SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Note
1 - Organization background and principal activities
Shengtai
Pharmaceutical Inc, (the “Company”), formerly known as West Coast Car Company
was incorporated in March 2004 in the State of Delaware as West Coast Car
Company.
Shengtai
Holding, Inc. (“SHI” was incorporated in the state of New Jersey on February 27,
2006. The Company, through its Chinese subsidiary, Weifang Shengtai
Pharmaceutical Co., Ltd. (“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,
PRC
on February 4, 1999. 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
Company recorded all normal recurring adjustments considered necessary to
give a
fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2008 annual report filed on Form 10-K.
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material inter-company transactions and balances have been eliminated
in the
consolidation.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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 fair value of share based compensation, and the collectability of accounts
receivable. Actual results could be materially different from these estimates
upon which the carrying values were based.
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 $4,881,394 and $4,717,121 as of September 30, 2008
and
June 30, 2008, respectively. Assets and liabilities were translated at 6.83
RMB
to $1.00 at September 30, 2008. The equity accounts were stated at their
historical rate. The average translation rates applied to income statement
for
the three months ended September 30, 2008 and 2007 were 6.84 RMB and 7.55
RMB to
$1.00. Cash flows are also translated at average translation rates for the
period; therefore, amounts reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Revenue
recognition
The
Company recognizes revenue when the goods are delivered, title has passed,
pricing is fixed, and collection is reasonably assured. Sales revenue represents
the invoiced value of goods, net of 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 costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted
to
$779,336 and $747,314 for the three months ended September 30, 2008 and 2007,
respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Financial
instruments
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.
On
July
1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a three-level valuation hierarchy
for disclosures of fair value measurement and enhances disclosures requirements
for fair value measures. The carrying amounts reported in the balance sheets
for
current receivables and payables, including short term loans, qualify as
financial instruments and are a reasonable estimate of fair value because
of the
short period of time between the origination of such instruments and their
expected realization and their current market rate of interest. The three
levels
are defined as follow:
|
·
|
Level
1: inputs to the valuation methodology are quoted prices (unadjusted)
for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2: inputs to the valuation methodology include quoted prices for
similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial
instruments.
|
|
·
|
Level
3: inputs to the valuation methodology are unobservable and significant
to
the fair value.
|
The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS
157.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to 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.
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. SFAS 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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
The
following is a reconciliation of the basic and diluted earnings per share:
|
|
Three
months ended
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
income for earnings per share
|
|
$
|
629,796
|
|
$
|
2,252,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,094,805
|
|
|
18,875,000
|
|
|
|
|
|
|
|
|
|
Diluted
effect of warrants
|
|
|
258,643
|
|
|
822,359
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in diluted computation
|
|
|
19,353,448
|
|
|
19,697,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.11
|
|
At
September 30, 2008, 4,473,945 shares of outstanding warrants were included
in
the three months ended September 30, 2008 calculation of diluted earnings
per
share and 660,000
shares
of outstanding stock options were excluded from the diluted earnings per
share
calculation as they are anti-dilutive.
At
September 30, 2007, all outstanding warrants were included in the three months
ended September 30, 2007 calculation of diluted earnings per share.
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Restricted
cash
The
Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions. As of September 30,
2008
and June 30, 2008, these amounts totaled $5,570,525 and $6,763,500,
respectively.
In
accordance with the Escrow Agreement and the Share Purchase Agreement signed
by
Shengtai Holding Inc., West Coast Car Company, Chinamerica Fund LP, and
Tri-State Title & Escrow, LLC (the “Escrow Agent”), the Company was required
to deposit with the Escrow Agent $5,500,000 immediately on the Closing Date
of
the Share Purchase Agreement. This fund can only be disbursed until certain
criteria are met. As of September 30, 2008 and June 30, 2008, the amount
not
disbursed was $201,305 and $198,000, 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
activity in the allowance for doubtful accounts for trade accounts receivable
is
as follows:
|
|
Three
months ended September 30, 2008
|
|
Year
ended
June
30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
440,701
|
|
$
|
431,178
|
|
|
|
|
|
|
|
|
|
Additions
charged to bad debt expense
|
|
|
226,911
|
|
|
93,557
|
|
|
|
|
|
|
|
|
|
Write-off
charged against the allowance
|
|
|
(182,386
|
)
|
|
(129,130
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
1,180
|
|
|
45,096
|
|
|
|
|
|
|
|
|
|
Ending
allowance for doubtful accounts
|
|
$
|
486,406
|
|
$
|
440,701
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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. The cash deposits in U.S. financial institutions
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 September 30, 2008 and June 30,
2008,
the Company’s bank balances exceeded government insured limits or not covered by
insurance by approximately $6,740,882 and $10,175,000, 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. For the three months ended September 30,
2008
and 2007, there were no customers that individually comprised 10% or more
of the
Company’s total revenues. For the three months ended September 30, 2008 and
2007, there were no vendors that individually accounted for over 10% or more
of
the Company’s total purchases.
For
export sales, we frequently require significant down payments or letter of
credit by our customers prior to shipment. During the year, the Company
maintains export credit insurance to protect the Company against the risk
that
the overseas customers may default on settlement.
The
following table summarizes financial information for the three months ended
September 30, 2008 and 2007, concerning the Company’s revenues based on
geographic area:
Revenue
|
|
September
30, 2008
|
|
September
30, 2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
China
|
|
$
|
15,960,750
|
|
$
|
17,187,494
|
|
|
|
|
|
|
|
|
|
International
|
|
|
2,162,978
|
|
|
2,185,575
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,123,728
|
|
$
|
19,373,069
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Inventories
Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:
|
|
September
30,
2008
|
|
June
30,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,160,192
|
|
$
|
1,409,577
|
|
|
|
|
|
|
|
|
|
Work-in-progress
|
|
|
1,662,310
|
|
|
1,688,161
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
1,804,067
|
|
|
1,941,540
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,626,569
|
|
$
|
5,039,278
|
|
The
Company reviews its inventory periodically for possible obsolete goods or
to
determine if any reserves are necessary. As of September 30, 2008, the Company
has determined that no reserves are necessary.
Prepayments
Prepayments
represent partial payments or deposits for inventory purchases.
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
|
|
|
5-20
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
5-10
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
Automobile
facilities
|
|
|
5-10
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
Electronic
equipment
|
|
|
5-7
|
|
|
Years
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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 September 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 and
additional contributions made and distributions received. The Company recognizes
a loss if it is determined that other than temporary decline in the value
of the
investment exists.
Intangible
assets
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 2008, the Company
acquired various land use rights for approximately $3,291,000. The Company
amortizes the cost of land use rights over the usage terms using the
straight-line method.
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
September 30, 2008, the Company determined that there had been no impairment.
Total amortization expense for the three months ended September 30, 2008
and
2007 amounted to $ 13,051 and $11,809 respectively.
Income
taxes
The
Company accounts for income taxes in accordance with 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 September 30, 2008 and June 30, 2008, the Company did not
have
any deferred tax assets or liabilities, and as such, no valuation allowances
were recorded at September 30, 2008 and June 30, 2008.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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 $1,884,466 and $2,476,725 for the three
months ended September 30, 2008, and $2,860,229 and $2,432,415 for the three
months ended September 30, 2007, respectively. Sales and purchases are recorded
net of VAT collected and paid as the Company acts as an agent for the
government. VAT taxes are not impacted by the income tax holiday in the PRC.
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Recently
issued accounting pronouncements
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 adopted SFAS 159 on July 1, 2008. The
Company chose not to elect the option to measure the fair value of eligible
financial assets and liabilities.
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
which did not materially affect the company.
In
December 2007, the FASB issued SFAS 141(R) "Business Combinations". 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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
In
March
2008, the FASB issued 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 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.
On
May 9,
2008, the FASB issued 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 EITF 07-5 “Determining whether an Instrument (or Embedded
Feature) is indexed to an Entity’s Own Stock”. This Issue 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 No 133 “Accounting for Derivatives and
Hedging Activities” (“SFAS 133”) 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 China (Renminbi). EITF 07-5
is
effective for fiscal years beginning after December 15, 2008. The Company
is
currently evaluating the impact of adoption of EITF 07-5 on the Company’s
consolidated financial statements.
In
June
2008, FASB issued EITF 08-4, “Transition Guidance for Conforming Changes to
Issue No. 98-5”. The objective of EITF 08-4 is to provide transition
guidance for conforming changes made to EITF No. 98-5, “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of
Issue No. 98-5 to Certain Convertible Instruments”, and SFAS 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity”. This Issue is effective for financial statements issued for fiscal
years ending after December 15, 2008. Early application is
permitted. Management is currently evaluating the impact of adoption of
EITF 08-4 on the accounting for the convertible notes and related warrants
transactions.
On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of
a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have
a
material impact on our financial position or results for the quarter ended
September 30, 2008.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Note
3 - Plant and equipment
Plant
and
equipment consist of the following:
|
|
September
30,
2008
|
|
June
30,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
11,624,589
|
|
$
|
6,343,954
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
44,195,785
|
|
|
37,239,847
|
|
|
|
|
|
|
|
|
|
Automobile
facilities
|
|
|
598,518
|
|
|
562,039
|
|
|
|
|
|
|
|
|
|
Electronic
equipment
|
|
|
415,667
|
|
|
368,550
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
27,417,909
|
|
|
36,373,688
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
84,252,468
|
|
|
80,888,078
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
(11,926,138
|
)
|
|
(10,945,057
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,326,330
|
|
$
|
69,943,021
|
|
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 three months ended September
30, 2008 and 2007 amounted to $951,659 and $686,653, respectively. Interest
costs totaling $701,621 and $230,656 was capitalized into
construction-in-progress for the three months ended September 30, 2008 and
2007,
respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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 20% investment under the equity method of accounting.
Summarized
unaudited financial information of Changle Shengshi is as follows:
|
|
September
30,
|
|
June
30,
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
15,487,906
|
|
$
|
14,117,813
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
27,824,899
|
|
|
27,231,806
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
43,312,805
|
|
|
41,349,619
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
22,228,241
|
|
|
20,333,700
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
2,984,520
|
|
|
2,976,360
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
18,100,044
|
|
|
18,039,559
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
43,312,805
|
|
$
|
41,349,619
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Summarized
financial information of Changle Shengshi for the three months ended September
30, 2008 and 2007 is as follows:
|
|
September
30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
10,394,563
|
|
$
|
7,171,525
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
360,394
|
|
$
|
2,167,691
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
$
|
14,714
|
|
$
|
1,757,159
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,035
|
|
$
|
1,372,948
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
2,207
|
|
$
|
274,589
|
|
|
|
|
|
|
|
|
|
Elimination
of intercompany profit
|
|
|
356
|
|
|
125,810
|
|
|
|
|
|
|
|
|
|
Company’s
share of net income
|
|
$
|
1,851
|
|
$
|
148,779
|
|
Note
5 - Related party transactions
The
Company’s utilities are partially provided by Changle Shengshi (See Note 4). As
of September 30, 2008 and June 30, 2008, the Company’s accounts payable due to
Changle Shengshi was approximately $535,000 and $715,000, respectively, which
related to a portion of the Company’s utilities being provided by Changle
Shengshi. The utilities expense amounted to approximately $1,676,331 and
$2,068,766 for the three months ended September 30, 2008 and 2007, respectively.
The
Company’s receivables from one loan contract with Changle Shengshi are as
follows:
|
|
September
30, 2008
|
|
June
30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
Due
on September 14, 2009, unsecured, 7.60% interest rate per
annum
|
|
$
|
438,900
|
|
$
|
437,700
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Note
6 - Debt
Short
term loans
Short
term loans represent amounts due to various banks which are normally due
within
one year, and these loans can be renewed with the banks. The Company’s short
term bank loans consisted of the following:
|
|
September
30, 2008
(Unaudited)
|
|
June
30, 2008
|
|
Loan
from Bank of China, due various dates from January 2009 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.
|
|
$
|
13,693,680
|
|
$
|
13,656,240
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates
from
January 2009 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.
|
|
$
|
2,926,000
|
|
$
|
3,895,530
|
|
|
|
|
|
|
|
|
|
Loan
from Agriculture Bank of China, due February 2009; monthly interest
only
payments; interest rate of 8.96% per annum, guaranteed by an unrelated
third party and secured by certain properties
|
|
$
|
2,194,500
|
|
$
|
2,188,500
|
|
|
|
|
|
|
|
|
|
Loan
from Commercial Bank, due June 2009; monthly interest-only payments;
interest rate at 8.019% per annum, guaranteed by an unrelated third
party,
unsecured.
|
|
$
|
1,463,000
|
|
$
|
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.
|
|
$
|
1,463,000
|
|
$
|
1,459,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,740,180
|
|
$
|
22,658,270
|
|
The
loans
are secured by buildings and improvements, machinery and equipment, and land
use
rights with carrying values as follows:
|
|
September
30, 2008
|
|
Buildings
and improvements
|
|
$
|
4,649,817
|
|
Machinery
and
equipment
|
|
|
4,161,709
|
|
Land
use rights
|
|
|
4,873,549
|
|
Total
|
|
$
|
13,685,075
|
|
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Notes
payable - banks
Notes
payable represent amounts due to various banks which are normally due within
one
year, and these notes can be renewed with the banks. The Company’s notes
payables consisted of the following:
|
|
September
30, 2008
(Unaudited)
|
|
June
30, 2008
|
|
Bank
of China, due November 2008, 0.05% transaction fee, restricted
cash
required 100% of loan amount, guaranteed by an unrelated third
party.
|
|
$
|
731,500
|
|
$
|
729,500
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due in March 2009, 0.05% transaction
fee,
restricted cash required 50% of loan amount, guaranteed by an unrelated
third party.
|
|
|
1,960,420
|
|
|
4,377,000
|
|
|
|
|
|
|
|
|
|
Shenzhen
Development Bank, due in December 2008, 0.05% transaction fee,
restricted
cash required 50% of loan amount, guaranteed by an unrelated third
party.
|
|
|
4,389,000
|
|
|
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.
|
|
|
1,463,000
|
|
|
1,459,000
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,543,920
|
|
$
|
10,942,500
|
|
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 $1,294,292 and $1,382,287 as of September 30, 2008 and
June
30, 2008, respectively. These loans are payable upon demand.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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 bears 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 $53,738 and $53,605 as of September 30, 2008 and June 30, 2008,
respectively. Interest expense was de minimis on this loan for the three
months
ended September 30, 2008 and 2007, respectively.
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 of the loan as of
September 30, 2008 and June 30, 2008 amounted to $362,521 and $640,228,
respectively.
Total
interest expense, net of capitalized interest, for the three months ended
September 30, 2008 and 2007 on all debt, amounted to $584,509 and $391,608,
respectively. Interest capitalized into construction-in-progress totaled
$701,621 and $230,656 for the three months ended September 30, 2008 and 2007,
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.
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
exemption 24% for income taxes until its exemption and reduction periods
expire
in August 2009.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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 are:
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs, except for High Tech companies
who pays a
reduced rate of 15%;
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of the
next 5
years or until the tax holiday term is completed, whichever is
sooner.
|
The
Company’s subsidiary, Weifang Shengtai was established before March 16, 2007,
and therefore is qualified to continue 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. During the three months ended September 30, 2008 and
2007,
the provision for income taxes was $133,219 and $305,845,
respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended September 30:
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
Foreign
income not recognized in USA
|
|
|
(34.0
|
)
|
|
(34.0
|
)
|
|
|
|
|
|
|
|
|
China
income taxes
|
|
|
25.0
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
China
income tax exemption
|
|
|
(13.0
|
)
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
Total
provision for income taxes
|
|
|
12.0
|
%
|
|
12.0
|
%
|
The
estimated tax savings due to the tax exemption for the three months ended
September 30, 2008 and 2007 amounted to $174,934 and $535,229, respectively.
The
net effect on basic earnings per share if the income tax had been applied
would
decrease basic earnings per share for the three months ended September 30,
2008
and 2007 by $0.01 and $0.03, respectively. The net effect on diluted earnings
per share if the income tax had been applied would decrease diluted earnings
per
share for the three months ended September 30, 2008 and 2007 by $0.01 and
$0.03,
respectively.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Taxes
payable
Taxes
payable consisted of the following:
|
|
September
30, 2008
(Unaudited)
|
|
June
30, 2008
|
|
|
|
|
|
|
|
VAT
payable
|
|
$
|
1,542,042
|
|
$
|
3,049,000
|
|
|
|
|
|
|
|
|
|
Individual
income tax withheld
|
|
|
464
|
|
|
767
|
|
|
|
|
|
|
|
|
|
Income
tax payable
|
|
|
924,077
|
|
|
1,518,278
|
|
|
|
|
|
|
|
|
|
Housing
property tax payable
|
|
|
9,930
|
|
|
9,903
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
1,425,889
|
|
|
53,304
|
|
|
|
|
|
|
|
|
|
Total
taxes payable
|
|
$
|
3,902,402
|
|
$
|
4,631,252
|
|
Note
8 - Commitments and Contingent liabilities
Guarantees
As
of
September 30, 2008, the Company has guaranteed $7.3 million of short term
loan
for unrelated party, Shandong Kuangji Group, Inc. (“Shandong Kuangji”). The
Company is obligated to perform under the guarantee if Shandong Kuangji fails
to
pay principal and interest payments when due. The maximum potential amount
of
future undiscounted payments under the guarantee is about $8.0 million including
accrued interest. The Company did not record a liability for the guarantee
because management believes Shandong Kuangji is current in its payment
obligations, and the likelihood of the Company having to make good on the
guarantee is remote.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Detail
of
guarantee amount to the unrelated parties as of September 30, 2008 is as
follows:
|
|
Short
Term
|
|
Company
|
|
Bank
Loans
|
|
|
|
|
|
Shandong
Kuangji Group Inc.
|
|
$
|
7,315,000
|
|
|
|
|
|
|
Total
|
|
$
|
7,315,000
|
|
Commitments
Capital
commitments outstanding as of September 30, 2008 were as follows:
|
|
Property
and Equipment
|
|
Nine
months ended June 30, 2009
|
|
$
|
234,080
|
|
Thereafter
|
|
$
|
-
|
|
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
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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.
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
Warrants
|
|
Warrants
|
|
Average
Exercise
|
|
Remaining
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Price
|
|
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2008 (unaudited)
|
|
|
4,473,975
|
|
|
4,473,945
|
|
$
|
2.54
|
|
|
3.63
|
|
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
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
|
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.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
The
stock
option activity was as follows:
|
|
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
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2008
|
|
|
660,000
|
|
$
|
3.34
|
|
$
|
-
|
|
Following
is a summary of the status of options outstanding at September 30, 2008:
Outstanding
Options
|
|
Exercisable
Options
|
|
Average
Exercise
Price
|
|
Outstanding
Options
|
|
Average
Remaining
Contractual
Life
|
|
|
Average
Exercise
Price
|
|
Exercisable
Options
|
$
|
3.34
|
|
660,000
|
|
4.62
|
|
$
|
3.34
|
|
—
|
Compensation
expense from stock options recognized for the three months ended September
30,
2008 was $158,818.
There
were no such expenses recognized for the three months ended September 30,
2007.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES
TO
THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
Note
10 - Statutory reserves
The
laws
and regulations of the People’s Republic of China required that before a
Sino-foreign cooperative joint venture enterprise distributes profits to
its
partners, it must first satisfy all tax
liabilities,
provide for losses in previous years, and make allocations, in proportions
determined at the discretion of the board of directors, after the statutory
reserve. The statutory reserves include the surplus reserve fund, and the
enterprise fund. These statutory reserves represent restricted retained
earnings.
Surplus
reserve fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory
surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
transfer to this reserve must be made before distribution of any dividends
to
shareholders. For the three months ended September 30, 2008 and 2007, the
Company did not transfer any fund to this reserve. The surplus reserve fund
is
non-distributable other than during liquidation and can be used to fund previous
years’ losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing shareholders in proportion
to their shareholding or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue
is
not less than 25% of the registered capital.
Enterprise
fund
The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required and the Company has not made any contribution to
this
fund.
Note
11 - Retirement benefit plans
Regulations
in the 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 three months ended September 30, 2008 and 2007, the Company made
contributions in the amounts of $135,036 and $57,351, respectively to the
Company’s retirement plan.
Note
12 - Subsequent event
Short
term loans
In
October 2008, the Company borrowed $1,465,000 loan from Xingye Bank in Weifang,
due June 2009, monthly interest-only payments, interest rate at 7.9695% per
annum, secured by certain properties.
Notes
payable
In
October 2008, the Company borrowed $1,465,000 notes payable of 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.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Forward
looking statements
The
following is a discussion and analysis of the results of operations of
Shengtai Pharmaceutical, Inc. (the "Company") and should be read in
conjunction with our financial statements and related notes contained in
this
Form 10-Q. This Form 10-Q contains forward looking statements that involve
risks
and uncertainties. You can identify these statements by the use of
forward-looking words such as "may", "will", "expect", "anticipate", "estimate",
"believe", "continue", or other similar words. You should read statements
that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operation or financial condition
or
state other "forward-looking" information. We believe that it is important
to
communicate our future expectations to our investors. However, there may
be
events in the future that we are unable to accurately predict or control.
Those
events as well as any cautionary language in this Form 10-Q provide
examples of risks, uncertainties and events that may cause our actual results
to
differ materially from the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of the events described
in
this Form 10-Q could have a material adverse effect on our business, operating
results and financial condition. Actual results may differ materially from
current expectations.
Overview
We
are,
through our wholly-owned subsidiary, Shengtai Holding Inc. and its wholly-owned
subsidiary in the People’s Republic of China (“PRC”), Weifang Shengtai
Pharmaceutical Co., Ltd, a leading manufacturer and supplier of pharmaceutical
grade glucose in the PRC. We are a market leader and preferred domestic supplier
of pharmaceutical grade glucose with about 40% market share in China. We
also
manufacture glucose, cornstarch and other products for the food and
beverage industry for the Chinese market.
Our
cornstarch production facility, which has a maximum capacity to produce 240,000
metric tons of cornstarch per year, was fully completed at the end of October
2007. This facility is close to our glucose production plants.
During
the three months ended September 30, 2008, we produced a total of 32,076
metric
tons of cornstarch, of which 17,253 metric tons were used to satisfy our
own
glucose production needs. The excess cornstarch was or will be then sold
to
outside customers who are in the pharmaceutical, food and beverage, and
industrial industries. The cornstarch sales amounted to $5.181 million and
accounted for 28.59% of our total sales revenue for the three months ended
September 30, 2008.
Corn
is
the principal raw material for our cornstarch. Since mid-2007 corn and other
food prices have been climbing at an annual inflation rate of 15% in China,
mostly due to the shortages of pork and grain and the development of alternative
energy industry. In order to maintain a stable corn price, the Chinese
government put restrictions to control the development of industrial use
of
corn, such as the conversion of corn into ethanol. Also the Chinese government
has put its corn reserve into market to help to maintain the corn price.
In
September corn prices increased at an annual rate of only 2%.
We
consider these government policies have had and will continue to have positive
effects on our operations. Management believes that stable corn prices will
help
maintain the availability of our raw materials and tend to stabilize our
gross
profit margin over time, although market and economic conditions may continue
to
have negative effects on our operations. However, in the three months ended
September 30, 2008 our margin has fallen from 24% to 18%, as discussed
below. The principal raw material for glucose is cornstarch. By using the
cornstarch manufactured from our own cornstarch production facility, we can
ensure our glucose products’ quality and consistency. Also, because our
cornstarch manufacturing facility is located next to our glucose manufacturing
facilities, we are able to eliminate shipping costs and lower glucose products’
manufacturing costs.
At
the
end of July 2008, we completed construction of a new glucose manufacturing
facility to boost our production capacity. At the end of September 2008,
the
facility passed its GMP inspection. The facility has a production capacity
of
120,000 tons, and with our pre-existing glucose manufacturing facility, we
now
have the production capacity of a total 180,000 tons (if necessary, can be
easily expandable to a total of 210,000 tons). From October 2008, we are
commencing start up operations in the new facility in stages with small amounts
first and building up to larger quantities.
During
the three months ended September 30, 2008, we produced a total of 21,291
metric
tons of glucose, and our sales of pharmaceutical grade glucose and other
glucose
products were $8.207 million, or 45.30% of our revenues.
In
addition to our pharmaceutical glucose and cornstarch series of products,
we also produce other products such asdextrin, corn embryo, fibers, protein
powders, and phytin, which are used for food, beverage and industrial
production. The sales revenues generated from these products were $4.730
million, and constituted approximately 26.1% of our total sales revenues
for the
three months ended September 30, 2007.
Management
believes that better living standards in China should lead to higher consumption
of our pharmaceutical glucose products in the PRC, especially the Dextrose
Monohydrate Transfusion Solution. In March 2008, the Chinese government
announced its plan to give insurance coverage to more rural residents in
China.
That is to say, more and more farmers in China can afford the expense of
healthcare. At the same time, despite the current deceleration in growth,
we
believe that the continuing economic growth, the rising purchasing power
of
domestic market, as well as the public awareness of quality health care
products, will resume as drivers in the demand for our pharmaceutical glucose
products.
We
believe that production capacity and product quality are key factors in
maintaining and improving our competitive position and enhancing our long
term competitiveness. As a result, we have been placing emphasis on (i) product
quality control, (ii) enhancement of operating efficiency and employee
competence, (iii) expansion of geographical coverage and diversification
of
customer base, and
(iv)
expansion of our production capacity.
Our
rate
of quality output (output conforming to pharmaceutical-grade glucose product
specifications) is maintained at 100%. We have a three-tier quality control
system and a well equipped quality inspection center to ensure timely detection
and then reprocessing of non-conforming products.
At
the
end of September 2008, the new glucose production facility passed its GMP
inspection, and our facilities and many of our products are fully certified
for
GMP, ISO9002 and HACCP international quality standards, and globally certified
HALAL, KOSHER and IP GMO.
Our
sales
network presently covers almost all provinces of mainland China except Tibet
Autonomous Region. We have four representative offices in Chengdu, Guangzhou,
Hangzhou and Nanchang to strengthen our domestic sales network. We believe
that
these offices help us to better interact with our customers, reinforce our
sales
force and improve our corporate image.
At
the
same time, we have exported our products to over 70 countries, including
Japan,
Singapore, Korea, Australia, Russia and India. For the three months ended
September 30, 2008, our international sales comprised approximately 11.7%
of our
total sales revenues.
The
target customers of our company are drug makers, medical supply companies,
medical supply exporters and food and beverage companies.
We
constantly strive to broaden and diversify our customer base. We believe
that a
broader customer base will mitigate our reliance on certain customers. 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. For the three months ended September 30, 2008, our
top ten
customers accounted for 35% for our total sales revenue.
Results
of Operations
The
following table sets forth our statements of operations for the three months
ended September 30, 2008 and 2007:
Three
Months Ended September 30, 2008 Compared with Three Months Ended September
30,
2007
The
following table shows our operating results for the three months ended September
30, 2007 and 2008
.
|
|
Three
months
ended
September
30,
2008
|
|
Three
months
ended
September
30,
2007
|
|
Sales
Revenue
|
|
|
18,123,728
|
|
|
19,373,069
|
|
Costs
of Goods Sold
|
|
|
14,931,187
|
|
|
14,779,032
|
|
Gross
Profit
|
|
|
3,192,541
|
|
|
4,594,037
|
|
Sales,
General and Administrative Expenses
|
|
|
2,429,790
|
|
|
1,696,555
|
|
Operating
Income
|
|
|
762,751
|
|
|
2,897,482
|
|
Other
Net Income (Expense)
|
|
|
264
|
|
|
(339,126
|
)
|
Income
before Income Taxes
|
|
|
763,015
|
|
|
2,558,356
|
|
Provision
for Income Taxes
|
|
|
133,219
|
|
|
305,845
|
|
Net
income
|
|
|
629,796
|
|
|
2,252,511
|
|
The
following table shows the breakdown of production and sales by product
categories, and between internal use and external sales of cornstarch, for
the
three months ended September 30, 2007 and 2008
.
Product
|
Metric
Tons
Three
months ended September 30, 2008
|
Metric
Tons
Three
months ended September 30, 2007
|
Sales
Revenue (%)
Three
months ended September 30, 2008
|
Sales
Revenue (%)
Three
months ended September 30,
2007
|
Glucose
|
21,291
|
24,181
|
$8,207,000
(45.3%)
|
$9,014,766(46.53%)
|
Cornstarch-Internal
|
17,253
(53.8%)
|
11,164
(30%)
|
|
|
Cornstarch-Sales
|
14,823
(46.1%)
|
26,073
(70%)
|
$5,181,000
(28.59%)
|
$6,025,748
(31.10%)
|
Total
Cornstarch
|
32,076
(100%)
|
37,237
(100%)
|
|
|
Other
|
|
|
$4,730,000
(26.1%)
|
$4,256,379
(21.97%)
|
Total
|
|
|
$18,123,728
(100%)
|
$19,373,069
(100%)
|
Overview
|
·
|
Since
mid-2007 corn prices have increased at an annual rate of 15%,
until
September 2008, when the increase was only at a rate of 2% per
year,
following the PRC government’s restrictions on industrial uses of corn and
the introduction of the government strategic corn reserve into
the
market.
|
|
·
|
After
our new cornstarch plant was completed in October 2007 we increased
our
cornstarch production with the objective of producing our own
cornstarch
raw material for our increasing production capacity for pharmaceutical
grade glucose. As our new glucose plant was only completed in
July 2008
and is being put into service on a gradual basis, we have been
producing
more cornstarch than we could use and selling the excess to customers.
In
the fiscal year ended June 30, 2008 we used 37% of our cornstarch
production as raw materials in our glucose production and sold
the
remaining 63% to customers. In the three months ended September
30, 2008,
we used 53.8% of our cornstarch internally and sold 46.1% to
customers.
|
|
·
|
Demand
for cornstarch plummeted in August and September 2008, as food
prices
dropped sharply amidst global financial turmoil. For example,
pork prices
dropped 40% in those months. In addition our sales were adversely
affected
by PRC government restrictions on manufacturing and transportation
during
the Beijing Olympics in August, which were aimed at reducing
pollution.
The resulting excess inventories (produced at very high corn
prices in the
cost of goods) led to aggressive price-cutting in the cornstarch
market,
sharply reducing margins. Some cornstarch companies are stopping
cornstarch production in this
market.
|
|
·
|
Because
we have the ability to raise or lower our production of cornstarch,
in
September we began to cut production to a level closer to our
own internal
needs. However, the combination of high corn prices built into
our
inventory and the much lower market prices led to a sharp reduction
in our
sales, profit margin and net income for the three months ended
September
30, 2008.
|
|
·
|
Our
objective in adjusting our cornstarch production is to improve
our
margins, as we ramp up glucose production in our new
plant.
|
|
·
|
We
plan to produce cornstarch to supply our own increasing needs
and will
produce more for outside sales if future market prices of corn
and
cornstarch make it economic.
|
Sales
revenue for the three months ended September 30, 2008 was $18,123,728, a
decrease of $1,249,341, or 6.45% compared with the corresponding period in
2007.
The decre
ase
in
sales revenue resulted from the decrease of our domestic sales of cornstarch
and
glucose. Our sales were impacted by government restrictions on manufacturing
and
transportation during the Beijing Olympics in August and sharply lower prices
of
cornstarch since August. However, Management believes that cornstarch
inventories are decreasing and will lead to higher prices in the future.
Management also believes that in the long run most of our cornstarch products
will be consumed internally to manufacture glucose.
Costs
of
goods sold for the three months ended September 30, 2008 was $14,931,187,
an
increase of $152,155, or 1.00% compared with the corresponding period in
2007.
The increase in cost of goods sold primarily resulted from increased corn
prices
and decreased demand resulting in higher per unit costs.
Gross
profit for the three months ended September 30, 2008 was $3,192,541, a decrease
of $1,401,496, or 30.51% compared with the corresponding period in 2007.
The
decrease in gross profits resulted from the decrease in sales and the increase
in cost of goods sold compared with the same period in 2007.
Gross
profit margin for the three months ended September 30, 2008 was 17.6%, a
decrease from 23.7% for the same period in 2007. The reasons for the decrease
in
gross profit margin were because of lower sales, increased raw material costs,
lower production, and higher production cost per unit.
Selling,
General and Administrative expenses for the three months ended September
30,
2008 were $2,429,790, an increase of $733,235, or 43.22% compared with the
corresponding period in 2007. The increase in our Selling, General and
Administrative expenses was mainly the result of increased labor cost and
increased bad debt expenses and in our China operation, as well as more
administrative expenses, such as consulting fees, legal fees, audit fees,
and
investor relations expenses as a reporting company. We incurred $158,818
in
non-cash stock option expenses for the three months ended September 30, 2008.
Net
income for the three months ended September 30, 2008 was $629,796, a decrease
of
$1,622,715 or 72.04% compared with the corresponding period in 2007. The
decrease in net income was primarily due to the decrease in our sales volume,
the increase of cost of goods sold, and increased selling, general, and
administrative expenses.
Liquidity
and Capital Resources
Operating
Activities
Three
Months Ended September 30, 2008 and 2007
Net
cash
provided by operating activities for the three months ended September 30,
2008
was $2,462,312, a decrease of 43.4%, or $1,885,986, from $4,348,298 provided
by
operating activities for the same period in 2007. The decrease in net cash
provided by operations was principally due to the decrease in net income
and
payments of tax payable and accounts payable. Unless this recent unfavorable
trend moderates, we may need to seek outside financing in very challenging
financial market conditions.
Investing
Activities
Three
Months Ended September 30, 2008 and 2007
Net
cash
used in investing activities for the three months ended September 30, 2008
was
$1,723,339, a decrease of 64.8%, or $3,162,626 from $4,885,965 used in investing
activities for the same period in 2007.
The
decrease of net cash used in investing activities resulted from capital
expenditures for building our cornstarch and glucose factories in fiscal
year
2007.
During
the three months ended September 30, 2007, most of the cash had been spent
on
the construction of the new glucose manufacturing complex and the construction
of a new dormitory. Less capital expenditure was spent during the three months
ended September 30, 2008. The new glucose manufacturing facility was completed
in July 2008. Management believes that we will have limited capital expenditures
during the balance of the fiscal 2009 year.
Financing
Activities
Three
Months Ended September 30, 2008 and 2007
Net
cash
used in financing activities for the three months ended September 30, 2008
was
$2,570,640, a decrease of 43.4%, or $1,970,921 from $4,541,561 used in the
financing activities for the same period in fiscal 2007. The decrease of
net
cash used in financing is mainly because the Company has more repayments
of
notes payable and short term loans for the three months ended September 30,
2007
than for the three months ended September 30, 2008.
Loans
Other
than our private placement financing in 2007, we have financed our operations
primarily through bank loans and operating income. We had a total of $21,740,180
short term bank loans outstanding as of September 30 2008. The loans were
secured by our properties or guaranteed by unrelated third parties. The terms
of
all these short term loans are for one year. We have never defaulted on any
of
these loans.
We
have
$2,267,020 non-current payables as of September 30 2008 and $2,653,995 as
of
June 30, 2008.
Guarantees
We
have
guaranteed certain borrowings of other unrelated third parties including
short
term bank loans. The total guaranteed amounts were $7,315,000 as of September
30, 2008. The total amount of guarantees provided to us by unrelated third
parties is $13,693,680.
Future
cash commitments
The
final
cost of our new glucose facility was approximately $32 million, out of which
the
building accounted for approximately $10 million and machinery and equipment
approximately $22 million. We are commencing start up operations in the new
facility in stages with small amounts first and building up to larger
quantities.
We
estimate the need for $6 million to $10 million per year to run the new
glucose
facilities at full capacity. However we are ramping up our production gradually,
so the exact amount required 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 will 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
Receivable
Accounts
receivable are stated at net realizable value. Any allowance for doubtful
accounts is established based on the management’s assessment of the
recoverability of accounts and other receivables. Management reviews our
accounts receivable on a regular basis to determine if the bad debt allowance
is
adequate. An estimate for doubtful accounts is made when collection of the
full
amount is no longer probable. Known bad debts are written off as incurred.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using straight-line method with a 3% residual value over the estimated
useful lives of the assets.
Foreign
currency translation
Our
functional currency is
Renminbi
(or
“RMB”). Foreign currency transactions are translated at the applicable rates of
exchange in effect at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated
at
the applicable rates of exchange in effect at that date. Revenues and expenses
are translated at the average exchange rates in effect during the reporting
period.
Translation
adjustments arising from the use of different exchange rates from period
to
period are included as a component of stockholders’ equity as “Accumulated Other
Comprehensive Income”. Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.
Recently
issued accounting pronouncements
Included
in the Notes to the Financial Statements.
Item
4. Controls and Procedure
s
(a)
Disclosure Controls and Procedures.
Mr.
Qingtai Liu, our Chief Executive Officer and Ms. Yiru Melody Shi, our Chief
Financial Officer, evaluated the effectiveness of the design and operation
of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of the end of the period covered by
this
Report. Based on that evaluation, our officers concluded that our disclosure
controls and procedures were effective and adequately designed to ensure
that
the information required to be disclosed by us in the reports we submit under
the Exchange Act is recorded, processed, summarized and reported within the
time
periods specified in the applicable rules and forms and that such information
was accumulated and communicated to our chief executive officer and chief
financial officer, in a manner that allowed for timely decisions regarding
required disclosure.
(b)
Changes
in Internal Control over Financial Reporting
During
the three months ended September 30, 2008, there has been no change in internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect our internal control over financial
reporting.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems no evaluation
of
controls can provide absolute assurance that all control issues, if any,
within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
Other
Information
The
certifications of our Chief Executive Officer and Chief Financial Officer
attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning our
disclosure controls and procedures and internal controls over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of
the
matters covered by such certifications.
PART
II -
OTHER INFORMATION.
Item
1A. Risk Factors.
Our
failure to contribute to certain designated statutory reserve funds prevents
us
for paying any dividends to our shareholders and this may adversely affect
the
value of your investment.
Under
the
PRC laws, Weifang Shengtai, a PRC wholly foreign -owned enterprise, is required
to set aside 10% of its net income each year to fund certain designated
statutory reserve funds until such reserve balance reaches 50% of its registered
capital. 50% of our registered capital is $7,502,998. Our designated
statutory reserve funds were $2,894,902 as of September 30, 2008. These reserves
are not distributable other than during liquidation and can be used to fund
previous years’ losses, if any, and may be utilized for business expansion or
converted into share capital by issuance of 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. As of September 30,
2008, Weifang Shengtai has not reached the required contributions to make
payment of any dividends to its shareholders until such contributions have
been
made. We currently intend to retain all future earnings for use in the operation
and expansion of our business. However, our inability to pay dividends may
adversely affect the market value of our common stock.
Other
than the above, there are no material changes in our risk factors from those
disclosed in our Annual Report on Form 10-K filed with the SEC on September
29,
2008.
Item
6. Exhibits
Exhibit
No.
|
|
Description
|
31.1
|
|
Certification
pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Qingtai
Liu;
|
|
|
|
31.2
|
|
Certification
pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for
Yiru Shi
;
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. 1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
Shengtai
Pharmaceutical, Inc.
(Registrant)
|
|
|
|
Dated:
November 13, 2008
|
|
/s/ Qingtai
Liu
|
|
Qingtai
Liu
|
|
Chief
Executive Officer
|
|
|
Dated:
November 13, 2008
|
/s/ Yiru
Shi
|
|
Yiru
Shi
|
|
Chief
Financial Officer
|