UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended December 31, 2011
¨
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|
For the transition period from ______________ to _____________
Commission file number:
000-51312
SHENGTAI PHARMACEUTICAL, INC.
(Exact name of registrant as specified
in its charter)
Delaware
|
|
54-2155579
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
Changda Road East, Development District,
|
|
|
Changle County, Shandong, The People’s Republic of
|
|
|
China
|
|
262400
|
(Address of principal executive offices)
|
|
(Zip Code)
|
011-86-536-2188831
(Registrant’s telephone number,
including area code)
|
|
|
|
|
|
|
(Former name, former address and former fiscal year, if changed since last report)
|
|
Indicate by check mark whether the registrant (1) has filed
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
x
No
¨
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
x
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.
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
|
|
|
|
Non-accelerated filer
|
¨
|
Smaller reporting company
|
x
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes
¨
No
¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date.
As of February 10, 2012, there are 9,584,912
shares of $0.001 par value common stock issued and outstanding.
INDEX
|
|
Page
|
|
|
|
PART I.
|
Financial Information (Unaudited)
|
|
|
|
|
|
Item 1. Financial Statements.
|
3
|
|
|
|
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
20
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
|
28
|
|
|
|
|
Item 4. Controls and Procedures.
|
28
|
|
|
|
PART II.
|
Other Information
|
|
|
|
|
|
Item 1. Legal Proceedings.
|
29
|
|
|
|
|
Item 1A. Risk Factors.
|
29
|
|
|
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
|
29
|
|
|
|
|
Item 3. Defaults Upon Senior Securities.
|
29
|
|
|
|
|
Item 4. Mine Safety Disclosures.
|
29
|
|
|
|
|
Item 5. Other Information.
|
29
|
|
|
|
|
Item 6. Exhibits.
|
30
|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash & cash equivalents
|
|
$
|
4,331,179
|
|
|
$
|
4,051,349
|
|
Restricted cash
|
|
|
1,851,339
|
|
|
|
8,972,600
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,241,419 and $1,506,470, respectively
|
|
|
8,963,530
|
|
|
|
8,580,973
|
|
Notes receivable
|
|
|
3,556,464
|
|
|
|
2,815,726
|
|
Other receivables
|
|
|
7,205,798
|
|
|
|
8,359,103
|
|
Inventories
|
|
|
17,488,039
|
|
|
|
13,016,399
|
|
Prepayments and other assets
|
|
|
445,240
|
|
|
|
2,296,982
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
43,841,589
|
|
|
|
48,093,131
|
|
|
|
|
|
|
|
|
|
|
Plant and equipment, net
|
|
|
82,106,021
|
|
|
|
77,029,157
|
|
Construction in progress
|
|
|
900,053
|
|
|
|
4,693,018
|
|
Equity investment
|
|
|
10,859,384
|
|
|
|
9,132,725
|
|
Advance for construction
|
|
|
727,804
|
|
|
|
2,039,929
|
|
Intangible assets, net
|
|
|
3,280,799
|
|
|
|
3,251,214
|
|
|
|
$
|
141,715,650
|
|
|
$
|
144,239,174
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,285,530
|
|
|
$
|
9,508,512
|
|
Accounts payable and accrued liabilities - related party
|
|
|
340,485
|
|
|
|
943,779
|
|
Notes payable - banks
|
|
|
277,339
|
|
|
|
11,447,800
|
|
Short term loans
|
|
|
62,947,502
|
|
|
|
48,094,740
|
|
Accrued liabilities
|
|
|
782,275
|
|
|
|
917,464
|
|
Other payable
|
|
|
1,614,868
|
|
|
|
2,642,598
|
|
Employee loans
|
|
|
294,841
|
|
|
|
261,938
|
|
Other payable - officer
|
|
|
36,831
|
|
|
|
36,285
|
|
Customer deposit
|
|
|
3,358,191
|
|
|
|
8,954,841
|
|
Taxes payable
|
|
|
1,457,659
|
|
|
|
1,809,093
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
80,395,521
|
|
|
|
84,617,050
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 2,500,000 shares authorized, no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 50,000,000 shares authorized, 9,584,912 shares issued and outstanding
|
|
|
9,585
|
|
|
|
9,585
|
|
Additional paid-in capital
|
|
|
21,553,499
|
|
|
|
21,553,499
|
|
Statutory reserves
|
|
|
4,184,163
|
|
|
|
4,068,822
|
|
Retained earnings
|
|
|
26,851,955
|
|
|
|
26,148,801
|
|
Accumulated other comprehensive income
|
|
|
8,720,928
|
|
|
|
7,841,417
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
61,320,130
|
|
|
|
59,622,124
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
141,715,651
|
|
|
$
|
144,239,174
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES
|
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
|
(UNAUDITED)
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Net sales
|
|
$
|
42,933,425
|
|
|
|
49,044,856
|
|
|
$
|
82,988,873
|
|
|
$
|
83,689,428
|
|
Cost of sales
|
|
|
38,892,394
|
|
|
$
|
43,145,306
|
|
|
|
75,562,795
|
|
|
|
71,770,521
|
|
Gross profit
|
|
|
4,041,031
|
|
|
|
5,899,550
|
|
|
|
7,426,078
|
|
|
|
11,918,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,026,462
|
|
|
|
2,103,390
|
|
|
|
5,179,077
|
|
|
|
4,683,194
|
|
Income from operations
|
|
|
1,014,569
|
|
|
|
3,796,160
|
|
|
|
2,247,001
|
|
|
|
7,235,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings on equity investment
|
|
|
32,977
|
|
|
|
144,244
|
|
|
|
306,890
|
|
|
|
231,133
|
|
Non-operating income
|
|
|
161,516
|
|
|
|
54,614
|
|
|
|
752,983
|
|
|
|
77,611
|
|
Non-operating expense
|
|
|
(6,244
|
)
|
|
|
(94,803
|
)
|
|
|
(13,725
|
)
|
|
|
(201,852
|
)
|
Interest expense and other charges
|
|
|
(1,391,266
|
)
|
|
|
(427,576
|
)
|
|
|
(2,234,377
|
)
|
|
|
(1,550,692
|
)
|
Interest income
|
|
|
139,465
|
|
|
|
70,770
|
|
|
|
144,191
|
|
|
|
72,036
|
|
Other income (expense), net
|
|
|
(1,063,552
|
)
|
|
|
(252,751
|
)
|
|
|
(1,044,038
|
)
|
|
|
(1,371,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
(48,983
|
)
|
|
|
3,543,409
|
|
|
|
1,202,963
|
|
|
|
5,863,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
16,079
|
|
|
|
846,940
|
|
|
|
384,468
|
|
|
|
1,524,397
|
|
Net income
|
|
|
(65,062
|
)
|
|
|
2,696,468
|
|
|
|
818,495
|
|
|
|
4,339,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
405,636
|
|
|
|
763,135
|
|
|
|
879,511
|
|
|
|
1,591,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
340,574
|
|
|
|
3,459,603
|
|
|
|
1,698,006
|
|
|
$
|
5,931,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share (basic and diluted)
|
|
$
|
(0.01
|
)
|
|
$
|
0.28
|
|
|
$
|
0.09
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares (basic and diluted)
|
|
|
9,584,912
|
|
|
|
9,584,912
|
|
|
|
9,584,912
|
|
|
|
9,584,912
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
818,495
|
|
|
$
|
4,339,552
|
|
Adjustments to reconcile net income to cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,866,186
|
|
|
|
3,560,415
|
|
Amortization
|
|
|
29,541
|
|
|
|
27,949
|
|
Bad debt (reduction) provision
|
|
|
(290,232
|
)
|
|
|
851,731
|
|
Share based compensation to employees
|
|
|
-
|
|
|
|
183,480
|
|
Earnings on equity investment
|
|
|
(306,890
|
)
|
|
|
(231,133
|
)
|
Loss on equipment disposal
|
|
|
-
|
|
|
|
111,874
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
58,328
|
|
|
|
(5,357,856
|
)
|
Notes receivable
|
|
|
(688,958
|
)
|
|
|
1,450,732
|
|
Other receivables
|
|
|
1,273,594
|
|
|
|
(876,791
|
)
|
Inventories
|
|
|
(4,294,968
|
)
|
|
|
(5,111,530
|
)
|
Prepayments and other assets
|
|
|
1,884,620
|
|
|
|
(308,910
|
)
|
Accounts payable and accrued liabilities
|
|
|
(4,089,919
|
)
|
|
|
3,881,847
|
|
Accounts payable and accrued liabilities - related party
|
|
|
(617,404
|
)
|
|
|
788,967
|
|
Other payable
|
|
|
(1,069,555
|
)
|
|
|
(746,316
|
)
|
Customer deposit
|
|
|
(5,731,010
|
)
|
|
|
3,342,622
|
|
Taxes payable
|
|
|
(381,549
|
)
|
|
|
(786,417
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(9,539,722
|
)
|
|
|
5,120,215
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Increase in equity investment
|
|
|
(1,254,400
|
)
|
|
|
-
|
|
Purchase plant and equipment
|
|
|
(1,221
|
)
|
|
|
(1,204,598
|
)
|
Additions to construction in progress
|
|
|
(78,432
|
)
|
|
|
(5,059,744
|
)
|
Advances for construction
|
|
|
1,342,590
|
|
|
|
1,037,108
|
|
Increase in land use right
|
|
|
(2,486
|
)
|
|
|
-
|
|
Loan to related party - non-current
|
|
|
-
|
|
|
|
(851,731
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
6,051
|
|
|
|
(6,078,966
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
7,121,261
|
|
|
|
12,916,104
|
|
Borrowings on notes payable - banks
|
|
|
1,844,282
|
|
|
|
-
|
|
Principal payments on notes payable - banks
|
|
|
(13,171,200
|
)
|
|
|
(10,888,680
|
)
|
Borrowings on short term loans
|
|
|
36,443,550
|
|
|
|
12,231,120
|
|
Principal payments on short term loans
|
|
|
(22,483,610
|
)
|
|
|
(5,966,400
|
)
|
Borrowings on employee loans
|
|
|
31,360
|
|
|
|
|
|
Principal payments on employee loans
|
|
|
(3,136
|
)
|
|
|
(22,523
|
)
|
Borrowings on long term loans
|
|
|
-
|
|
|
|
4,778,788
|
|
Payments on long term loans
|
|
|
-
|
|
|
|
(4,778,788
|
)
|
Borrowings on third party loan
|
|
|
-
|
|
|
|
335,610
|
|
Payment on capital lease obligation
|
|
|
-
|
|
|
|
(5,732,806
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
9,782,506
|
|
|
|
2,872,424
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate change in cash
|
|
|
30,995
|
|
|
|
791,911
|
|
Increase in cash & cash equivalents
|
|
|
279,831
|
|
|
|
2,705,584
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents, beginning of year
|
|
|
4,051,349
|
|
|
|
4,121,543
|
|
Cash & cash equivalents, end of year
|
|
$
|
4,331,179
|
|
|
$
|
6,827,127
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,899,711
|
|
|
$
|
1,361,124
|
|
Income taxes
|
|
$
|
705,945
|
|
|
$
|
1,672,926
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Decrease of other receivable for acquisition of plant and equipment
|
|
$
|
20,651
|
|
|
$
|
-
|
|
Transfers of construction in progress-related inventory to plant and equipment
|
|
$
|
79,217
|
|
|
$
|
-
|
|
Acquisition of plant and equipment on credit on account
|
|
$
|
3,557,333
|
|
|
$
|
-
|
|
Completion of construction-in-progress (transferred to plant and equipment)
|
|
$
|
7,415,903
|
|
|
$
|
575,344
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
SHENGTAI PHARMACEUTICAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Organization principal activities
Shengtai Pharmaceutical, Inc, the "Company,”
was incorporated in March 2004 in the State of Delaware. The Company, through its subsidiaries, manufactures and distributes
glucose and starch as pharmaceutical raw materials, other starch products and other glucose products such as corn meals, food and
beverage glucose and dextrin. The Company's business operations are conducted in the People's Republic of China, the "PRC.”
Note 2 – Accounting policies
Accounting principles
In the opinion of management, the accompanying
balance sheets and related interim statements of income and comprehensive income, and cash flows include all adjustments, consisting
only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). 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 Company’s
2011 Form 10-K filed on October 7, 2011 with the U.S. Securities and Exchange Commission.
Principles of consolidation
The consolidated financial statements
of Shengtai Pharmaceutical, Inc. and its subsidiaries reflect the activities of the parent and its wholly-owned subsidiaries Shengtai
Holding, Inc., “SHI,” and Weifang Shengtai Pharmaceutical Co., Ltd., “Weifang Shengtai.” All material inter-company
transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of consolidated 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. Actual
results could differ from those estimates.
Reclassification
Certain reclassification has been made
to the previous year’s financial statements to conform to current year presentation.
Recently issued accounting pronouncements
In December 2011, the FASB issued guidance
on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about
both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject
to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January
1, 2013.
In September 2011, the FASB issued guidance
on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity
determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify
potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any).
If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment
test is not required. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011, with early adoption permitted.
In June 2011, the FASB issued guidance
on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and
its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement
of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for annual
periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral of certain portion of this guidance.
In May 2011, the FASB issued guidance
to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use
measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty
credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally,
the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and
assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable
inputs. The new guidance is effective for annual periods beginning after December 15, 2011.
Note 3 – Earnings (loss) per
share
Basic earnings per share are computed
based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per
share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is
computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common
stock at the average market price during the period.
The components of basic and diluted earnings
(loss) per share consisted of the following:
|
|
Three months ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net (loss) income for earnings per share
|
|
$
|
(65,062
|
)
|
|
$
|
2,696,468
|
|
Weighted average shares used in basic and diluted computation
|
|
|
9,584,912
|
|
|
|
9,584,912
|
|
(Loss) earnings per share, basic and diluted:
|
|
$
|
(0.01
|
)
|
|
$
|
0.28
|
|
|
|
Six months ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net income for earnings per share
|
|
$
|
818,495
|
|
|
$
|
4,339,552
|
|
Weighted average shares used in basic and diluted computation
|
|
|
9,584,912
|
|
|
|
9,584,912
|
|
Earnings per share, basic and diluted:
|
|
$
|
0.09
|
|
|
$
|
0.45
|
|
The Company’s warrants and stock
options were not included in the calculation of diluted earnings per share for the three and six months ended December 31, 2011
and 2010 as the effect would be anti-dilutive.
Note 4 - Concentrations of risk
The Company's operations are conducted
solely within 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 Chinese 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.
The cash deposits in U.S. financial institutions
exceed the amounts insured by the U.S. government. Balances at financial institutions or state owned banks within the PRC are not
covered by insurance. Non-performance by these institutions could expose the Company to losses for amounts in excess of insured
balances. At December 31, 2011 and June 30, 2011, the Company’s bank balances with the banks and cash in hand in PRC amounted
to $6,170,755 and $ 13,017,076, respectively, which are uninsured and subject to credit risk. The Company has not experienced nonperformance
by these institutions.
For the three and six months ended December
31, 2011 and 2010, there were no customers that individually comprised 10% or more of the Company’s total revenues.
The Company has one vendor, Dezhou No.5
Grain and Cooking Oil Warehouse that individually comprised 10% or more of the Company’s total purchase for the six months
ended December 31, 2011.
There was no one vendor that individually
comprised 10% or more of the Company’s total purchase for the three months ended December 31, 2011.
There was no one vendor that individually
comprised 10% or more of the Company’s total purchase for the three and six months ended December 31, 2010.
For export sales, the Company frequently
requires significant down payments or letter of credit from its customers prior to shipment. During the year, the Company maintained
export credit insurance to protect the Company against the risk that the overseas customers may default on settlement.
The following table summarizes financial
information for Company’s revenues based on geographic area:
|
|
Three months ended
|
|
|
|
December 31
|
|
|
|
2011
|
|
|
2010
|
|
Revenue
|
|
|
|
|
|
|
|
|
China
|
|
$
|
35,419,626
|
|
|
$
|
40,835,070
|
|
International
|
|
|
7,513,799
|
|
|
|
8,209,786
|
|
Total
|
|
$
|
42,933,425
|
|
|
$
|
49,044,856
|
|
|
|
Six months ended
|
|
|
|
December 31
|
|
|
|
2011
|
|
|
2010
|
|
Revenue
|
|
|
|
|
|
|
|
|
China
|
|
$
|
67,891,521
|
|
|
$
|
69,498,700
|
|
International
|
|
|
15,097,352
|
|
|
|
14,190,728
|
|
Total
|
|
$
|
82,988,873
|
|
|
$
|
83,689,428
|
|
Note 5 - Restricted cash
The Company through its bank agreements
is required to keep certain amounts on deposit that are subject to withdrawal restrictions. These amounts were $1,851,339 and $8,972,600
as of December 31, 2011 and June 30, 2011, respectively.
Note 6 - Other receivables
Other receivables include receivables
from unrelated parties for transactions other than sales.
The other receivables include Company's
advances of $
5,430,300 and $6,961,500
as of December 31, 2011 and June 30, 2011, respectively.
These are advances
to its purchasing department employees as purchase advances for corn purchases.
This amount is 100% secured by the personal assets of Company’s CEO as the guarantee extended by him.
As of December 31, 2011, the other receivables
balance includes a loan to an unrelated third party in the amount of $787,000. The loan is not guaranteed, interest free, and due
on demand. The loan had been paid off in January 2012. The Company provided the loan to maintain long term business relationship.
The other receivables balance includes
a loan to an unrelated third party in the amount of approximately $486,000 and $384,000 as of December 31, 2011 and June 30, 2011,
respectively. The loan is not guaranteed, interest free, and due on demand. The Company provided the loan to maintain long term
business relationship.
Note 7 - Inventories
Inventories are stated at the lower of
cost (weighted average basis) or market and consisted of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Raw materials
|
|
$
|
4,830,062
|
|
|
$
|
2,539,104
|
|
Work-in-progress
|
|
|
7,610,200
|
|
|
|
3,203,585
|
|
Finished goods
|
|
|
5,047,777
|
|
|
|
7,273,710
|
|
Total
|
|
$
|
17,488,039
|
|
|
$
|
13,016,399
|
|
The Company reviews its inventory periodically
for possible obsolete goods or to determine if any reserves are necessary. As of December 31, 2011, the Company has determined
that no reserves are necessary.
Note 8 - Prepayments and other assets
Prepayments and other assets mainly represent
partial payments or deposits for inventory and equipment and other purchases and services. As of December 31, 2011, prepayments
mainly represent partial payments or deposits for repairing parts, decorating fee, monitoring system, consulting services, gardening
fee, and other fees.
Note 9 - Plant and equipment and construction-in-progress
Plant and equipment and construction-in-progress
consisted of the following:
|
|
December 31,
2011
|
|
|
June 30,
2011
|
|
Buildings
|
|
$
|
39,212,124
|
|
|
$
|
38,354,966
|
|
Machinery and equipment
|
|
|
77,612,526
|
|
|
|
69,170,960
|
|
Automobile
|
|
|
789,261
|
|
|
|
736,800
|
|
Electronic equipment
|
|
|
774,413
|
|
|
|
611,950
|
|
Construction-in-progress
|
|
|
900,053
|
|
|
|
4,693,018
|
|
Total
|
|
|
119,288,377
|
|
|
|
113,567,694
|
|
Accumulated depreciation and amortization
|
|
|
(36,282,303
|
)
|
|
|
(31,845,519
|
)
|
Plant and equipment, net and construction-in-progress
|
|
$
|
83,006,074
|
|
|
$
|
81,722,175
|
|
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 December 31, 2011 and 2010 amounted to $1,969,276 and $1,665,369, respectively. Depreciation expense
for the six months ended December 31, 2011 and 2010 amounted to $3,866,186 and $3,560,415, respectively. Interest costs totaling
$34,166 and $422,571 were capitalized into construction-in-progress for the three months ended December 31, 2011 and 2010, respectively.
Interest costs totaling $115,215 and $422,571 were capitalized into construction-in-progress for the six months ended December
31, 2011 and 2010, respectively.
Note 10 - Equity investment
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 investmnent exists. On September 16, 2003, Weifang Shengtai entered into a joint venture
partnership with Weifang City Investment Company and Changle Century Sun Paper Industry Co., Ltd, “Changle Paper,”
and formed Changle Shengshi Redian Co., Ltd, "Changle Shengshi.” Changle Shengshi was incorporated in Weifang
City, Shandong Province, the PRC. Changle Shengshi's principal activity is to produce and sell electricity and steam to Weifang
Shengtai and Changle Paper for the use of their own production. Weifang Shengtai owns 20% of Changle Shengshi and the Company accounts
for this 20% investment under the equity method of accounting.
Summarized financial information of Changle
Shengshi is as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
Current assets
|
|
$
|
62,040,201
|
|
|
$
|
45,545,505
|
|
Non-current assets
|
|
|
75,957,810
|
|
|
|
71,950,385
|
|
Total assets
|
|
$
|
137,998,011
|
|
|
$
|
117,495,890
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
86,021,585
|
|
|
$
|
63,492,149
|
|
Non-current liabilities
|
|
|
537,000
|
|
|
|
17,457,647
|
|
Stockholders' equity
|
|
|
51,439,426
|
|
|
|
36,546,094
|
|
Total liabilities and stockholders' equity
|
|
$
|
137,998,011
|
|
|
$
|
117,495,890
|
|
During the six months ended December 31,
2011, the Company increased investment in Changle Shengshi by 8,000,000 RMB (approximately $1.25 million). Changle Paper increased
its investment proportionately, which resulted in the Company’s 20% investment in the investee.
Note 11 - Advance for construction
Advances for construction are paid to
unrelated parties, interest free, and with no collateral and no guarantee.
Note 12 - Intangible assets
Intangible assets consisted of the following:
|
|
December 31,
2011
|
|
|
June 30,
2011
|
|
Land use rights
|
|
$
|
3,688,288
|
|
|
$
|
3,625,020
|
|
Less: accumulated amortization
|
|
|
(414,328
|
)
|
|
|
(378,696
|
)
|
Land use rights, net
|
|
|
3,273,961
|
|
|
|
3,246,324
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
10,819
|
|
|
|
8,181
|
|
Less: accumulated amortization
|
|
|
(3,980
|
)
|
|
|
(3,291
|
)
|
Software, net
|
|
|
6,839
|
|
|
|
4,890
|
|
Total intangible assets, net
|
|
$
|
3,280,799
|
|
|
$
|
3,251,214
|
|
Intangible assets are primarily comprised
of land use rights, which are pledged as collateral for certain bank loans. The Chinese government owns all land in the PRC. However,
the government grants "land use rights" for terms ranging from 20 to 50 years. 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 December 31, 2011, the Company determined that there had been no impairment. For the three months ended December 31, 2011
and 2010, amortization expense for these intangible assets are amounted to $14,852 and $14,205, respectively. For the six months
ended December 31, 2011 and 2010, amortization expense for these intangible assets are amounted to $29,541 and $27,949, respectively.
The following table consists of the expected
amortization expenses for the next five years:
Years ended December 31,
|
|
Amount
|
|
2012
|
|
$
|
56,000
|
|
2013
|
|
|
56,000
|
|
2014
|
|
|
56,000
|
|
2015
|
|
|
56,000
|
|
2016
|
|
|
56,000
|
|
Thereafter
|
|
|
3,000,799
|
|
Total
|
|
$
|
3,280,799
|
|
Note 13 - 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, the VAT rate is
13%. A credit is available whereby VAT paid on the purchases of semi-finished products, raw materials used in the production of
the Company's finished products, and payment of freight expenses can be used to offset the VAT due on sales of the finished products.
VAT on sales and VAT on purchases amounted
to $
5,642,608
and $
5,809,887
, respectively, for the three month
ended December 31, 2011. VAT on sales and VAT on purchases amounted to $
6,443,295 and $6,216,854
,
respectively, for the three months ended December 31, 2010. VAT on sales and VAT on purchases amounted to $
11,027,206
and $
11,688,765
, respectively, for the six month ended December 31, 2011. VAT on sales
and VAT on purchases amounted to $
10,955,557 and $10,776,688
, respectively, for the six months
ended December 31, 2010. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the
Chinese government. VAT taxes are not impacted by the income tax holiday in the PRC.
Note 14 - Notes payable
Notes payable represents arrangements
with various banks for payments to suppliers ,which are normally due within one year. However, these notes can typically be renewed
with the banks on an annual basis. As of December 31, 2011 and June 30, 2011, the Company’s notes payables consisted of the
following:
|
|
December 31,
2011
|
|
|
June 30,
2011
|
|
Weifang Bank, due from June 2011 to June 2012, 0.07% transaction fee, and restricted cash required 50% of loan amount, guaranteed by inventory pledge
|
|
$
|
-
|
|
|
$
|
4,950,400
|
|
|
|
|
|
|
|
|
|
|
Bank of China, due June 2012, 0.05% transaction fee, and restricted cash required 100% of loan amount, guaranteed by an unrelated third party
|
|
|
277,339
|
|
|
|
3,094,000
|
|
|
|
|
|
|
|
|
|
|
Loan from Shenzhen Development Bank, due from March 2011 to September 2011, 0.05% transaction fee, and restricted cash required for 100% of loan amount, and guaranteed by an unrelated third party
|
|
|
-
|
|
|
|
3,403,400
|
|
Total
|
|
$
|
277,339
|
|
|
$
|
11,447,800
|
|
Note 15 - Short term loans
Short term loans represent amounts due to various banks that
are normally due within one year. However, these loans can typically be renewed with the banks on an annual basis. As of December
31, 2011 and June 30, 2011, the Company’s short term bank loans consisted of the following:
|
|
December 31,
2011
|
|
|
June 30,
2011
|
|
Loans from Bank of China, due various dates from January 2012 to May 2012; quarterly interest only payments; interest rates ranging from 5.679% to 6.603% per annum, guaranteed by an unrelated third party, unsecured
|
|
$
|
18,245,902
|
|
|
$
|
20,094,040
|
|
|
|
|
|
|
|
|
|
|
Loans from Industrial and Commercial Bank of China, due on various dates from January 2012 to September 2012; monthly interest only payments; interest rates ranging from 6.06% to 6.9536% per annum, guaranteed by an unrelated third party and certain collateral,unsecured
|
|
|
13,693,800
|
|
|
|
10,983,700
|
|
|
|
|
|
|
|
|
|
|
Loan from Agriculture Bank of China, due from September 2012 to November 2012; monthly interest only payments; interest rates ranging from 6.56% to 7.216% per annum, guaranteed by an unrelated third party, unsecured
|
|
|
6,296,000
|
|
|
|
4,641,000
|
|
|
|
|
|
|
|
|
|
|
Loan from Qingdao Bank, due June 2012, monthly interest only payments; interest rate of 6.116% per annum, guaranteed by an unrelated third party, unsecured
|
|
|
2,361,000
|
|
|
|
3,094,000
|
|
|
|
|
|
|
|
|
|
|
Loan from Shenzhen Development Bank, due March 2012, monthly interest only payments; interest rate of 6.06% per annum, guaranteed by an unrelated third party, unsecured
|
|
|
3,462,800
|
|
|
|
3,403,400
|
|
|
|
|
|
|
|
|
|
|
Loan from China Merchants Bank, due April 2012, monthly interest only payments; interest rate ranging from 6.1% to 7.93% per annum, secured by certain properties
|
|
|
1,574,000
|
|
|
|
3,094,000
|
|
|
|
|
|
|
|
|
|
|
Loan from Zhongxin Bank, due from January 2011 to October 2011, monthly interest only payments; interest rates ranging from 6.06% to 7.0902% per annum, guaranteed by an unrelated third party, unsecured
|
|
|
-
|
|
|
|
1,237,600
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of Communications, due August 2012, monthly interest only payments; interest rates ranging from 6.56% to 7.544% per annum, guaranteed by an unrelated third party, unsecured
|
|
|
4,722,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from China Construction Bank, due from January 2012 to Febuary 2012, monthly interest only payments; interest rate ranging from 6.1% to 7.137% per annum, guaranteed by certain collateral, unsecured
|
|
|
9,444,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Minsheng Bank, due October 2012, monthly interest only payments; interest rates ranging from 6.56% to 8.528% per annum, guaranteed by an unrelated third party, unsecured
|
|
|
3,148,000
|
|
|
|
1,547,000
|
|
Total
|
|
$
|
62,947,502
|
|
|
$
|
48,094,740
|
|
Short term loan interest expenses,
net of capitalized interest amounted to $1,733,922 and $1,664,461 for the three months ended December 31, 2011 and 2010,
respectively. Short term loan interest expenses amounted to $1,743,213 and $1,674,159 for the six months ended December 31,
2011 and 2010, respectively.
Note 16 - Employee loans
From time to time, the Company borrows
monies from certain employees for cash flow purposes. These loans accrue interest at 9.6%, do not require collateral, and the principal
is due upon demand. Interest expense related to these loans were approximately $6,649 and $13,592 for the three months ended December
31, 2011 and 2010, respectively. Interest expense related to these loans were approximaetly $13,246 and $6,796 for the six
months ended December 31, 2011 and 2010, respectively.
Note 17 - Income taxes
Our effective tax rates were approximately
32.0% and 26.0% for the six months ended December 31, 2011 and 2010, respectively. Our effective tax rate was lower than the U.S.
federal statutory rate primarily due to the fact that our operations are carried out in foreign jurisdictions, which are subject
to lower income tax rates.
Note 18 - Commitments and contingent
liabilities
Guarantees
As of December 31, 2011, the Company had
guaranteed loans on behalf of three unrelated parties. The Company is obligated to perform under the guarantee if those guarantee
companies fail to pay principal and interest payments when due. The maximum potential amount of future undiscounted payments under
the guarantee is $8.29 million for those guarantee companies, including accrued interest. However, the guarantees given by the
Company have been fully secured by their CEO’s personal assets. The Company has not recorded a liability for the guarantee
because management estimates that those companies are current in their payment obligations, and the likelihood of the Company having
to make payments under the guarantee is remote.
Details of guarantee amounts to unrelated
parties as of December 31, 2011 are as follows:
|
|
Short Term
|
|
Company
|
|
Bank Loans
|
|
|
|
|
|
Yuanli Chemical Engineering Inc.
|
|
$
|
4,722,000
|
|
Qingdao Shizhan Technology Co.,Ltd
|
|
|
1,574,000
|
|
Weifang Century-Light Industry Co.,Ltd
|
|
|
1,574,000
|
|
Total
|
|
$
|
7,870,000
|
|
As of December 31, 2011, Weifang Century-Light
Industry Co.,Ltd and Yuanli Chemical Engineering Inc. guaranteed $6,610,800 and $4,722,000 for the Company, respectively.
Litigation
In the Company's ordinary course of business,
the Company may be subject to certain legal proceedings.
Note 19 - Stockholders’ equity
On November 9, 2010, the Company effected
a 1-for-2 reverse stock split of its issued and outstanding shares of Common Stock; reducing the number of its authorized shares
of Common Stock and Preferred Stock by the same reverse stock split ratio. The reverse stock split and the reduction of the
number of authorized shares of Common Stock and Preferred Stock were authorized by the stockholders of the Company at its annual
general meeting of stockholders held on October 26, 2010. As of November 12, 2010, the outstanding and issued shares were
approximately 9,584,912 shares (prior to the reverse stock split, the number outstanding was 19,169,805), before rounding
up fractional shares. The authorized number of shares of Common Stock was reduced from 100,000,000 to 50,000,000, and the
authorized number of shares of Preferred Stock was reduced from 5,000,000 to 2,500,000. These financial statements have been
adjusted retroactively to reflect the reverse stock split.
In connection with the 1-for-2 reverse
stock split, all outstanding warrants and options will have 1-for-2 reverse split with the exercise price doubled.
Warrants
On May 15, 2007, in connection with the
Share Purchase Agreement, the Company issued 2,187,500 warrants, "Investor Warrants,” which carry an exercise price
of $5.20 and a 5-year term. The Investor Warrants are callable if the Company's shares trade at or above $16.00 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. During the year ended
June 30, 2008, a total of 97,403 warrants were exercised by three stockholders.
Also in connection with the Share Purchase
Agreement, the Company issued 109,375 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 37,500 warrants to Chinamerica Fund, LLP and 12,500 warrants to Jeff Jenson, collectively,
the "Lead Investor Warrants,” to compensate Chinamerica Fund LLP as the lead investor and Jeff Jenson in assisting in
providing the shell company, West Coast Car Company. These Lead Investor Warrants have the same terms as the Investor Warrants
except that they have an exercise price of $0.02 per share. In June 2008, Jeff Jenson exercised the 12,500 warrants issued to him.
In November 2008, Chinamerica Fund, LLP exercised the 37,500 warrants issued to the fund.
All Investor Warrants, Placement Agent
Warrants and Lead Investor Warrants meet the conditions for equity classification pursuant to ASC 815 (formerly SFAS 133, "Accounting
for Derivatives") and ASC 815 (formerly 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.
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Life
|
|
Outstanding, June 30, 2010
|
|
|
2,199,473
|
|
|
|
2,199,473
|
|
|
$
|
5.20
|
|
|
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2011
|
|
|
2,199,473
|
|
|
|
2,199,473
|
|
|
|
5.20
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2011
|
|
|
2,199,473
|
|
|
|
2,199,473
|
|
|
$
|
5.20
|
|
|
|
0.72
|
|
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 awards under the Stock Incentive Plan better align the interests of its employees with those of its stockholders. 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 250,000
stock options and 80,000 non-qualified stock options pursuant to the Stock Incentive Plan. All options have an exercise price of
$6.68, which was the closing price on the date of grant, and expire five years after the date of grant. All options vest over a
period of three years on a quarterly basis from the date of grant.
The Company uses the Black-Scholes option
pricing model which was developed for use in estimating the fair value of options. Option pricing models require the input of highly
complex and subjective variables, including the expected life of options granted and the Company's expected stock price volatility
over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially
affect the estimated value of the Company's employee stock options, it is management's opinion that the Black-Scholes option valuation
model may not provide an accurate measure of the fair value of the Company's employee stock options and that value may not be indicative
of the fair value observed in a willing buyer/willing seller market transaction.
The assumptions used in calculating the
fair value of options granted in 2008 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
|
|
$
|
6.68
|
|
The volatility of the Company's common
stock was estimated by management based on the historical volatility; the risk free interest rate was based on Treasury Constant
Maturity Rates published by the U.S. Federal Reserve for periods applicable to the estimated life of the options; and the expected
dividend yield was based on the current and expected dividend policy. The fair value of the options was based on the Company's
common stock price on the date the options were granted. 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.
On June 1, 2010, the Company hired two
directors, Mr. Yaojun Liu and Mr. Fei He. In the Employment Agreements entered into on June 1, 2010 between the Company and each
director, the Company granted each director an option to purchase 40,000 shares of common stock of the Company. The shares vest
over 3 years annually starting June 1, 2010 and terminate on the third anniversary of the date of issuance of this option. The
Company valued the shares at $5.20 per share. The fair values of stock options granted to the two directors were estimated at the
date of grant amounting $ 165,611 using the Black-Scholes option-pricing model with the following assumptions:
Weighted average risk-free interest rate
|
|
|
2.79
|
%
|
|
|
|
|
|
Expected term
|
|
|
3 years
|
|
|
|
|
|
|
Expected volatility
|
|
|
133
|
%
|
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
|
|
|
Weighted average grant-date fair value per option
|
|
$
|
3.00
|
|
The stock option activity was as follows for the year ended
June 30, 2011 and six months ended December 31, 2011:
|
|
Options
outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, June 30, 2010
|
|
|
342,500
|
|
|
$
|
5.95
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
80,000
|
|
|
|
5.20
|
|
|
|
160,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(167,500
|
)
|
|
|
5.35
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2011
|
|
|
255,000
|
|
|
|
5.95
|
|
|
|
1,274,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(40,000
|
)
|
|
|
5.20
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
215,000
|
|
|
$
|
6.40
|
|
|
$
|
1,174,400
|
|
Following is a summary of the status of options outstanding
at December 31, 2011:
|
Average Exercise
Price
|
|
|
Outstanding
Options
|
|
|
Average Remaining Contractual Life
|
|
|
Average Exercise
Price
|
|
|
Exercisable
Options
|
|
|
$
|
6.40
|
|
|
|
215,000
|
|
|
|
6.47
|
|
|
$
|
6.58
|
|
|
|
188,333
|
|
Compensation expense from stock options
recognized for the three and six months ended December 31, 2011 were $0 and $0, respectively. Compensation expense from stock options
recognized for the three and six months ended December 31, 2010 were
$83,304 and $183,480
, respectively.
As of December 31, 2011, there is $18,401 estimated expense with respect to unvested stock-based awards yet to be recognized as
an expense over the employee's remaining weighted average service period.
Note 20 - Statutory reserves
The laws and regulations of the PRC require
that before a Sino-foreign cooperative joint venture enterprise distributes profits to its partners, it must first satisfy all
tax liabilities, provide for losses in previous years, and make allocations in proportions determined at the discretion of the
board of directors, after the statutory reserves. The statutory reserves include the surplus reserve fund, and the enterprise fund.
These statutory reserves represent restricted retained earnings.
Surplus reserve fund
The Company is required to transfer 10%
of its net income, as determined in accordance with the PRC’s accounting rules and regulations, to a statutory surplus reserve
fund until such reserve balance reaches 50% of the Company’s registered capital. The transfer to this reserve must be made
before distribution of any dividends to stockholders. For the three months ended December 31, 2011 and 2010, the Company transferred
$(4,824) and $457,319 to this reserve. For the six months ended December 31, 2011 and 2010, the Company transferred $115,341 and
$457,319 to this reserve. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous
years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to
existing stockholders 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.
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 December
31, 2011 the Company had appropriated to the statutory reserve approximately $4,200,000.
Enterprise fund
The enterprise fund may be used to acquire
fixed assets or to increase the working capital to expand production and operations of the Company. No minimum contribution is
required and the Company has not made any contribution to this fund as of December 31, 2011.
Note 21 - Retirement benefit plans
Regulations in the PRC require the Company
to contribute to a defined contribution retirement plan for the benefit of all permanent employees. The Company is required to
make contributions to the state retirement plan at 15% to 20% of the monthly base salaries of all current permanent employees.
The PRC government is responsible for the administration and benefit liability to retired employees. For the three months ended
December 31, 2011 and 2010, the Company made contributions in the amounts of $131,059 and $30,343, respectively, to the Company’s
retirement plan. For the six months ended December 31, 2011 and 2010, the Company made contributions in the amounts of
$272,431 and $169,006, respectively, to the Company’s retirement plan.
Note 22 - Related party transactions
The Company’s utilities (electricity
and steam) are mostly provided by Changle Shengshi. As of December 31, 2011 and June 30, 2011, the Company’s accounts payable
due to Changle Shengshi was $340,485 and $943,779, respectively, which related to a portion of the Company’s utilities being
provided by Changle Shengshi. The Company’s transaction amounts with Changle Shengshi amounted to approximately $3,832,857
and $
3,518,879
for the three months ended December 31, 2011 and 2010, respectively. The Company’s
transaction amounts with Changle Shengshi amounted to approximately $7,267,830 and $
7,170,278
for the six months ended December 31, 2011 and 2010, respectively.
From time to time, the Company borrows
monies from Qingtai Liu, the Company’s CEO and President, for cash flow purposes of the Company. The loans do not require
collateral and the principal is due upon demand. Before January 1, 2009, the interest rate was at 7.2% for the first six months,
and then 10.8% thereafter until the full principal amounts are paid by the Company. After January 1, 2009, the interest rate was
changed to 7.2% for the loan period. Employee loan from officer amounted to $36,831 and $36,285 as of December 31, 2011 and June
30, 2011, respectively. Interest expense related to this loan was approximately $650 and $0 for the three months ended December
31, 2011 and 2010, respectively. Interest expense related to this loan was approximately $1,300 and $0 for the six months ended
December 31, 2011 and 2010, respectively.
As of December 31, 2011, the other receivables
includes Company's advances of $5,430,300 to its purchasing department employees as purchase advances for corn purchases. This
amount is secured by the personal assets of CEO as per guarantee extended by him.
Note 23 - Subsequent events
In January 2012, the Company obtained
a short term loan of $3,935,000 from China Construction Bank, due April 2012; monthly interest only payments; interest rates of
6.71% per annum, guaranteed by certain collateral, and unsecured.
In January 2012, the Company obtained
a short term loan of $2,848,940 from Bank of China, due January 2013; quarterly interest only payments; interest rates of 6.888%
per annum, guaranteed by certain collateral, and unsecured.
In January 2012, the Company obtained
a short term loan of $1,574,000 from Bank of China, due January 2013; quarterly interest only payments; interest rates of 6.888%
per annum, guaranteed by certain collateral, and unsecured.
In February 2012, the Company obtained
a short loan of $944,400 from Industrial and Commercial Bank of China, due November 2012; monthly interest only payments; interest
rates of 7.216% per annum, guaranteed by certain collateral, and unsecured.
In February 2012, the Company obtained
a short loan of $944,400 from Industrial and Commercial Bank of China, due November 2012; monthly interest only payments; interest
rates of 7.216% per annum, guaranteed by certain collateral, and unsecured.
In January 2012, the Company has paid
back $1,888,800 short term loan from Industrial and Commercial Bank of China.
In January 2012, the Company has paid
back $1,574,000 short term loan from Bank of China.
In January 2012, the Company has paid
back $2,848,940 short term loan from Bank of China.
In January 2012, the Company has paid
back $1,574,000 short term loan form China Construction Bank.
In February 2012, the Company has paid
bach $3,746,434 short term loan from China Construction Bank.
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 financial condition and results of operations of Shengtai Pharmaceutical, Inc., the ("Company”) and should be
read in conjunction with the Company’s 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
the Company’s future expectations, contain projections of the Company’s future results of operation or financial condition
or state other “forward-looking" information. The Company believes that it is important to communicate its future expectations
to its investors. However, there may be events in the future that the Company is 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
the Company’s actual results to differ materially from the expectations the Company describes in its 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 the Company’s
business, operating results and financial condition. Actual results may differ materially from current expectations.
Overview
We are, through our wholly owned subsidiary,
Shengtai Holding Inc., and its wholly owned subsidiary in the People's Republic of China, the ("PRC”), WeifangShengtai
Pharmaceutical Co., Ltd. (“WeifangShengtai”), a leading manufacturer and supplier of pharmaceutical grade glucose in
the PRC. We believe that we are a market leader and preferred domestic supplier of pharmaceutical grade glucose. We estimate that
we have about over 30% market share in Mainland China. We also manufacture glucose, cornstarch and other products for the food
and beverage industry.
The Company’s cornstarch production
facility has a maximum capacity of 400,000 tons per year. The facility allows us to use self-produced cornstarch to
produce glucose and to be able to ensure the adequacy and quality of the cornstarch we use. Since cornstarch is produced on our
premises, we are able to eliminate costs to ship the cornstarch to our glucose production facility, thus resulting in lower manufacturing
costs.
We have been improving dextrose anhydrous
and animal feeds production lines and building an additional warehouse to store purchased corn. The warehouse was completed
in October 2011 and can be used to store an additional 14,000 tons of corn. As a result, we have successfully expanded our corn
storage from 36,000 tons to 50,000 tons from October 2010 to October 2011. Because corn prices have been increasing since 2009,
the expansion of our warehousing capacity will allow us to store more corn and better control the cost of production.
During the six months ended December 31,
2011, we used
internally 77,001 metric tons of corn starch to satisfy our own glucose production
needs. The excess cornstarch was or will be sold to outside customers in the pharmaceutical, food and beverage and other industries.
Cornstarch sales amounted to $21.53 million and accounted for 25.94% of our
total net sales for the six months ended December
31, 2011. Our business may be severely affected by movements in the commodity markets. Corn is the principal raw material for our
cornstarch and the price of cornstarch as a commodity tends to follow the price of corn. Beginning September 2008, corn prices
began decreasing due to large corn harvests. However, by July 2009, corn prices began to increase. This trend continued into
fiscal year 2012. Corn prices for the twelve months ended December 31, 2011 were approximately 13.21% higher than the same period
in 2010. Corn prices for the six months ended December 31, 2011 were approximately 17.14% higher than for the same period in 2010.
While it is hard to accurately predict the trend of corn prices, we remain focused on improving our pricing ability and maintaining
a stable profit.
The Chinese government has been improving
its effort in controlling corn prices. We believe that these government efforts will continue to have mixed effects on our operations.
Stable corn prices will help maintain the availability of raw materials and tend to stabilize our gross profit margin over time,
although market and economic conditions may have negative effects on our operations.
During the six months ended December 31,
2011, we sold a total of 67,234 metric tons of glucose, and our sales of pharmaceutical grade glucose and other glucose
products were $39.10 million, or 47.12%of our net sales. During the three months ended December 31, 2011, we sold a total
of 36,492 metric tons of glucose, and our sales of pharmaceutical grade glucose and other glucose products were $21.24 million,
or 49.48% of our net sales.
In addition to our pharmaceutical glucose
and cornstarch products, we also produce other products such as dextrin, corn embryo, fibers, and protein power, which are
used for pharmaceutical, food and beverages, and other production purposes. The net sales generated from these products
were $11.74 and $22.36 million, and constituted approximately 27.34% and 26.94% of our total net sales for the three and six months
ended December 31, 2011,respectively.
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 emphasize (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 utilization.
We have a three-tier quality control system
and a well-equipped quality inspection center to ensure timely detection and reprocessing of non-conforming products.
Our glucose production facility passed
GMP inspection and our facilities and many of our products are fully certified for GMP, ISO9001,ISO22000 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 the Tibet Autonomous Region.
For the six months ended
December 31, 2011, we exported products to around 43 countries, with the Netherlands, Korea and Thailand, being the
leading purchasers. For the six months ended December 31, 2011, our international sales comprised approximately 18.19% of our
total net sales. During the same period in 2010, our international sales comprised approximately 16.96% of our total
net sales. For the three months ended December 31, 2011, our international sales comprised approximately 17.50% of our total
net sales. During the same period in 2010, our international sales comprised approximately 16.74% of our total net
sales. Glucose, cornstarch, and other products occupies 50.09%, 0.00%, and 49.91% of the total exporting sales for the three
months ended December 31, 2011, respectively. Glucose, cornstarch, and other products occupies 41.95%, 0.24%, and 57.81% of
the total exporting sales for the six months ended December 31, 2011, respectively. Glucose, cornstarch, and other
products occupies 75.58%, 0.19%, and 24.23% of the total exporting sales for the three months ended December 31, 2010,
respectively. Glucose, cornstarch, and other products occupies 71.88%, 0.11%, and 28.01% of the total exporting sales for the
six months ended December 31, 2010, respectively.
Our target customers 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 major customers. We believe that
a broader market for our products can increase demand for our products, reduce our vulnerability to market changes and provide
additional areas of growth in the future. For the six months ended December 31, 2011, our top ten customers accounted for 35.29%
of our total net sales.For the three months ended December 31, 2011, our top ten customers accounted for 36.26% of our total net
sales.
Below is list of customers who account
for more than 5% of our net sales.
Six months ended December 31, 2011
|
|
|
|
|
|
|
Customer Name
|
|
Accounts Receivable
(Advance from customer)
|
|
|
Sales
|
|
|
% Of Total
Sales
|
|
K.F.P
|
|
|
|
(7,619
|
)
|
|
|
4,425,257
|
|
|
|
5.33
|
%
|
Three months ended December 31, 2011
|
|
|
|
|
|
|
Customer Name
|
|
Accounts Receivable
(Advance From Customer)
|
|
|
Sales
|
|
|
% Of Total
Sales
|
|
K.F.P
|
|
|
(7,619
|
)
|
|
|
2,170,367
|
|
|
|
5.06
|
%
|
Shandong Sanxing Corn Industry technolodyCo.,Ltd
|
|
|
|
611
|
|
|
|
2,176,890
|
|
|
|
5.07
|
%
|
Results of Operations
Three Months Ended December 31, 2011
Compared with Three Months Ended December 31, 2010
The following table shows our operating
results for the three months ended December 31, 2011 and 2010:
|
|
Three months
Ended
December 31,
2011
|
|
|
Three months
Ended
December 31,
2010
|
|
Net Sales
|
|
$
|
42,933,425
|
|
|
$
|
49,044,856
|
|
Cost of Sales
|
|
|
38,892,394
|
|
|
|
43,145,306
|
|
Gross Profit
|
|
|
4,041,031
|
|
|
|
5,899,550
|
|
Selling, General and Administrative Expenses
|
|
|
3,026,462
|
|
|
|
2,103,390
|
|
Income From Operations
|
|
|
1,014,569
|
|
|
|
3,796,160
|
|
Other Income (Expense), Net
|
|
|
(1,063,552
|
)
|
|
|
(252,751
|
)
|
Income Before Provision For Income Taxes
|
|
|
(48,983
|
)
|
|
|
3,543,409
|
|
Provision For Income Taxes
|
|
|
16,079
|
|
|
|
846,940
|
|
Net Income
|
|
$
|
(65,062
|
)
|
|
$
|
2,696,468
|
|
The following table shows the breakdown
of production and sales by product categories, and between self-use by WeifangShengtai and the sales of cornstarch to third parties,
for the three months ended December 31, 2011 and 2010:
Products
|
|
Metric Tons
Three months
ended
December 31, 2011
|
|
|
Metric Tons
Three months
ended
December 31, 2010
|
|
|
Net Sales (%)
Three months
ended
December 31, 2011
|
|
|
Net Sales (%)
Three months
ended
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glucose–Sales
|
|
|
36,492
|
|
|
|
40,811
|
|
|
$
|
21,243,370(49.48
|
)%
|
|
$
|
20,252,164 (41.29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch-Self use
|
|
|
40,233(63.42
|
)%
|
|
|
35,854(45.01
|
)%
|
|
|
|
|
|
|
|
|
Cornstarch-Sales
|
|
|
23,207(36.58
|
)%
|
|
|
43,809(54.99
|
)%
|
|
$
|
9,951,313(23.18
|
)%
|
|
$
|
16,205,781 (33.04
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cornstarch
|
|
|
63,440(100
|
)%
|
|
|
79,663(100
|
)%
|
|
|
|
|
|
|
|
|
Other Sales
|
|
|
31,083
|
|
|
|
36,835
|
|
|
$
|
11,738,741(27.34
|
)%
|
|
$
|
12,586,911 (25.67
|
)%
|
Total Sales
|
|
|
|
|
|
|
|
|
|
$
|
42,933,425(100
|
)%
|
|
$
|
49,044,856(100
|
)%
|
Net sales for the three months ended December
31, 2011 were $
42,933,425,
a decrease of $
6,111,431
or 12.46%,
compared with the same period in 2010. The decrease in net sales primarily resulted from
decreased sales
quantities for the three months ended December 31, 2011, compared to the same period last year.
For the three months ended
December 31, 2011 compared to the same period last year, the quantity of our glucose products sold decreased about
10.58%,
while the average unit selling price of our glucose products increased about 11.91%. For
the three months ended December
31, 2011 compared to the same period last year, the quantity of our cornstarch products sold decreased about
47.03%,
while the average unit selling price of our cornstarch products increased about 10.45
%. For the three months ended
December 31, 2011 compared to the same period last year, the quantity of our other products sold decreased
about
15.62%, while the average unit selling price of our other products increased about 5.44
%. The increased unit selling prices
are caused by the increased raw material cost during the quarter ended December 31, 2011 compared to the same period last year.
The sales quantity decreased mainly because the Company tried to maintain a certain gross profit while the corn prices increased.
Net sales from
exports for the three months ended December 31, 2011 decreased approximately 8.48
% compared with the same period in 2010.
The
decrease is mainly attributable to the decreased sales quantities offset by the increased unit sales
ended December 31, 2011 compared to the same period last year. The increased unit price is related to the increased corn prices.
The sales quantity decreased mainly because the Company tried to maintain a certain gross profit while the corn prices increased.
Cost of sales for the three months ended
December 31, 2011 was $
38,892,394,
an decrease of $
4,252,912
or 9.86%, compared with the same period in 2010. The decrease in cost of sales was mainly due to the decrease of sales offset by
the increase in the price of corn, our main raw material.
Gross profit for the three months ended
December 31, 2011 was $
4,041,031,
a decrease of $
1,858,519
or
31.50%, compared with the same period in 2010. The decrease of gross profit is mainly because the unit selling prices of our products
did not increase as fast as the corn prices. Gross profit margin for the three months ended December 31, 2011 was 9.41%, a decrease
from 12.03% for the same period in 2010. The reason for the decrease of gross profit margin is mainly because the price of corn,
our main raw material, increased approximately 17.71% for the three months ended December 31, 2011 compared to the same period
last year whereas the average selling prices did not increase as much. The Company believes that the market is taking its time
to respond to the increased corn prices and will reach a more profitable price level in the near future. At the same time, the
Company believes that the Company’s actions to improve gross profit margin, such as expanding raw material storage facilities
to reduce the impact of fluctuation on the price of our raw materials, will benefit us in maintaining our profitability.
For the three months ended December 31,
2011, selling, general and administrative expenses were $
3,026,462,
an increase of $
923,072
or 43.88%, compared to $
2,103,390
for the three months ended December 31, 2010. The selling,
general, and administrative expenses increased mainly due to increased shipping expenses caused by increased gas prices. The Company
incurred
$0 and $83,304 non-cash stock option expenses for the three months ended December 31,2011 and
2010, respectively. The option expenses are included in selling, general and administrative expenses
.
Net loss(income) for the three months
ended December 31, 2011 was
$(65,062), a decrease of $2,761,530, compared with $2,696,468 for the same
period in 2010
. The decrease in net income was primarily attributable to the decreased gross profit and increased selling,
general, and administrative expenses.
Six Months Ended December 31, 2011
Compared with Six Months Ended December 31, 2010
The following table shows our operating
results for the six months ended December 31, 2011 and 2010:
|
|
Six months
Ended
December 31,
2011
|
|
|
Six months
Ended
December 31,
2010
|
|
Net Sales
|
|
$
|
82,988,873
|
|
|
$
|
83,689,428
|
|
Cost of Sales
|
|
|
75,562,795
|
|
|
|
71,770,521
|
|
Gross Profit
|
|
|
7,426,078
|
|
|
|
11,918,907
|
|
Selling, General and Administrative Expenses
|
|
|
5,179,077
|
|
|
|
4,683,194
|
|
Income From Operations
|
|
|
2,247,001
|
|
|
|
7,235,713
|
|
Other Income (Expense), Net
|
|
|
(1,044,038
|
)
|
|
|
(1,371,764
|
)
|
Income Before Provision For Income Taxes
|
|
|
1,202,963
|
|
|
|
5,863,949
|
|
Provision For Income Taxes
|
|
|
384,468
|
|
|
|
1,524,397
|
|
Net Income
|
|
$
|
818,495
|
|
|
$
|
4,339,552
|
|
The following table shows the breakdown
of production and sales by product categories, and between self-use by WeifangShengtai and the sales of cornstarch to third parties,
for the six months ended December 31, 2011 and 2010:
Products
|
|
Metric Tons
Six months ended
December 31,
2011
|
|
|
Metric Tons
Six months ended
December 31,
2010
|
|
|
Net Sales (%)
Six months ended
December 31,
2011
|
|
|
Net Sales (%)
Six months ended
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glucose–Sales
|
|
|
67,234
|
|
|
|
72,323
|
|
|
$
|
39,102,593(47.12
|
)%
|
|
$
|
34,837,156 (41.63
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cornstarch-Self use
|
|
|
77,001(60.35
|
)%
|
|
|
73,734(48.85
|
)%
|
|
|
|
|
|
|
|
|
Cornstarch-Sales
|
|
|
50,591(39.65
|
)%
|
|
|
77,202(51.15
|
)%
|
|
$
|
21,526,673(25.94
|
)%
|
|
$
|
28,170,845 (33.66
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cornstarch
|
|
|
127,592(100
|
)%
|
|
|
150,936 (100
|
)%
|
|
|
|
|
|
|
|
Other Sales
|
|
|
67,234
|
|
|
|
63,703
|
|
|
$
|
22,359,606(26.94
|
)%
|
|
$
|
20,681,427 (24.71
|
)%
|
Total Sales
|
|
|
|
|
|
|
|
|
|
$
|
82,988,873(100
|
)%
|
|
$
|
83,689,428 (100
|
)%
|
Net sales for the six months ended December
31, 2011 were $
82,988,873
, a decrease of $
700,555
or 0.84%,
compared with the same period in 2010. The decrease in net sales primarily resulted from decreased sales quantities for the six
months ended December 31, 2011, compared to the same period last year. For the six months ended December 31, 2011 compared to the
same period last year, the quantity of our glucose products sold decreased about
7.04%, while the average
unit selling price of our glucose products increased about 14.86%. F
or the six months ended December 31, 2011 compared to
the same period last year, the quantity of our cornstarch products sold decreased about 34.47%, while the average unit selling
price of our cornstarch products increased about 10.93%. For the six months ended December 31, 2011 compared to the same period
last year, the quantity of our other products sold decreased about 8.12%, while the average unit selling price of our other products
increased about 12.00%. The increased unit selling prices are caused by the increased raw material cost during the quarter ended
December 31, 2011 compared to the same period last year. The sales quantity was affected mainly because the Company tried to maintain
a certain gross profit while the corn prices increased.
Net sales from exports for the six months
ended December 31, 2011 increased approximately 6.39% compared with the same period in 2010. The increase is mainly attributable
to the increased unit sales prices due to increased corn prices for the six months ended December 31, 2011 compared to the same
period last year.
Cost of sales for the six months ended
December 31, 2011 was $
75,562,795
an increase of $
3,792,274
,
or 5.28%, compared with the same period in 2010. The increase in cost of sales was mainly due to increase in the price of corn,
our main raw material.
Gross profit for the six months ended
December 31, 2011 was $
7,426,078,
a decrease of $
4,492,829
or 37.69%, compared with the same period in 2010. The decrease of gross profit is mainly because the unit selling prices of our
products did not increase as fast as the corn prices. Gross profit margin for the six months ended December 31, 2011 was 8.95%,
a decrease from 14.24% for the same period in 2010. The reason for the decrease of gross profit margin is mainly because the price
of corn, our main raw material, increased approximately 17.14% for the six months ended December 31, 2011 compared to the same
period last year where the average selling prices did not increase much. The Company believes that the market is taking its time
to respond to the increased corn prices and will reach a more profitable price level in the near future. At the same time, the
Company believes that the Company’s actions to improve gross profit margin, such as expanding raw material storage facilities
to reduce the impact of fluctuation on the price of our raw materials, will benefit us in maintaining our profitability.
For the six months ended December 31,
2011, selling, general and administrative expenses were $5,179,077, an increase of $
495,
883
or 10.59%, compared to $
4,683,194
for the six months ended December 31, 2010. The
selling, general, and administrative expenses increased mainly due to increased selling and general and administrative expenses
caused by increased inventory loss. The Company incurred $0 and $183,480 non-cash stock option expenses for the six months ended
December 31, 2011 and 2010, respectively. The option expenses are included in selling, general and administrative expenses.
Net income for the six months ended December
31, 2011 was $
818,495,
a decrease of $
3,521,057,
compared with
$
4,339,552
for the same period in 2010. The decrease in net income was primarily attributable
to the decreased gross profit.
Liquidity and Capital Resources
Operating Activities
Net cash used in operating activities
for the six months ended December 31, 2011 was $
9,539,722
, an increase of 286.31%, or $14,659,937,
compared with $
5,120,215
provided by operating activities for the same period in 2010. The reasons
for increased cash used in operating activities include less net income generated due to decreased gross profit caused by increased
corn prices, more fulfillment for customer deposit, and more payments made to accounts payable, offset by more advances to employees
for corn purchases to lock in lower corn prices, more accounts receivable collection, and storage of more corns.
Investing Activities
Net cash provided by investing activities
for the six months ended December 31, 2011 was $6,051, an increase of 100.10%, or $6,085,017, compared with $
6,078,966
used in investing activities for the same period in 2010. The increase is due to less investment in progressing construction
and an increase in equity investment during the six months ended December 31, 2011 compared to the same period last year.
Financing Activities
Net cash provided by financing activities
for the six months ended December 31, 2011 was $9,782,506, an increase of 240.57%, or $6,910,082, compared with $
2,872,424
provided by financing activities for the same period in 2010. The increase is due to more borrowing from short term
loans during the six months ended December 31, 2011 compared to the same period last year.
Loans
Other than the equity financing in 2008,
our PRC operating subsidiary, WeifangShengtai financed its operations and capital expenditure requirements primarily through bank
loans and operating income. WeifangShengtai had a total of
$62,947,502 and $48,094,740 short term bank
loans outstanding as of December 31, 2011 and June 30, 2011, respectively. The loans were secured by WeifangShengtai’s
properties and accounts receivable. The terms of all these short term loans were all for one year. WeifangShengtai has never defaulted
on any loans. In addition, Weifang Shengtai had $277,339 and $11,447,800 in sho
rt-term notes due to the banks
as of December 31, 2011 and June 30, 2011, respectively. These notes were due within one year and secured by 50% to 100%
of the loan amount in restricted cash. Some were guaranteed by unrelated third parties.
WeifangShengtai does not have any long
term loans from local banks. The outstanding long-term loans, or the non-current portion of payables, and the non-current portion
of capital lease obligation, which can be classified as long term liabilities, were
$0 and
$0,
as of December 31, 2011 and June 30, 2011, respectively.
Guarantees
We have guaranteed certain borrowings
of other unrelated third parties including short term bank loans, lines of credit and bank notes. The total guaranteed amounts
were
$7,870,000, and $7,735,000 as of December 31, 2011 and June 30, 2011. Some unrelated third parties
have guaranteed approximately $11,332,800 and $11,138,400 of our debt, as of December 31, 2011 and June 30, 2011, respectively.
Future Cash Commitments and Needs
The Company estimates the need for capital
to run new production facilities. The exact amount will be determined based on both the market demand for the Company’s products
and the time needed for these facilities to run at full capacity. The Company will carefully review its financial condition and
consider financing with internally generated cash, bank loans or additional equity. The Company expects that its proceeds
from operating cash flows and its cash balances, together with amounts available under its loans, will be sufficient to meet its
anticipated liquidity needs for the next twelve months.
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 incorporated by reference herein. The following reflects 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 six 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
In the normal course of business, the
Company extends credit to its customers without requiring collateral or other security interests. Management reviews its accounts
receivable at each reporting period to provide for an allowance against accounts receivable for an amount that could become uncollectible.
This review process may involve the identification of payment problems with specific customers. The Company estimates this allowance
based on the aging of the accounts receivable, historical collection experience, and other relevant factors, such as changes in
the economy and the imposition of regulatory requirements that can have an impact on the industry. These factors continuously change,
and can have an impact on collections and the Company’s estimation process. These impacts may be material.
Certain accounts receivable amounts are
charged off against allowances after designated periods of collection. Subsequent cash recoveries are recognized as income in the
period when they occur.
Property and equipment
Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using the straight-line method, with a 3% residual value, over the estimated
useful lives of the assets.
Foreign currency translation
Our functional currency is Renminbi,(“RMB”)
Foreign currency transactions are translated at the applicable rates of exchange in effect at the transaction dates. Monetary assets
and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange
in effect at that date. Revenues and expenses are translated at the average exchange rates in effect during the reporting period.
Translation adjustments arising from the
use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated
Other Comprehensive Income.” Gains and losses resulting from foreign currency translations are included in Accumulated Other
Comprehensive Income.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued guidance
on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity
determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify
potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any).
If an entity determines that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment
test is not required. The new guidance will be effective for us beginning July 1, 2012.
In June 2011, the FASB issued guidance
on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and
its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement
of net income and other comprehensive income or in two separate but consecutive statements. The new guidance will be effective
for us beginning July 1, 2012 and will have financial statement presentation changes only.
In May 2011, the FASB issued guidance
to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use
measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty
credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally,
the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and
assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable
inputs. The new guidance will be effective for us beginning January 1, 2012. Other than requiring additional disclosures, we do
not anticipate material impacts on our financial statements upon adoption.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Mr. Qingtai Liu, the
Company’s Chief Executive Officer, and Mr. Yongqiang Wang, the Company’s current financial controller, have
evaluated the effectiveness of the design and operation of the Company’s 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 Quarterly Report on Form
10-Q (“Report”). Based on that evaluation which, among other things, identified personnel turnover in
the areas concerned, mainly referring to our chief financial officer’s resignations during the last two years,
the Company’s officers concluded that disclosure controls and procedures were not effective and were not adequately
designed to ensure that the information required to be disclosed by the Company in the reports the Company submits 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 the Company’s Chief Executive Officer and Chief
Financial Officer in a manner that allowed for timely decisions regarding required disclosure.
Notwithstanding the existence of such
material weakness in our internal controls over financial reporting, our management, including our Chief Executive Officer, believes
that the financial statements included in this Report fairly present in all material respects our financial condition, results
of operations and cash flows for the periods presented.
Management is committed to remediating
the material weakness as quickly as possible. Additionally, and in recognition of immediate financial reporting needs, the Company
intends to implement additional controls and procedures during the current fiscal year to continue to ensure timely and accurate
financial reporting objectives. Such additional controls and procedures may include: the retention of a U.S. based CPA as Chief
Financial Officer with U.S. GAAP experience and appropriate knowledge of internal controls over financial reporting, for purposes
of appropriate oversight of the financial reporting process and continued training of the accounting staff; recruitment of additional
personnel with relevant U.S. GAAP experience to enhance our financial reporting and internal control function; and retention of
the services of a consultant for advisory services with respect to SOX 404 compliance.
Changes in Internal Control over
Financial Reporting
During the quarter ended December 31,
2011, there has been no material change in internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect the Company’s 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company becomes
involved in various lawsuits and legal proceedings that arise in the ordinary course of business. While the ultimate outcome of
these lawsuits and legal proceedings cannot be determined at this time, it is the opinion of management that the resolution of
these actions will not have a material adverse effect on the Company’s financial condition, results of operations or cash
flows.
Item 1A. Risk Factors.
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits.
Exhibit No.
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Title of Document
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|
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31.1
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Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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|
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31.2
|
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
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32.1
|
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
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32.2
|
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
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101.INS
|
XBRL Instance Document*
|
|
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101.SCH
|
XBRL Taxonomy Extension Schema*
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase*
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase*
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase*
|
|
|
101.PRE
|
XBRL Extension Presentation Linkbase*
|
*
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The Exhibits attached to this Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 14, 2012
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SHENGTAI PHARMACEUTICAL, INC.
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By:
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/s/ Qingtai Liu
|
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Qingtai Liu
|
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Chief Executive Officer
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(Principal Executive Officer)
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By:
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s/ Yongqiang Wang
|
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Yongqiang Wang
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Financial Controller
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(Principal Financial Officer)
|
|
Shengtai Pharmaceutical (GM) (USOTC:SGTI)
과거 데이터 주식 차트
부터 8월(8) 2024 으로 9월(9) 2024
Shengtai Pharmaceutical (GM) (USOTC:SGTI)
과거 데이터 주식 차트
부터 9월(9) 2023 으로 9월(9) 2024