UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2009
Commission
File Number
0-51312
SHENGTAI PHARMACEUTICAL,
INC.
(Exact
name of small business issuer as specified in its charter)
DELAWARE
|
|
54-2155579
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
CHANGDA
ROAD EAST, DEVELOPMENT DISTRICT,
CHANGLE
COUNTY, SHANDONG,
PEOPLE’S REPUBLIC OF CHINA
262400
(Address
of principal executive offices)
011-86-536-6295802
(Issuer's
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
þ
No
o
.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer
o
|
Accelerated
Filer
o
|
Non-Accelerated
Filer
o
|
Smaller
Reporting Company
þ
|
|
|
(Do
not check if a smaller
reporting
company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
þ
As of May
13, 2009, there were outstanding 19,169,805 shares of common stock, par value
$0.001 per share, of the registrant.
CONSOLIDATED
BALANCE SHEETS
AS OF
MARCH 31, 2009 AND JUNE 30, 2008
|
|
March
31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
2,249,064
|
|
|
$
|
3,405,606
|
|
Restricted
cash
|
|
|
8,992,823
|
|
|
|
6,763,500
|
|
Notes
receivable
|
|
|
149,447
|
|
|
|
458,630
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$492,918
|
|
|
|
|
|
|
|
|
and
$440,701 as of March 31, 2009 and June 30, 2008,
respectively
|
|
|
6,518,464
|
|
|
|
7,614,236
|
|
Other
receivables
|
|
|
249,284
|
|
|
|
691,215
|
|
Inventories
|
|
|
6,929,686
|
|
|
|
5,039,278
|
|
Prepayments
|
|
|
371,267
|
|
|
|
310,381
|
|
Loan
to related party
|
|
|
439,500
|
|
|
|
-
|
|
Total
current assets
|
|
|
25,899,535
|
|
|
|
24,282,846
|
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
71,893,618
|
|
|
|
69,943,021
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Investment
in Changle Shengshi Redian Co., Ltd.
|
|
|
3,739,131
|
|
|
|
3,607,912
|
|
Loan
to related party - noncurrent
|
|
|
-
|
|
|
|
437,700
|
|
Intangible
assets - land use right, net of accumulated amortization
|
|
|
3,494,976
|
|
|
|
3,042,183
|
|
Total
other assets
|
|
|
7,234,107
|
|
|
|
7,087,795
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
105,027,260
|
|
|
$
|
101,313,662
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Notes
payable - banks
|
|
$
|
13,185,000
|
|
|
$
|
10,942,500
|
|
Accounts
payable
|
|
|
6,289,009
|
|
|
|
7,669,728
|
|
Accounts
payable - related parties
|
|
|
637,792
|
|
|
|
714,776
|
|
Short
term loans
|
|
|
22,707,500
|
|
|
|
22,658,270
|
|
Accrued
liabilities
|
|
|
212,595
|
|
|
|
261,187
|
|
Other
payable
|
|
|
2,917,200
|
|
|
|
2,146,108
|
|
Employee
loans
|
|
|
841,297
|
|
|
|
1,382,287
|
|
Employee
loan - officer
|
|
|
43,549
|
|
|
|
53,605
|
|
Third
party loan
|
|
|
192,642
|
|
|
|
640,228
|
|
Customer
deposit
|
|
|
1,729,702
|
|
|
|
804,323
|
|
Taxes
payable
|
|
|
2,618,424
|
|
|
|
4,631,252
|
|
Current
portion of capital lease obligations
|
|
|
398,862
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
51,773,572
|
|
|
|
51,904,264
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Capital
lease obligation
|
|
|
4,875,368
|
|
|
|
-
|
|
Other
payable - noncurrent
|
|
|
1,424,044
|
|
|
|
2,653,995
|
|
Total
long term liabilities
|
|
|
6,299,412
|
|
|
|
2,653,995
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
58,072,984
|
|
|
|
54,558,259
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
|
|
|
|
|
19,169,805
and 19,094,805 shares issued and outstanding as
|
|
|
|
|
|
|
|
|
of
December 31, 2008 and June 30, 2008, respectively
|
|
|
19,170
|
|
|
|
19,095
|
|
Paid-in
capital
|
|
|
20,464,837
|
|
|
|
19,987,708
|
|
Statutory
reserves
|
|
|
3,004,008
|
|
|
|
2,894,902
|
|
Retained
earnings
|
|
|
18,521,982
|
|
|
|
19,136,577
|
|
Accumulated
other comprehensive income
|
|
|
4,944,279
|
|
|
|
4,717,121
|
|
Total
shareholders' equity
|
|
|
46,954,276
|
|
|
|
46,755,403
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
105,027,260
|
|
|
$
|
101,313,662
|
|
The
accompanying notes are an integral part of this statement.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE
THREE AND NINE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
SALES
REVENUE
|
|
$
|
16,301,522
|
|
|
$
|
20,701,577
|
|
|
$
|
49,220,996
|
|
|
$
|
65,028,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
15,283,929
|
|
|
|
16,220,665
|
|
|
|
43,016,707
|
|
|
|
50,085,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,017,593
|
|
|
|
4,480,912
|
|
|
|
6,204,289
|
|
|
|
14,942,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,322,178
|
|
|
|
1,603,932
|
|
|
|
6,074,853
|
|
|
|
5,114,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
(304,585
|
)
|
|
|
2,876,980
|
|
|
|
129,436
|
|
|
|
9,828,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on equity investment
|
|
|
59,524
|
|
|
|
43,070
|
|
|
|
92,936
|
|
|
|
192,826
|
|
Other
income
|
|
|
60,364
|
|
|
|
67,451
|
|
|
|
115,545
|
|
|
|
177,160
|
|
Other
expense
|
|
|
(4,428
|
)
|
|
|
(96,191
|
)
|
|
|
(255,540
|
)
|
|
|
(300,035
|
)
|
Interest
expense and other charges
|
|
|
(527,987
|
)
|
|
|
(738,634
|
)
|
|
|
(591,493
|
)
|
|
|
(1,674,515
|
)
|
Interest
income
|
|
|
7,548
|
|
|
|
55,697
|
|
|
|
104,221
|
|
|
|
154,101
|
|
Other
expense, net
|
|
|
(404,979
|
)
|
|
|
(668,607
|
)
|
|
|
(534,331
|
)
|
|
|
(1,450,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
(709,564
|
)
|
|
|
2,208,373
|
|
|
|
(404,895
|
)
|
|
|
8,377,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(48,166
|
)
|
|
|
321,220
|
|
|
|
100,594
|
|
|
|
1,108,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS)
INCOME
|
|
|
(661,398
|
)
|
|
|
1,887,153
|
|
|
|
(505,489
|
)
|
|
|
7,269,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(60,568
|
)
|
|
|
1,554,258
|
|
|
|
227,158
|
|
|
|
2,966,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
(LOSS) INCOME
|
|
$
|
(721,966
|
)
|
|
$
|
3,441,411
|
|
|
$
|
(278,331
|
)
|
|
$
|
10,236,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,169,805
|
|
|
|
19,069,805
|
|
|
|
19,129,146
|
|
|
|
18,967,857
|
|
Diluted
|
|
|
19,169,805
|
|
|
|
19,845,195
|
|
|
|
19,129,146
|
|
|
|
19,959,689
|
|
The
accompanying notes are an integral part of this statement.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
Accumulated other
|
|
|
|
|
|
|
Common stock
|
|
|
Paid-in
|
|
|
Statutory
|
|
|
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
reserves
|
|
|
Unrestricted
|
|
|
income
|
|
|
Totals
|
|
BALANCE,
June 30, 2007
|
|
|
18,875,000
|
|
|
$
|
18,875
|
|
|
$
|
19,163,549
|
|
|
$
|
1,735,484
|
|
|
$
|
9,885,670
|
|
|
$
|
826,998
|
|
|
$
|
31,630,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
warrants
|
|
|
194,805
|
|
|
|
195
|
|
|
|
506,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506,493
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
158,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,818
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,269,249
|
|
|
|
|
|
|
|
7,269,249
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966,909
|
|
|
|
2,966,909
|
|
BALANCE,
March 31, 2008 (Unaudited)
|
|
|
19,069,805
|
|
|
$
|
19,070
|
|
|
$
|
19,828,665
|
|
|
$
|
1,735,484
|
|
|
$
|
17,154,919
|
|
|
$
|
3,793,907
|
|
|
$
|
42,532,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
warrants
|
|
|
25,000
|
|
|
|
25
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
158,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,818
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,141,076
|
|
|
|
|
|
|
|
3,141,076
|
|
Transfer
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,159,418
|
|
|
|
(1,159,418
|
)
|
|
|
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
923,214
|
|
|
|
923,214
|
|
BALANCE,
June 30, 2008
|
|
|
19,094,805
|
|
|
$
|
19,095
|
|
|
$
|
19,987,708
|
|
|
$
|
2,894,902
|
|
|
$
|
19,136,577
|
|
|
$
|
4,717,121
|
|
|
$
|
46,755,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
|
|
476,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476,454
|
|
Exercised
warrants
|
|
|
75,000
|
|
|
|
75
|
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505,489
|
)
|
|
|
|
|
|
|
(505,489
|
)
|
Transfer
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,106
|
|
|
|
(109,106
|
)
|
|
|
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227,158
|
|
|
|
227,158
|
|
BALANCE,
March 31, 2009 (Unaudited)
|
|
|
19,169,805
|
|
|
$
|
19,170
|
|
|
$
|
20,464,837
|
|
|
$
|
3,004,008
|
|
|
$
|
18,521,982
|
|
|
$
|
4,944,279
|
|
|
$
|
46,954,276
|
|
The
accompanying notes are an integral part of this statement.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
NINE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(505,489
|
)
|
|
$
|
7,269,249
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,612,903
|
|
|
|
2,076,992
|
|
Amortization
|
|
|
40,225
|
|
|
|
38,263
|
|
Allowance
for bad debts
|
|
|
50,387
|
|
|
|
16,558
|
|
Stock
based employee compensation
|
|
|
476,454
|
|
|
|
158,818
|
|
Loss
(Gain) on equipment disposal
|
|
|
159,269
|
|
|
|
(91,480
|
)
|
Gain
on disposal of land use right
|
|
|
-
|
|
|
|
(24,783
|
)
|
Earnings
on equity investment
|
|
|
(92,936
|
)
|
|
|
(192,826
|
)
|
Amortization
of discount on capital lease obligation
|
|
|
146,681
|
|
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,076,312
|
|
|
|
(1,108,695
|
)
|
Notes
receivable
|
|
|
310,963
|
|
|
|
380,411
|
|
Other
receivables
|
|
|
444,622
|
|
|
|
1,987,660
|
|
Inventories
|
|
|
(1,869,045
|
)
|
|
|
(1,404,996
|
)
|
Prepayments
|
|
|
(471,355
|
)
|
|
|
(620,451
|
)
|
Accounts
payable
|
|
|
(1,614,791
|
)
|
|
|
(595,474
|
)
|
Accounts
payable - related party
|
|
|
(79,896
|
)
|
|
|
(1,252,106
|
)
|
Accrued
liabilities
|
|
|
(49,430
|
)
|
|
|
(568,922
|
)
|
Accrued
liabilities - related party
|
|
|
-
|
|
|
|
482,160
|
|
Other
payable
|
|
|
596,396
|
|
|
|
362,035
|
|
Customer
deposit
|
|
|
921,757
|
|
|
|
297,543
|
|
Taxes
payable
|
|
|
(2,031,181
|
)
|
|
|
2,261,984
|
|
Net
cash provided by operating activities
|
|
|
1,121,846
|
|
|
|
9,471,940
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Other
receivables - related party
|
|
|
-
|
|
|
|
2,570,100
|
|
Purchase
plant and equipment
|
|
|
(9,679
|
)
|
|
|
(154,262
|
)
|
Proceeds
from equipment disposal
|
|
|
5,125,750
|
|
|
|
35,266
|
|
Additions
to construction in progress
|
|
|
(4,810,511
|
)
|
|
|
(7,725,153
|
)
|
Acquisition
of land use right
|
|
|
(480,356
|
)
|
|
|
(324,031
|
)
|
Purchase
of software program
|
|
|
-
|
|
|
|
(5,426
|
)
|
Advances
on plant and equipment purchase
|
|
|
-
|
|
|
|
(9,876,385
|
)
|
Loan
repayment from related party
|
|
|
-
|
|
|
|
678,200
|
|
Proceed
from land use right disposal
|
|
|
-
|
|
|
|
30,826
|
|
Net
cash used in investing activities
|
|
|
(174,796
|
)
|
|
|
(14,770,865
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Decrease
in restricted cash
|
|
|
(2,201,573
|
)
|
|
|
3,407,360
|
|
Borrowings
on notes payable - banks
|
|
|
16,607,430
|
|
|
|
5,425,600
|
|
Payments
on notes payable - banks
|
|
|
(14,410,680
|
)
|
|
|
(10,579,920
|
)
|
Borrowings
on short term loans
|
|
|
13,722,365
|
|
|
|
12,750,160
|
|
Payments
on short term loans
|
|
|
(13,766,300
|
)
|
|
|
(11,380,196
|
)
|
Borrowings
on employee loans
|
|
|
392,147
|
|
|
|
1,412,554
|
|
Payments
on employee loans
|
|
|
(938,635
|
)
|
|
|
(459,082
|
)
|
Borrowings
on employee loan - officer
|
|
|
-
|
|
|
|
45,187
|
|
Other
receivables - shareholder
|
|
|
(10,252
|
)
|
|
|
1,273,495
|
|
Borrowings
on third party loan
|
|
|
113,650
|
|
|
|
2,898,529
|
|
Payments
on third party loan
|
|
|
(563,715
|
)
|
|
|
(2,826,195
|
)
|
Payment
on other payable - equipment purchase
|
|
|
(1,033,127
|
)
|
|
|
(614,633
|
)
|
Cash
proceeds from warrants exercised
|
|
|
750
|
|
|
|
506,493
|
|
Net
cash (used in) provided by financing activities
|
|
|
(2,087,940
|
)
|
|
|
1,859,352
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
(15,652
|
)
|
|
|
248,470
|
|
|
|
|
|
|
|
|
|
|
DECREASE
IN CASH
|
|
|
(1,156,542
|
)
|
|
|
(3,191,103
|
)
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of period
|
|
|
3,405,606
|
|
|
|
6,420,439
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of period
|
|
$
|
2,249,064
|
|
|
$
|
3,229,336
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE
|
|
|
|
|
|
|
|
|
Cash
paid for Interest, net of capitalized interest
|
|
$
|
259,588
|
|
|
$
|
904,560
|
|
Cash
paid for Income taxes
|
|
$
|
1,134,656
|
|
|
$
|
13,768
|
|
Non-cash
construction in progress transferring into plant and
equipment
|
|
$
|
36,961,097
|
|
|
$
|
13,356,018
|
|
The
accompanying notes are an integral part of this
statement.
SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(UNAUDITED)
Note
1 - Organization background and principal activities
Shengtai
Pharmaceutical Inc, (the “Company”), was incorporated in March 2004 in the State
of Delaware. The Company, through its direct and indirect subsidiaries,
manufactures and distributes pharmaceutical raw 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”).
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 Shengtai Holding, Inc. (‘SHI”) and Weifang Shengtai Pharmaceutical
Co., Ltd (“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.
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 stock 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”) 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. Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
Assets
and liabilities were translated at 6.83 RMB and 6.87 RMB to $1.00 at March 31,
2009 and June 30, 2008, respectively. The equity accounts were stated at their
historical rate. The average translation rates applied to income statement
amounts for the three months ended March 31, 2009 and 2008 were 6.83 RMB and
7.15 RMB to $1.00 and for nine months ended March 31, 2009 and 2008 were 6.83
RMB and 7.37 RMB respectively. 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 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”), and estimated returns
of product from customers. 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 finished
products and certain freight expenses. The Company allows customers to return
products only if a product is later determined by the Company to be ineffective.
Based on our historical experience over the past three years, product returns
have been insignificant throughout all of our product lines. Therefore, the
Company does not estimate deductions or allowance for sales returns. Sales
returns are taken against revenue when products are returned from customers.
Sales are presented net of any discounts given to customers.
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 related to
costs of goods sold amounted to $182,386 and $768,076 for the three months ended
March 31, 2009 and 2008. Shipping and handling costs amounted to $1,864,916and
$2,647,833 for the nine months ended March 31, 2009 and 2008,
respectively.
Financial
instruments
SFAS 107,
“Disclosures about Fair Value of Financial Instruments” defines financial
instruments and requires disclosure of the fair value of those instruments. SFAS
157, “Fair Value Measurements”, adopted July 1, 2008, 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, their expected realization and, if
applicable, the stated rate of interest is equivalent to rates currently
available. The three levels are defined as follows:
|
¨
|
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 uses the Black-Scholes option pricing model which
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.
Under
SFAS 123R, the Company’s expected volatility assumption is based on the
historical volatility of Company’s stock. The Company used 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.
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
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:
|
|
Three months ended March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net
(loss) income for earnings per share
|
|
$
|
(661,398
|
)
|
|
$
|
1,887,153
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,169,805
|
|
|
|
19,069,805
|
|
Diluted
effect of warrants
|
|
|
-
|
|
|
|
775,390
|
|
Weighted
average shares used in diluted computation
|
|
|
19,169,805
|
|
|
|
19,845,195
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.10
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.10
|
|
|
|
Nine months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net
(loss) income for earnings per share
|
|
$
|
(505,489
|
)
|
|
$
|
7,269,249
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
19,129,146
|
|
|
|
18,967,857
|
|
Diluted
effect of warrants
|
|
|
-
|
|
|
|
991,832
|
|
Weighted
average shares used in diluted computation
|
|
|
19,129,146
|
|
|
|
19,959,689
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.36
|
|
No
warrants were included in the three and nine months ended March 31, 2009
calculation of diluted earnings per share because the Company had net loss. At
March 31, 2008, all 4,473,945 shares of outstanding warrants were included in
the three and nine months ended March 31, 2008 calculation of diluted earnings
per share, respectively.
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.
Restricted
cash
The
Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions. As of March 31, 2009 and
June 30, 2008, these amounts totaled $8,992,823 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 when certain
criteria are met. As of March 31, 2009 and June 30, 2008, the undisbursed amount
was $202,823 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. Each quarter, management
reviews its accounts receivable to identify payment problems with specific
customers, in order to estimate the allowance for potentially uncollectible
amounts. 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
a material impact on collections and the Company’s estimation process. Accounts
receivable are charged off against allowances after collection efforts prove
unsuccessful. 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:
|
|
Nine months
ended
March 31,
2009
|
|
|
|
(Unaudited)
|
|
Allowance
for doubtful accounts, June 30, 2008
|
|
$
|
440,701
|
|
Provision
for bad debt expense
|
|
|
365,713
|
|
Write-off
charged against the allowance
|
|
|
(315,434)
|
|
Foreign
currency translation adjustments
|
|
|
1,938
|
|
|
|
|
|
|
Ending
Allowance for doubtful accounts, March 31, 2008
(Unaudited)
|
|
$
|
492,918
|
|
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 majority of its
deposits are with 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. At March 31, 2009, the Company had an
aggregate of $10,341,935 on deposit with ten banks within the PRC and
approximately $677,111 on deposit with Bank of America in the United States. The
cash deposits at Bank of America exceed the amounts insured by the U.S.
government by approximately $427,111. 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 March 31, 2009 and June 30, 2008, the Company’s bank
balances exceeded government insured limits or not covered by insurance by
$10,769,046 and $10,175,000, respectively. The Company has not experienced, nor
does it anticipate, non-performance by these institutions.
For the
three and nine months ended March 31, 2009 and 2008, no customers individually
comprised 10% or more of the Company’s total revenues. For the three and nine
months ended March 31, 2009 and 2008, no vendors individually accounted for over
10% or more of the Company’s total purchases.
For
export sales, the Company frequently requires significant down payments or a
letter of credit from customers prior to shipment. Tthe Company maintains export
credit insurance to protect against the risk that overseas customers may default
on settlement.
The
following table summarizes the Company’s revenues by geographic
area:
,
For the three months ended
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
|
(Unaudited
)
|
|
|
(Unaudited
)
|
|
Revenue
|
|
|
|
|
|
|
China
|
|
$
|
13,867,243
|
|
|
$
|
18,693,577
|
|
International
|
|
|
2,434,279
|
|
|
|
2,008,000
|
|
Total
|
|
$
|
16,301,522
|
|
|
$
|
20,701,577
|
|
,
For the nine months ended
|
March 31,
2009
|
|
March 31,
2008
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Revenue
|
|
|
|
|
China
|
|
$
|
42,869,605
|
|
|
$
|
58,498,996
|
|
International
|
|
|
6,351,391
|
|
|
|
6,529,938
|
|
Total
|
|
$
|
49,220,996
|
|
|
$
|
65,028,934
|
|
Inventories
Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:
|
|
March 31,
2009
|
|
|
June 30,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw
materials
|
|
$
|
1,659,541
|
|
|
$
|
1,409,577
|
|
|
|
|
|
|
|
|
|
|
Work-in-progress
|
|
|
2,135,955
|
|
|
|
1,688,161
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
3,134,190
|
|
|
|
1,941,540
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,929,686
|
|
|
$
|
5,039,278
|
|
The
Company reviews its inventory periodically for possible obsolete goods or to
determine if any reserves are necessary. As of March 31, 2009, 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. Maintenance,
repairs, and minor renewals are charged to expense as incurred while major
additions and improvements 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 Company’s 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
|
Long-lived
assets of the Company are reviewed at least annually, and 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 depreciation to determine whether subsequent
events and circumstances warrant revised estimates of useful lives. As of March
31, 2009, 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 consist of
the following:
|
|
March 31, 2009
|
|
|
June 30, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Land
use rights:
|
|
$
|
4,168,846
|
|
|
$
|
3,688,326
|
|
Less:
accumulated amortization
|
|
|
(679,940
|
)
|
|
|
(652,761
|
)
|
Land
use rights, net
|
|
|
3,488,906
|
|
|
|
3,035,565
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
7,325
|
|
|
|
7,325
|
|
Less:
accumulated amortization
|
|
|
(1,255
|
)
|
|
|
(707
|
)
|
Software,
net
|
|
|
6,070
|
|
|
|
6,618
|
|
Total
intangible assets, net
|
|
$
|
3,494,976
|
|
|
$
|
3,042,183
|
|
Intangible
assets are primarily comprised of land use rights which are pledged as
collateral for bank loans as of March 31, 2009. 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 $3,688,326. From July 2008 to
March 2009, the Company acquired various land use rights for approximately
$480,520. The Company amortizes the cost of land use rights over the usage terms
using the straight-line method.
Intangible
assets are reviewed at least annually, and 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 March 31, 2009, the Company
determined that there had been no impairment. Total amortization expense for
three months ended March 31, 2009 and 2008 amounted to $14,115 and 14,443 and
for the nine months ended March 31, 2009 and 2008 amounted to $40,225 and 38,263
respectively.
The
following table consists of the expected amortization expenses for the next five
years:
Years
ended March 31,
|
|
Amount
|
|
2010
|
|
$
|
56,460
|
|
2011
|
|
|
56,460
|
|
2012
|
|
|
56,460
|
|
2013
|
|
|
56,460
|
|
2014
|
|
|
56,460
|
|
Thereafter
|
|
|
3,212,676
|
|
Total
|
|
$
|
3,494,976
|
|
Income
taxes
The
Company accounts for income taxes in accordance with SFAS 109, “Accounting for
Income Taxes.” under the asset and liability method and FASB Interpretation No.
48 (“FIN 48”), "Accounting for Uncertainty in Income Taxes”.
Under 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 March 31, 2009 and June 30,
2008, the Company did not have any deferred tax assets or liabilities because
there are no material differences between taxable income and financial income
for Chinese tax reporting, and as such, no valuation allowances were recorded at
March 31, 2009 and June 30, 2008.
FIN 48
clarifies the accounting and disclosure for uncertain tax positions and
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
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 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 VAT
paid on 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 $2,184,923 and $2,031,772 for the three
months ended March 31, 2009, and $3,455,146 and $2,829,511 for the three months
ended March 31, 2008, respectively. VAT on sales and VAT on purchases amounted
to $4,833,264 and $2,899,729 for the nine months ended March 31, 2009, and
$10,071,774 and $7,909,022 for the nine months ended March 31, 2008,
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 past experience and the financial
condition of the companies to which the guarantees were made.
Recently issued accounting
pronouncements
In
February 2007, the FASB issued 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
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (“FSP FAS 133-1” and “FIN 45-4”). FSP FAS 133-1 and FIN
45-4 amends disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies the disclosure requirements of SFAS No.
161 and is effective for quarterly periods beginning after November 15, 2008,
and fiscal years that include those periods. The adoption of FSP FAS 133-1 and
FIN 45-4 did not have a material impact on the Company’s current consolidated
financial position, results of operation or cash flows.
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 to use 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 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 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 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 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 adoption of SFAS 162 had no material impact
on the Company’s 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 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 China (Renminbi). EITF 07-5 is effective for fiscal years
beginning after December 15, 2008. Therefore, all nonemployee options,
conversion features on debt, and warrants will get liability accounting upon
adoption and will be required to be marked to market each accounting period. The
Company is currently evaluating the impact of adoption of EITF 07-5 on the
Company’s consolidated financial statements.
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.
Management is currently evaluating the impact of adopting FSP 157-3on
accounting.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. We are currently evaluating this new FSP but do not believe that it
will have a significant impact on the determination or reporting of our
financial results.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets,” to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more frequent disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. We are currently evaluating
this new FSP but do not believe that it will have a significant impact on the
determination or reporting of our financial results.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” 107 to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the disclosure requirements of this new FSP.
Note
3 - Plant and equipment
Plant and
equipment consist of the following:
|
|
March 31,
2009
|
|
|
June 30,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Buildings
|
|
$
|
19,153,748
|
|
|
$
|
6,343,954
|
|
Machinery
and equipment
|
|
|
55,729,346
|
|
|
|
37,239,847
|
|
Capitalized
equipment lease
|
|
|
5,127,500
|
|
|
|
-
|
|
Automobile
facilities
|
|
|
512,110
|
|
|
|
562,039
|
|
Electronic
equipment
|
|
|
442,864
|
|
|
|
368,550
|
|
Construction
in progress
|
|
|
4,361,708
|
|
|
|
36,373,688
|
|
Total
|
|
|
85,327,276
|
|
|
|
80,888,078
|
|
Accumulated
depreciation (including $0 on capitalized equipment lease)
|
|
|
(13,433,658
|
)
|
|
|
(10,945,057
|
)
|
Total
|
|
$
|
71,893,618
|
|
|
$
|
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 March 31,
2009 and 2008 amounted to $1,488,617 and $889,826, respectively. Interest cost
capitalized into construction in progress for the three months ended March 31,
2009 and 2008 amounted to $149,964 and $127,868, respectively. Depreciation
expense for the nine months ended March 31, 2009 and 2008 amounted to $3,612,903
and $2,076,992, respectively. Interest costs totaling $1,589,457 and $413,928
was capitalized into construction in progress for the nine months ended March
31, 2009 and 2008, 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 20% investment under the equity method of
accounting.
Summarized
unaudited financial information of Changle Shengshi is as follows:
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Current
assets
|
|
$
|
12,097,907
|
|
|
$
|
14,117,813
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
32,659,663
|
|
|
|
27,231,806
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
44,757,570
|
|
|
|
41,349,619
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
23,753,977
|
|
|
|
20,333,700
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
1,992,400
|
|
|
|
2,976,360
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
19,011,193
|
|
|
|
18,039,559
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
44,757,570
|
|
|
$
|
41,349,619
|
|
Summarized financial information of Changle Shengshi for the nine months ended
March 31, 2009 and 2008 is as follows:
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net
sales
|
|
$
|
32,396,099
|
|
|
$
|
22,590,696
|
|
Gross
profit
|
|
$
|
2,302,830
|
|
|
$
|
5,211,473
|
|
Income
before taxes
|
|
$
|
778,979
|
|
|
$
|
4,021,604
|
|
Net
income
|
|
$
|
581,710
|
|
|
$
|
2,432,468
|
|
|
|
|
|
|
|
|
|
|
Company
share of income
|
|
$
|
116,342
|
|
|
$
|
486,494
|
|
Elimination
of intercompany profit
|
|
|
23,406
|
|
|
|
272,206
|
|
Company’s
share of net income
|
|
$
|
92,936
|
|
|
$
|
214,288
|
|
Note
5 - Related party transactions
The
Company’s utilities are partially provided by Changle Shengshi (See Note 4). As
of March 31, 2009 and June 30, 2008, the Company’s payable due to Changle
Shengshi was approximately $637,792 and $714,776, respectively, which related to
a portion of the Company’s utilities being provided by Changle Shengshi. The
utilities expense for the three months ended March 31, 2009 and 2008 amounted to
$2,742,707 and $1,481,203, respectively. The utilities expense amounted to
approximately $5,636,269 and $5,516,287 for the nine months ended March 31, 2009
and 2008, respectively.
The
Company’s receivables from one loan contract with Changle Shengshi are as
follows:
|
|
March 31,
2009
|
|
|
June 30,
|
|
|
|
(Unaudited)
|
|
|
2008
|
|
Due
on September 14, 2009, unsecured, 7.60% interest rate per
annum
|
|
$
|
439,500
|
|
|
$
|
437,700
|
|
Note
6 - Debt
Short term
loans
Short
term loans represent amounts due to various banks which are due within one year.
These loans can generally be renewed. The Company’s short term bank loans
consisted of the following:
|
|
March 31
2009
(Unaudited)
|
|
|
June 30,
2008
|
|
Loan
from Bank of China, due various dates from April 2009 to March 2010;
monthly
interest
only payments; interest rates ranging from 5.31% to 8.964% per annum,
guaranteed
by an unrelated third party and secured by certain
properties.
|
|
$
|
13,185,000
|
|
|
$
|
13,656,240
|
|
|
|
|
|
|
|
|
|
|
Loan
from Industrial and Commercial Bank of China, due various dates from April
2009 to January 2010; monthly interest only payments; interest rates
ranging from 5.31% to 7.47% per annum, guaranteed by an unrelated third
party and secured by certain properties.
|
|
|
5,127,500
|
|
|
|
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.
|
|
|
-
|
|
|
|
2,188,500
|
|
|
|
|
|
|
|
|
|
|
Loan
from Commercial Bank, due June 2009; monthly interest-only payments;
interest rate at 9.711% per annum, guaranteed by an unrelated third party,
unsecured.
|
|
|
1,465,000
|
|
|
|
1,459,000
|
|
|
|
|
|
|
|
|
|
|
Loan
from ShangHai PuFa Bank, due November 2009; monthly interest-only
payments; interest rate of 6.66% per annum, guaranteed by an unrelated
third party, unsecured.
|
|
|
1,465,000
|
|
|
|
1,459,000
|
|
|
|
|
|
|
|
|
|
|
Loan
from Weifang Xingye Bank, due October 2009; monthly interest-only
payments; interest rate of 6.96% per annum, guaranteed by an unrelated
third party, unsecured.
|
|
|
1,465,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,707,500
|
|
|
$
|
22,658,270
|
|
The loans
are secured by property and equipment, and land use rights with carrying values
as follows:
|
|
March 31, 2009
|
|
Buildings
and improvements
|
|
$
|
16,811,604
|
|
Land
use rights
|
|
|
2,585,188
|
|
Total
|
|
$
|
19,396,792
|
|
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:
|
|
March 31,
2009
(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.
|
|
$
|
-
|
|
|
$
|
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.
|
|
|
-
|
|
|
|
4,377,000
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due in August 2009, 0.05% transaction fee,
restricted cash required 50% of loan amount, guaranteed by an unrelated
third party.
|
|
|
2,930,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China, due in March 2009, 0.05% transaction fee,
guaranteed by an unrelated third party
(1).
|
|
|
732,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
China
Agriculture Bank, due in August 2009, 0.05% transaction fee, and
restricted cash required 100% of loan amount, guaranteed by an unrelated
third party.
|
|
|
1,465,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Shenzhen
Development Bank, due in June 2009, 0.05% transaction fee, restricted cash
required 66.66% of loan amount, guaranteed by an unrelated third
party.
|
|
|
6,592,500
|
|
|
|
4,377,000
|
|
|
|
|
|
|
|
|
|
|
Weifang
Xingye Bank, due in April 2009, 0.05% transaction fee, restricted cash
required 50% of loan amount, guaranteed by an unrelated third
party.
|
|
|
1,465,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
13,185,000
|
|
|
$
|
10,942,500
|
|
(1): The
Company has repaid this note in April 2009.
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 $841,297and $1,382,287 as of March 31, 2009 and
June 30, 2008, respectively.
Employee loan -
officer
From time
to time, the Company borrows monies from Qingtai Liu, our Chief Executive
Officer, 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 $43,549 and $53,605 as of
March 31, 2009 and June 30, 2008, respectively. Interest expense was not
significant on this loan for the nine months ended March 31, 2009 and 2008,
respectively.
Third party
loan
From time
to time, the Company borrows 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. The balance of the loan as of
March 31, 2009 and June 30, 2008 amounted to $192,642 and $640,228,
respectively.
Interest
Interest
expense net of amounts capitalized into construction in progress for the three
months ended March 31, 2009 and 2008 on all debt amounted to $439,084 and
$647,235, respectively. Interest capitalized totaled $149,964 and
$127,868 for the three months ended March 31, 2009 and 2008, respectively. Total
interest expense, net of capitalized interest, for the nine months ended March
31, 2009 and 2008 on all debt amounted to $479,903 and $1,533,256, respectively.
Interest capitalized into construction-in-progress totaled $1,589,457 and
$413,928 for the nine months ended March 31, 2009 and 2008,
respectively.
Note
7 - Income taxes
Before
January 1, 2008, the Company was 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.
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 year 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, , and giving effect to the 50% exemption, the
Company is subject to income taxes at a reduced rate of 12% from September 2006
to 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 are:
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs, except for High Tech companies who pay a
reduced rate of 15%;
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of the next 5
years or until the tax holiday term is completed, whichever is
sooner.
|
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.
Income
tax (benefits)provision for the three months ended March 31, 2009 and 2008
amounted to $(48,166) and $321,220, respectively. During the nine months ended
March 31, 2009 and 2008, the provision for income taxes was $100,594 and
$1,108,388, respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the nine months ended March 31:
|
|
2009
|
|
|
2008
|
|
|
|
(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
|
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
|
China
income tax exemption
|
|
|
(13.0
|
)
|
|
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
China
income tax rate in China
|
|
|
12.0
|
%
|
|
|
13.0
|
%
|
For the
nine months ended March 31, 2009, the Company incurred losses before income
taxes. For the nine months ended March 31, 2008, the Company’s
effective tax rate was 13.0%. Income before income taxes includes
losses from non-Chinese entities, which are not deductible. After
adjusting these losses, the Company’s effective rate was equivalent to the
effective rate in China for both years.
The
estimated tax savings due to the tax exemption for the three months ended March
31, 2009 and 2008 amounted to $0 and $321,704, respectively. The net effect on
basic earnings per share if the income tax had been applied would have no effect
on loss per share for the three months ended March 31, 2009, and decrease the
basic and diluted earnings per share for the three months ended March 31, 2008
by $0.02.
The
estimated tax savings due to the tax exemption for the nine months ended March
31, 2009 and 2008 amounted to $126,322 and $1,699,248, respectively. The net
effect on basic earnings per share if the income tax had been applied would
increase the basic and diluted loss per share by $0.01 for the nine months ended
March 31, 2009, and decrease the basic and diluted earnings per share for the
nine months ended March 31, 2008 by $0.09.
Shengtai
Pharmaceutical Inc. and Shengtai Holding Inc. were incorporated in the United
States and have incurred net operating losses for income tax purposes for the
nine months ended March 31, 2009. The net operating loss carry forwards for
United States income taxes was approximately $2,204,600 which may be available
to reduce future years’ taxable income. These carry forwards will expire, if not
utilized, starting in 2027 through 2028. Management believes that the
realization of the benefits from these losses appears uncertain for United
States income tax purposes due to the fact that these two companies will remain
as cost centers. Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to zero. The
valuation allowance at March 31, 2009 was approximately $750,000 Management
reviews this valuation allowance periodically and makes adjustments as
warranted.
Taxes
payable
Taxes
payable consisted of the following:
|
|
March 31,
2009
(Unaudited)
|
|
|
June 30,
2008
|
|
VAT
payable
|
|
$
|
2,066,514
|
|
|
$
|
3,049,000
|
|
|
|
|
|
|
|
|
|
|
Individual
income tax withheld
|
|
|
515
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
Income
tax payable
|
|
|
536,131
|
|
|
|
1,518,278
|
|
|
|
|
|
|
|
|
|
|
Housing
property tax payable
|
|
|
9,944
|
|
|
|
9,903
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
5,320
|
|
|
|
53,304
|
|
|
|
|
|
|
|
|
|
|
Total
taxes payable
|
|
$
|
2,618,424
|
|
|
$
|
4,631,252
|
|
Note
8 - Commitments and Contingent liabilities
Guarantees
As of
March 31, 2009, the Company has guaranteed $1.9 million and $7.3 million of
short term loans for each unrelated party, Yuanli Chemical Engineering Inc.
(“Yuanli”) and Shangdong Kuangji Group Inc. (“Shandong Kuangji”),
respectively.
The
Company is obligated to perform under the guarantee if Yuanli or Shandong
Kuangji fail to pay principal and interest payments when due. The maximum
potential amount of future undiscounted payments under the guarantee about $2.0
million for Yuanli and $7.4 million for Shangdong Kuanji, including accrued
interests. The Company did not record a liability for the guarantee because
management believes Yuanli and Shangdong Kuanji are current in their payment
obligations, and the likelihood of the Company having to make good on the
guarantee is remote.
Details
of guarantee amounts to the unrelated parties as of March 31, 2009 is as
follows:
|
|
Short Term
|
|
Company
|
|
Bank Loans
|
|
|
|
|
|
Yuanli
Chemical Engineering Inc.
|
|
$
|
1,904,500
|
|
|
|
|
|
Shandong
Kuangji Group Inc.
|
|
|
7,325,000
|
|
|
|
|
|
|
Total
|
|
$
|
9,229,500
|
|
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
Stock
issuance
In
November 2008, Chinamerica Fund, LP exercised 75,000 warrants at $0.01 per
share.
Warrants
In
connection with the Share Purchase Agreement, the 4,375,000 warrants issued
(“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, LP and 25,000 warrants to Jeff Jenson
(collectively as “Lead Investor Warrants”) to compensate Chinamerica Fund LP 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. In November 2008,
Chinamerica Fund, LP exercised the 75,000 warrants issued to the
fund.
All
Investor Warrants, Placement Agent Warrants, and Lead Investor Warrants meet the
conditions for equity classification pursuant to SFAS 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.
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Average
Exercise
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
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009 (unaudited)
|
|
|
4,398,945
|
|
|
|
4,398,945
|
|
|
$
|
2.60
|
|
|
|
3.14
|
|
Stock
options
On
January 4, 2008, the Company adopted the “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
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 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,
March 31, 2009
|
|
|
660,000
|
|
|
$
|
3.34
|
|
|
$
|
-
|
|
Following
is a summary of the status of options outstanding at March 31, 2009:
Outstanding
Options
|
|
|
Exercisable
Options
|
|
Average
Exercise
Price
|
|
Outstanding
Options
|
|
|
Average
Remaining
Contractual
Life
|
|
|
Average
Exercise
Price
|
|
|
Exercisable
Options
|
|
$
|
3.34
|
|
|
660,000
|
|
|
|
4.12
|
|
|
$
|
3.34
|
|
|
|
275,000
|
|
Compensation
expense from stock options recognized for the three and nine months ended March
31, 2009 was $158,818 and $476,454, respectively. Compensation expense from
stock options recognized for the three and nine months ended March 31, 2008 was
$158,818 and $158,818, respectively.
Note
10 - Statutory reserves
The laws
and regulations of the PRC 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 make appropriations to reserve funds, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of the PRC (“PRC GAAP”). Appropriations to the statutory surplus are
required to be at least 10% of the after tax net income, as determined in
accordance with the PRC accounting rules and regulations until such reserve
balance reaches 50% of the Company’s registered capital. Appropriations to the
discretionary surplus reserve are made at the discretion of the Board of
directors.
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.
The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the three months ended March 31, 2009 and 2008, the Company
did not transfer any funds to this reserve. For the nine months ended March 31,
2009, the Company transferred $109,106 to the reserve. For the nine months ended
March 31, 2008, the Company did not transfer any funds to this reserve because,
until recently, the Company had a practice of transferring at the end of
the fiscal year.
Pursuant
to the Company’s articles of incorporation, the Company is to appropriate 10% of
its net profits as statutory surplus reserve up to $7,500,000. As of March 31,
2009 the Company had appropriated to the statutory reserve approximately
$3,000,000. The Company plan to contribute $4,500,000 in the
future.
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 nine months ended March 31, 2009 and 2008, the Company made
contributions in the amounts of $84,632 and $139,073, respectively to the
Company’s retirement plan. For the three months ended March 31, 2009 and 2008,
the Company made contributions in the amounts of $298,283 and $47,558,
respectively.
Note
12 – Sale Leaseback
Capital
lease
On
December 10, 2008, the Company entered into a sale leaseback arrangement and
sold part of its equipment to an unrelated third party for $5,127,500. The
leaseback has been accounted for as a capital lease with the same third party to
lease the same equipment for 4 years, with total payments of $8,108,775. The
title of the equipment will be transferred back to the Company upon the last
payment and after the third party received a one time payment of $43,950 from
the Company. A one time processing fee of $51,275 was paid by the Company. A
loss of $201,793 realized on this transaction has been recognized in
non-operating expense since the carrying value of the equipment sold exceeded
its fair value. The minimum payments for the remaining lease term of 45 months
from April 2009 to December 2012 are as follows.
Total
lease payment
|
|
$
|
7,991,379
|
|
Less
imputed interest
|
|
|
2,717,149
|
|
Total
capital lease obligation as of March 31, 2009
|
|
|
5,274,230
|
|
Less
current maturity
|
|
|
398,862
|
|
Capital
lease obligation – long term portion as of March 31, 2009
|
|
$
|
4,875,368
|
|
Note
13 - Subsequent event
In May
2009, the company borrowed $587,200 loan from Bank of China, due May 2010, with
monthly interest-only payments and an interest rate at 5.310% per annum, and
which is secured by certain properties.
In May
2009, the company borrowed $587,200 loan from Bank of China, due May 2010, with
monthly interest-only payments and an interest rate at 8.5905% per annum, and
which is secured by certain properties.
In April
2009, the Company borrowed $4,453,600 notes payable from Industrial and
Commercial Bank of China, due in October 2009, 0.05% transaction fee, restricted
cash required 50% of loan amount, and guaranteed by an unrelated third
party.
In April
2009, the Company borrowed $1,465,000 notes payable from Shenghai Pudong
Development Bank, due in October 2009, 0.05% transaction fee, restricted cash
required 100% of loan amount, and guaranteed by an unrelated third
party.
In
January 2009, the company borrowed $879,000 loan from Bank of China, due April
2010, with monthly interest-only payments and an interest rate at 5.310% per
annum, and which is 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.
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
.
(together,
“
we,”
“
us”
or
“
our”
)
,
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 nine months ended March 31, 2009, we used 68,063 metric tons cornstarch to
satisfy our own glucose production needs and sold the excess 39,971 metric tons
of cornstarch to outside customers who are in the pharmaceutical, food and
beverage, and industrial industries. The cornstarch sales amounted to $10.802
million and accounted for 21.94% of our total sales revenue for the nine months
ended March 31, 2009.
Our
business can be severely affected by movements in the commodity markets. (See
Item 1A “Risk Factors”) Corn is the principal raw material for our
cornstarch and the price of cornstarch as a commodity tends to follow the price
of corn. Since mid-2007 to September 2008, corn and other food prices climbed 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 and corn are the
main raw material used for these industries. 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 the market to help to maintain
the corn price. Since September 2008, in a sharp reversal, corn prices have been
decreasing due to large corn harvests. Corn prices for the three months ended
March 31, 2009 are approximately 14% lower than for the same period last year.
Corn prices for the nine months ended March 31, 2009 are approximately 8% lower
than for the same period last year.
In the
three months ended March 31, 2009 our margin compared to the same period ended
2008 has fallen from 22% to 6% primarily because of decreased unit prices,
as well as because of the high per unit overhead cost from the partial
utilization of our new glucose production facility, less efficiency due to
operating of a new factory, and reduced production of cornstarch. We are
still gradually increasing our utilization of our new glucose facility, but only
reached approximately 49% of capacity in the three months ended March 31, 2009.
In the nine months ended March 31, 2009 compared to the same period ended 2008
our margin has fallen from 23% to 13%. 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. In April 2009, we have transferred our sodium gluconate production
line to oral glucose production line with annual production capacity of 120,000
tons. We now have the production capacity of a total 192,000 tons (if necessary,
can be easily expandable to a total of 222,000 tons).
During
the nine months ended March 31, 2009, we produced a total of 63,918 metric tons
of glucose, or approximately 36% of our then 180,000 ton capacity, and our sales
of pharmaceutical-grade glucose and other glucose products were $25.888 million,
or 52.60% of our revenues. We plan to continue to increase utilization of our
glucose facility, which should gradually increase operating margins over
time.
In
addition to our pharmaceutical glucose and cornstarch series of products,
we also produce other products such as dextrin, corn embryo, fibers, protein
powders, and phytin, which are used for food, beverage and industrial
production. The sales revenues generated from these products were $12.531
million, and constituted approximately 25.46% of our total sales revenues for
the nine months ended March 31, 2009.
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 January 2009, the Chinese government
announced its medical stimulus plan to spend a total of 850 billion RMB (USD 123
billion) by 2011 to provide universal primary medical services. Over the next
three years, the multi-billion health care investment plan is aimed at expanding
the government sponsored medical insurance network to provide accessible and
affordable health care coverage to over 90% of the population. Under the plan,
each person covered by the system will receive a larger amount of annual subsidy
after the 2010 year. The focus of this plan is aimed at providing basic
healthcare to many more people—not expensive high tech
equipment. This should increase demand for glucose, since it is a
very basic and relatively low cost element of healthcare in clinics and
hospitals. In addition, the plan will also build hospitals and improve medical
services in the rural and under-developed areas. That is to say, more people
especially 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 in China, 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.
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, as set forth above, our new glucose production facility
passed its GMP inspection, and our facilities and many of our products are fully
certified for GMP, ISO9001:2000 and HACCP international quality standards, and
globally certified HALAL, KOSHER and NON-GMO IP.
Our sales
network presently covers almost all provinces of mainland China except Tibet
Autonomous Region. We have three representative offices in Chengdu, Guangzhou,
and Nanchang to strengthen our domestic sales network. We believe that these
offices will 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 nine months ended March
31, 2009, our international sales comprised approximately 12.90% 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 nine months ended March 31, 2009, our top ten
customers accounted for 21.79% of our total sales revenue.
Results
of Operations
Three
Months Ended March 31, 2009 Compared with Three Months Ended March 31,
2008
The
following table shows our operating results for the three months ended March 31,
2009 and 2008:
|
|
Three months
ended
March 31,
2009
|
|
|
Three months
ended
March 31,
2008
|
|
Sales
Revenue
|
|
$
|
16,301,522
|
|
|
$
|
20,701,577
|
|
Costs
of Goods Sold
|
|
|
15,283,929
|
|
|
|
16,220,665
|
|
Gross
Profit
|
|
|
1,017,593
|
|
|
|
4,480,912
|
|
Sales,
General and Administrative Expenses
|
|
|
1,322,178
|
|
|
|
1,603,932
|
|
Operating
Income (Loss)
|
|
|
(304,585
|
)
|
|
|
2,876,980
|
|
Other
Expense
|
|
|
(404,979
|
)
|
|
|
(668,607
|
)
|
Income
(Loss) before Income Taxes
|
|
|
(709,564
|
)
|
|
|
2,208,373
|
|
Provision
for Income Taxes
|
|
|
(48,166
|
)
|
|
|
321,220
|
|
Net
income (Loss)
|
|
$
|
(661,398
|
)
|
|
$
|
1,887,153
|
|
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 March 31, 2009
and 2008:
Product
|
|
Metric Tons
Three months ended
March 31, 2009
|
|
|
Metric Tons
Three months ended
March 31, 2008
|
|
|
Sales Revenue (%)
Three months ended
March 31, 2009
|
|
|
Sales Revenue (%)
Three months ended
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glucose
–Sales
|
|
|
22,407
|
|
|
|
19,069
|
|
|
$
|
8,427,848
(51.70)
|
%
|
|
$
|
7,965,569 (38.48
|
%)
|
Cornstarch-Internal
|
|
|
28,172
(66.20)
|
%
|
|
|
13,769
(33.62)
|
%
|
|
|
|
|
|
|
|
|
Cornstarch-Sales
|
|
|
14,384
(33.80)
|
%
|
|
|
27,180
(66.38)
|
%
|
|
$
|
3,594,010
(22.05)
|
%
|
|
$
|
7,078,585
(34.19
|
%)
|
Total
Cornstarch
|
|
|
42,556
(100)
|
%
|
|
|
40,949
(100)
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
$
|
4,279,664
(26.25)
|
%
|
|
$
|
5,657,423 (27.33
|
%)
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
16,301,522
(100)
|
%
|
|
$
|
20,701,577
(100
|
%)
|
Overview
|
¨
|
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 at the end of 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 March 31, 2009, we used 66.20% of our
cornstarch internally and sold 33.80% to
customers.
|
|
¨
|
Demand for cornstarch plummeted
since August 2008, as food prices dropped sharply amidst global financial
turmoil. For example, pork prices dropped approximately 40% in those
months. 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.
|
|
¨
|
We plan to produce cornstarch to
supply our own needs and will produce more for outside sales if future
market prices of corn and cornstarch make it profitable to do
so.
|
Sales
revenue for the three months ended March 31, 2009 was $16,301,522, a decrease of
$4,400,055, or 21.25% compared with the corresponding period in 2008. The
decrease in sales revenue resulted primarily from a 47% decrease in our sales of
cornstarch and a decrease in domestic unit sales prices.
Cost of
goods sold for the three months ended March 31, 2009 was $15,283,929, a decrease
of $936,736, or 5.77% compared with the corresponding period in 2008. The
decrease in cost of goods sold primarily resulted from reduced production and
sales. The higher per unit costs resulted from decreased corn starch production,
and allocating the cost of the new glucose factory facilities over less than
full capacity production.
Gross
profit for the three months ended March 31, 2009 was $1,017,593, a decrease of
$3,463,319, or 77.29% compared with the corresponding period in 2008. The
decrease in gross profits resulted from the decrease in sales and increase in
cost of goods sold.
Gross
profit margin for the three months ended March 31, 2009 was 6.24%, a decrease
from 21.65% for the same period in 2008. The reasons for the decrease
in gross profit margin were because of lower sales, decrease in unit sales
prices, lower production, and higher production cost per unit.
Selling,
General and Administrative expenses for the three months ended March 31, 2009
were $1,322,178, a decrease of $281,754, or 17.57% compared with the
corresponding period in 2008. The decrease in our Selling, General and
Administrative expenses was mainly the result of decreased administrative
expenses which mainly include shipping and handling expenses. For the three
months ended March 31, 2009 we have tried a new sales policy to let our
customers handle the shipping and handling thus lowered our shipping and
handling expenses. We incurred $158,818 and $0 in non-cash stock option expenses
for the three months ended March 31, 2009 and March 31, 2008.
Net
income (loss) for the three months ended March 31, 2009 was $(661,398), a
decrease of $2,548,551, or 135.05% compared with the corresponding period in
2008. The decrease in net income was primarily due to the decrease in our sales
volume, and decrease in our unit sales prices.
Nine
Months Ended March 31, 2009 Compared with nine Months Ended March 31,
2008
The
following table shows our operating results for the nine months ended March 31,
2009 and 2008.
|
|
Nine months
ended
March 31,
2009
|
|
|
Nine months
ended
March 31,
2008
|
|
Sales
Revenue
|
|
$
|
49,220,996
|
|
|
$
|
65,028,934
|
|
Costs
of Goods Sold
|
|
|
43,016,707
|
|
|
|
50,085,971
|
|
Gross
Profit
|
|
|
6,204,289
|
|
|
|
14,942,963
|
|
Sales,
General and Administrative Expenses
|
|
|
6,074,853
|
|
|
|
5,114,863
|
|
Operating
Income
|
|
|
129,436
|
|
|
|
9,828,100
|
|
Other
Expense
|
|
|
(534,331
|
)
|
|
|
(1,450,463
|
)
|
Income
(loss) before Income Taxes
|
|
|
(404,895
|
)
|
|
|
8,377,637
|
|
Provision
for Income Taxes
|
|
|
100,594
|
|
|
|
1,108,388
|
|
Net
income (loss)
|
|
$
|
(505,489
|
)
|
|
$
|
7,269,249
|
|
The following table shows the
breakdown of production and sales by product categories, and between internal
use and external sales of cornstarch, for the nine months ended March 31, 2009
and 2008.
Product
|
|
Metric Tons
Nine months ended
March 31, 2009
|
|
|
Metric Tons
Nine months ended
March 31, 2008
|
|
|
Sales Revenue (%)
Nine months ended
March 31, 2009
|
|
|
Sales Revenue (%)
Nine months ended
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glucose
–Sales
|
|
|
63,918
|
|
|
|
66,964
|
|
|
$
|
25,887,701
(52.60)
|
%
|
|
$
|
26,091,292
(40.12)
|
%
|
Cornstarch-Internal
|
|
|
68,063
(63.00)
|
%
|
|
|
44,944
(35.25)
|
%
|
|
|
|
|
|
|
|
|
Cornstarch-Sales
|
|
|
39,971
(37.00)
|
%
|
|
|
82,568
(64.75)
|
%
|
|
$
|
10,801,539
(21.94)
|
%
|
|
$
|
21,837,794
(33.58)
|
%
|
Total
Cornstarch
|
|
|
108,034
(100)
|
%
|
|
|
127,512
(100)
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
$
|
12,531,756
(25.46)
|
%
|
|
$
|
17,099,848
(26.30)
|
%
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
49,220,996
(100)
|
%
|
|
$
|
65,028,934
(100)
|
%
|
Sales
revenue for the nine months ended March 31, 2009 was $49,220,996, a decrease of
$15,807,938, or 24.31% compared with the corresponding period in 2008. The
decrease in sales revenue resulted from the decrease of unit sales prices, a 52%
decrease of our sales of cornstarch and a 27% decrease in sales of other
products. Our sales were impacted by government restrictions on manufacturing
and transportation during the Beijing Olympics in August 2008 and sharply lower
prices and demand for cornstarch since August.
Cost of
goods sold for the nine months ended March 31, 2009 was $43,016,707, a decrease
of $7,069,264, or 14.11% compared with the corresponding period in 2008. The
decrease in cost of goods sold primarily resulted from lower sales and
production and higher per unit costs resulted from higher overhead cost from not
fully operated new glucose factory facilities and reduced cornstarch
production.
Gross
profit for the nine months ended March 31, 2009 was $6,204,289, a decrease of
$8,738,674, or 58.48% compared with the corresponding period in 2008. The
decrease in gross profits resulted from the decrease in sales and increase in
cost of goods sold.
Gross
profit margin for the nine months ended March 31, 2009 was 12.60%, a decrease
from 22.98% for the same period in 2008. The reasons for the decrease in gross
profit margin were because of lower sales, lower production, and higher
production cost per unit.
Selling,
General and Administrative expenses for the nine months ended March 31, 2009
were $6,074,853, an increase of $959,990, or 18.77% compared with the
corresponding period in 2008. The increase in our Selling, General and
Administrative expenses was mainly the result of increased labor cost and
increased bad debt expenses 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 $476,454 and
$158,818 in non-cash stock option expenses for the nine months ended March 31,
2009 and 2008, respectively.
Net
income (loss) for the nine months ended March 31, 2009 was $(505,489), a
decrease of $7,774,738, or 106.95% compared with the corresponding period in
2008. The decrease in net income was primarily due to the decrease in our sales,
and increased selling, general, and administrative expenses.
Liquidity and Capital Resources
Operating
Activities
Nine
Months Ended March 31, 2009 and 2008
Net cash
provided by operating activities for the nine months ended March 31, 2009 was
$1,121,846, a decrease of 88.16%, or $8,350,094 from $9,471,940 provided by
operating activities for the same period in 2008. The decrease in net cash
provided by operations was principally due to the decrease in net income and
increased payments of tax payable.
Notes
receivable and other receivables are classified as operating cash flows because
these assets are used for operating purposes. These assets are mainly used to
purchase our raw materials and fund our normal operations.
Investing
Activities
Nine
Months Ended March 31, 2009 and 2008
Net cash
used in investing activities for the nine months ended March 31, 2009 was
$174,796, a decrease of 98.82%, or $14,596,069 from $14,770,865 used in
investing activities for the same period in 2008. The decrease of net cash used
in investing activities resulted from equipment sales and capital lease back of
some of the new glucose factories equipments in December 2008. During the nine
months ended March 31, 2008, 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 nine months ended March
31, 2009. 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 year of 2009.
Financing
Activities
Nine
Months Ended March 31, 2009 and 2008
Net cash
used in financing activities for the nine months ended March 31, 2009 was
$2,087,940, an decrease of 212.29%, or $3,947,292 from $1,859,352 of cash
provided by the financing activities for the same period in fiscal 2008. The
decrease of net cash provided by financing is mainly because the Company paid
off more bank loans and borrowed less from third party and employees for the
nine months ended March 31, 2009 compared to the nine months ended March 31,
2008.
Loans
We have
financed our operations primarily through bank loans and operating income. We
had a total of $22,707,500 short term bank loans outstanding as of March 31,
2009. 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. Although we have in the past renewed these
loans on their due dates, unless the lenders agree to continue this practice, we
are obligated to repay the $22,707,500 with interest, an amount substantially in
excess of our available cash.
We have
$6,299,412 non-current payables as of March 31, 2009 and $2,653,995 as of June
30, 2008. In December 2008, we did a sale and leaseback of equipment, which
resulted in payables over a number of future years.
Guarantees
We have
guaranteed certain borrowings of other unrelated third parties including short
term bank loans. The total guaranteed amounts were $9,229,500 as of March 31,
2009. The total amount of guarantees provided to us by unrelated third parties
is 9,522,000 as of March 31, 2009.
Future
cash commitments and needs
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 have commenced operations in the new
facility in stages with small amounts first and would build up to larger
quantities in the coming quarters.
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.
At March
31, 2009 we had $2.2 million in unrestricted cash, which would cover our current
burn rate for seven months if we operate at breakeven. As noted, our
business has suffered from the commodity market decline in corn and cornstarch
prices and from the adverse economic conditions in the PRC and
elsewhere. We believe that we will be able to manage our cash
needs. However, unless our sales revenue and cashflow increase, we
will carefully review our financial condition and consider financing either with
the cash internally generated, bank loans, or with additional equity and may
consider strategic alternatives.
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
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”), and estimated
returns of product from customers. 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. We allow our
customers to return products only if our product is later determined by us to be
ineffective. Based on our historical experience over the past three years,
product returns have been insignificant throughout all of our product
lines. Therefore, we do not estimate deductions or allowance for
sales returns. Sales returns are taken against revenue when products
are returned from customers. Sales are presented net of any discounts
given to customers.
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.
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
In
February 2007, the FASB issued 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.
IIn 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 adoption of SFAS 162 had no material impact
on the Company’s 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 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 China (Renminbi). EITF 07-5 is effective for fiscal years
beginning after December 15, 2008. Therefore, all nonemployee options,
conversion features on debt, and warrants will get liability accounting upon
adoption and will be required to be marked to market each accounting period. The
Company is currently evaluating the impact of adoption of EITF 07-5 on the
Company’s consolidated financial statements.
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.
Management is currently evaluating the impact of adopting FSP 157-3on
accounting.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. FSP FAS 157-4 amends SFAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This FSP
shall be applied prospectively with retrospective application not permitted.
This FSP shall be effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP
FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. We are currently evaluating this new FSP but do not believe that it
will have a significant impact on the determination or reporting of our
financial results.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF 99-20, “Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets,” to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity’s management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more frequent disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early
adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an
entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1,
the entity also is required to early adopt this FSP. We are currently evaluating
this new FSP but do not believe that it will have a significant impact on the
determination or reporting of our financial results.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” 107 to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the disclosure requirements of this new FSP.
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 ineffective and are not 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 March 31, 2009, 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 1.
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
1A. Risk Factors.
There
have been 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, except for
the following:
Our
business is materially affected by the corn, cornstarch and related products
commodity markets. Adverse and volatile market and economic
conditions can harm our sales volumes, unit prices, cashflow and
profitability.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults on Senior
Securities.
Not
Applicable.
Item 4.
Submission of Matters to a Vote of
Security Holders.
None.
Item 5.
Other
Information.
None.
Item
6. Exhibits
(a)
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:
May 14, 2009
|
/s/ Qingtai
Liu
|
|
Qingtai
Liu
|
|
Chief
Executive Officer
|
|
|
Dated:
May 14, 2009
|
/s/ Yiru
Shi
|
|
Yiru
Shi
|
|
Chief
Financial Officer
|
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