NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
Note
1 – Organization background and principal activities
Shengtai
Pharmaceutical Inc, (the “Company”), formerly known as West Coast Car Company
was incorporated in March 2004 in the State of Delaware.
On
May
15, 2007, the Company entered into a share exchange agreement (the “Share
Exchange Agreement”) with the shareholders of Shengtai Holding Inc. (“SHI”).
Pursuant to the Share Exchange Agreement, Qingtai Liu and Chenghai Du,
shareholders of all the issued and outstanding shares of common stock of
SHI,
exchanged all SHI’s common stock for 9,125,000 newly-issued shares of the
Company. As a result of the Share Exchange Agreement and the Share Purchase
Agreement, the Company acquired all of the outstanding capital stock of
SHI.
Because SHI owns 100% of Weifang Shengtai Pharmaceutical Co., Ltd (hereinafter
known as “Weifang Shengtai”), Weifang Shengtai is now an indirect wholly-owned
subsidiary of the Company. For accounting purposes, the acquisition of
SHI has
been treated as a recapitalization of SHI with SHI as the acquirer. The
historical financial statements prior to May 15, 2007 are those of
SHI.
In
addition, 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
conjunction with this Share Purchase Agreement, Mr. Qingtai Liu, the controlling
stockholder and chief executive officer, placed an aggregate 5,000,000
shares of
common stock in an escrow account held with Tri-State Title & Escrow, LLC
upon closing of the Share Purchase Agreement. Pursuant to the Share Purchase
Agreement, one half of the escrowed shares are to be released to the Purchasers
on a pro-rated basis if the audited consolidated financial statements of
the
Company prepared in accordance with US generally accepted accounting principles
(GAAP) do not reflect at least after-tax net income of at least $7,000,000
or
fully diluted earnings per share of $0.33 for the fiscal year ended June
30,
2007; and if the audited consolidated financial statements of the Company
prepared in accordance with US GAAP do not reflect at least an after-tax
net
income of $9,000,000 or fully diluted earnings per share of $0.43 for the
fiscal
year ending June 30, 2008, the second half of the escrow shares will be
distributed on a pro-rated basis to the Purchasers. The Company determined
that
the threshold for the year ended June 30, 2007 has been met.
SHI
was
incorporated in the state of New Jersey on February 27, 2006. The Company,
through its Chinese subsidiary,
Weifang
Shengtai, manufactures and distributes raw drug materials (glucose, dehydrate
glucose) and drug supplements (starch, dextrin, polyacrylic acid
resin).
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
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. Weifang Shengtai’s 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,
a
founding shareholder of Weifang Shengtai, sold his 49% interest in Weifang
Shengtai to SHI for RMB 15 million (approximately $1,925,996), this amount
was
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. In accordance with laws governing foreign acquisitions of a Chinese
registered company, SHI contributed the $1,925,996 as required. 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. In May and June 2007, SHI contributed $11,080,000 towards
the
additional registered capital. 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
DECEMBER
31, 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.
In
the
opinion of management, the accompanying balance sheet, and related interim
statements of income, stockholders’ equity and cash flows include all
adjustments, consisting only of normal recurring items.
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 $2,239,649 and $826,998 as of December 31, 2007
and June
30, 2007, respectively. Assets and liabilities were translated at 7.29
RMB and
7.60 RMB to $1.00 USD at December 31, 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 six months ended December 31,
2007 and
2006 were 7.49 RMB and 7.90 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 title has passed,
pricing is fixed and collection is reasonably assured. Sales revenue represents
the invoiced value of goods, net of a value-added tax (VAT). Most 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, except that 13% VAT applies to our products of corn plumules.
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
$1,935,875 and $1,097,916 for the six months ended December 31, 2007 and
2006,
respectively. Shipping and handling costs related to costs of goods sold
amounted to $1,188,561 and $501,563 for the three months ended December
31, 2007
and 2006.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
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.
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 financial 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 December 31, 2007 and June 30, 2007 amounted to $2,991,134 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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
The
following is a reconciliation of the basic and diluted earnings per share
computation for the three and six months ended December 31, 2007 and
2006:
|
|
|
Three months ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Net
income for earnings per share
|
|
$
|
3,129,585
|
|
$
|
1,588,971
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
18,961,992
|
|
|
10,125,000
|
|
|
Diluted
effect of warrants
|
|
|
1,334,014
|
|
|
-
|
|
|
Weighted
average shares used in diluted computation
|
|
|
20,296,006
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
$
|
0.16
|
|
|
Diluted
|
|
$
|
0.15
|
|
$
|
0.16
|
|
|
|
|
Six months ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
Net
income for earnings per share
|
|
$
|
5,382,096
|
|
$
|
3,073,002
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
18,918,496
|
|
|
10,125,000
|
|
|
Diluted
effect of warrants
|
|
|
1,082,460
|
|
|
-
|
|
|
Weighted
average shares used in diluted computation
|
|
|
20,000,956
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.28
|
|
$
|
0.30
|
|
|
Diluted
|
|
$
|
0.27
|
|
$
|
0.30
|
|
At
December 31, 2007 and 2006, all outstanding warrants were included in the
three
and six months ended December 31, 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. As of December 31,
2007 and
June 30, 2007, these amounts were $1,885,500 and $5,628,500,
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
December 31, 2007 and June 30, 2007, the amount not disbursed was $348,000
and
$500,000, respectively, and this balance is classified under other receivables
in the Company’s consolidated balance sheets.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
Accounts
receivable
In
the
normal course of business, the Company extends unsecured credit to its
customers. Accounts receivable, outstanding at December 31, 2007 and June
30,
2007 amounted to $6,665,875 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 of uncollectible accounts is
made to
the allowance for doubtful accounts when management believes collection
of the
full amount is in doubt. 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 December 31, 2007 and June 30, 2007 is as
follows:
|
|
|
Six months ended
|
|
Year ended
|
|
|
|
|
December 31, 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
|
|
|
(126,334
|
)
|
|
(217,838
|
)
|
|
Foreign
currency translation adjustments
|
|
|
15,043
|
|
|
19,444
|
|
|
Ending,
allowance for doubtful accounts
|
|
$
|
319,887
|
|
$
|
431,178
|
|
Concentrations
of risk
Management
believes the credit risk on bank deposits is limited because the counterparties
are banks with high credit-ratings assigned by international credit-rating
agencies, or state-owned banks in China. 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.
The
Company’s concentrations of credit risk are primarily in trade accounts
receivable. Management conducts credit evaluations of customers but generally
has not required collateral or other security interests when granting credit.
Management estimates uncollectible accounts based primarily on the age
of the
receivables but also when payment problems with specific customers are
identified. For the six months ended December 31, 2007 and 2006, the top
ten
customers accounted for 25% and 21%, respectively, of total sales.
For
export sales, management frequently requires significant down payments
or letter
of credit prior to shipment. During the year, the Company maintains export
credit insurance to protect against the risk that the overseas 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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
Inventories
Inventories
are stated at the lower of cost or market using the weighted average basis
and
consists of the following:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw
materials
|
|
$
|
944,574
|
|
$
|
2,297,901
|
|
|
Work-in-progress
|
|
|
1,091,731
|
|
|
1,130,900
|
|
|
Finished
goods
|
|
|
2,438,550
|
|
|
1,020,466
|
|
|
Total
|
|
$
|
4,474,855
|
|
$
|
4,449,267
|
|
The
Company reviews its inventory periodically for possible obsolete goods
and to
determine if any reserves are necessary. As of December 31, 2007 and June
30,
2007, management determined no reserves 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 six months
ended
December 31, 2007 and 2006 amounted to $1,187,166 and $802,766, respectively.
Depreciation expense for the three months ended December 31, 2007 and 2006
amounted to $500,513 and $360,664, respectively.
Estimated
useful lives of the assets are as follows:
|
|
|
Estimated Useful Life
|
|
|
Buildings
and improvements
|
|
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 carrying values have become impaired. The
Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates
the
periods of depreciation to determine whether events and circumstances warrant
revised estimates of useful lives. As of December 31, 2007, the Company
expects
these assets to be fully recoverable.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
Plant
and
equipment consists of the following:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Buildings
and improvements
|
|
$
|
5,792,751
|
|
$
|
5,272,190
|
|
|
Machinery
and equipment
|
|
|
34,926,778
|
|
|
22,257,978
|
|
|
Automobile
facilities
|
|
|
524,767
|
|
|
487,319
|
|
|
Electronic
equipment
|
|
|
329,474
|
|
|
307,391
|
|
|
Construction
in progress
|
|
|
5,399,754
|
|
|
9,055,482
|
|
|
Total
|
|
|
46,973,524
|
|
|
37,380,360
|
|
|
Accumulated
depreciation
|
|
|
8,622,620
|
|
|
7,202,286
|
|
|
Total
|
|
$
|
38,350,904
|
|
$
|
30,178,074
|
|
Interest
costs totaling $286,060 and $391,949 was capitalized into construction
in
progress for the six months ended December 31, 2007 and 2006, respectively.
Interest cost capitalized into construction in progress for the three months
ended December 31, 2007 amounted to $93,513 and $234,513,
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
Summarized
financial information of Changle Shengshi is as follows:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
Current
assets
|
|
$
|
4,707,712
|
|
$
|
8,065,168
|
|
|
Non-current
assets
|
|
|
26,094,726
|
|
|
23,027,549
|
|
|
Total
assets
|
|
|
30,802,438
|
|
|
31,092,717
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
10,717,907
|
|
|
14,137,526
|
|
|
Non-current
liabilities
|
|
|
4,140,420
|
|
|
3,576,800
|
|
|
Shareholders'
equity
|
|
|
15,944,111
|
|
|
13,378,391
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
30,802,438
|
|
$
|
31,092,717
|
|
Summarized
financial information of Changle Shengshi for the six months ended is as
follows:
|
|
|
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Net
sales
|
|
$
|
14,509,581
|
|
$
|
6,163,826
|
|
|
Gross
profit
|
|
$
|
4,216,417
|
|
$
|
1,053,783
|
|
|
Income
before taxes
|
|
$
|
3,444,249
|
|
$
|
524,037
|
|
|
Net
income
|
|
$
|
1,959,781
|
|
$
|
411,472
|
|
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
391,956
|
|
$
|
82,294
|
|
|
Elimination
of intercompany profit
|
|
|
239,222
|
|
|
60,087
|
|
|
Company’s
share of net income
|
|
$
|
152,734
|
|
$
|
22,207
|
|
Intangible
assets
All
land
in the People’s Republic of China is owned by the government. However, the
government grants “land use rights” for terms ranging from 20 to 50 years. 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 Company amortizes the cost of land use rights over
their
term of the agreement using the straight-line method.
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
rights were $1,998,685.
This
balance is classified under other receivables in the Company’s consolidated
balance sheets. As of December 31, 2007 $685,500 had been received. As
receivable balance is from local government, the Company believes there
is no
collectibility issue.
Intangible
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired.
Management considers assets to be impaired if the carrying value exceeds
the
future projected cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether subsequent
events
and circumstances warrant revised estimates of useful lives. As of December
31,
2007, the Company expects these assets to be fully recoverable.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
At
December 31, 2007 and June 30, 2007, accumulated amortization amounted
to
$122,809 and $96,299, respectively. Total amortization expense for the
six
months ended December 31, 2007 and 2006 amounted to $23,820 and $21,159,
respectively. Amortization expense for the three months ended December
31, 2007
and 2006 amounted to $12,011 and $10,657, 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
December 31, 2007 and June 30, 2007.
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.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments
are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
(UNAUDITED)
The
Company does not anticipate any events which could cause change to these
uncertainties.
The
Company is subject to taxation in the U.S. and in the PRC jurisdictions.
There
are no ongoing examinations by taxing authorities at this time. The years
2005
to 2007 remain subject to examination by the United States tax authorities.
The
year 2007 remain subject to examination by the PRC tax authorities.
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,
except that 13% VAT applies to our products of corn plumules. 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 $6,616,628 and $5,079,511 for
the six
months ended December 31, 2007, and $3,543,233 and $3,201,727 for the
six months
ended December 31, 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. VAT on sales and VAT
on
purchases amounted to $3,756,399 and $2,647,096 for the three months
ended
December 31, 2007, and $1,920,544 and $1,740,191 for the three months
ended
December 31, 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.
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 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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
(UNAUDITED)
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 six months ended December 31, 2007 and 2006 amounted
to
$13,560 and $65,027, respectively.
Interest
paid for the six months ended December 31, 2007 and 2006 amounted to $788,221
and $500,771, respectively.
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. On December 20, 2007 Mr. Qingtai Liu has fully repaid the
remaining balance of $1,229,625.
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 $935,077 and $949,992 of accounts payable
due to Changle Shengshi at December 31, 2007 and June 30, 2007, respectively.
The utilities expense amounted to $4,035,084 and $1,399,190 for the six
months
ended December 31, 2007 and 2006, respectively. The utilities expense for
the
three months ended December 31, 2007 and 2006 amounted to $1,966,318 and
$777,069, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
(UNAUDITED)
The
Company loaned money to Changle Shengshi and entered into two loan contracts
as
follows:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Due
on November 19, 2007, unsecured, 7.95% interest rate per
annum
|
|
$
|
-
|
|
$
|
657,500
|
|
|
|
|
|
|
|
|
|
|
|
Due
on September 14, 2009, unsecured, 7.6% interest rate per
annum
|
|
|
411,300
|
|
|
394,500
|
|
|
|
|
$
|
411,300
|
|
$
|
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 December
31, 2007
and June 30, 2007 was $0 and $992,449, respectively. Total related party
purchases from
Shouguang
Shengtai
for the
six months ended December 31, 2007 and 2006 amounted to $0 and $7,110,940,
respectively, which represents approximately 0% and 46% of the Company’s
purchase of raw materials for the six months ended December 31, 2007 and
2006,
respectively. Purchases for the three months ended December 31, 2007 and
2006
amounted to $0 and $2,235,833, respectively, which represents approximately
0%
and 27% of the Company’s purchase of raw material for the three months ended
December 31, 2007 and 2006.
The
following table summarizes other receivable – related party as of December 31,
2007 and June 30, 2007 are as follows:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Changle
Shengshi Redian Co., Ltd
|
|
$
|
-
|
|
$
|
1,499,207
|
|
|
|
|
|
|
|
|
|
|
|
Shouguang
Shengtai Starch Co. Ltd
|
|
|
-
|
|
|
992,449
|
|
|
|
|
$
|
-
|
|
$
|
2,491,656
|
|
Note
5 – Prepayments
Prepayments
represent partial payments or deposits on inventory purchases and amounted
to
$631,130 and $140,376 as of December 31, 2007 and June 30, 2007,
respectively.
Prepayments
– non-current represent partial payments or deposits on plant and equipment
purchases and amounted to $12,640,708 and $7,429,371 as of December 31,
2007 and
June 30, 2007, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
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:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan
from Bank of China, due various dates from January to August
2008. Monthly
interest only payments ranging from 7.313% to 7.668% per annum,
guaranteed
by unrelated third party and secured by properties
|
|
$
|
10,213,950
|
|
$
|
10,993,400
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates
from
January to August 2008 monthly interest only payments ranging
from 7.956%
to 8.892% per annum, guaranteed by unrelated third party and
secured by
properties
|
|
|
2,742,000
|
|
|
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
|
|
|
-
|
|
|
1,959,350
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Communication Bank, due July 2007. Monthly interest only
payments
7.2% per annum, guaranteed by unrelated third party
|
|
|
-
|
|
|
1,972,500
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Commercial Bank, due July 2008. Monthly interest only
payments at
8.019% per annum, guaranteed by unrelated third party.
|
|
|
1,371,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from ShangHai PuFa Bank, due October 2008. Monthly interest
only payments
at 8.384% per annum, guaranteed by unrelated third party
|
|
|
1,371,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,697,950
|
|
$
|
18,870,250
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
(UNAUDITED)
Notes
payable - banks
Notes
payable represent amounts due to various banks which are normally due within
one
year, and these notes can be renewed with the banks. The Company’s notes
payables consisted of the following:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Bank
of China, due in October 2007, restricted cash required 50%
of loan
amount, guaranteed by unrelated third party
|
|
$
|
-
|
|
$
|
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
|
|
|
1,371,000
|
|
|
3,945,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,371,000
|
|
$
|
8,942,000
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
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% for the first six months then
10.8%
thereafter and the principal is due upon demand. Employee loans amounted
to
$1,785,196 and $596,516
as
of
December 31, 2007 and June 30, 2007, respectively.
Employee
loans - officer
The
Company has borrowed monies from Mr. Qingtai Liu to fund the Company’s
operations. The loans bear interest at 7.2% for the first six month then
10.8%
there after and the principal is due upon demand. Employee loans from officer
amounted to $36,963 and $0
as
of
December 31, 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 December 31, 2007 and June 30, 2007 amounted to $2,160,193 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:
|
|
|
December
31,
2007
|
|
June
30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Agricultural
Credit Union, interest at 7.84% per annum, due May 2008
|
|
$
|
397,590
|
|
$
|
381,350
|
|
|
Total
|
|
|
397,590
|
|
|
381,350
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
(UNAUDITED)
Current
maturities for the next five years are follows:
|
|
|
Amount
|
|
|
June
30, 2008
|
|
$
|
397,590
|
|
|
Thereafter
|
|
$
|
-
|
|
Interest
expense net of amounts capitalized into construction in progress for the
six
months ended December 31, 2007 and 2006 on all debt amounted to $886,021
and
$322,833, respectively. Interest capitalized totaled $286,060 and $391,949
for
the six months ended December 31, 2007 and 2006, respectively
.
Interest
expense net of amounts capitalized into construction in progress for the
three
months ended December 31, 2007 and 2006 on all debt amounted to $494,413
and
$305,418, respectively. Interest capitalized totaled $93,513 and $234,295
for
the three months ended December 31, 2007 and 2006, respectively
.
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 state government granted the Company income tax exemptions as follows:
100%
exemption for the first 2 years from September 2004 to August 2006 and
50%
exemption for the third to fifth years from September 2006 to August 2009.
In
addition, the Company is located in a Special Economic Zone and the PRC
tax
authority has offered 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 existing
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
The
key
changes are:
|
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs, except for High Tech companies
who pay a
reduced rate of 15%;
|
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax
holiday
treatment approved by local government for a grace period of
the next 5
years or until the tax holiday term is completed, whichever is
sooner.
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
(UNAUDITED)
The
Company’s subsidiary, Weifang Shengtai, was established before March 16, 2007
and therefore is qualified to continue to be taxes at the reduced tax rate
as
described above. Starting from January 1, 2008 the company will be subject
to
25% income tax according to the newly issued income tax regulation.
During
the six months ended December 31, 2007 and 2006, the provision for income
taxes
was $787,168 and $301,138, respectively. Income tax provision for the three
months ended December 31, 2007 and 2006 amounted to $481,323 and $243,723,
respectively.
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 six months ended
December
31, 2007 and 2006 amounted to $1,377,544 and $894,451, respectively. The
net
effect on basic earnings per share if the income tax had been applied would
decrease basic earnings per share for the six months ended December 31,
2007 and
2006 by $0.07 and $0.09, respectively. The net effect on diluted earnings
per
share if the income tax had been applied would decrease diluted earnings
per
share for the six months ended December 31, 2007 and 2006 by $0.07 and
$0.09,
respectively. The estimated tax savings due to the tax exemption for the
three
months ended December 31, 2007 and 2006 amounted to $842,315 and $462,038,
respectively. The net effect on basic earnings per share if the income
tax had
been applied would decrease basic earnings per share for the three months
ended
December 31, 2007 and 2006 by $0.04 and $0.05, respectively. The net effect
on
diluted earnings per share if the income tax had been applied would decrease
diluted earnings per share for the three months ended December 31, 2007
and 2006
by $0.04 and $0.05, respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
(UNAUDITED)
Taxes
payable
Taxes
payable consisted of the following:
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
VAT
payable
|
|
$
|
2,052,942
|
|
$
|
1,273,390
|
|
|
Individual
income tax withheld
|
|
|
1,199
|
|
|
1,316
|
|
|
Income
tax payable
|
|
|
1,791,532
|
|
|
764,827
|
|
|
Housing
property tax payable
|
|
|
8,222
|
|
|
7,306
|
|
|
Others
|
|
|
2,409
|
|
|
2,093
|
|
|
Total
|
|
$
|
3,856,304
|
|
$
|
2,048,932
|
|
Note
8 – Commitments and Contingent liabilities
Guarantees
As
of
December 31, 2007, the Company guaranteed $9.7 million of short term loans
for
unrelated parties. The Company is obligated to perform under the guarantee
if
these parties failed to pay principal and interest payments when due. Including
accrued interest, the maximum potential amount of future undiscounted payments
under the guarantee is $10.3 million. The company did not record a liability
for
the guarantee because management believes the likelihood of that the Company
will have to pay is remote. Detail of guarantee amount to the unrelated
parties
as of December 31, 2007 is as follows:
|
|
|
Short
Term
|
|
|
Company
|
|
Bank
Loans
|
|
|
|
|
|
|
|
Chang
Le Century Sun Paper Industry Co.
|
|
$
|
2,879,100
|
|
|
Shangdong
Kuangji Group Inc.
|
|
|
6,855,000
|
|
|
Total
|
|
$
|
9,734,100
|
|
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 an aggregate of 8,750,000 shares of common stock and 4,375,000
warrants for $2.00 per share for an aggregate purchase price of $17,500,000
and
net proceeds of $15,256,428.
In
connection with the offering, the Company paid a placement fee equal to
12% of
gross proceeds in cash totaling $2,100,000 and issued 218,750 warrants.
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
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.
Concurrent
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.
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
Warrants
|
|
Warrants
|
|
Average Exercise
|
|
Remaining
|
|
|
|
|
Outsanding
|
|
Exercisable
|
|
Price
|
|
Contractual Life
|
|
|
Outstanding,
June 30, 2007
|
|
|
4,475,000
|
|
|
4,475,000
|
|
$
|
2.54
|
|
|
4.63
|
|
|
Granted
|
|
|
218,750
|
|
|
218,750
|
|
|
2.60
|
|
|
4.13
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
194,805
|
|
|
194,805
|
|
|
2.60
|
|
|
-
|
|
|
Outstanding,
December 31, 2007
|
|
|
4,498,945
|
|
|
4,498,945
|
|
$
|
2.54
|
|
|
4.13
|
|
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
The
transfer to this reserve must be made before distribution of any dividends
to
shareholders. For the six months ended December 31, 2007 and 2006, the
Company
did not transfer any funds 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
.
The
Company is required to make contributions to the state retirement plan
at 15% to
20% of the monthly basic salaries of all permanent current employees. The
PRC
government is responsible for the benefit liability to these retired employees.
For
the
six
months
ended
December
31, 2007 and 2006, the Company made
pension
con
tribution
s
in the
amount of
$121,516
and $114,703, respectively.
For
the
three
months
ended
December
31, 2007 and 2006, the Company made
pension
con
tribution
s
in the
amount of
$63,676
and $45,322, respectively.
Note
12 – Revenue by geographic area
The
following table summarized financial information for the six and three
months
ended December 31, 2007 and 2006 concerning the Company’s revenues based on
geographic area:
For
the
six months ended,
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
Revenue
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
China
|
|
$
|
39,805,419
|
|
$
|
15,294,599
|
|
|
International
|
|
|
4,521,938
|
|
|
7,615,211
|
|
|
Total
|
|
$
|
44,327,357
|
|
$
|
22,909,810
|
|
For
the
three months ended,
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
Revenue
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
China
|
|
$
|
22,630,330
|
|
$
|
11,204,103
|
|
|
International
|
|
|
2,323,958
|
|
|
1,106,386
|
|
|
Total
|
|
$
|
24,954,288
|
|
$
|
12,310,489
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31
,
2007
(UNAUDITED)
Note
13 – Subsequent event
The
Company borrowed money from an unrelated third related party and temporarily
classified in third party loan. Money was borrowed temporarily until the
bank
loans have been approved. The money was repaid in January of 2008 when
bank loan
was issued.
Loan
amount due to Bank of China and Industrial and Commercial Bank of China
in
January 2008 amounted to $356,460 and $1,371,000, respectively, was subsequently
repaid in January 2008.
STOCK
OPTIONS
On
January 4, 2008 we granted options to purchase 660,000 shares of common
stock
under our 2007 Stock Incentive Plan, with an exercise price of $3.30 per
share,
which was the closing price of a share of our common stock on the Over
The
Counter Bulletin Board on the date of grant.