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:
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we
will be able to capitalize on economic reforms;
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the
PRC government will continue its pursuit of economic reform
policies;
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the
economic policies, even if pursued, will be successful;
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economic
policies will not be significantly altered from time to time; and
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business
operations in the PRC will not become subject to the risk of
nationalization.
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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 no 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 PRC 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 PRC registered companies, which enjoy the same
status as other PRC registered companies in business-to-business dispute
resolution.
Since
the
Articles of Association of Weifang Shengtai do not provide for the resolution
of
business disputes, the parties are free to proceed to either the PRC 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 PRC 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
the Company 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, 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.
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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 we 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. In 2007 the PRC central bank raised interest rates five
times. 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 manufacturing our own
cornstarch. 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 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, 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 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
2008
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 2009 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 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
Our
failure to contribute to certain designated statutory reserve funds prevents
us
for paying any dividends to our shareholders and this may adversely affect
the
value of your investment.
Under
the
PRC laws, Weifang Shengtai, a PRC wholly foreign -owned enterprise, is required
to set aside 10% of its net income each year to fund certain designated
statutory reserve funds until such reserve balance reaches 50% of its registered
capital. These reserves are not 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 issue 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. Weifang Shengtai has not made the required
contributions. As a result, Weifang Shengtai is unable to make payment of any
dividends to its shareholders until such contributions have been made. We
currently intend to retain all future earnings for use in the operation and
expansion of our business. However, our inability to pay dividends may
adversely affect the market value of our common stock.