The
diverse range of transfusion media can 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. IMS Health estimates the global
pharmaceutical market at $712 in 2007. It estimates global market growth
in 2007
at 6.4% with 13.3% in Asia, including 25.7% in China. IMS Media Advisory
April
16, 2008. In its 2008 forecast, IMS identifies the following key market
dynamics: The seven markets of China, Brazil, Mexico, South Korea, India,
Turkey
and Russia are expected to grow 12 - 13 percent in 2008. “In these markets,
there is significantly greater access both to generic and innovative new
medicines as primary care improves and becomes more available in rural areas,
and as private health insurance becomes more commonly held.” IMS Health's 2008
Global Pharmaceutical Market and Therapy Forecast November 1, 2007.
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, 2007 total global pharmaceutical sales grew 6.4%
at
constant exchange rates, to $712 billion. In the top ten major markets, audited
growth was 5.1% in 2007. 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 web site
(http://www.ynetc.gov.cn/Art
icle_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 Web site (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 Web site, 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
web
site (www.yd210.com)).
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 healthcare.
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 with 50%
of
its total production being exported. 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 web site,
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 Materials 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
healthcare 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 web site, 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
materials 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.
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 the domestic market, as well
as
the public awareness of quality healthcare 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:
|
·
|
Healthcare
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 healthcare
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, we are able to 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
FY2006
|
|
FY2007
|
|
FY2008
|
|
$
|
370,467
|
|
$
|
548,172
|
|
$
|
3,103,805
|
|
Russia
Import
approval permit issued in 2004
Products
exported: Dextrose Monohydrate Oral, Dextrose Monohydrate
transfusion
FY2006
|
|
FY2007
|
|
FY2008
|
|
$
|
258,115
|
|
$
|
1,006,133
|
|
$
|
1,248,805
|
|
Australia
Import
approval permit issued in 2003
Product
exported: Dextrose Monohydrate Oral
|
|
FY2007
|
|
FY2008
|
|
$
|
278,202
|
|
$
|
813,746
|
|
$
|
433,312.6
|
|
Singapore
(plus
re-export
to
Thailand)
Import
approval permit issued in 2003
Products
exported:
Dextrose
Monohydrate
Injection
|
|
FY2007
|
|
FY2008
|
|
$
|
28,285
|
|
$
|
29,345
|
|
$
|
60,573
|
|
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)
•
CPI
USA
(oral) ,(andh)
•
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. Internationally, although our foreign competitors
may be better-capitalized, we have significant advantages as
follows:
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 292,275 square meters of land, of which approximately
only
81.29% is being utilized, leaving room for expansion. We have only started
to
export to markets such as South Korea, Russia, Australia and Singapore and
seventy 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, the existing glucose manufacturing facility and
the 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 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 focus more on 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 our goals
for growth:
•
Vertical
integration of our manufacturing capabilities by building and operating a
cornstarch plant.
We
believe the cornstarch plant can lower production costs and improve profit
margin because higher-quality and lower cost raw materials could be produced
in-house and there is 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 240,000
tons (it can be easily expanded to 300,000 tons) 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 commenced construction of our
new
glucose manufacturing facility, which was completed in July
2008.
•
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 our business, (ii)
reorganize sales department, (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 the Search Engine
Optimization
Major
Customers
Our
customers are principally located in the PRC but we hope to expand our
international customer base. Our principal customers are hospitals and
pharmaceutical companies. Below is a list of our largest PRC
customers:
•
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
•
Hong
Kong
Xiehe Group
•
Redox
Australia
•
PBI
Thailand
•
SGN
Korea
No
one
customer accounted for more than 10% of our sales for fiscal years ended
June
30, 2008, 2007, and 2006.
Intellectual
Property
We
formally acquired the registered "Heng De Bao" trademark from Changle Medical
Starch Factory on or about July 28, 2000. The trademark 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
is
valid through 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 plants, and flowers;
and malt which is animal food.
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, February
14,
2013, and April 18, 2009, respectively.
Additionally,
we have obtained Drug Registration Certificates for glucose and glucose pro
oral
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.
All
of
our production lines including the new glucose production lines have passed
inspection by the Environmental Protection Bureau of the PRC and was issued
a
Certificate of Qualification.
Employees
As
of
June 30, 2008, we employed approximately 825 full-time employees. Of these,
7
are group administrators, 20 are managers, approximately 45 are in sales,
approximately 50 perform administrative functions, and approximately 703
are in
production, storage and distribution.
Item
1A. Risk Factors.
Investment
in our common stock involves risks. You should carefully consider the risks
we
describe below before deciding to invest. The market price of our common
stock
could decline due to any of these risks, in which case you could lose all
or
part of your investment. In assessing these risks, you should also refer
to the
other information included in this Annual Report, including our consolidated
financial statements and the accompanying notes. You should pay particular
attention to the fact that we are a holding company with substantial operations
in China and are subject to legal and regulatory environments that in many
respects differ from that of the United States. Our business, financial
condition or results of operations could be affected materially and adversely
by
any of the risks discussed below and any others not foreseen. This discussion
contains forward-looking statements.
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, we are subject
to the
environmental rules and regulations such as the Integrated Wastewater Discharge
Standard (GB8978-1996).
The
PRC
only recently has afforded provincial and local economic autonomy and permitted
private economic activities. The PRC government has exercised and continues
to
exercise substantial control over virtually every sector of the PRC economy
through regulation and state ownership.
Our
ability to operate in the PRC may be harmed by changes in its laws and
regulations, including those relating to manufacturing, taxation, import
and
export tariffs, environmental regulations, land use rights, property and
other
matters.
Our
production and manufacturing facility is subject to PRC regulation and
environmental laws. The PRC government has been active in regulating the
pharmaceutical and medicinal goods industry. Our business and products are
subject to government regulations mandating the use of good manufacturing
practices. Changes in these laws or regulations in the PRC, or other countries
we sell into, that govern or apply to our operations could have a materially
adverse effect on our business. For example, the law could change so as to
prohibit the use of certain chemical agents in our products. If such chemical
agents are found in our products, then such a change would reduce our
productivity of that product.
We
are a
state-licensed corporation. If we were to lose our state-licensed status,
we
would no longer be able to manufacture our products in the PRC.
There
is no assurance that PRC economic reforms will not adversely affect our
operations in the future
As
a
developing nation, the PRC's economy is more volatile than that of developed
Western industrial economies. It differs significantly from that of the U.S.
or
a Western European country in such respects as structure, level of development,
capital reinvestment, resource allocation and self- sufficiency. Only in
recent
years has the PRC economy moved from what had been a command economy through
the
1970s to one that during the 1990s encouraged substantial private economic
activity. Although the PRC government still owns the majority of productive
assets in the PRC, in the past several years the government has implemented
economic reform measures that emphasize decentralization and encourage private
economic activity.
In
1993,
the Constitution of the PRC was amended to reinforce such economic reforms.
The
trends of the 1990s indicate that future policies of the Chinese government
will
emphasize greater utilization of market forces. The PRC government has confirmed
that economic development will follow the model of a market economy. For
example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinated to the state-owned companies, which are the
mainstay of the Chinese economy. However, there can be no assurance that,
under
some circumstances, the government's pursuit of economic reforms will not
be
restrained or curtailed. Actions by the central government of the PRC could
have
a significant adverse effect on economic conditions in the country as a whole
and on the economic prospects for our Chinese operations. Economic reforms
could
either benefit or damage our operations and profitability. Some of the things
that could have this effect are: (i) level of government involvement in the
economy; (ii) control of foreign exchange; (iii) methods of allocating
resources; (iv) international trade restrictions; and (v) international
conflict.
Under
the
present direction, we believe that the PRC will continue to strengthen its
economic and trading relationships with foreign countries and business
development in the PRC will follow market forces. While we believe that this
trend will continue, there can be no assurance that this will be the case.
A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports
or
sources of supplies, or the expropriation or nationalization of private
enterprises and could require us to divest ourselves of any interest we then
hold in Chinese properties or businesses. Although the PRC government has
been
pursuing economic reform policies for more than two decades, there is no
assurance that the government will continue to pursue these policies or that
these policies may not be significantly changed, especially in the event
of a
change in leadership, social or political disruption, or other circumstances
affecting the PRC's political, economic and social life.
Because
these economic reform measures may be inconsistent, ineffectual or temporary,
there are no assurances that:
•
we
will
be able to capitalize on economic reforms;
•
the
Chinese government will continue its pursuit of economic reform
policies;
•
the
economic policies, even if pursued, will be successful;
•
economic
policies will not be significantly altered from time to time; and
•
business
operations in the PRC will not become subject to the risk of
nationalization.
Anti-inflation
measures may be ineffective or harm our ability to do business in the
PRC
Since
1979, the PRC government has continued to reform its economic system. Because
many reforms are unprecedented or experimental, they are expected to be refined
and improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation,
or
in the disparities in per capita wealth between regions within the PRC, could
lead to further readjustment of the reform measures. This refining and
readjustment process may instead negatively affect our operations and there
is
no guarantee that it will be effective.
Over
the
last few years, the PRC's economy has registered a high growth rate. During
the
past ten years, the rate of inflation in the PRC has been as high as 20.7%
and
as low as -2.2%. Recently, there have been indications that rates of inflation
have increased. In response, the PRC government recently has taken measures
to
curb this excessively expansive economy. These corrective measures were designed
to restrict the availability of credit or regulate growth and contain inflation.
These measures have included devaluations of the PRC currency, the Renminbi
(RMB), restrictions on the availability of domestic credit, reducing the
purchasing capability of certain of its customers, and limited re-centralization
of the approval process for purchases of some foreign products. These austere
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 our
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 rules mandate accounting practices, which are not consistent
with
U.S. generally accepted accounting principles. PRC’s accounting rules require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of accounts of Foreign Invested Enterprises
are
maintained in accordance with Chinese accounting rules. 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 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, Ms. Yiru Shi, and Mr.
Chris
Wang, may be residents of the PRC and not of the United States, and
substantially all the assets of these persons are located outside the U.S.
As a
result, it could be difficult for investors to effect service of process
in the
United States, or to enforce a judgment obtained in the United States against
us
or any of these persons.
The
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but
not
limited to the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings.
We
and any future subsidiaries are considered foreign persons or foreign funded
enterprises under PRC laws, and as a result, we are required to comply with
PRC
laws and regulations. These laws and regulations are sometimes vague and
may be
subject to future changes, and their official interpretation and enforcement
may
involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance
by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may
have on
our business.
Governmental
control of currency conversion may affect the value of your
investment.
The
majority of our revenues will be settled in Renminbi and U.S. dollars, and
any
future restrictions on currency exchanges may limit our ability to use revenues
generated in Renminbi to fund any future business activities outside the
PRC or
to make dividend or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises like
us
may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in the PRC authorized to conduct foreign exchange
business.
In
addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in the PRC, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the PRC regulatory
authorities will not impose more stringent restrictions on the convertibility
of
the Renminbi.
The
value of our securities and your ability to receive dividends may be affected
by
the foreign exchange rates 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 rates 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—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 appreciation
of the Renminbi against the U.S. Dollar. While the international reaction
to the
Renminbi revaluation has generally been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. Dollar.
Recent
PRC regulations relating to the establishment of offshore special purpose
companies by PRC domestic residents and registration requirements for employee
stock ownership plans or share option plans may subject our PRC resident
beneficial owners or the plan participants to personal liability, limit our
ability to inject capital into our PRC subsidiaries, limit our subsidiaries’
ability to increase their registered capital or distribute profits to us,
or may
otherwise adversely affect us.
The
China
State Administration of Foreign Exchange ("SAFE") issued a public notice
in
October 2005 requiring PRC domestic residents to register with the local
SAFE
branch before establishing or controlling any company outside of China for
the
purpose of capital financing with assets or equities of PRC companies, referred
to in the notice as an "offshore special purpose company." PRC domestic
residents who are shareholders of offshore special purpose companies and
have
completed round trip investments but did not make foreign exchange registrations
for overseas investments before November 1, 2005 were retroactively required
to
register with the local SAFE branch before March 31, 2006. PRC resident
shareholders are also required to amend their registrations with the local
SAFE
in certain circumstances. After consultation with China counsel, we do not
believe that any of our PRC domestic resident shareholders are subject to
the
SAFE registration requirement, however, we cannot provide any assurances
that
all of our shareholders who are PRC residents will not be required to make
or
obtain any applicable registrations or approvals required by these SAFE
regulations in the future. The failure or inability of our PRC resident
shareholders to comply with the registration procedures set forth therein
may
subject us to fines and legal sanctions, restrict our cross-border investment
activities, or limit our PRC subsidiaries’ ability to distribute dividends or
obtain foreign-exchange-dominated loans to our company.
As
it is
uncertain how the SAFE regulations will be interpreted or implemented, we
cannot
predict how these regulations will affect our business operations or future
strategy. For example, we may be subject to more stringent review and approval
process with respect to our foreign exchange activities, such as remittance
of
dividends and foreign-currency-denominated borrowings, which may adversely
affect our results of operations and financial condition. In addition, if
we
decide to acquire a PRC domestic company, we cannot assure you that we or
the
owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by
the
SAFE regulations. This may restrict our ability to implement our acquisition
strategy and could adversely affect our business and prospects.
In
December 2006, the People’s Bank of China promulgated the Implementation Rules
of the Administrative Measures for Individual Foreign Exchange, or the
Individual Foreign Exchange Rules, setting forth the respective requirements
for
foreign exchange transactions by PRC individuals under either the current
account or the capital account. In January 2007, SAFE issued implementing
rules
for the Individual Foreign Exchange Rules, which, among other things, specified
approval requirements for certain capital account transactions such as a
PRC
citizen’s participation in the employee stock ownership plans or stock option
plans of an overseas publicly-listed company. On March 28, 2007, SAFE
promulgated the Application Procedure of Foreign Exchange Administration
for
Domestic Individuals Participating in Employee Stock Holding Plan or Stock
Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the
Stock Option Rule, PRC citizens who are granted stock options by an overseas
publicly-listed company are required, through a PRC agent or PRC subsidiary
of
such overseas publicly-listed company, to register with SAFE and complete
certain other procedures. We and our PRC employees who may be granted stock
options are subject to the Stock Option Rule. If we or our PRC optionees
fail to
comply with these regulations, we or our PRC optionees may be subject to
fines
and legal sanctions.
The
new provisions of the PRC Employment Contract Law may substantially increase
our
labor-related costs in the future.
The
PRC
Employment Contract Law, which became effective as of January 1, 2008, contains
many more provisions favorable to employees than existing labor regulations
in
effect in China. This may substantially increase our labor-related costs
in our
future operations. According to the new law, an employee is entitled to
terminate his or her employment relationship with his or her employer for
certain causes, such as delay in payment of wages or social insurance
contribution or dissatisfactory labor protection, and under such circumstances
the employer is liable to pay compensation to the employee. The amount of
such
compensation payment shall be one month's salary for each year that the employee
has served the employer, subject to a cap of twelve months' salary. An employer
shall also be liable to compensate an employee when the employer decides
not to
renew an existing employment contract that is about to expire, unless the
employee refuses to renew the employment contract even though the employer
offers equal or more favorable terms than those in the existing employment
contract. In addition, an employer is obligated to conclude an open-ended
employment contract with an employee after two consecutive terms of fixed-term
employment, which means the employer will be liable to pay damages to an
employee if it terminates this employee without cause, until the employee
reaches an age at which he or she is eligible for pension payment. We may
have
greater difficulty terminating underperforming employees and may incur higher
levels of labor costs in order to comply with the provisions of the new law,
which may have a material adverse effect on our business, financial condition
and operating results.
Risks
related to our business
We
cannot give any assurance that any plans for future expansion will be
implemented or that they will be successful.
While
we
have expansion plans, which include making full use of the newly built
cornstarch manufacturing plant (partially completed and operational since
January 2007), upgrading our existing glucose manufacturing facility, building
a
new glucose manufacturing facility and expanding our sales overseas, there
is no
guarantee that such plans will be implemented or that they will be successful.
These plans are subject to, among other things, their feasibility to meet
the
challenges we face, our ability to arrange for sufficient funding and the
ability to hire qualified and capable employees to carry out these expansion
plans.
We
have a limited operating history and limited historical financial information
upon which you may evaluate our performance.
Our
operating subsidiary, Weifang Shengtai, was incorporated in 1999 and our
operations have been largely confined to the PRC. In addition, while we have
had
some experience in managing a cornstarch manufacturing facility, we may not
be
adequately prepared to manage and operate a larger, 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:
|
•
|
expand
our product offerings and maintain the high quality of our
products;
|
|
•
|
manage
our expanding operations, including the integration of any future
acquisitions;
|
|
•
|
obtain
sufficient working capital to support our expansion and to fill
customers'
orders in time;
|
|
•
|
maintain
adequate control of our expenses;
|
|
•
|
implement
our product development, marketing, sales, and acquisition strategies
and
adapt and modify them as needed;
and
|
|
•
|
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.
|
We
face stiff 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 financial resources than we do. This additional experience
and financial backing 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 assure you that we can
successfully remain competitive. If our competitors develop a more efficient
product or undertake 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 our revenues are generated
from sales in the PRC, a slowdown or other adverse developments in the PRC
economy could materially and adversely affect our customers, demand for our
products, and our business. Although the PRC economy has grown significantly
in
recent years, we cannot assure you that such growth will continue. While
we
believe the demand for our products is not dependent on the health of the
economy, we do not know how sensitive we are to a slowdown in economic growth
or
other adverse changes in the PRC economy. A slowdown in overall economic
growth,
an economic downturn or recession or other adverse economic developments
in the
PRC may materially reduce the demand for our products and materially and
adversely affect our business.
Our
major
competitors may be better able than us to successfully endure downturns in
our
sector. In periods of reduced demand for our products, we can either choose
to
maintain market share by reducing our selling prices to meet competition
or
maintain selling prices, which would likely sacrifice market share. Sales
and
overall profitability would be reduced under either scenario. In addition,
we
cannot assure you that additional competitors will not enter our existing
markets, or that we will be able to compete successfully against existing
or new
competition.
Inflation
in the PRC could negatively affect our profitability and
growth.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and
rising
inflation. If prices for our products rise at a rate that is insufficient
to
compensate for the rise in the costs of supplies, it may have an adverse
effect
on profitability. In order to control inflation in the past, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a
slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade
and
indicated in a statement that the measure was prompted by inflationary concerns
in the PRC economy. Repeated rises in interest rates by the central bank
would
likely slow economic activity in the PRC which could, in turn, materially
increase our costs and also reduce demand for our products.
A
widespread health problem in the PRC could negatively affect our
operations
A
renewed
outbreak of SARS or another widespread public health problem in the PRC,
such as
bird flu, where a major portion of our revenue is derived, could have an
adverse
effect on our operations. Our operations may be impacted by a number of
health-related factors, including quarantines or closures of some offices
that
would adversely disrupt our operations. Any of the foregoing events or
other
unforeseen consequences of public health problems could adversely affect
our
operations.
Enforcement
against us or our directors and officers may be
difficult
Because
our principal assets are located outside of the U.S. and almost all our
directors and officers reside outside of the U.S., it may be difficult for
you
to enforce your rights based on U.S. Federal securities laws against us and
our
officers and some directors or to enforce a U.S. court judgment against us
or
them in the PRC.
In
addition, our operating subsidiary is located in the PRC and substantially
all
of its assets are located outside of the U.S. It may, therefore, be difficult
for investors in the U.S. to enforce their legal rights based on the civil
liability provisions of the U.S. Federal securities laws against us in the
courts of either the U.S. or the PRC, 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
have identified significant deficiencies in our internal
controls.
As
set
forth in Item 9A, below, we have identified significant deficiencies in our
internal controls. While we are taking steps to address these significant
deficiencies, there can be no assurance that such steps will be adequate
to
entirely cure the deficiencies.
Inadequate
funding for our capital expenditures may affect our growth and
profitability
Our
sales
revenues have increased from $19,999,826 for the year ended June 30, 2004,
to $
90,871,223 for the year ended June 30, 2008. 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:
|
•
|
our
financial condition and results of
operations;
|
|
•
|
the
condition of the PRC economy and the healthcare sector in the
PRC;
|
|
•
|
conditions
in relevant financial markets; and
|
|
•
|
relevant
PRC laws and regulations.
|
If
we are
unable to obtain financing, as needed, on a timely basis and on acceptable
terms
to our investors or lenders, our financial position,competitive position,
growth
and profitability may be adversely affected.
We
may not be able to effectively control and manage our
growth.
If
our
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. We may not have the requisite
experience to manage and operate a larger, more modern cornstarch manufacturing
plant and a bigger glucose production line. In addition, we may face challenges
in managing expanding product offerings and in integrating acquired businesses
with our own. These events would increase demands on our existing management,
workforce and facilities. Failure to satisfy these increased demands could
interrupt or adversely affect our operations and cause production backlogs,
longer product development time frames and administrative
inefficiencies.
Significant
fluctuations in raw material prices may have a material adverse effect on
us
We
do not
have any long-term supply contracts with our raw materials suppliers. Any
significant fluctuation in price of our raw materials could have a material
adverse effect on the manufacturing cost of our products. We are subject
to
market conditions and although raw materials are generally available and
we have
not experienced any raw materials 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 supplies 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 reasons beyond our control.
We
had
also mitigated the risks of a shortage in cornstarch by managing a
cornstarch-producing company, Shouguang Shengtai Starch Company, and implemented
a vertical integration manufacturing program, which includes building our
own
cornstarch processing plant, in which the plant is now operational. This
will
not only lower production costs and improve profit margins, but it will
also
allow Weifang Shengtai to produce higher quality, lower-cost cornstarch.
We
cannot guarantee these measures will be effective in eliminating all risks
attendant to the supply of raw materials. In the
event
that our cost of materials increase, we may have to raise prices of our
products, making us less competitive in price.
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
materials costs to our customers.
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 policy 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
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, such as the
United
States, where product liability claims are more prevalent.
Except
for automobile insurance, and Directors & Officers Liability and Company
Reimbursement 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 38.64% 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 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 American Stock Exchange. You may not be able to sell your shares due
to the
absence of an established trading market.
Our
common stock is subject to the Penny Stock
Regulations
Our
common stock is, and will continue to be, subject to the SEC's "penny stock"
rules to the extent that the price remains less than $5.00. Those rules,
which
require delivery of a schedule explaining the penny stock market and the
associated risks before any sale, may further limit your ability to sell
your
shares.
The
SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. Our common
stock,
when and if a trading market develops, may fall within the definition of
penny
stock and subject to rules that impose additional sales practice requirements
on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess
of
$1,000,000, or annual incomes exceeding $200,000 or $300,000, together with
their spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for
any
transaction, other than exempt transactions, involving a penny stock, the
rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and
the
registered representative, current quotations for the securities and, if
the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny
stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common stock and may affect the ability of investors to sell
their
common stock in the secondary market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the
economy
and the financial markets or other developments affecting our competitors
or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market
price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
A
large
number of shares of common stock will be issuable for future sale which will
dilute the ownership percentage of our current holders of common stock. We
have
successfully registered for public resale 8,750,000 shares (as well as 4,375,000
shares issuable on exercise of the attached warrants) belonging to our investors
and the availability for public resale of those shares may depress our stock
price.
Also
as a
result, there will be a significant number of new shares of common stock
on the
market in addition to the current public float. Sales of substantial amounts
of
common stock, or the perception that such sales could occur, and the existence
of warrants to purchase shares of common stock at prices that may be below
the
then current market price of the common stock, could adversely affect the
market
price of our common stock and could impair our ability to raise capital through
the sale of our equity securities.
Item
1B. Unresolved Staff Comments.
Not
applicable.
Item
2. Properties.
Our
facility in the PRC is located at the 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 June 2007 Weifang Shengtai purchased various land
use
rights in succession for a total price of approximately $2,243,000. Weifang
Shengtai obtained another land use right in July 2007 for a price of
approximately $314,000. Weifang Shengtai obtained a new land use right in
March
2008 for a price of $346,410. In May 2008, the Company paid approximately
$734,000 to a local government which enabled the land use right to be classified
from industrial use to commercial use. As a result Weifang Shengtai has the
right to use various parcels of land that range from 20 to 50 years in term,
all
of which are currently being used by Weifang Shengtai for its business.
Weifang
Shengtai occupies an area of approximately 292,275 square meters (72 acres)
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
|
|
14,696
|
|
(Reserved
for future growth)
|
|
January
14, 2030
|
Changle
Economic and Technology Development Zone
|
|
73,313.38
|
|
Old
glucose production facility
|
|
April
28, 2052
|
Changle
Economic and Technology Development Zone
|
|
40,000
|
|
(Reserved
for future growth)
|
|
March
10, 2058
|
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
|
Item
3.
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.
Item
4.
Submission
of
Matters
to
a
Vote
of
Security
Holders.
None.
PA
R
T
I
I
Item
5.
M
ar
k
et
for
R
e
gi
s
tra
n
t’s
C
ommon
Eq
u
i
ty,
R
e
lat
e
d
S
toc
k
h
ol
d
e
r
M
atte
r
s
and
I
ss
u
er
P
u
r
c
ha
s
e
s
of
Eq
u
i
ty
S
e
c
u
ritie
s
.
Market
I
n
format
i
on
We
began
trading on the Over the Counter Bulletin Board on January 12, 2007, and
our
symbol is "SGTI.OB." Prior to that, 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 September
24, 2008,
the last reported bid price of our common stock was $2.50 per share and
the last
reported ask price was $2.70 per share.
CALENDAR
QUARTER ENDED
|
|
HIGH
BID(S)
|
|
LOW
BID(S)
|
|
September
30, 2007
|
|
$
|
6
|
|
$
|
1.01
|
|
December
31, 2007
|
|
$
|
5.51
|
|
$
|
2.45
|
|
March
31, 2008
|
|
$
|
3.45
|
|
$
|
2.61
|
|
June
30, 2008
|
|
$
|
3.5
|
|
$
|
2.75
|
|
Holders
As
of
September 24, 2008, there were 19,094,805 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.
Equity
Compensation Plan Information and Warrants and Options
As
of
September 24, 2008 we had 4,473,945 outstanding warrants to purchase
4,473,945
shares of common stock. 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
.
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
.
received
five year warrants to purchase 218,750 shares of common stock at an exercise
price of 2.60 per share, as adjusted. These have the same terms as the
warrants
issued to the Selling Stockholders in the May 15, 2007, private placement.
On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”).
On
May
14, 2008, the Company granted 500,000 stock options and 160,000 non-qualified
stock options pursuant to the Stock Incentive Plan. All options have
an exercise
price of $3.34, which is the closing price on the date of grant, and
expire five
years after the date of grant. All options vest over a period of three
years
from the date of grant.
Plan
category
|
|
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
|
|
Weighted-average exercise price
of outstanding options, warrants
and rights
|
|
Number of securities remaining available for
future issuance under equity compensation
plans (excluding securities reflected in column
(a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Equity
compensation plans not approved by security holders
|
|
|
660,000
|
|
$
|
3.34
|
|
|
1,340,000
|
|
Total
|
|
|
660,000
|
|
$
|
3.34
|
|
|
1,340,000
|
|
Item
6. S
e
l
e
c
ted
Fina
n
c
ial
Data.
The
following selected financial data for the fiscal years ended 2008,2007,
2006,
2005 and2004 are derived from our audited consolidated financial statements.
The
data should be read in conjunction with our consolidated financial statements
and notes thereto and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in this
report.
Consolidated
Statements of
Operations
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(audited)
|
|
(audited)
|
|
(audited)
|
|
(audited)
|
|
(audited)
|
|
|
|
|
|
|
|
Sales
revenue
|
|
$
|
90,871,223
|
|
$
|
51,706,215
|
|
$
|
36,029,179
|
|
$
|
24,860,399
|
|
$
|
19,999,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of good sold
|
|
|
70,613,757
|
|
|
39,527,662
|
|
|
27,568,092
|
|
|
19,557,743
|
|
|
16,487,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
20,257,466
|
|
|
12,178,553
|
|
|
8,461,087
|
|
|
5,302,656
|
|
|
3,512,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
7,390,623
|
|
|
4,674,679
|
|
|
3,831,778
|
|
|
3,242,330
|
|
|
2,474,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
12,866,843
|
|
|
7,503,874
|
|
|
4,629,309
|
|
|
2,060,326
|
|
|
1,037,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
net income
|
|
|
(1,810,530
|
)
|
|
524,088
|
|
|
(418,398
|
)
|
|
(445,169
|
)
|
|
(550,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income taxes
|
|
|
11,056,313
|
|
|
8,027,962
|
|
|
4,210,911
|
|
|
1,615,157
|
|
|
487,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
645,988
|
|
|
878,836
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,410,325
|
|
$
|
7,149,126
|
|
$
|
4,210,911
|
|
$
|
1,615,157
|
|
$
|
487,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
3,890,123
|
|
|
641,596
|
|
|
185,402
|
|
|
—
|
|
|
—
|
|
Comprehensive
Income
|
|
$
|
14,300,448
|
|
$
|
7,790,722
|
|
$
|
4,396,313
|
|
$
|
11,615,157
|
|
$
|
487,577
|
|
Earning
per share - basic
|
|
$
|
0.55
|
|
$
|
0.64
|
|
$
|
0.42
|
|
$
|
0.16
|
|
$
|
0.05
|
|
Earning
per share - diluted
|
|
$
|
0.52
|
|
$
|
0.62
|
|
$
|
0.42
|
|
$
|
0.16
|
|
$
|
0.05
|
|
Basic
weighted average common shares outstanding
|
|
|
18,993,789
|
|
|
11,251,712
|
|
|
10,125,000
|
|
|
10,125,000
|
|
|
10,125,000
|
|
Diluted
weighted average common shares outstanding
|
|
|
19,874,486
|
|
|
11,477,545
|
|
|
10,125,000
|
|
|
10,125,000
|
|
|
10,125,000
|
|
|
|
Year
Ended June 30,
|
|
Consolidated
Balance Sheets
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(audited)
|
|
(audited)
|
|
(audited)
|
|
(audited)
|
|
(audited)
|
|
Current
Assets
|
|
$
|
24,282,846
|
|
$
|
31,266,489
|
|
$
|
12,149,634
|
|
$
|
11,981,783
|
|
$
|
7,900,644
|
|
Total
Assets
|
|
|
101,313,662
|
|
|
73,760,133
|
|
|
31,271,457
|
|
|
23,672,498
|
|
|
17,644,345
|
|
Current
Liabilities
|
|
|
51,904,264
|
|
|
38,468,085
|
|
|
23,612,427
|
|
|
19,564,316
|
|
|
14,447,904
|
|
Total
Liabilities
|
|
|
54,558,259
|
|
|
42,129,557
|
|
|
24,614,027
|
|
|
20,411,316
|
|
|
16,141,904
|
|
Total
Stockholders’ Equity
|
|
|
46,755,403
|
|
|
31,630,576
|
|
|
6,657,430
|
|
|
3,261,182
|
|
|
1,502,441
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
This
report contains forward-looking statements. These statements relate to
future
events or our future financial performance. In some cases, youcan 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 genereally,
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 Annual Report on Form 10-K 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 Form 10-K 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,” and Item 1A—Risk Factors.
Overview
We
are,
through our wholly-owned subsidiary, Shengtai Holding Inc. and its wholly-owned
subsidiary in the PRC, Weifang Shengtai Pharmaceutical Co., Ltd, a leading
manufacturer and supplier of pharmaceutical grade glucose in the PRC.
We also
manufacture glucose and starch products for food and beverage industry
for
domestic market.
During
the reporting period, we increased our production of pharmaceutical grade
glucose products, in particular dextrose monohydrate. 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 for restorative and
nutritional purposes. It is used as a raw material in a wide array of
pharmaceutical products such as transfusions and intravenous drips.
Our
cornstarch production facility with the design capacity to produce 240,000
tons
of cornstarch a year was completed and started production in January
2007. This
new complex is close to our existing glucose production plant and new
glucose
production complex which was completed in July, 2008. Additionally, this
new
facility allows us to produce our own cornstarch and replace our suppliers
of
cornstarch. We are able to ensure the adequacy and quality of the cornstarch
we
use and also meet our increasing demand for quality cornstarch. Since
cornstarch
is produced on our premises, we are able to eliminate shipping costs
to
transport the cornstarch to our glucose production facility and operating
costs,
thus resulting in lower manufacturing costs.
In
addition to our pharmaceutical glucose series of products, we also have
produced
other product lines of glucose and starch products such as industrial
glucose,
syrup, starch, Avermectins, and dextrin, which are used for food, beverage
and
industrial production. In May 2008 we stopped producing Avermectins because
we
can not currently produce and sell this product on an efficient scale
and we
want to focus our limited resources to our main product line for the
time
being.
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 healthcare 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.
Management
has been placing emphasis on (i) product quality control (ii) enhancement
of
operating efficiency (iii) expansion of geographical coverage and
diversification of customer base, and (iv) new product development. We
believe
that these points are essentially for maintaining our
competitiveness.
Our
production facilities have been fully certified GMP (Good Manufacturing
Practice
for Drugs), ISO9002 and HACCP. The 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.
Our
production lines are vertically integrated. Our production facilities
are all
inter-connected by an enclosed pipeline system to enhance overall production
efficiency, minimize wastage of water and raw materials, and to avoid
production
contamination.
We
are
currently developing 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. We believe that environment protection and production efficiency
are
important in our growth.
At
the
end of calendar year 2006, the Changle local government negotiated with
us and
required us to surrender the land use right of our old factory in the
downtown
Changle for their municipal construction. The land we occupied was 27,396
square
meters. We were offered a bigger parcel of land in Changle Economic and
Technology Development Zone with 85,880 square meters as described
below.
In
April
2007, we acquired the rights to use a piece of land measuring 85,880
square
meters in the Changle Economic and Technology evelopment Zone. We developed
the
land and built a new glucose production complex with an expected production
capacity of 120,000 tons per year ( It can expanded to 150,000 if necessary).
The construction has been finished at the end of July 2008. The new facility
will be used to produce pharmaceutical grade glucose.
In
July
2007, we acquired the right to use a piece of land measuring 40,000 square
meters in the Changle Economic and Technology Development Zone. We plan
to use
the land as reserve for future development. During the reporting period
under
review, we managed to successfully expand our domestic sales network.
As of June
30, 2008, all the provinces except Tibet in the PRC have been covered
by our
domestic sales network. We have established representative offices in
4
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 seventy countries, and we plan to increase our global
sales in
the coming years.
We
constantly strive to broaden and diversify our customer base. A broader
customer
base can not only mitigate our reliance on certain big customers, but
also bring
us more opportunities. We 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. Our top ten customers accounted
for
only 34.08% for our total sales for the fiscal year ended June 30,
2008.
Management
is not aware of any adverse trends that would materially affect our market
and
financial position. We will continue to identify and pursue innovative
products
and technology to our increase market share and optimize our cost structure.
Barring unforeseen circumstances, we anticipate continued growth in our
sales
growth. Our ability to meet increased customer demand and stay profitable
will
however still depend on
factors
such as our production capacity and working capital.
Result
of Operations
Year
Ended June 30, 2008 Compared with Year Ended June 30, 2007
The
following table shows our operating results for the fiscal years ended
June 30,
2008 and 2007.
|
|
Fiscal Year ended
June 30, 2008
|
|
Fiscal Year ended
June 30, 2007
|
|
Sales Revenue
|
|
$
|
90,871,223
|
|
$
|
51,706,215
|
|
Costs
of Goods Sold
|
|
|
70,613,757
|
|
|
39,527,662
|
|
Gross
Profit
|
|
|
20,257,466
|
|
|
12,178,553
|
|
Sales,
General and Administrative Expenses
|
|
|
7,390,623
|
|
|
4,674,679
|
|
Operating
Income
|
|
|
12,866,843
|
|
|
7,503,874
|
|
Other
Net Income (Expense)
|
|
|
(1,810,530
|
)
|
|
524,088
|
|
Income
before Income Taxes
|
|
|
11,056,313
|
|
|
8,027,962
|
|
Provision
for Income Taxes
|
|
|
645,988
|
|
|
878,836
|
|
Net
income
|
|
|
10,410,325
|
|
|
7,149,126
|
|
Sales
revenue for the fiscal year ended June 30, 2008 was $90,871,223, an increase
of
$37,165,008, or 75.75% compared with the corresponding period in 2007. This
increase was mostly the result of the increase in sales of our corn starch
and
other products which include Fibers, Dextrin, corn embryo, Protein Powders,
and
Phytin. The increased revenue of these two categories is mainly because we
completed the new cornstarch plant in September, 2006, and the cornstarch
plant
production capacity achieved 73.33% utilization rate in FY 2008. Glucose
revenues did not increase because our old glucose plant has reached full
production capacity. In addition, the sales prices increased, especially
the
price of the other products which include Fibers, Dextrin, corn embryo, Protein
Powders, and Phytin
.
Costs
of
goods sold for the year ended June 30, 2008 was $70,613,757, an increase
of
$31,086,095, or 78.64% compared with the corresponding period in 2007.
The
increase in cost of goods sold is in tandem with the increase in sales
of our
products and because of the increase of our main raw material - corn.
Gross
profit for the year ended June 30, 2008 was $20,257,466, an increase of
$8,078,913, or 66.34% compared with the corresponding period
in
2007.
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.
However,
the profit margin of 2008 is lower than 2007. Gross profit margin for the
year
ended June 30, 2008 was 22.3%, while it was 23.6% for the same period in
2007.
The decreased gross profit margin is because of the increased corn price
and
increased sales of lower gross profit margin corn products. As the product
capacity of cornstarch is improved, we produced a large scale of cornstarch,
and
the new plant of glucose had not been completed, we cannot use most of
the
cornstarch, so we have to sell most of the cornstarch, and the sales composition
of our products changed. We expect after the completion of our new glucose
plant, most cornstarch will be consumed internally, and the sales of glucose
will increase, so the sales will be composed of mainly higher gross profit
margin products. Then the total gross profit margin should be
higher.
Selling,
general and administrative expenses for the year ended June 30, 2008 was
$7,390,623, an increase of $2,715,944, or 58.10% compared with the corresponding
period in 2007. 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
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. In addition, the
expense
of stock options $317,636 was also a part of selling, general and administrative
expenses.
Net
income for the year ended June 30, 2008 was $10,410,325, an increase of
$3,261,199, or 45.62% compared with the corresponding period in
2007.
The
increase of net income was due to our increase in production output, sales
volume and gross profit.
Fiscal
Year Ended June 30, 2007 and Fiscal 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, 2007
|
|
Fiscal Year ended
June 30, 2006
|
|
Sales Revenue
|
|
$
|
51,706,215
|
|
$
|
36,029,179
|
|
Costs
of Goods Sold
|
|
|
39,527,662
|
|
|
27,568,092
|
|
Gross
Profit
|
|
|
12,178,553
|
|
|
8,461,087
|
|
Sales,
General and Administrative Expenses
|
|
|
4,674,679
|
|
|
3,831,778
|
|
Operating
Income
|
|
|
7,503,874
|
|
|
4,629,309
|
|
Other
Net Income (Expense)
|
|
|
524,088
|
|
|
(418,398
|
)
|
Income
before Income Taxes
|
|
|
8,027,962
|
|
|
4,210,911
|
|
Provision
for Income Taxes
|
|
|
878,836
|
|
|
—
|
|
Net
income
|
|
|
7,149,126
|
|
|
4,210,911
|
|
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.
Liquidity
and Capital Resources
Operating
Activities
Fiscal
Year Ended June 30, 2008 compared to Fiscal Year Ended June
30,2007
Net
cash
provided by operating activities for fiscal year 2008 was $7,482,153,
compared
to $5,552,502 provided by operating activities for fiscal year 2007.
The
increase of net cash provided by operations was mostly because of the
following
reasons: We have increased sales. More other receivables have been collected,
and all other receivable -related parties and receivable- shareholders
have been
collected.
Investing
Activities
Fiscal
Year Ended June 30, 2008 compared to Fiscal Year Ended June 30,
2007
Net
cash
used in investing activities for fiscal 2008 was $13,986,437, compared
to
$21,151,410 used in investing activities for fiscal 2007. The decrease
of net
cash used in investing activities is because we spent most of our capital
expenditures for building our cornstarch and glucose factories in fiscal
year
2007. In fiscal year 2008, we are in the process of completing the glucose
factory and there is less capital expenditure. The glucose factory was
completed
in July 2008.
Financing
Activities
Fiscal
Year Ended June 30, 2008 Compared to Fiscal year Ended June 30,
2007
Net
cash
provided by financing activities for fiscal 2008 was $3,176,334 compared
to
$21,677,695 for the same period in fiscal 2007. The decrease was mostly
because
there was an equity financing of $15,256,428 in 2007 while there was
no equity
financing in 2008.
Contractual
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due
by period
|
|
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
Long-Term
Debt Obligations
|
|
$
|
5,099,205
|
|
$
|
2,039,682
|
|
$
|
3,059,523
|
|
$
|
—
|
|
$
|
—
|
|
Capital
Lease Obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
Lease Obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchase
Obligations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
Long-Term Liabilities Reflected on the Registrant's Balance
Sheet under
GAAP
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
5,099,205
|
|
$
|
$2,039,682
|
|
$
|
3,059,523
|
|
$
|
—
|
|
$
|
—
|
|
Loans
Other
than the equity financing last year, 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
$22,658,270,$18,870, 250, and $8,576,200 short term bank loans outstanding
as of
June 30, 2008, 2007, and 2006, respectively. The loans were secured by
Weifang
Shengtai’s properties and accounts receivable. The terms of all these short term
loans were for one year. Weifang Shengtai has never defaulted on any
loans.
Weifang
Shengtai does not have any 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 $2,653,995, $3,661,472, and $1,001,600 as
of June
30, 2008, 2007, and 2006, respectively.
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 $7,295,000, $8,560,650 and $14,270,880 as of June 30, 2008, 2007 and
2006.
Some unrelated third parties have guaranteed approximately $ 13,729,190,
$
14,925,250 and $ 5,158,240 of our debt, as of June 30, 2008, 2007 and 2006.
Future
cash commitments
We
estimate the need for $6 million to $10 million to run the new glucose
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 condition 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 3% residual value, over the estimated
useful lives of the assets.
Foreign
currency translation
Our
functional currency is the Chinese 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.
Item7A.
Quantitative and Qualitative Disclosures About Market
Risk.
Credit
Risk.
We
are
exposed to credit risk from our cash at bank, fixed deposits and contract
receivables. The credit risk on cash at bank and fixed
deposits
is limited because the counterparts are recognized financial institutions.
Contract receivables are subject to credit evaluations. We periodically
record a
provision for doubtful collections based on an evaluation of the collectibility
of contract 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.
Substantial
portion 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 policies
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 the 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.
Item
8. Financial Statements and Supplementary Data.
The
information required by this Item 8 is included in Item 15 of this Form
10-K.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
During
the fiscal year ended June 30, 2008, there were no changes in and disagreements
with accountants and financial disclosure.
Item
9A Controls and Procedures
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. Our management is also required to assess
and
report on the effectiveness of our internal control over financial reporting
in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002 ("Section
404").
Management assessed the effectiveness of our internal control over financial
reporting as of June 30, 2008. In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework. During our
assessment of the effectiveness of internal control over financial reporting
as
of June 30, 2008, management identified significant deficiencies related
to the
following:
|
1.
|
Accounting
and Finance Personnel Weaknesses - US GAAP expertise - The current
staff
in the accounting department is relatively new and inexperienced,
and
needs substantial training so as to meet with the higher demands
of being
a U.S. public company. The accounting skills and understanding
necessary
to fulfill the requirements of U.S. GAAP-based reporting, including
the
skills of subsidiary financial statements consolidation, are
inadequate
and were inadequately supervised.
|
|
2.
|
Lack
of internal audit function - The Company lacks qualified resources
to
perform the internal audit functions properly. In addition, the
scope and
effectiveness of the internal audit function are yet to be developed.
|
Our
accounting staff is well versed in ensuring compliance with PRC accounting
and
reporting requirements for our operating subsidiaries and prior to our
May, 2007
transaction in which we became a public company, was not required to meet
or
apply U.S. GAAP requirements. As a result, with the exception of certain
additional persons hired to address these deficiencies, our current accounting
department responsible for financial reporting of the Company, on a consolidated
basis, is relatively new to U.S. GAAP and the related internal control
procedures required of U.S. public companies. Although our accounting staff
is
professional and experienced in accounting requirements and procedures
generally
accepted in the PRC, management has determined that they require additional
training and assistance in U.S. GAAP matters. Management has determined
that our
internal audit function is also significantly deficient due to insufficient
qualified resources to perform internal audit functions.
In
order
to correct the foregoing deficiencies, we have taken the following remedial
measures:
|
1.
|
In
May 2008, we engaged Ms. Yiru Shi, a CPA with experience as an
independent
auditor as well as financial experience at Sun Microsystems and
Hewlett
Packard, to serve as our chief financial officer. Ms. Yiru Shi
has
extensive experience in internal control and U.S. GAAP reporting
compliance and an MBA from the University of California-Irvine
and
together with our chief executive officer will oversee and manage
our the
financial reporting process and required training of the accounting
staff.
|
|
2.
|
In
July, 2008 we engaged independent consultants to assist the Company
in
improving the internal control system based on the criteria set
forth by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework. The consultants
are
currently in the process of conducting an evaluation of our internal
control over financial reporting, and designing and implementing
enhanced
processes and procedures to improve our internal control over
financial
reporting.
|
|
3.
|
We
plan to train our internal accountants well in U.S. GAAP principles
and
reporting. Although our accounting staff is professional and
experienced
in accounting requirements and procedures generally accepted
in the PRC,
management has determined that they require additional training
and
assistance in U.S. GAAP matters.
|
|
4.
|
We
are also planning to establish an internal audit unit to establish
effective internal control. We plan to allocate sufficient resources
to
achieve an effective internal audit
function.
|
|
5.
|
We
plan to recruit and train additional accounting personnel with
experience
in U.S. GAAP.
|
We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of
these
steps and make any changes that our management deems appropriate.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5)
is a
deficiency, or a combination of deficiencies, in internal control over
financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be
prevented
or detected on a timely basis. A significant deficiency is a deficiency,
or a
combination of deficiencies, in internal control over financial reporting
that
is less severe than a material weakness, yet important enough to merit
attention
by those responsible for oversight of the company's financial reporting.
Our
management is not aware of any material weaknesses in our internal control
over
financial reporting, and nothing has come to the attention of management
that
causes them to believe that any material inaccuracies or errors exist in
our
financial statements as of June 30, 2008. The reportable conditions and
other
areas of our internal control over financial reporting identified by us
as
needing improvement have not resulted in a material restatement of our
financial
statements. Nor are we aware of any instance where such reportable conditions
or
other identified areas of weakness have resulted in a material misstatement
or
omission in any report we have filed with or submitted to the Securities
and
Exchange Commission.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
the
policies and procedures may deteriorate.
Auditor
Attestation
This
annual report does not include an attestation report of our registered
public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this annual
report.
Item
9B. Other Information.
None.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
Below
are
our executive officers and directors. 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.
Di
r
ec
t
ors
and Exe
c
ut
i
ve
Offi
c
e
rs
|
|
Posit
i
on/T
i
tle
|
|
Age
|
Qingtai
Liu
|
|
Ch
i
e
f
Exe
c
ut
i
ve
Off
i
cer
/
D
i
re
c
tor
|
|
50
|
Yongqiang
Wang
|
|
Di
r
ec
t
or
|
|
39
|
Chris
W.
Wang
|
|
Di
r
ec
t
or
|
|
37
|
Changxin
Li
|
|
Di
r
ec
t
or
|
|
48
|
Winfred
Lee
|
|
Di
r
ec
t
or
|
|
48
|
Yiru
Shi
|
|
Chi
e
f
F
i
n
a
n
c
i
a
l
Offi
c
e
r
|
|
35
|
The
following is a summary of the biographical information of our directors
and
officers:
Qingtai
Liu
, 50, 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
, 39, 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
, 37, 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
o
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
, 48, 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
, 48, 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
Yiru
Shi
, 35, Served as audit manager for Kabani & Co., Inc., Controller
at Aroa Marketing, Channel Program Manager at Sun Microsystems and financial
analyst at Hewlett Packard China, obtained MBA from University of California,
Irvine, Bachelors degrees in Computer Science and International Trade and
Business from Beijing Polytechnic University and is a Certified Public
Accountant
All
of
our directors hold offices until the next annual meeting of the shareholders
of
the Company, and until their successors have been qualified after being
elected
or appointed. 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 shareholders 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:
|
ཫ
|
had
any bankruptcy petition foiled by or against any business of
which was a
general partner or executive officer, either at the time of the
bankruptcy
or within two years prior to that
time,
|
|
ཫ
|
been
convicted in a criminal proceeding and is not subject to a pending
criminal proceeding,
|
|
ཫ
|
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
|
|
ཫ
|
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.
|
Section
16(A) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our
officers
and directors and persons who own more than 10% of a registered class of
our
equity securities to file initial reports of ownership and reports of changes
in
ownership with the Securities and Exchange Commission (the "SEC"). Such
persons
are required by SEC regulation to furnish us with copies of all Section
16(a)
forms they file.
Based
solely on review of the copies of such forms received by us with respect
to
fiscal year 2007, or written representations from certain reporting persons,
we
believe that all filing requirements applicable to its directors, officers
and
persons who own more than ten percent of a registered class of our equity
securities have been complied.
Item
11. 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
have
formed a Compensation Committee of the Board of Directors comprised solely
of
independent directors to oversee the compensation of our named executive
officers. The members of our Compensation Committee are Wenbing Christopher
Wang
(Chairman) Changxin Li; and Winfred Lee.
Summary
Compensation Table
The
following is a summary of the compensation we paid for each of the two
years
ended June 30, 2008, and 2007, respectively (i) to the person who acted
as our
principal executive officer during our fiscal year ended June 30, 2008
and (ii)
to the former employee who received compensation in excess of $100,000
for one
of these years . None of our other executive officers received compensation
in
excess of $100,000 for any of these two years.
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus($)
|
|
Stock
Awards($)
|
|
Option
Awards($)
|
|
Non
Equity
Incentive
Plan
Compensation
($)
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compension
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qingtai
Liu (1)
|
|
|
2008
|
|
|
133,714
|
|
|
—
|
|
|
—
|
|
|
96,253
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
229,967
|
|
|
|
|
2007
|
|
|
19,662
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yizhao
Zhang (2)
|
|
|
2008
|
|
|
105,500
|
|
|
—
|
|
|
—
|
|
|
77,003
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
207,003
|
|
|
|
|
2007
|
|
|
12,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Chairman
and Chief Executive Officer (Principal Executive
Officer).
|
(2)
|
Mr.
Zhang joined us as our Chief Financial Officer in May 2007 and
resigned in
May 2008.
|
Grants
of Plan-Based Awards in Fiscal 2008
On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”).
On
May
14, 2008, the Company granted 500,000 stock options and 160,000 non-qualified
stock options pursuant to the Stock Incentive Plan. All options have an
exercise
price of $3.34, which is the closing price on the date of grant, and expire
five
years after the date of grant. All options vest over a period of three
years
from the date of grant.
Outstanding
Equity Awards at 2008 Fiscal Year End
As
of
June 30, 2008, there are 660,000 shares of options outstanding.
Equity
Compensation Plan Information at June 30, 2008
The
following table sets forth information as of June 30, 2008 regarding
compensation plans under which the Company’s equity securities are authorized
for issuance.
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Plan Category
|
|
|
Number
of securities
to
be issued upon
exercise
of
outstanding
equity
awards
|
|
|
Weighted-average
exercise
price of
outstanding
equity
awards($
)
|
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in column(a)
)
|
|
Equity
compensation plans approved by security holders
Shengtai
Pharmaceutical, Inc. 2007 Stock Incentive Plan.
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holder
s
Issuances of non-qualified options to employees
|
|
|
660,000
|
|
$
|
3.34
|
|
|
1,340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
660,000
|
|
$
|
3.34
|
|
|
1,340,000
|
|
Option
Exercises and Stock Vested in Fiscal 2008.
There
were no option exercises or stock vested in 2008.
Employment
Agreements
We
have
no employment agreements with any executive officer, except for our employment
agreement dated May 1, 2008 with Yiru (Melody) Shi, our Chief Financial
Officer.
Compensation
of Directors.
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 officers are not compensated for services they perform as directors
of
the Company. The details of such compensation are:
|
ཫ
|
annual
compensation of $15,000;
|
|
ཫ
|
additional
annual compensation of $15,000 if the director serves as the
Chairman of
the Audit Committee; and
|
|
ཫ
|
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 are also 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.
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related
Stockholder Matters.
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 June 30,
2008.
Name
and
Address
of
Beneficial
Own
e
r
|
|
T
i
t
le of
C
l
ass
|
|
Amount
and
Nature
of
Beneficial
Ownership
(1)(2)
|
|
P
e
r
cent of
Class
(
4)
|
|
Qingtai
Liu (3)
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive officer and President
|
|
|
|
|
|
|
|
|
|
|
Hi-Tech
Industrial Park of Changle County, Shandong Province, PRC
262400
|
|
|
Common Stock
|
|
|
7,378,025
|
|
|
38.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Yiru
Shi (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 07620Common Stock
|
|
|
Common Stock
|
|
|
1,025,000
|
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Investments LLC
|
|
|
|
|
|
|
|
|
|
|
5150
Poplar Avenue, Suite 805, Memphis, TN 38137
|
|
|
Common Stock
|
|
|
2,650,000
|
|
|
13.88
|
%
|
(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 Shengtai Holding, Inc. (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 our 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 purchased 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 and Yongqiang Wang were appointed directors of the Company
on May 15, 2007. Mr. Zhang was appointed as our Chief Financial Officer in
May
2007. Ms Shi was appointed as our Chief Financial Officer in May 2008. Messrs.
Wang, Li and Lee were appointed directors of the Company on June 22, 2007.
(4)
Based
on 19,094,805 shares of common stock issued and outstanding on June 30, 2008.
In
addition, in determining the percent of common stock owned by a person on
June
30, 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 June
30,
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.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
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 sell
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, 2008, total
investment of approximately $3,607,912 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 $714,776, $858,881 and $348,366 of accounts payable
to
Changle Shengshi at June 30, 2008,2007 and 2006, respectively. The utilities
expenses amounted to $9,851,833 $4,958,249 and $1,705,675, for the years
ending
June 30, 2008,2007 and 2006, respectively.
The
Company
loaned
money
to
C
hangle
Shengshi
and
e
nt
e
red
i
nto
two
lo
a
n
contr
a
cts
as
fol
l
o
w
s:
|
|
June 30, 2008
|
|
June 30, 2007
|
|
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
|
|
|
437,700
|
|
|
394,500
|
|
Total
|
|
$
|
437,700
|
|
$
|
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. As of June 30, 2008, total receivable
due from Changle Shengshi was $0.
Item
14. Principal Accounting Fees and Services.
Aggregate
fees billed by our current principal accountants, Moore Stephens Wurth
Frazer
and Torbet, LLP for audit services related to the most recent fiscal year,
and
for other professional services billed in the most recent fiscal year,
were as
follows:
|
|
Fiscal 2007
|
|
Fiscal 2008 (3)
|
|
Audit
Fees (1)
|
|
$
|
145,000
|
|
$
|
145,000
|
|
Audit-Related
Fees
|
|
|
—
|
|
|
—
|
|
Tax
Fees (2)
|
|
|
—
|
|
|
5,000
|
|
All
Other Fees
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
145,000
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
(1)
|
Comprised
the audit of the Company's annual financial statements and reviews
of the
Company's quarterly financial statements, as well as
consents
related to and reviews of other documents filed with the Securities
and
Exchange Commission.
|
(2)
|
Comprised
preparation of all federal and state corporate income tax returns
for the
Company and its subsidiaries.
|
(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. Disclosure of the
fees billed
by our current accountants, Moore Stephens Wurth Frazer and Torbet,
LLP is
for the fiscal year ended June 30,
2008.
|
Aggregate
fees billed by our previous principal accountants, Mantyla McRoberts LLC,
for
audit services related to the most recent two fiscal years, and for other
professional services billed in the most recent two fiscal years, were
as
follows:
|
|
|
Fiscal 2006(3)
|
|
Audit
Fees
(1)
|
|
$
|
10,792
|
|
Audit-R
e
l
a
ted
F
e
es
|
|
|
—
|
|
Tax
Fees
(2)
|
|
$
|
250
|
|
All
Other Fees
|
|
|
—
|
|
Tot
a
l
|
|
$
|
11,042
|
|
|
|
|
|
|
(1)
|
Comprised
the audit of the Company's annual financial statements and reviews
of the
Company's quarterly financial statements, as well as consents
related to
and reviews of other documents filed with the Securities and
Exchange
Commission.
|
(2)
|
Comprised
preparation of all federal and state corporate income tax returns
for the
Company and its subsidiaries.
|
(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. Disclosure of the
fees billed
by our ex accountants, Mantyla McRoberts LLC is for the fiscal
years ended
December 31, 2006 and 2005.
|
Under
the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed
by our
independent accountants must now be approved in advance by our Audit Committee
to assure that such services do not impair our accountants' independence
. Our
Audit Committee’s Chairman is Mr. Chris Wang and the other members are Changxin
Li and Winfred Li. Our Audit Committee reviews and recommends to our Board
of
Directors for approval audit and permissible non-audit services performed
by
Moore Stephens Wurth Frazer and Torbet, LLP as well as fees charged by
them for
such services. Previously when we did not have an Audit Committee, our
Board of
Directors carried out this function.
PART
IV
Item
15. Exhibits, Financial Statement Schedules.
(a)
|
Financial
Statements and Financial Statement
Schedules
|
(1)
|
Report
of Independent Registered Public Accounting
Firm
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets as of June 30, 2008 and 2007
|
F-2
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the Years
Ended
June 30, 2008, 2007 and 2006
|
F-3
|
|
|
Consolidated
Statements of Shareholders' Equity for the Years Ended June 30,
2008, 2007
and 2006
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2008, 2007
and
2006
|
F-5
|
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
|
|
All
other schedules for which provision is made in the applicable
accounting
regulations of the SEC are not required under the related instructions
or
are inapplicable and therefore have been
omitted.
|
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 (the “Company”) as of June 30, 2008 and 2007, and the
related consolidated statements of income and other comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year
period ended June 30, 2008. Shengtai Pharmaceutical Inc.’s management is
responsible for these financial statements. Our responsibility is to express
an
opinion on these financial statements based on our audits.
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, 2008 and 2007, and the results of its operations
and its cash flows for each of the years in the three-year period ended June
30,
2008 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, 2008
CONSOLIDATED
BALANCE SHEETS
AS
OF
JUNE 30, 2008 AND 2007
|
|
2008
|
|
2007
|
|
ASSETS
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,405,606
|
|
$
|
6,420,439
|
|
Restricted
cash
|
|
|
6,763,500
|
|
|
6,128,500
|
|
Accounts
receivable, net of allowance for doubtful accounts of $440,701
and
$431,178 as of June 30, 2008 and 2007, respectively
|
|
|
7,614,236
|
|
|
5,779,967
|
|
Notes
receivable
|
|
|
458,630
|
|
|
984,675
|
|
Other
receivables
|
|
|
691,215
|
|
|
2,984,484
|
|
Other
receivables - related parties
|
|
|
—
|
|
|
2,491,656
|
|
Other
receivables - shareholder
|
|
|
—
|
|
|
1,229,625
|
|
Loan
to related party
|
|
|
—
|
|
|
657,500
|
|
Inventories
|
|
|
5,039,278
|
|
|
4,449,267
|
|
Prepayments
|
|
|
310,381
|
|
|
140,376
|
|
Total
current assets
|
|
|
24,282,846
|
|
|
31,266,489
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
69,943,021
|
|
|
30,178,074
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Investment
in unconsolidated affiliate
|
|
|
3,607,912
|
|
|
2,675,678
|
|
Loan
to related party - non-current
|
|
|
437,700
|
|
|
394,500
|
|
Prepayments
- non-current
|
|
|
—
|
|
|
7,429,371
|
|
Intangible
assets, net
|
|
|
3,042,183
|
|
|
1,816,021
|
|
Total
other assets
|
|
|
7,087,795
|
|
|
12,315,570
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
101,313,662
|
|
$
|
73,760,133
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,669,728
|
|
$
|
3,807,997
|
|
Accounts
payable - related party
|
|
|
714,776
|
|
|
949,992
|
|
Notes
payable - banks
|
|
|
10,942,500
|
|
|
8,942,000
|
|
Short
term loans
|
|
|
22,658,270
|
|
|
18,870,250
|
|
Accrued
liabilities
|
|
|
261,187
|
|
|
229,643
|
|
Other
payable
|
|
|
2,146,108
|
|
|
1,526,903
|
|
Employee
loans
|
|
|
1,382,287
|
|
|
596,516
|
|
Employee
loan - officer
|
|
|
53,605
|
|
|
—
|
|
Third
party loan
|
|
|
640,228
|
|
|
318,274
|
|
Customer
deposits
|
|
|
804,323
|
|
|
796,228
|
|
Long
term loan - current maturities
|
|
|
—
|
|
|
381,350
|
|
Taxes
payable
|
|
|
4,631,252
|
|
|
2,048,932
|
|
Total
current liabilities
|
|
|
51,904,264
|
|
|
38,468,085
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
|
|
Other
payable - noncurrent
|
|
|
2,653,995
|
|
|
3,661,472
|
|
Total
long term liabilities
|
|
|
2,653,995
|
|
|
3,661,472
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
54,558,259
|
|
|
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,
19,094,805
and 18,875,000 shares issued and outstanding
as
June 30, 2008 and 2007, respectively
|
|
|
19,095
|
|
|
18,875
|
|
Paid-in
capital
|
|
|
19,987,708
|
|
|
19,163,549
|
|
Statutory
reserves
|
|
|
2,894,902
|
|
|
1,735,484
|
|
Retained
earnings
|
|
|
19,136,577
|
|
|
9,885,670
|
|
Accumulated
other comprehensive income
|
|
|
4,717,121
|
|
|
826,998
|
|
Total
shareholders' equity
|
|
|
46,755,403
|
|
|
31,630,576
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
101,313,662
|
|
$
|
73,760,133
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
SALES
REVENUE
|
|
$
|
90,871,223
|
|
$
|
51,706,215
|
|
$
|
36,029,179
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
70,613,757
|
|
|
39,527,662
|
|
|
27,568,092
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
20,257,466
|
|
|
12,178,553
|
|
|
8,461,087
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
7,390,623
|
|
|
4,674,679
|
|
|
3,831,778
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
12,866,843
|
|
|
7,503,874
|
|
|
4,629,309
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of unconsolidated affiliate
|
|
|
272,239
|
|
|
131,420
|
|
|
41,635
|
|
Gain
from sales of land use rights
|
|
|
—
|
|
|
1,647,833
|
|
|
—
|
|
Other
income
|
|
|
584,749
|
|
|
121,798
|
|
|
181,874
|
|
Other
expense
|
|
|
(391,858
|
)
|
|
(225,898
|
)
|
|
(214,641
|
)
|
Interest
expense and other charges
|
|
|
(2,447,608
|
)
|
|
(1,270,418
|
)
|
|
(555,572
|
)
|
Interest
income
|
|
|
171,948
|
|
|
119,353
|
|
|
128,306
|
|
Other
income (expense), net
|
|
|
(1,810,530
|
)
|
|
524,088
|
|
|
(418,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
11,056,313
|
|
|
8,027,962
|
|
|
4,210,911
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
645,988
|
|
|
878,836
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
10,410,325
|
|
|
7,149,126
|
|
|
4,210,911
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
3,890,123
|
|
|
641,596
|
|
|
185,402
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
14,300,448
|
|
$
|
7,790,722
|
|
$
|
4,396,313
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
$
|
0.64
|
|
$
|
0.42
|
|
Diluted
|
|
$
|
0.52
|
|
$
|
0.62
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,993,789
|
|
|
11,251,712
|
|
|
10,125,000
|
|
Diluted
|
|
|
19,874,486
|
|
|
11,477,545
|
|
|
10,125,000
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR
THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006
|
|
Common stock
|
|
|
|
Capital
|
|
Retained earnings
|
|
Accumulated
other
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
contribution
|
|
Statutory
|
|
|
|
comprehensive
|
|
|
|
|
|
Shares
|
|
Par value
|
|
capital
|
|
receivable
|
|
reserves
|
|
Unrestricted
|
|
income
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Exercised
warrants
|
|
|
219,805
|
|
|
220
|
|
|
506,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506,743
|
|
Option
issued to employees
|
|
|
|
|
|
|
|
|
317,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317,636
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,410,325
|
|
|
|
|
|
10,410,325
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,159,418
|
|
|
(1,159,418
|
)
|
|
|
|
|
—
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,890,123
|
|
|
3,890,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2008
|
|
|
19,094,805
|
|
$
|
19,095
|
|
$
|
19,987,708
|
|
$
|
—
|
|
$
|
2,894,902
|
|
$
|
19,136,577
|
|
$
|
4,717,121
|
|
$
|
46,755,403
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,410,325
|
|
$
|
7,149,126
|
|
$
|
4,210,911
|
|
Adjustments
to reconcile net income to cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,964,678
|
|
|
2,239,157
|
|
|
1,478,734
|
|
Amortization
|
|
|
57,254
|
|
|
42,644
|
|
|
41,454
|
|
Bad
debt expense
|
|
|
93,557
|
|
|
271,602
|
|
|
114,780
|
|
Stock
option expense
|
|
|
317,636
|
|
|
—
|
|
|
—
|
|
(Gain)
loss on building and equipment disposal
|
|
|
(169,726
|
)
|
|
186,470
|
|
|
—
|
|
Gain
on disposal of land use right
|
|
|
—
|
|
|
(1,647,833
|
)
|
|
—
|
|
Equity
in income of unconsolidated investment
|
|
|
(603,261
|
)
|
|
(131,420
|
)
|
|
(41,635
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,127,048
|
)
|
|
(2,288,351
|
)
|
|
(261,286
|
)
|
Notes
receivable
|
|
|
(2,274,840
|
)
|
|
(591,936
|
)
|
|
(126,992
|
)
|
Other
receivables
|
|
|
1,994,157
|
|
|
(582,008
|
)
|
|
1,567
|
|
Other
receivables - related parties
|
|
|
2,608,944
|
|
|
(2,427,043
|
)
|
|
—
|
|
Other
receivables - shareholder
|
|
|
1,292,742
|
|
|
(366,185
|
)
|
|
—
|
|
Inventories
|
|
|
(304,476
|
)
|
|
(2,394,250
|
)
|
|
173,225
|
|
Prepayments
|
|
|
(165,981
|
)
|
|
99,957
|
|
|
(28,710
|
)
|
Prepayments
- related party
|
|
|
—
|
|
|
1,409,944
|
|
|
301,037
|
|
Accounts
payable
|
|
|
(7,730,549
|
)
|
|
1,773,031
|
|
|
176,458
|
|
Accounts
payable - related party
|
|
|
(320,156
|
)
|
|
390,986
|
|
|
200,660
|
|
Accrued
liabilities
|
|
|
(781,690
|
)
|
|
130,238
|
|
|
(65,014
|
)
|
Other
payable
|
|
|
(906,285
|
)
|
|
410,174
|
|
|
166,860
|
|
Customer
deposit
|
|
|
(74,646
|
)
|
|
492,586
|
|
|
201,045
|
|
Taxes
payable
|
|
|
2,201,518
|
|
|
1,385,613
|
|
|
(14,792
|
)
|
Net
cash provided by operating activities
|
|
|
7,482,153
|
|
|
5,552,502
|
|
|
6,528,302
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliate
|
|
|
—
|
|
|
(909,439
|
)
|
|
(124,020
|
)
|
Proceeds
from building and equipment disposal
|
|
|
139,163
|
|
|
—
|
|
|
—
|
|
Acquisition
of plant and equipment
|
|
|
(14,517,157
|
)
|
|
(11,041,561
|
)
|
|
(6,232,594
|
)
|
Acquisition
of intangible assets
|
|
|
(296,893
|
)
|
|
(949,900
|
)
|
|
—
|
|
Advances
on plant and equipment purchase
|
|
|
—
|
|
|
(7,225,790
|
)
|
|
(1,155,999
|
)
|
Repayments
on loan to related party
|
|
|
688,450
|
|
|
—
|
|
|
—
|
|
Loan
to related party
|
|
|
—
|
|
|
(1,024,720
|
)
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(13,986,437
|
)
|
|
(21,151,410
|
)
|
|
(7,512,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(524,140
|
)
|
|
(2,024,720
|
)
|
|
(279,045
|
)
|
Borrowings
on notes payable - banks
|
|
|
11,703,650
|
|
|
8,710,120
|
|
|
12,201,088
|
|
Principal
payments on notes payable - banks
|
|
|
(10,739,820
|
)
|
|
(7,173,040
|
)
|
|
(10,743,853
|
)
|
Borrowings
on short term loans
|
|
|
21,383,257
|
|
|
24,785,415
|
|
|
8,979,048
|
|
Principal
payments on short term loans
|
|
|
(19,758,515
|
)
|
|
(15,178,665
|
)
|
|
(8,358,948
|
)
|
Borrowings
on employee loans
|
|
|
1,458,353
|
|
|
384,224
|
|
|
431,111
|
|
Principal
payments on employee loans
|
|
|
(778,444
|
)
|
|
(458,632
|
)
|
|
(113,060
|
)
|
Borrowings
on employee loan - officer
|
|
|
53,605
|
|
|
1,281
|
|
|
—
|
|
Principal
payments on employee loan - officer
|
|
|
—
|
|
|
(96,580
|
)
|
|
—
|
|
Borrowings
on third party loan
|
|
|
3,139,855
|
|
|
251,378
|
|
|
57,319
|
|
Principal
payments on third party loan
|
|
|
(2,868,909
|
)
|
|
—
|
|
|
—
|
|
Borrowings
on long term loan
|
|
|
—
|
|
|
—
|
|
|
992,160
|
|
Principal
payments on long term loan
|
|
|
(399,301
|
)
|
|
(1,549,889
|
)
|
|
(868,140
|
)
|
Proceeds
from issuance of common stock
|
|
|
506,743
|
|
|
15,256,428
|
|
|
—
|
|
Payments
of amounts due officer
|
|
|
—
|
|
|
(1,925,996
|
)
|
|
—
|
|
Proceeds
from capital contribution receivable
|
|
|
—
|
|
|
696,371
|
|
|
—
|
|
Dividends
paid to shareholders
|
|
|
—
|
|
|
—
|
|
|
(1,664,503
|
)
|
Net
cash provided by financing activities
|
|
|
3,176,334
|
|
|
21,677,695
|
|
|
633,177
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
313,117
|
|
|
(160,805
|
)
|
|
25,408
|
|
|
|
|
|
|
|
|
|
|
|
|
(DECREASE)
INCREASE IN CASH
|
|
|
(3,014,833
|
)
|
|
5,917,982
|
|
|
(325,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of year
|
|
|
6,420,439
|
|
|
502,457
|
|
|
828,183
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of year
|
|
$
|
3,405,606
|
|
$
|
6,420,439
|
|
|
502,457
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for Interest, net of capitalized interest
|
|
$
|
1,901,531
|
|
$
|
1,270,418
|
|
$
|
555,572
|
|
Cash
paid for Income taxes
|
|
$
|
14,809
|
|
$
|
125,782
|
|
$
|
—
|
|
Non-cash
investing and financing activities -
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of land use right in exchange for other receivable
|
|
$
|
692,304
|
|
$
|
—
|
|
$
|
—
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
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.
On
May
15, 2007, the Company entered into a share exchange agreement (the “Share
Exchange Agreement”) with the shareholders of Shengtai Holding, Inc. (“SHI”).
Contemporaneously, 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 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. Pursuant to the Share Purchase
Agreement, the Purchasers acquired 8,750,000 shares of common stock and
4,375,000 attached warrants for $2.00 per unit (or an aggregate purchase
price
of $17,500,000) and for total net proceeds of $15,256,428. The exercise
price of
the warrants is $2.60 per share and the term of the warrants is five years.
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
conjunction with the Share Purchase Agreement, Qingtai Liu, the controlling
shareholder and Chief Executive Officer of the Company, 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 accounting principles
generally accepted in the United States of America (“US GAAP”) do not reflect
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. If the audited consolidated
financial statements of the Company prepared in accordance with US GAAP
do not
reflect an after-tax net income of at least $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 escrowed shares will be distributed on a pro-rated basis to the Purchasers.
The Company determined that the thresholds for the two years ended June
30, 2008
and 2007 have 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 (e.g., glucose,
dehydrated glucose) and drug supplements (e.g., starch, dextrin, polyacrylic
acid resin). The Company’s primary business operations are conducted in the
People’s Republic of China (“PRC”).
Weifang
Shengtai was established in Changle County, Weifang City, Shandong Province,
in
People’s Republic of China on February 4, 1999. Qingtai Liu and his management
team were the original shareholders of Weifang Shengtai.
On
April
19, 2006, pursuant to a shareholders’ resolution, 37 Chinese shareholders
(“Original Shareholders”) of Weifang Shengtai transferred their 17.95% interest
in the Company to 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 City.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
On
June
20, 2006, SHI signed an agreement to acquire Bio-One Corporation’s (“Bio-One”)
51% interest in Weifang Shengtai and Qingtai Liu’s 49% interest in Weifang
Shengtai. Qingtai Liu, a founding shareholder of Weifang Shengtai, sold
his 49%
interest in Weifang Shengtai to SHI for RMB 15,000,000 (USD $1,925,996),
and
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 stock of Bio-One owned by Qingtai Liu. Weifang Shengtai became
a
wholly foreign owned entity (“WFOE”) and obtained the approval of the local
branch of the MOC in Weifang City on June 21, 2006. The business term is
20
years beginning on February 10, 2004, the date Bio-One acquired its 51%
in
Weifang Shengtai. In accordance with the laws governing foreign acquisitions
of
a Chinese registered company, SHI contributed the $1,925,996 as required
to
Weifang Shengtai, and 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 Weifang City and the Company obtained a new business license
on
July 16, 2007, for a term of 20 years.
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, 2005. The Company recorded all normal recurring adjustments considered
necessary to give a fair presentation of operating results for the periods
presented.
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
consolidation.
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made in the preparation
of the Company’s consolidated financial statements relate to the assessment of
the carrying values of accounts receivable. Actual results could be materially
different from these estimates upon which the carrying values were based.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Foreign
currency translation
The
reporting currency of the Company is the US dollar. The Company uses the
Chinese
Renminbi (“RMB”) as its functional currency. In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation,”
results of operations and cash flows are translated at average exchange
rates
during the period, and assets and liabilities are translated at the unified
exchange rates at the balance sheet dates, and equity is translated at
the
historical exchange rates. As a result, amounts related to assets and
liabilities reported on the statements of cash flows will not necessarily
agree
with changes in the corresponding accounts on the balance sheets. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the statements of shareholders’ equity. Translation
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 $4,717,121 and $826,998 as of June 30, 2008 and
2007,
respectively. Assets and liabilities were translated at 6.85 RMB and 7.60
RMB to
$1.00 at June 30, 2008 and 2007, respectively. The average translation
rates
applied to consolidated statements of income for the years ended June 30,
2008,
2007 and 2006 were 7.26 RMB, 7.81 RMB and 8.06 RMB to $1.00 US dollar,
respectively.
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 value-added tax (“VAT”). Most of the
Company’s products sold in the PRC are subject to a VAT 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 products and certain freight
expenses.
Shipping
and handling
Shipping
and handling cost related to costs of goods sold are included in selling,
general and administrative expenses. For the years ended June 30, 2008,
2007,
and 2006, shipping and handling costs amounted to $3,097,843, $1,927,118,
and
$1,980,055, respectively,
Financial
instruments
SFAS
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 payables, accrued liabilities, customer
deposits, taxes 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 rates of interest.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to SFAS No. 123R
(“SFAS 123R”), “Share Based Payment.” The Company estimates the fair value of
the award using the Black-Scholes option pricing model. Under SFAS 123R,
the
Company’s expected volatility assumption is based on the historical volatility
of Company’s stock. The expected life assumption is primarily based on
historical exercise patterns and employee post-vesting termination behavior.
The
risk-free interest rate for the expected term of the option is based on
the U.S.
Treasury yield curve in effect at the time of grant.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Stock-based
compensation expense is recognized based on awards expected to vest, and
there
were no estimated forfeitures as the Company has a short history of issuing
options. FAS 123R requires forfeitures to be estimated at the time of grant
and
revised in subsequent periods, if necessary, if actual forfeitures differ
from
those estimates.
Earnings
per share
The
Company reports earnings per share in accordance with the provisions of
SFAS No.
128 (“SFAS 128”), "Earnings Per Share." SFAS 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, 2008, 2007, and 2006:
|
|
2008
|
|
2007
|
|
2006
|
|
N
Net income for earnings per share
|
|
$
|
10,371,154
|
|
$
|
7,149,126
|
|
$
|
4,210,911
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
18,993,789
|
|
|
11,251,712
|
|
|
10,125,000
|
|
Diluted
effect of warrants
|
|
|
880,697
|
|
|
225,833
|
|
|
—
|
|
Weighted
average shares used in diluted computation
|
|
|
19,874,486
|
|
|
11,477,545
|
|
|
10,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
$
|
0.64
|
|
$
|
0.42
|
|
Diluted
|
|
$
|
0.52
|
|
$
|
0.62
|
|
$
|
0.42
|
|
At
June
30, 2008 and 2007, all outstanding warrants were included in the calculation
of
diluted earnings per share. At June 30, 2006, the Company did not have
any
outstanding warrants or stock options.
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities
of
three months or less to be cash and cash equivalents.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Restricted
cash
The
Company, through its bank agreement, is required to keep certain amounts
on
deposit that are subject to withdrawal restrictions. These amounts were
$6,565,500 and $5,628,500 as of June 30, 2008 and 2007, respectively.
In
accordance with the Escrow Agreement and the Share Purchase Agreement by
and
among Shengtai Holding Inc., West Coast Car Company, Chinamerica Fund LLP,
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 when certain
criteria are met. As of June 30, 2008 and June 30, 2007, the undisbursed
amounts
were $198,000 and $500,000, respectively, and these are included in restricted
cash in the consolidated balance sheets.
Accounts
receivable
In
the
normal course of business, the Company extends credit to its customers
without
requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible.
This
review process may involve the identification of payment problems with
specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material.
Certain
accounts receivable amounts are charged off against allowances after designated
period of collection efforts. Subsequent cash recoveries are recognized
as
income in the period when they occur.
The
activities in the allowance for doubtful accounts are as follows for the
years
ended June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
431,178
|
|
$
|
357,970
|
|
Additions
charged to bad debt expense
|
|
|
93,557
|
|
|
271,602
|
|
Write-off
charged against the allowance
|
|
|
(129,130
|
)
|
|
(217,838
|
)
|
Foreign
currency translation adjustments
|
|
|
45,096
|
|
|
19,444
|
|
Ending
allowance for doubtful accounts
|
|
$
|
440,701
|
|
$
|
431,178
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Concentrations
of risk
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 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
others.
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. Cash includes cash on hand and
demand
deposits in accounts maintained with state-owned banks within the PRC 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 deposits in financial institutions that exceed the amounts insured
by the
U.S. government. Balances at financial institutions or state owned banks
within
the PRC are not covered by insurance. Non-performance by these institutions
could expose the Company to losses for amounts in excess of insured balances.
At
June 30, 2008 and 2007, the Company’s bank balances exceeded government insured
limits by approximately $10,175,000 and $12,130,000, respectively. The
Company
has not experienced, nor does it anticipate, nonperformance by these
institutions.
The
Company’s concentrations of credit risk are primarily in trade accounts
receivable and accounts payable. There were no customers that individually
comprised 10% or more of the revenues or trade accounts receivable at June
30,
2008, and 2007. For the year ended June 30, 2008, two vendors accounted
for
approximately 23% of the Company’s total purchases. As of June 30, 2008,
accounts payable for these vendors amounted to $362,807. For the years
ended
June 30, 2007 and 2006, one vendor accounted for approximately 22% and
77%,
respectively, of the Company’s total purchases. There were no accounts payable
balance for this vendor as of June 30, 2007.
For
export sales, management frequently requires significant down payments
or letter
of credit prior to shipment. For these sales, the Company maintains export
credit insurance to protect against the risk that the overseas customers
may
default on settlement.
The
following table summarizes financial information for the years ended June
30,
2008, 2007 and 2006, concerning the Company’s revenues based on geographic area:
Revenue
|
|
2008
|
|
2007
|
|
2006
|
|
China
|
|
$
|
81,160,283
|
|
$
|
46,607,204
|
|
$
|
31,282,456
|
|
International
|
|
|
9,710,940
|
|
|
5,099,011
|
|
|
4,746,723
|
|
Total
|
|
$
|
90,871,223
|
|
$
|
51,706,215
|
|
$
|
36,029,179
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Inventories
Inventories
are stated at the lower of cost (weighted average basis) or market and
consist
of the following as of June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Raw
materials
|
|
$
|
1,409,577
|
|
$
|
2,297,901
|
|
Work-in-progress
|
|
|
1,688,161
|
|
|
1,130,900
|
|
Finished
goods
|
|
|
1,941,540
|
|
|
1,020,466
|
|
Total
|
|
$
|
5,039,278
|
|
$
|
4,449,267
|
|
The
Company reviews its inventory periodically for possible obsolescence or
to
determine if any reserves are necessary. As of June 30, 2008 and 2007, the
Company determined that no reserves were necessary.
Prepayments
Prepayments
represent partial payments or deposits for inventory and property and equipment
purchases. Certain of the prepayments are for those anticipated purchases,
primarily property and equipment, that are scheduled to occur beyond the
one-year time frame.
Plant
and equipment
Plant
and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to property and equipment accounts are recorded at cost.
Maintenance, repairs, and minor renewals are charged directly to expense
as
incurred. Major additions and betterments to property and equipment accounts
are
capitalized. Depreciation is computed using the straight-line method over
the
estimated useful lives of the assets with 3% residual value.
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
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Impairment
of long-lived assets
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, 2008, the Company
expects these assets to be fully recoverable.
Investment
in unconsolidated affiliate
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.
Intangible
assets are primarily comprised of land use rights. All land in the PRC
is owned
by the Chinese 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 $2,243,000. The Company
obtained another land use right in July 2007 for approximately $314,000.
In May
2008, the Company paid approximately $734,000 to a local government which
enabled the land use right to be classified from industrial use to commercial
use. The Company amortizes the cost of land use rights over the usage terms
using the straight-line method.
On
June
30, 2007, the Company sold a land use right at an auction due to relocation
of
one of the Company’s manufacturing plants. At the time of the sale, the net book
value of the land use right was $306,984, and the sale price for the land
use
right was $1,954,817, for a gain of approximately $1,648,000. As of June
30,
2008, total proceeds had been received.
Intangible
assets of the Company are reviewed at least annually, 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, 2008, the Company determined that there had been no impairment. For
the
years ended June 30, 2008, 2007 and 2006, amortization expense relating
to these
intangible assets amounted to $57,254, $42,644 and $41,454 respectively.
Income
taxes
The
Company accounts for income taxes in accordance with
SFAS
N
o.
109
(“SFAS 109”), “Accounting for Income Taxes.” Under the asset and liability
method as required by SFAS 109, deferred income taxes are recognized for
the tax
consequences of temporary differences by applying enacted statutory tax
rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Under
SFAS 109, the effect on deferred income taxes of a change in tax rates
is
recognized in income in the period that includes the enactment date. A
valuation
allowance is recognized if it is more likely than not that some portion,
or all
of, a deferred tax asset will not be realized. As of June 30, 2008 and
2007, the
Company did not have any deferred tax assets or liabilities, and as such,
no
valuation allowances were recorded at June 30, 2008 and 2007.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109," which clarifies the accounting
and
disclosure for uncertain tax positions. This interpretation is effective
for
fiscal years beginning after December 15, 2006, and the Company has implemented
this interpretation as of July 1, 2007. FIN 48 prescribes a recognition
threshold and measurement attribute for recognition and measurement of
a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Under
FIN
48, evaluation of a tax position is a two-step process. The first step
is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals
or
litigation based on the technical merits of that position. The second step
is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements.
A
tax position is measured at the largest amount of benefit that is greater
than
50 percent likely of being realized upon ultimate settlement. Tax positions
that
previously failed to meet the more-likely-than-not recognition threshold
should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
The
adoption of FIN 48 at July 1, 2007, did not have a material effect on the
Company's consolidated 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, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would
lead
to changes to these uncertainties.
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 standard value added tax rate is 17% of the gross sales
price,
however, for the Company’s corn plumules products, the VAT rate is 13%. 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
products.
VAT
on
sales and VAT on purchases amounted to $13,794,406 and $9,840,077, respectively,
for the year ended June 30, 2008. For the year ended June 30, 2007, VAT
on sales
and VAT on purchases amounted to $7,453,346 and $6,991,599, respectively.
For
the year ended June 30, 2006, VAT on sales and VAT on purchases amounted
to
$5,571,553 and $4,545,708, respectively. Sales and purchases are recorded
net of
VAT collected and paid as the Company acts as an agent for the Chinese
government. VAT taxes are not impacted by the income tax holiday in the
PRC.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Guarantees
From
time
to time, the Company guarantees the debt of others unrelated to the Company.
Pursuant to FIN 45, “Guarantor’s Accounting for and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others,” the
Company must record guarantees at the fair value of the expected future
payments. However, the Company estimates that it will not be required to
make
any payments under these guarantees based on the past experience and the
financial condition of the companies to which the guarantees were
made.
Recently
issued accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value
Measurements. SFAS 157 establishes a framework for measuring fair value
and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of this statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. SFAS 157 is effective
for
financial statements for fiscal years beginning after November 15, 2007,
with
earlier adoption permitted. The Company is evaluating the impact, if any,
that
the adoption of this statement will have on its consolidated results of
operations and financial position.
On
February 14, 2008, the FASB issued FASB Staff Position No. FAS 157-1 ("FSP
FAS
157-1"), "Application of FASB Statement No. 157 to FASB Statement No. 13
and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13". FSP
FAS
157-1 does not apply under FASB Statement No. 13 (“Statement 13”), "Accounting
for Leases," and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under
Statement
13. This scope exception does not apply to assets acquired and liabilities
assumed in a business combination that are required to be measured at fair
value
under SFAS No. 141 or SFAS No. 141R, regardless of whether those assets
and
liabilities are related to leases.
On
February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2 ("FSP
FAS
157-2"), "Effective Date of FASB Statement No. 157." With the issuance
of FSP
FAS 157-2, the FASB agreed to: (a) defer the effective date in SFAS No.
157 for
one year for certain nonfinancial assets and nonfinancial liabilities,
except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), and (b) remove certain leasing
transactions from the scope of SFAS No. 157. The deferral is intended to
provide
the FASB time to consider the effect of certain implementation issues that
have
arisen from the application of SFAS No. 157 to these assets and
liabilities.
In
February 2007, the FASB issued SFAS No. 159, (“SFAS 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 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 impact, if
any, that the adoption of SFAS 159 will have on its consolidated results
of
operations or financial position.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
In
December 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces Question 6
of Section D.2 of Topic 14,
Share-Based
Payment
of
the
Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to
continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007. The Company currently uses
the “simplified” method to estimate the expected term for share option grants as
the Company does not have enough historical experience to provide a reasonable
estimate. The Company intends on using the “simplified” method until the Company
has enough historical experience to provide a reasonable estimate of expected
term in accordance with SAB 110. The Company adopted SAB 110 on January
1, 2008,
and the Company is currently assessing the impact, if any, of this adoption.
In
December 2007, the FASB issued SFAS No. 141(R) "Business Combinations"
("SFAS
141R"). The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the
way
assets and liabilities are recognized in the purchase accounting as well
as
requiring the expensing of acquisition-related costs as incurred. Furthermore,
SFAS 141R provides guidance for recognizing and measuring the goodwill
acquired
in the business combination and determines what information to disclose
to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for fiscal
years
beginning on or after December 15, 2008. Earlier adoption is prohibited.
The
Company is evaluating the impact, if any, that the adoption of this statement
will have on its consolidated results of operations or financial
position.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Noncontrolling
Interests in Consolidated Financial Statements — An Amendment of ARB No. 51.”
SFAS 160 amends ARB No. 51 to establish accounting and reporting standards
for
the noncontrolling interest in a subsidiary and for the deconsolidation
of a
subsidiary. It is intended to eliminate the diversity in practice regarding
the
accounting for transactions between equity and noncontrolling interests
by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160
also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation, requires
that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests
of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption permitted, and it is to be applied
prospectively. SFAS 160 is must be applied prospectively as of the beginning
of
the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements, which must be applied retrospectively for
all
periods presented. The Company has not yet evaluated the impact that SFAS
160
will have on its consolidated financial position or results of
operations.
In
March
2008, the FASB issued SFAS No. 161 ("SFAS 161"), "Disclosures about Derivative
Instruments and Hedging Activities." SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring
enhanced
disclosures to enable financial statement users to better understand the
effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for
interim
periods and fiscal years beginning after November 15, 2008. The Company
does not
anticipate that the adoption of SFAS 161 will have a material impact on
its
consolidated results of operations or financial position.
In
May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that
are
presented in conformity with GAAP for nongovernmental entities. SFAS 162
is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly
in
Conformity with Generally Accepted Accounting Principles." The Company
does not
expect the adoption of SFAS 162 will have a material impact on its consolidated
results of operations or financial position.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
On
May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon
Conversion (Including Partial Cash Settlement)." FSP APB 14-1 clarifies
that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of
APB
Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of
such
instruments should separately account for the liability and equity components
in
a manner that will reflect the entity's nonconvertible debt borrowing rate
when
interest cost is recognized in subsequent periods. FSP APB14-1 is effective
for
financial statements issued for fiscal years beginning after December 15,
2008,
and interim periods within those fiscal years. The Company has not yet
evaluated
the impact that FSP APB 14-1 will have on its consolidated results of operations
or financial position.
In
June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF No. 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within
those fiscal years. Early application is not permitted. Paragraph 11(a)
of SFAS
133 “Accounting for Derivatives and Hedging Activities” specifies that a
contract that would otherwise meet the definition of a derivative but is
both
(a) indexed to the Company’s own stock and (b) classified in
stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. EITF 07-5 provides a new
two-step
model to be applied in determining whether a financial instrument or an
embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
SFAS 133 paragraph 11(a) scope exception. This standard triggers liability
accounting on all options and warrants exercisable at strike prices denominated
in any currency other than the functional currency of the operating entity
in
the PRC (Renminbi). Management is currently evaluating the impact of adoption
of
EITF 07-5 on the accounting for related warrants transactions.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation with no impact on the previously reported net income or cash
flows.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Note
3 - Plant and equipment
Plant
and
equipment consist of the following at June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Buildings
and improvements
|
|
$
|
6,343,954
|
|
$
|
5,272,190
|
|
Machinery
and equipment
|
|
|
37,239,847
|
|
|
22,257,978
|
|
Automobile
facilities
|
|
|
562,039
|
|
|
487,319
|
|
Electronic
equipment
|
|
|
368,550
|
|
|
307,391
|
|
Construction-in-progress
|
|
|
36,373,688
|
|
|
9,055,482
|
|
Total
|
|
|
80,888,078
|
|
|
37,380,360
|
|
Accumulated
depreciation
|
|
|
(10,945,057
|
)
|
|
(7,202,286
|
)
|
Total
|
|
$
|
69,943,021
|
|
$
|
30,178,074
|
|
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. Depreciation expense for the years ended June 30,
2008,
2007 and 2006 amounted to $2,964,678, $ 2,239,157 and $1,478,734, respectively.
Interest costs totaling $598,953, $759,372 and $189,904 was capitalized
into
construction-in-progress for the years ended June 30, 2008, 2007 and 2006
respectively.
Note
4 - Investment in unconsolidated affiliate
On
September 16, 2003, the Company entered into a joint venture partnership
with
Weifang City Investment Company and Changle Century Sun Paper Industry
Co., Ltd,
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated in Weifang City, Shandong Province, PRC. Changle
Shengshi’s principal activity is to produce and sell electricity and heat. The
Company accounts for this investment under the equity method of
accounting.
On
April
12, 2005, the Company’s ownership percentage in Changle Shengshi was reduced
from 30% to 20% as a result of an additional investment to Changle Shengshi
by
another party. This did not have any material impact on the Company’s
consolidated financial statements.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Summarized
financial information of Changle Shengshi is as follows as of June 30,
2008 and
2007:
|
|
2008
|
|
2007
|
|
Current
assets
|
|
$
|
14,117,813
|
|
$
|
8,065,168
|
|
Non-current
assets
|
|
|
27,231,806
|
|
|
23,027,549
|
|
Total
assets
|
|
|
41,349,619
|
|
|
31,092,717
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
20,333,700
|
|
|
14,137,526
|
|
Non-current
liabilities
|
|
|
2,976,360
|
|
|
3,576,800
|
|
Shareholders'
equity
|
|
|
18,039,559
|
|
|
13,378,391
|
|
Total
liabilities and shareholders' equity
|
|
$
|
41,349,619
|
|
$
|
31,092,717
|
|
Summarized
financial information of Changle Shengshi is as follows for the years ended
June
30, 2008, 2007, and 2006:
|
|
2008
|
|
2007
|
|
2006
|
|
Net
sales
|
|
$
|
31,653,752
|
|
$
|
17,366,341
|
|
$
|
7,622,505
|
|
Gross
profit
|
|
$
|
6,247,654
|
|
$
|
3,586,157
|
|
$
|
1,249,000
|
|
Income
before taxes
|
|
$
|
4,571,573
|
|
$
|
2,308,837
|
|
$
|
431,747
|
|
Net
income
|
|
$
|
3,016,305
|
|
$
|
1,546,921
|
|
$
|
430,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
|
603,261
|
|
|
309,384
|
|
|
86,136
|
|
Elimination
of intercompany profit
|
|
|
(331,022
|
)
|
|
(177,964
|
)
|
|
(44,501
|
)
|
Company's
share of net income
|
|
$
|
272,239
|
|
$
|
131,420
|
|
$
|
41,635
|
|
Note
5 - Related party transactions
Through
September 2006, the Company purchased certain volume of starch from Shouguang
Shengtai Starch Co. Ltd. (“Shouguang Shengtai”), an entity in which Qingtai Liu,
the Company’s Chief Executive Officer, has a 40% interest. From September 2006,
the Company began its own production of starch, and no additional purchases
were
made from Shouguan Shengtai for the procurement of starch. As Shouguang
Shengtai
is partially owned by the Company’s Chief Executive Officer, prepayments made by
the Company has been reclassified to other receivable - related party,
as the
balance was to be refunded by Shouguang Shengtai. As of June 30, 2007,
other
receivable - related party was $992,449. For the years ended June 30, 2007
and
2006, the Company made purchases of approximately from Shouguang Shengtai
$7,652,465 and $13,794,612, respectively, which was approximately 22% and
77% of
the Company’s total purchases of raw materials. For the year ended June 30,
2008, the Company did not make any purchases from Shouguang Shengtai.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
In
connection with the Company’s purchase of Qingtai Liu’s 49% interest in Weifang
Shengtai as described in Note 1, and the 17.95% ownership interest transfer
from
the Original Shareholders of Weifang Shengtai to Qingtai Liu on April 19,
2006,
Qingtai Liu assumed the liabilities of the Original Shareholders’ capital
contribution and was entitled to contribute this amount as a capital
contribution to the Company. On December 20, 2007, Qingtai Liu repaid the
remaining balance of $1,229,625.
The
Company’s utilities are partially provided by Changle Shengshi. (See Note 4). As
of June 30, 2008 and 2007, the Company’s accounts payable due to Changle
Shengshi was approximately $715,000 and $950,000, respectively, which related
to
a portion of the Company’s utilities being provided by Changle Shengshi. The
utilities expense amounted to approximately $9,852,000, $4,958,000 and
$1,706,000 for the years ended June 30, 2008, 2007 and 2006, respectively.
As
of
June 30, 2008 and 2007, the Company’s receivables from two loan contracts with
Changele Shengshi were as follows:
|
|
June
30, 2008
|
|
June
30, 2007
|
|
Due
on November 19, 2007, unsecured, 7.95% interest rate per annum
|
|
$
|
—
|
|
$
|
657,500
|
|
Due
on September 14, 2009, unsecured, 7.60% interest rate per annum
|
|
|
437,700
|
|
|
394,500
|
|
Total
|
|
$
|
437,700
|
|
$
|
1,052,000
|
|
Periodically,
the Company advances monies to Changle Shengshi for temporary cash flow
purposes. This transaction is recurring in nature and the Company does
not
charge interest on these advances, which are due on demand. As of June
30, 2007,
total receivable due from Changle Shengshi was $1,499,207. As of June 30,
2008,
the Company did not have any amounts due from Changle Shengshi.
The
following table summarizes other receivable - related parties as of June
30,
2008 and 2007 is as follows:
|
|
2008
|
|
2007
|
|
Changle
Shengshi Redian Co., Ltd
|
|
$
|
—
|
|
$
|
1,499,207
|
|
Shouguang
Shengtai Starch Co. Ltd
|
|
|
—
|
|
|
992,449
|
|
Total
|
|
$
|
—
|
|
$
|
2,491,656
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
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. As of June 30,
2008 and
2007, the Company’s short term bank loans consisted of the following:
|
|
2008
|
|
2007
|
|
Loan
from Bank of China, due various dates from January 2008 to
June 2009;
monthly interest only payments; interest rates ranging from
7.47% to 8.96%
per annum, guaranteed by an unrelated third party and secured
by certain
properties.
|
|
$
|
13,656,240
|
|
$
|
10,993,400
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates
from
August 2007 to May 2009; monthly interest only payments; interest
rates
ranging from 7.47% to 8.96% per annum, guaranteed by an unrelated
third
party and secured by certain properties.
|
|
$
|
3,895,530
|
|
$
|
3,945,000
|
|
|
|
|
|
|
|
|
|
Loan
from Agriculture Bank of China, due various dates from February
2008 to
February 2009; monthly interest only payments; interest rate
of 8.96% per
annum, guaranteed by an unrelated third party and secured by
certain
properties
|
|
$
|
2,188,500
|
|
$
|
1,959,350
|
|
|
|
|
|
|
|
|
|
Loan
from Communication Bank, due July 2007; monthly interest only
payments;
interest rate of 7.2% per annum, guaranteed by an unrelated
third party.
|
|
$
|
—
|
|
$
|
1,972,500
|
|
|
|
|
|
|
|
|
|
Loan
from Commercial Bank, due July 2008; monthly interest-only
payments;
interest rate at 8.019% per annum, guaranteed by an unrelated
third party,
unsecured.
|
|
$
|
1,459,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Loan
from ShangHai PuFa Bank, due October 2008; monthly interest-only
payments;
interest rate of 8.384% per annum, guaranteed by an unrelated
third party,
unsecured.
|
|
$
|
1,459,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,658,270
|
|
$
|
18,870,250
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
The
loans
are secured by buildings and improvements, machinery and equipment, and
land use
rights with carrying values as follows:
|
|
June
30, 2008
|
|
Buildings
and improvements
|
|
$
|
4,637,104
|
|
Machinery
and
equipment
|
|
|
4,150,330
|
|
Land
use rights
|
|
|
4,860,224
|
|
Total
|
|
$
|
13,647,658
|
|
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. As of June 30, 2008
and
2007, the Company’s notes payables consisted of the following:
|
|
2008
|
|
2007
|
|
Bank
of China, due November 2008, 0.05% transaction fee, restricted
cash
required 100% of loan amount, guaranteed by an unrelated third
party.
|
|
$
|
729,500
|
|
$
|
4,997,000
|
|
Industrial
and Commercial Bank of China, due in September 2008, 0.05%
transaction
fee, restricted cash required 50% of loan amount, guaranteed
by an
unrelated third party.
|
|
|
4,377,000
|
|
|
3,945,000
|
|
Shenzhen
Development Bank, due in December 2008, 0.05% transaction fee,
restricted
cash required 50% of loan amount, guaranteed by an unrelated
third party.
|
|
|
4,377,000
|
|
|
—
|
|
Shenzhen
Development Bank, due in December 2008, 0.05% transaction fee,
restricted
cash required 100% of loan amount, guaranteed by an unrelated
third party.
|
|
|
1,459,000
|
|
|
—
|
|
Total
|
|
$
|
10,942,500
|
|
$
|
8,942,000
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Employee
loans
From
time
to time, the Company borrows monies from certain employees for cash flow
purposes of the Company. These loans do not require collateral and bear
interest
at 7.2% for the first six months, and then 10.8% thereafter until the full
principal amounts are paid by the Company and the principal is due upon
demand.
Employee loans amounted to $1,382,287 and $596,516 as of June 30, 2008
and June
30, 2007, respectively. Interest expense amounted to $105,672, $45,856,
and
$56,425 for the years ended June 30, 2008, 2007, and 2006, respectively.
These
loans are payable upon demand.
Employee
loan - officer
From
time
to time, the Company has borrowed monies from Qingtai Liu for cash flow
purposes
of the Company. The loan does not require collateral and bear interest
at 7.2%
for the first six months, and then 10.8% until the full principal amount
is paid
by the Company and the principal is due upon demand. Employee loan from
officer
amounted to $53,605 and $0 as of June 30, 2008 and June 30, 2007, respectively.
Interest expense was de minimis on this loan for the years ended June 30,
2008,
2007, and 2006.
Third
party loan
From
time
to time, the Company borrowed money from an unrelated individual for use
in
operations. The loan does not require collateral and bears interest at
7.2% for
the first six months, and then 10.8% until the full principal amount is
paid by
the Company . The principal is due upon demand. Balance on this loan as
of June
30, 2008 and 2007 was $640,228 and $318,274, respectively.
Long
term loan - current portion
Long
term
loan - current portion represents an amount due to a bank which was normally
due
within one year. During the year ended June 30, 2008, the outstanding amount
was
paid in full. As of June 30, 2008 and 2007, long term loan - current portion
was:
|
|
June
30, 2008
|
|
June
30, 2007
|
|
Agricultural
Credit Union, interest at 7.84% per annum, due May 2008
|
|
$
|
—
|
|
$
|
381,350
|
|
Interest
Total
interest expense, net of capitalized interest, for the years ended June
30,
2008, 2007, and 2006 on all debt, amounted to $1,901,531, $1,270,418, and
$555,572 respectively. Interest capitalized into construction-in-progress
totaled $598,953, $759,372 and $189,904 for the years ended June 30, 2008,
2007
and 2006, respectively.
Note
7 - Income taxes
The
Company is governed by the Income Tax Law of the PRC concerning Foreign
Investment Enterprises (“FIEs”) and Foreign Enterprises and various local income
tax laws (the “Income Tax Laws”). Under the Income Tax Laws, FIEs are generally
subject to an effective income tax 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, FIEs scheduled to operate for
a period
of 10 years or more and engaged in manufacturing and production may be
exempt
from income taxes for up to 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,
2008
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 two years from September 2004 to August 2006, and
50%
exemption for years three to five from September 2006 to August 2009. In
addition, the Company is located in a Special Economic Zone and the PRC
tax
authority has offered it with a special income tax rate of 24%. With the
approval of the local government, the Company is subject to income taxes
at a
reduced rate of 12% from September 2006 to August 2009, after the two-year
24%
exemption for income taxes until its exemption and reduction periods expire
in
August 2009.
Beginning
on January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).
The
key
changes were:
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 five
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 to be taxed at the reduced rate
as
described above until the tax holiday term is completed. Starting on September
1, 2009, the Company will be subject to a 25% income tax rate pursuant
to the
new income tax laws.
For
the
years ended June 30, 2008, 2007, and 2006, provision for income taxes was
$645,988, $878,836 and $0, respectively,
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended June 30:
|
|
2008
|
|
2007
|
|
2006
|
|
U.S.
statutory rates
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
Foreign
income not recognized in the U.S.
|
|
|
(34.0
|
)
|
|
(34.0
|
)
|
|
(34.0
|
)
|
China
income taxes
|
|
|
29.0
|
|
|
33.0
|
|
|
33.0
|
|
China
income tax exemption
|
|
|
(17.0
|
)
|
|
(21.0
|
)
|
|
(33.0
|
)
|
Applicable
income tax rate
|
|
|
12.0
|
%
|
|
12.0
|
%
|
|
—
|
%
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
The
estimated tax savings due to the tax exemption for the years ended June
30,
2008, 2007 and 2006 amounted to $1,468,820, $1,537,963 and $1,389,601,
respectively. The net effect on basic earnings per share if income taxes
had
been applied would decrease basic earnings per share for the years ended
June
30, 2008, 2007 and 2006 by $0.08, $0.13 and $0.14 respectively. The net
effect
on diluted earnings per share if income taxes had been applied would decrease
diluted earnings per share for the years ended June 30, 2008, 2007 and
2006 by
$0.07, $0.13 and $0.14 respectively.
Taxes
payable
Taxes
payable consisted of the following as of June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
VAT
payable
|
|
$
|
3,049,000
|
|
$
|
1,273,390
|
|
Individual
income tax withheld
|
|
|
767
|
|
|
1,316
|
|
Income
tax payable
|
|
|
1,518,278
|
|
|
764,827
|
|
Housing
property tax payable
|
|
|
9,903
|
|
|
7,306
|
|
Others
|
|
|
53,304
|
|
|
2,093
|
|
Total
taxes payable
|
|
$
|
4,631,252
|
|
$
|
2,048,932
|
|
Note
8 - Dividends
Prior
to
June 30, 2006, the Board of Directors of Weifang Shengtai approved and
declared
dividends of $2,468,400. As of June 30, 2008, the Company does not have
any
outstanding dividends payable. As of, and for the years ended June 30,
2008,
2007 and 2006, the dividends paid or declared by the company to its original
shareholders were as follows:
|
|
June
30,
2008
|
|
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
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Note
9 - Shareholders’ equity
Warrants
In
connection with the Share Purchase Agreement, the 4,375,000 warrants (“Investor
Warrants”) carry an exercise price of $2.60 and a 5-year term. The Investor
Warrants are callable if the Company’s shares trade at or above $8.00 per share
for 20 consecutive trading days and underlying shares are registered for
resale.
The Investor Warrants contain standard adjustment provisions upon stock
dividend, stock split, stock combination, recapitalization, and a change
of
control transaction.
Also
in
connection with the Share Purchase Agreement, the Company issued 218,750
warrants (“Placement Agent Warrants”) to Brill Securities, the Placement Agent.
These Placement Agent Warrants have the same terms as the Investor Warrants.
These warrants were issued on August 8, 2007.
Concurrent
with the offering related to the Share Purchase Agreement, the Company
issued
75,000 warrants to Chinamerica Fund, LLP and 25,000 warrants to Jeff Jenson
(collectively as “Lead Investor Warrants”) to compensate Chinamerica Fund LLP as
the lead investor and for Jeff Jenson in assisting in providing the shell
of
West Coast Car Company. These warrants have the same terms as the Investor
Warrants except with an exercise price of $0.01 per share. In June 2008,
Jeff
Jenson exercised the 25,000 warrants issued to him.
All
Investor Warrants, Placement Agent Warrants, and Lead Investor Warrants
meet the
conditions for equity classification pursuant to SFAS No. 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 for as common stock issuance
cost.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
Warrants
|
|
Warrants
|
|
Average
Exercise
|
|
Remaining
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Price
|
|
Contractual
Life
|
|
Outstanding,
June 30, 2006
|
|
|
—
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
Granted
|
|
|
4,475,000
|
|
|
4,475,000
|
|
|
2.54
|
|
|
5.00
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding,
June 30, 2007
|
|
|
4,475,000
|
|
|
4,475,000
|
|
$
|
2.54
|
|
|
4.87
|
|
Granted
|
|
|
218,750
|
|
|
218,750
|
|
|
2.60
|
|
|
5.00
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
219,805
|
|
|
219,805
|
|
|
2.31
|
|
|
—
|
|
Outstanding,
June 30, 2008
|
|
|
4,473,945
|
|
|
4,473,945
|
|
$
|
2.54
|
|
|
3.88
|
|
Stock
options
On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”). The Company believes that such
awards better align the interests of its employee with those of its
shareholders. Option awards are generally granted with an exercise price
equal
to the fair value of the Company’s stock at the date of grant.
On
May
14, 2008, the Company granted 500,000 stock options and 160,000 non-qualified
stock options pursuant to the Stock Incentive Plan. All options have an
exercise
price of $3.34, which is the closing price on the date of grant, and expire
five
years after the date of grant. All options vest over a period of three
years on
a quarterly basis from the date of grant.
The
Company uses the Black-Scholes option pricing model which was developed
for use
in estimating the fair value of options. Option pricing models require
the input
of highly complex and subjective variables including the expected life
of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes
in
the subjective assumptions can materially affect the estimated value of
the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option valuation model may not provide an accurate measure
of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using
an
option pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
The
assumptions used in calculating the fair value of options granted using
the
Black-Scholes option pricing model are as follows:
Weighted
average risk-free interest rate
|
|
|
3.22
|
%
|
Expected
term
|
|
|
4
years
|
|
Expected
volatility
|
|
|
146
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Weighted
average grant-date fair value per option
|
|
$
|
3.34
|
|
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
The
volatility of the Company’s common stock was estimated by management based on
the historical volatility; the risk free interest rate was based on Treasury
Constant Maturity Rates published by the U.S. Federal Reserve for periods
applicable to the estimated life of the options; and the expected dividend
yield
was based on the current and expected dividend policy. The fair value of
the
options was based on the Company’s common stock price on the date the options
were granted. SFAS 123R allows use of the “simplified” method to determine the
term when other information is not available. Because the Company does
not have
sufficient applicable history of employee stock options activity, the Company
uses the simplified method to estimate the life of the options by taking
the sum
of the vesting period and the contractual life and then calculating the
midpoint
which is the estimated term of the options.
The
stock
option activity was as follows for the year ended June 30, 2008:
|
|
Options
outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding,
June 30, 2007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Granted
|
|
|
660,000
|
|
$
|
3.34
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding,
June 30, 2008
|
|
|
660,000
|
|
$
|
3.34
|
|
$
|
—
|
|
As
the
options were first granted in May 2008, there was no stock option activity
for
the year ended June 30, 2007, and prior.
Following
is a summary of the status of options outstanding at June 30, 2008:
Outstanding
Options
|
|
Exercisable
Options
|
|
Average
Exercise
Price
|
|
Outstanding
Options
|
|
Average
Remaining
Contractual
Life
|
|
|
Average
Exercise
Price
|
|
Exercisable
Options
|
$
|
3.34
|
|
660,000
|
|
4.87
|
|
$
|
3.34
|
|
—
|
Compensation
expense from stock options recognized for the year ended June 30, 2008
was
$317,636
.
There
were no such expenses recognized for the years ended June 30, 2007 and
2006.
Note
10 - Commitments and Contingencies
Guarantees
During
the year ended June 30, 2008, the Company guaranteed $7.3 million of short
term
bank loans for an unrelated party, Shangdong Kuangji Group, Inc. (Shangdong
Kuangji”). The Company is obligated to perform under the guarantee if Shangdong
Kuangji fails to pay principal and interest payments when due. The maximum
potential amount of future undiscounted payments under the guarantee is
$8.0
million including accrued interest. As of June 30, 2008, the Company did
not
record a liability for the guarantee because management believes Shangdong
Kuangji is current in its payment obligations, and the likelihood of the
Company
having to make good on the guarantee is remote. As of June 30, 2008, Shangdong
Kuangji’s outstanding short term bank loan balance was $7,295,000
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Litigation
In
the
Company’s ordinary course of business, the Company may be subject to certain
legal proceedings. After review and consultation with the Company’s legal
counsel, management believes that the outcome of the legal matters will
not have
a materially adverse effect on the consolidated results of operations or
consolidated financial position of the Company.
Note
11 - Statutory reserves
The
laws
and regulations of the PRC require 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 reserves. 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’s 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, 2008, 2007, and 2006, the Company
transferred $1,159,418, $734,396, and $616,256, 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.
Enterprise
fund
The
enterprise fund may be used to acquire fixed assets or to increase the
working
capital to expand production and operations of the Company. No minimum
contribution is required and the Company has not made any contribution
to this
fund.
Note
12 - Retirement benefit plans
Regulations
in the PRC 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 base salaries of all current permanent employees. The PRC government
is
responsible for the administration and benefit liability to retired employees.
For the years ended June 30, 2008, 2007 and 2006, the Company made contributions
in the amounts of $308,399, $207,308, and $170,533, respectively to the
Company’s retirement plan.
See
report of independent registered public accounting firm.
SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Note
13- Subsequent event
Short
term loans
In
July
2008, the Company paid in full the outstanding amount of $1,459,000 to
Commercial Bank, in satisfaction of its loan terms. In August 2008, the
Company
paid $977,530 to Industrial and Commercial Bank of China in accordance
with the
loan agreement.
In
September 2008, the Company borrowed $1,459,854 loan from Commercial
Bank, due
June 2009, monthly interest-only payments; interest rate at 9.71% per
annum,
secured by certain properties.
Notes
payable
By
September 2008, the Company paid in full the outstanding amount of $4,377,000
to
Industrial and Commercial Bank of China, in satisfaction of its loan
terms.
In
September 2008, the Company borrowed $1,956,204 notes payable from Industrial
and Commercial Bank of China, due in March 2009, 0.05% transaction fee,
restricted cash required 50% of loan amount, secured by certain
properties.
Incorporated
by
Reference
|
|
|
|
|
|
Filing
|
Exhibit
|
|
|
|
|
|
|
Numb
e
r
|
|
Exhibit
Description
|
|
Form
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Amended
and
Restated
Cer
t
ificate
of
Incorporation
|
|
Form
1
0
-SB
|
|
September
26,
2006
|
|
|
|
|
|
|
|
3.2
|
|
By
Laws
|
|
Form
1
0
-SB
|
|
September
2
6,
2006
|
|
|
|
|
|
|
|
4.1
|
|
Form
of
Warrants
to
Investors
|
|
Form
8
-K
|
|
May
21,
2007
|
|
|
|
|
|
|
|
10.1
|
|
Share
Exchange
Agreement
dated
May
1
5,
2007
by
and
among
the
Company
and
Shengtai
Holding,
Inc
|
|
Form
8
-K
|
|
May
21,
2007
|
|
|
|
|
|
|
|
10.2
|
|
Share
Purchase
Agreement
dat
e
d
a
s
of
May
15,
2007
between
the Company and the Purchasers
|
|
Form
8
-K
|
|
May
21,
2007
|
|
|
|
|
|
|
|
16.1
|
|
Letter
dated
May
17,
2007
f
r
om
West
Coast
Car
Company
to
Ma
n
t
yla
McRobers
LLC
|
|
Form
8
-K
|
|
May
21,
2007
|
|
|
|
|
|
|
|
16.2
|
|
Letter
dated
May
23,
2007
f
r
om
Mantyla
McReynolds
LLC
to
t
he
S
e
curi
t
i
e
s
and Exch
a
nge
Comm
i
ssion
|
|
Form
8
-K/A
|
|
May
24,
2007
|
|
|
|
|
|
|
|
21.1
|
|
List
of
Subsidiaries
|
|
Form
8
-K
|
|
May
21,
2007
|
|
|
|
|
|
|
|
99.1
|
|
Press
release dated May 21, 2007
issued
by
West
Coast
Car
Company
|
|
Form
8
-K
|
|
May
21,
2007
|
|
|
|
|
|
|
|
|
|
Filed
and Furnished herewith
|
|
|
|
|
10.3
|
|
Employment
Agreement dated May 1, 2008 between the Company and Yiru
Shi
|
|
Form
10
-K
|
|
May
29
,
2008
|
SIGN
A
TU
R
ES
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following person on behalf of the registrant and in
the
capacity and on the date indicated.
SHENGTAI
PHARMACEUTICAL, INC.
|
(Registrant)
|
|
|
By:
|
/s/
Qingtai Liu
|
|
Qingtai
Liu
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the Registrant and in
the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Qingtai Liu
|
|
Chief
Executive Officer (Principal Executive
|
|
September
28, 2008
|
Qingtai Liu
|
|
Officer)
and Director
|
|
|
|
|
|
|
|
/s/
Yiru Shi
|
|
Chief Financial Officer (Principal Financial and
|
|
September
28, 2008
|
Yiru
Shi
|
|
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Yongqiang Wang
|
|
Director
|
|
September
28, 2008
|
Yongqiang Wang
|
|
|
|
|
|
|
|
|
|
/s/
Wenbing Christopher Wang
|
|
Director
|
|
September
28, 2008
|
Wenbing
Christopher Wang
|
|
|
|
|
|
|
|
|
|
/s/
Changxin Li
|
|
Director
|
|
September
28, 2008
|
Changxin Li
|
|
|
|
|
|
|
|
|
|
/s/ Winfred Lee
|
|
|
|
|
Winfred
Lee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
31
-