PROSPECTUS
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Filed
Pursuant to Rule 424(b)(3)
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Registration
No. 333-144235
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SHENGTAI
PHARMACEUTICAL, INC.
6,550,960
Shares of Common Stock
4,180,195
Shares of Common Stock
Underlying
Warrants
Offered
by Selling Stockholders
The
selling stockholders identified in this prospectus are offering for sale from
time to time up to 10,731,155 shares of our common stock, including 4,180,195
shares they may acquire on exercise of warrants. The common stock and warrants
were issued to the selling stockholders in a private placement completed on
May
15, 2007. The warrants expire on May 15, 2012 and have an exercise price of
$2.60 per share, as adjusted.
The
selling stockholders may offer all or part of their shares for resale from
time
to time through public or private transactions, at either prevailing market
prices or at privately negotiated prices. We will not receive any of the
proceeds from the sales of the shares by the selling stockholders. To the extent
the warrants are exercised, if at all, we will receive the exercise price for
those warrants. We will pay all of the registration expenses incurred in
connection with this offering (estimated to be $192,118), but the selling
stockholders will pay all of the selling commissions, brokerage fees and related
expenses.
Our
common stock is quoted on the National Association of Securities Dealers
Over-the-Counter Bulletin Board under the symbol "SGTI.OB." As of April 27,
2008, the last reported bid price of our common stock was $3.20 per share and
the last reported ask price was $3.10 per share.
There
is
a limited market in our common stock. The shares are being offered by the
selling stockholders in anticipation of the development of a secondary trading
market in our common stock. We cannot give you any assurance that an active
trading market in our common stock will develop, or if an active market does
develop, that it will continue.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 12 for a discussion of certain risk factors that you should
consider.
You
should read the entire prospectus before making an investment
decision.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is May 6, 2008
TABLE
OF CONTENTS
About
This Prospectus
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6
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Cautionary
Note Regarding Forward Looking Statements
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and
Other Information Contained in this Prospectus
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6
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Prospectus
Summary
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8
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Risk
Factors
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13
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Use
of Proceeds
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27
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Selected
Consolidated Financial Data
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28
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Management's
Discussion and Analysis of Financial Condition
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and
Results of Operations
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28
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Quantitative
and Qualitative Disclosure About Market Risk
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37
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Business
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38
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Properties
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56
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Legal
Proceedings
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57
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Market
Price of and Dividends on our Common Stock
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And
Related Stockholder Matters
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57
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Security
Ownership of Certain Beneficial Owners and Management
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60
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Directors
and Executive Officers
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61
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Executive
Compensation
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63
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Certain
Relationships and Related Transactions
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66
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Selling
Stockholders
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67
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Plan
of Distribution
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70
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Description
of Our Securities
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72
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Changes
in and Disagreements with Accountants
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74
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Where
You Can Find More Information
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75
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Legal
Matters
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75
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Experts
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75
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Financial
Statements
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F-1
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ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. The selling stockholders are offering to sell and seeking
offers to buy shares of our common stock, including shares they acquire upon
exercise of their warrants, only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as
of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. The prospectus will be updated
and updated prospectuses made available for delivery to the extent required
by
the federal securities laws.
No
person
is authorized in connection with this prospectus to give any information or
to
make any representations about us, the selling stockholders, the securities
or
any matter discussed in this prospectus, other than the information and
representations contained in this prospectus. If any other information or
representation is given or made, such information or representation may not
be
relied upon as having been authorized by us or any selling stockholder. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy the securities in any circumstances under which the offer or solicitation
is unlawful. Neither the delivery of this prospectus nor any distribution of
securities in accordance with this prospectus shall, under any circumstances,
imply that there has been no change in our affairs since the date of this
prospectus. The prospectus will be updated and updated prospectuses made
available for delivery to the extent required by the federal securities
laws.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS
This
prospectus contains some forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical
or
current facts. Forward-looking statements involve risks and uncertainties.
Forward-looking statements include statements regarding, among other things,
(a)
our projected sales, profitability, and cash flows, (b) our growth strategies,
(c) anticipated trends in our industries, (d) our future financing plans and
(e)
our anticipated needs for working capital. They are generally identifiable
by
use of the words "may," "will," "should," "anticipate," "estimate," "plans,"
“potential," "projects," "continuing," "ongoing," "expects," "management
believes," "we believe," "we intend" or the negative of these words or other
variations on these words or comparable terminology. These statements may be
found under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus generally.
In particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such
as legal proceedings, and financial results.
Any
or
all of our forward-looking statements in this report may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or
by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws
,
we
undertake no obligation to publicly update any forward-looking statements,
whether as the result of new information, future events, or
otherwise.
Currency
Unless
otherwise noted, all currency figures in this filing are in U.S.dollars.
References to "yuan" or "RMB" are to the Chinese yuan (also known as the
Renminbi). According to www.Xe.com as of April 28, 2008, $1.00 = 7.0030
yuan.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information you should consider before
investing in our common stock. You should read the entire prospectus, including
"Risk Factors" and the consolidated financial statements and the related notes
before making an investment decision. Except as otherwise specifically stated
or
unless the context otherwise requires, the “Company,” we," "our" and "us" refers
collectively to Shengtai Pharmaceutical, Inc., a Delaware corporation and its
subsidiaries, Shengtai Holding Inc., a New Jersey Corporation and Weifang
Shengtai Pharmaceutical Co., Ltd, a wholly foreign-owned entity organized under
the laws of the People's Republic of China (“PRC”).
THE
COMPANY
Business
Overview
We
are
engaged in the business of manufacturing and supplying pharmaceutical grade
glucose products for medicinal purposes and other glucose and starch products
used for the food and beverage industry and for industrial production primarily
in the People's Republic of China (“PRC”). Our business is conducted through our
indirect wholly-owned subsidiary Weifang Shengtai Pharmaceutical Co., Ltd.
(“Weifang Shengtai”).
Approximately
ninety percent (90%) of our sales revenues for the fiscal year ended June 30,
2007 were attributable to sales made in the PRC with ten percent
(10%)
of
our sales derived from the international market.
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Corporate
History
Shengtai
Pharmaceutical, Inc. (“Shengtai”), formerly known as West Coast Car Company
(“WCCC”), was incorporated in Delaware in March 2004 and commenced operations in
Temecula, California in November 2004 doing business as So Cal Car Company.
Until July 2006, WCCC was a pre-owned retail automobile dealership in Southern
California, operating as a "traditional" pre-owned dealership, whereby it sought
out vehicles from various sources, such as auctions, private parties and
wholesalers and then sold the vehicles to the general public. The Company was
unable to achieve a profit and did not renew its lease when it expired at the
end of July 2006.
WCCC
had
limited operations and generated no revenue for the year ended December 31,
2006
and revenue of $30,318 for the year ended December 31, 2005
On
September 26, 2005, WCCC registered as a public reporting company by filing
a
Form 10-SB with the Securities and Exchange Commission under Section12(g) of
the
Securities Exchange Act of 1934, as amended. (the “Exchange Act”). On January
12, 2007 WCCC's common stock was available for quotation on the Over the Counter
Bulletin Board under the symbol "WCSC.” On July 31, 2007, WCCC changed its name
to Shengtai Pharmaceutical, Inc. and its symbol was changed to
SGTI.
On
February 4, 1999, Weifang Shengtai was established in Changle County, Weifang
City, Shandong Province, PRC. Mr. Qingtai Liu and Weifang Shengtai’s management
were the original shareholders.
In
February 1999, Weifang Shengtai acquired for $775,000 all the assets of Weifang
Fifth Pharmaceutical Plant, a former PRC state-owned enterprise (who had
defaulted on a bank loan of approximately $5 million and which had its pledged
assets taken over by the lending bank).
On
February 27, 2006, Shengtai Holding Inc., a New Jersey corporation (“SHI”), was
formed by Messrs. Qingtai Liu and Chenghai Du as a holding company for Weifang
Shengtai.
On
June
20, 2006, SHI acquired all of the outstanding shares of Weifang Shengtai from
Mr. Qingtai Liu and Bio-One, Inc. SHI acquired Mr. Qingtai Liu’s 49% equity
interest in Weifang Shengtai for approximately RMB 15 million (approximately
$1,920,000) and acquired Bio-One’s 51% equity interest in Weifang Shengtai for
$1,000,000 as well as a return of $4,180,000 worth of preferred stock of
Bio-One. As a result of this acquisition, Weifang Shengtai became a wholly
foreign owned entity or “WFOE” and obtained the requisite approval of the local
branch of the Ministry of Commerce in the City of Weifang on June 21,
2006
.
Its
business term is 20 years starting on February 10, 2004, the date of approval
of
a previous joint venture which was not pursued
.
Weifang
Shengtai’s registered capital is RMB32 million (approximately $3.92 million) of
which $1,925,996 was required to be contributed by June 21, 2007. This amount
has already been sent to Weifang Shengtai from the proceeds raised under the
share purchase agreement described below.
Share
Exchange Agreement
On
May
15, 2007, WCCC entered into a share exchange agreement with the stockholders
of
SHI, under which Messrs. Qingtai Liu and Chenghai Du, holders of all of the
issued and outstanding shares of common stock of SHI, exchanged all of their
shares of SHI for 8,212,500 and 912,500, respectively, newly-issued shares
of
common stock of WCCC. The newly issued shares represented approximately 91%
of
the then outstanding shares of WCCC. The share exchange transaction closed
on
May 15, 2007. As a result of the share exchange SHI became a direct wholly-owned
subsidiary of WCCC and Weifang Shengtai became an indirect wholly-owned
subsidiary.
In
connection with the share exchange, WCCC’s former directors, Daniel Drummond and
Alex Ferries, appointed Mr. Qingtai Liu as Chief Executive Officer and
President, and as a director of WCCC and appointed Yongqiang Wang as a director
and thereafter resigned as directors and officers of WCCC, subject to the filing
and dissemination of Schedule 14f-1. Shengtai
filed an
information statement with the SEC on May 4, 2007, relating to the change in
control of WCCC’s Board of Directors containing the information required under
Rule 14f-1 of the Securities Exchange Act of 1934, as amended and on May 4,
2007. Shengtai distributed that information statement to all holders of record
of its common stock. After the closing of the share exchange, there occurred
a
change in control in the Board of Directors with Messrs. Qingtai Liu and
Yongqiang Wang constituting the sole members of the Board of
Directors.
Corporate
Structure
As
a
result of the consummation of the share exchange on May 15, 2007, our corporate
structure is as follows:
The
Share Purchase Agreement
On
May
15, 2007, we entered into and closed on a share purchase agreement with nineteen
accredited investors (who are the selling stockholders named in this prospectus
(the “Selling Stockholders”) who purchased from us for $2.00 per share (or an
aggregate purchase price of $17,500,000) an aggregate of 8,750,000 shares of
common stock and 4,375,000 attached five year warrants with an exercise
price of $2.60 per share, as adjusted. We received net cash proceeds of
approximately $15,323,000 from this financing. The closing of the transaction
contemplated by the share purchase agreement occurred immediately following
the
closing of the share exchange. Brill Securities, Inc
.
acted as
placement agent for the share purchase and received $875,000 as a placement
fee,
an additional $175,000 for non accountable expenses and are entitled to receive
warrants to purchase 109,375 shares of common stock.
As of April 4, 2008, 6,550,960 shares of common stock and 4,180,195
shares of common stock underlying the warrants remain available for resail.
We
are
registering for resale in this prospectus 10,731,155 shares of common stock
which represents all of 6,550,960 shares of common stock that remain from the
original amount purchased by the Selling Stockholders which have not been sold
as of April 4, 2008 and 4,180,195 shares of common stock issuable on
exercise of the warrants. For additional disclosure relating to the terms of
the
share purchase agreement, reference is made to “BUSINESS - Corporate
History.”
Executive
Offices
Our
executive offices are located at 45 Old Millstone Drive, Unit #6, East Windsor,
NJ 08520, and our telephone number is (609) 426-8996
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THE
OFFERING
The
Offering
This
prospectus relates to (i) 6,550,960 shares of common stock and (ii)
4,180,195 shares of common stock underlying warrants attached to the shares
of
common stock. These shares and attached warrants were purchased by the Selling
Stockholders pursuant to the share purchase agreement entered into on May 15,
2007 and may be offered for sale by the Selling Stockholders from time to
time.
Common
stock outstanding prior to Offering
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18,875,000
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Common
stock offered by the Company
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0
shares
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Total
shares of common stock offered by Selling Stockholders
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10,731,655
(includes 4,180,195 shares underlying the warrants attached to the
shares
purchased by the Selling Stockholders in the May 15, 2007 private
placement.)
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Common
stock to be outstanding after the offering (assuming all warrants
have
been exercised)
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23,444,805
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Use
of Proceeds
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We
will not receive any of the proceeds from the sale of the shares
owned by
the Selling Stockholders. However, we will receive the net proceeds
from
any exercise of the warrants to acquire up to 4,367,695 shares offered
under this prospectus. We intend to use any proceeds received from
the
exercise of warrants for working capital and other general corporate
purposes. We cannot assure you that any of the warrants will ever
be
exercised.
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Our
OTC Bulletin Board Trading Symbol
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SGTI.OB
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Risk
Factors
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See
"Risk Factors" beginning on page 12 and other information included in
this prospectus for a discussion of factors you should consider before
deciding to invest in shares of our common
stock.
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Background
On
May
15, 2007, we entered into a share purchase agreement under which the Selling
Stockholders purchased from us, for $2.00 per share or an aggregate purchase
price of $17,500,000, an aggregate of 8,750,000 shares of common stock
and 4,375,000 attached warrants. This financing closed on May 15, 2007 and
we received approximately $15,323,000 as net proceeds. Under the terms of the
share purchase agreement, which granted the investors certain registration
rights with respect to the shares of common stock which they purchased as well
as the shares underlying the warrants purchased, we are required to file an
initial registration statement on Form S-1 (or such other form as may be
applicable) covering those shares. As of April 4, 2008, 6,550,960 shares of
common stock and 4,180,195 shares of common stock underlying the warrants remain
available for resale.
Reference
is made to “Selling Stockholders - Background
”
in this prospectus for disclosure relating to our obligations, as set forth
in
share purchase agreement, to register the shares (and the shares underlying
the
warrants) and the circumstances in which we may be required to pay liquidated
damages for failing to comply with those obligations.
Plan
of Distribution
This
offering is not being underwritten. The Selling Stockholders directly, through
agents designated by them from time to time or through brokers or dealers also
to be designated, may sell their shares from time to time, in or through
privately negotiated transactions, or in one or more transactions, including
block transactions, on the OTC Bulletin Board or on any stock exchange on which
the shares may be listed in the future pursuant to and in accordance with the
applicable rules of such exchange or otherwise. The selling price of the shares
may be at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. To the extent required,
the specific shares to be sold, the names of the Selling Stockholders, the
respective purchase prices and public offering prices, the names of any such
agent, broker or dealer and any applicable commission or discounts with respect
to a particular offer will be described in an accompanying prospectus. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus. We will keep this prospectus current until the expiration dates
of
the warrants (May 15, 2012), even if the warrants which underlie certain shares
of our common stock subject to this prospectus are out of the
money.
We
will
not receive any proceeds from sales of shares by the Selling Stockholders.
However, if any of the Selling Stockholders decide to exercise their warrants,
we will receive the net proceeds of the exercise of outstanding warrants held
by
the Selling Stockholders. The warrants do not provide for cashless exercise.
We
intend to use any proceeds we receive from the exercise of warrants for working
capital and other general corporate purposes. We cannot assure you that any
of
the warrants ever be exercised.
We
will
pay all expenses of registration incurred in connection with this offering
(estimated to be $192,118), but the Selling Stockholders will pay all of the
selling commissions, brokerage fees and related expenses. We have agreed to
indemnify the Selling Stockholders against certain liabilities, including
liabilities under the Securities Act.
The
Selling Stockholders and any broker-dealers or agents that participate with
the
Selling Stockholders in the distribution of any of the shares may be deemed
to
be “underwriters” within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of the shares purchased by them
may be deemed to be underwriting commissions or discounts under the Securities
Act.
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
Chinese 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 guarantee
that
it will be effective.
Over
the
last few years, the PRC's economy has registered a high growth rate. During
the
past ten years, the rate of inflation in the PRC has been as high as 20.7%
and
as low as -2.2%. Recently, there have been indications that rates of inflation
have increased. In response, the PRC government recently has taken measures
to
curb this excessively expansive economy. These corrective measures were designed
to restrict the availability of credit or regulate growth and contain inflation.
These measures have included devaluations of the PRC currency, the Renminbi
(RMB), restrictions on the availability of domestic credit, reducing the
purchasing capability of certain of its customers, and limited re-centralization
of the approval process for purchases of some foreign products. These austerity
measures alone may not succeed in slowing down the economy's excessive expansion
or control inflation, and may result in severe dislocations in the PRC economy.
The PRC government may adopt additional measures to further combat inflation,
including the establishment of freezes or restraints on certain projects or
markets. Such measures could harm the market for our products and inhibit our
ability to conduct business in the PRC.
The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors
The
PRC
legal and judicial system may negatively impact foreign investors. In 1982,
the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge
in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making
is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist,
or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that
is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced
the
protection of foreign investment and allowed for more control by foreign parties
of their investments in PRC enterprises. There can be no assurance that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting the PRC's political, economic or social life, will not affect the
PRC
government's ability to continue to support and pursue these reforms. Such
a
shift could have a material adverse effect on our business and
prospects.
The
practical effect of the PRC legal system on our business operations in the
PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly,
the
PRC accounting laws mandate accounting practices, which are not consistent
with
U.S. generally accepted accounting principles. PRC’s accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. Weifang Shengtai is a wholly foreign owned enterprise.
Second, while the enforcement of substantive rights may appear less clear than
United States procedures, the Foreign Invested Enterprises and Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the
same
status as other Chinese registered companies in business-to-business dispute
resolution.
Since
the
Articles of Association of Weifang Shengtai do not provide for the resolution
of
disputes business, the parties are free to proceed to either the Chinese courts
or if they are in agreement, to arbitration.
Any
award
rendered by an arbitration tribunal is enforceable in accordance with the United
Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958). Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
In
addition, some of our present and future executive officers and our directors,
most notably, Mr. Qingtai Liu, Mr. Yongqiang Wang, Mr. Yizhao Zhang and Chris
Wang may be residents of the PRC and not of the United States, and substantially
all the assets of these persons are located outside the U.S. As a result, it
could be difficult for investors to effect service of process in the United
States, or to enforce a judgment obtained in the United States against us or
any
of these persons.
The
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings.
We
and any future subsidiaries are considered foreign persons or foreign funded
enterprises under PRC laws, and as a result, we are required to comply with
PRC
laws and regulations. These laws and regulations are sometimes vague and may
be
subject to future changes, and their official interpretation and enforcement
may
involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance
by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may have
on
our business.
Governmental
control of currency conversion may affect the value of your
investment
.
The
majority of our revenues will be settled in Renminbi and U.S. dollars, and
any
future restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside the PRC
or
to make dividend or other payments in U.S. dollars. Although the Chinese
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.
PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents, if applied to us, may subject the PRC resident shareholders
of
us or our parent company to personal liability and limit our ability to acquire
PRC companies or to inject capital into our PRC subsidiary, limit our PRC
subsidiary's ability to distribute profits to us or otherwise materially
adversely affect us.
In
October 2005, the PRC State Administration of Foreign Exchange (“SAFE”) issued a
public notice, the Notice on Relevant Issues in the Foreign Exchange Control
over Financing and Return Investment Through Special Purpose Companies by
Residents Inside China (the “SAFE Notice”), which requires PRC residents,
including both legal persons and natural persons, to register with the competent
local SAFE branch before establishing or controlling any company outside of
China, referred to as an “offshore special purpose company,” for the purpose of
overseas equity financing involving onshore assets or equity interests held
by
them. In addition, any PRC resident that is the shareholder of an offshore
special purpose company is required to amend its SAFE registration with the
local SAFE branch with respect to that offshore special purpose company in
connection with any increase or decrease of capital, transfer of shares, merger,
division, equity investment or creation of any security interest over any assets
located in China. Moreover, if the offshore special purpose company was
established and owned the onshore assets or equity interests before the
implementation date of the SAFE notice, a retroactive SAFE registration is
required to have been completed before March 31, 2006. If any PRC shareholder
of
any offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore special
purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. After the SAFE notice, an implementation rules on the SAFE notice
was issued on May 29, 2007 which provides for implementation guidance and
supplements the procedures as provided in the SAFE notice. For an offshore
special purpose company which was established and owned the onshore assets
or
equity interests before the implementation date of the SAFE notice, a
retroactive SAFE registration requirement is repeated.
Due
to
lack of official interpretation, some of the terms and provisions of the SAFE
Notice and its implementation rules remain unclear, and the implementation
of
the SAFE Notice by central SAFE and local SAFE branches has been inconsistent
since its adoption. Based on the advice of our PRC counsel and after
consultation with relevant SAFE officials, we believe that the PRC resident
shareholders of our parent company were required to complete their respective
SAFE registrations pursuant to the SAFE Notice.
Moreover,
because of uncertainty over how the SAFE Notice will be interpreted and
implemented, and how or whether the SAFE Notice and implementation rules will
apply to us, we cannot predict how SAFE will affect our business operations
or
future strategies. For example, our present and prospective PRC subsidiaries’
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE Notice by our or our parent company’s PRC resident
shareholders. In addition, such PRC residents may not always be able to complete
registration procedures required by the SAFE Notice. We also have little control
over either our present or prospective direct or indirect shareholders or the
outcome of such registration procedures. A failure by our or our parent
company’s PRC resident shareholders or future PRC resident shareholders to
comply with the SAFE Notice, if SAFE requires it, could subject us to fines
or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary’s ability to make distributions or pay dividends or affect
our ownership structure, which could adversely affect our business and
prospects.
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 a
cornstarch manufacturing plant, completed and operational in September
2007, upgrading our existing glucose manufacturing facility, building a new
glucose manufacturing facility and expanding our sales overseas, there is no
guarantee that such plans will be implemented or that they will be successful.
These plans are subject to, among other things, their feasibility to meet the
challenges we face, our ability to arrange for sufficient funding and the
ability to hire qualified and capable employees to carry out these expansion
plans.
We
have a limited operating history and limited historical financial information
upon which you may evaluate our performance
.
Our
operating subsidiary, Weifang Shengtai, was incorporated in 1999 and our
operations have been largely confined to the PRC. In addition, while we have
had
some experience in managing a cornstarch manufacturing facility, we may not
be
adequately prepared to manage and operate a larger and more modern
facility.
We
are in
our early stages of development and face risks associated with a new company
in
a growth industry. We may not successfully address these risks and uncertainties
or successfully implement our operating strategies. If we fail to do so, it
could materially harm our business to the point of having to cease operations
and could impair the value of our common stock to the point investors may lose
their entire investment. Even if we accomplish these objectives, we may not
generate positive cash flows or the profits we anticipate in the
future.
Although
our revenues have grown rapidly since our inception from the growing demand
for
our glucose products, we cannot assure you that we will maintain our
profitability or that we will not incur net losses in the future. We expect
that
our operating expenses will increase as we expand. Any significant failure
to
realize anticipated revenue growth could result in significant operating losses.
We will continue to encounter risks and difficulties frequently experienced
by
companies at a similar stage of development, including our potential failure
to:
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expand
our product offerings and maintain the high quality of our
products;
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manage
our expanding operations, including the integration of any future
acquisitions;
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obtain
sufficient working capital to support our expansion and to fill customers'
orders in time;
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maintain
adequate control of our expenses;
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implement
our product development, marketing, sales, and acquisition strategies
and
adapt and modify them as needed; and
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anticipate
and adapt to changing conditions in the dextrose monohydrate and
glucose
products markets in which we operate as well as the impact of any
changes
in government regulation, mergers and acquisitions involving our
competitors, technological developments and other significant competitive
and market dynamics.
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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 us and/or
have
more experience and money that we do. This additional experience and money
may
enable our competitors to produce more cost-effective products and market their
products with more success than we are able to, which would decrease our sales.
We expect that we will be required to continue to invest in product development
and productivity improvements to compete effectively in our markets. However,
we
cannot give assure you that we can successfully remain competitive. If our
competitors developed a more efficient product or undertook more aggressive
and
costly marketing campaigns than us this could have a material adverse effect
on
our business, results of operations or financial condition.
A
slowdown in the PRC economy may adversely affect our
operations.
As
all of
our operations are conducted in the PRC and most of all of our revenues are
generated from sales in the PRC, a slowdown or other adverse developments in
the
PRC economy could materially and adversely affect our customers, demand for
our
products and our business. Although the PRC economy has grown significantly
in
recent years, we cannot assure you that such growth will continue. While we
believe the demand for our products is not dependent on the health of the
economy, we do not know how sensitive we are to a slowdown in economic growth
or
other adverse changes in the PRC economy. A slowdown in overall economic growth,
an economic downturn or recession or other adverse economic developments in
the
PRC may materially reduce the demand for our products and materially and
adversely affect our business.
Our
major
competitors may be better able than us to successfully endure downturns in
our
sector. In periods of reduced demand for our products, we can either choose
to
maintain market share by reducing our selling prices to meet competition or
maintain selling prices, which would likely sacrifice market share. Sales and
overall profitability would be reduced under either scenario. In addition,
we
cannot assure you that additional competitors will not enter our existing
markets, or that we will be able to compete successfully against existing or
new
competition.
Inflation
in the PRC could negatively affect our profitability and
growth.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the PRC economy. Repeated rises in interest rates by the central bank would
likely slow economic activity in the PRC which could, in turn, materially
increase our costs and also reduce demand for our products.
A
widespread health problem in the PRC could negatively affect our
operations
A
renewed
outbreak of SARS or another widespread public health problem in the PRC, such
as
bird flu, where a major portion of the 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, especially corn
prices, could have a material adverse effect on the manufacturing cost of
our products. We are subject to market conditions and although raw materials
are
generally available and we have not experienced any raw material shortage in
the
past, we cannot assure you that the necessary materials will continue to be
available to us at prices currently in effect or acceptable to us.
We
may
have limited options in the short-term for alternative supply if our suppliers
fail for any reason, including their business failure or financial difficulties,
to continue the supply of raw materials. Moreover, identifying and accessing
alternative sources may increase our costs.
Although
we are in the corn-producing region in the Shandong province, there is no
guarantee that we will not face a shortage of corn because of some natural
calamity or other reason.
We
had
also mitigated the risks of a shortage in cornstarch by managing our inhouse
cornstarch producing facility to implement a vertical integration
manufacturing program. This will not only lower production costs and improve
profit margins, it will also allow Weifang Shengtai to produce higher quality,
lower-cost cornstarch. We cannot guarantee these measures will be effective
in
eradicating all risks attendant to the supply of raw materials. In the event
our
cost of materials is increased, we may have to raise prices of our products,
making us less competitive price-wise.
We
may
not be able to adjust our product prices, especially in the short-term, to
recover the costs of any increases in raw materials. Our future profitability
may be adversely affected to the extent we are unable to pass on higher raw
material costs to our customers.
We
may be exposed to intellectual property infringement and other claims by third
parties, which, if successful, could cause us to pay significant damage awards
and incur other costs.
Our
success also depends in large part on our ability to use and develop our
technology and know-how without infringing the intellectual property rights
of
third parties. We believe that the technology we use is not protected by any
patent or intellectual property rights. As litigation becomes more common in
the
PRC in resolving commercial disputes, we face a higher risk of being the subject
of intellectual property infringement claims. The validity and scope of claims
relating to the manufacturing of pharmaceutical grade products and cornstarch
involve complex technical, legal and factual questions and analysis and,
therefore, may be highly uncertain. The defense and prosecution of intellectual
property suits, patent opposition proceedings and related legal and
administrative proceedings can be both costly and time consuming and may
significantly divert the efforts and resources of our technical and management
personnel. An adverse determination in any such litigation or proceedings to
which we may become a party could subject us to significant liability, including
damage awards, to third parties, require us to seek licenses from third parties,
to pay ongoing royalties, or to redesign our products or subject us to
injunctions preventing the manufacture and sale of our products. Protracted
litigation could also result in our customers or potential customers deferring
or limiting their purchase or use of our products until resolution of such
litigation. Further, we do not have adequate product liability insurance
coverage against defective products as our products are manufactured according
to fairly basic formulas. Any disputes so far have been resolved through
friendly negotiations. There is no guarantee that we will not be involved in
any
legal proceedings should such negotiations fail one day.
Potential
environmental liability could have a material adverse effect on our operations
and financial condition.
To
the
knowledge of management, neither the production nor the sale of our products
constitute activities, or generate materials in a material manner, that requires
our operation to comply with the PRC environmental laws. Although it has not
been alleged by PRC government officials that we have violated any current
environmental regulations, we cannot assure you that the PRC government will
not
amend the current PRC environmental protection laws and regulations. Our
business and operating results may be materially and adversely affected if
we
were to be held liable for violating existing environmental regulations or
if we
were to increase expenditures to comply with environmental regulations affecting
our operations.
We
rely on Mr. Qingtai Liu, our Chief Executive Officer and President, for the
management of our business, and the loss of his services may significantly
harm
our business and prospects.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Qingtai Liu, our Chief
Executive Officer and President for the direction of our business. The loss
of
the services of Mr. Liu, for any reason, may have a material adverse effect
on
our business and prospects. We cannot assure you that the services of Mr. Liu
will continue to be available to us, or that we will be able to find a suitable
replacement for Mr. Liu. We have not entered into an employment contract with
Mr. Liu. We do not have key man insurance on Mr. Qingtai Liu. If Mr. Liu dies
and we are unable to replace Mr. Liu for a prolonged period of time, we may
be
unable to carry out our long term business plan and our future prospect for
growth, and our business, may be harmed.
We
may not be able to hire and retain qualified personnel to support our growth
and
if we are unable to retain or hire such personnel in the future, our ability
to
improve our products and implement our business objectives could be adversely
affected.
Our
future success depends heavily upon the continuing services of the members
of
our senior management team, in particular our Chief Executive Officer and
President, Mr. Qingtai Liu. If one or more of our senior executives or other
key
personnel is/are unable or unwilling to continue in his/her/their present
positions, we may not be able to replace them easily or at all, and our business
may be disrupted and our financial condition and results of operations may
be
materially and adversely affected. Competition for senior management and
personnel is intense, the pool of qualified candidates is very limited, and
we
may not be able to retain the services of our senior executives or senior
personnel, or attract and retain high-quality senior executives or senior
personnel in the future. This failure could materially and adversely affect
our
future growth and financial condition.
We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be
adequate.
We
are
constantly striving to improve our internal accounting controls. With the
appointment of our new Chief Financial Officer, Mr. Yizhao Zhang, we hope to
develop an adequate internal accounting control to budget, forecast, manage
and
allocate our funds and account for them. There is no guarantee that such
improvements will be adequate or successful or that such improvements will
be
carried out on a timely basis. If we do not have adequate internal accounting
controls, we may not be able to appropriately budget, forecast and manage our
funds, we may also be unable to prepare accurate accounts on a timely basis
to
meet our continuing financial reporting obligations and we may not be able
to
satisfy our obligations under US securities laws.
Standards
for compliance with Section 404 of the Sarbanes-Oxley Act Of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting,
and
attestation of this assessment by our company's independent registered public
accountants. The SEC extended the compliance dates for non-accelerated filers,
as defined by the SEC. Accordingly, we believe that the annual assessment of
our
internal controls requirement will first apply to our annual report for the
2007
fiscal year and the attestation requirement of management's assessment by our
independent registered public accountants will first apply to our annual report
for the 2008 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to
provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.
We
have inadequate insurance coverage
We
do not
presently maintain product liability insurance, and our property and equipment
insurance does not cover the full value of our property and equipment, which
leaves us with exposure in the event of loss or damage to our properties or
claims filed against us.
We
currently do not carry any product liability or other similar insurance. We
cannot assure you that we would not face liability in the event of the failure
of any of our products. This is particularly true given our plan to
significantly expand our sales into international markets, like the United
States, where product liability claims are more prevalent.
Except
for property and automobile insurance, we do not have other insurance such
as
business liability or disruption insurance coverage for our operations in the
PRC.
We
do not
maintain a reserve fund for warranty or defective products claims. Our costs
could substantially increase if we experience a significant number of warranty
claims. We have not established any reserve funds for potential warranty claims
since historically we have experienced few warranty claims for our products
so
that the costs associated with our warranty claims have been low. If we
experience an increase in warranty claims or if our repair and replacement
costs
associated with warranty claims increase significantly, it would have a material
adverse effect on our financial condition and results of
operations.
Risks
related to an investment in our common stock
Our
Chief Executive Officer and President controls us through his position and
stock
ownership and his interests may differ from other
stockholders
Our
Chief
Executive Officer and President, Mr. Qingtai Liu, beneficially
owns
approximately 40.73%
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. Under
the terms of the share purchase agreement entered into on May 15, 2007 we are
required to register for public resale 6,550,960 shares (as well as 4,180,195
shares issuable on exercise of the attached warrants) and the availability
for
public resale of those shares may depress our stock price.
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 6,550,960 shares (as well as 4,180,195
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.
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.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from any sales of the shares offered for sale
and sold under this prospectus by the Selling Stockholders. We will receive
proceeds from the issuance of shares of our common stock on the exercise, if
any, of the 4,375,000 warrants originally issued to the Selling Stockholders
in
connection with our private placement completed on May 15, 2007. The warrants
expire on May 15, 2012 and are exercisable at $2.60 per share, as adjusted.
If
all of these outstanding warrants are exercised for cash, we would receive
aggregate net proceeds of approximately $11,375,000. The terms of the warrants
do not provide for cashless exercise.
We
intend to use the net proceeds from the exercise of warrants, if any, for
working capital and other general corporate purposes. We cannot assure you
that
any of the warrants will ever be exercised for cash, if at all.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This
report contains forward-looking statements. These statements relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or
“continue,” the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. Factors that may cause our results to differ include, but are not
limited to: changes in the scope or timing of our projects; slowdown in the
demand for pharmaceutical grade glucose and glucose and starch products
generally, which could reduce revenues and profit margins.
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we, nor any other person, assume
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this registration statement to conform such
statements to actual results or to changes in our
expectations.
The
following discussion should be read in conjunction with our audited consolidated
financial statements and the related notes and other financial information
appearing elsewhere in this registration statement and other reports and filings
made with the Securities and Exchange Commission. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation the disclosures made under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”—Risk
Factors.
Overview
We
are,
through our wholly-owned subsidiary, Shengtai Holding Inc. and its wholly-owned
subsidiary in the People’s Republic of China (“PRC”), Weifang Shengtai
Pharmaceutical Co., Ltd., a leading manufacturer and supplier of pharmaceutical
grade glucose in the PRC. We also manufacture glucose, cornstarch and other
glucose-related products for the Chinese market.
During
the six months ended December 31, 2007, we produced a total of approximately
34,633 metric tons of glucose, and our sales for pharmaceutical grade glucose
and other glucose products were $17.6 million, or approximately 40% of our
revenues. Because we ceased glucose production in our old facility in downtown
Changle at the beginning of second quarter, the amount of glucose produced
was
lower than the corresponding period last year.
Our
new
cornstarch production facility, which has a maximum capacity to produce 240,000
metric tons of cornstarch per year, was completed at the end of October
2007. This new facility is close to our existing glucose production plant
and new glucose production complex that is currently near completion of
construction.
During
the six months ended December 31, 2007, we produced a total of 88,914 metric
tons of cornstarch, of which 31,174 metric tons were used to satisfy our own
glucose production needs. Some excess cornstarch was then sold to outside
customers, resulting in approximately 33.5% of our total sales revenue. Although
cornstarch had a lower gross profit margin than glucose, we nevertheless
increased its production which generated necessary working capital and funds
for
construction of our new glucose complex. We believe that once we complete the
upgrade of our existing facilities and complete our new glucose production
complex in the first half of calendar 2008, we will utilize more cornstarch
internally for the production of pharmaceutical glucose and other higher
value-added products.
The
principal raw material for pharmaceutical glucose is cornstarch. By using the
products from our own cornstarch production facilities, we can ensure their
quality and consistency. Also, because cornstarch is produced inhouse, we are
able to eliminate shipping costs to transport the cornstarch to our glucose
production facility resulting in lower manufacturing costs.
Corn
is
the principal raw materials for our cornstarch. Since mid-2007 food prices
have
been climbing at double-digit annual inflation rates in China, principally
due
to the shortages of pork and grain. Recently Chinese regulators reiterated
publicly that they intended to control the development of industrial use of
corn, such as the conversion of corn into ethanol. We believe that Chinese
leaders are concerned that industrial demand for corn will raise corn prices
and
the government is determined to curb the use of corn for fuel.
At
the
same time, since December 11, 2007, Chinese regulators have been selling corn
reserves to the open market on a weekly basis for approximately $240 per metric
ton.
Management
believes that stable corn prices will help maintain the availability of our
raw
materials, and therefore, stabilize our gross profit margin. We consider these
government policies have had and will continue to have positive effects on
our
operations.
In
addition to our pharmaceutical glucose series of products and cornstarch,
we also produce significant amounts of other non-medicinal but glucose or
cornstarch related products such as syrup, starch, dextrin, corn embryo, fibers,
protein powders Avermectins, and sodium gluconate, which are used for food,
beverage and other industrial purposes. The sales revenues generated from these
products were approximately 5.9 times of those last year, and constituted
approximately 26.6% of our total sales revenues for the six months ended
December 31, 2007.
During
the six months ended December 31, 2007, we expanded our manufacturing of
Avermectins, which were a veterinary medicine derived from glucose. We have
greatly improved our efficiency in Avermectins production over the past year.
Monthly capacity has increased from 700-800 kilograms to approximately 1000
kilograms. At the same time, we have increased yield coefficients from 90%
to
93%. As a result, the unit cost has been reduced approximately 13.3%. We believe
that Avermectins production will eventually become a substantial product line
for us due to its high market demand and considerable gross profit margin.
However, we currently do not generate material profits from this product due
to
the small amounts we produce, which are not yet sufficient to cover the
associated overhead costs. In order to achieve economies of scale and
profitability, we believe we will need to produce approximately 100 metric
tons
per year.
At
the
end of June 2007, we set up a new product line to manufacture sodium gluconate.
This non-corrosive, non-toxic and highly pure gluconate is gaining popularity
as
a chelating agent in the PRC and is widely used in pharmaceutical, construction
and chemical industries. Sodium gluconate is widely used as a retarder of cement
in the construction industry. It efficiently prevents commercial cement from
concreting and agglomerating during transportation. It is also used as a surface
cleaning agent of steel, a professional cleaning agent of glass bottles, and
an
antiscale and corrosion inhibitor. Accordingly, we are targeting construction
companies as our end customers since real estate construction is a booming
sector in the PRC economy.
Because
of its seasonality, we temporarily suspended its production in November 2007
but
expect to continue in late February 2008. Because we have only a short
production history with this product, we cannot predict future profitability.
However, during our production, gross profit margins were approximately
30%.
Management
strongly believes that through manufacturing innovative products to meet market
demand, we would be able to command better profit margins, diversify our product
lines and minimize our operating risks.
We
believe that better living standards may lead to higher consumption of our
products in the PRC. The robust and continuing economic growth, the rising
purchasing power of domestic market, as well as the public awareness of quality
health care products, are all drivers in the demand for our products. We also
believe that the strong growth in the PRC pharmaceutical industry can increase
the selling prices of our major products, and enhance our revenues and increase
our gross profit margins.
We
believe that production capacity and product quality are key factors in
entrenching our market leadership position and to accomplishing our long
term competitiveness. As a result, we have been placing emphasis on (i) product
quality control, (ii) enhancement of operating efficiency and employee
competence, (iii) expansion of geographical coverage and diversification of
customer base, and (iv) new product development.
Our
rate
of quality output (output conforming to pharmaceutical-grade glucose product
specifications) is maintained at 100%. We have a three-tier quality control
system and a well equipped quality inspection center to ensure timely detection
and then reprocessing of non-conforming products.
Recently
some PRC national and local authorities carefully inspected our production
lines
and workshops, and then certified both the quality of our equipments and the
safety of our production. Now all our production facilities have been fully
certified GMP (Good Manufacturing Practice for Drugs), ISO9001 and HACCP. The
State Food and Drug Administration certified our production facilities again
and
extended the production permit to October 2010. Recently CCIC Conformity
Assessment Services Co. renewed our HACCP certificate. HACCP, or Hazard Analysis
and Critical Control Points, is a systematic preventive approach to food and
pharmaceutical safety which aims at identifying and eliminating or reducing
the
critical control points where risks might arise, rather than merely inspecting
the finished products.
At
the
same time, we have been seeking to get our products recognized by international
authorities. Most of our products are also certified HALAL, KOSHER and IP GMO,
which are recognized globally. We believe that helps our future expansion in
oversea markets.
Our
production lines are vertically integrated. Our production facilities are all
inter-connected by an enclosed pipeline system to enhance overall production
efficiency, minimize waste of water and raw materials, and avoid production
contamination. We constantly develop new production technology to recycle our
waste water and byproducts. At the same time, we are improving overall
production efficiency by analyzing and ameliorating inefficient production
processes.
In
December 2006, the Changle local government negotiated with us to surrender
the
land use rights for our old factory in the downtown Changle for use in municipal
construction. The land we occupied was 27,396 square meters. We purchased a
bigger parcel of land in Changle Economic and Technology Development Zone with
85,880 square meters as described below.
After
acquiring the land, we began to develop it and build a new glucose production
complex with an anticipated production capacity of 120,000 tons per year. The
new facility will be used to produce pharmaceutical grade glucose and other
value-added glucose products. We plan to equip this complex with
state-of-the-art machinery and technology, and employ strict quality control
standards over it. We have already ordered the machinery and equipment for
the
glucose production complex and are training our employees to run it.
We
commenced construction in early July 2007 and anticipate that construction
will
be completed in the first half of calendar year 2008.
We
continue to strengthen our domestic sales network, which presently covers almost
all provinces of mainland China except the Tibet Autonomous Region. We have
established four representative offices in Chengdu, Guangzhou, Hangzhou and
Nanchang to strengthen our domestic sales network. We believe that these offices
help us to better interact with our customers, reinforce our sales force and
improve our corporate image. Before the new glucose complex is put into use
next
year, the domestic market remains our focus and major customer
base.
At
the
same time, we had a modest increase of global sales during the six months ended
December 31, 2007. We have been successful in exporting more dextrose anhydrate
and pharmaceutical grade oral glucose during the reporting period. Currently
we
export to customers in over sixty countries. Our international sales comprised
approximately 10.7% of our total sales revenues during the six months ended
December 31, 2007, slightly lower than the percentage of the corresponding
period last year, although the volume and dollar amount both
increased.
We
are
however cautious about our expanding international sales. China has been
imposing more and more policies to discourage exports due to China’s trading
surplus, especially those related to food and natural resources processing.
Our
international marketing team would carefully analyze our profitability by
considering the effects of the gradual appreciation of
Renminbi
against
the U.S. dollar and production costs before committing to such transactions.
We
constantly seek to broaden and diversify our customer base. We believe that
a
broader customer base will mitigate our reliance on certain customers. We also
believe a broader market for our products can increase demand for our products,
reduce our vulnerability to market changes, and provide additional areas of
growth in the future. For the six months ended December 31, 2007, Weifang Xingda
Feed Co. Ltd., our largest customer, accounted for 5.71% of our total sales
revenues and Double Crane Pharmaceutical Co. Ltd, our largest pharmaceutical
glucose customer, accounted for 1.33% of our total sales revenues. Our top
ten
customers accounted for only 32.0% for our total sales for the six months ended
December 31, 2007, as compared to 28.0% for the same period last
year.
Management
is not aware of any adverse trends that are likely to materially affect our
market and financial position. We will seek to continue to identify and pursue
innovative products and technology to our increase market share and optimize
our
cost structure. Although we can offer no assurance, we anticipate our current
sales growth will continue for the remainder of this fiscal year. Our ability
to
meet increased customer demand and stay profitable will however still depend
on
factors such as our production capacity and working capital.
Results
of Operations
Three
Months Ended December 31, 2007 Compared with Three Months Ended December 31,
2006
The
following table shows our operating results for the three months ended December
31, 2006 and 2007
.
|
|
Three
months
ended
December
31, 2007
|
|
Three
months
ended
December
31, 2006
|
|
Sales
Revenue
|
|
|
24,954,288
|
|
|
12,310,489
|
|
Costs
of Goods Sold
|
|
|
19,086,274
|
|
|
9,237,442
|
|
Gross
Profit
|
|
|
5,868,014
|
|
|
3,073,047
|
|
Sales,
General and Administrative Expenses
|
|
|
1,814,376
|
|
|
958,077
|
|
Operating
Income
|
|
|
4,053,638
|
|
|
2,114,970
|
|
Other
Net Income (Expense)
|
|
|
(442,730
|
)
|
|
(282,276
|
)
|
Income
before Income Taxes
|
|
|
3,610,908
|
|
|
1,832,694
|
|
Provision
for Income Taxes
|
|
|
481,323
|
|
|
243,723
|
|
Net
income
|
|
|
3,129,585
|
|
|
1,588,971
|
|
Sales
revenue for the three months ended December 31, 2007 was $24,954,288, an
increase of $12,643,799, or 102.7% compared with the corresponding period in
2006. The increased sales revenues were principally due to our cornstarch
production, higher product prices, and the diversification of product lines
and
the expansion of sales of higher-value products.
Costs
of
goods sold for the three months ended December 31, 2007 was $19,086,274, an
increase of $9,848,832, or 106.6% compared with the corresponding period in
2006. The increase in cost of goods sold primarily resulted from the increase
in
sales of our products.
Gross
profit for the three months ended December 31, 2007 was $5,868,014, an increase
of $2,794,967, or 91% compared with the corresponding period in 2006. The
increase in gross profit was principally attributable to the economies of scale
resulting from the expansion of our production output and enhanced operating
efficiencies. At the same time, we were able to pass on raw material cost
increases to our customers.
Gross
profit margin for the three months ended December 31, 2007 was 23.5%, a decrease
from 25.0% for the same period in 2006. This one and a half percentage point
decrease of overall gross profit margin was principally due to our increased
sales of cornstarch, a product with lower profit margins.
Selling,
General and Administrative expenses for the three months ended December 31,
2007
were $1,814,376, an increase of $856,299, or 89.4% compared with the
corresponding period in 2006. The increase in our Selling, General and
Administrative expenses was the result of the expansion of our production output
and domestic sales network. Larger quantity of cornstarch also called for higher
shipping costs.
Net
income for the three months ended December 31, 2007 was $3,129,585, an increase
of $1,540,614, or 97% compared with the corresponding period in 2006. Generally,
the increase in net income was due to the increase in our product prices, sales
volume and the introduction of new products.
Six
Months Ended December 31, 2007 Compared with Six Months Ended December 31,
2006
The
following table shows our operating results for the six months ended December
31, 2006 and 2007
.
|
|
Six months
ended
December
31, 2007
|
|
Six months
ended
December
31, 2006
|
|
Sales
Revenue
|
|
|
44,327,357
|
|
|
22,909,810
|
|
Costs
of Goods Sold
|
|
|
33,865,306
|
|
|
17,397,319
|
|
Gross
Profit
|
|
|
10,462,051
|
|
|
5,512,491
|
|
Sales,
General and Administrative Expenses
|
|
|
3,510,931
|
|
|
1,929,945
|
|
Operating
Income
|
|
|
6,951,120
|
|
|
3,582,546
|
|
Other
Net Income (Expense)
|
|
|
(781,856
|
)
|
|
(208,406
|
)
|
Income
before Income Taxes
|
|
|
6,169,264
|
|
|
3,374,140
|
|
Provision
for Income Taxes
|
|
|
787,168
|
|
|
301,138
|
|
Net
income
|
|
|
5,382,096
|
|
|
3,073,002
|
|
Sales
revenue for the six months ended December 31, 2007 was $44,327,357, an increase
of $21,417,547, or 93.5% compared with the corresponding period in 2006.
Production
from our new cornstarch facility was the principal driver of our sales
performance. Sales of the excess cornstarch to outside customers constituted
33.5% of our total sales for these six months. Higher product prices of our
glucose products were also a driver of higher revenues. Unit prices for most
of
our products increased an average of 11% from those in the same period last
year. Our efforts in diversifying product lines, as well as in expanding
the
sales of higher-value products, were also an important factor. Revenues from
products other than glucose and cornstarch amounted $11.7 million, or 5.9
times
of the number for the corresponding period last year.
Costs
of
goods sold for the six months ended December 31, 2007 was $33,865,306, an
increase of $16,467,987, or 94.7% compared with the corresponding period in
2006. The increase in cost of goods sold primarily resulted from the increase
in
sales of our products.
Gross
profit for the six months ended December 31, 2007 was $10,462,051, an increase
of $4,949,560, or 89.8% compared with the corresponding period in 2006. The
increase in gross profit was primarily attributable to the economies of scale
resulting from the expansion of our production output and enhanced operating
efficiency. Although product cost increased as a result of commodity price
increases and other raw material price increases, the selling price was higher
than the price increase of raw materials, thus making our gross profit higher.
Gross
profit margin for the six months ended December 31, 2007 was 23.6%, a slight
decrease from 24.1% for the same period in 2006. Sales of excess cornstarch
to
outside customers resulted in lower profit margins, because the gross profit
margin for cornstarch is much lower than the overall profit margins. We
anticipate that our gross profit margin will gradually improve as we increase
our glucose processing capacity and achieve greater economies of scale in the
production of our new products in the coming months.
Selling,
General and Administrative expenses for the six months ended December 31, 2007
was $3,510,931, an increase of $1,580,986, or 81.9% compared with the
corresponding period in 2006. The increase in our Selling, General and
Administrative expenses was the result of the expansion of our production output
and domestic sales network. We have also incurred additional administrative
expenses, such as legal fees, audit fees, and investor relation expenses as
a
reporting company. Higher worker insurance requirements and environmental
expenditures were also the causes of higher general and administrative expenses.
Net
income for the six months ended December 31, 2007 was $5,382,096, an increase
of
$2,309,094, or 75.1% compared with the corresponding period in 2006. Generally,
the increase of net income was due to the increase in our operating efficiency,
the increase in product prices and sales volume, as well as the introduction
of
new products.
Liquidity
and Capital Resources
Operating
Activities
Six
Months Ended December 31, 2007 and 2006
Net
cash
provided by operating activities for the six months ended December 31, 2007
was
$9,628,193, an increase of $7,180,330 from $2,447,863 provided in operating
activities for the same period in 2006. As our existing operations have matured,
they have been able to generate additional cash. The increase in net cash
provided by operations was principally derived from the collection of
receivables and advances from customers, as well as from other receivables.
Investing
Activities
Six
Months Ended December 31, 2007 and 2006
Net
cash
used in investing activities for the six months ended December 31, 2007 was
$10,739,919, compared to $9,600,712 used for the same period in 2006. Most
of
the cash had been spent on the advances for the purchase of machinery and
equipment for the new glucose manufacturing complex, as well as the associated
construction.
Our
preliminary budget for constructing our new glucose complex was approximately
$12 million. As of December 31, 2007, we spent approximately $15.9 million
on
construction and for the purchase of the machinery and equipment, taking into
account the accelerated appreciation of the
Renminbi
against
the US dollar and the increase in various costs due to the inflation from a
robust PRC economy. After its completion, we anticipate the necessary working
capital will be at least $6 million, based on the projected sales and ordinary
business cycles. We anticipate that we will seek outside funding from banks
or
the equity markets in order to fund such capital requirements. There can be
no
assurance, however, that the necessary funds will be available to us, or, if
available, that they will be available on acceptable terms.
Financing
Activities
Significant
Events
On
May
15, 2007, we completed, at a price of $2 per share, a private placement of
8,750,000 shares and 4,375,000 attached five year warrants to purchase our
common stock at an exercise price of $2.60 per share, as adjusted. We received
net proceeds of $15,256,428 from that offering.
Six
Months Ended December 31, 2007 and 2006
Net
cash
used in financing activities for the six months ended December 31, 2007 was
$4,358,725, compared to $6,943,744 provided for the same period in fiscal 2006.
We used part of the proceeds from our equity financing to repay our outstanding
debt, both long term notes and short term debts, focusing on those with high
interest rates or with less favorable terms. By lowering our debt to equity
ratio, we believe we successfully enhanced our financial standing.
In
addition to building the new glucose manufacturing complex, as well as the
acquisition of new machinery and equipment for our new plant, we plan to upgrade
our existing glucose production facility by replacing our old machinery to
produce more “complex” glucose products such as anhydrous glucose transfusion,
monohydrate glucose transfusion and oral glucose.
After
the
construction and the upgrade, we anticipate that at least 70% (up from current
40%) of the cornstarch produced by the new cornstarch production plant will
be
used by us as raw material for the production of our glucose products. This
upgrade will not only allow for increased production of higher grade glucose,
but also facilitate the extension of our dextrose series of products. We
anticipate that this will result in higher profit margins and greater
revenues.
Loans
Before
our equity financing, our PRC operating subsidiary, Weifang Shengtai financed
its operations and capital expenditure requirements primarily through bank
loans
and operating income. Weifang Shengtai had a total of $15,697,950 and
$18,870,250 short term bank loans outstanding as of December 31, and June 30,
2007, respectively. The loans were secured by Weifang Shengtai’s properties. The
terms of all these short term loans were for one year. Weifang Shengtai has
never defaulted on any of these loans.
Weifang
Shengtai also had non-current payables, which are classified as long term
liabilities, of $3,183,858 and $3,661,472 as of December 31, and June 30, 2007,
respectively.
We
have
focused on lowering our liabilities, short term or long term loans, in order
to
improve our financial position
Guarantees
We
have
guaranteed certain borrowings of other unrelated third parties including short
term bank loans. The total guaranteed amounts were $9,734,100 and $8,560,650
as
of December 31, and June 30, 2007, respectively.
Future
cash commitments
We
anticipate the need for $6 million as working capital to run our new glucose
complex. The exact amount would be determined based on both the market demand
of
our products and the time needed for this complex to run at full capacity.
As
of
December 31, 2007, we expended approximately $15.9 million for the glucose
manufacturing complex, including the cost for acquiring the land, construction
of plant, and the purchase of new machinery and equipment.
We
also
estimate that the upgrade of our existing glucose production facility will
be
completed in the first half of calendar 2008. We anticipate the necessary
capital to be between $2 million and $3 million.
A
portion
of our capital requirements will be funded from the cash generated by operations
and the proceeds of our May 2007 private placement, and the remaining portion
can be financed, as set forth above.
Critical
Accounting Policies and Estimates
We
have
disclosed in the notes to our financial statements those accounting policies
that we consider to be significant in determining our results of operations
and
our financial position which are incorporating by reference herein. We believe
that the following reflect the more critical accounting policies that currently
affect our financial condition and results of operations.
Revenue
recognition
We
utilize the accrual method of accounting. Revenue is recognized when the
products are delivered, title has passed, and collectibility is reasonably
assured. Sales revenue represents the invoiced value of goods, net of
value-added tax (VAT).
Use
of estimates
In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates
of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets and the valuation
of
inventories. Actual results could differ from those estimates.
Accounts
Receivables
Accounts
receivables are stated at net realizable value. Any allowance for doubtful
accounts is established based on the management’s assessment of the
recoverability of accounts and other receivables. Management reviews our
accounts receivable on a regular basis to determine if the bad debt allowance
is
adequate. An estimate for doubtful accounts is made when collection of the
full
amount is no longer probable. Known bad debts are written off as incurred.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using straight-line method with a 3% residual value over the estimated
useful lives of the assets.
Foreign
currency translation
Our
functional currency is
Renminbi
(or
“RMB”). Foreign currency transactions are translated at the applicable rates of
exchange in effect at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated
at
the applicable rates of exchange in effect at that date. Revenues and expenses
are translated at the average exchange rates in effect during the reporting
period.
Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated Other
Comprehensive Income”. Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.
Fiscal
Year ended 2007
Result
of Operations
Fiscal
Year Ended June 30, 2007 Compared with Year Ended June 30,
2006
The
following table shows our operating results for the fiscal years ended June
30,
2006 and 2007
.
|
|
Fiscal
Year ended
June
30, 2006
|
|
Fiscal
Year ended
June
30, 2007
|
|
Sales
Revenue
|
|
|
36,029,179
|
|
|
51,706,215
|
|
Costs
of Goods Sold
|
|
|
27,568,092
|
|
|
39,527,662
|
|
Gross
Profit
|
|
|
8,461,087
|
|
|
12,178,553
|
|
Sales,
General and Administrative Expenses
|
|
|
3,831,778
|
|
|
4,674,679
|
|
Operating
Income
|
|
|
4,629,309
|
|
|
7,503,874
|
|
Other
Net Income (Expense)
|
|
|
(418,398
|
)
|
|
524,088
|
|
Income
before Income Taxes
|
|
|
4,210,911
|
|
|
8,027,962
|
|
Provision
for Income Taxes
|
|
|
—
|
|
|
878,836
|
|
Net
income
|
|
|
4,210,911
|
|
|
7,149,126
|
|
Sales
revenue for the fiscal year ended June 30, 2007 was $51,706,215, an increase
of
$15,677,036, or 43.5% compared with the corresponding period in 2006. This
increase was mostly the result of the increase in sales of our glucose products
and higher product prices. In addition, our new cornstarch plant began
production in 2007 resulting in maximizing the production of our glucose
manufacturing facility and the sale of additional excess cornstarch to outside
customers. Accordingly, the total sales of both glucose and cornstarch were
both
increased.
Costs
of
goods sold for the year ended June 30, 2007 was $39,527,662, an increase of
$11,959,570, or 43.4% compared with the corresponding period in 2006. The
increase in cost of goods sold is
in
tandem
with the
increase in sales of our products.
Gross
profit for the year ended June 30, 2007 was $12,178,553, an increase of
$3,717,466, or 43.9% compared with the corresponding period in 2006. The reason
for the increase in gross profit was mostly due to the economies of scale
resulting from the expansion of our production output and enhanced operating
efficiency. Although product cost increased as a result of price increases
of
corn and other raw materials, the selling price was higher than the price
increase of corn, thus making our gross profit higher.
However,
there is not significant increase of gross profit margin from fiscal 2006 to
2007. Gross profit margin for the year ended June 30, 2007 was 23.6%, while
it
was 23.5% for the same period in 2006. We produced some new products with high
profit margins, but at the same time the sales of lower profit margin products
to outside customers, such as cornstarch, averaged down our overall gross profit
margin.
Selling,
General and Administrative expenses for the year ended June 30, 2007 was
$4,674,679, an increase of $842,901, or 22% compared with the corresponding
period in 2006. The increase in our Selling, General and Administrative expenses
was the result of the expansion of our production output, especially the
expansion of domestic sales network. The higher worker insurance requirements
and environment related expenditures are also the causes of higher general
and
administrative expenses. However, the percentage of increase in our expenses
is
much lower than the percentage increase in our gross profit because of greater
efficiencies of scale from a larger production output and our strict cost
control.
Net
income for the year ended June 30, 2007 was $7,149,126, an increase of
$2,938,215, or 69.8% compared with the corresponding period in 2006. The
increase of net income was due to our increase in production output, sales
volume and gross profit margin, as well as the gain derived from surrendering
our land use rights in the piece of property in downtown Changle to the Changle
local government.
Fiscal
Year Ended June 30, 2006 and Fiscal Year Ended June 30,
2005
The
following table shows our operating results for the fiscal years ended June
30,
2005 and 2006.
|
|
Fiscal
Year ended
June
30, 2005
|
|
Fiscal
Year ended
June
30, 2006
|
|
Sales
Revenue
|
|
|
24,860,399
|
|
|
36,029,179
|
|
Costs
of Goods Sold
|
|
|
19,557,743
|
|
|
27,568,092
|
|
Gross
Profit
|
|
|
5,302,656
|
|
|
8,461,087
|
|
Sales,
General and Administrative Expenses
|
|
|
3,242,330
|
|
|
3,831,778
|
|
Operating
Income
|
|
|
2,060,326
|
|
|
4,629,309
|
|
Other
Net Expense
|
|
|
(445,169
|
)
|
|
(418,398
|
)
|
Income
before Income Taxes
|
|
|
1,615,157
|
|
|
4,210,911
|
|
Provision
for Income Taxes
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
|
1,615,157
|
|
|
4,210,911
|
|
Sales
revenue for fiscal year ended June 30, 2006 was $36,029,179, an increase of
$11,168,780 which represented a 44.9% increase compared with the same period
in
2005. The reason for the increase was a 27.4% increase in sales volume and
an
increase in the selling prices of our products. For example, the domestic
selling price of our oral dextrose product increased by an average 14.7%, while
its export selling price increased 13.66%.
The
selling price of our products is determined by market demand. If the demand
is
higher than the supply, we will increase our prices. Accordingly, prices
fluctuate throughout the year.
Costs
of
goods sold for the fiscal year ended June 30, 2006 was $27,568,092, an increase
of $8,010,349 or 41.0% from $19,557,743 for the same period in 2005. The
increase on the cost of goods was
in
tandem
with the
increase in sales volume.
Gross
profit for the fiscal year ended June 30, 2006 was $8,461,087, an increase
of
$3,158,431 or 59.6% from $5,302,656 for the same period in 2005. The gross
profit margin for fiscal 2006 was 23.5%, while it was 21.3% for fiscal 2005.
The
reason for the increase in gross profit margin was that the unit cost decreased
due to the economies of scale resulting from the expansion of our production
output. Although the product cost increased as a result of the price increase
of
corn, the selling price was higher than the price increase of corn, thus making
our gross profit margin higher.
Our
Selling, General and Administrative expenses for the fiscal year ended June
30,
2006 were $3,831,778, an increase of $589,448 or 18.2% from $3,242,330 for
the
same period in 2005. This was the result of the increase in our production
output. However, the percentage increase of our Selling, General and
Administrative expenses of 18.2% is lower than the percentage increase in our
sales.
Other
expenses for fiscal 2006 and 2005 were $214,641 and $1,683 respectively. The
increase was directly related to the increase in our production
output.
Net
income for fiscal 2006 was $4,210,911, an increase of $2,595,754 compared with
fiscal 2005. The reason for this increase was the increase in sales volume
and
gross profit.
Liquidity
and Capital Resources
Operating
Activities
Fiscal
Year Ended June 30, 2007 compared to Fiscal Year Ended June 30,
2006
Net
cash
provided by operating activities for fiscal 2007 was $5,052,502, compared to
$6,528,302 provided by operating activities for fiscal 2006. The decrease in
net
cash provided by operations was mostly due to the facts that we extended credit
sales to some long-term customers, and we stored more inventories because we
needed additional raw materials (corn) for cornstarch production.
Investing
Activities
Fiscal
Year Ended June 30, 2007 compared to Fiscal Year Ended June 30,
2006
Net
cash
used in investing activities for fiscal 2007 was $21,151,410, compared to
$7,512,613 used in investing activities for fiscal 2006. Most of the cash has
been spent on the construction of the new cornstarch manufacturing facility
and
the new glucose manufacturing complex, as well as some advances on the purchase
of plant equipment. Before these facilities are completed and put into operation
next year, we expect to incur additional capital expenditure in the coming
months.
Our
preliminary budget for the new glucose complex would be approximately $12
million, without taking into account any appreciation of the RMB against the
US
dollar and increased construction costs due to the recent inflation from a
robust economy.
Financing
Activities
Recent
Events
On
May
15, 2007, we completed, at a price of $2 per share, a private placement of
8,750,000 shares and 4,375,000 attached five year warrants to purchase common
stock at an exercise price of $2.60 per share, as adjusted. We received net
proceeds of $15,256,428 from that offering.
Fiscal
Year Ended June 30, 2007 Compared to Fiscal year Ended June 30,
2006
Net
cash
provided by financing activities for fiscal 2007 was $22,177,695 compared to
$633,177 for the same period in fiscal 2006. The increase was mostly due to
the
effect of the short term borrowings from local banks and the recent equity
financing. The proceeds were mainly used for capital expenditure and as working
capital.
Besides
our capital expenditure in building the new glucose manufacturing complex,
as
well as the acquisition of new plant and equipment for the newly built plant,
we
plan to upgrade our existing glucose production facility by replacing our old
machinery to produce more “complex” glucose products such as anhydrous glucose
transfusion, monohydrate glucose transfusion and oral glucose.
After
this upgrade, we expect that at least 70% (up from 50%) of the cornstarch
produced by the new cornstarch production plant will be used by us as raw
material for the production of our glucose products. This upgrade will not
only
allow for increased production of higher grade glucose, but also facilitate
the
extension of our dextrose series of products. We anticipate that this will
result in higher profit margins and bigger revenues.
In
July 2007, we began construction of employee dormitory. Construction is expected
to be completed in June 2008. Total amount expected to be spent on the
construction is approximately $800,000 to $900,000.
Loans
Before
the recent financing, our PRC operating subsidiary, Weifang Shengtai financed
its operations and capital expenditure requirements primarily through bank
loans
and operating income. Weifang Shengtai had a total of $18,870, 250, $8,576,200
and $7,683,500 short term bank loans outstanding as of June 30, 2007, 2006
and
2005, respectively. The loans were secured by Weifang Shengtai’s properties. The
terms of all these short term loans were for one year. Weifang Shengtai has
never defaulted on any of these loans.
Weifang
Shengtai also has long term loans from local banks. The outstanding long-term
loans, or the non-current portion of payables, which can be classified as long
term liabilities, were $3,661,472, $1,001,600 and $847,000 as of June 30, 2007,
2006 and 2005, respectively.
The
significant increase of bank loans during the reporting period, for both short
term and long term loans, is mostly due to the massive capital needs in
construction and increased working capital needed for increased
production.
Guarantees
We
have
guaranteed certain borrowings of other unrelated third parties including short
term bank loans, lines of credit and bank notes. The total guaranteed amounts
were $8,560,650 and $14,270,880 as of June 30, 2007 and 2006.
Future
cash commitments
We
anticipate spending about $15 million in the upgrading of our existing glucose
manufacturing facility and the construction of a new glucose production complex
and a new employee dormitory, of which a portion of it will be financed
through bank loans and a portion would be funded from the proceeds of our May
2007 private placement. We also estimate the need for $6 million to $8 million
to run these facilities. The exact amount will be determined based on both
the
market demand of our products and the time needed for these facilities to run
at
full capacity. We may carefully review our financial conditions and consider
financing either with the cash internally generated, bank loans, or with
additional equity.
Critical
Accounting Policies and Estimates
We
have
disclosed in the notes to our financial statements those accounting policies
that we consider to be significant in determining our results of operations
and
our financial position which are incorporating by reference herein. We believe
that the following reflect the more critical accounting policies that currently
affect our financial condition and results of operations.
Revenue
recognition
We
utilize the accrual method of accounting. Revenue is recognized when the
products are delivered, title has passed, and collectibility is reasonably
assured. Sales revenue represents the invoiced value of goods, net of
value-added tax (VAT).
Use
of estimates
In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates
of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets and the valuation
of
inventories. Actual results could differ from those estimates.
Accounts
Receivables
Accounts
receivables are stated at net realizable value. Any allowance for doubtful
accounts is established based on the management’s assessment of the
recoverability of accounts and other receivables. Management reviews our
accounts receivable on a regular basis to determine if the bad debt allowance
is
adequate. An estimate for doubtful accounts is made when collection of the
full
amount is no longer probable. Known bad debts are written off as
incurred.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using straight-line method with a 3% residual value over the estimated
useful lives of the assets.
Foreign
currency translation
Our
functional currency is Renminbi (“RMB”). Foreign currency transactions are
translated at the applicable rates of exchange in effect at the transaction
dates. Monetary assets and liabilities denominated in foreign currencies at
the
balance sheet date are translated at the applicable rates of exchange in effect
at that date. Revenues and expenses are translated at the average exchange
rates
in effect during the reporting period.
Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated Other
Comprehensive Income”. Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
Credit
Risk
.
We are
exposed to credit risk from our cash at bank, fixed deposits and account
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Account
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the collectibility
of account receivables by assessing, among other factors, the customer’s
willingness or ability to pay, repayment history, general economic conditions
and our ongoing relationship with the customers.
Country
Risk.
Substantially all of our business, assets and operations are located and
conducted in the PRC. While the PRC’s economy has experienced significant growth
in the past twenty years, growth has been uneven, both geographically and among
various sectors of the economy. The PRC government has implemented various
measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall economy of the PRC, but may also
have
a negative effect on us. For example, our operating results and financial
condition may be adversely affected by government control over capital
investments or changes in regulations applicable to us. If there are any changes
in any policy by the PRC government and our business is negatively affected
as a
result, then our financial results, including our ability to generate revenues
and profits, will also be negatively affected.
Foreign
Currency Risk.
Substantially all of our operations are conducted in the PRC. Our sales and
purchases are conducted within the PRC in
Renminbi
.
Conversion of
Renminbi
into
foreign currencies is regulated by the People’s Bank of China through a unified
floating exchange rate system. Although the PRC government has stated its
intention to support the value of the
Renminbi
, there
can be no assurance that such exchange rate will not again become volatile
or
that the
Renminbi
will not
devalue significantly against the U.S. dollar. Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and income
derived from our operations in the PRC. In addition, the
Renminbi
is not
freely convertible into foreign currency and all foreign exchange transactions
must take place through authorized institutions
BUSINESS
Overview
We
are
through our indirect wholly-owned subsidiary, Weifang Shengtai, a PRC based
company, a manufacturer and supplier of glucose products in the PRC. Our
products include pharmaceutical grade glucose used for medical purposes, and
glucose and starch products for the food and beverage industry and for
industrial production.
Approximately ninety
percent (90%) of our sales revenues for the fiscal year ended June 30, 2007.
were attributable to sales made in the PRC.
Dextrose
(a form of glucose) is one of the most important carbohydrates and the chief
source of energy in the human body. As such dextrose monohydrate is used in
a
wide array of pharmaceutical products such as transfusions and intravenous
drips
for restorative and nutritional purposes. (Source: A survey by the China
Starch Industry Association. (Source: An extract from “China’s Starch, Modified
Starch and Crystallized Glucose Production Summary, 2006 edition”, published in
July 2007 by the China Starch Industry Association).
Approximately
sixty two percent (62%) of our sales revenues for the fiscal year ended June
30,
2007 were attributable to sales of pharmaceutical grade glucose.
In
addition to our pharmaceutical glucose series of products, we also produce
the
other medicinal product lines described below and glucose and starch products
such as industrial glucose, syrup, starch, avermectins, dextrin, maltose and
maltitol, which are used for food, beverage and industrial
production
.
We
believe that the global market for pharmaceutical grade glucose (dextrose)
is
approximately 3 billion bottles per year and growing (Source: China Medical
Glass Bottle website,
www.bbmt.com
, report
titled “The International Big Infusion Drugs Plastic Packing Market is Huge”
dated September 29, 2006).
In
the PRC alone, from 2002 to 2004, the annual demand for glucose has
increased from 250,000 tons to 800,000 tons per year, and the annual demand
for
glucose is expected to increase to 1.7 million tons per year by
2009 (Source: An extract from “Analysis on Present Situation and Prospect
of Chinese Starch Sugar Industry” published by
Starch and Sugar
, Volume
I of 2007).
Our
Products
We
manufacture two categories of products (i) pharmaceutical and medicinal grade
products and (ii) raw material for the food and beverage and processing
industries
Pharmaceutical
and medicinal grade products:
These
products accounted for 68% of our sales for the fiscal year ended June 30,
2007.
Set forth the below is a list of our major pharmaceutical and medical grade
products:
Dextrose
Monohydrate (DMH)
Dextrose
Monohydrate Transfusion (25kg/bag)
Dextrose
Monohydrate Oral in large bags (720kg/bag)
Dextrose
Monohydrate Oral in small bags (25kg/bag)
Dextrose
Anhydrous (25kg/bag)
Dextrose
Monohydrate Oral for export (25kg/bag)
Dextrose
Monohydrate transfusion for export (25kg/bag)
Dextrose
Anhydrous for export (25kg/bag)
Cornstarch,
Dextrin
Glucose
and starch products for the pharmaceutical and hospital markets
:
Multivitamin
glucose (500g/bag)
Glucose
base solution
Pharmaceutical
grade starch (25kg/bag)
Raw
Materials for the Food Beverage and Processing
Industries
We
produce raw materials for the food and beverage and processing
industries:
Industrial glucose (for domestic and export)
Syrup for export
Starch for export
Avermectins
Dextrin (for domestic and export)
Avermectins Ointment
Avermectins refinement
Maltose
Maltitol
Sodium
Glucomate
During
the reporting period, we expanded our manufacturing and supply of Avermectins,
which is a veterinary medicine derived from glucose. The market prospect for
it
has been encouraging.
New
Products
At
the
end of June 2007, we set up a new product line to manufacture sodium gluconate.
This non-corrosive, non-toxic and highly pure gluconate is gaining popularity
as
a chelating agent in the PRC and is widely used in pharmaceutical, construction
and chemistry industries.
The
initial sales of sodium gluconate have been encouraging. As a compound of
glucose and sodium hydroxide, sodium gluconate is a high quality crystalline
sodium salt of gluconic acid. It appears as white crystals that exhibit
excellent solubility. We dissolved sodium hydroxide in glucose solution, along
with certain catalysts. The solution is then heated. Separating the catalysts
by
steaming the solution, and then after a series of processes such as
inspissations, crystallization, centrifugation and dehydration, we eventually
get the end product - sodium gluconate.
Since
we
have only begun the production of sodium gluconate, we have insufficient
profitability records for the reporting period, but we anticipate its gross
profit margin to be between 25% and 30%, depending on our scale of production
scale and our production efficiency.
Currently
we are targeting the construction companies as our end customers since real
estate construction is a booming sector in the PRC economy.
Sales
of Products by Type and Geographic Locations
Approximately
ninety percent (90%)of our sales revenues for the fiscal year ended June 30,
2007 were attributable to domestic sales made in the PRC.
Set
forth
below is a breakdown of the principal products sold by us in different
geographic locations over the previous three fiscal years and the revenues
attributed to such sales.
Sales
by Product
|
|
FY
6/30/2005 (Revenue) ($)
|
|
%
of Total
|
|
FY
6/30/2006 Revenues ($)
|
|
%
of Total
|
|
FY
6/30/2007 Revenues ($)
|
|
%
of Total
|
|
Dextrose
Monohydrate (DMH)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
9,655,570
|
|
|
38.8
|
|
|
9,474,787
|
|
|
26.3
|
|
|
14,110,347
|
|
|
27.3
|
|
International
|
|
|
207,293
|
|
|
0.8
|
|
|
1,363,569
|
|
|
3.8
|
|
|
1,516,334
|
|
|
2.9
|
|
Dextrose
Anhydrate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
1,606,832
|
|
|
6.5
|
|
|
762,238
|
|
|
2.1
|
|
|
1,409,117
|
|
|
2.7
|
|
International
|
|
|
256,261
|
|
|
1.0
|
|
|
534,253
|
|
|
1.5
|
|
|
1,009,844
|
|
|
2.0
|
|
Pharmaceutical
Grade Oral Glucose
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
9,892,962
|
|
|
39.8
|
|
|
16,578,570
|
|
|
46.0
|
|
|
12,044,464
|
|
|
23.3
|
|
International
|
|
|
1,000,550
|
|
|
4.0
|
|
|
2,824,816
|
|
|
7.8
|
|
|
2,553,863
|
|
|
4.9
|
|
Industrial
Grade Oral Glucose
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
1,452,959
|
|
|
5.8
|
|
|
2,003,386
|
|
|
5.6
|
|
|
2,632,628
|
|
|
5.1
|
|
Corn
Starch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
265,223
|
|
|
1.1
|
|
|
946,436
|
|
|
2.6
|
|
|
8,645,865
|
|
|
16.7
|
|
International
|
|
|
2,359
|
|
|
0.0
|
|
|
1,933
|
|
|
0.0
|
|
|
8,436
|
|
|
0.0
|
|
Sales
and Marketing
Sales
are
carried out directly by our sales department and we are not dependent on
distributors or middlemen. As of June 30, 2007, 27 of a total 31 provinces
(or
province equivalent administrative district) in the mainland PRC have been
covered by our domestic sales network. We have established representative
offices in 7 provinces to fortify our domestic sales network. We believe that
these offices help us to better interact with our customers, reinforce our
sales
force and improve our corporate image. In the meantime, we export our products
to customers in over sixty countries, and we plan to increase our global sales
in the coming years.
Delivery
Methods
We
utilize the following delivery methods: ground transportation, shipment by
sea
and by rail. Products sold internationally are shipped by sea. Approximately
80%
of our products are delivered by ground transportation. We generally bear the
costs and risks of transportation unless a customer specifies a particular
mode
of delivery.
The
Glucose Production Process
Our
glucose is made from enzyme-converted cornstarch. The glucose that we produce
has the following characteristics: low heat, endotoxin in bacteria lower than
0.125Eu/ml, high purity, and a production standard of lower than
0.06Eu/ml.
The
steps
required to produce glucose from cornstarch are:
|
·
|
The
cornstarch is converted into an
emulsion;
|
|
·
|
Alpha-Amylase
Glucoamylase is added;
|
|
·
|
The
emulsion from the chemical reaction form the combination of the two
above
is cleaned and dried after filtering, discoloring, ion exchange,
inspissation, crystallization and separation;
and
|
|
·
|
The
cleaned and dried end-product of the above process is
glucose
|
Under
normal operating conditions, the finished product rate is 100%, with no rejects
and wasted products. In case of a power outage or equipment malfunction,
sub-standard output is detected by our quality control procedures, and is placed
back into the production process for re-processing.
Major
Suppliers
The
three
principal ingredients for glucose production are cornstarch, enzyme preparations
and active carbon. The major suppliers for these raw materials are as
follows:
Cornstarch
Shouguang
Shengtai Starch Company Ltd (“Shougang Shengtai”) was our main supplier of
cornstarch. Previously, Mr. Qingtai Liu, our Chief Executive Officer and
President
,
owned
40% of the stock of Shouguang Shengtai and managed Shougang Shengtai under
a management contract. Shouguang Shengtai supplied cornstarch to us based on
sales contracts, but there were no long-term supply agreements between Shouguang
Shengtai and us. This production facility had been used for the past five years
to ensure stable supplies of quality starch to us. We purchased approximately
45%, 77% and 81% of our total cornstarch with the amount of $7,652,465,
$15,963,415 and $13,794,612 for the years ended June 30, 2007, 2006 and
2005, respectively from Shouguang Shengtai. The sharp decline of purchase from
Shougang Shengtai in fiscal 2007 is because we have completed building a new
cornstarch production complex with annual production capacity of 300,000 tons
which supplies us with the cornstarch we need. We expect such third party
purchase to be minimal in the years ahead. See “New Cornstarch Manufacturing
Facility.” Shougang Shengtai has ceased its operations as of early calendar
2007.
Enzyme
Preparations
We
purchased a total of 369 tons of enzyme preparations from our sole supplier
for
the past three years, Novozymes (China) Biotechnology Co. Ltd. Although we
have
not purchased enzyme preparations from any other source, there are a number
of other suppliers from whom we can make purchases, if necessary.
Active
Carbon
We
believe that Fujian Sha County Qingshan Chemical Carbon Corporation is one
of
the major active carbon producers in the PRC. We purchased a total of 4,100
tons
of active carbon from them over the past three years. There are a number of
other suppliers of active carbon from whom we can make purchases, if
necessary.
We
are
not dependent on any one supplier of raw materials and machinery nor have
we ever experienced a shortage of supply of raw materials or
machinery.
New
Cornstarch Manufacturing Facility
We
completed most of the construction of a new cornstarch production complex with
annual production capacity of 300,000 tons. The new complex is close to our
existing glucose production plant. It started producing cornstarch in January
2007. When it reaches its full production capacity, we believe its production
capability will be in excess of 2.5 times the 120,000 ton per year production
capacity of Shougang Shengtai. The new cornstarch production facility was
commissioned at the end of 2006 and started production in January 2007.
Currently, the production capacity of the new cornstarch production plant is
240,000 tons per year.
The
new
cornstarch facility will allow us to supplement and eventually replace our
purchases from Shougang Shengtai, which had inadequate production to meet our
needs. In addition, Shougang Shengtai utilized older equipment which led to
unpredictable quality in the cornstarch it produced. It is approximately 60
kilometers from our facility and has resulted in additional shipping costs,
which then led to higher manufacturing costs.
Because
Mr. Qingtai Liu
was managing Shougang
Shengtai, our management was able to make a smooth transition to manufacturing
our own cornstarch during fiscal year ended 2007.
During
calendar 2007, approximately 50% of the new cornstarch production plant’s
output (i.e. 150,000 tons per year) will be used as raw materials
for glucose production, and the other 50% will be sold to customers in the
food and beverage, pharmaceutical and industrial industries.
Our new
cornstarch production complex consists of the following parts:
|
·
|
Cornstarch
production line
|
|
·
|
Warehouse
for finished product (cornstarch)
|
|
·
|
Logistical
and delivery coordination center
|
|
·
|
Environmentally
friendly waste water treatment
facilities
|
Our
new
cornstarch production has the following benefits:
|
·
|
Low-cost
and stable supply of high-quality raw materials for glucose
production
|
|
·
|
The
stable supply of cornstarch will enable our existing glucose production
plant to operate at full capacity
|
|
·
|
Reduced
transportation costs of raw
materials
|
|
·
|
Quality
assurance of cornstarch since we are producing our own
cornstarch
|
Glucose
Manufacturing Facility Upgrade
We
plan
to upgrade our existing glucose production facility by replacing our old
machinery to produce more complex glucose products such as anhydrous glucose
transfusion, monohydrate glucose transfusion and oral glucose. We also plan
to
add an additional production line such as the production line for sodium
gluconate.
After
this upgrade, we expect that at least 70% (up from 50%) of the cornstarch
produced by the new cornstarch production plant will be used by us as raw
materials for glucose production. This upgrade will also allow for increased
production of glucose.
Construction
of New Glucose Manufacturing Facility
We
have
begun construction on a new glucose manufacturing facility to boost our
production capacity. The facility is deigned to have a production capacity
of
120,000 tons. Our preliminary budget for the new glucose complex is
approximately $12 million, without taking account of any appreciation of the
Renminbi and increased construction costs due to the recent inflationary economy
in the PRC. A portion of the costs will be financed through bank loans and
the
remainder from the monies we had raised in our May 2007 private placement.
We
anticipate that construction will be completed by the first half of calendar
2008.
Quality
Control
Our
PRC
production facilities are fully certified by applicable PRC regulations for
cGMP, ISO9002 and HACCP international quality standards. The rate of quality
output (output conforming to pharmaceutical-grade glucose product
specifications) is maintained at 100% because non-conforming products can be
reprocessed.
A
three-tier quality control system (production team level, workshop level, and
management accountability for quality) ensures that all products are produced
in
a pollution-free, contamination-free and efficient production environment
following strict quality-oriented procedures:
|
·
|
A
team of workers on-duty is responsible for the smooth operation of
the
production process by adhering to proper procedures. The intermediate
output from each production step is sampled and checked to ensure
that the
final output is of specified quality
standards.
|
|
·
|
Equipment
is checked regularly and maintained to ensure proper operation. The
quality of the water used in the production process is regularly
checked
as well. The level of airborne particles and microbes in the production
sites is regularly checked to eliminate
contamination.
|
|
·
|
The
quality of all output is reviewed by the General Manager of the Quality
Control Department, and ultimately approved by the CEO. A full set
of
written quality control records is
maintained.
|
The
qualities of our manufactured glucose can be summarized as follows:
Properties
:
white
crystal, granular powder, odorless, sweet taste, easy soluble in water, slightly
soluble in alcohol
Specific
rotatory power
:
+52.0
degrees— +53.5degrees
Dry
loss
:
≤9.5%
Chloride:
<0.02%
Sulfate:
<0.02%
Alcohol-insoluble
matter:
≤5mg
Ferrous
salt:
<0.002%
Ignition
residue:
0.08%
Heavy
metal:
≤20ppm
Arsenide:
<2ppm
Sulfite
and soluble starch:
appear
yellow when added to an iodine test solution.
The
qualities of our Dextrose Monohydrate Transfusion (Liquid glucose) may be
summarized as follows:
Perceptual
index:
Appearance:
colorless without the impurity that can be seen by naked eye
Odor:
no
unusual odor
Taste:
Clear
sweet
Physical
and chemical index
Solid
substance:
more
than 84%
DE:
38-42
PH:
4.6
-6.0
Maltose
content:
8% -
20%
Transmittance
(426nm):
more
than 94
Coke
Temperature:
more
than or equal to 125
Ash:
no more
than 0.3%
Hygienic
index:
As:
not more
than 0.5mg/Kg
Pb:
not more
than 0.5mg/Kg
Bacterium
total:
not more
than 1,000/g
E.
coli:
not more
than 30/100g
Pathogen:
No
Market
Analysis
Industry
Overview and Trends
The pharmaceutical
transfusion was first put to use in 1832. Since then clinical transfusion
has grown from its rather limited choice of original physiological brine to
more
than 200 different kinds of transfusion media.
The
diverse range of transfusion media could be grouped into five
categories:
|
·
|
Body
fluid balance (Isohydria)
|
|
·
|
Nutritional
transfusion
|
|
·
|
Therapeutic
transfusion (including herbal
transfusion)
|
Dextrose
Monohydrate is widely used in the medical and clinical environment for
restorative and nutritional purposes. For example, a solution of pure glucose
(Dextrose or D-glucose) has been recommended for use by subcutaneous injection
as a restorative measure after major operations or as a nutritive measure in
debilitating diseases.
Dextrose
Monohydrate is widely used in hospitals and clinical institutions in the PRC
and
is covered by the PRC Government-subsidized Medical Insurance
Scheme.
Glucose
exists in many forms in nature, including in plants, fruits, honey and animal
products. In humans, every 100ml of blood typically contains 80-120 mg glucose.
Glucose is the ingredient for many saccharide compounds such as saccharose,
maltose, starch, glycogen and vitamins. The properties of glucose are summarized
as: white crystal with sweet taste, easily soluble in water, difficult to
dissolve in alcohol, insoluble in organic solvents such as ether, chloroform
and
neutral reaction to litmus.
Liquid
glucose is a transparent and viscous liquid, and is produced by the action
of
enzymes on refined cornstarch. Glucose is formed by the hydrolysis of many
carbohydrates, including sucrose, maltose, cellulose, starch and glycogen.
Fermentation of glucose by yeast produces ethyl alcohol and carbon dioxide.
Glucose is made industrially by the hydrolysis of starch under the influence
of
diluted aid, or more commonly, under that of enzymes.
Glucose
is used for many different purposes, as a raw material for many food and
beverage products and as a substitute for sucrose. With the technological
advances in food and beverage production, and as also in response to the demand
from consumers for healthier food and drinks, producers are using more and
more
glucose as a raw material. Glucose is also used in veterinary medicine as a
carrier of animal medicines.
Glucose
is used by the pharmaceutical and chemical industries in a variety of ways.
By
using different reaction mechanisms, different types of chemical compounds
are
produced, using the self-oxidation and combination mechanism to produce calcium
gluconate, zinc gluconate, and glucorone; using the hydro-reduction mechanism
to
produce sorbic alcohol and manno-alcohol, or to produce Vitamin B2, glutamine,
ribose, and other vitamins.
World
Pharmaceutical Market
The
global market for pharmaceutical products is growing at a significant rate
and is projected to continue to do so in the immediate future.
Pharmaceutical Market Trends, 2006-2010 by BioPortfolio forecast an increase
in
the global pharmaceutical market to $842 billion in 2010.
The
Pharmaceutical Business Review reported, “
Positive
economic growth, stabilizing political structures, growing patient populations,
and increasing direct foreign investment in the emerging markets of Brazil,
Russia, India and China (BRIC) are creating significant opportunities for
pharmaceutical companies to expand into these markets and maximize future
revenue potential. Pharmaceutical sales across the BRIC economies grew by 22.3%
in 2005, compared to single digit growth in the major markets of the US, Europe
and Japan.
”
According
to IMS, a leading forecast provider of market intelligence to the pharmaceutical
and healthcare industries, 2005 total global pharmaceutical sales grew 7% at
constant exchange rates, to $602 billion. In the ten major markets, audited
growth was 5.7% in 2005. IMS audits covers 95% of the market, while the
remaining 5% are estimates.
The
PRC Pharmaceutical Market
With
annual growth rates in the PRC pharmaceutical industry exceeding 15% per year,
the PRC has become a critically important market (see “China’s Pharmaceutical
Market is World’s Ninth Largest”, October 22, 2005, available on www.100md.com).
Our expectation of similar growth rate also comes from a demographic analysis.
The PRC has the most aged citizens in the world. In 2004, it had 143 million
people aged 60 and above. This number will be 200 million in 2014 and 300
million in 2026. (See article titled “China’s ageing problem and seven
features”, dated February 24, 2006, available on www.china.org.cn). We believe
that an aging population will necessarily call for the demand of more
pharmaceutical and medicinal products to meet its needs. Demand for better
drugs
and medical equipment is driving this market. We believe it will continue to
grow as the country modernizes and provides healthcare to a population of 1.3
billion people. Currently, the population of the PRC is served by approximately
310,000 medical and clinical institutions.
The
PRC
is one of the top 10 emerging pharmaceutical markets of the world, and is the
second largest market in Asia after Japan as reported in an article dated May
6,
2005 titled “Experts Forecast China will become the World’s Fifth Biggest
Medicine Market in 2010” on the Chinese Small-Medium Enterprises website
(
http://www.ynetc.gov.cn/Article_Show.asp?ArticleID=387
). By
2010, it is believed the PRC will become the world’s fifth largest
pharmaceutical market after the USA, Japan, Germany, and France according to
a
report dated November 13, 2002 titled “Asia Pacific Medical Industrial Council
Forecasts China will become the World’s Fifth Largest Pharmaceutical Market by
2010” on People’s Website (www.people.com.cn). It is projected that the PRC
pharmaceutical market would be valued at $75 billion by 2010, accounting for
10%
of global demand, and $120 billion by 2020 (Source:
www.http://managert.bokee.com/4173614.html).
The
value
of PRC pharmaceutical goods produced in 1970 was only $21.7 billion. (as
reported on the Szechuan News Website, www.newssc.org, in an article titled
“Discussion on the Development and State of China’s Pharmaceutical Industry”).
Currently the PRC pharmaceutical market produces goods with a value of over
$54.6 billion, according to an article in the July/August 2006 edition of the
magazine Pharmaceutical Manufacturing. The PRC produces a little less than
25%
of what is produced by the U.S. pharmaceutical market, which is valued at
$240 billion. Projections show that the total value of global pharmaceuticals
will expand to $750 billion in 2010 (Source: Western Medical People website
(www.yd210.com)).
IMS
reported that the total pharmaceutical market will expand at a compound
annual growth rate of 5-8% over the next five years. North America and Europe
are each projected to grow at a 5-8% pace; Asia Pacific/Africa, 9-12%; Latin
America, 7-10%; and Japan, 3-6%. Emerging markets including the PRC, Korea,
Mexico, Russia and Turkey, will all experience double-digit growth, outpacing
global performance and signaling important shifts in the
marketplace.
We
believe that the global demand for pharmaceuticals is likely to continue to
increase; with developing countries now being economically more prosperous
and
capable of spending more money on improving health care.
Major
Import and Export Markets for Pharmaceutical Products
The
major
producers of chemical pharmaceutical raw materials are Western Europe, North
America, Japan, China and India. Western Europe is a net exporter exporting
50%
of its total production. North America is a major importer, with its own
products only able to satisfy 20% of its total demand. Japan is believed to
be evolving to become a net importer. The PRC and India have emerged into
two major exporters for pharmaceutical raw materials, exporting 30-40% of its
total output. (Source: Article titled “2002-2003 Analysis of the World’s
Pharmaceutical Market” as reported on the Shanghai Information Services Platform
website, http://www.istis.sh.cn/)
The
total
annual chemical drug-base production of the PRC is approximately 500,000 tons,
consisting of raw materials for the production of anti-biotic, vitamins,
pain-killers and hormonal and other drugs, and is second only to United States.
The PRC and India are emerging as the major exporters in these product and
raw
material categories.
The
Pharmaceutical Raw Material Manufacturing Industry in the
PRC
The
PRC,
as a country, has put a lot of emphasis on the production of pharmaceutical
raw
materials in the past 40-50 years. Additionally, in the past ten
years, a number of large international pharmaceutical companies have moved
their
productions to the PRC, such as Cargill, CPI and Roquette. Both factors have
contributed to the growth of this specific segment in the PRC.
This
industry segment can be categorized into three groups: first, the state-owned
or
government-subsidized pharmaceutical companies taking up 30% of market share;
second, the foreign-owned or Sino-foreign Joint ventures taking up 60% of market
share, and with the bulk of smaller firms competing for the remaining 10%.
We
fall into the second category.
Market
Analysis and Projections for Clinical Transfusion Products in the
PRC
Transfusion
solutions are one of most commonly used clinical prescriptions in hospitals
and
health care institutions. Dextrose Monohydrate is one of the five most important
types of medical prescriptions in the PRC and is one of the most widely used
pharmaceutical products.
The
total
production volume of transfusion solutions grew from 1.38 billion bottles in
1995 to 2.91 billion bottles in 2001, i.e. annual growth of around 16.1%
(source: http://www.chinapharm.com.en/html/scfx/20034815219.html). The types
of
transfusion solutions grew from 40 to more than 80 types of medical transfusion
formulations.
There
are
more than 200 types of transfusion solutions developed and used in overseas
countries, and the annual per capital consumption is more than 3 bottles. The
PRC has only approximately 50 types of transfusion products, and the per
capital consumption is around 2.15 bottles. Most of the consumption is for
Dextrose Monohydrate.
(Source:
Report titled “Major Transportation of Liquid Pharmaceutical Products: Entering
the Speedway” dated April 21, 2003 published on Chinapharm website,
www.chinapharm.com.cn)
We
believe that we are one of the top producers of Dextrose Monohydrate transfusion
solutions as well as Dextrose Anhydrous solutions. These products are the raw
material or base solutions for pharmaceutical manufacturers to add specific
medical formulations to produce medicated transfusion. Our industrial customers
are producers of medical transfusion solutions.
The
growth in demand for Dextrose Monohydrate transfusion solutions is co-related
to
the growth of the pharmaceutical production and consumption trends and patterns.
Medical transfusion is a common and well-accepted treatment routine all over
the
PRC for many ailments, ranging from the common cold, influenza, and intestinal
disorders to clinical restorative or recuperative prescriptions after surgical
operations. There are altogether 310,000 medical service providers such as
hospitals, clinics, and health-care institutions serving the 1.3 billion people
in the PRC.
Some
authorities predict that the PRC’s pharmaceutical industry will grow at a rate
of between 15 and 16 % for the whole year of 2007, a little higher than the
number for 2006. (Source: http://www.bioon.com/industry/market, report title:
Forecast of Pharmaceutical Industry in 2007).
Based
on
our analysis of the consumption of glucose products carried out by the China
Starch Industry Association and the disposable income per capita from China
National Statistics Bureau, we believe that there is a strong correlation
between the consumption of glucose products and the disposable income per
capita.
We
predict that higher living standards would lead to higher consumption of
pharmaceutical dextrose. It is our understanding that the robust and continuing
economic growth, the rising purchasing power of domestic market, as well as
the
public awareness of quality health care products, are all drivers to the demand
for our products. The strong growth in the PRC pharmaceutical industry will
also
help increase the selling prices of our major products, and enhance our revenues
and increase our gross profit margin.
Target
Market
Our
principal customers are:
|
·
|
Health
Care Institutions
|
|
·
|
Medical
supply companies
|
|
·
|
Pharmaceutical
companies
|
|
·
|
Medical
supply exporters
|
|
·
|
Food
and beverage companies
|
We
market
our products to these types of businesses within the PRC and plan to expand
our
export business as we increase our production capabilities, particularly in
wholesale sales to foreign distributors.
We
utilize the following factors/incentives to encourage the purchase of our
products:
|
·
|
High
quality, pharmaceutical grade
products
|
|
·
|
Certified
product reliability
|
|
·
|
New
and improved medicinal products and
packaging
|
|
·
|
Excellent
service and support
|
Domestic
and International Market
The
market in the PRC for our products is very large and growing rapidly. There
are more than 310,000 medical service providers such as hospitals and health
care institutions all over the PRC.
We
believe that the export market is a lucrative market that we plan to further
develop and expand. Due to the strong domestic demand for our products and
our
prior production constraints, historically we could only serve a fraction
of the export market.
Our
export revenues for the Dextrose Monohydrate series of products (which also
includes anhydrous glucose and oral glucose) derived from our top four export
markets are summarized as follows:
South
Korea
Import
approval permit issued in 2003
Products
exported: Dextrose Monohydrate Oral and Dextrose Anhydrous
Import
approval permit issued in 2003
Products
exported: Dextrose Monohydrate Oral and Dextrose Anhydrous
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
342,955
|
|
$
|
370,467
|
|
$
|
548,172
|
|
Russia
Import
approval permit issued in 2004
Products
exported: Dextrose Monohydrate Oral, Dextrose Monohydrate
transfusion
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
100,000
|
|
$
|
258,115
|
|
$
|
1,006,133
|
|
Australia
Import
approval permit issued in 2003
Product
exported: Dextrose Monohydrate Oral
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
42,780
|
|
$
|
278,202
|
|
$
|
813,746
|
|
Singapore
(plus re-export to Thailand)
Import
approval permit issued in2003
Products
exported: Dextrose Monohydrate Injection
FY2005
|
|
FY2006
|
|
FY2007
|
|
$
|
89,725
|
|
$
|
28,285
|
|
$
|
29,345
|
|
Competition
Some
of
our competitors of its main products are listed below. They are coded as
follows:
(trans
=
competitor in Dextrose Monohydrate transfusion solution)
(oral
=
competitor in oral Dextrose Monohydrate)
(andh
=
competitor in Dextrose Anhydrous)
|
·
|
Dong
Ping Rui Xing Petrochemical Company Ltd
(trans)
|
|
·
|
North
China Pharmaceutical Production Company Ltd
(trans)
|
|
·
|
Ci
Feng Pharmaceutical Production Company Ltd
(trans)
|
|
·
|
Yi
Kan Pharmaceutical Production Company Ltd
(trans)
|
|
·
|
Hebei
Shengxue Company Ltd (andh)
|
|
·
|
Northern
China Kan Yin Pharmaceutical Product Company Ltd
(trans)
|
|
·
|
Shandong
Xi Wang Company Ltd (oral)
|
|
·
|
QingHuangDao
Lihua Glucose Company Ltd (oral)
|
|
·
|
Hebei
Hua Ying Glucose Company Ltd (oral)
|
|
·
|
Cargill
USA (trans), (oral)
|
|
·
|
Roquette
(trans), (andh)
|
|
·
|
Cerestar
(trans), (andh)
|
|
·
|
Hebei
Zhou Ping Rui Xue Glucose Company Ltd
(andh)
|
|
·
|
Hebei
Linhua Glucose and Medicinal Production Company Ltd
(andh)
|
Among
our
domestic competitors, we believe that we are the largest manufacturer of
pharmaceutical grade glucose. However, our foreign competitors may be
better-capitalized and more technologically advanced.
Competitive
Advantages
With
the
PRC being a major corn-producing region of Asia, and Shandong being the major
corn-producing province of the PRC, our operating subsidiary Weifang Shengtai,
located in Shandong, has the advantage of a steady supply of raw materials,
which are located nearby with low transportation costs.
Among our
assets is a total of 25,746 square meters of land, of which approximately sixty
percent (60%) being utilized, leaving room for expansion.
We
have
only started to export to markets such as South Korea, Russia, Australia and
Singapore and sixty other countries. Taking into consideration the geographical
proximity and cross-cultural similarities with the Northern and South-Eastern
Asian markets, we believe that we can be competitive in terms of product price,
delivery lead-time and customer service responsiveness.
With
our
new cornstarch facility, a planned upgrade of our glucose manufacturing facility
and construction of another new glucose manufacturing facility, we believe
that we will be able to stabilize our raw material costs and
production, enable our glucose production facility to function at maximum
capacity and produce more products for both the domestic and export
markets.
We
believe that we are the one of the leading producers of Dextrose Monohydrate
transfusion solution in the PRC, with an estimated 30% of the overall PRC market
share (Source: “Compilation of the Means of Production for Starch, Modified
Starch, Crystal Glucose and Liquid Starch Sugars in 2005” published by the China
Starch Industry Association in July 2006). The other suppliers of Dextrose
Monohydrate transfusion solutions have pharmaceutical production lines with
a diversified range of medicinal products. We believe that we are the only
manufacturer that has our primary focus on producing high-quality Dextrose
Monohydrate transfusion solutions in the PRC.
The
other competitors are manufacturing companies with a diversified range of
industrial glucose and cornstarch products. We believe that most of our
competitors put more emphasis on volume production of medium to low value-added
products, while we focuses more on quality production of high value-added
products.
Backlog
Our
orders are processed on a made to order basis and we do not have any backlog
of
orders.
Growth
Initiative
We
have
developed and are implementing the following initiatives to achieve its growth
goals:
|
·
|
Vertical
integration of our manufacturing capabilities by building and operating
a
cornstarch plant.
|
We
believe the new cornstarch processing plant will lower production costs and
improve profit margin because higher-quality and lower cost raw materials will
be produced in-house and there will be no transportation costs because the
cornstarch processing plant is next to the glucose production line. This will
somewhat shield us from external cornstarch price fluctuation, thus protecting
or improving its profit margins.
|
·
|
Increase
its glucose production capabilities to be able to meet market
demand
|
Overseas
demand had not been fully satisfied in the past because our products have been
sold out due to strong domestic demand in the PRC. We believe that our new
300,000 ton cornstarch processing plant will supply enough raw materials to
increase production volumes and sales to an expanding domestic client base
and
fulfill more overseas orders which offer higher profit margins. . In line with
this, we have commenced construction of our new glucose manufacturing facility,
which is anticipated to be completed next year.
Beyond
the pharmaceutical-grade products, some of the industrial-grade products can
be
further refined and transformed into higher-margin products, such
as modified starch and glucose-transformed nutraceutical raw materials. We
have in our pipeline biotechnology product formulas that could be deployed
to
serve emerging market segments in the next few years. An example of this is
in
the production of sodium gluconate, which has been sold recently on a trial
basis to encouraging feedback.
|
·
|
Expand
our marketing and sales efforts to identify and secure additional
domestic
customers and increase our export
sales
|
We
plan
to (i) optimize our web site to describe and promote its business, (ii) take
out
advertisements in trade publications, (iii) buy advertisements for various
search words and phrases (e.g. “glucose”) on Google and Yahoo and major PRC
search engines, (iv) conduct seminars at various trade show events to promote
our products, and (v) optimize our web site so that people doing ‘natural’
searches will see the web site link on the first page of the search by refining
its Search Engine Optimization
Major
Customers
Our
customers are principally located in the PRC but we hope to expand our
international customer base. Our principal customers for pharmaceutical products
are mostly hospitals and pharmaceutical companies. Below is a list of our
largest PRC customers:
|
·
|
Zhejiang
Hsin Pharmaceutical Co Ltd
|
|
·
|
Shouguang
Tianli Biological Technology Co Ltd
|
|
·
|
Guangdong
Weishiya Health Food Co Ltd
|
|
·
|
Lianyungang
Roquette Co Ltd
|
|
·
|
Sichuan
Kelun Pharmaceutical Co Ltd
|
|
·
|
Beijing
Double-Crane Pharmaceutical Co Ltd
|
|
·
|
Huayuan
Changfu Pharmaceutical Group
|
|
·
|
Anhui
Fengyuan Pharmaceutical Group
|
|
·
|
Huayu
Wuxi Pharmaceutical Co Ltd
|
|
·
|
Chengdu
Qingshan Pharmaceutical Co Ltd
|
|
·
|
Guangdong
Duole Dairy Co Ltd
|
No
one
customer accounted for more than 10% of our sales revenues for any of the fiscal
years ended June 30, 2007, 2006 or 2005.
Intellectual
Property
We
formally acquired the registered “Heng De Bao” trade mark from Changle Medical
Starch Factory on or about July 28, 2000. The trade mark was assigned by the
Chinese Trademark Bureau and registered under classes 31 (pharmaceutical starch
and white dextrin) and 5 (pharmaceutical glucose). The class 31 registration
was
renewed till June 10, 2009 while the class 5 registration was renewed and valid
till May 9, 2011. International Class Code 5 covers pharmaceuticals, veterinary
and sanitary preparations; dietetic substances adapted for medical use; food
for
babies; plasters, materials for dressings; material for stopping teeth, dental
wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.
International Class Code 31 covers agricultural, horticultural, and
forestry products and grains not included in other classes; live animals, fresh
fruits and vegetables; seeds, natural plans, and flowers; foodstuffs for animal,
malt.
Insurance
We
purchased automobile insurance with third party liability coverage for our
vehicles and life insurance for our key personnel. We do not have other
insurance such as property insurance, business liability or disruption insurance
coverage for our operations in the PRC. While a lawsuit against a company such
as Weifang Shengtai in the PRC would be rare, we cannot make any assurance
that we will not have exposure for liability in the event of a
lawsuit.
Government
Regulations
Because
we manufacture medicinal and pharmaceutical products, we are subject to the
laws
governing the Good Practice in the Manufacturing and Quality Control of Drugs
(as amended in 1998) as promulgated by the PRC State Food and
Drug
Administration on March 18, 1999.
We
are
also subject to business license and approval regulations that are required
for
all corporations in the PRC.
We
have
obtained Certificates of Good Manufacturing Practices for Pharmaceutical
Products (“GMP Certificates”) issued by the PRC State Food and
Drug
Administration. The GMP Certificates certify that we have complied with the
requirements of Chinese Current Good Manufacturing Practices for Pharmaceutical
Products in the manufacture of bulk Dextrose Monohydrate, glucose and anhydrous
glucose and the GMP Certificates are valid through May 18, 2009, March 23,
2008
and April 18, 2009 respectively.
Additionally,
we have obtained Drug Registration Certificates for glucose and glucosum pro
orale from the State Food and Drug Administration in accordance with the PRC
Medical Products Governance Law and its implementing regulations.
Environmental
Compliance
We
are
subject to PRC environmental laws, rules and regulations that are standard
to
manufacturing facilities.
Our
production line has passed inspection by the Environmental Protection Bureau
of
PRC and was issued a Certificate of Qualification.
Employees
As
of
June 30, 2007, we employed approximately 760 full-time employees. Of these,
7
are group administrators, 20 are managers, approximately 45 are in marketing
,
approximately 50 perform administrative functions, and approximately 638 are
in
production, storage and distribution.
Corporate
History
Shengtai,
formerly known as West Coast Car Company (“WCCC”), was incorporated in Delaware
in March 2004 and commenced operations in Temecula, California in November
2004
doing business as So Cal Car Company. Until July 2006, WCCC was a pre-owned
retail automobile dealership in Southern California, operating as a
"traditional" pre-owned dealership, whereby it sought out vehicles from various
sources, such as auctions, private parties and wholesalers and then sold the
vehicles to the general public. The Company was unable to achieve a profit
and
did not renew its lease when it expired at the end of July 2006.
WCCC
had
limited operations and generated no revenue for the year ended December 31,
2006
and revenue of $30,318 for the year ended December 31, 2005.
On
September 26, 2005, WCCC registered as a public reporting company by filing
a
Form 10-SB with the SEC under Section12(g) of the Exchange Act. On January
12,
2007 WCCC’s common stock was available for quotation on the Over the Counter
Bulletin Board under the symbol "WSCS.” On July 31, 2007, WCCC changed its name
to Shengtai Pharmaceutical, Inc. and its symbol was changed to
SGTI.
On
February 4, 1999, Weifang Shengtai was established in Changle County, Weifang
City, Shandong Province, PRC. Mr. Qingtai Liu and Weifang Shengtai’s management
were the original shareholders.
In
February 1999, Weifang Shengtai acquired for $775,000 all the assets of Weifang
Fifth Pharmaceutical Plant, a former PRC state-owned enterprise (who had
defaulted on a bank loan of approximately $5 million and which had its pledged
assets taken over by the lending bank).
On
February 27, 2006, Shengtai Holding Inc., a New Jersey corporation “(SHI”), was
formed by Messrs. Qingtai Liu and Chenghai Du as a holding company for Weifang
Shengtai.
On
June
20, 2006, SHI acquired all of the outstanding shares of Weifang Shengtai from
Mr. Qingtai Liu and Bio-One, Inc. SHI acquired Mr. Qingtai Liu’s 49% equity
interest in Weifang Shengtai for approximately RMB 15 million (approximately
$1,920,000) and acquired Bio-One’s 51% equity interest in Weifang Shengtai for
$1,000,000 as well as a return of $4,180,000 worth of preferred stock of
Bio-One. As a result of this acquisition, Weifang Shengtai became a wholly
foreign owned entity or “WFOE” and obtained the requisite approval of the local
branch of the Ministry of Commerce in the City of Weifang on June 21,
2006
.
Its
business term is 20 years starting on February 10, 2004, the date of approval
of
a previous joint venture which was not pursued
.
Weifang
Shengtai’s registered capital is RMB32 million (approximately $3.92 million) of
which $1,925,996 was required to be contributed by June 21, 2007. This amount
has already been sent to Weifang Shengtai from the proceeds raised under the
share purchase agreement described below.
Share
Exchange Agreement
On
May
15, 2007, WCCC entered into a share exchange agreement with the stockholders
of
SHI, under which Messrs. Qingtai Liu and Chenghai Du, holders of all of the
issued and outstanding shares of common stock of SHI, exchanged all of their
shares of SHI for 8,212,500 and 912,500, respectively, newly-issued shares
of
common stock of WCCC. The newly issued shares represented approximately 91%
of
the then outstanding shares of WCCC. The share exchange transaction closed
on
May 15, 2007. As a result of the share exchange SHI became a direct wholly-owned
subsidiary of WCCC and Weifang Shengtai became an indirect wholly-owned
subsidiary.
In
connection with the share exchange, WCCC’s former directors, Daniel Drummond and
Alex Ferries, appointed Mr. Qingtai Liu as Chief Executive Officer and
President, and as a director of WCCC and appointed Yongqiang Wang as a director
and thereafter resigned as directors and officers of Shengtai, subject to the
filing and dissemination of Schedule 14f-1. WCCC
filed
an
information statement with the SEC on May 4, 2007, relating to the change in
control of WCCC’s Board of Directors containing the information required under
Rule 14f-1 of the Securities Exchange Act of 1934, as amended and on May 4,
2007. Shengtai distributed that information statement to all holders of record
of its common stock. After the closing of the share exchange, there occurred
a
change in control in the Board of Directors with Messrs. Qingtai Liu and
Yongqiang Wang constituting the sole members of the Board of
Directors.
Corporate
Structure
As
a
result of the consummation of the share exchange on May 15, 2007, our corporate
structure is as follows:
The
Share Purchase Agreement
On
May
15, 2007, we entered into and closed on a share purchase agreement with the
Selling who purchased from us for $2.00 per share (or an aggregate purchase
price of $17,500,000) an aggregate of 8,750,000 shares of common stock and
attached five year warrants to purchase an aggregate of 4,375,000 shares at
an
exercise price of $2.60 per share, as adjusted. We received net cash proceeds
of
approximately $15,323,000 from this financing. The closing of the share purchase
agreement immediately followed the closing of the share exchange. Brill
Securities, Inc
.
acted as
placement agent for the share purchase and received $875,000 as a placement
fee,
an additional $175,000 as a non-accountable expense and are entitled to receive
warrants to purchase 109,375 shares of common stock.
We are
registering for resale in this prospectus 10,731,155 shares of common stock
which represents all of 6,550,960 shares of common stock purchased by the
Selling Stockholders and all of 4,180,195 shares of common stock issuable on
exercise of the 4,180,195 attached warrants.
On
April
27, 2008
,
the last
reported bid price of our common stock was $3.20 per share and the last reported
ask price was $3.10 per share.
Make
Good Provisions
Under
the
terms of the share purchase agreement, in the event that the Company’s after tax
net income is less than $7 million (or fully diluted earnings per share of
$0.33) for the fiscal year ending December 31, 2007, the Company’s management is
required to transfer to the Selling Stockholders, on a pro-rata basis and for
no
consideration, 2,500,000 shares of common stock owned by management. In
addition, in the event the Company’s after tax net income is less than $9
million (or fully diluted earnings per share of $0.43) for the fiscal year
ending December 31, 2008, the Company’s management is required to transfer to
the Selling Stockholders, on a pro-rata basis and for no consideration,
2,500,000 shares of common stock owned by management. Mr. Qingtai Liu
placed these 5 million in an escrow account held with Tri-State Title &
Escrow, LLC on closing of the share purchase agreement.
Right
of First Refusal
Under
the
terms of the share purchase agreement the Selling Stockholders have the right
of
first refusal on any placement or offering of any future debt or equity
securities. This rights ends on the later of May 15, 2007 or one (1) year
following the effective date of the initial registration statement covering
the
resale of the shares and the warrant shares.
Warrant
Call Rights
Under
the
terms of the warrants the Company may force the holders of the then outstanding
warrants to exercise the warrants in the event (i) the volume weighted average
price of the common stock equals or exceeds $8.00 per share during any
twenty (20) consecutive trading days and (ii) the underlying shares for which
the warrant is exercisable are registered for resale.
Adjustment
to Exercise Price of Warrant; Full Ratchet
If
at
anytime within 18 months after May 15, 2007 the Company issues any shares of
common stock at a price lower than $2.60 per share then the warrant exercise
price will be adjusted to the lower price.
Registration
Rights
Under
the
terms of the share purchase agreement the Selling Stockholders were granted
certain registration rights.
Reference is made to “Selling Stockholders - Background
”
in this prospectus for disclosure relating to our obligations, as set forth
in
share purchase agreement, to register the shares (and the shares underlying
the
warrants) and the circumstances in which we may be required to pay liquidated
damages for failing to comply with those obligations.
Lock
Up
As
requied by share purchase agreement Mr. Qingtai Liu entered into a
“lock-up” agreement pursuant to which he, and his wife and daughter have agreed
not to sell or transfer any shares of the Company’ common stock for the period
continuing through the effective date of the initial registration statement
filed by the Company and ending twelve (12) months thereafter (which was
July 16, 2007). Mr. Liu is the beneficial owner of 7,766,325 shares of the
Company’s common stock.
PROPERTIES
Our
facility in the PRC is located at Hi-Tech Industrial Park of Changle
County, Shandong Province, PRC 262400.
All
land
in the PRC is owned by the government and cannot be sold to any individual
or
entity. Instead, the government grants or allocates landholders a “land use
right.” From March 2000 to December 2003 Weifang Shengtai purchased various land
use rights in succession for a total price of $1,295,959. Weifang Shengtai
has
obtained another land use right in June 2007 for a price of $949,900. As a
result Weifang Shengtai has the right to use various parcels of land that range
from 20 to 50 years in length, all of which are currently being used by Weifang
Shengtai for its business.
Weifang
Shengtai occupies an area of approximately 253,746 square meters in Changle
Economic and Technology Development Zone. Set forth below is the detailed
information regarding the land:
Location
|
|
Area
(square
meters)
|
|
Construction
on the
Land
|
|
Expiration
|
Changle
Economic and Technology
Development
Zone
|
|
85,880.43
|
|
New
glucose production complex
|
|
April
20,2057
|
|
|
|
|
|
|
|
Changle
Economic and Technology
Development
Zone
|
|
16,168
|
|
None
|
|
January
14, 2030
|
|
|
|
|
|
|
|
Changle
Economic and Technology
Development
Zone
|
|
73,313.38
|
|
Glucose
production facility
|
|
April
28, 2052
|
|
|
|
|
|
|
|
Changle
Economic and Technology
Development
Zone
|
|
19,692.4
|
|
Office
and staff buildings
|
|
September
21, 2052
|
|
|
|
|
|
|
|
Changle
Economic and Technology
Development
Zone
|
|
58,692
|
|
Cornstarch
processing plant (11,800 sq meters)
|
|
April
2, 2054
|
LEGAL
PROCEEDINGS
We
know
of no material, active, pending or threatened proceeding against us
or our subsidiaries, nor are we, or any subsidiary, involved as a
plaintiff or defendant in any material proceeding or pending
litigation.
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S
COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
We
began
trading on the Over the Counter Bulletin Board on January 12, 2007 and our
symbol is "SGTI." Prior to January 12, 2007, there had never been any
established public market for shares of our common stock. The following
table sets forth for the period indicated the prices of the common stock in
the
over-the-counter market, as reported and summarized by the OTC Bulletin Board.
Such prices are based on inter-dealer bid and asked prices, without markup,
markdown, commissions, or adjustments and may not represent actual transactions.
As of April 17, 2008 , the last reported bid price of our common stock was
$3.07
per share and the last reported ask price was $3.14 per share.
CALENDAR
QUARTER ENDED
|
|
HIGH
BID(S)
|
|
LOW
BID(S)
|
|
March
31, 2007 (1)
|
|
—
|
|
—
|
|
June
30, 2007
|
|
$
|
6.00
|
|
$
|
1.01
|
|
September
20, 2007
|
|
$
|
6.00
|
|
$
|
2.50
|
|
December
31, 2007
|
|
$
|
4.60
|
|
$
|
2.90
|
|
March
31, 2008
|
|
$
|
3.43
|
|
$
|
2.66
|
|
(1)
Source: NASDAQ.com
Holders
As
of
April 4, 2008, there were 19,069,805 shares of our common stock issued and
outstanding and there were 46 holders of record of our common stock.
Dividends
Since
our
incorporation, no dividends have been paid on our common stock. We intend to
retain any earnings for use in our business activities, so it is not expected
that any dividends on our common stock will be declared and paid in the
foreseeable future.
As
a
holding company our ability to pay dividends is dependent on the receipt of
dividends from SHI and our PRC based operating company Weifang Shengtai. 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.
Warrants
As
of
December 31, 2007 we had
4,498,945
outstanding
warrants to purchase
4,498,945
shares
of
common stock and no outstanding options. Set forth below is a description of
our
outstanding warrants.
On
May
15, 2007, we entered into a share purchase agreement and completed a private
placement of our shares and warrants. Under the share purchase agreement we
sold
to the Selling Stockholders for $2.00 per share (or a total of $17,500,000)
an
aggregate of 8,750,000 shares of commons tock and 4,375,000 warrants to purchase
4,375,000 shares of common stock. The exercise price of the warrants is $2.60
per share, as adjusted, and the warrants expire on May 15, 2012
.
“For
more
disclosure relating to the terms of these warrants reference is made to
“BUSINESS - Corporate History - Share Purchase Agreement.”
On
May
15, 2007, we issued to Chinamerica Fund, L.P. 75,000 warrants and Jeff Jenson
25,000 warrants to compensate the former as lead investor and the latter in
assisting in providing the shell. These warrants have an exercise price of
$0.01
per share and a term of five years.
As
part
of their consideration for acting as placement agent for the May 15, 2007
private placement Brill Securities, Inc
.
are
entitled to receive five year warrants to purchase 109,375 shares of common
stock at an exercise price of 2.60 per share, as adjusted. These warrants have
not yet been issued but will have the same terms as the warrants issued to
the
Selling Stockholders in the May 15, 2007 private placement.
Shares
Eligible for Future Sale
Future
sales of substantial amounts of our common stock in the trading market could
adversely affect market prices.
As
of
April 4, 2008 , we had 19,069,805 shares of our common stock issued and
outstanding. If all of our
4,498,945
outstanding
warrants as of December 31, 2007 are exercised we will have 23,568,750 shares
of
common stock issued and outstanding. The 6,550,960 shares of common stock and
4,367,695
shares
issuable on conversion of the warrants registered in this prospectus will be
freely tradeable without restriction or further registration under the
Securities Act. All other outstanding shares not registered in this prospectus
will be deemed "restricted securities" as defined under Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 promulgated under
the
Securities Act, which rules are summarized below
.
On May
15, 2008, which is one year after the closing of the share exchange transaction,
9,125,000 shares, which were issued in connection with the share exchange
transaction, may be sold under and subject to Rule 144 described
below.
Rule
144
On
November 15, 2007, the SEC adopted an amendment to Rule 144 that, among other
things, in certain cases, shortens the holding period under Rule 144 for
restricted securities from one year to six months. Under the revised rule,
non-affiliates will be able to freely resell restricted securities after
satisfying a six-month holding period, subject only to the public information
requirement. After satisfying a 12-month holding period, non-affiliates may
freely resell restricted securities without any additional requirements. Under
the revised rule affiliates of the issuer may re-sell restricted securities,
subject to restrictions governing the volume of sales, manner of sale and the
filing of Form 144. Re-sales of restricted and unrestricted securities initially
issued by a shell company are eligible for re-sale under Rule 144 if the
following conditions are met:
|
·
|
The
issuer ceases to be a shell company,
|
|
·
|
The
issuer is subject to Section 15(d) or 13 reporting requirements under
the
Securities Exchange Act, of 1934,
as
amended.
|
|
·
|
The
issuer is current in its reporting with the Securities and Exchange
Commission
|
|
·
|
One
year has elapsed from the time the issuer has filed Form 10 type
information indicating that its status is not a
shell
company
|
The
amendment became effective on
February
15, 2008.
Lock-Up
Agreement
Mr.
Qingtai Liu entered into a “lock-up” agreement pursuant to which he, and
his wife and daughter have agreed not to sell or transfer any shares of the
Company’ common stock for the period continuing through the effective date of
the initial registration statement filed by the Company and ending twelve
(12) months thereafter (which was July 16, 2008). Mr. Liu is the beneficial
owner of 7,766,325 shares of the Company’s common stock.
Other
Registration Rights
Other
than the registration rights set forth in the share purchase agreement, we
have
no other obligation to register under the Securities Act any of our shares
of
common stock.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities by (i) any person or group owning more than
5% of any class of voting securities, (ii) each director, (iii) our chief
executive officer and the Company’s top three most highly compensated officers
and (iv) all executive officers and directors as a group as of April 4,
2008.
Name
and Address of Beneficial Owner
|
|
Title
of Class
|
|
Amount
and Nature of Beneficial Ownership (1)(2)
|
|
Percent
of Class (4)
|
|
Qingtai
Liu (3)
Chief
Executive officer and President
Hi-Tech
Industrial Park of Changle County, Shandong Province, PRC
262400
|
|
|
Common
Stock
|
|
|
7,766,325
|
|
|
40.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Yizhao
Zhang (3)
Chief
Financial Officer, President and a director
Hi-Tech
Industrial Park of Changle County, Shandong Province, PRC
262400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Yongqiang
Wang (3)
director
Hi-Tech
Industrial Park of Changle County, Shandong Province, PRC
262400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Chris
Wenbing Wang (3)
director
Hi-Tech
Industrial Park of Changle County, Shandong Province, PRC
262400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Winfred
Lee (3)
director
Hi-Tech
Industrial Park of Changle County, Shandong Province, PRC
262400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Changxin
Li (3)
director
Hi-Tech
Industrial Park of Changle County, Shandong Province, PRC
262400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Private Equity Partners Co., Limited
15
Church Street, Alpine, NJ 07620
|
|
|
Common
Stock
|
|
|
1,537,500
|
|
|
7.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Investments LLC 5150 Poplar Avenue, Suite 805, Memphis, TN
38137
|
|
|
Common
Stock
|
|
|
3,975,000
|
|
|
17.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group (6) persons)
|
|
|
Common
Stock
|
|
|
7,766,325
|
|
|
40.73
|
%
|
(1)
On May 15, 2007, we entered into the share exchange agreement. Under the
share exchange agreement Messrs. Qingtai Liu and Chenghai Du, holders of all
the
issued and outstanding shares of common stock of SHI, exchanged their SHI shares
for 8,212,500 and 912,500 newly-issued shares of the Company’s common stock
(representing approximately 91% of the issued and outstanding shares then
outstanding). The share exchange closed on May 15, 2007. Mr. Qingtai Liu entered
into an agreement dated May 8, 2006 with certain foreign finders and Hickey
Turner Capital, Inc. in which Mr. Liu agreed to transfer 446,175 shares of
the
Company’s common stock for the benefit of the foreign finders and Hickey Turner
Capital, Inc. and/or its designees for consulting services. In addition
to transferring these shares, on May 15, 2007, he also transferred an aggregate
of 776,600 shares to his wife and minor child equally on the same date (which
shares are deemed to be beneficially owned by Mr. Liu).
(2) On
May 15, 2007, we entered into and closed on a share purchase agreement. Under
the share purchase agreement, certain investors (the Selling Stockholders named
in this prospectus) purchased from the Company for $2.00 per share (or a total
of $17,500,000) an aggregate of 8,750,000 shares of common stock
and 4,375,000 attached five year warrants.
(3) Messrs.
Qingtai Liu, Yongqiang Wang were appointed directors of the Company on May
15,
2007. Mr. Zhang was appointed as our CFO in May 2007. Messrs. Wang, Li and
Lee
were appointed directors of the Company on June 22, 2007.
(4) Based
on 19,069,805 shares of common stock issued and outstanding on April 4, 2008.
In
addition, in determining the percent of common stock owned by a person on April
4, 2008, (a) the numerator is the number of shares of the class beneficially
owned by such person and includes shares which the beneficial owner may acquire
within 60 days upon conversion or exercise of a derivative security, and (b)
the
denominator is the sum of (i) the shares of that class outstanding on April
4,
2008, and (ii) the total number of shares that the beneficial owner may acquire
upon conversion or exercise of a derivative security within such 60 day period.
Unless otherwise stated, each beneficial owner has sole power to vote and
dispose of the shares.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
Directors and Executive Officers
The
table
below sets forth certain information about our executive officers and directors
as of April 4, 2008. Most of our executive officers and directors are residents
of the PRC. As a result, it may be difficult for investors to effect
service of process within the United States upon them or to enforce court
judgments obtained against them in the United States courts.
Directors
and Executive Officers
|
|
Position/Title
|
|
Age
|
|
Qingtai
Liu
|
|
|
Chief
Executive Officer/Director
|
|
|
49
|
|
Yongqiang
Wang
|
|
|
Director
|
|
|
38
|
|
Chris
W. Wang
|
|
|
Director
|
|
|
36
|
|
Changxin
Li
|
|
|
Director
|
|
|
47
|
|
Winfred
Lee
|
|
|
Director
|
|
|
47
|
|
Yizhao
Zhang
|
|
|
Chief
Financial Officer
|
|
|
37
|
|
The
following is a summary of the biographical information of our
directors and officers:
Qingtai
Liu
,
49,
graduated from the Electrical Engineering Faculty of the Shandong Technical
University with a Bachelor of Science degree in February 1982. He became the
workshop director and head of the production department of Changle Wireless
Device Factory until 1988, whereupon he assumed the position of Head of Science
and Technology at the Changle Power Factory. In 1990, Mr. Liu became the
Director of Weifang Fifth Pharmaceutical Plant. From January 1999 to present
day, he is the Chairman and Chief Executive Officer of Weifang Shengtai
Pharmaceutical Co., Ltd. Under his leadership, the Company successfully
developed unique production techniques for the production of glucose and
medicinal coating products, and has won Technology Innovation awards issued
by
the Chang Le County, Weifang City and the Shandong provincial government
offices. The medicinal coating material technology that Mr Liu jointly developed
with the Shandong University has been certified by the Technology Development
Bureau of the Shandong Province to be of international standard.
Over
the
years, Mr Liu has been endorsed by the Weifang City Government office as a
Leading Technology Innovator and a Distinguished Pharmaceutical Production
Director. He also is the deputy to the People’s Conference of both Weifang City
and Changle County.
Yongqiang
Wang
,
38,
graduated with an Associates degree from the Shandong Economic and Management
Institute. He joined Weifang Shengtai in April 2006 as the assistant to the
General Manager of the Accounts Department and was in charged of the finance
department. He assumed the position of Deputy General Manager of the Accounts
Department in February 2007. Prior to joining us, Mr. Wang worked as a financial
manager for various enterprises.
Chris
W. Wang
,
36, has
served as the Chief Financial Officer of Fushi International, Inc. since
December 13, 2005. Since March 2005, Mr. Wang also serves as the Chief Financial
Officer of Dalian Fushi. Mr. Wang served as an Executive Vice President of
Redwood Capital, Inc. from November 2004 to March 2005, with specific focus
on
providing strategic and financial advisory services to PRC-based clients seeking
access to the U.S. capital markets. Mr. Wang previously served as Assistant
VP
of Portfolio Management at China Century Investment Corporation from October
2002 to September 2004. Prior to that, Mr. Wang worked for Credit Suisse First
Boston (HK) Ltd. Fluent in both English and Chinese, Mr. Wang holds an MBA
in
Finance and Corporate Accounting from Simon Business School of University of
Rochester.
Changxin
Li
,47,
has
been the Chief of the Department of Medicine, member of the Credentials
Committee and Medical Director of both the Echocardiography Laboratory and
Cardiopulmonary Department of the Otsego Memorial Hospital since 2005. He has
also been an internist with the Otsego Memorial Hospital since 1995. Mr. Li
graduated with an MB from the Weifang (formerly Changwei) Medical College,
Weifang, Shandong, China in 1982 and a PhD from the Department of Physiology,
University of Alberta, Edmonton, Alberta, Canada in 1990. He is a Fellow of
the
American College of Physicians (USA).
Winfred
Lee
,
47, has
been a Contract Administrator with Tenet Healthsystems for South Bay Medical
Center, North Hollywood Medical Center, Midway Hospital, Century City Hospital,
and Brotman Medical Center from 1997. Mr. Lee graduated with a Bachelor of
Science in Business Management from Brigham Young University, Provo, Utah in
1984. He then graduated with a Doctor of Medicine from the Medical College
of
Wisconsin, Milwaukee, Wisconsin, in 1988 and a Doctor of Jurisprudence from
the
J.
Reuben Clark Law School at Brigham Young University, Provo, Utah, in 1992.
Mr.
Lee is a member of the California Bar and the Phi Delta Phi Legal
Society
Yizhao
Zhang
,
37, has
over 11 years of experience in portfolio investment, corporate finance,
financial advisory and accounting. He is a certified public accountant of
Delaware, and a member of the American Certified Accountants (AICPA). Before
joining our Company, Mr. Zhang held senior positions in Chinawe Asset Management
Corporation (OTC BB: CHWE) and China Natural Resources Incorporation (NASDAQ
CM:
CHNR). Previously, Mr. Zhang had experiences in portfolio management and asset
trading in Guangdong South Financial Services Corporation from 1993 to 1999.
Mr.
Zhang received a Bachelor degree in Economics from Fudan University, Shanghai
in
1992 and obtained an MBA degree with Financial Analysis and Accounting
concentrations from the State University of New York at Buffalo in 2003.
He joined the Company in May 2007.
All
of
our directors hold office until the next annual meeting of stockholders and
until their respective successors have been elected or qualified. Officers
serve at the discretion of the Board of Directors. There are no family
relationships among our directors or executive officers. There is no arrangement
or understanding between or among our officers and directors pursuant to which
any director or officer was or is to be selected as a director or officer,
and
there is no arrangement, plan or understanding as to whether non-management
stockholders will exercise their voting rights to continue to elect the current
Board of Directors.
Our
directors and executive officers have not during the past five
years:
|
·
|
had
any bankruptcy petition filed by or against any business of which
he was a
general partner or executive officer, either at the time of the bankruptcy
or within two years prior to that
time;
|
|
·
|
been
convicted in a criminal proceeding and is not subject to a pending
criminal proceeding;
|
|
·
|
been
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting
his
involvement in any type of business, securities, futures, commodities
or
banking activities;
|
|
·
|
or
been found by a court of competent jurisdiction (in a civil action),
the
Securities Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law,
and the
judgment has not been reversed, suspended or
vacated
|
Our
directors are residents of the PRC. As a result, it may be difficult for
investors to effect service of process within the United States upon them or
to
enforce court judgments obtained against them in United States
courts.
Director
Independence
The
Board
of Directors has determined that Chris W. Wang, Changxin Li and Winfred Lee
are
each an independent director under the NASDAQ and SEC rules for determining
independence. Accordingly, although we are not currently required by NASDAQ
or
SEC rules to have a majority of independent directors, we believe that a
majority of our board members are independent.
Audit
Committee
The
Board
of Directors formed an Audit Committee in 2008, established in accordance
with
section 3(a)(58) of Securities Exchange Act of 1934 (the “Exchange Act”). The
Board of Directors has determined that each of the members of the Audit
Committee is “independent,” as defined in the corporate governance listing
standards of NASDAQ and Rule 10A-3 under the Exchange Act relating to audit
committees. In addition, the Board has determined that all members of the
Audit
Committee are financially literate and that Mr. Chris Wang qualifies as an
“audit committee financial expert” as defined by the Securities and Exchange
Commission.
The
committee assists the Board in fulfilling its oversight responsibilities
relating to:
|
·
|
our
auditing, accounting and reporting practices;
|
|
·
|
the
adequacy of our systems of internal
controls;
|
|
·
|
and
the quality and integrity of publicly reported financial disclosures.
|
In
this
role, the committee appoints the independent auditors and reviews and approves
the scope of the audit, the financial statements and the independent auditors’
fees.
The
Audit
Committee exercises the powers of the Board of Directors in connection with
our
accounting and financial reporting practices, and provides a channel of
communication between the Board of Directors and independent registered public
accountants.
Our
Audit
Committee consists of Mr. Chris Wang (Chairman) and Changxin Li and Winfred
Li
Compensation
Committee
We
do not presently have a Compensation Committee. Our Board of Directors
presently performs that function.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
We
endeavor to provide our “named executive officers” (as defined in Item 402 of
Regulation S-K) with a competitive base salary that is in-line with their roles
and responsibilities when compared to peer companies of comparable size in
the
same or similar locality.
It
is not
uncommon for PRC private corporations in that locality to have base salaries
as
the sole and only form of compensation. The base salary level is established
and
reviewed based on the level of responsibilities, the experience and tenure
of
the individual and the current and potential contributions of the individual.
The base salary is compared to the list of similar positions within comparable
peer companies and with consideration of the executive’s relative experience in
his or her position. Base salaries are reviewed periodically and at the
time of promotion or other changes in responsibilities.
We
plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. This compensation program shall be comparative to our peers
in
the industry and aimed to retain and attract talented individuals.
We
will
also consider forming a Compensation Committee comprising predominantly of
independent directors to oversee the compensation of our named executive
officers
Summary
Compensation Table
The
following is a summary of the compensation we paid for each of the tow years
ended June 30, 2007 and 2006 (i) to the persons who acted as our principal
executive officers during our fiscal year ended June 30, 2007 and (ii) to the
person who acted as our principal financial officer or acted in a similar
capacity during our fiscal year ended June 30, 2007. None of our other executive
officers received compensation in excess of $100,000 for either of these two
years.
Name
and Principal Position
|
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-equity
Incentive Plan Compensation
($)
|
|
|
Change
in Pension
Value
and Nonqualified Deferred Compensation Earnings
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
Robert
Worthington
(President)
(1)(3)
|
|
|
2007
2006
|
|
|
12,200
12,200
|
|
|
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
12,200
12,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Drummond
(Acting
President and Vice President
(1)(2)(3)
|
|
|
2007
2006
|
|
|
5,000
5,000
—
|
|
|
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
5,000
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qingtai
Liu (2)(3)
|
|
|
2007
2006
|
|
|
19,662
9,300
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
19,662
9,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yizhao
Zhang (4)
|
|
|
2007
|
|
|
10,667
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,667
|
|
(1)
|
Mr.
Worthington began serving as our President in March 2004. On August
30,
2006, Mr. Worthington tendered his resignation, effective August
4, 2006,
as officer and director of the Company. As a result of Mr. Worthington's
resignation, Mr. Daniel Drummond, a director and Vice President,
assumed
the position of Acting President until such time as the Board has
the
opportunity to fully assess the situation and consider new nominees
to the
Board.
|
(2)
|
On
May 15, 2007, we entered into and consummated a share exchange
agreement. As a result of the to the share exchange agreement, Messrs
Qingtai Liu and Chenghai Du became our majority shareholders. In
connection with the closing of the Share Exchange Agreement, former
directors of the Company, Mr. Daniel Drummond and Mr. Alex Ferries
appointed Mr. Qingtai Liu as a Director of the Company, Chairman
of the
Board and Chief Executive Officer of the Company, appointed Mr. Yongqiang
Wang as director of the Company and submitted their resignation as
directors and officers of the Company, subject to the filing and
dissemination of Schedule 14f-1.
|
|
On
May 4, 2007, we filed an information statement with the SEC relating
to
the change in control of our Board of Directors containing the
information
required under Rule 14f-1 of the Exchange Act and on May 4, 2007,
we
distributed that information statement to all holders of record
of our
common stock.
|
(3)
|
In
our Annual Report on Form 10-KSB filed on March 27, 2007, we reported
that
our Board of Directors, pursuant to our Bylaws, approved a change
in our
fiscal year end from December 31 to June 30. Because Mr. Worthington
and
Mr. Drummond are no longer our officers and did not receive any
compensation in calendar 2007, their executive compensation is reported
based on a financial year end of December 31. By contrast, our current
Chief Executive Officer, Mr. Qingtai Liu’s compensation is reported based
on a financial year end of June 30.
|
(4)
|
Mr.
Zhang joined us as our Chief Financial Officer in May
2007.
|
Grants
of Plan-Based Awards in Fiscal 2007
There
were no option grants during the fiscal year ended June 30, 2007
Outstanding
Equity Awards at 2007 Fiscal Year End
There
were no option exercises or options outstanding at June 30, 2007.
Option
Exercises and Stock Vested in Fiscal 2007.
There
were no option exercises or stock vested during the fiscal year ended June
30,
2007.
Employment
Agreements
We
have
no employment agreements with any of our executive officers.
Compensation
of Directors.
Board
Compensation
The
following table provides information for our fiscal year ended June 30, 2007
regarding all plan and non-plan compensation awarded to, earned by or paid
to
each person who served as a non-employee director for some portion or all of
fiscal 2007. Other than as set forth in the table and the narrative that
follows it, to date we have not paid any fees to or reimbursed any expenses
of
our directors, made any equity or non-equity awards to directors, or paid any
other compensation to directors.
DIRECTOR
COMPENSATION
|
|
|
|
Name
|
|
Fees
Earned or Paid in Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)(1)
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
Non-Qualified
Deferred Compensation Earnings
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
Qintai
Liu
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Yongqiang
Wang
|
|
$
|
15,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Chris
Wenbing Wang
|
|
$
|
30.000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Changxin
Li
|
|
$
|
15,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Winfred
Leei
|
|
$
|
15,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Our
current non-executive directors are compensated for all services they perform
as
directors , including attendance at Board of Directors meetings and service
as
members of committees of the Board of Directors to which they are appointed.
Executive directors are not compensated for services they perform as directors
of the Company. The details of such compensation are:
|
·
|
annual
compensation of $15,000;
|
|
·
|
additional
annual compensation of $15,000 if the director serves as the Chairman
of
the Audit Committee; and
|
|
·
|
we
may also grant the non-executive directors certain options to purchase
our
shares, the amount and terms of which shall be determined by the
Board of
Directors.
|
The
non-executive directors would also be reimbursed for all of their out-of-pocket
expenses in traveling to and attending meetings of the Board of Directors and
committees on which they would serve.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Weifang
Shengtai 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 at Weifang City, Shandong Province, People’s Republic
of China. Changle Shengshi’s principal activity is to produce and sells
electricity and heat.
Weifang
Shengtai owned a 30% interest in Changle Shengshi as of June 30, 2004. On
April
12, 2005, its percentage ownership in Changle Shengshi was diluted from 30%
to
20% due to an additional investment into Changle Shengshi from another party.
Changle Shengshi has a registered capital of approximately $10,800,000. Weifang
Shengtai invested approximately $2,200,000 towards its registered capital,
which
accounts for a 20% share of Changle Shengshi’s stock. As of June 30, 2007,
total investment of approximately $2,675,678 represents 20% of Changle
Shengshi’s paid-in capital, which includes earnings on equity
investment.
As
an
investor and shareholder of Changle Shengshi, Weifang Shengtai enjoys a
preferential discount of 19.7% off the market price of electricity supplied
by
the plant to Weifang Shengtai. The intercompany profits were eliminated on
our
financial statements.
Weifang
Shengtai had a total of $858,881, $348,366 and $97,488 of accounts payable
to
Changle Shengshi at June 30, 2007, 2006 and 2005, respectively. The utilities
expenses amounted to $4,958,249, $1,705,675 and $581,338, for the years ending
June 30, 2007, 2006 and 2005, respectively.
The
Company loaned money to Changle Shengshi and entered into two loan contracts
as
follows:
|
|
June
30, 2007
|
|
June
30, 2006
|
|
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
|
|
|
394,500
|
|
|
-
|
|
Total
|
|
$
|
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.
“Shougang
Shengtai” was contractually managed by Mr. Qingtai Liu, who was also a 40%
stockholder of Shougang Shengtai. Shougang Shengtai provided raw materials,
namely cornstarch and cornstarch slurry to Weifang Shengtai at market prices.
It
ceased operations in early calendar 2007.
Previously
Shougang Shengtai provided raw materials, namely cornstarch and cornstarch
slurry to Weifang Shengtai at market prices. It ceased operations in early
calendar 2007. Weifang Shengtai had $0, $1,378,133 and $1,625,608 of prepayments
to Shouguang Shengtai at June 30, 2007, 2006 and 2005, respectively. Total
related party purchases for the years ending June 30, 2007, 2006 and 2005
amounted to $7,652,465 , $15,963,415, and $13,794,612,
respectively.
On
June
20, 2006, pursuant to a shareholders’ resolution, Bio-One Corporation,
(“Bio-One”) and Mr. Qingtai Liu, the original shareholder of Weifang Shengtai
agreed to transfer their collective 100% ownership in Weifang Shengtai to
Shengtai Holding Inc. (“SHI”).
Mr.
Qingtai Liu sold his 49% stock equity in Weifang Shengtai for approximately
RMB
15 million (approximately $1.92 million). Bio-One sold its 51% stock equity
in
Weifang Shengtai for $1,000,000 as well as a return of $4,180,000 worth
preferred stock of Bio-One. In accordance with laws governing foreign
acquisitions of a PRC registered company, the remaining balance of $1,925,996,
being the amount due from SHI is required to be made within 1 year from the
date
of issuance of the business license. As of June 30, 2007, this requirement
has
been met by SHI.
As
of
June 30, 2006, SHI owed Mr. Qingtai Liu $1,925,996 in connection with the SHI’s
purchase of his 49% interest in Weifang Shengtai. This amount is unsecured
and
non-interest bearing. As of June 30, 2007, the amount owed to Mr. Qingtai Liu
has been repaid. In connection to this transaction and the 17.95% ownership
interest transfer transaction from the 37 Chinese original shareholders of
Weifang Shengtai (“Original Shareholders”) to Mr. Qingtai Liu on April 19, 2006,
Mr. Qingtai Liu has assumed the liabilities of the Original Shareholders’
capital contribution and is entitled to contribute this amount as capital
contribution to the Company. As of June 30, 2007, the remaining balance to
be
contributed by Mr. Qingtai Liu amounted to $1,229,625. This balance will be
repaid in form of cash or operating assets by December 31, 2007.
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
SELLING
STOCKHOLDERS
This
prospectus covers the resale of the shares of common stock owned by the Selling
Stockholders named below. The Selling Stockholders acquired the shares and
the
warrants pursuant to the share purchase agreement on May 15, 2007. The following
table lists the names of the Selling Stockholders as well as (1) the number
of
shares that they hold as of April 4, 2008 that were previously acquired in
the
May 15, 2007 private placement all of which were registered, and (2) the number
of shares underlying the warrants acquired in the May 15, 2007 private placement
all of which are being registered. As of April 4, 2008, the Selling Stockholders
have sold 2,393,345 shares of common stock pursuant to the Registration
Statement on Form S-1 (Registration No. 333- 144235) effective on July 17,
2007.
Each Selling Stockholder is offering for sale all of the shares acquired and
all
of the shares he or it will acquire upon exercise of the warrants acquired
in
the private placement.
Each
Selling Stockholder may offer for sale all or part of the shares and warrant
shares acquired in the May 15, 2007 private placement from time to time. The
table assumes that the Selling Stockholders will sell all of the shares offered
for sale and that they beneficially own no other shares other than those
acquired in the private placement and accordingly they will beneficially own
no
shares of common stock upon completion of the offering. A Selling Stockholder
is
under no obligation, however, to sell any shares immediately pursuant to this
prospectus, nor is a Selling Stockholder obligated to sell all or any portion
of
the shares at any time.
Because
we do not know how many shares may be sold by the Selling Stockholders pursuant
to this prospectus, no estimate can be given as to the number of the shares
that
will be held by the Selling Stockholders upon termination of this offering.
None
of the Selling Stockholders have, or have had within the last three years,
any
material relationship with us, or any predecessor or affiliate.
Each
Selling Stockholder set forth below has the sole investment and voting power
with respect to all shares of common stock shown as beneficially owned by such
Selling Stockholder, except as otherwise indicated in the table. Under
applicable SEC rules, a person is deemed to be the "beneficial owner" of a
security with regard to which the person, directly or indirectly, has or shares
(a) the voting power, which includes the power to vote or direct the voting
of
the security, or (b) the investment power, which includes the power to dispose,
or direct the disposition, of the security, in each case, irrespective of the
person's economic interest in the security. Under these SEC rules, a person
is
deemed to beneficially own securities which the person has the right to acquire
within 60 days through the exercise of any option or warrant or through the
conversion of another security.
Name
of Stockholder
|
|
Number
of shares
of
common
stock
held and
offered
pursuant
to
this
Prospectus
|
|
Number
of shares
of
common
stock
underlying
Warrants
held and offered
pursuant
to
this
Prospectus
|
|
Shares
Beneficially Owned before Offering
Number
|
|
Shares
Beneficially Owned before Offering
Percent
|
|
Shares
beneficially owned after the Offering
Number
|
|
Shares
beneficially owned after the Offering
Percent
|
|
Chestnut
Ridge Partners, LP
|
|
|
5,000
|
|
|
62,500
|
|
|
67,500
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Private Equity Partners Co., Limited
|
|
|
1,025,000
|
|
|
512,500
|
|
|
1,537,500
|
|
|
7.9
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Investments, LLC
|
|
|
2,650,000
|
|
|
1,325,000
|
|
|
3,975,000
|
|
|
19.5
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silver
Rock I, Ltd
|
|
|
0
|
|
|
75,000
|
|
|
75,000
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Offshore Opportunity Fund, Ltd
|
|
|
0
|
|
|
75,000
|
|
|
75,000
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whitebox
Intermarket Partners, LP
|
|
|
319,000
|
|
|
162,500
|
|
|
481500
|
|
|
2.5
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MidSouth
Investor Fund LP
|
|
|
250,000
|
|
|
125,000
|
|
|
375,000
|
|
|
1.9
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keyrock
Partners, LP
|
|
|
0
|
|
|
50,000
|
|
|
50,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Halter
Pope USX China Fund
|
|
|
200,000
|
|
|
100,000
|
|
|
300,000
|
|
|
1.6
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jayhawk
Private Equity Fund, LP
|
|
|
300,724
|
|
|
470,384
|
|
|
771,108
|
|
|
4.0
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jayhawk
Private Equity Co-Invest Fund, LP
|
|
|
18,931
|
|
|
29,616
|
|
|
48,547
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chinamerica
Shengtai Acquisition, LLC
|
|
|
0
|
|
|
312,500
|
|
|
312,500
|
|
|
1.61
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renaissance
US Growth Investment Trust PLC
|
|
|
500,000
|
|
|
250,000
|
|
|
750,000
|
|
|
3.9
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premier
RENN US Emerging Growth Fund Limited
|
|
|
250,000
|
|
|
125,000
|
|
|
375,000
|
|
|
2.0
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chinamerica
Fund, LP
|
|
|
625,000
|
|
|
305,195
|
|
|
1,005,195
|
|
|
5.1
|
%
|
|
75,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heller
Capital Investments, LLC
|
|
|
0
|
|
|
|
|
|
0
|
|
|
0
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quasar
Global Opportunity Fund, L.P.
|
|
|
100,000
|
|
|
50,000
|
|
|
150,000
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RCG
Latitude Master Fund, Ltd.
|
|
|
250,000
|
|
|
125,000
|
|
|
375,000
|
|
|
2.0
|
%
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quasar
Global Opportunity Fund International, Ltd
|
|
|
50,000
|
|
|
25,000
|
|
|
75,000
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sue
Johnson
|
|
|
4,870
|
|
|
0
|
|
|
4,870
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
T.
Horch
|
|
|
2,435
|
|
|
0
|
|
|
2,435
|
|
|
*
|
|
|
0
|
|
|
*
|
|
*
less
than 1%.
The
beneficial ownership of the Selling Stockholders has been calculated based
on
the number of shares outstanding on April 4, 2008 after accounting for sales
of
common stock and exercise of warrants by the Selling Stockholders as of that
date.
Background
On
May
15, 2007, we entered into and closed on a share purchase agreement under which
the Selling Stockholders purchased from us for $2.00 per share or an aggregate
purchase price of $17,500,000 an aggregate of 8,750,000 shares of common stock
and 4,375,000 attached warrants to purchase 4,375,000 shares of common
stock. As of April 4, 2008, 6,550,960 shares of common stock and 4,180,195
shares of common stock underlying the warrants remain available for resail.
We
are registering for resale in this prospectus the 6,550,960 shares of common
stock and 4,180,195 shares underlying the warrants for a total of
10,731,115 shares.
Under
the
terms of the share purchase agreement, which granted the Selling Stockholders
certain registration rights with respect to the shares of common stock which
they purchased as well as the shares underlying the warrants purchased, we
are
required to file an initial registration statement on Form S-1 (or such other
form as may be applicable) to register no later than June 29, 2007 the resale
by
the Selling Stockholders of the shares and the warrant shares. If the
registration statement is not filed by that filing date, we are required to
pay
the investors liquidated damages payable in cash in an amount equal to 1.0%
of
the purchase price ($175,000). These damages are required to be paid each month
until the registration statement is filed.
If
the
registration statement is not declared effective prior December 1, 2007 we
are
required to pay the Selling Stockholders liquidated damages in the amount equal
to 0.50% of the purchase price paid by each such investor payable in cash
monthly until the registration statement is declared effective.
In
addition to the obligation to file an initial registration statement, the
Company is obligated to file subsequent registration statements, in the event
all the shares and warrant shares cannot be registered for resale in the initial
registration statement, until all the shares and warrant shares have been
registered for resale. The subsequent registration statements are to be filed
at
the earliest dates permissible under then current SEC guidance (each, a
“relevant date”) and the investors’ shares are required to be registered for
resale pro-rata to their investment in each subsequent registration statement.
If any subsequent registration statement is not filed by the relevant date,
liquidated damages equal to the amount of 1.0% of the purchase amount of the
remaining unregistered shares and warrant shares shall be paid pro-rata in
cash
to the investors on the first business day after the relevant date, and on
each
monthly anniversary of said date (applied on a daily pro rata basis) until
the
subsequent registration statement is filed.
If
a
subsequent registration statement is not declared effective within 200 days
of
the relevant date, liquidated damages are to be paid in cash pro-rata to the
investors holding unregistered shares and warrant shares in an amount equal
to
0.50% of the purchase price of the remaining unregistered shares and warrant
shares subscribed for by the investors monthly until the registration statement
is declared effective.
The
Company is obligated to keep all registration statements and subsequent
registration statements effective and disclose such information as is necessary
for sales to be made pursuant to such registration statement or subsequent
registration statement, as applicable. The failure to do so will subject the
Company to liquidated damages equal to 0.50% of the purchase price of the shares
and warrant shares permitted to be registered for the first ninety (90) days
and
1% from the ninety-first day thereafter (a “maintenance failure”).
The
Company has no obligation to pay liquidated damages for any delay arising from
(i) issues raised by the SEC relating to Rule 415 of the Securities Act or
to
the structure of the sale and resale of the shares and warrant shares, (ii)
information required from persons or entities other than the Company or its
subsidiaries, or (iii) issues resulting from or relating to acts or omissions
of
persons or entities other than the Company or its subsidiaries. These liquidated
damages, together with the damages arising from a maintenance failure are
subject to a cap of 10% of the purchase price paid by the Selling Stockholders
($1,750,000)
PLAN
OF DISTRIBUTION
The
Selling Stockholders may sell the common stock offered by this prospectus
directly or through brokers or dealers who may act solely as agents or may
acquire common stock as principals. Such sales may be made at prevailing market
prices, at prices related to such prevailing market prices, or at variable
prices negotiated between the sellers and purchasers. The Selling Stockholders
may distribute the common stock in one or more of the following
methods:
|
·
|
ordinary
brokers transactions, which may include long or short sales through
the
facilities of the Over-the-Counter Bulletin Board (if a market maker
successfully applies for inclusion of our common stock in such market)
or
other market;
|
|
|
|
|
·
|
privately
negotiated transactions;
|
|
|
|
|
·
|
transactions
involving cross or block trades or otherwise on the open
market;
|
|
|
|
|
·
|
sales
"at the market" to or through market makers or into an existing
market for
the common stock;
|
|
|
|
|
·
|
sales
in other ways not involving market makers or established trading
markets,
including direct sales to purchasers or sales made through
agents;
|
|
·
|
through
transactions in puts, calls, options, swaps or other derivatives
(whether
exchange listed or otherwise);
or
|
|
·
|
any
combination of the above, or by any other legally available
means.
|
In
addition, the Selling Stockholders may enter into hedging transactions with
broker-dealers who may engage in short sales of common stock, or options or
other transactions that require delivery by broker-dealers of the common
stock.
The
Selling Stockholders and/or the purchasers of common stock may compensate
brokers, dealers, underwriters or agents with discounts, concessions or
commissions (compensation may be in excess of customary commissions). The
Selling Stockholders and any broker dealers acting in connection with the sale
of the shares being registered may be deemed to be underwriters within the
meaning of Section 2(11) of the Securities Act, as amended, and any profit
realized by them on the resale of shares as principals may be deemed
underwriting compensation under the Securities Act.
We do
not know of any arrangements between the Selling Stockholders and any broker,
dealer, or agent relating to the sale or distribution of the shares being
registered.
We
and
the Selling Stockholders and any other persons participating in a distribution
of our common stock will be subject to applicable provisions of the Exchange
Act
and the rules and regulations thereunder, including, without limitation,
Regulation M, which may restrict certain activities of, and limit the timing
of
purchases and sales of securities by, these parties and other persons
participating in a distribution of securities. Furthermore, under Regulation
M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions.
The
Selling Stockholders may sell any securities that this prospectus covers under
Rule 144 of the Securities Act rather than under this prospectus if they
qualify.
We
cannot
assure you that the Selling Stockholders will sell any of their shares of common
stock.
In
order
to comply with the securities laws of certain states, if applicable, the Selling
Stockholders will sell the common stock in jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states, the Selling
Stockholders may not sell or offer the common stock unless the holder registers
the sale of the shares of common stock in the applicable state or the applicable
state qualifies the common stock for sale in that state, or the applicable
state
exempts the common stock from the registration or qualification
requirement.
We
have
agreed to pay all fees and expenses incident to the registration of the shares
being offered under this prospectus (estimated to be $192,118). However each
Selling Stockholder is responsible for paying any discounts, commissions and
similar selling expenses they incur.
We
have
agreed to indemnify the Selling Stockholders whose shares we are registering
from all liability and losses resulting from any misrepresentations we make
in
connection with the registration statement.
DESCRIPTION
OF OUR SECURITIES
The
following is a summary description of our capital stock and certain provisions
of our Amended and Restated Certificate of Incorporation and By-laws, as
amended, and by provisions to the Delaware law.
General
We
are
authorized to issue 100,000,000 shares of common stock, $.001 par value, and
5,000,000 shares of preferred stock, $.001 par value. The following is a summary
of the material terms of the common stock and preferred stock as well as the
outstanding warrants.
Common
Stock
As
of
April 4, 2008 there were 19,069,805 shares of common stock issued and
outstanding. The holders of common stock are entitled to one vote per share
on
all matters submitted to a vote of stockholders and are not entitled to cumulate
their votes in the election of directors. The holders of common stock are
entitled to any dividends that may be declared by the Board of Directors out
of
funds legally available therefore subject to the prior rights of holders of
any
outstanding shares of preferred stock and any contractual restrictions we have
against the payment of dividends on common stock. In the event of our
liquidation or dissolution, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock. Holders of common
stock have no preemptive or other subscription rights and no right to convert
their common stock into any other securities.
Preferred
Stock
Our
Amended and Restated Certificate of Incorporation authorizes 5,000,000 shares
of
Preferred Stock, $.001 par value per share. 4,000,000 of these shares are "blank
check" preferred stock. The Board of Directors is authorized to provide for
the
issuance of these unissued and undesignated "blank check" shares of preferred
stock in one or more series, and to fix the number of shares and to determine
the rights, preferences and privileges thereof.
Series
A Preferred Stock
:
The
Company has designated 1,000,000 shares of its preferred stock as Series A
Preferred Stock of which none are currently outstanding. The Series A Preferred
Stock have the following rights: (i) holders of Series A Preferred Stock, in
preference to the holders of Common Stock shall be entitled to receive cash
dividends at a rate of 8% of the Series A Preferred issue price. Such dividends
are non-cumulative and payable when, as and if declared by our Board of
Directors; (ii) holders of Series A Preferred Stock vote together as a single
class with holders of Common Stock, with each share of Series A Preferred Stock
being entitled to cast a number of votes equal to the number of shares of Common
Stock into which it is convertible, which is 2.5 as of the date hereof; (iii)
in
addition to certain automatic conversion provisions, which go in effect upon
the
closing of a public offering, which provides gross proceeds in excess of
$5,000,000 to the Company, the Series A Preferred Stock is convertible at any
time at the option of the holders thereof, at the rate of 2.5 shares of Common
Stock (subject to adjustment for certain dilutive issuances) for each share
of
Series A Preferred Stock; and (iv) holders of Series A Preferred Stock will,
upon liquidation, dissolution or winding-up of the Corporation, in preference
to
the holders of Common Stock, be entitled to receive an amount equal to the
issue
price per share of Series A Preferred Stock.
Warrants
Set
forth
below is a description of our outstanding warrants to purchase a total of
4,375,000 shares of our common stock.
On
May
15, 2007 we issued to the Selling Stockholders under the share purchase
agreement warrants to purchase a total of 4,375,000 shares of our common stock.
The warrants expire on May 15, 2012 and have an exercise price of $2.60 per
share, as adjusted. We may force the holders of all warrants to exercise all,
or
the remaining portion of, any warrants outstanding and unexercised at the
exercise price of $2.60 in the event (i) the “volume weighted average
price’ of our common stock equals or exceeds $8.00 per share during any
twenty (20) consecutive trading days and (ii) all shares for which the Warrant
is exercisable are registered for resale by the holder of the
warrant.
On
May
15, 2007, we issued to Chinamerica Fund, L.P. 75,000 warrants and to Jeff Jenson
25,000 warrants to compensate the former as lead investor and the latter in
assisting in providing the shell. These warrants have an exercise price of
$0.01
per share and a term of five years.
As
part
of their consideration for acting as placement agent for the May 15, 2007
private placement Brill Securities, Inc
.
received
five year warrants to purchase 109,375 shares of common stock at an exercise
price of $2.60 per share, as adjusted. These warrants have the same terms as
the
warrants issued to the Selling Stockholders in the May 15, 2007 private
placement.
Anti-takeover
provisions
As
discussed above, our Board of Directors can issue up to 4,000,000 shares of
"blank check" preferred stock, with any rights or preferences, including the
right to approve or not approve an acquisition or other change in control.
The
issuance of such "blank check" preferred stock could be used to discourage
a
transaction involving an actual or potential change in control of us or our
management, including a transaction in which our stockholders might otherwise
receive a premium for their shares over then current prices.
In
addition, we are subject to Section 203 of the Delaware General Corporation
Law,
or DGCL, which regulates acquisitions of some Delaware corporations. In general,
Section 203 prohibits, with some exceptions, a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date of the transaction
in which the person became an interested stockholder, unless: (i) prior to
the
date a person becomes an interested stockholder, the board of directors of
the
corporation approved the business combination or the other transaction in which
the person became an interested stockholder; (ii) upon consummation of the
transaction that resulted in the person becoming an interested stockholder,
the
person owned at least 85% of the voting stock of the corporation outstanding
at
the time the transaction commenced, excluding shares owned by persons who are
directors or officers of the corporation and issued under employee stock plans
under which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a
tender or exchange offer; or (iii) on or subsequent to the date the person
became an interested stockholder, the board of directors of the corporation
approved the business combination and the stockholders of the corporation,
other
than the interested stockholder, authorized the transaction at an annual or
special meeting of stockholders by the affirmative vote of at least 66 2/3
% of
the outstanding stock of the corporation not owned by the interested
stockholder.
Section
203 of the DGCL defines a "business combination" to include any of the
following: (i) any merger or consolidation involving the corporation or any
direct or indirect majority-owned subsidiary of the corporation and the
interested stockholder; (ii) any sale, transfer, pledge or other disposition
of
10% or more of the corporation's assets involving the interested stockholder;
(iii) in general, any transaction that results in the issuance or transfer
by
the corporation of any of its stock of any class or series to the interested
stockholder; (iv) any transaction involving the corporation that has the effect
of increasing the proportionate share of its stock of any class or series owned
by the interested stockholder; or the receipt by the interested stockholder
of
the benefit of any loans, advances, guarantees, pledges, or other financial
benefits provided by or through the corporation.
In
general, Section 203 defines an "interested stockholder" as: (i) any person
who
owns 15% or more of a corporation's outstanding voting stock; (ii) any person
associated or affiliated with the corporation, who owns or within three years
prior to the determination of interested stockholder status, did own, 15% or
more of a corporation's outstanding voting stock; or (iii) the affiliates and
associates of any such person.
Section
203 of the DGCL could depress our stock price and delay, discourage or prohibit
transactions not approved in advance by our board of directors, such as takeover
attempts that might result in a premium over the market price of our common
stock.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
On
May
17, 2007, following our change in control as a result of the share exchange
agreement, our Board of Directors approved the dismissal of Mantyla McReynolds
LLC ("Mantyla") as our registered independent certified public accounting firm.
Concurrent with this action, our Board of Directors appointed Moore Stephens
Wurth Frazer and Torbet LLP (“Moore Stephens”) as our new registered independent
certified public accounting firm. Moore Stephens had been the auditors of
Shengtai Holding, Inc. Moore Stephens is located at 1199 South Fairway Drive,
Suite 200, Walnut, CA 91789.
Mantyla
had been previously engaged as our independent auditing firm to audit our
financial statements.
Mantyla’s
audit opinion on the financial statements for the past two years did not contain
an adverse opinion, a disclaimer of opinion, nor was it qualified or modified
as
to uncertainty, audit scope or accounting principles, except for a going concern
opinion expressing substantial doubt about our ability to continue as a going
concern.
During
our two most recent fiscal years (ended December 31, 2006 and 2005) and from
January 1, 2007 to the date of this prospectus, there has not been any
disagreements with Mantyla, whether or not resolved, on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or
procedure, which, if not resolved to Mantyla’s satisfaction, would have caused
it to make reference to the subject matter of the disagreement in connection
with its reports.
We
have
fully authorized Mantyla to respond fully to the inquiries of Moore Stephens
concerning the subject matter of each such agreements or events and to all
other
inquiries.
During
the period we engaged Mantyla, Moore Stephens was not engaged as either the
principal accountant to audit our financial statements or as the auditor of
a
significant subsidiary of us and on whom Mantyla was expected to express
reliance in its reports.
Further,
during the period we engaged Mantyla, neither we nor anyone on the our behalf,
had consulted Moore Stephens regarding the application of accounting principles
to a specific completed or contemplated transaction, or the type of audit
opinion that might be rendered on our financial statements.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC, 100 F Street, N.E., Washington, D.C. 20549, a registration
statement on Form S-1, under the Securities Act for the common stock offered
by
this prospectus. We have not included in this Prospectus all the information
contained in the registration statement and you should refer to the registration
statement and its exhibits for further information.
The
registration statement and reports, statements and other information we file
with the SEC under the Exchange Act may be read and copied at the SEC's Public
Reference Room at 100 F Street NE, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room at 1-800-SEC-0330.
The
SEC maintains a web site (http://www.sec.gov.) that contains the registration
statements, reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC such as us. You
may
access our SEC filings electronically at this SEC website. The SEC filings
are
also available to the public from commercial document retrieval
services.
LEGAL
MATTERS
Our
counsel, Guzov Ofsink, LLC, located at 600 Madison Avenue, 14th Floor, New
York,
New York 10022, is passing upon the validity of the issuance of the common
stock
offered under this prospectus.
EXPERTS
Moore
Stephens Wurth Frazer and Torbet LLP, our new registered independent certified
public accounting firm located at 1199 South Fairway Drive, Suite 200, Walnut,
CA 91789, have audited the financial statements of Shengtai Pharmaceutical,
Inc.
and subsidiaries included in this registration statement to the extent, and
for
the periods set forth in their reports. We have relied upon such reports, given
upon the authority of such firm as experts in accounting and
auditing.
SHENGTAI
PHARMACEUTICAL INC.
FINANCIAL
STATEMENTS
(Stated
in US dollars)
CONTENTS
|
|
PAGE
|
|
|
|
|
|
DECEMBER
31, 2007 AND 2006 (UNAUDITED)
|
|
|
|
CONSOLIDATED
BALANCE SHEET
|
|
|
F-2
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
F-3
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
F-4
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
F-5
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
F-6
|
|
|
|
|
|
|
JUNE
30, 2007 AND, 2006,
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
F-1
|
|
CONSOLIDATED
BALANCE SHEET
|
|
|
F-2
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
F-3
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
F-4
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
F-5
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
F-6
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF
DECEMBER 31, 2007 AND JUNE 30, 2007
|
|
December
31,
|
|
June
30,
|
|
|
|
2007
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
1,046,004
|
|
$
|
6,420,439
|
|
Restricted
cash
|
|
|
1,885,500
|
|
|
5,628,500
|
|
Accounts
receivable, net of allowance for doubtful accounts of $319,887 and
$431,178 as of December 31, and June 30, 2007,
respectively
|
|
|
6,345,988
|
|
|
5,779,967
|
|
Notes
receivable
|
|
|
1,799,285
|
|
|
984,675
|
|
Other
receivables
|
|
|
2,155,536
|
|
|
3,484,484
|
|
Other
receivables - related parties
|
|
|
-
|
|
|
2,491,656
|
|
Other
receivables - shareholder
|
|
|
-
|
|
|
1,229,625
|
|
Loan
to related party
|
|
|
-
|
|
|
657,500
|
|
Inventories
|
|
|
4,474,855
|
|
|
4,449,267
|
|
Prepayments
|
|
|
631,130
|
|
|
140,376
|
|
Total
current assets
|
|
|
18,338,298
|
|
|
31,266,489
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
38,350,904
|
|
|
30,178,074
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Investment
in Changle Shengshi Redian Co., Ltd.
|
|
|
3,188,822
|
|
|
2,675,678
|
|
Loan
to related party - non-current
|
|
|
411,300
|
|
|
394,500
|
|
Prepayments
- non-current
|
|
|
12,640,708
|
|
|
7,429,371
|
|
Intangible
assets - land use right, net of accumulated amortization
|
|
|
2,193,801
|
|
|
1,816,021
|
|
Total
other assets
|
|
|
18,434,631
|
|
|
12,315,570
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
75,123,833
|
|
$
|
73,760,133
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,408,140
|
|
$
|
3,807,997
|
|
Accounts
payable - related party
|
|
|
935,077
|
|
|
949,992
|
|
Notes
payable - banks
|
|
|
1,371,000
|
|
|
8,942,000
|
|
Short
term loans
|
|
|
15,697,950
|
|
|
18,870,250
|
|
Accrued
liabilities
|
|
|
164,386
|
|
|
229,643
|
|
Other
payable
|
|
|
1,937,205
|
|
|
1,526,903
|
|
Employee
loans
|
|
|
1,785,196
|
|
|
596,516
|
|
Employee
loan - officer
|
|
|
36,963
|
|
|
-
|
|
Third
party loan
|
|
|
2,160,193
|
|
|
318,274
|
|
Customer
deposit
|
|
|
1,258,155
|
|
|
796,228
|
|
Long
term loan - current maturity
|
|
|
397,590
|
|
|
381,350
|
|
Taxes
payable
|
|
|
3,856,304
|
|
|
2,048,932
|
|
Total
current liabilities
|
|
|
33,008,159
|
|
|
38,468,085
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
Other
payable - noncurrent
|
|
|
3,183,858
|
|
|
3,661,472
|
|
Total
long term liabilities
|
|
|
3,183,858
|
|
|
3,661,472
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
36,192,017
|
|
|
42,129,557
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized, no shares issued
and
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 19,069,805
and
18,875,000 shares issued and outstanding as of December 31, and June
30,
2007, respectively
|
|
|
19,070
|
|
|
18,875
|
|
Paid-in
capital
|
|
|
19,669,847
|
|
|
19,163,549
|
|
Statutory
reserves
|
|
|
1,735,484
|
|
|
1,735,484
|
|
Retained
earnings
|
|
|
15,267,766
|
|
|
9,885,670
|
|
Accumulated
other comprehensive income
|
|
|
2,239,649
|
|
|
826,998
|
|
Total
shareholders' equity
|
|
|
38,931,816
|
|
|
31,630,576
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
75,123,833
|
|
$
|
73,760,133
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
SALES
REVENUE
|
|
$
|
24,954,288
|
|
$
|
12,310,489
|
|
$
|
44,327,357
|
|
$
|
22,909,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
19,086,274
|
|
|
9,237,442
|
|
|
33,865,306
|
|
|
17,397,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
5,868,014
|
|
|
3,073,047
|
|
|
10,462,051
|
|
|
5,512,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,814,376
|
|
|
958,077
|
|
|
3,510,931
|
|
|
1,929,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
4,053,638
|
|
|
2,114,970
|
|
|
6,951,120
|
|
|
3,582,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on equity investment
|
|
|
977
|
|
|
17,683
|
|
|
149,756
|
|
|
22,207
|
|
Non-operating
income
|
|
|
69,962
|
|
|
38,369
|
|
|
109,709
|
|
|
97,163
|
|
Non-operating
expense
|
|
|
(26,495
|
)
|
|
(2,783
|
)
|
|
(203,844
|
)
|
|
(2,783
|
)
|
Interest
expense and other charges
|
|
|
(519,417
|
)
|
|
(351,223
|
)
|
|
(935,881
|
)
|
|
(368,638
|
)
|
Interest
income
|
|
|
32,243
|
|
|
15,678
|
|
|
98,404
|
|
|
43,645
|
|
Other
(expense), net
|
|
|
(442,730
|
)
|
|
(282,276
|
)
|
|
(781,856
|
)
|
|
(208,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
3,610,908
|
|
|
1,832,694
|
|
|
6,169,264
|
|
|
3,374,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
481,323
|
|
|
243,723
|
|
|
787,168
|
|
|
301,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
3,129,585
|
|
|
1,588,971
|
|
|
5,382,096
|
|
|
3,073,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
140,556
|
|
|
246,971
|
|
|
1,412,651
|
|
|
246,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
3,270,141
|
|
$
|
1,835,942
|
|
$
|
6,794,747
|
|
$
|
3,319,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
$
|
0.16
|
|
$
|
0.28
|
|
$
|
0.30
|
|
Diluted
|
|
$
|
0.15
|
|
$
|
0.16
|
|
$
|
0.27
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,961,992
|
|
|
10,125,000
|
|
|
18,918,496
|
|
|
10,125,000
|
|
Diluted
|
|
|
20,296,006
|
|
|
10,125,000
|
|
|
20,000,956
|
|
|
10,125,000
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
Common
stock
|
|
|
|
|
|
Retained
earnings
|
|
|
|
|
|
|
|
Shares
|
|
Par
value
|
|
|
|
|
|
|
|
Unrestricted
|
|
Accumulated
other
comprehensive
income
|
|
Totals
|
|
BALANCE,
June 30, 2006
|
|
|
10,125,000
|
|
$
|
10,125
|
|
$
|
3,915,871
|
|
$
|
(1,925,996
|
)
|
$
|
1,001,088
|
|
$
|
3,470,940
|
|
$
|
185,402
|
|
$
|
6,657,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,073,002
|
|
|
|
|
|
3,073,002
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,971
|
|
|
246,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
(Unaudited)
|
|
|
10,125,000
|
|
$
|
10,125
|
|
$
|
3,915,871
|
|
$
|
(1,925,996
|
)
|
$
|
1,001,088
|
|
$
|
6,543,942
|
|
$
|
432,373
|
|
$
|
9,977,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
8,750,000
|
|
|
8,750
|
|
|
15,247,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,256,428
|
|
Capital
contribution received
|
|
|
|
|
|
|
|
|
|
|
|
1,925,996
|
|
|
|
|
|
|
|
|
|
|
|
1,925,996
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,076,124
|
|
|
|
|
|
4,076,124
|
|
Adjustment
to statutory
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734,396
|
|
|
(734,396
|
)
|
|
|
|
|
-
|
|
Foreign
currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
394,625
|
|
|
394,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2007
|
|
|
18,875,000
|
|
$
|
18,875
|
|
$
|
19,163,549
|
|
$
|
-
|
|
$
|
1,735,484
|
|
$
|
9,885,670
|
|
$
|
826,998
|
|
$
|
31,630,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
warrants
|
|
|
194,805
|
|
|
195
|
|
|
506,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506,493
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,382,096
|
|
|
|
|
|
5,382,096
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,412,651
|
|
|
1,412,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
(Unaudited)
|
|
|
19,069,805
|
|
$
|
19,070
|
|
$
|
19,669,847
|
|
$
|
-
|
|
$
|
1,735,484
|
|
$
|
15,267,766
|
|
$
|
2,239,649
|
|
$
|
38,931,816
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
5,382,096
|
|
$
|
3,073,002
|
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,187,166
|
|
|
802,766
|
|
Amortization
|
|
|
23,820
|
|
|
21,159
|
|
Allowance
for bad debts
|
|
|
-
|
|
|
718
|
|
Gain
on equipment disposal
|
|
|
(90,098
|
)
|
|
-
|
|
Loss
on disposal of land use right
|
|
|
5,954
|
|
|
-
|
|
Earnings
on equity investment
|
|
|
(149,757
|
)
|
|
(22,207
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(311,689
|
)
|
|
(1,042,970
|
)
|
Notes
receivable
|
|
|
(772,571
|
)
|
|
(569,932
|
)
|
Other
receivables
|
|
|
1,186,223
|
|
|
(975
|
)
|
Other
receivables - related party
|
|
|
2,531,257
|
|
|
(502,261
|
)
|
Other
receivables - shareholder
|
|
|
1,254,248
|
|
|
-
|
|
Inventories
|
|
|
159,692
|
|
|
(393,469
|
)
|
Prepayments
|
|
|
(472,365
|
)
|
|
(139,392
|
)
|
Prepayments
- related party
|
|
|
-
|
|
|
(39,024
|
)
|
Accounts
payable
|
|
|
(1,668,080
|
)
|
|
896,568
|
|
Accounts
payable - related party
|
|
|
(293,176
|
)
|
|
(412,070
|
)
|
Accrued
liabilities
|
|
|
(150,906
|
)
|
|
43,689
|
|
Other
payable
|
|
|
(313,162
|
)
|
|
299,581
|
|
Customer
deposit
|
|
|
417,062
|
|
|
398,934
|
|
Payable
- officer
|
|
|
31,145
|
|
|
-
|
|
Taxes
payable
|
|
|
1,671,334
|
|
|
33,746
|
|
Net
cash provided by operating activities
|
|
|
9,628,193
|
|
|
2,447,863
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of equity investment
|
|
|
-
|
|
|
(898,150
|
)
|
Purchase
plant and equipment
|
|
|
(28,455
|
)
|
|
(415,524
|
)
|
Proceeds
from equipment disposal
|
|
|
34,733
|
|
|
-
|
|
Additions
to construction in progress
|
|
|
(5,865,225
|
)
|
|
(7,553,156
|
)
|
Acquisition
of land use right
|
|
|
(317,183
|
)
|
|
(10,677
|
)
|
Purchase
of software program
|
|
|
(5,343
|
)
|
|
-
|
|
Advances
on plant and equipment purchase
|
|
|
(5,226,396
|
)
|
|
-
|
|
Loan
repayment from related party
|
|
|
667,950
|
|
|
-
|
|
Loan
to related party - non-current
|
|
|
-
|
|
|
(723,205
|
)
|
Net
cash used in investing activities
|
|
|
(10,739,919
|
)
|
|
(9,600,712
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
3,842,060
|
|
|
28,071
|
|
Borrowings
on notes payable - banks
|
|
|
1,335,900
|
|
|
7,055,930
|
|
Payments
on notes payable - banks
|
|
|
(9,084,120
|
)
|
|
(7,084,000
|
)
|
Borrowings
on short term loans
|
|
|
3,566,853
|
|
|
13,168,650
|
|
Payments
on short term loans
|
|
|
(7,440,963
|
)
|
|
(4,946,150
|
)
|
Borrowings
on employee loans
|
|
|
1,271,112
|
|
|
-
|
|
Payments
on employee loans
|
|
|
(137,616
|
)
|
|
-
|
|
Borrowings
on third party loan
|
|
|
1,781,556
|
|
|
-
|
|
Payments
on long term loans
|
|
|
-
|
|
|
(885,500
|
)
|
Cash
proceeds from issuance of common stock
|
|
|
506,493
|
|
|
-
|
|
Dividend
paid to shareholders
|
|
|
-
|
|
|
(393,257
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(4,358,725
|
)
|
|
6,943,744
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
96,016
|
|
|
9,228
|
|
|
|
|
|
|
|
|
|
DECREASE
IN CASH
|
|
|
(5,374,435
|
)
|
|
(199,877
|
)
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
6,420,439
|
|
|
502,457
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
1,046,004
|
|
$
|
302,580
|
|
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
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
December
31, 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 following:
|
|
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
(UNAUDITED)
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
Exercise
Price
|
|
|
|
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
(UNAUDITED)
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
contributions in the amount of $121,516 and $114,703, respectively. For the
three months ended December 31, 2007 and 2006, the Company made pension
contributions 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.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
of
Shengtai Pharmaceutical Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Shengtai Pharmaceutical
Inc. and Subsidiaries as of June 30, 2007 and 2006, and the related consolidated
statements of income and comprehensive income, shareholders’ equity, and cash
flows for each of the years in the three-year period ended June 30, 2007. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Shengtai Pharmaceutical
Inc.
and Subsidiaries as of June 30, 2007 and 2006, and the results of its operations
and cash flows for each of the years in the three-year period ended June 30,
2007, in conformity with accounting principles generally accepted in the United
States of America.
/s/
Moore
Stephens Wurth Frazer and Torbet, LLP
Walnut
California
September
26, 2007
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF
JUNE 30, 2007 AND 2006
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,420,439
|
|
$
|
502,457
|
|
Restricted
cash
|
|
|
5,628,500
|
|
|
3,881,200
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$431,178
and $357,970 as of
June
30, 2007 and 2006, respectively
|
|
|
5,779,967
|
|
|
3,531,810
|
|
Notes
receivable
|
|
|
984,675
|
|
|
358,920
|
|
Other
receivables
|
|
|
3,484,484
|
|
|
369,884
|
|
Other
receivables - related parties
|
|
|
2,491,656
|
|
|
-
|
|
Other
receivables - shareholder
|
|
|
1,229,625
|
|
|
-
|
|
Loan
to related party
|
|
|
657,500
|
|
|
-
|
|
Inventories
|
|
|
4,449,267
|
|
|
1,895,878
|
|
Prepayments
|
|
|
140,376
|
|
|
231,352
|
|
Prepayments
- related party
|
|
|
-
|
|
|
1,378,133
|
|
Total
current assets
|
|
|
31,266,489
|
|
|
12,149,634
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
30,178,074
|
|
|
14,562,974
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Investment
in Changle Shengshi Redian Co., Ltd.
|
|
|
2,675,678
|
|
|
2,245,086
|
|
Loan
to related party - non-current
|
|
|
394,500
|
|
|
-
|
|
Prepayments
- non-current
|
|
|
7,429,371
|
|
|
1,166,998
|
|
Intangible
assets - land use right, net of accumulated amortization
|
|
|
1,816,021
|
|
|
1,146,765
|
|
Total
other assets
|
|
|
12,315,570
|
|
|
4,558,849
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
73,760,133
|
|
$
|
31,271,457
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
3,807,997
|
|
$
|
1,582,812
|
|
Accounts
payable - related party
|
|
|
949,992
|
|
|
348,366
|
|
Notes
payable - banks
|
|
|
8,942,000
|
|
|
7,011,200
|
|
Short
term loans
|
|
|
18,870,250
|
|
|
8,576,200
|
|
Investment
payable
|
|
|
-
|
|
|
888,920
|
|
Accrued
liabilities
|
|
|
229,643
|
|
|
92,862
|
|
Other
payable
|
|
|
1,526,903
|
|
|
256,291
|
|
Employee
loans
|
|
|
596,516
|
|
|
640,667
|
|
Employee
loan - officer
|
|
|
-
|
|
|
93,149
|
|
Third
party loan
|
|
|
318,274
|
|
|
57,319
|
|
Dividends
payable
|
|
|
-
|
|
|
389,216
|
|
Customer
deposit
|
|
|
796,228
|
|
|
276,609
|
|
Long
term liabilities - current maturities
|
|
|
381,350
|
|
|
876,400
|
|
Payable
- officer
|
|
|
-
|
|
|
1,925,996
|
|
Taxes
payable
|
|
|
2,048,932
|
|
|
596,420
|
|
Total
current liabilities
|
|
|
38,468,085
|
|
|
23,612,427
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
Other
payable - non-current
|
|
|
3,661,472
|
|
|
-
|
|
Long
term loans
|
|
|
-
|
|
|
1,001,600
|
|
Total
long term liabilities
|
|
|
3,661,472
|
|
|
1,001,600
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
42,129,557
|
|
|
24,614,027
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized,
no
shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized,
18,875,000,
and 10,125,000 shares issued and
outstanding
as of June 30, 2007 and 2006,
respectively
|
|
|
18,875
|
|
|
10,125
|
|
Paid-in
capital
|
|
|
19,163,549
|
|
|
3,915,871
|
|
Capital
contribution receivable
|
|
|
-
|
|
|
(1,925,996
|
)
|
Statutory
reserves
|
|
|
1,735,484
|
|
|
1,001,088
|
|
Retained
earnings
|
|
|
9,885,670
|
|
|
3,470,940
|
|
Accumulated
other comprehensive income
|
|
|
826,998
|
|
|
185,402
|
|
Total
shareholders' equity
|
|
|
31,630,576
|
|
|
6,657,430
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
73,760,133
|
|
$
|
31,271,457
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
|
|
2007
|
|
2006
|
|
2005
|
|
SALES
REVENUE
|
|
$
|
51,706,215
|
|
$
|
36,029,179
|
|
$
|
24,860,399
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
39,527,662
|
|
|
27,568,092
|
|
|
19,557,743
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
12,178,553
|
|
|
8,461,087
|
|
|
5,302,656
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
4,674,679
|
|
|
3,831,778
|
|
|
3,242,330
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
7,503,874
|
|
|
4,629,309
|
|
|
2,060,326
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) on equity investment
|
|
|
131,420
|
|
|
41,635
|
|
|
(69,345
|
)
|
Other
income
|
|
|
121,798
|
|
|
181,874
|
|
|
205,162
|
|
Gain
from sales of land use right
|
|
|
1,647,833
|
|
|
-
|
|
|
-
|
|
Other
expense
|
|
|
(225,898
|
)
|
|
(214,641
|
)
|
|
(1,683
|
)
|
Interest
expense and other charges
|
|
|
(1,270,418
|
)
|
|
(555,572
|
)
|
|
(606,539
|
)
|
Interest
income
|
|
|
119,353
|
|
|
128,306
|
|
|
27,236
|
|
Other
income (expense), net
|
|
|
524,088
|
|
|
(418,398
|
)
|
|
(445,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
8,027,962
|
|
|
4,210,911
|
|
|
1,615,157
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
878,836
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
7,149,126
|
|
|
4,210,911
|
|
|
1,615,157
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
641,596
|
|
|
185,402
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
7,790,722
|
|
$
|
4,396,313
|
|
$
|
1,615,157
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
per share - basic
|
|
$
|
0.64
|
|
$
|
0.42
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
per share - diluted
|
|
$
|
0.62
|
|
$
|
0.42
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding - basic
|
|
|
11,251,712
|
|
|
10,125,000
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding - diluted
|
|
|
11,477,545
|
|
|
10,125,000
|
|
|
10,125,000
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR
THE
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
|
|
Common
stock
|
|
|
|
Capital
|
|
Retained
earnings
|
|
Accumulated
other
|
|
|
|
|
|
Shares
|
|
Par
value
|
|
Paid-incapital
|
|
contributionreceivable
|
|
Statutoryreserves
|
|
Unrestricted
|
|
comprehensiveincome
|
|
Totals
|
|
BALANCE,
June 30, 2004
|
|
|
10,125,000
|
|
$
|
10,125
|
|
$
|
3,915,871
|
|
$
|
(3,069,645
|
)
|
$
|
142,559
|
|
$
|
503,531
|
|
$
|
-
|
|
$
|
1,502,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000,065
|
)
|
|
|
|
|
(1,000,065
|
)
|
Capital
contribution received
|
|
|
|
|
|
|
|
|
|
|
|
1,143,649
|
|
|
|
|
|
|
|
|
|
|
|
1,143,649
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615,157
|
|
|
|
|
|
1,615,157
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,273
|
|
|
(242,273
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2005
|
|
|
10,125,000
|
|
$
|
10,125
|
|
$
|
3,915,871
|
|
$
|
(1,925,996
|
)
|
$
|
384,832
|
|
$
|
876,350
|
|
$
|
-
|
|
$
|
3,261,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000,065
|
)
|
|
|
|
|
(1,000,065
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,210,911
|
|
|
|
|
|
4,210,911
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
616,256
|
|
|
(616,256
|
)
|
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,402
|
|
|
185,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2006
|
|
|
10,125,000
|
|
$
|
10,125
|
|
$
|
3,915,871
|
|
$
|
(1,925,996
|
)
|
$
|
1,001,088
|
|
$
|
3,470,940
|
|
$
|
185,402
|
|
$
|
6,657,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
8,750,000
|
|
|
8,750
|
|
|
15,247,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,256,428
|
|
Capital
contribution received
|
|
|
|
|
|
|
|
|
|
|
|
1,925,996
|
|
|
|
|
|
|
|
|
|
|
|
1,925,996
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,149,126
|
|
|
|
|
|
7,149,126
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734,396
|
|
|
(734,396
|
)
|
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
641,596
|
|
|
641,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2007
|
|
|
18,875,000
|
|
$
|
18,875
|
|
$
|
19,163,549
|
|
$
|
-
|
|
$
|
1,735,484
|
|
$
|
9,885,670
|
|
$
|
826,998
|
|
$
|
31,630,576
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
|
|
2007
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
7,149,126
|
|
$
|
4,210,911
|
|
$
|
1,615,157
|
|
Adjustments
to reconcile net income to cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,239,157
|
|
|
1,478,734
|
|
|
1,332,533
|
|
Amortization
|
|
|
42,644
|
|
|
41,454
|
|
|
39,258
|
|
Allowance
for bad debts
|
|
|
271,602
|
|
|
114,780
|
|
|
39,514
|
|
Loss
on building disposal
|
|
|
186,470
|
|
|
-
|
|
|
-
|
|
Gain
on disposal of land use right
|
|
|
(1,647,833
|
)
|
|
-
|
|
|
-
|
|
(Earnings)
loss on equity investment
|
|
|
(131,420
|
)
|
|
(41,635
|
)
|
|
69,345
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,288,351
|
)
|
|
(261,286
|
)
|
|
(1,548,602
|
)
|
Notes
receivable
|
|
|
(591,936
|
)
|
|
(126,992
|
)
|
|
(44,307
|
)
|
Other
receivables
|
|
|
(1,082,008
|
)
|
|
1,567
|
|
|
(152,818
|
)
|
Other
receivables - related party
|
|
|
(2,427,043
|
)
|
|
-
|
|
|
-
|
|
Other
receivables - shareholder
|
|
|
(366,185
|
)
|
|
-
|
|
|
-
|
|
Inventories
|
|
|
(2,394,250
|
)
|
|
173,225
|
|
|
(879,841
|
)
|
Prepayments
|
|
|
99,957
|
|
|
(28,710
|
)
|
|
377,245
|
|
Prepayments
- related party
|
|
|
1,409,944
|
|
|
301,037
|
|
|
(562,560
|
)
|
Accounts
payable
|
|
|
1,773,031
|
|
|
176,458
|
|
|
10,660
|
|
Accounts
payable - related party
|
|
|
390,986
|
|
|
200,660
|
|
|
102,260
|
|
Accrued
liabilities
|
|
|
130,238
|
|
|
(65,014
|
)
|
|
(28,497
|
)
|
Other
payable
|
|
|
410,174
|
|
|
166,860
|
|
|
(62,102
|
)
|
Customer
deposit
|
|
|
492,586
|
|
|
201,045
|
|
|
16,292
|
|
Taxes
payable
|
|
|
1,385,613
|
|
|
(14,792
|
)
|
|
382,665
|
|
Net
cash provided by operating activities
|
|
|
5,052,502
|
|
|
6,528,302
|
|
|
706,202
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of equity investment
|
|
|
(909,439
|
)
|
|
(124,020
|
)
|
|
(453,750
|
)
|
Purchase
plant and equipment
|
|
|
(731,295
|
)
|
|
(418,498
|
)
|
|
(363,660
|
)
|
Additions
to construction in progress
|
|
|
(10,308,985
|
)
|
|
(5,814,096
|
)
|
|
(2,575,510
|
)
|
Acquisition
of land use right
|
|
|
(949,900
|
)
|
|
-
|
|
|
-
|
|
Purchase
of software program
|
|
|
(1,281
|
)
|
|
-
|
|
|
-
|
|
Advance
on plant and equipment purchase
|
|
|
(7,225,790
|
)
|
|
(1,155,999
|
)
|
|
-
|
|
Loan
to related party
|
|
|
(1,024,720
|
)
|
|
-
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(21,151,410
|
)
|
|
(7,512,613
|
)
|
|
(3,392,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(1,524,720
|
)
|
|
(279,045
|
)
|
|
(1,663,750
|
)
|
Borrowings
on notes payable - banks
|
|
|
8,710,120
|
|
|
12,201,088
|
|
|
7,132,950
|
|
Payments
on notes payable - banks
|
|
|
(7,173,040
|
)
|
|
(10,743,853
|
)
|
|
(3,835,700
|
)
|
Borrowings
on short term loans
|
|
|
24,785,415
|
|
|
8,979,048
|
|
|
7,683,500
|
|
Payments
on short term loans
|
|
|
(15,178,665
|
)
|
|
(8,358,948
|
)
|
|
(7,435,390
|
)
|
Borrowings
on employee loans
|
|
|
384,224
|
|
|
431,111
|
|
|
117,734
|
|
Payments
on employee loans
|
|
|
(458,632
|
)
|
|
(113,060
|
)
|
|
(84,255
|
)
|
Borrowings
on employee loan - officer
|
|
|
1,281
|
|
|
-
|
|
|
-
|
|
Payments
on employee loan - officer
|
|
|
(96,580
|
)
|
|
-
|
|
|
-
|
|
Borrowings
on third party loan
|
|
|
251,378
|
|
|
57,319
|
|
|
-
|
|
Borrowings
on long term loans
|
|
|
-
|
|
|
992,160
|
|
|
-
|
|
Payments
on long term loans
|
|
|
(1,549,889
|
)
|
|
(868,140
|
)
|
|
(726,000
|
)
|
Cash
proceeds from issuance of common stock
|
|
|
15,256,428
|
|
|
-
|
|
|
1,143,649
|
|
Payments
of amounts due officer
|
|
|
(1,925,996
|
)
|
|
-
|
|
|
-
|
|
Proceeds
from capital contribution receivable
|
|
|
696,371
|
|
|
-
|
|
|
-
|
|
Dividend
paid to shareholders
|
|
|
-
|
|
|
(1,664,503
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
22,177,695
|
|
|
633,177
|
|
|
2,332,738
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
(160,805
|
)
|
|
25,408
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH
|
|
|
5,917,982
|
|
|
(325,726
|
)
|
|
(353,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of year
|
|
|
502,457
|
|
|
828,183
|
|
|
1,182,163
|
|
CASH,
end of year
|
|
$
|
6,420,439
|
|
$
|
502,457
|
|
$
|
828,183
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of this statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
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 as West Coast Car
Company. In the State of California, the Company has operated as West Coast
Car
Company d/b/a So Cal Car Company. The Company operated as a “traditional”
pre-owned dealership, whereby it sought out vehicles from various sources,
and
then sell the vehicles to the general public. Starting from 2007, the Company
changed its business to acquiring, or merging with, an operating
business.
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).
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Weifang
Shengtai was established in Changle County, Weifang City, Shandong Province,
People’s Republic of China on February 4, 1999. Mr. Qingtai Liu and his
management team were the original shareholders.
On
December 25, 2003, Bio-One Corporation (referred to as “Bio-One”), a Nevada
corporation signed a joint venture agreement with Weifang Shengtai. Pursuant
to
the Joint Venture Agreement, Bio-One acquired a 51% interest in Weifang Shengtai
for a cash payment $2,000,000 to fund its share of the registered capital and
2,090,000 shares of Bio-One’s Series A preferred stock to the former
shareholders of Weifang Shengtai. The business term was for 20 years with
registered capital of $3,920,000. Bio-One paid its $2,000,000 contribution
in
2004. The original shareholders contributed a total of $1,920,000 between 1999
and 2004.
On
April
19, 2006, pursuant to a shareholders’ resolution, 37 Chinese shareholders of
Weifang Shengtai transferred their 17.95% interest in the company to Mr. Qingtai
Liu for RMB 5,628,880 ($703,610). On June 3, 2006, the equity exchange was
approved by the local branch of the Ministry of Commerce (MOC) in
Weifang.
On
June
20, 2006, SHI signed an agreement to acquire a 100% ownership in Weifang
Shengtai from Bio-One Corporation which owned a 51% interest in Weifang Shengtai
and Mr. Qingtai Liu who owned the remaining 49% interest. Mr. Qingtai Liu,
who
is one of the founding shareholders of Weifang Shengtai, sold his 49% interest
in Weifang Shengtai to SHI for RMB 15 million (approximately $1,925,996), this
amount is paid in May 2007. Bio-One sold its 51% interest in Weifang Shengtai
to
SHI for $1,000,000 in cash and the return of 4,180,000 Series A preferred shares
of Bio-One owned by Mr. Qingtai Liu. Weifang Shengtai became a wholly foreign
owned entity or “WFOE” and obtained the approval of the local branch of the
Ministry of Commerce (MOC) in the City of Weifang on June 21, 2006. The business
term is 20 years starting on February 10, 2004 when Bio-One acquired its 51%
in
Weifang Shengtai. The registered capital is RMB 32 million (approximately $3.92
million). In accordance with laws governing foreign acquisitions of a Chinese
registered company, SHI will be required to contribute $1,925,996 which required
to be made within 1 year from the date of approval of the business license.
As
of June 30, 2007, this requirement has been met by SHI. As a result of this
transaction, SHI exercised control over Weifang Shengtai.
On
May
26, 2007, Weifang Shengtai increased its registered capital from $3,920,000
to
$15,000,000. The additional $1,108,000 registered capital was contributed by
SHI
in May and June of 2007. This transaction was approved by the local branch
of
the MOC in the City of Weifang and the Company obtained a new business license
on July 16, 2007.
Note
2 - Summary of significant accounting policies
The
reporting entity
The
consolidated financial statements of Shengtai Pharmaceutical Inc. and
Subsidiaries reflect the activities of the parent and its wholly owned
subsidiaries SHI and Weifang Shengtai. The purchase of SHI has been accounted
for as a reverse acquisition and a recapitalization. The assets and liabilities
of SHI were transferred at historical cost under the equity structure of the
Company due to the reverse acquisition on May 15, 2007. The consolidated
financial statements have been presented as if the acquisition occurred at
June
30, 2004.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material inter-company transactions and balances have been eliminated in
the
consolidation.
Foreign
currency translation
The
reporting currency of the Company is the US dollar. The Company uses their
local
currency, Renminbi (RMB), as their functional currency. Results of operations
and cash flow are translated at average exchange rates during the period, and
assets and liabilities are translated at the unified exchange rate as quoted
by
the People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of shareholders’ equity. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
Translation
adjustments amounted to $826,998 and $185,402 as of June 30, 2007 and 2006,
respectively. Assets and liabilities were translated at 7.60 RMB and 7.99 RMB
to
$1.00 USD at June 30, 2007 and 2006, respectively. The equity accounts were
stated at their historical rate. The average translation rates applied to income
statement for the years ended June 30, 2007, 2006 and 2005 were 7.81 RMB, 8.06
RMB and 8.26 RMB to $1.00 USD. Cash flows are also translated at average
translation rates for the period; therefore, amounts reported on the statement
of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet.
Revenue
recognition
The
Company recognizes revenue when the goods are delivered and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added
tax
(VAT). All of the Company’s products sold in the PRC are subject to a Chinese
value-added tax at a rate of 17% of the gross sales price or at a rate approved
by the Chinese local government. This VAT may be offset by VAT paid by the
Company on raw materials and other materials included in the cost of producing
their finished product and certain freight expenses.
Shipping
and handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs. Shipping and handling costs amounted to
$1,927,118, $1,980,055, and $1,494,435, respectively, for the years ended June
30, 2007, 2006 and 2005.
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.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
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 June 30, 2007 and 2006 amounted to $12,129,924 and $4,580,468,
respectively of which $100,000 of the 2007 balance is covered by insurance.
The
Company has not experienced any losses in such accounts and believes it is
not
exposed to any risks on its cash in bank accounts.
Earnings
per share
The
Company reports earnings per share in accordance with the provisions of SFAS
No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders
by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur
if
securities or other contracts to issue common stock were exercised and converted
into common stock.
The
following is a reconciliation of the basic and diluted earnings per share
computation for the years ended June 30, 2007, 2006 and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
Net
income for earnings per share
|
|
$
|
7,149,126
|
|
$
|
4,210,911
|
|
$
|
1,615,157
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
11,251,712
|
|
|
10,125,000
|
|
|
10,125,000
|
|
Diluted
effect of warrants
|
|
|
225,833
|
|
|
-
|
|
|
-
|
|
Weighted
average shares used in diluted computation
|
|
|
11,477,545
|
|
|
10,125,000
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
$
|
0.42
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.62
|
|
$
|
0.42
|
|
$
|
0.16
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
At
June
30, 2007, all outstanding warrants were included in the year ended June 30,
2007
calculation of diluted earnings per share.
Restricted
cash
The
Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions and these amounts are
$5,628,500 and $3,881,200 as of June 30, 2007 and 2006,
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
June 30, 2007, the amount not disbursed was $500,000 and this balance is
classified under other receivables in the Company’s consolidated balance
sheets.
Accounts
receivable
The
Company’s business operations are conducted in the People’s Republic of China.
During the normal course of business, the Company extends unsecured credit
to
its customers. Accounts receivable, outstanding at June 30, 2007 and 2006
amounted to $6,211,145 and $3,889,780, respectively. Management reviews its
accounts receivable on a regular basis to determine if the allowance for
doubtful accounts is adequate. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. Known bad debts are written
off against allowance for doubtful accounts when identified.
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the periods ended June 30, 2007 and 2006 is as follows:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
357,970
|
|
$
|
233,976
|
|
Additions
charged to bad debt expense
|
|
|
271,602
|
|
|
114,780
|
|
Write-off
charged against the allowance
|
|
|
(217,838
|
)
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
19,444
|
|
|
9,214
|
|
Ending
allowance for doubtful accounts
|
|
$
|
431,178
|
|
$
|
357,970
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Concentrations
of credit risk
The
credit risk on bank deposits is limited because the counterparties are banks
with high credit-ratings assigned by international credit-rating agencies,
or
state-owned banks in China. The Company has never experienced any losses in
such
accounts and believes it is not exposed to any significant risks on its cash
in
bank accounts, either in the People’s Republic of China or in the United
States.
Our
financial instruments that potentially expose us to concentrations of credit
risk are primarily our trade accounts receivable. We conduct credit evaluations
of our customers but generally have not required collateral or other security
interests from our customers when we grant them credit. We make a provision
for
estimated uncollectible accounts based primarily on the age of the receivables
but also when we identify potential payment problems with specific customers.
For the reporting period, the top ten customers account for 29.3% for our total
sales. We have not had significant collections issues for receivables generated
from sales of our products.
For
export sales, we frequently require significant down payments or letter of
credit by our customers prior to shipment. During the year, the Company
maintains export credit insurance to protect the Company against the risk that
the oversea customers may default on settlement.
Inventories
Inventories
are stated at the lower of cost or market using the weighted average basis
and
consists of the following:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Raw
materials
|
|
$
|
2,297,901
|
|
$
|
92,478
|
|
Work-in-progress
|
|
|
1,130,900
|
|
|
938,283
|
|
Finished
goods
|
|
|
1,020,466
|
|
|
865,117
|
|
Total
|
|
$
|
4,449,267
|
|
$
|
1,895,878
|
|
The
Company reviews its inventory periodically for possible obsolete goods or to
determine if any reserves are necessary. As of June 30, 2007 and 2006, the
Company has determined that no reserves are necessary.
Plant
and equipment
Plant
and
equipment are stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of
the
assets with 3% residual value. Depreciation expense for the years ended June
30,
2007, 2006 and 2005 amounted to $2,239,157, $1,478,734 and 1,332,533,
respectively.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Estimated
useful lives of the assets are as follows:
|
|
Estimated
|
|
Useful
Life
|
|
Buildings
|
|
|
5-20
|
|
|
years
|
|
Machinery
and equipment
|
|
|
5-10
|
|
|
years
|
|
Automobile
facilities
|
|
|
5-10
|
|
|
years
|
|
Electronic
equipment
|
|
|
5-7
|
|
|
years
|
|
Construction
in progress represents the costs incurred in connection with the construction
of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the assets are
completed and placed into service.
Maintenance,
repairs and minor renewals are charged directly to expenses as incurred. Major
additions and betterment to property and equipment are capitalized.
Long-lived
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2007, the Company
expects these assets to be fully recoverable.
Plant
and
equipment consists of the following:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Buildings
|
|
$
|
5,272,190
|
|
$
|
3,433,689
|
|
Machinery
and equipment
|
|
|
22,257,978
|
|
|
8,901,528
|
|
Automobile
facilities
|
|
|
487,319
|
|
|
242,435
|
|
Electronic
equipment
|
|
|
307,391
|
|
|
183,433
|
|
Construction
in progress
|
|
|
9,055,482
|
|
|
7,256,042
|
|
Total
|
|
|
37,380,360
|
|
|
20,017,127
|
|
Accumulated
depreciation
|
|
|
7,202,286
|
|
|
5,454,153
|
|
Total
|
|
$
|
30,178,074
|
|
$
|
14,562,974
|
|
Interest
costs totaling $759,372 and $189,904 was capitalized into construction in
progress for the years ended June 30, 2007 and 2006, respectively.
Investment
in Changle Shengshi Redian Co., Ltd.
The
Company entered into a joint venture partnership with Weifang City Investment
Company and Changle Century Sun Paper Industry Co., Ltd on September 16, 2003
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated in Weifang City, Shandong Province, People’s Republic
of China. Changle Shengshi’s principal activity is to produce and sell
electricity and heat.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
On
April
12, 2005, the Company’s ownership percentage in Changle Shengshi was diluted
from 30% to 20% as a result of an additional investment to Changle Shengshi
by
another party. The Company accounts for this investment under the equity method.
Equity method investments are recorded at original cost and adjusted to
recognize the Company’s proportionate share of the investee’s net income or
losses, additional contributions made and distributions received and
amortization of basis differences. The Company recognizes a loss if it is
determined that other than temporary decline in the value of the investment
exists.
Summarized
financial information of Changle Shengshi is as follows:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Current
assets
|
|
$
|
8,065,168
|
|
$
|
6,809,428
|
|
Non-current
assets
|
|
|
23,027,549
|
|
|
16,191,704
|
|
Total
assets
|
|
|
31,092,717
|
|
|
23,001,132
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
14,137,526
|
|
|
6,266,901
|
|
Non-current
liabilities
|
|
|
3,576,800
|
|
|
5,508,800
|
|
Shareholders'
equity
|
|
|
13,378,391
|
|
|
11,225,431
|
|
Total
liabilities and shareholders' equity
|
|
$
|
31,092,717
|
|
$
|
23,001,132
|
|
Summarized
financial information of Changle Shengshi for the years is as
follows:
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net
sales
|
|
$
|
17,366,341
|
|
$
|
7,622,505
|
|
$
|
1,906,861
|
|
Gross
profit
|
|
$
|
3,586,157
|
|
$
|
1,249,000
|
|
$
|
(110,418
|
)
|
Income
before taxes
|
|
$
|
2,308,837
|
|
$
|
431,747
|
|
$
|
(370,586
|
)
|
Net
income
|
|
$
|
1,546,921
|
|
$
|
430,682
|
|
$
|
(370,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
309,384
|
|
$
|
86,136
|
|
$
|
(74,117
|
)
|
Elimination
of intercompany profit
|
|
|
177,964
|
|
|
44,501
|
|
|
(4,772
|
)
|
Company's
share of net income
|
|
$
|
131,420
|
|
$
|
41,635
|
|
$
|
(69,345
|
)
|
Intangible
assets
All
land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. However, the government grants the user a “land
use right” to use the land. The Company has purchased land use rights from March
2000 to December 2003 in succession for a total price of approximately
$1,295,959. The Company has obtained another land use right in June 2007 for
a
price of $949,900. The Company has the right to use various parcels of land
that
range from 20 to 50 years in length. The Company amortizes the cost of the
land
use rights over their useful life using the straight-line method. At June 30,
2007 and 2006, accumulated amortization amounted to $96,299 and $194,178,
respectively.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
On
June
30, 2007 the Company sold land use right at an auction due to relocation in
one
of the Company’s manufacturing plant. The net book value of the land use right
sold amounted to $306,984. The gross proceeds from the sales of the land use
right was $1,998,685. This balance has not been received as of June 30, 2007
and
this balance is classified under other receivables in the Company’s consolidated
balance sheets.
Intangible
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2007, the Company
expects these assets to be fully recoverable.
Total
amortization expense for the years ended June 30, 2007, 2006 and 2005 amounted
to $42,644, $41,454 and $39,258 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
June 30, 2007 and 2006.
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. The adoption had no
affect on the Company’s financial statements.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Value
Added Tax
Enterprises
or individuals who sell products, engage in repair and maintenance or import
and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products, raw materials used in the production of the Company’s finished
products, and payment of freight expenses can be used to offset the VAT due
on
sales of the finished product.
VAT
on
sales and VAT on purchases amounted to $7,453,346 and $6,991,599 for the year
ended June 30, 2007, $5,571,553 and $4,545,708 for the year ended June 30,
2006,
and $3,773,090 and $3,589,025 for the year ended June 30, 2005, 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 the past experience and the
financial condition of the companies (See note 10).
Recently
issued accounting pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”
(“FIN 48”). The Company adopted Interpretation No. 48 on January 1, 2007. See
income taxes section above for details.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
addresses the measurement of fair value by companies when they are required
to
use a fair value measure for recognition or disclosure purposes under GAAP.
SFAS
No. 157 provides a common definition of fair value to be used throughout GAAP
which is intended to make the measurement of fair value more consistent and
comparable and improve disclosures about those measures. SFAS No. 157 will
be
effective for an entity's financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect SFAS
No.
157 will have on its consolidated financial statements.
In
February 2007, the Financial Accounting Standards Board (‘‘FASB’’) issued
Statement of Financial Accounting Standards (‘‘SFAS’’) No. 159, The Fair Value
Option for Financial Assets and Financials Liabilities — Including an Amendment
of FASB Statement No. 115. This standard permits measurement of certain
financial assets and financial liabilities at fair value. If the fair value
option is elected, the unrealized gains and losses are reported in earnings
at
each reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument
in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS No. 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements. The
standard is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is currently evaluating the provisions
of SFAS No. 159 to determine the potential impact, if any, the adoption will
have on the Company’s financial statements.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered
for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed. The
Company is currently evaluating the effect of this pronouncement on financial
statements.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
Note
3 - Supplemental disclosure of cash flow information
Income
taxes paid for the years ended June 30, 2007, 2006 and 2005 amounted to
$125,782, $0 and $0, respectively.
Interest
paid for the years ended June 30, 2007, 2006 and 2005 amounted to $1,820,918,
$613,288 and $586,480, respectively.
Non-cash
investing and financing activity
During
the year ended June 30, 2007, the Company acquired plant and equipment and
construction in progress through non-current prepayment and accounts payables.
Total plant and equipment and construction in progress acquired in the year
ended June 30, 2007 not purchased by cash amounted to $4,498,494.
During
2006, the Company used $999,106 of amounts due from Mr. Qingtai Liu to offset
total dividends and other payables due him.
Note
4 - Related party transactions
For
business convenience, the Company purchases starch from Shouguang Shengtai
Starch Co. Ltd. (“Shouguang Shengtai”), of which Mr. Qingtai Liu, the Company’s
chief executive officer, owns 40%. The Company had $1,378,133 of prepayments
to
Shouguang Shengtai at June 30, 2006. 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 June 30, 2007 was $992,449. Total related party
purchases from Shouguang Shengtai for the years ended June 30, 2007, 2006 and
2005 amounted to $7,652,465 and $15,963,415 and $13,794,612, respectively,
which
represents approximately 22%, 77% and 81% of the Company’s purchase of raw
materials for the years ended June 30, 2007, 2006 and 2005,
respectively.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
As
of
June 30, 2006, the Company owed Mr. Qingtai Liu $1,925,996 in connection with
the Company’s purchase of his 49% interest in Weifang Shengtai as described in
note 1. This amount is unsecured and non-interest bearing. As of June 30, 2007
the amount owed to Mr. Qingtai Liu has been repaid. In connection to this
transaction and the 17.95% ownership interest transfer transaction from the
37
Chinese original shareholders of Weifang Shengtai (“Original Shareholders”) to
Mr. Qingtai Liu on April 19, 2006, Mr. Qingtai Liu has assumed the liabilities
of the Original Shareholders’ capital contribution and is entitled to contribute
this amount as capital contribution to the Company. As of June 30, 2007, the
remaining balance to be contributed by Mr. Qingtai Liu amounted to $1,229,625.
This balance will be repaid in form of cash or operating assets by December
31,
2007.
The
Company’s utilities are partially provided by Changle Shengshi, a related party,
as described in Note 2 under the caption “Investment in Changle Shengshi Redian
Co., Ltd”. The Company had a total of $949,992 and $348,366 of accounts payable
due to Changle Shengshi at June 30, 2007 and 2006, respectively. The utilities
expense amounted to $4,958,249, $1,705,675 and $581,338 for the years ended
June
30, 2007, 2006 and 2005, respectively.
The
Company loaned money to Changle Shengshi and entered into two loan contracts
as
follows:
|
|
June
30, 2007
|
|
June
30, 2006
|
|
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
|
|
|
394,500
|
|
|
-
|
|
Total
|
|
$
|
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.
Note
5 - Prepayments
Prepayments
represent partial payments or deposits on inventory purchases and amounted
to
$140,376 and $231,352 as of June 30, 2007 and 2006, respectively.
Prepayments
- non-current represent partial payments or deposits on plant and equipment
purchases and amounted to $7,429,371 and $1,166,998 as of June 30, 2007 and
2006, respectively.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
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 following:
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Loan
from Bank of China, due varoius dates from July 2007 to June 2008.
Monthly
interest
only
payments ranging from 7.3125% to 7.668% per annum, guaranteed by
unrelated
third
party and secured by properties
|
|
$
|
10,993,400
|
|
$
|
6,710,720
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates from
July
2007 to
March
2008 monthly interest only payments ranging from 6.120% to 8.307%
per
annum,
guaranteed
by unrelated third party and secured by properties
|
|
|
3,945,000
|
|
|
1,252,000
|
|
|
|
|
|
|
|
|
|
Loan
from Agriculture Bank of China, due various dates from November to
December of 2007.
Monthly
interest only payments raging from 7.956% to 8.568%per annum,
guaranteed
by unrelated third party and secured by and properties
|
|
|
1,959,350
|
|
|
613,480
|
|
|
|
|
|
|
|
|
|
Loan
from Communication Bank, due July 2007. Monthly interest only payments
7.2% per
annum,
guaranteed by unrelated third party
|
|
|
1,972,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,870,250
|
|
$
|
8,576,200
|
|
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:
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Bank
of China, various amounts, due dates from September to October 2007,
restricted cash
required
50% of loan amount, guaranteed by unrelated third party
|
|
$
|
4,997,000
|
|
$
|
5,759,200
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, various amounts, various due dates
from July
to
August
2007, restricted cash required 50% of loan amount, guaranteed by
unrelated
third
party
|
|
|
3,945,000
|
|
|
1,252,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,942,000
|
|
$
|
7,011,200
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Employee
loans
The
Company has borrowed monies from certain employees to fund the Company’s
operations. The loans bear interest at 7.2% and the principal is due upon
demand. Employee loans amounted to $596,516 and $640,667 as of June 30, 2007
and
2006, respectively.
Employee
loan - officer
The
chief
executive officer, Mr. Liu, Qingtai, loaned money to the Company’s operations.
The loans bear interest at 7.2% and the principal is due upon demand. Employee
loan - officer amounted to $0 and $93,149 as of June 30, 2007 and 2006,
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 June 30, 2007 and 2006 amounted to $318,274 and $57,319,
respectively.
Long
term loans
Long
term
loans represent amounts due to various banks and other outside parties which
are
normally due on demand after one year. The Company had a total of $0 and
$1,001,600 of total long term loans, net of current maturities and consisted
of
the following:
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Bank
of China, Chang Le Branch, secured by land use right, building, equipment
and
unrelated
third parties interest at 6.138% per annum, due September
2006
|
|
$
|
-
|
|
$
|
876,400
|
|
|
|
|
|
|
|
|
|
Agricultural
Credit Union, interest at 7.84% per annum, due May 2008
|
|
|
381,350
|
|
|
363,080
|
|
|
|
|
|
|
|
|
|
San
Dong Energy Saving Project Inc., interest at 10.0% per annum, due
March
2009
|
|
|
-
|
|
|
638,520
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
381,350
|
|
|
1,878,000
|
|
Less
current maturities
|
|
|
(381,350
|
)
|
|
(876,400
|
)
|
Total
|
|
$
|
-
|
|
$
|
1,001,600
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Current
maturities for the next five years are follows:
|
|
Amount
|
|
June
30, 2008
|
|
$
|
381,350
|
|
Thereafter
|
|
$
|
-
|
|
Total
interest expense (net of capitalized interest) for the years ended June 30,
2007, 2006 and 2005 on all debt amounted to $1,270,418, $555,572 and $606,539,
respectively. Interest capitalized into construction in progress totaled
$759,372, $189,904 and $59,669 for the years ended June 30, 2007, 2006 and
2005,
respectively.
Note
7 - Investment payable
Investment
payable represents additional capital that the Company is required to contribute
into its equity investment, Changle Shengshi. The investment payable amounted
to
$0 and $888,920 at June 30, 2007 and 2006, respectively.
Note
8 - 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.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
In
February 2004, the Company became a Sino-foreign joint venture. In August 2004,
the Company was granted by the state government for benefit of income tax
exemption in first 2 years from September 2004 to August 2006 and 50% exemption
for the third to fifth years from September 2006 to August 2008. In addition,
the Company is located in a Special Economic Zone and the PRC tax authority
has
offered a special income tax rate of 24% for the company. With the approval
of
the local government, the Company is subject to income tax at a reduced rate
of
12% from September 2006 to August 2008 after the two-year 24% exemption for
income taxes until its exemption and reduction periods expire in August
2008.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).
The
key
changes are:
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs, except for High Tech companies who
pays a
reduced rate of 15%;
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of the
next 5
years or until the tax holiday term is completed, whichever is
sooner.
|
The
Company’s subsidiary, Weifang Shengtai, was established before March 16, 2007
and therefore is qualified to continue enjoying the reduced tax rate as
described above. Since the detailed guidelines of the new tax law is not
publicized yet, the Company can not determined what the new tax rate will be
applicable to the Company after the end of their respective tax holiday
terms.
During
the years ended June 30, 2007, 2006 and 2005, there was $878,836, $0 and $0,
respectively, provision for income taxes.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended June 30:
|
|
2007
|
|
2006
|
|
2005
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
Foreign
income not recoginized in USA
|
|
|
(34.0
|
)
|
|
(34.0
|
)
|
|
(34.0
|
)
|
China
income taxes
|
|
|
33.0
|
|
|
33.0
|
|
|
33.0
|
|
China
income tax exemption
|
|
|
(21.0
|
)
|
|
(33.0
|
)
|
|
(33.0
|
)
|
Total
provision for income taxes
|
|
|
12.0
|
%
|
|
-
|
%
|
|
-
|
%
|
The
estimated tax savings due to the tax exemption for the years ended June 30,
2007, 2006 and 2005 amounted to $1,537,963, $1,389,601 and $533,002,
respectively. The net effect on basic earnings per share if the income tax
had
been applied would decrease basic earnings per share for the years ended June
30, 2007, 2006 and 2005 by $0.13, $0.14 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 years ended June 30, 2007, 2006 and 2005
by
$0.13, $0.14 and $0.05, respectively.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Taxes
payable
Taxes
payable consisted of the following:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
VAT
payable
|
|
$
|
1,273,390
|
|
$
|
608,602
|
|
Individual
income tax withheld
|
|
|
1,316
|
|
|
454
|
|
Income
tax payable (credit)
|
|
|
764,827
|
|
|
(20,586
|
)
|
Housing
property tax payable
|
|
|
7,306
|
|
|
6,956
|
|
Others
|
|
|
2,093
|
|
|
994
|
|
Total
|
|
$
|
2,048,932
|
|
$
|
596,420
|
|
Note
9 - Dividends
Prior
June 30, 2006, the board of directors of Weifang Shengtai approved and declared
total dividends of $2,468,400.
The
dividends paid or declared by the company to its original shareholders were
as
follows:
|
|
June
30,
2007
|
|
June
30,
2006
|
|
Dividends
payable, beginning
|
|
$
|
389,216
|
|
$
|
1,000,065
|
|
Dividends
declared
|
|
|
-
|
|
|
1,000,065
|
|
Dividends
paid
|
|
|
(389,216
|
)
|
|
(1,664,503
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
53,589
|
|
Dividends
payable, ending
|
|
$
|
-
|
|
$
|
389,216
|
|
Note
10 - Commitments and Contingent liabilities
Guarantees
As
of
June 30, 2007, the Company has guaranteed the debts of others in the following
amounts:
Company
|
|
Short
Term Bank Loans
|
|
Notes
Payable
|
|
Totals
|
|
Chang
Le Century Sun Paper Industry Co.
|
|
$
|
5,417,800
|
|
$
|
2,551,100
|
|
$
|
7,968,900
|
|
Weifang
Yongchang Food Co.
|
|
|
591,750
|
|
|
-
|
|
|
591,750
|
|
Total
|
|
$
|
6,009,550
|
|
$
|
2,551,100
|
|
$
|
8,560,650
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Note
11 - Shareholders’ equity
On
May
15, 2007, the Company entered into and consummated a share purchase agreement
(the “Share Purchase Agreement”) with nineteen accredited investors (the
“Purchasers”). Pursuant to the Share Purchase agreement, the Purchasers
purchased from the Company an aggregate of 8,750,000 shares of common stock
and
4,375,000 attached warrants for $2.00 per share (or an aggregate purchase price
of $17,500,000) and for total net proceeds of $15,256,428. The exercise price
of
the warrants $2.60 per share and the term of the warrants is five years. In
connection with the offering, the Company paid a placement fee of 12% of the
proceeds in cash.
Warrants
Concurrent
with the private placement, the Company issued 4,375,000 warrants with an
exercise price at $2.60 per share (“Investor Warrants”) to investors. These
warrants issued to the new investors have a 5-year term and shall be callable
by
the Company if the Company’s shares trade at $8.00 for 20 consecutive trading
days and underlying shares are registered for resale. The warrants contain
a
standard adjustment provisions upon stock dividend, stock split, stock
combination, recapitalization and a change of control transaction.
The
Company also issued 218,750 warrants with exercise price at $2.60 (“Placement
Agent Warrants”) to Brill Securities, inc., the exclusive placement agent. These
warrants have the same terms as the Investor Warrants. These warrants were
issued on August 8, 2007.
In
connection with the offering, the Company issued Chinamerica Fund, LP 75,000
warrants and Jeff Jenson 25,000 warrants (collectively as “Lead Investor
Warrants”) to compensate the former as lead investor and the latter in assisting
in providing the shell of West Coast Car Company. These warrants have the same
term as the Investor Warrant except with an exercise price of $0.01 per
share.
All
Investor Warrants, Placement Agent warrants, and Lead Investor Warrants meet
the
conditions for equity classification pursuant to FAS 133 “Accounting for
Derivatives” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock”. Therefore, these
warrants were classified as equity and accounted as common stock issuance
cost.
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
Warrants
|
|
Warrants
|
|
Average
Exercise
|
|
Remaining
|
|
|
|
Outsanding
|
|
Exercisable
|
|
Price
|
|
Contractual
Life
|
|
Outstanding,
June 30, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
4,475,000
|
|
|
4,475,000
|
|
$
|
2.54
|
|
|
4.88
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding,
June 30, 2007
|
|
|
4,475,000
|
|
|
4,475,000
|
|
$
|
2.54
|
|
|
4.88
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Note
12 - 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,
the
common welfare fund, and the enterprise fund. These statutory reserves represent
restricted retained earnings.
Surplus
reserve fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividends
to
shareholders. For the years ended June 30, 2007, 2006 and 2005, the Company
transferred $734,396, $616,256 and $242,273, respectively, 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.
Common
welfare fund
The
Company is required to transfer 5% to 10% of its net income, as determined
in
accordance with the PRC accounting rules and regulations, to the statutory
common welfare fund. This fund can only be utilized on capital items for the
collective benefit of the Company’s employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare facilities. This
fund
is non-distributable other than upon liquidation. The transfer to this fund
must
be made before distribution of any dividend to shareholders. For the years
ended
June 30, 2007, 2006 and 2005, the Company transferred $0 and $205,419 and
$80,758, respectively, to the reserve fund. Effective from January 1, 2006,
the
common welfare fund reserve is no longer required by the PRC accounting rules
and regulations. The balance in this fund at June 30, 2006 was transferred
to
the surplus reserve fund.
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.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Note
13 - Retirement benefit plans
Regulations
in the People’s Republic of China require the Company to contribute to a defined
contribution retirement plan for the benefit of all permanent employees. All
permanent employees are entitled to an annual pension equal to their basic
salaries at retirement. The PRC government is responsible for the benefit
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at 15% to 20% of the monthly basic
salaries of the current employees. For the years ended June 30, 2007, 2006
and
2005, the Company made pension contributions in the amount of $207,308, $170,533
and $152,096, respectively.
Note
14 - Current vulnerability due to certain concentrations
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.
Note
15 - Revenue by geographic area
The
following table summarized financial information for the periods ended June
30,
2007, 2006 and 2005 concerning the Company’s revenues based on geographic
area:
Revenue
|
|
2007
|
|
2006
|
|
2005
|
|
China
|
|
$
|
46,607,204
|
|
$
|
31,282,456
|
|
$
|
22,393,195
|
|
International
|
|
|
5,099,011
|
|
|
4,746,723
|
|
|
2,467,204
|
|
Total
|
|
$
|
51,706,215
|
|
$
|
36,029,179
|
|
$
|
24,860,399
|
|
Note
16 - Subsequent event
In
July
2007, the Company began construction of employee dormitory. Construction is
expected to be completed in June 2008 .Total amount expected to be spent on
the
construction is approximately $800,000 to $900,000.
See
report of independent registered public accounting firm.
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