31, 2009
|
|
|
5,076,055
|
|
Less
current maturity
|
|
|
838,435
|
|
Capital
lease obligation – long term portion as of December 31,
2009
|
|
$
|
4,237,620
|
|
Note
12 - 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, 2009 and 2008, the Company made
contributions in the amounts of $178,442 and $213,651, respectively to the
Company’s retirement plan. For the three months ended December 31, 2009 and
2008, the Company made contributions in the amounts of $90,826 and $78,615,
respectively to the Company’s retirement plan.
Note 12 - Subsequent event
In
January 2010, the Company obtained a bank note from Qingdan
Bank. This note is short term in nature with a due date in March
2010, for a transaction fee equal to 0.05 percent. In addition, it
restricted 50% of the usage of the note, and a guarantee was executed by an
unrelated third party.
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.
Overview
We are,
through our wholly-owned subsidiary, Shengtai Holding Inc. and its wholly-owned
subsidiary in the People’s Republic of China (“PRC”), Weifang Shengtai
Pharmaceutical Co., Ltd, a leading manufacturer and supplier of pharmaceutical
grade glucose in the PRC. Based on our assessment, we believe that we are a
market leader and preferred domestic supplier of pharmaceutical grade glucose
with about 40% market share in mainland 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 located next to our glucose production
plants.
During
the six months ended December 31, 2009, we produced a total of 101,689 metric
tons of cornstarch, of which 64,961 metric tons were used 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 $11.620 million and
accounted for 22.50% of our total sales revenue for the six months ended
December 31, 2009.
Our
business can be severely affected by movements in the commodity markets. Corn is
the principal raw material for our cornstarch and the price of cornstarch as a
commodity tends to follow the price of corn. Since mid-2007 to September 2008,
corn and other food prices climbed at an annual inflation rate of 15% in China.
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 the market to help to maintain the corn price. Since September
2008, in a sharp reversal, corn prices have been decreasing due to large corn
harvests. From July 2009, corn prices started to increase. Corn prices for the
three months ended December 31, 2009 are approximately 17.8% higher than for the
same period last year. Corn prices for the six months ended December 31, 2009
are approximately 11.3% higher than for the same period last
year.
We
consider these government policies have had and will continue to have mixed
effects on our operations. Management believes that stable 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. However, in the six months ended
December 31, 2009, our profit margin has fallen from 15.8% to 15.1%
compared to the same period last year, as discussed below. 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. In April 2009, we have transferred our sodium gluconate production
line to oral glucose production line with annual production capacity of 12,000
tons. We now have a glucose production capacity of a total 192,000 tons (if
necessary, it can be easily expandable to a total of 222,000 tons).
During
the six months ended December 31, 2009, we produced a total of 64,899 metric
tons of glucose, and our sales of pharmaceutical grade glucose and other glucose
products were $27.401 million, or 53.07% of our revenues.
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 $12.615
million, and constituted approximately 24.43% of our total sales revenues for
the six months ended December 31, 2009.
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 2010. The focus of this plan is to provide basic healthcare to 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 people especially more farmers in China can afford
healthcare expenses. At the same time, despite the current deceleration in
growth, we believe that the continuing economic growth in China, the rising
purchasing power of China’s domestic market, as well as increased public
awareness of quality health care products, will be the drivers in the demand for
our pharmaceutical glucose products.
We
believe that production capacity, product quality, and cost control 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) improvement of our production
capacity utilization.
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.
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 the 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, 2009, our international sales comprised approximately 19.82% 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, 2009, our top ten
customers accounted for 25% for our total sales revenue.
Results
of Operations
The
following table sets forth our statements of operations for the three and six
months ended December 31, 2009 and 2008:
Three
Months Ended December 31, 2009 Compared with Three Months Ended December 31,
2008
The
following table shows our operating results for the three months ended December
31, 2009 and 2008 .
|
|
Three
months
ended
December
31,
2009
|
|
|
Three
months
ended
December
31,
2008
|
|
Sales
Revenue
|
|
|
28,508,859
|
|
|
|
14,795,746
|
|
Costs
of Goods Sold
|
|
|
24,039,512
|
|
|
|
12,801,591
|
|
Gross
Profit
|
|
|
4,469,347
|
|
|
|
1,994,155
|
|
Sales,
General and Administrative Expenses
|
|
|
2,195,676
|
|
|
|
2,322,885
|
|
Operating
Income
|
|
|
2,273,671
|
|
|
|
(328,730
|
)
|
Other
Net Income (Expense)
|
|
|
(746,482
|
)
|
|
|
(129,616
|
)
|
Income
before Income Taxes
|
|
|
1,527,190
|
|
|
|
(458,346
|
)
|
Provision
for Income Taxes
|
|
|
474,964
|
|
|
|
15,541
|
|
Net
income
|
|
|
1,052,225
|
|
|
|
(473,887
|
)
|
The
following table shows the breakdown of production and sales by product
categories, and between internal use to manufacture glucose products and
external sales of cornstarch, for the three months ended December 31, 2009 and
2008.
Product
|
|
|
Metric Tons
Three months
ended December
31,
2009
|
|
|
Metric Tons
Three months
ended December
31,
2008
|
|
|
Sales Revenue (%)
Three months
ended December
31,
2009
|
|
|
Sales Revenue (%)
Three months
ended December
31,
2008
|
|
Glucose
|
|
|
33,605
|
|
|
20,220
|
|
|
$13,893,774 (48.73)%
|
|
|
$9,252,853(62.5)%
|
|
Cornstarch-Internal
|
|
|
|
|
|
22,638 (67.8)%
|
|
|
|
|
|
|
|
Cornstarch-Sales
|
|
|
21,296 (37.58)%
|
|
|
10,764 (32.2)%
|
|
|
$6,999,359 (24.56)%
|
|
|
$2,026,529 (13.7)%
|
|
Total
Cornstarch
|
|
|
56,675 (100)%
|
|
|
33,402 (100)%
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
$7,615,726 (26.71)%
|
|
|
$3,516,364 (23.8)%
|
|
Total
|
|
|
|
|
|
|
|
|
$28,508,859 (100)%
|
|
|
$14,759,746 (100)%
|
|
Overview
Sales
revenue for the three months ended December 31, 2009 was $28,508,859, an
increase of $13,713,113, or 92.68% compared with the corresponding period in
2008. The increase in sales revenue primarily resulted from the increase of our
export sales and domestic cornstarch and other products sales. Exporting sales
revenue for the three months ended December 31, 2009 increased approximately
307% compared with the corresponding period in 2008. The increase is because
with the recovery of the global economic crisis and with our exporting
department reorganization in fiscal year 2009, the international demand of our
glucose and protein powder products increased compared to the same period last
year. Domestic sales for cornstarch and other products for the three months
ended December 31, 2009 increased approximately 127% compared with the same
period last year. The increase in domestic sales was because of the higher
demand for cornstarch and increase in unit sales price for
cornstarch.
Costs of
goods sold for the three months ended December 31, 2009 was $24,039,512, an
increase of $11,237,921, or 87.79% compared with the corresponding period in
2008. The increase in cost of goods sold primarily resulted from increased sales
and increased corn prices.
Gross
profit for the three months ended December 31, 2009 was $4,469,347, an increase
of $2,475,192, or124.12% compared with the corresponding period in 2008. The
increase in gross profits resulted from the increase in sales compared with the
same period in 2008.
Gross
profit margin for the three months ended December 31, 2009 was 15.7%, an
increase from 13.5% for the same period in 2008. The increase in gross profit
margin was due to decreased selling, general, and administrative
expenses.
Selling,
General and Administrative expenses for the three months ended December 31, 2009
were $2,195,676, a decrease of $127,209, or 5.48% compared with the
corresponding period in 2008. The decrease in our Selling, General and
Administrative expenses was mainly the result of our efforts in controlling our
costs. Especially we have controlled our professional expenses as a public
company by lowering our legal, audit, and investment relationship expenses. We
incurred $158,818 in non-cash stock option expenses for the three months ended
December 31, 2009.
Net
income for the three months ended December 31, 2009 was $1,052,225, an increase
of $1,526,112 or 322.04% compared with the corresponding period in 2008. The
increase in net income was primarily due to the increase in our sales, decreased
selling, general, and administrative expenses, and increase of other
income.
Six
Months Ended December 31, 2009 Compared with Six Months Ended December 31,
2008
The
following table shows our operating results for the six months ended December
31, 2009 and 2008 .
|
|
Six months
ended
December
31,
2009
|
|
|
Six months
ended
December
31,
2008
|
|
Sales
Revenue
|
|
|
51,635,916
|
|
|
|
32,919,474
|
|
Costs
of Goods Sold
|
|
|
43,845,213
|
|
|
|
27,732,778
|
|
Gross
Profit
|
|
|
7,790,704
|
|
|
|
5,186,696
|
|
Sales,
General and Administrative Expenses
|
|
|
4,280,365
|
|
|
|
4,752,675
|
|
Operating
Income
|
|
|
3,510,338
|
|
|
|
434,021
|
|
Other
Net Income (Expense)
|
|
|
(1,111,418
|
)
|
|
|
(129,352
|
)
|
Income
before Income Taxes
|
|
|
2,398,920
|
|
|
|
304,669
|
|
Provision
for Income Taxes
|
|
|
562,862
|
|
|
|
148,760
|
|
Net
income
|
|
|
1,836,059
|
|
|
|
155,909
|
|
The
following table shows the breakdown of production and sales by product
categories, and between internal use to manufacture glucose products and
external sales of cornstarch, for the six months ended December 31, 2009 and
2008.
Product
|
|
|
Metric Tons
Six months
ended December
31,
2009
|
|
|
Metric Tons
Six months
ended December
31,
2008
|
|
|
Sales Revenue (%)
Six months
ended December
31,
2009
|
|
|
Sales Revenue (%)
Six months
ended December 31,
2008
|
|
Glucose
|
|
|
64,899
|
|
|
41,511
|
|
|
$27,401,222 (53.07)%
|
|
|
$17,459,853(53.0)%
|
|
Cornstarch-Internal
|
|
|
64,961 (63.88)%
|
|
|
39,891 (60.9)%
|
|
|
|
|
|
|
|
Cornstarch-Sales
|
|
|
15,432 (36.12)%
|
|
|
25,587 (39.1)%
|
|
|
$11,620,091 (22.50)%
|
|
|
$7,207,529 (21.9)%
|
|
Total
Cornstarch
|
|
|
101,689 (100)%
|
|
|
65,478 (100)%
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
$12,614,603 (24.43)%
|
|
|
$8,252,092 (25.1)%
|
|
Total
|
|
|
|
|
|
|
|
|
$51,635,916 (100)%
|
|
|
$32,919,474 (100)%
|
|
Overview
Sales
revenue for the six months ended December 31, 2009 was $51,635,916, an increase
of $18,716,442, or 56.86% compared with the corresponding period in 2008. The
increase in sales revenue resulted from the increase of our export sales.
Exporting sales revenue for the six months ended December 31, 2009 increased
approximately 161% compared with the corresponding period in 2008. The increase
is because with the recovery of the global economic crisis and with our
exporting department reorganization in fiscal year 2009, the international
demand of our glucose and protein powder products increased compared to the same
period last year. Domestic sales for cornstarch and other products for the three
months ended December 31, 2009 increased approximately 203% compared with the
same period last year. The increase in domestic sales was because of the higher
demand for cornstarch and increase in unit sales price for
cornstarch.
Costs of
goods sold for the six months ended December 31, 2009 was $43,845,213, an
increase of $16,112,435, or 58.10% compared with the corresponding period in
2008. The increase in cost of goods sold primarily resulted from increased sales
and increased corn prices.
Gross
profit for the six months ended December 31, 2009 was $7,790,704, an increase of
$2,604,008, or 50.21% compared with the corresponding period in 2008. The
increase in gross profits resulted from the increase in sales compared with the
same period in 2008.
Gross
profit margin for the six months ended December 31, 2009 was 15.1%, a decrease
from 15.8% for the same period in 2008. The decrease in gross profit margin was
primarily due to increased raw material costs.
Selling,
General and Administrative expenses for the six months ended December 31, 2009
were $4,280,365, a decrease of $472,310, or 9.94% compared with the
corresponding period in 2008. The decrease in our Selling, General and
Administrative expenses was mainly the result of our efforts in controlling our
costs. Especially we have controlled our professional expenses as a public
company by lowering our legal, audit, and investment relationship expenses. We
incurred $317,636 in non-cash stock option expenses for the six months ended
December 31, 2009.
Net
income for the six months ended December 31, 2009 was $1,836,059, an increase of
$1,680,150 or 1077.65% compared with the corresponding period in 2008. The
increase in net income was primarily due to the increase in our sales, and
decreased selling, general, and administrative expenses.
Liquidity and Capital Resources
Operating
Activities
Net cash
provided by operating activities for the six months ended December 31, 2009 was
$8,733,614, an increase of 1094.34%, or $9,611,947, from $878,333 used in
operating activities for the same period in 2008. The increase in net cash
provided by operations was principally due to the increase of other payable and
tax payable.
Investing
Activities
Net cash
used in investing activities for the six months ended December 31, 2009 was
$8,653,664, a decrease of 302.08%, or $12,935,935 from $4,282,271 provided by
investing activities for the same period in 2008. The increase of net cash used
in investing activities resulted from more capital expenditures for acquisition
of fixed assets and intangible assets. Management believes that we will have
limited capital expenditures during the balance of the fiscal 2010
year.
Financing
Activities
Net cash
provide by financing activities for the six months ended December 31, 2009 was
$4,012,675, a decrease of 20127.22%, or $3,992,837 from $19,838 provided by
financing activities for the same period in fiscal 2008. The increase of net
cash provide by financing activities is mainly because the Company has more
borrowings on short term loans for the six months ended December 31, 2009 than
for the six months ended December 31, 2008.
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 $33,300,900
short term bank loans outstanding as of December 31, 2009. 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.
We have
$4,237,620 non-current payables as of December 31, 2009 and $5,642,556 as of
June 30, 2009.
Guarantees
We have
guaranteed certain borrowings of other unrelated third parties including short
term bank loans. The total guaranteed amounts were $4,401,000 as of December 31,
2009. The total amount of guarantees provided to us by unrelated third parties
is $14,508,630.
Future
cash commitments
We
estimate the need for $6 million to $10 million to run the new glucose
facilities. The exact amount 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 may 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
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.
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
In
the normal course of business, the Company extends credit to its customers
without requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. 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 an impact on collections and the Company’s estimation
process. These impacts may be material.
Certain
accounts receivable amounts are charged off against allowances after designated
period of collection efforts. Subsequent cash recoveries are recognized as
income in the period when they occur.
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
In June
2009, the FASB issued ASC 105 (previously SFAS No. 168,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
("GAAP") - a replacement of FASB Statement No. 162
), which will become
the source of authoritative accounting principles generally accepted in the
United States recognized by the FASB to be applied to nongovernmental entities.
The Codification is effective in the third quarter of 2009, and accordingly,
the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009
and all subsequent public filings will reference the Codification as the sole
source of authoritative literature. The Company does not believe that this will
have a material effect on its consolidated financial statements.
In June
2009, the FASB issued ASC 855 (previously SFAS No. 165,
Subsequent Events
), which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date but before the financial statements are
issued or available to be issued. It is effective for interim and annual periods
ending after June 15, 2009. There was no material impact upon the adoption of
this standard on the Company’s consolidated financial statements.
In
June 2009, the FASB issued ASC 860 (previously SFAS No. 166,
“Accounting for Transfers of Financial Assets”) , which requires additional
information regarding transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. SFAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS 166 is effective for
fiscal years beginning after November 15, 2009. The Company does not
believe this pronouncement will impact its financial
statements.
In
June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for
determining whether to consolidate a variable interest entity. These amended
standards eliminate a mandatory quantitative approach to determine whether a
variable interest gives the entity a controlling financial interest in a
variable interest entity in favor of a qualitatively focused analysis, and
require an ongoing reassessment of whether an entity is the primary beneficiary.
These amended standards are effective for us beginning in the first quarter of
fiscal year 2010 and we are currently evaluating the impact that adoption will
have on our consolidated financial statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820,
Measuring
Liabilities at Fair Value
, which provides additional guidance on the
measurement of liabilities at fair value. These amended standards clarify that
in circumstances in which a quoted price in an active market for the identical
liability is not available, we are required to use the quoted price of the
identical liability when traded as an asset, quoted prices for similar
liabilities, or quoted prices for similar liabilities when traded as assets. If
these quoted prices are not available, we are required to use another valuation
technique, such as an income approach or a market approach. These amended
standards are effective for us beginning in the fourth quarter of fiscal year
2009 and are not expected to have a significant impact on our consolidated
financial statements.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
We
currently do not hold or use any derivative or other financial instruments that
expose us to substantial market risk and we have no foreign exchange
contracts.
We are
exposed to foreign exchange risk arising from fluctuations in the exchange rate
between U.S. Dollars and Renminbi. Our operations are located in the People’s
Republic of China and substantially all of our revenues and assets are
denominated in Renminbi. However our reporting currency is the U.S. Dollar and
some of our expenses are denominated in U.S. Dollars. As a result, our financial
results are potentially subject to the impact of changes in value between U.S.
Dollars and Renminbi. If the Renminbi depreciates relative to the U.S. Dollar,
the value of our revenues, earnings and assets as reported in our financial
statements will decline.
Item 4. Controls and
Procedures.
(a)
Disclosure Controls and Procedures.
Mr.
Qingtai Liu, our Chief Executive Officer and Mr. Yongqiang Wang, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of the end of the period covered by this
Report. Based on that evaluation, our officers concluded that our disclosure
controls and procedures were effective and are adequately designed to ensure
that the information required to be disclosed by us in the reports we submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the applicable rules and forms and that such
information was accumulated and communicated to our chief executive officer and
chief financial officer, in a manner that allowed for timely decisions regarding
required disclosure.
(b) Changes
in Internal Control over Financial Reporting
During
the six months ended December 31, 2009, there has been no change in internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect our internal control over financial
reporting.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
Other
Information
The
certifications of our Chief Executive Officer and Chief Financial Officer
attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning our
disclosure controls and procedures and internal controls over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of the
matters covered by such certifications.
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings.
|
To our knowledge, there is no material legal proceeding
pending or threatened against us.
Not
Applicable.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
Item
3.
|
Defaults
Upon Senior Securities
|
None.
Item 4.
|
Submission of Matters to a Vote
of Security Holders.
|
None.
Item 5.
|
Other
Information
|
Not
applicable.
Copies of
the following documents are included as exhibits to this report pursuant to Item
601 of Regulation S-K.
Exhibit No.
|
SEC Ref. No.
|
Title of Document
|
|
|
|
1
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
2.
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
3
|
32.1
|
Certification
of the Principal Executive Officer pursuant to U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
|
|
|
4
|
32.2
|
Certification
of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
*
The Exhibit attached to this Form 10-Q
shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934 (the "Exchange Act") or otherwise subject to liability
under that section, nor shall it be deemed incorporated by reference in any
filing under the Securities Act of 1933, as amended, or the Exchange Act, except
as expressly set forth by specific reference in such
filing.
SIGNATURES
In
accordance with the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date:
February 15, 2010
|
SHENGTAI
PHARMACEUTICAL, INC.
|
|
|
|
|
By:
|
/s/
Qingtai Liu
|
|
|
Qingtai
Liu
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
By:
|
/s/
Yongqiang Wang
|
|
|
Yongqiang
Wang
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial
Officer)
|
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