Weifang
Shengtai was established in Changle County, Weifang City, Shandong Province,
People’s Republic of China on February 4, 1999. Mr. Qingtai Liu and his
management team were the original shareholders.
On
December 25, 2003, Bio-One Corporation (referred to as “Bio-One”), a Nevada
corporation signed a joint venture agreement with Weifang Shengtai. Pursuant
to
the Joint Venture Agreement, Bio-One acquired a 51% interest in Weifang Shengtai
for $2,000,000 cash, to fund its share of the registered capital, and 2,090,000
shares of Bio-One’s Series A preferred stock to the former shareholders of
Weifang Shengtai. The business term was for 20 years with registered capital
of
$3,920,000. Bio-One paid its $2,000,000 contribution in 2004. The original
shareholders contributed a total of $1,920,000 between 1999 and
2004.
On
April
19, 2006, pursuant to a shareholders’ resolution, 37 Chinese shareholders of
Weifang Shengtai transferred their 17.95% interest in Weifang Shengtai to
Mr.
Qingtai Liu for RMB 5,628,880 ($703,610). On June 3, 2006, the equity exchange
was approved by the local branch of the Ministry of Commerce (MOC) in
Weifang.
On
June
20, 2006, SHI signed an agreement to acquire a 100% ownership in Weifang
Shengtai from Bio-One Corporation which owned a 51% interest in Weifang Shengtai
and Mr. Qingtai Liu who owned the remaining 49% interest. Mr. Qingtai Liu,
who
is one of the founding shareholders of Weifang Shengtai, sold his 49% interest
in Weifang Shengtai to SHI for RMB 15 million (approximately $1,925,996),
this
amount is paid in May 2007. Bio-One sold its 51% interest in Weifang Shengtai
to
SHI for $1,000,000 in cash and the return of 4,180,000 Series A preferred
shares
of Bio-One owned by Mr. Qingtai Liu. Weifang Shengtai became a wholly foreign
owned entity or “WFOE” and obtained the approval of the local branch of the
Ministry of Commerce (MOC) in the City of Weifang on June 21, 2006. The business
term is 20 years starting on February 10, 2004 when Bio-One acquired its
51% in
Weifang Shengtai. The registered capital is RMB 32 million (approximately
$3.92
million). In accordance with laws governing foreign acquisitions of a Chinese
registered company, SHI will be required to contribute $1,925,996 which required
to be made within 1 year from the date of approval of the business license.
As
of June 30, 2007, this requirement has been met by SHI. As a result of this
transaction, SHI exercised control over Weifang Shengtai.
On
May
26, 2007, Weifang Shengtai increased its registered capital from $3,920,000
to
$15,000,000. The additional $1,108,000 registered capital was contributed
by SHI
in May and June of 2007. This transaction was approved by the local branch
of
the MOC in the City of Weifang and the Company obtained a new business license
on July 16, 2007.
Note
2 - Summary of significant accounting policies
The
reporting entity
The
consolidated financial statements of Shengtai Pharmaceutical Inc. and
Subsidiaries reflect the activities of the parent and its wholly owned
subsidiaries SHI and Weifang Shengtai. The purchase of SHI has been accounted
for as a reverse acquisition and a recapitalization. The assets and liabilities
of SHI were transferred at historical cost under the equity structure of
the
Company due to the reverse acquisition on May 15, 2007. The consolidated
financial statements have been presented as if the acquisition occurred at
June
30, 2006.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material inter-company transactions and balances have been eliminated
in the
consolidation.
Foreign
currency translation
The
reporting currency of the Company is the US dollar. The Company uses their
local
currency, Renminbi (RMB), as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period,
and
assets and liabilities are translated at the unified exchange rate as quoted
by
the People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of shareholders’ equity. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in
a
currency other than the functional currency are included in the results of
operations as incurred.
Translation
adjustments amounted to $1,272,095 and $826,998 as of September 30, 2007
and
June 30, 2007, respectively. Assets and liabilities were translated at 7.50
RMB
and 7.60 RMB to $1.00 USD at September 30, 2007 and June 30, 2007, respectively.
The equity accounts were stated at their historical rate. The average
translation rates applied to income statement for the three months ended
September 30, 2007 and 2006 were 7.55 RMB and 7.96 RMB to $1.00 USD. Cash
flows
are also translated at average translation rates for the period; therefore,
amounts reported on the statement of cash flows will not necessarily agree
with
changes in the corresponding balances on the balance sheet.
Revenue
recognition
The
Company recognizes revenue when the goods are delivered and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added
tax
(VAT). All of the Company’s products sold in the PRC are subject to a Chinese
value-added tax at a rate of 17% of the gross sales price or at a rate approved
by the Chinese local government. This VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished product and certain freight expenses.
Shipping
and handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs. Shipping and handling costs amounted to
$747,314 and $596,353 for the three months ended September 30, 2007 and 2006,
respectively.
Use
of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management
to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. For example,
management estimates potential losses on outstanding receivables. Management
believes that the estimates utilized in preparing its financial statements
are
reasonable and prudent. Actual results could differ from these
estimates.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Financial
instruments
Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value
of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, notes receivable,
other
receivables,
prepayments, accounts payable, other payable, accrued liabilities, customer
deposits, tax payable, and loans to approximate their fair values because
of the
short period of time between the origination of such instruments and their
expected realization and their current market rate of interest.
Cash
and concentration of risk
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People’s Republic of China and the United States of
America. Certain f
inancial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains cash balances at financial institutions which,
from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for the banks located in the Unites States. Balances at financial
institutions or state owned banks within the PRC are not covered by
insurance.
Total
cash (including restricted cash balances) in banks at September 30, 2007
and
June 30, 2007 amounted to $4,107,062 and $12,129,924, respectively of which
$100,000
is covered by insurance.
The
Company has not experienced any losses in such accounts and believes it is
not
exposed to any risks on its cash in bank accounts.
Earnings
per share
The
Company reports earnings per share in accordance with the provisions of SFAS
No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders
by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur
if
securities or other contracts to issue common stock were exercised and converted
into common stock.
The
following is a reconciliation of the basic and diluted earnings per share
computation for the thee months ended September 30, and June 30,
2007:
|
|
|
Three
months ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Net
income for earnings per share
|
|
$
|
2,252,511
|
|
$
|
1,484,031
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
18,875,000
|
|
|
10,125,000
|
|
|
Diluted
effect of warrants
|
|
|
822,359
|
|
|
-
|
|
|
Weighted
average shares used in diluted computation
|
|
|
19,697,359
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
$
|
0.15
|
|
|
Diluted
|
|
$
|
0.11
|
|
$
|
0.15
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
At
September 30, 2007, all outstanding warrants were included in the three months
ended September 30, 2007 calculation of diluted earnings per share.
Restricted
cash
The
Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions and these amounts are
$2,634,400 and $5,628,500 as of September 30, 2007 and June 30, 2007,
respectively.
Under
the
Escrow Agreement and the Share Purchase Agreement signed by Shengtai Holding
Inc., West Coast Car Company, Chinamerica Fund LP, and Tri-State Title &
Escrow, LLC (the “Escrow Agent”), the Company was required to deposit with the
Escrow Agent $5,500,000 immediately on the Closing Date of the Share Purchase
Agreement. This fund can only be disbursed until certain criteria are met.
As of
September 30, 2007, the amount not disbursed was $348,000 and this balance
is
classified under other receivables in the Company’s consolidated balance
sheets.
Accounts
receivable
The
Company’s business operations are conducted in the People’s Republic of China.
During the normal course of business, the Company extends unsecured credit
to
its customers. Accounts receivable, outstanding at September 30, 2007 and
June
30, 2007 amounted to $6,821,441 and $6,211,145, respectively. Management
reviews
its accounts receivable on a regular basis to determine if the allowance
for
doubtful accounts is adequate. An estimate for doubtful accounts is made
when
collection of the full amount is no longer probable. Known bad debts are
written
off against allowance for doubtful accounts when identified.
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the periods ended September 30, 2007 and June 30, 2007 is as
follows:
|
|
|
Three
months ended
|
|
Year
ended
|
|
|
|
|
September
30,
2007
|
|
June
30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Beginning,
allowance for doubtful accounts
|
|
$
|
431,178
|
|
$
|
357,970
|
|
|
Additions
charged to bad debt expense
|
|
|
-
|
|
|
271,602
|
|
|
Write-off
charged against the allowance
|
|
|
-
|
|
|
(217,838
|
)
|
|
Foreign
currency translation adjustments
|
|
|
6,230
|
|
|
19,444
|
|
|
Ending,
allowance for doubtful accounts
|
|
$
|
437,408
|
|
$
|
431,178
|
|
|
|
|
|
|
|
|
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Concentrations
of risk
The
credit risk on bank deposits is limited because the counterparties are banks
with high credit-ratings assigned by international credit-rating agencies,
or
state-owned banks in China. The Company has never experienced any losses
in such
accounts and believes it is not exposed to any significant risks on its cash
in
bank accounts, either in the People’s Republic of China or in the United
States.
Our
financial instruments that potentially expose us to concentrations of credit
risk are primarily our trade accounts receivable. We conduct credit evaluations
of our customers but generally have not required collateral or other security
interests from our customers when we grant them credit. We make a provision
for
estimated uncollectible accounts based primarily on the age of the receivables
but also when we identify potential payment problems with specific customers.
For the three months ended September 30, 2007 and 2006, the top ten customers
account for 36% and 33%, respectively, for our total sales. We have not had
significant collections issues for receivables generated from sales of our
products.
For
export sales, we frequently require significant down payments or letter of
credit by our customers prior to shipment. During the year, the Company
maintains export credit insurance to protect the Company against the risk
that
the oversea customers may default on settlement.
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced
by the
political, economic and legal environments in the PRC, and by the general
state
of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other
things.
Inventories
Inventories
are stated at the lower of cost or market using the weighted average basis
and
consists of the following:
|
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Raw
materials
|
|
$
|
658,830
|
|
$
|
2,297,901
|
|
|
Work-in-progress
|
|
|
800,400
|
|
|
1,130,900
|
|
|
Finished
goods
|
|
|
2,270,177
|
|
|
1,020,466
|
|
|
Total
|
|
$
|
3,729,407
|
|
$
|
4,449,267
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
The
Company reviews its inventory periodically for possible obsolete goods or
to
determine if any reserves are necessary. As of September 30, 2007 and June
30,
2007, the Company has determined that no reserves are necessary.
Plant
and equipment
Plant
and
equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using the straight-line method over the estimated useful lives of
the
assets with 3% residual value. Depreciation expense for the three months
ended
September 30, 2007 and 2006 amounted to $686,653
and
$354,249,
respectively.
Estimated
useful lives of the assets are as follows:
|
|
|
Estimated
Useful Life
|
|
|
Buildings
|
|
|
5-20
|
|
|
Years
|
|
|
Machinery
and equipment
|
|
|
5-10
|
|
|
Years
|
|
|
Automobile
facilities
|
|
|
5-10
|
|
|
Years
|
|
|
Electronic
equipment
|
|
|
5-7
|
|
|
Years
|
|
Construction
in progress represents the costs incurred in connection with the construction
of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and placed into service.
Maintenance,
repairs and minor renewals are charged directly to expenses as incurred.
Major
additions and betterment to property and equipment are capitalized.
Long-lived
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the
future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of September 30, 2007, the
Company
expects these assets to be fully recoverable.
Plant
and
equipment consists of the following:
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Buildings
|
|
$
|
5,884,332
|
|
$
|
5,272,190
|
|
|
Machinery
and equipment
|
|
|
24,768,463
|
|
|
22,257,978
|
|
|
Automobile
facilities
|
|
|
507,270
|
|
|
487,319
|
|
|
Electronic
equipment
|
|
|
315,843
|
|
|
307,391
|
|
|
Construction
in progress
|
|
|
11,726,039
|
|
|
9,055,482
|
|
|
Total
|
|
|
43,201,947
|
|
|
37,380,360
|
|
|
Accumulated
depreciation
|
|
|
7,997,875
|
|
|
7,202,286
|
|
|
Total
|
|
$
|
35,204,072
|
|
$
|
30,178,074
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Interest
costs totaling $230,656 and $157,654 was capitalized into construction in
progress for the three months ended September 30, 2007 and 2006,
respectively
.
Investment
in Changle Shengshi Redian Co., Ltd.
The
Company entered into a joint venture partnership with Weifang City Investment
Company and Changle Century Sun Paper Industry Co., Ltd on September 16,
2003
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated in Weifang
City,
Shandong Province, People’s Republic of China. Changle Shengshi’s principal
activity is to produce and sell electricity and heat.
On
April
12, 2005, the Company’s ownership percentage in Changle Shengshi was diluted
from 30% to 20% as a result of an additional investment to Changle Shengshi
by
another party. The Company accounts for this investment under the equity
method.
Equity method investments are recorded at original cost and adjusted to
recognize the Company’s proportionate share of the investee’s net income or
losses, additional contributions made and distributions received and
amortization of basis differences. The Company recognizes a loss if it is
determined that other than temporary decline in the value of the investment
exists.
Summarized
financial information of Changle Shengshi is as follows:
|
|
|
September
30,
|
|
June
30,
|
|
|
|
|
2007
|
|
2007
|
|
|
Current
assets
|
|
$
|
7,377,603
|
|
$
|
8,065,168
|
|
|
Non-current
assets
|
|
|
24,196,068
|
|
|
23,027,549
|
|
|
Total
assets
|
|
|
31,573,671
|
|
|
31,092,717
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
12,990,809
|
|
|
14,137,526
|
|
|
Non-current
liabilities
|
|
|
3,628,480
|
|
|
3,576,800
|
|
|
Shareholders'
equity
|
|
|
14,954,382
|
|
|
13,378,391
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
31,573,671
|
|
$
|
31,092,717
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Summarized
financial information of Changle Shengshi for the years is as
follows:
|
|
|
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Net
sales
|
|
$
|
7,171,525
|
|
$
|
2,458,810
|
|
|
Gross
profit
|
|
$
|
2,167,691
|
|
$
|
383,201
|
|
|
Income
before taxes
|
|
$
|
1,757,159
|
|
$
|
176,029
|
|
|
Net
income
|
|
$
|
1,372,948
|
|
$
|
122,639
|
|
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
274,589
|
|
$
|
24,528
|
|
|
Elimination
of intercompany profit
|
|
|
125,810
|
|
|
20,004
|
|
|
Company’s
share of net income
|
|
$
|
148,779
|
|
$
|
4,524
|
|
Intangible
assets
All
land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. However, the government grants “land use rights.”
From March 2000 to June 2007, the Company acquired various land use rights
for
approximately $2,242,859. The Company obtained another land use right in
July
2007 for $314,500. The terms of the these land use rights range from 20 to
50
years. The Company amortizes the cost of the land use rights over their useful
life using the straight-line method. At September 30, 2007 and June 30, 2007,
accumulated
amortization amounted to $107,606 and $96,299
,
respectively
.
Intangible assets, net of accumulated amortization, amounted to $2,146,489
and
$1,816,021 as of September 30, 2007 and June 30, 2007.
On
June
30, 2007 the Company sold land use right at an auction due to relocation
in one
of the Company’s manufacturing plants. The net book value of the land use right
sold amounted to $306,984. The gross proceeds from the sales of the land
use
right was $1,998,685. This balance has not been received as of September
30,
2007 and
this
balance is classified under other receivables in the Company’s consolidated
balance sheets. As receivable balance is from local government, the Company
determined there is no collectability issue.
Intangible
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the
future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of September 30, 2007, the
Company
expects these assets to be fully recoverable.
Total
amortization expense for the three months ended September 30, 2007 and 2006
amounted to $11,809 and $10,502 respectively.
Income
taxes
The
Company reports income taxes under SFAS 109 which requires the recognition
of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist
of
taxes currently due plus deferred taxes. There are no deferred tax amounts
at
September 30, 2007 and June 30, 2007.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
The
charge for taxation is based on the results for the year as adjusted for
items,
which are non-assessable or disallowed. It is calculated using tax rates
that
have been enacted or substantively enacted by the balance sheet
date.
Deferred
tax is accounted for using the balance sheet liability method in respect
of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding
tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period
when
the asset is realized or the liability is settled. Deferred tax is charged
or
credited in the income statement, except when it is related to items credited
or
charged directly to equity, in which case the deferred tax is also dealt
with in
equity.
Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current
ax
assets and liabilities on a net basis.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur.
The amount recognized is the largest amount of tax benefit that is greater
than
50% likely of being realized on examination. For tax positions not meeting
the
“more likely than not” test, no tax benefit is recorded. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosures, and transition. The adoption had no affect
on the
Company’s financial statements.
Value
Added Tax
Enterprises
or individuals who sell products, engage in repair and maintenance or import
and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales
price.
A credit is available whereby VAT paid on the purchases of semi-finished
products, raw materials used in the production of the Company’s finished
products, and payment of freight expenses can be used to offset the VAT due
on
sales of the finished product.
VAT
on
sales and VAT on purchases amounted to $2,860,229 and $2,432,415 for the
three
months ended September 30, 2007, and $1,622,689 and $1,461,536 for the three
months ended September 30, 2006, respectively. Sales and purchases are recorded
net of VAT collected and paid as the Company acts as an agent for the
government. VAT taxes are not impacted by the income tax holiday.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Guarantees
From
time
to time, the Company guarantees the debt of others. Pursuant to Financial
Accounting Standards Board Interpretation 45, “Guarantor’s Accounting for and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others,” the Company records guarantees at the fair value of the
expected future payments. Management estimates they will not be required
to make
any payments under these guarantees based on the past experience and the
financial condition of the companies (See note 8).
Recently
issued accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which
addresses the measurement of fair value by companies when they are required
to
use a fair value measure for recognition or disclosure purposes under GAAP.
SFAS
No. 157 provides a common definition of fair value to be used throughout
GAAP
which is intended to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. SFAS No. 157 will
be
effective for an entity's financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect SFAS
No.
157 will have on its consolidated financial statements.
In
February 2007, the Financial Accounting Standards Board (‘‘FASB’’) issued
Statement of Financial Accounting Standards (‘‘SFAS’’) No. 159, The Fair Value
Option for Financial Assets and Financials Liabilities — Including an Amendment
of FASB Statement No. 115. This standard permits measurement of certain
financial assets and financial liabilities at fair value. If the fair value
option is elected, the unrealized gains and losses are reported in earnings
at
each reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument
in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS No. 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements.
The
standard is effective as of the beginning of the fiscal year that begins
after
November 15, 2007. The Company is currently evaluating the provisions
of SFAS No. 159 to determine the potential impact, if any, the adoption will
have on the Company’s financial statements.
Note
3 - Supplemental disclosure of cash flow information
Income
taxes paid for the three months ended September 30, 2007 and 2006 amounted
to
$13,445 and $32,314, respectively.
Interest
paid for the three months ended September 30, 2007 and 2006 amounted to $406,325
and $135,371, respectively.
Non-cash
investing and financing activity
During
the three months ended September 30, 2007, plant and equipment and construction
in progress acquired through non current prepayments and account payable
amounted to $2,754,637.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Note
4 - Related party transactions
In
connection with the Company’s purchase of Mr. Qingtai Liu’s 49% interest in
Weifang Shengtai as described in Note 1, and the 17.95% ownership interest
transfer transaction from the 37 Chinese original shareholders of Weifang
Shengtai (“Original Shareholders”) to Mr. Qingtai Liu on April 19, 2006, Mr.
Qingtai Liu has assumed the liabilities of the Original Shareholders’ capital
contribution and is entitled to contribute this amount as capital contribution
to the Company. As of September 30, 2007, the remaining balance to be
contributed by Mr. Qingtai Liu amounted to $1,282,378. This balance will
be
repaid in cash or operating assets by December 31, 2007.
The
Company’s utilities are partially provided by Changle Shengshi, a related party,
as described in Note 2 under the caption “Investment in Changle Shengshi Redian
Co., Ltd”. The Company had a total of $1,122,569 and $949,992 of accounts
payable due to Changle Shengshi at September 30, 2007 and June 30, 2007,
respectively. The utilities expense amounted to $2,068,766 and $622,121 for
the
three months ended September 30, 2007 and 2006, respectively.
The
Company loaned money to Changle Shengshi and entered into two loan contracts
as
follows:
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Due
on November 19, 2007, unsecured, 7.95% interest rate per
annum
|
|
$
|
667,000
|
|
$
|
657,500
|
|
|
Due
on September 14, 2009, unsecured, 7.6% interest rate per
annum
|
|
|
400,200
|
|
|
394,500
|
|
|
|
|
$
|
1,067,200
|
|
$
|
1,052,000
|
|
The
Company also loaned money to Changle Shengshi in June 2007, for temporary
cash
flow needs. This transaction is recurring in nature. The Company does not
charge
interest on these receivables and it is due on demand. As of June 30, 2007,
total receivable due from Changle Shengshi was $1,499,207. This balance was
repaid by Changle Shengshi in July 2007.
For
business convenience, the Company purchased starch from Shouguang Shengtai
Starch Co. Ltd. (“Shouguang Shengtai”), of which
Mr.
Qingtai Liu, the Company’s chief executive officer, owns 40%.
Since
the
Company initiated production of starch, no more purchases were made from
Shouguang Shengtai. Prepayment balance is reclassified to other receivable
-
related party as the balance is to be refunded. Balance as of September 30,
2007
and June 30, 2007 was $1,006,789 and $992,449, respectively. Total related
party
purchases from
Shouguang
Shengtai
for the
three months ended September 30, 2007 and 2006 amounted to $0 and $4,875,107,
respectively, which represents approximately 0% and 69% of the Company’s
purchase of raw materials for the three months ended September 30, 2007 and
2006, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
The
following table summarizes the Company’s other receivable - related parties
balances as of September 30, 2007 and June 30, 2007 are as
follows:
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Changle
Shengshi Redian Co., Ltd
|
|
$
|
-
|
|
$
|
1,499,207
|
|
|
|
|
|
|
|
|
|
|
|
Shouguang
Shengtai Starch Co. Ltd
|
|
|
1,006,789
|
|
|
992,449
|
|
|
|
|
$
|
1,006,789
|
|
$
|
2,491,656
|
|
Note
5 - Prepayments
Prepayments
represent partial payments or deposits on inventory purchases and amounted
to
$108,250 and $140,376 as of September 30, 2007 and June 30, 2007,
respectively.
Prepayments
- non-current represent partial payments or deposits on plant and equipment
purchases and amounted to $7,992,765 and $7,429,371 as of September 30, 2007
and
June 30, 2007, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Note
6 - Debt
Short
term loans
Short
term loans represent amounts due to various banks which are normally due
within
one year, and these loans can be renewed with the banks. The
Company’s
short
term bank loans consisted of the follow
ing:
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan
from Bank of China, due various dates from October 2007 to June
2008.
Monthly interest only payments ranging from 7.313% to 7.668% per
annum,
guaranteed by unrelated third party and secured by
properties
|
|
$
|
10,405,200
|
|
$
|
10,993,400
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates
from
November 2007 to August 2008 monthly interest only payments ranging
from
6.120% to 8.892% per annum, guaranteed by unrelated third party
and
secured by properties
|
|
|
4,002,000
|
|
|
3,945,000
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Agriculture Bank of China, Due various dates from November
to
December of 2007. Monthly interest only payments ranging from 7.956%
to
8.568% per annum, Guaranteed by unrelated third party and secured
by
properties
|
|
|
1,987,660
|
|
|
1,959,350
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Communication Bank, due July 2007. Monthly interest only payments
7.2% per annum, guaranteed by unrelated third party
|
|
|
-
|
|
|
1,972,500
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,394,860
|
|
$
|
18,870,250
|
|
Notes
payable - banks
Notes
payable represent amounts due to various banks which are normally due within
one
year, and these notes can be renewed with the banks. The Company’s notes
payables consisted of the following:
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Bank
of China, due in October 2007, restricted cash required 50% of
loan
amount, guaranteed by unrelated third party
|
|
$
|
2,934,800
|
|
$
|
4,997,000
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due in February 2008, restricted
cash
required 50% of loan amount, guaranteed by unrelated third
party
|
|
|
1,334,000
|
|
|
3,945,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,268,800
|
|
$
|
8,942,000
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Employee
loans
The
Company has borrowed monies from certain employees to fund the Company’s
operations. The loans bear interest at 7.2% and the principal is due upon
demand. Employee loans amounted to $513,584 and $596,516
as
of
September 30, 2007 and June 30, 2007, respectively.
Third
party loan
The
Company borrowed money from an unrelated individual for use in operations.
The
loan bears 7.2% interest and the principal is due upon demand. Balance of
the
loan as of September 30, 2007 and June 30, 2007 amounted to $322,872 and
$318,274, respectively.
Long
term loan - current maturity
Long
term
loan - current maturity represent amounts due to various banks and other
outside
parties which are normally due within one year consisted of the
following:
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Agricultural
Credit Union, interest at 7.84% per annum, due May 2008
|
|
$
|
386,860
|
|
$
|
381,350
|
|
|
Total
|
|
|
386,860
|
|
|
381,350
|
|
Current
maturities for the next five years are follows:
|
|
|
Amount
|
|
|
June
30, 2008
|
|
$
|
386,860
|
|
|
Thereafter
|
|
$
|
-
|
|
Total
interest expense (net of capitalized interest) for the three months ended
September 30, 2007 and 2006 on all debt amounted to $391,608 and $17,415,
respectively. Interest capitalized into construction in progress totaled
$230,656 and $157,654 for the three months ended September 30, 2007 and 2006,
respectively
.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Note
7 - Income taxes
The
Company is governed by the Income Tax Law of the People’s Republic of China
(PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws (the Income Tax Laws). Under the Income Tax
Laws,
foreign investment enterprises (FIE) generally are subject to an income tax
at
an effective rate of 33% (30% state income taxes plus 3% local income taxes)
on
income as reported in their statutory financial statements after appropriate
tax
adjustments unless the enterprise is located in specially designated regions
of
cities for which more favorable effective tax rates apply. Upon approval
by the
PRC tax authorities, FIE's scheduled to operate for a period of 10 years
or more
and engaged in manufacturing and production may by exempt from income taxes
for
two years, commencing with their first profitable year of operations, after
taking into account any losses brought forward from prior years, and thereafter
with a 50% exemption for the next three years.
In
February 2004, the Company became a Sino-foreign joint venture. In August
2004,
the Company was granted by the state government for benefit of income tax
exemption in first 2 years from September 2004 to August 2006 and 50% exemption
for the third to fifth years from September 2006 to August 2008. In addition,
the Company is located in a Special Economic Zone and the PRC tax authority
has
offered a special income tax rate of 24% for the company. With the approval
of
the local government, the Company is subject to income tax at a reduced rate
of
12% from September 2006 to August 2008 after the two-year 24% exemption for
income taxes until its exemption and reduction periods expire in August 2008.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).
The
key
changes are:
|
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs, except for High Tech companies
who pays a
reduced rate of 15%;
|
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of the
next 5
years or until the tax holiday term is completed, whichever is
sooner.
|
The
Company’s subsidiary, Weifang Shengtai, was established before March 16, 2007
and therefore is qualified to continue enjoying the reduced tax rate as
described above. Since the detailed guidelines of the new tax law is not
publicized yet, the Company can not determined what the new tax rate will
be
applicable to the Company after the end of their respective tax holiday
terms.
During
the three months ended September 30, 2007 and 2006, the provision for income
taxes was $305,845 and $57,415, respectively.,
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended June 30:
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
Foreign
income not recognized in USA
|
|
|
(34.0
|
)
|
|
(34.0
|
)
|
|
China
income taxes
|
|
|
33.0
|
|
|
33.0
|
|
|
China
income tax exemption
|
|
|
(21.0
|
)
|
|
(33.0
|
)
|
|
Total
provision for income taxes
|
|
|
12.0
|
%
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
The
estimated tax savings due to the tax exemption for the three months ended
September 30, 2007 and 2006 amounted to $535,229 and $432,413, respectively.
The
net effect on basic earnings per share if the income tax had been applied
would
decrease basic earnings per share for the three months ended September 30,
2007
and 2006 by $0.03 and $0.04, respectively. The net effect on diluted earnings
per share if the income tax had been applied would decrease diluted earnings
per
share for the three months ended September 30, 2007 and 2006 by $0.03 and
$0.04,
respectively.
Taxes
payable
Taxes
payable consisted of the following:
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
VAT
payable
|
|
$
|
1,555,258
|
|
$
|
1,273,390
|
|
|
Individual
income tax withheld
|
|
|
1,258
|
|
|
1,316
|
|
|
Income
tax payable
|
|
|
1,161,065
|
|
|
764,827
|
|
|
Housing
property tax payable
|
|
|
7,085
|
|
|
7,306
|
|
|
Others
|
|
|
1,799
|
|
|
2,093
|
|
|
Total
|
|
$
|
2,726,465
|
|
$
|
2,048,932
|
|
Note
8 - Commitments and Contingent liabilities
Guarantees
As
of
September 30, 2007, the Company has guaranteed $10.7 million of short term
loan
for unrelated parties. The Company would be obligated to perform under the
guarantee if these parties failed to pay principal and interest payments
to the
lender when due. Including accrued interest, the maximum potential amount
of
future (undiscounted) payments under the guarantee would be $11.4 million.
The
company did not recognize a liability for the guarantee because the likelihood
of that the Company will have to pay is remote. Detail of guarantee amount
to
the unrelated parties as of September 30, 2007 is as follows:
|
|
|
Short
Term
|
|
|
Company
|
|
Bank
Loans
|
|
|
Chang
Le Century Sun Paper
|
|
|
|
|
Industry
Co.
|
|
$
|
8,030,680
|
|
|
Shangdong
Kuangji Group Inc.
|
|
|
2,668,000
|
|
|
Total
|
|
$
|
10,698,680
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Note
9 - Shareholders’ equity
On
May
15, 2007, the Company entered into and consummated a share purchase agreement
(the “Share Purchase Agreement”) with nineteen accredited investors (the
“Purchasers”). Pursuant to the Share Purchase agreement, the Purchasers
purchased from the Company an aggregate of 8,750,000 shares of common stock
and
4,375,000 attached warrants for $2.00 per share (or an aggregate purchase
price
of $17,500,000) and for total net proceeds of $15,256,428. The exercise price
of
the warrants $2.60 per share and the term of the warrants is five
years.
In
connection with the offering, the Company paid a placement fee of 12% of
the
proceeds in cash.
Warrants
Concurrent
with the private placement, the Company issued 4,375,000 warrants with an
exercise price at $2.60 per share (“Investor Warrants”) to investors. These
warrants issued to the new investors have a 5-year term and shall be callable
by
the Company if the Company’s shares trade at $8.00 for 20 consecutive trading
days and underlying shares are registered for resale. The warrants contain
a
standard adjustment provisions upon stock dividend, stock split, stock
combination, recapitalization and a change of control transaction.
The
Company also issued 218,750 warrants with exercise price at $2.60 (“Placement
Agent Warrants”) to Brill Securities, inc., the exclusive placement agent. These
warrants have the same terms as the Investor Warrants. These warrants were
issued on August 8, 2007.
In
connection with the offering, the Company issued Chinamerica Fund, LP 75,000
warrants and Jeff Jenson 25,000 warrants (collectively as “Lead Investor
Warrants”) to compensate the former as lead investor and the latter in assisting
in providing the shell of West Coast Car Company. These warrants have the
same
term as the Investor Warrant except with an exercise price of $0.01 per
share.
All
Investor Warrants, Placement Agent warrants, and Lead Investor Warrants meet
the
conditions for equity classification pursuant to FAS 133 “Accounting for
Derivatives” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock”. Therefore, these
warrants were classified as equity and accounted as common stock issuance
cost.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
|
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Life
|
|
|
Outstanding,
June 30, 2007
|
|
|
4,475,000
|
|
|
4,475,000
|
|
$
|
2.54
|
|
|
4.63
|
|
|
Granted
|
|
|
218,750
|
|
|
218,750
|
|
|
2.60
|
|
|
4.63
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Outstanding,
September 30, 2007
|
|
|
4,693,750
|
|
|
4,693,750
|
|
$
|
2.54
|
|
|
4.63
|
|
Note
10 - Statutory reserves
The
laws
and regulations of the People’s Republic of China required that before a
Sino-foreign cooperative joint venture enterprise distributes profits to
its
partners, it must first satisfy all tax
liabilities,
provide for losses in previous years, and make allocations, in proportions
determined at the discretion of the board of directors, after the statutory
reserve. The statutory reserves include the surplus reserve fund, and the
enterprise fund. These statutory reserves represent restricted retained
earnings.
Surplus
reserve fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory
surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividends
to
shareholders. For the three months ended September 30, 2007 and 2006, the
Company did not transfer any fund to this reserve. The surplus reserve fund
is
non-distributable other than during liquidation and can be used to fund previous
years’ losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders in proportion
to their shareholding or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue
is
not less than 25% of the registered capital.
Enterprise
fund
The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required and the Company has not made any contribution to
this
fund.
Note
11 - Retirement benefit plans
Regulations
in the People’s Republic of China require the Company to contribute to a defined
contribution retirement plan
for the
benefit of all permanent employees
.
All
permanent
employees are entitled to an annual pension equal to their basic salaries
at
retirement. The PRC government is responsible for the benefit liability to
these
retired employees. The Company is required to make contributions to the state
retirement plan at 15% to 20% of the monthly basic salaries of the current
employees.
For
the
three
months
ended
September
30, 2007 and 2006, the Company made
pension
con
tribution
s
in the
amount of
$57,351
and $43,854, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
Note
12 - Revenue by geographic area
The
following table summarized financial information for the three months ended
September 30, 2007 and 2006 concerning the Company’s revenues based on
geographic area:
|
Revenue
|
|
September
30, 2007
|
|
September
30, 2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
China
|
|
$
|
17,187,494
|
|
$
|
9,706,812
|
|
|
International
|
|
|
2,185,575
|
|
|
892,509
|
|
|
Total
|
|
$
|
19,373,069
|
|
$
|
10,599,321
|
|
Note
13 - Subsequent event
On
November 1, 2007, a warrant holder paid the Company $2.60 per share for a
total
of $227,500 and exercised 87,500 warrants into 87,500 shares of common
stock.