Item
1.
Business.
This
Annual Report on Form 10-K (including the section regarding Management’s
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-K.
Additionally, statements concerning future matters are forward-looking
statements.
Although
forward-looking statements in this Annual Report on Form 10-K reflect our
good faith judgment, such statements can only be based on facts and factors
currently known by us. Consequently, forward-looking statements are inherently
subject to risks and uncertainties and actual results and outcomes may differ
materially from the results and outcomes discussed in or anticipated by the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, without limitation, those
specifically addressed in Item 1A—“Risks Factors” below, as well as those
discussed elsewhere in this Annual Report on Form 10-K. Readers are urged
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Annual Report on Form 10-K. We file reports
with the SEC. We make available on our website under “Investor Relations/SEC
Filings,” free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.chinaglucose.com
.
You can
also read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You can
obtain additional information about the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains
an Internet site (
www.sec.gov
)
that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including
us.
We
undertake no obligation to revise or update any forward-looking statements
in
order to reflect any event or circumstance that may arise after the date of
this
Annual Report on Form 10-K. Readers are urged to carefully review and
consider the various disclosures made throughout the entirety of this Annual
Report, which attempt to advise interested parties of the risks and factors
that
may affect our business, financial condition, results of operations and
prospects.
All
references to us, we, the Company and Shengtai refer to Shengtai Pharmaceutical,
Inc. (formerly known as West Coast Car Company, and its subsidiaries) and the
PRC to the People’s Republic of China.
Overview
We
are
through our indirect wholly-owned subsidiary, Weifang Shengtai, a PRC-based
company, a manufacturer and supplier of glucose products in the PRC. Our
products include pharmaceutical grade glucose used for medical purposes, and
glucose and starch products for the food and beverage industry and for
industrial production.
Approximately
ninety percent (90.25%) of our sales revenues for the fiscal year ended June
30,
2007 were attributable to sales made in the PRC.
Dextrose
(a form of glucose) is one of the most important carbohydrates and the chief
source of energy in the human body. As such dextrose monohydrate is used in
a
wide array of pharmaceutical products such as transfusions and intravenous
drips
for restorative and nutritional purposes.
(Source:
A survey by the China Starch Industry Association. (Source: An extract from
“China’s Starch, Modified Starch and Crystallized Glucose Production Summary,
2006 edition”, published in July 2007 by the China Starch Industry
Association).
Approximately
sixty two percent (62%) of our sales revenues for the fiscal year ended June
30,
2007 were attributable to sales of pharmaceutical grade glucose.
In
addition to our pharmaceutical glucose series of products, we also produce
the
other medicinal product lines described below and glucose and starch products
such as industrial glucose, syrup, starch, avermectins, dextrin, maltose and
maltitol, which are used for food, beverage and industrial
production
.
We
believe that the global market for pharmaceutical grade glucose (dextrose)
is
approximately 3 billion bottles per year and growing (Source: China Medical
Glass Bottle website,
www.bbmt.com
,
report
titled “The International Big Infusion Drugs Plastic Packing Market is Huge”
dated September 29, 2006).
In
the PRC alone, from 2002 to 2004, the annual demand for glucose has
increased from 250,000 tons to 800,000 tons per year, and the annual demand
for
glucose is expected to increase to 1.7 million tons per year by
2009 (Source: An extract from “Analysis on Present Situation and Prospect
of Chinese Starch Sugar Industry” published by
Starch
and Sugar
,
Volume
I of 2007).
Our
Products
We
manufacture two categories of products (i) pharmaceutical and medicinal grade
products and (ii) raw material for the food and beverage and processing
industries
Pharmaceutical
and medicinal grade products:
These
products accounted for 68% of our sales for the fiscal year ended June 30,
2007.
Set forth below is a list of our major pharmaceutical and medical grade
products:
Dextrose
Monohydrate (DMH)
Dextrose
Monohydrate Transfusion (25kg/bag)
Dextrose
Monohydrate Oral in large bags (720kg/bag)
Dextrose
Monohydrate Oral in small bags (25kg/bag)
Dextrose
Anhydrous (25kg/bag)
Dextrose
Monohydrate Oral for export (25kg/bag)
Dextrose
Monohydrate transfusion for export (25kg/bag)
Dextrose
Anhydrous for export (25kg/bag)
Cornstarch,
Dextrin, Polypropylene Resin II, Polypropylene Resin III, and Polypropylene
Resin IV
Glucose
and starch products for the pharmaceutical and hospital markets
:
Multivitamin
glucose (500g/bag)
Glucose
base solution
Pharmaceutical
grade starch (25kg/bag)
Raw
Materials for the Food Beverage and Processing
Industries
We
produce raw materials for the food and beverage and processing
industries:
Industrial
glucose (for domestic and export)
Syrup
for
export
Starch
for export
Avermectins
Dextrin
(for domestic and export)
Avermectins
Ointment
Avermectins
refinement
Maltose
Maltitol
During
the reporting period, we expanded our manufacturing and supply of Avermectins,
which is a veterinary medicine derived from glucose. The market prospect for
it
has been encouraging.
New
Products
At
the
end of June 2007, we set up a new product line to manufacture sodium gluconate.
This non-corrosive, non-toxic and highly pure gluconate is gaining popularity
as
a chelating agent in the PRC and is widely used in pharmaceutical, construction
and chemistry industries.
The
initial sales of sodium gluconate have been encouraging. As a compound of
glucose and sodium hydroxide, sodium gluconate is a high quality crystalline
sodium salt of gluconic acid. It appears as white crystals that exhibit
excellent solubility. We dissolved sodium hydroxide in glucose solution, along
with certain catalysts. The solution is then heated. Separating the catalysts
by
steaming the solution, and then after a series of processes such as
inspissations, crystallization, centrifugation and dehydration, we eventually
get the end product - sodium gluconate.
Since
we
have only begun the production of sodium gluconate, we have insufficient
profitability records for the reporting period, but we anticipate its gross
profit margin to be between 25% and 30%, depending on our scale of production
scale and our production efficiency.
Currently
we are targeting the construction companies as our end customers since real
estate construction is a booming sector in the PRC economy.
Sales
of Products by Type and Geographic Locations
Approximately
90% of our sales revenues for the fiscal year ended June 30, 2007 were
attributable to domestic sales made in the PRC.
Set
forth
below is a breakdown of the principal products sold by us in different
geographic locations over the previous three fiscal years and the revenues
attributed to such sales.
Sales
by Product
|
|
FY
6/30/2005
(Revenue)
($)
|
|
%
of Total
|
|
FY
6/30/2006
Revenues
($)
|
|
%
of Total
|
|
FY
6/30/2007
Revenues
($)
|
|
%
of Total
|
|
Dextrose
Monohydrate (DMH)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
9,655,570
|
|
|
39.1
|
|
|
9,474,787
|
|
|
26.7
|
|
|
14,110,347
|
|
|
27.0
|
|
International
|
|
|
207,293
|
|
|
0.8
|
|
|
1,363,569
|
|
|
3.9
|
|
|
1,516,334
|
|
|
2.9
|
|
Dextrose
Anhydrate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
1,606,832
|
|
|
6.5
|
|
|
762,238
|
|
|
2.2
|
|
|
1,409,117
|
|
|
2.7
|
|
International
|
|
|
256,261
|
|
|
1.0
|
|
|
534,253
|
|
|
1.4
|
|
|
1,009,844
|
|
|
1.9
|
|
Pharmaceutical
Grade Oral Glucose
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
9,892,962
|
|
|
44.1
|
|
|
16,578,570
|
|
|
46.8
|
|
|
12,044,464
|
|
|
23.0
|
|
International
|
|
|
1,000,550
|
|
|
4.1
|
|
|
2,824,816
|
|
|
8.0
|
|
|
2,553,863
|
|
|
4.9
|
|
Industrial
Grade Oral Glucose
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
1,452,959
|
|
|
5.9
|
|
|
2,003,386
|
|
|
5.7
|
|
|
2,632,628
|
|
|
5
.0
|
|
Corn
Starch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
265,223
|
|
|
1.1
|
|
|
946,436
|
|
|
2.7
|
|
|
8,645,865
|
|
|
16.5
|
|
International
|
|
|
2,359
|
|
|
0.0
|
|
|
1,933
|
|
|
0.0
|
|
|
8,436
|
|
|
0.0
|
|
Sales
and Marketing
Sales
are
carried out directly by our sales department and we are not dependent on
distributors or middlemen. As of June 30, 2007, 27 of a total 31 provinces
(or
province equivalent administrative district) in the mainland PRC have been
covered by our domestic sales network. We have established representative
offices in 7 provinces to fortify our domestic sales network. We believe that
these offices help us to better interact with our customers, reinforce our
sales
force and improve our corporate image. In the meantime, we export our products
to customers in over sixty countries, and we plan to increase our global sales
in the coming years.
Delivery
Methods
We
utilize the following delivery methods: ground transportation, shipment by
sea
and by rail. Products sold internationally are shipped by sea. Approximately
80%
of our products are delivered by ground transportation. We generally bear the
costs and risks of transportation unless a customer specifies a particular
mode
of delivery.
The
Glucose Production Process
Our
glucose is made from enzyme-converted cornstarch. The glucose that we produce
has the following characteristics: low heat, endotoxin in bacteria lower than
0.125Eu/ml, high purity, and a production standard of lower than
0.06Eu/ml.
The
steps
required to produce glucose from cornstarch are:
|
·
|
The
cornstarch is converted into an
emulsion;
|
|
·
|
Alpha-Amylase
Glucoamylase is added;
|
|
·
|
The
emulsion from the chemical reaction form the combination of the
two above
is cleaned and dried after filtering, discoloring, ion exchange,
inspissation, crystallization and separation; and
|
|
·
|
The
cleaned and dried end-product of the above process is
glucose
|
Under
normal operating conditions, the finished product rate is 100%, with no rejects
and wasted products. In case of a power outage or equipment malfunction,
sub-standard output is detected by our quality control procedures, and is placed
back into the production process for re-processing.
Major
Suppliers
The
three
principal ingredients for glucose production are cornstarch, enzyme preparations
and active carbon. The major suppliers for these raw materials are as
follows:
Cornstarch
Shouguang
Shengtai Starch Company Ltd (“Shougang Shengtai”) was our main supplier of
cornstarch. Previously, Mr. Qingtai Liu, our Chief Executive Officer and
President
,
owned
40% of the stock of Shouguang Shengtai and managed Shougang Shengtai under
a management contract. Shouguang Shengtai supplied cornstarch to us based on
sales contracts, but there were no long-term supply agreements between Shouguang
Shengtai and us. This production facility had been used for the past five years
to ensure stable supplies of quality starch to us. We purchased approximately
45%, 77% and 81% of our total cornstarch with the amount of $7,652,465,
$15,963,415 and $13,794,612 for the years ended June 30, 2007, 2006 and
2005, respectively from Shouguang Shengtai. The sharp decline of purchase from
Shougang Shengtai in fiscal 2007 is because we have completed building a new
cornstarch production complex with annual production capacity of 300,000 tons
which supplies us with the cornstarch we need. We expect such third party
purchase to be minimal in the years ahead. See “New Cornstarch Manufacturing
Facility
.”
Shougang Shengtai has ceased its operations as of early calendar
2007.
Enzyme
Preparations
We
purchased a total of 369 tons of enzyme preparations from our sole supplier
for
the past three years, Novozymes (China) Biotechnology Co. Ltd. Although we
have
not purchased enzyme preparations from any other source, there are a number
of other suppliers from whom we can make purchases, if necessary.
Active
Carbon
We
believe that Fujian Sha County Qingshan Chemical Carbon Corporation is one
of
the major active carbon producers in the PRC. We purchased a total of 4,100
tons
of active carbon from them over the past three years. There are a number of
other suppliers of active carbon from whom we can make purchases, if
necessary.
We
are
not dependent on any one supplier of raw materials and machinery nor have
we ever experienced a shortage of supply of raw materials or
machinery.
New
Cornstarch Manufacturing Facility
We
completed most of the construction of a new cornstarch production complex with
annual production capacity of 300,000 tons. The new complex is close to our
existing glucose production plant. It started producing cornstarch in January
2007. When it reaches its full production capacity, we believe its production
capability will be in excess of 2.5 times the 120,000 ton per year production
capacity of Shougang Shengtai. The new cornstarch production facility was
commissioned at the end of 2006 and started production in January 2007.
Currently, the production capacity of the new cornstarch production plant is
240,000 tons per year. The new cornstarch facility will allow us to supplement
and eventually replace our purchases from Shougang Shengtai, which had
inadequate production to meet our needs. In addition, Shougang Shengtai utilized
older equipment which led to unpredictable quality in the cornstarch it
produced. It is approximately 60 kilometers from our facility and resulted
in
additional shipping costs, which then led to higher manufacturing
costs.
Because
Mr. Qingtai Liu
was managing Shougang
Shengtai, our management was able to make a smooth transition to manufacturing
our own cornstarch during the reporting period.
During
calendar 2007, approximately 50% of the new cornstarch production plant’s
output (i.e. 150,000 tons per year) will be used as raw materials
for glucose production, and the other 50% will be sold to customers in the
food and beverage, pharmaceutical and industrial industries.
Our new
cornstarch production complex consists of the following parts:
|
·
|
Cornstarch
production line
|
|
·
|
Warehouse
for finished product (cornstarch)
|
|
·
|
Logistical
and delivery coordination center
|
|
·
|
Environmentally
friendly waste water treatment
facilities
|
Our
new
cornstarch production has the following benefits:
|
·
|
Low-cost
and stable supply of high-quality raw materials for glucose
production
|
|
·
|
The
stable supply of cornstarch will enable our existing glucose production
plant to operate at full capacity
|
|
·
|
Reduced
transportation costs of raw
materials
|
|
·
|
Quality
assurance of cornstarch since we are producing our own
cornstarch
|
Glucose
Manufacturing Facility Upgrade
We
plan
to upgrade our existing glucose production facility by replacing our old
machinery to produce more complex glucose products such as anhydrous glucose
transfusion, monohydrate glucose transfusion and oral glucose. We also plan
to
add an additional production line such as the production line for sodium
gluconate.
After
this upgrade, we expect that at least 70% (up from 50%) of the cornstarch
produced by the new cornstarch production plant will be used by us as raw
materials for glucose production. This upgrade will also allow for increased
production of glucose.
Construction
of New Glucose Manufacturing Facility
We
have
begun construction on a new glucose manufacturing facility to boost our
production capacity. The facility is deigned to have a production capacity
of
150,000 tons. Our preliminary budget for the new glucose complex is
approximately $12 million, without taking account of any appreciation of the
Renminbi and increased construction costs due to the recent inflationary economy
in the PRC. A portion of the costs will be financed through bank loans and
the
remainder from the monies we had raised in our May 2007 private placement.
We
anticipate that construction will be completed by the end of calendar 2007
or
the first half of calendar 2008.
Quality
Control
Our
PRC
production facilities are fully certified by applicable PRC regulations for
cGMP, ISO9002 and HACCP international quality standards. The rate of quality
output (output conforming to pharmaceutical-grade glucose product
specifications) is maintained at 100% because non-conforming products can be
reprocessed.
A
three-tier quality control system (production team level, workshop level, and
management accountability for quality) ensures that all products are produced
in
a pollution-free, contamination-free and efficient production environment
following strict quality-oriented procedures:
|
·
|
A
team of workers on-duty is responsible for the smooth operation of
the
production process by adhering to proper procedures. The intermediate
output from each production step is sampled and checked to ensure
that the
final output is of specified quality standards.
|
|
·
|
Equipment
is checked regularly and maintained to ensure proper operation. The
quality of the water used in the production process is regularly
checked
as well. The level of airborne particles and microbes in the production
sites is regularly checked to eliminate contamination.
|
|
·
|
The
quality of all output is reviewed by the General Manager of the Quality
Control Department, and ultimately approved by the CEO. A full set
of
written quality control records is
maintained.
|
The
qualities of our manufactured glucose can be summarized as follows:
Properties
:
white
crystal, granular powder, odorless, sweet taste, easy soluble in water, slightly
soluble in alcohol
Specific
rotatory power
:
+52.0
degrees— +53.5degrees
Dry
loss
:
≤9.5%
Chloride:
<0.02%
Sulfate:
<0.02%
Alcohol-insoluble
matter:
≤5mg
Ferrous
salt:
<0.002%
Ignition
residue:
0.08%
Heavy
metal:
≤20ppm
Arsenide:
<2ppm
Sulfite
and soluble starch:
appear
yellow when added to an iodine test solution.
The
qualities of our Dextrose Monohydrate Transfusion (Liquid glucose) may be
summarized as follows:
Perceptual
index:
Appearance:
colorless without the impurity that can be seen by naked eye
Odor:
no
unusual odor
Taste:
Clear
sweet
Physical
and chemical index
Solid
substance:
more
than 84%
DE:
38-42
PH:
4.6
-6.0
Maltose
content:
8% -
20%
Transmittance
(426nm):
more
than 94
Coke
Temperature:
more
than or equal to 125
Ash:
no more
than 0.3%
Hygienic
index:
As:
not more
than 0.5mg/Kg
Pb:
not more
than 0.5mg/Kg
Bacterium
total:
not more
than 1,000/g
E.
coli:
not more
than 30/100g
Pathogen:
No
Market
Analysis
Industry
Overview and Trends
The pharmaceutical
transfusion was first put to use in 1832. Since then clinical transfusion
has grown from its rather limited choice of original physiological brine to
more
than 200 different kinds of transfusion media.
The
diverse range of transfusion media could be grouped into five
categories:
|
·
|
Body
fluid balance (Isohydria)
|
|
·
|
Nutritional
transfusion
|
|
·
|
Therapeutic
transfusion (including herbal
transfusion)
|
Dextrose
Monohydrate is widely used in the medical and clinical environment for
restorative and nutritional purposes. For example, a solution of pure glucose
(Dextrose or D-glucose) has been recommended for use by subcutaneous injection
as a restorative measure after major operations or as a nutritive measure in
debilitating diseases.
Dextrose
Monohydrate is widely used in hospitals and clinical institutions in the PRC
and
is covered by the PRC Government-subsidized Medical Insurance
Scheme.
Glucose
exists in many forms in nature, including in plants, fruits, honey and animal
products. In humans, every 100ml of blood typically contains 80-120 mg glucose.
Glucose is the ingredient for many saccharide compounds such as saccharose,
maltose, starch, glycogen and vitamins. The properties of glucose are summarized
as: white crystal with sweet taste, easily soluble in water, difficult to
dissolve in alcohol, insoluble in organic solvents such as ether, chloroform
and
neutral reaction to litmus.
Liquid
glucose is a transparent and viscous liquid, and is produced by the action
of
enzymes on refined cornstarch. Glucose is formed by the hydrolysis of many
carbohydrates, including sucrose, maltose, cellulose, starch and glycogen.
Fermentation of glucose by yeast produces ethyl alcohol and carbon dioxide.
Glucose is made industrially by the hydrolysis of starch under the influence
of
diluted aid, or more commonly, under that of enzymes.
Glucose
is used for many different purposes, as a raw material for many food and
beverage products and as a substitute for sucrose. With the technological
advances in food and beverage production, and as also in response to the demand
from consumers for healthier food and drinks, producers are using more and
more
glucose as a raw material. Glucose is also used in veterinary medicine as a
carrier of animal medicines.
Glucose
is used by the pharmaceutical and chemical industries in a variety of ways.
By
using different reaction mechanisms, different types of chemical compounds
are
produced, using the self-oxidation and combination mechanism to produce calcium
gluconate, zinc gluconate, and glucorone; using the hydro-reduction mechanism
to
produce sorbic alcohol and manno-alcohol, or to produce Vitamin B2, glutamine,
ribose, and other vitamins.
World
Pharmaceutical Market
The
global market for pharmaceutical products is growing at a significant rate
and is projected to continue to do so in the immediate future.
Pharmaceutical Market Trends, 2006-2010 by BioPortfolio forecast an increase
in
the global pharmaceutical market to $842 billion in 2010.
The
Pharmaceutical Business Review reported, “
Positive
economic growth, stabilizing political structures, growing patient populations,
and increasing direct foreign investment in the emerging markets of Brazil,
Russia, India and China (BRIC) are creating significant opportunities for
pharmaceutical companies to expand into these markets and maximize future
revenue potential. Pharmaceutical sales across the BRIC economies grew by 22.3%
in 2005, compared to single digit growth in the major markets of the US, Europe
and Japan.
”
According
to IMS, a leading forecast provider of market intelligence to the pharmaceutical
and healthcare industries, 2005 total global pharmaceutical sales grew 7% at
constant exchange rates, to $602 billion. In the ten major markets, audited
growth was 5.7% in 2005. IMS audits covers 95% of the market, while the
remaining 5% are estimates.
The
PRC Pharmaceutical Market
With
annual growth rates in the PRC pharmaceutical industry exceeding 15% per year,
the PRC has become a critically important market (see “China’s Pharmaceutical
Market is World’s Ninth Largest”, October 22, 2005, available on www.100md.com).
Our expectation of similar growth rate also comes from a demographic analysis.
The PRC has the most aged citizens in the world. In 2004, it had 143 million
people aged 60 and above. This number will be 200 million in 2014 and 300
million in 2026. (See article titled “China’s ageing problem and seven
features”, dated February 24, 2006, available on www.china.org.cn). We believe
that an aging population will necessarily call for the demand of more
pharmaceutical and medicinal products to meet its needs. Demand for better
drugs
and medical equipment is driving this market. We believe it will continue to
grow as the country modernizes and provides healthcare to a population of 1.3
billion people. Currently, the population of the PRC is served by approximately
310,000 medical and clinical institutions.
The
PRC
is one of the top 10 emerging pharmaceutical markets of the world, and is the
second largest market in Asia after Japan as reported in an article dated May
6,
2005 titled “Experts Forecast China will become the World’s Fifth Biggest
Medicine Market in 2010” on the Chinese Small-Medium Enterprises website
(
http://www.ynetc.gov.cn/Article_Show.asp?ArticleID=387
).
By
2010, it is believed the PRC will become the world’s fifth largest
pharmaceutical market after the USA, Japan, Germany, and France according to
a
report dated November 13, 2002 titled “Asia Pacific Medical Industrial Council
Forecasts China will become the World’s Fifth Largest Pharmaceutical Market by
2010” on People’s Website (www.people.com.cn). It is projected that the PRC
pharmaceutical market would be valued at $75 billion by 2010, accounting for
10%
of global demand, and $120 billion by 2020 (Source:
www.http://managert.bokee.com/4173614.html).
The
value
of PRC pharmaceutical goods produced in 1970 was only $21.7 billion. (as
reported on the Szechuan News Website, www.newssc.org, in an article titled
“Discussion on the Development and State of China’s Pharmaceutical Industry”).
Currently the PRC pharmaceutical market produces goods with a value of over
$54.6 billion, according to an article in the July/August 2006 edition of the
magazine Pharmaceutical Manufacturing. The PRC produces a little less than
25%
of what is produced by the U.S. pharmaceutical market, which is valued at
$240 billion. Projections show that the total value of global pharmaceuticals
will expand to $750 billion in 2010 (Source: Western Medical People website
(www.yd210.com)).
IMS
reported that the total pharmaceutical market will expand at a compound
annual growth rate of 5-8% over the next five years. North America and Europe
are each projected to grow at a 5-8% pace; Asia Pacific/Africa, 9-12%; Latin
America, 7-10%; and Japan, 3-6%. Emerging markets including the PRC, Korea,
Mexico, Russia and Turkey, will all experience double-digit growth, outpacing
global performance and signaling important shifts in the marketplace.
We
believe that the global demand for pharmaceuticals is likely to continue to
increase; with developing countries now being economically more prosperous
and
capable of spending more money on improving health care.
Major
Import and Export Markets for Pharmaceutical Products
The
major
producers of chemical pharmaceutical raw materials are Western Europe, North
America, Japan, China and India. Western Europe is a net exporter exporting
50%
of its total production. North America is a major importer, with its own
products only able to satisfy 20% of its total demand. Japan is believed to
be evolving to become a net importer. The PRC and India have emerged into
two major exporters for pharmaceutical raw materials, exporting 30-40% of its
total output. (Source: Article titled “2002-2003 Analysis of the World’s
Pharmaceutical Market” as reported on the Shanghai Information Services Platform
website, http://www.istis.sh.cn/)
The
total
annual chemical drug-base production of the PRC is approximately 500,000 tons,
consisting of raw materials for the production of anti-biotic, vitamins,
pain-killers and hormonal and other drugs, and is second only to United States.
The PRC and India are emerging as the major exporters in these product and
raw
material categories.
The
Pharmaceutical Raw Material Manufacturing Industry in the PRC
The
PRC,
as a country, has put a lot of emphasis on the production of pharmaceutical
raw
materials in the past 40-50 years. Additionally, in the past ten
years, a number of large international pharmaceutical companies have moved
their
productions to the PRC, such as Cargill, CPI and Roquette. Both factors have
contributed to the growth of this specific segment in the PRC.
This
industry segment can be categorized into three groups: first, the state-owned
or
government-subsidized pharmaceutical companies taking up 30% of market share;
second, the foreign-owned or Sino-foreign Joint ventures taking up 60% of market
share, and with the bulk of smaller firms competing for the remaining 10%.
We
fall into the second category.
Market
Analysis and Projections for Clinical Transfusion Products in the
PRC
Transfusion
solutions are one of most commonly used clinical prescriptions in hospitals
and
health care institutions. Dextrose Monohydrate is one of the five most important
types of medical prescriptions in the PRC and is one of the most widely used
pharmaceutical products.
The
total
production volume of transfusion solutions grew from 1.38 billion bottles in
1995 to 2.91 billion bottles in 2001, i.e. annual growth of around 16.1%
(source: http://www.chinapharm.com.en/html/scfx/20034815219.html). The types
of
transfusion solutions grew from 40 to more than 80 types of medical transfusion
formulations.
There
are
more than 200 types of transfusion solutions developed and used in overseas
countries, and the annual per capital consumption is more than 3 bottles. The
PRC has only approximately 50 types of transfusion products, and the per
capital consumption is around 2.15 bottles. Most of the consumption is for
Dextrose Monohydrate.
(Source:
Report titled “Major Transportation of Liquid Pharmaceutical Products: Entering
the Speedway” dated April 21, 2003 published on Chinapharm website,
www.chinapharm.com.cn)
We
believe that we are one of the top producers of Dextrose Monohydrate transfusion
solutions as well as Dextrose Anhydrous solutions. These products are the raw
material or base solutions for pharmaceutical manufacturers to add specific
medical formulations to produce medicated transfusion. Our industrial customers
are producers of medical transfusion solutions.
The
growth in demand for Dextrose Monohydrate transfusion solutions is co-related
to
the growth of the pharmaceutical production and consumption trends and patterns.
Medical transfusion is a common and well-accepted treatment routine all over
the
PRC for many ailments, ranging from the common cold, influenza, and intestinal
disorders to clinical restorative or recuperative prescriptions after surgical
operations. There are altogether 310,000 medical service providers such as
hospitals, clinics, and health-care institutions serving the 1.3 billion people
in the PRC.
Some
authorities predict that the PRC’s pharmaceutical industry will grow at a rate
of between 15 and 16 % for the whole year of 2007, a little higher than the
number for 2006. (Source: http://www.bioon.com/industry/market, report title:
Forecast of Pharmaceutical Industry in 2007).
Based
on
our analysis of the consumption of glucose products carried out by the China
Starch Industry Association and the disposable income per capita from China
National Statistics Bureau, we believe that there is a strong correlation
between the consumption of glucose products and the disposable income per
capita.
We
predict that higher living standards would lead to higher consumption of
pharmaceutical dextrose. It is our understanding that the robust and continuing
economic growth, the rising purchasing power of domestic market, as well as
the
public awareness of quality health care products, are all drivers to the demand
for our products. The strong growth in the PRC pharmaceutical industry will
also
help increase the selling prices of our major products, and enhance our revenues
and increase our gross profit margin.
Target
Market
Our
principal customers are:
|
·
|
Health
Care Institutions
|
|
·
|
Medical
supply companies
|
|
·
|
Pharmaceutical
companies
|
|
·
|
Medical
supply exporters
|
|
·
|
Food
and beverage companies
|
We
market
our products to these types of businesses within the PRC and plan to expand
our
export business as we increase our production capabilities, particularly in
wholesale sales to foreign distributors.
We
utilize the following factors/incentives to encourage the purchase of our
products:
|
·
|
High
quality, pharmaceutical grade
products
|
|
·
|
Certified
product reliability
|
|
·
|
New
and improved medicinal products and
packaging
|
|
·
|
Excellent
service and support
|
Domestic
and International Market
The
market in the PRC for our products is very large and growing rapidly. There
are more than 310,000 medical service providers such as hospitals and health
care institutions all over the PRC.
We
believe that the export market is a lucrative market that we plan to further
develop and expand. Due to the strong domestic demand for our products and
our
prior production constraints, historically we could only serve a fraction
of the export market.
Our
export revenues for the Dextrose Monohydrate series of products (which also
includes anhydrous glucose and oral glucose) derived from our top four export
markets are summarized as follows:
South
Korea
Import
approval permit issued in 2003
Products
exported: Dextrose Monohydrate Oral and Dextrose Anhydrous
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
342,955
|
|
$
|
370,467
|
|
$
|
548,172
|
|
Russia
Import
approval permit issued in 2004
Products
exported: Dextrose Monohydrate Oral, Dextrose Monohydrate
transfusion
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
100,000
|
|
$
|
258,115
|
|
$
|
1,006,133
|
|
Australia
Import
approval permit issued in 2003
Product
exported: Dextrose Monohydrate Oral
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
42,780
|
|
$
|
278,202
|
|
$
|
813,746
|
|
Singapore
(plus re-export to Thailand)
Import
approval permit issued in2003
Products
exported: Dextrose Monohydrate Injection
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
89,725
|
|
$
|
28,285
|
|
$
|
29,345
|
|
Competition
Some
of
our competitors of its main products are listed below. They are coded as
follows:
(trans
=
competitor in Dextrose Monohydrate transfusion solution)
(oral
=
competitor in oral Dextrose Monohydrate)
(andh
=
competitor in Dextrose Anhydrous)
|
·
|
Dong
Ping Rui Xing Petrochemical Company Ltd
(trans)
|
|
·
|
North
China Pharmaceutical Production Company Ltd
(trans)
|
|
·
|
Ci
Feng Pharmaceutical Production Company Ltd
(trans)
|
|
·
|
Yi
Kan Pharmaceutical Production Company Ltd
(trans)
|
|
·
|
Hebei
Shengxue Company Ltd (andh)
|
|
·
|
Northern
China Kan Yin Pharmaceutical Product Company Ltd
(trans)
|
|
·
|
Shandong
Xi Wang Company Ltd (oral)
|
|
·
|
QingHuangDao
Lihua Glucose Company Ltd (oral)
|
|
·
|
Hebei
Hua Ying Glucose Company Ltd (oral)
|
|
·
|
Cargill
USA (trans), (oral)
|
|
·
|
Roquette
(trans), (andh)
|
|
·
|
Cerestar
(trans), (andh)
|
|
·
|
Hebei
Zhou Ping Rui Xue Glucose Company Ltd
(andh)
|
|
·
|
Hebei
Linhua Glucose and Medicinal Production Company Ltd
(andh)
|
Among
our
domestic competitors, we believe that we are the largest manufacturer of
pharmaceutical grade glucose. However, our foreign competitors may be
better-capitalized and more technologically advanced.
Competitive
Advantages
With
the
PRC being a major corn-producing region of Asia, and Shandong being the major
corn-producing province of the PRC, our operating subsidiary Weifang Shengtai,
located in Shandong, has the advantage of a steady supply of raw materials,
which are located nearby with low transportation costs.
Among our
assets is a total of 253,746 square meters of land, of which approximately
only
60% is being utilized, leaving room for expansion.
We
have
only started to export to markets such as South Korea, Russia, Australia and
Singapore and sixty other countries. Taking into consideration the geographical
proximity and cross-cultural similarities with the Northern and South-Eastern
Asian markets, we believe that we can be competitive in terms of product price,
delivery lead-time and customer service responsiveness.
With
our
new cornstarch facility, a planned upgrade of our glucose manufacturing facility
and construction of another new glucose manufacturing facility, we believe
that we will be able to stabilize our raw material costs and
production, enable our glucose production facility to function at maximum
capacity and produce more products for both the domestic and export
markets.
We
believe that we are the one of the leading producers of Dextrose Monohydrate
transfusion solution in the PRC, with an estimated 30% of the overall PRC market
share (Source: “Compilation of the Means of Production for Starch, Modified
Starch, Crystal Glucose and Liquid Starch Sugars in 2005” published by the China
Starch Industry Association in July 2006). The other suppliers of Dextrose
Monohydrate transfusion solutions have pharmaceutical production lines with
a diversified range of medicinal products. We believe that we are the only
manufacturer that has our primary focus on producing high-quality Dextrose
Monohydrate transfusion solutions in the PRC.
The
other competitors are manufacturing companies with a diversified range of
industrial glucose and cornstarch products. We believe that most of our
competitors put more emphasis on volume production of medium to low value-added
products, while we focuses more on quality production of high value-added
products.
Backlog
Our
orders are processed on a made to order basis and we do not have any backlog
of
orders.
Growth
Initiative
We
have
developed and are implementing the following initiatives to achieve its growth
goals:
|
·
|
Vertical
integration of our manufacturing capabilities by building and operating
a
cornstarch plant.
|
We
believe the new cornstarch processing plant will lower production costs and
improve profit margin because higher-quality and lower cost raw materials will
be produced in-house and there will be no transportation costs because the
cornstarch processing plant is next to the glucose production line. This will
somewhat shield us from external cornstarch price fluctuation, thus protecting
or improving its profit margins.
|
·
|
Increase
its glucose production capabilities to be able to meet market
demand
|
Overseas
demand had not been fully satisfied in the past because our products have been
sold out due to strong domestic demand in the PRC. We believe that our new
300,000 ton cornstarch processing plant will supply enough raw materials to
increase production volumes and sales to an expanding domestic client base
and
fulfill more overseas orders which offer higher profit margins. In line with
this, we have commenced construction of our new glucose manufacturing facility,
which is anticipated to be completed next year.
Beyond
the pharmaceutical-grade products, some of the industrial-grade products can
be
further refined and transformed into higher-margin products, such
as modified starch and glucose-transformed nutraceutical raw materials. We
have in our pipeline biotechnology product formulas that could be deployed
to
serve emerging market segments in the next few years. An example of this is
in
the production of sodium gluconate, which has been sold recently on a trial
basis to encouraging feedback.
|
·
|
Expand
our marketing and sales efforts to identify and secure additional
domestic
customers and increase our export
sales
|
We
plan
to (i) optimize our web site to describe and promote its business, (ii) take
out
advertisements in trade publications, (iii) buy advertisements for various
search words and phrases (e.g. “glucose”) on Google and Yahoo and major PRC
search engines, (iv) conduct seminars at various trade show events to promote
our products, and (v) optimize our web site so that people doing ‘natural’
searches will see the web site link on the first page of the search by refining
its Search Engine Optimization
Major
Customers
Our
customers are principally located in the PRC but we hope to expand our
international customer base. Our principal customers are hospitals and
pharmaceutical companies. Below is a list of our largest PRC
customers:
|
·
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Zhejiang
Hsin Pharmaceutical Co Ltd
|
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·
|
Shouguang
Tianli Biological Technology Co Ltd
|
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·
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Guangdong
Weishiya Health Food Co Ltd
|
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Lianyungang
Roquette Co Ltd
|
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Sichuan
Kelun Pharmaceutical Co Ltd
|
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Beijing
Double-Crane Pharmaceutical Co Ltd
|
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Huayuan
Changfu Pharmaceutical Group
|
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Anhui
Fengyuan Pharmaceutical Group
|
|
·
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Huayu
Wuxi Pharmaceutical Co Ltd
|
|
·
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Chengdu
Qingshan Pharmaceutical Co Ltd
|
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·
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Guangdong
Duole Dairy Co Ltd
|
No
one
customer accounted for more than 10% of our sales revenues for any of the fiscal
years ended June 30, 2007, 2006 or 2005.
Intellectual
Property
We
formally acquired the registered “Heng De Bao” trade mark from Changle Medical
Starch Factory on or about July 28, 2000. The trade mark was assigned by the
Chinese Trademark Bureau and registered under classes 31 (pharmaceutical starch
and white dextrin) and 5 (pharmaceutical glucose). The class 31 registration
was
renewed till June 10, 2009 while the class 5 registration was renewed and valid
till May 9, 2011. International Class Code 5 covers pharmaceuticals, veterinary
and sanitary preparations; dietetic substances adapted for medical use; food
for
babies; plasters, materials for dressings; material for stopping teeth, dental
wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.
International Class Code 31 covers agricultural, horticultural, and
forestry products and grains not included in other classes; live animals, fresh
fruits and vegetables; seeds, natural plans, and flowers; foodstuffs for animal,
malt.
Insurance
We
purchased automobile insurance with third party liability coverage for our
vehicles and life insurance for our key personnel. We do not have other
insurance such as property insurance, business liability or disruption insurance
coverage for our operations in the PRC. While a lawsuit against a company such
as Weifang Shengtai in the PRC would be rare, we cannot make any assurance
that we will not have exposure for liability in the event of a lawsuit.
Government
Regulations
Because
we manufacture medicinal and pharmaceutical products, we are subject to the
laws
governing the Good Practice in the Manufacturing and Quality Control of Drugs
(as amended in 1998) as promulgated by the PRC State Food and
Drug
Administration on March 18, 1999.
We
are
also subject to business license and approval regulations that are required
for
all corporations in the PRC.
We
have
obtained Certificates of Good Manufacturing Practices for Pharmaceutical
Products (“GMP Certificates”) issued by the PRC State Food and
Drug
Administration. The GMP Certificates certify that we have complied with the
requirements of Chinese Current Good Manufacturing Practices for Pharmaceutical
Products in the manufacture of bulk Dextrose Monohydrate, glucose and anhydrous
glucose and the GMP Certificates are valid through May 18, 2009, March 23,
2008
and April 18, 2009 respectively.
Additionally,
we have obtained Drug Registration Certificates for glucose and glucosum pro
orale from the State Food and Drug Administration in accordance with the PRC
Medical Products Governance Law and its implementing regulations.
Environmental
Compliance
We
are
subject to PRC environmental laws, rules and regulations that are standard
to
manufacturing facilities.
Our
production line has passed inspection by the Environmental Protection Bureau
of
PRC and was issued a Certificate of Qualification.
Employees
As
of
June 30, 2007, we employed approximately 760 full-time employees. Of these,
7
are group administrators, 20 are managers, approximately 45 are in marketing,
approximately 50 perform administrative functions, and approximately 638 are
in
production, storage and distribution.
Item
1A. Risk Factors.
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common
stock.
Risks
related to doing business in the People’s Republic of
China
Our
business operations are conducted primarily in the PRC. Because PRC laws,
regulations and policies are continually changing, our PRC operations will
face
several risks summarized below.
Our
ability to operate in the PRC may be harmed by changes in its laws and
regulations
Our
offices and manufacturing plants are located in the PRC and the production,
sale
and distribution of our products are subject to PRC rules and regulations.
In
particular, the manufacture and supply of pharmaceutical grade and medicinal
products are subject to the PRC rules and regulations, such as the Good Practice
in the Manufacturing and Quality Control of Drugs (as amended in 1998) as
promulgated by the PRC State Food and Drug Administration on March 18, 1999
and
the PRC Medical Products Governance Law. In addition, because we operate a
cornstarch production facility which produces waste water and we are subject
to
the environmental rules and regulations such as the Integrated Wastewater
Discharge Standard (GB8978-1996).
The
PRC
only recently has afforded provincial and local economic autonomy and permitted
private economic activities. The PRC government has exercised and continues
to
exercise substantial control over virtually every sector of the PRC economy
through regulation and state ownership.
Our
ability to operate in the PRC may be harmed by changes in its laws and
regulations, including those relating to manufacturing, taxation, import and
export tariffs, environmental regulations, land use rights, property and other
matters.
Our
production and manufacturing facility is subject to PRC regulation and
environmental laws. The PRC government has been active in regulating the
pharmaceutical and medicinal goods industry. Our business and products are
subject to government regulations mandating the use of good manufacturing
practices. Changes in these laws or regulations in the PRC, or other countries
we sell into, that govern or apply to our operations could have a materially
adverse effect on our business. For example, the law could change so as to
prohibit the use of certain chemical agents in our products. If such chemical
agents are found in our products, then such a change would reduce our
productivity of that product.
We
are a
state-licensed corporation.
If
we
were to lose our state-licensed status, we would no longer be able to
manufacture our products in the PRC.
There
is no assurance that PRC economic reforms will not adversely affect our
operations in the future
As
a
developing nation, the PRC's economy is more volatile than that of developed
Western industrial economies. It differs significantly from that of the U.S.
or
a Western European country in such respects as structure, level of development,
capital reinvestment, resource allocation and self-sufficiency. Only in recent
years has the PRC economy moved from what had been a command economy through
the
1970s to one that during the 1990s encouraged substantial private economic
activity. Although the PRC government still owns the majority of productive
assets in the PRC, in the past several years the government has implemented
economic reform measures that emphasize decentralization and encourage private
economic activity.
In
1993,
the Constitution of the PRC was amended to reinforce such economic reforms.
The
trends of the 1990s indicate that future policies of the Chinese government
will
emphasize greater utilization of market forces. The PRC government has confirmed
that economic development will follow the model of a market economy. For
example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinated to the state-owned companies, which are the
mainstay of the Chinese economy. However, there can be no assurance that, under
some circumstances, the government's pursuit of economic reforms will not be
restrained or curtailed. Actions by the central government of the PRC could
have
a significant adverse effect on economic conditions in the country as a whole
and on the economic prospects for our Chinese operations. Economic reforms
could
either benefit or damage our operations and profitability. Some of the things
that could have this effect are: (i) level of government involvement in the
economy; (ii) control of foreign exchange; (iii) methods of allocating
resources; (iv) international trade restrictions; and (v) international
conflict.
Under
the
present direction, we believe that the PRC will continue to strengthen its
economic and trading relationships with foreign countries and business
development in the PRC will follow market forces. While we believe that this
trend will continue, there can be no assurance that this will be the case.
A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports
or
sources of supplies, or the expropriation or nationalization of private
enterprises and could require us to divest ourselves of any interest we then
hold in Chinese properties or businesses.
Although
the PRC government has been pursuing economic reform policies for more than
two
decades, there is no assurance that the government will continue to pursue
these
policies or that these policies may not be significantly changed, especially
in
the event of a change in leadership, social or political disruption, or other
circumstances affecting the PRC's political, economic and social
life.
Because
these economic reform measures may be inconsistent, ineffectual or temporary,
there are no assurances that:
|
·
|
we
will be able to capitalize on economic reforms;
|
|
·
|
the
Chinese government will continue its pursuit of economic reform
policies;
|
|
·
|
the
economic policies, even if pursued, will be successful;
|
|
·
|
economic
policies will not be significantly altered from time to time; and
|
|
·
|
business
operations in the PRC will not become subject to the risk of
nationalization.
|
Anti-inflation
measures may be ineffective or harm our ability to do business in the
PRC
Since
1979, the PRC government has reformed its economic system. Because many reforms
are unprecedented or experimental, they are expected to be refined and improved.
Other political, economic and social factors, such as political changes, changes
in the rates of economic growth, unemployment or inflation, or in the
disparities in per capita wealth between regions within the PRC, could lead
to
further readjustment of the reform measures. This refining and readjustment
process may instead negatively affect our operations and there is guarantee
that
it will be effective.
Over
the
last few years, the PRC's economy has registered a high growth rate. During
the
past ten years, the rate of inflation in the PRC has been as high as 20.7%
and
as low as -2.2%. Recently, there have been indications that rates of inflation
have increased. In response, the PRC government recently has taken measures
to
curb this excessively expansive economy. These corrective measures were designed
to restrict the availability of credit or regulate growth and contain inflation.
These measures have included devaluations of the PRC currency, the Renminbi
(RMB), restrictions on the availability of domestic credit, reducing the
purchasing capability of certain of its customers, and limited re-centralization
of the approval process for purchases of some foreign products. These austerity
measures alone may not succeed in slowing down the economy's excessive expansion
or control inflation, and may result in severe dislocations in the PRC economy.
The PRC government may adopt additional measures to further combat inflation,
including the establishment of freezes or restraints on certain projects or
markets. Such measures could harm the market for our products and inhibit our
ability to conduct business in the PRC.
The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors
The
PRC
legal and judicial system may negatively impact foreign investors. In 1982,
the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge
in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making
is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist,
or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that
is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced
the
protection of foreign investment and allowed for more control by foreign parties
of their investments in PRC enterprises. There can be no assurance that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting the PRC's political, economic or social life, will not affect the
PRC
government's ability to continue to support and pursue these reforms. Such
a
shift could have a material adverse effect on our business and
prospects.
The
practical effect of the PRC legal system on our business operations in the
PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly,
the
PRC accounting laws mandate accounting practices, which are not consistent
with
U.S. generally accepted accounting principles. PRC’s accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. Weifang Shengtai is a wholly foreign owned enterprise.
Second, while the enforcement of substantive rights may appear less clear than
United States procedures, the Foreign Invested Enterprises and Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the
same
status as other Chinese registered companies in business-to-business dispute
resolution.
Since
the
Articles of Association of Weifang Shengtai do not provide for the resolution
of
disputes business, the parties are free to proceed to either the Chinese courts
or if they are in agreement, to arbitration.
Any
award
rendered by an arbitration tribunal is enforceable in accordance with the United
Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958). Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
In
addition, some of our present and future executive officers and our directors,
most notably, Mr. Qingtai Liu, Mr. Yongqiang Wang, Mr. Yizhao Zhang and Mr.
Chris Wang, may be residents of the PRC and not of the United States, and
substantially all the assets of these persons are located outside the U.S.
As a
result, it could be difficult for investors to effect service of process in
the
United States, or to enforce a judgment obtained in the United States against
us
or any of these persons.
The
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings.
We
and any future subsidiaries are considered foreign persons or foreign funded
enterprises under PRC laws, and as a result, we are required to comply with
PRC
laws and regulations. These laws and regulations are sometimes vague and may
be
subject to future changes, and their official interpretation and enforcement
may
involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance
by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may have
on
our business.
Governmental
control of currency conversion may affect the value of your
investment
.
The
majority of our revenues will be settled in Renminbi and U.S. dollars, and
any
future restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside the PRC
or
to make dividend or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises like
us
may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in the PRC authorized to conduct foreign exchange
business.
In
addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in the PRC, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the PRC regulatory
authorities will not impose more stringent restrictions on the convertibility
of
the Renminbi.
The
value of our securities and your ability to receive dividends may be affected
by
the foreign exchange rate between U.S. dollars and Renminbi and the PRC
government’s control over the Renminbi.
The
value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and Renminbi, and between those currencies and other currencies in
which
our sales may be denominated. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, our
business, and the price of our common stock may be harmed. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiary in the PRC would be reduced.
The
PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
We
receive substantially all of our revenues in Renminbi which is currently not
a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing
PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of the PRC to pay capital expenses, such as the repayment of bank loans
denominated in foreign currencies
.
The
PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain expenses as they come
due.
The
fluctuation of the Renminbi may materially and adversely affect your
investment.
The
value
of the Renminbi against the U.S. Dollar and other currencies may fluctuate
and
is affected by, among other things, changes in the PRC's political and economic
conditions. As we rely almost entirely on revenues earned in the PRC since
most
of our sales occur in the PRC, any significant revaluation of the Renminbi
may
materially and adversely affect our cash flows, revenues and financial
condition. For example, to the extent that we need to convert U.S. Dollars
we
receive from an offering of our securities into Renminbi for our operations,
appreciation of the Renminbi against the U.S. Dollar could have a material
adverse effect on our business, financial condition and results of operations.
Conversely, if we decide to convert our Renminbi into U.S. Dollars for the
purpose of making payments for dividends on our common shares or for other
business purposes and the U.S. Dollar appreciates against the Renminbi, the
U.S.
Dollar equivalent of the Renminbi we convert would be reduced. In addition,
the
depreciation of significant U.S. Dollar denominated assets could result in
a
charge to our income statement and a reduction in the value of these
assets.
On
July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. Dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in an
approximately 2.0% appreciation of the Renminbi against the U.S. Dollar. While
the international reaction to the Renminbi revaluation has generally been
positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in a further
and more significant appreciation of the Renminbi against the U.S.
Dollar.
Recent
SAFE Regulations may restrict our ability to remit profits out of the PRC as
dividends
Recent
PRC State Administration of Foreign Exchange ("SAFE") Regulations regarding
offshore financing activities by PRC residents have undergone a number of
changes which may increase the administrative burden we face. The failure by
our
stockholders who are PRC residents to make any required applications and filings
pursuant to such regulations may prevent us from being able to distribute
profits and could expose us and our PRC resident stockholders to liability
under
PRC law.
SAFE
issued a public notice ("October Notice") effective from November 1, 2005,
which
requires registration with SAFE by the PRC resident stockholders of any foreign
holding company of a PRC entity. We are a foreign holding company of a PRC
entity
.
Without
registration, the PRC entity cannot remit any of its profits out of the PRC
as
dividends or otherwise; however, it is uncertain how the October Notice will
be
interpreted or implemented regarding specific documentation requirements for
a
foreign holding company formed prior to the effective date of the October
Notice, such as in our case
.
In
addition, the October Notice requires that any monies remitted to PRC residents
outside of the PRC be returned within 180 days; however, there is no indication
of what the penalty will be for failure to comply or if stockholder
non-compliance will be considered to be a violation of the October Notice by
us
or otherwise affect us.
In
the
event that the proper procedures are not followed under the SAFE October Notice,
we could lose the ability to remit monies outside of the PRC and would therefore
be unable to pay dividends or make other distributions. Our PRC resident
stockholders could be subject to fines, other sanctions and even criminal
liabilities under the PRC Foreign Exchange Administrative Regulations
promulgated January 29, 1996, as amended.
Risks
related to our business
We
give no assurances that any plans for future expansion will be implemented
or
that they will be successful.
While
we
have expansion plans, which include making full use of the newly built
cornstarch manufacturing plant (partially completed and operational since
January 2007), upgrading our existing glucose manufacturing facility, building
a
new glucose manufacturing facility and expanding our sales overseas, there
is no
guarantee that such plans will be implemented or that they will be successful.
These plans are subject to, among other things, their feasibility to meet the
challenges we face, our ability to arrange for sufficient funding and the
ability to hire qualified and capable employees to carry out these expansion
plans.
We
have a limited operating history and limited historical financial information
upon which you may evaluate our performance
.
Our
operating subsidiary, Weifang Shengtai, was incorporated in 1999 and our
operations have been largely confined to the PRC. In addition, while we have
had
some experience in managing a cornstarch manufacturing facility, we may not
be
adequately prepared to manage and operate a larger and more modern facility.
We
are in
our early stages of development and face risks associated with a new company
in
a growth industry. We may not successfully address these risks and uncertainties
or successfully implement our operating strategies. If we fail to do so, it
could materially harm our business to the point of having to cease operations
and could impair the value of our common stock to the point investors may lose
their entire investment. Even if we accomplish these objectives, we may not
generate positive cash flows or the profits we anticipate in the
future.
Although
our revenues have grown rapidly since our inception from the growing demand
for
our glucose products, we cannot assure you that we will maintain our
profitability or that we will not incur net losses in the future. We expect
that
our operating expenses will increase as we expand. Any significant failure
to
realize anticipated revenue growth could result in significant operating losses.
We will continue to encounter risks and difficulties frequently experienced
by
companies at a similar stage of development, including our potential failure
to:
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expand
our product offerings and maintain the high quality of our
products;
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manage
our expanding operations, including the integration of any future
acquisitions;
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obtain
sufficient working capital to support our expansion and to fill customers'
orders in time;
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maintain
adequate control of our expenses;
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implement
our product development, marketing, sales, and acquisition strategies
and
adapt and modify them as needed;
and
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anticipate
and adapt to changing conditions in the dextrose monohydrate and
glucose
products markets in which we operate as well as the impact of any
changes
in government regulation, mergers and acquisitions involving our
competitors, technological developments and other significant competitive
and market dynamics.
|
If
we are not successful in addressing any or all of these risks, our business
may
be materially and adversely affected.
Because
we are a relatively new company, we may not be experienced enough to address
all
the risks in our business or in our expansion including successfully operating
our new cornstarch manufacturing plant and construction of our new glucose
manufacturing facility. If we are unable to anticipate and react to such risks,
our business may be materially and adversely affected.
We
will face a lot of competition, some of which may be from companies which may
be
better capitalized and more experienced than us.
We
face
competition from other domestic and global manufacturers and suppliers of
pharmaceutical grade dextrose monohydrate and glucose. Although we view
ourselves in a favorable position vis-à-vis our competition, some of the other
companies that sell into our markets may be more successful than us and/or
have
more experience and money that we do. This additional experience and money may
enable our competitors to produce more cost-effective products and market their
products with more success than we are able to, which would decrease our sales.
We expect that we will be required to continue to invest in product development
and productivity improvements to compete effectively in our markets. However,
we
cannot give assure you that we can successfully remain competitive. If our
competitors developed a more efficient product or undertook more aggressive
and
costly marketing campaigns than us this could have a material adverse effect
on
our business, results of operations or financial condition.
A
slowdown in the PRC economy may adversely affect our
operations.
As
all of
our operations are conducted in the PRC and most of all of our revenues are
generated from sales in the PRC, a slowdown or other adverse developments in
the
PRC economy could materially and adversely affect our customers, demand for
our
products and our business. Although the PRC economy has grown significantly
in
recent years, we cannot assure you that such growth will continue. While we
believe the demand for our products is not dependent on the health of the
economy, we do not know how sensitive we are to a slowdown in economic growth
or
other adverse changes in the PRC economy. A slowdown in overall economic growth,
an economic downturn or recession or other adverse economic developments in
the
PRC may materially reduce the demand for our products and materially and
adversely affect our business.
Our
major
competitors may be better able than us to successfully endure downturns in
our
sector. In periods of reduced demand for our products, we can either choose
to
maintain market share by reducing our selling prices to meet competition or
maintain selling prices, which would likely sacrifice market share. Sales and
overall profitability would be reduced under either scenario. In addition,
we
cannot assure you that additional competitors will not enter our existing
markets, or that we will be able to compete successfully against existing or
new
competition.
Inflation
in the PRC could negatively affect our profitability and
growth.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the PRC economy. Repeated rises in interest rates by the central bank would
likely slow economic activity in the PRC which could, in turn, materially
increase our costs and also reduce demand for our products.
A
widespread health problem in the PRC could negatively affect our
operations
A
renewed
outbreak of SARS or another widespread public health problem in the PRC, such
as
bird flu, where a major portion of our revenue is derived, could have an adverse
effect on our operations. Our operations may be impacted by a number of
health-related factors, including quarantines or closures of some offices that
would adversely disrupt our operations. Any of the foregoing events or other
unforeseen consequences of public health problems could adversely affect our
operations.
Enforcement
against us or our directors and officers may be
difficult
Because
our principal assets are located outside of the U.S. and almost all our
directors and officers reside outside of the U.S., it may be difficult for
you to enforce your rights based on U.S. Federal securities laws against us
and
our officers and some directors or to enforce a U.S. court judgment against
us
or them in the PRC.
In
addition, our operating subsidiary is located in the PRC and substantially
all
of its assets are located outside of the U.S. It may therefore be difficult
for
investors in the U.S. to enforce their legal rights based on the civil liability
provisions of the U.S. Federal securities laws against us in the courts of
either the U.S. or the PRC and, even if civil judgments are obtained in U.S.
courts, to enforce such judgments in PRC courts. Further, it is unclear if
extradition treaties now in effect between the U.S. and the PRC would permit
effective enforcement against us or our officers and directors of criminal
penalties under the U.S. Federal securities laws or otherwise.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The
PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
Inadequate
funding for our capital expenditure may affect our growth and
profitability
Our
sales
revenues have increased from $19,999,826, for the fiscal year ended June 30,
2004 to $ 51,706,215 for the fiscal year ended June 30, 2007
.
Our
continued growth is dependent upon our ability to raise capital from outside
sources. Our ability to obtain financing will depend upon a number of factors,
including:
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our
financial condition and results of operations;
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the
condition of the PRC economy and the healthcare sector in the PRC;
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conditions
in relevant financial markets; and
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relevant
PRC laws regulating the same.
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If
we are
unable to obtain financing, as needed, on a timely basis and on acceptable
terms
to our investors or lenders, our financial position, competitive position,
growth and profitability may be adversely affected.
We
may not be able to effectively control and manage our
growth.
If
our
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. We may not have the requisite
experience to manage and operate a larger, more modern cornstarch manufacturing
plant and a bigger glucose production line. In addition, we may face challenges
in managing expanding product offerings and in integrating acquired businesses
with our own. These events would increase demands on our existing management,
workforce and facilities. Failure to satisfy these increased demands could
interrupt or adversely affect our operations and cause production backlogs,
longer product development time frames and administrative
inefficiencies.
Significant
fluctuations in raw material prices may have a material adverse effect on
us
We
do not
have any long-term supply contracts with our raw materials suppliers. Any
significant fluctuation in price of our raw materials could have a material
adverse effect on the manufacturing cost of our products. We are subject to
market conditions and although raw materials are generally available and we
have
not experienced any raw material shortage in the past, we cannot assure you
that
the necessary materials will continue to be available to us at prices currently
in effect or acceptable to us.
We
may
have limited options in the short-term for alternative supply if our suppliers
fail for any reason, including their business failure or financial difficulties,
to continue the supply of raw materials. Moreover, identifying and accessing
alternative sources may increase our costs.
Although
we are in the corn-producing region in the Shandong province, there is no
guarantee that we will not face a shortage of corn because of some natural
calamity or other reason.
We
had
also mitigated the risks of a shortage in cornstarch by managing a
cornstarch-producing company, Shouguang Shengtai Starch Company, and implemented
a vertical integration manufacturing program, which includes building our own
cornstarch processing plant, which plant is now operational. This will not
only
lower production costs and improve profit margins, it will also allow Weifang
Shengtai to produce higher quality, lower-cost cornstarch. We cannot guarantee
these measures will be effective in eradicating all risks attendant to the
supply of raw materials. In the event our cost of materials is increased, we
may
have to raise prices of our products, making us less competitive
price-wise.
We
may
not be able to adjust our product prices, especially in the short-term, to
recover the costs of any increases in raw materials. Our future profitability
may be adversely affected to the extent we are unable to pass on higher raw
material costs to our customers.
We
may be exposed to intellectual property infringement and other claims by third
parties, which, if successful, could cause us to pay significant damage awards
and incur other costs.
Our
success also depends in large part on our ability to use and develop our
technology and know-how without infringing the intellectual property rights
of
third parties. We believe that the technology we use is not protected by any
patent or intellectual property rights. As litigation becomes more common in
the
PRC in resolving commercial disputes, we face a higher risk of being the subject
of intellectual property infringement claims. The validity and scope of claims
relating to the manufacturing of pharmaceutical grade products and cornstarch
involve complex technical, legal and factual questions and analysis and,
therefore, may be highly uncertain. The defense and prosecution of intellectual
property suits, patent opposition proceedings and related legal and
administrative proceedings can be both costly and time consuming and may
significantly divert the efforts and resources of our technical and management
personnel. An adverse determination in any such litigation or proceedings to
which we may become a party could subject us to significant liability, including
damage awards, to third parties, require us to seek licenses from third parties,
to pay ongoing royalties, or to redesign our products or subject us to
injunctions preventing the manufacture and sale of our products. Protracted
litigation could also result in our customers or potential customers deferring
or limiting their purchase or use of our products until resolution of such
litigation. Further, we do not have adequate product liability insurance
coverage against defective products as our products are manufactured according
to fairly basic formulas. Any disputes so far have been resolved through
friendly negotiations. There is no guarantee that we will not be involved in
any
legal proceedings should such negotiations fail one day.
Potential
environmental liability could have a material adverse effect on our operations
and financial condition.
To
the
knowledge of management, neither the production nor the sale of our products
constitute activities, or generate materials in a material manner, that requires
our operation to comply with the PRC environmental laws. Although it has not
been alleged by PRC government officials that we have violated any current
environmental regulations, we cannot assure you that the PRC government will
not
amend the current PRC environmental protection laws and regulations. Our
business and operating results may be materially and adversely affected if
we
were to be held liable for violating existing environmental regulations or
if we
were to increase expenditures to comply with environmental regulations affecting
our operations.
We
rely on Mr. Qingtai Liu, our Chief Executive Officer and President, for the
management of our business, and the loss of his services may significantly
harm
our business and prospects.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Qingtai Liu, our Chief
Executive Officer and President for the direction of our business. The loss
of
the services of Mr. Liu, for any reason, may have a material adverse effect
on
our business and prospects. We cannot assure you that the services of Mr. Liu
will continue to be available to us, or that we will be able to find a suitable
replacement for Mr. Liu. We have not entered into an employment contract with
Mr. Liu. We do not have key man insurance on Mr. Qingtai Liu. If Mr. Liu dies
and we are unable to replace Mr. Liu for a prolonged period of time, we may
be
unable to carry out our long term business plan and our future prospect for
growth, and our business, may be harmed.
We
may not be able to hire and retain qualified personnel to support our growth
and
if we are unable to retain or hire such personnel in the future, our ability
to
improve our products and implement our business objectives could be adversely
affected.
Our
future success depends heavily upon the continuing services of the members
of
our senior management team, in particular our Chief Executive Officer and
President, Mr. Qingtai Liu. If one or more of our senior executives or other
key
personnel is/are unable or unwilling to continue in his/her/their present
positions, we may not be able to replace them easily or at all, and our business
may be disrupted and our financial condition and results of operations may
be
materially and adversely affected. Competition for senior management and
personnel is intense, the pool of qualified candidates is very limited, and
we
may not be able to retain the services of our senior executives or senior
personnel, or attract and retain high-quality senior executives or senior
personnel in the future. This failure could materially and adversely affect
our
future growth and financial condition.
We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be
adequate.
We
are
constantly striving to improve our internal accounting controls. With the
appointment of our new Chief Financial Officer, Mr. Yizhao Zhang, we hope to
develop an adequate internal accounting control to budget, forecast, manage
and
allocate our funds and account for them. There is no guarantee that such
improvements will be adequate or successful or that such improvements will
be
carried out on a timely basis. If we do not have adequate internal accounting
controls, we may not be able to appropriately budget, forecast and manage our
funds, we may also be unable to prepare accurate accounts on a timely basis
to
meet our continuing financial reporting obligations and we may not be able
to
satisfy our obligations under US securities laws.
Standards
for compliance with Section 404 of the Sarbanes-Oxley Act Of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting,
and
attestation of this assessment by our company's independent registered public
accountants. The SEC extended the compliance dates for non-accelerated filers,
as defined by the SEC. Accordingly, we believe that the annual assessment of
our
internal controls requirement will first apply to our annual report for the
2007
fiscal year and the attestation requirement of management's assessment by our
independent registered public accountants will first apply to our annual report
for the 2008 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to
provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.
We
have inadequate insurance coverage
We
do not
presently maintain product liability insurance, and our property and equipment
insurance does not cover the full value of our property and equipment, which
leaves us with exposure in the event of loss or damage to our properties or
claims filed against us.
We
currently do not carry any product liability or other similar insurance. We
cannot assure you that we would not face liability in the event of the failure
of any of our products. This is particularly true given our plan to
significantly expand our sales into international markets, like the United
States, where product liability claims are more prevalent.
Except
for property and automobile insurance, we do not have other insurance such
as
business liability or disruption insurance coverage for our operations in the
PRC.
We
do not
maintain a reserve fund for warranty or defective products claims. Our costs
could substantially increase if we experience a significant number of warranty
claims. We have not established any reserve funds for potential warranty claims
since historically we have experienced few warranty claims for our products
so
that the costs associated with our warranty claims have been low. If we
experience an increase in warranty claims or if our repair and replacement
costs
associated with warranty claims increase significantly, it would have a material
adverse effect on our financial condition and results of
operations.
Risks
related to an investment in our common stock
Our
Chief Executive Officer and President controls us through his position and
stock
ownership and his interests may differ from other
stockholders
Our
Chief
Executive Officer and President, Mr. Qingtai Liu, beneficially owns
approximately 41.15% of our common stock. As a result, although Mr. Liu is
not
the holder of a majority of the outstanding shares, Mr. Liu may be able to
influence the outcome of stockholder votes on various matters, including the
election of directors and extraordinary corporate transactions, including
business combinations. Mr. Liu's interests may differ from other stockholders.
We
do not intend to pay cash dividends in the foreseeable
future
We
currently intend to retain all future earnings for use in the operation and
expansion of our business. We do not intend to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends
or
other payments from our operating subsidiary based in the PRC, Weifang Shengtai.
Our operating subsidiary, from time to time, may be subject to restrictions
on
its ability to make distributions to us, including as a result of restrictions
on the conversion of local currency into U.S. dollars or other hard currency
and
other regulatory restrictions. See “Risks related to doing business in the
People’s Republic of China”.
There
is currently a very limited trading market for our common
stock
Our
common stock has been quoted on the over-the-counter Bulletin Board since
January 2007. Because we were formerly a shell company, our bid and ask
quotations have not regularly appeared on the OTC Bulletin Board for any
consistent period of time. There is a limited trading market for our common
stock and our common stock may never be included for trading on any stock
exchange or through any other quotation system, including, without limitation,
the NASDAQ Stock Market. You may not be able to sell your shares due to the
absence of an established trading market.
Our
common stock is subject to the Penny Stock
Regulations
Our
common stock is, and will continue to be subject to the SEC's "penny stock"
rules to the extent that the price remains less than $5.00. Those rules, which
require delivery of a schedule explaining the penny stock market and the
associated risks before any sale, may further limit your ability to sell your
shares.
The
SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. Our common stock,
when and if a trading market develops, may fall within the definition of penny
stock and subject to rules that impose additional sales practice requirements
on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000, or annual incomes exceeding $200,000 or $300,000, together with
their spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for
any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common stock and may affect the ability of investors to sell their
common stock in the secondary market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or
us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
A
large
number of shares of common stock will be issuable for future sale which will
dilute the ownership percentage of our current holders of common stock. We
have
successful registered for public resale 8,750,000 shares (as well as 4,375,000
shares issuable on exercise of the attached warrants) belonging to our investors
and the availability for public resale of those shares may depress our stock
price.
Also
as a
result, there will be a significant number of new shares of common stock on
the
market in addition to the current public float. Sales of substantial amounts
of
common stock, or the perception that such sales could occur, and the existence
of warrants to purchase shares of common stock at prices that may be below
the
then current market price of the common stock, could adversely affect the market
price of our common stock and could impair our ability to raise capital through
the sale of our equity securities.
Item
1B. Unresolved Staff Comments.
Not
applicable.