SGTI Shengtai Pharmaceutical Inc (GM)

 

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 September 30, 2012

 

¨	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 November 14, 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.	27
	Item 4.  Controls and Procedures.	27
PART II.	Other Information
	Item 1.  Legal Proceedings.	28
	Item 1A. Risk Factors.	28
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.	28
	Item 3.  Defaults Upon Senior Securities.	28
	Item 4.  Mine Safety Disclosures.	28
	Item 5.  Other Information.	28
	Item 6.  Exhibits.	28

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

 

		September 30,				June 30,
		2012				2012
ASSETS
CURRENT ASSETS:
Cash & cash equivalents		$	9,487,764			$	4,903,303
Restricted cash			7,010,195				13,084,586
Accounts receivable, net of allowance for doubtful accounts of $1,989,045 and $1,603,051,respectively			9,887,273				12,099,625
Notes receivable			4,243,459				4,590,758
Other receivables			5,918,337				8,862,789
Inventories			32,083,824				29,457,981
Prepayments and other assets			1,986,828				1,023,154
Total current assets			70,617,681				74,022,195
PLANT AND EQUIPMENT, net			78,494,877				80,185,228
CONSTRUCTION IN PROGRESS			3,409,340				1,213,540
EQUITY INVESTMENT			11,972,328				11,704,050
ADVANCE FOR CONSTRUCTION			1,483,711				2,188,892
INTANGIBLE ASSETS, NET			3,259,903				3,271,147
Total assets		$	169,237,841			$	172,585,052
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	7,858,443			$	5,432,615
Accounts payable and accrued liabilities - related party			980,243				405,926
Notes payable - banks			8,590,848				17,835,706
Short term bank loans			75,540,520				73,483,997
Accrued liabilities			542,819				479,593
Other payable			1,318,385				1,672,805
Employee loans			292,926				295,076
Other payable - officer			36,965				37,027
Customer deposit			10,512,128				9,610,252
Taxes payable			1,154,607				997,529
Total current liabilities			106,827,885				110,250,526
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 2,500,000 shares authorized, no shares issued and outstanding as of September 30, 2012 and June 30, 2012			-				-
Common stock, $0.001 par value, 50,000,000 shares authorized, 9,584,912 shares issued and outstanding as of September 30, 2012 and June 30, 2012			9,585				9,585
Additional paid-in capital			21,945,101				21,945,101
Statutory reserves			4,257,449				4,226,125
Retained earnings			27,229,069				27,064,092
Accumulated other comprehensive income			8,968,752				9,089,623
Total stockholders' equity			62,409,956				62,334,526
Total liabilities and stockholders' equity		$	169,237,841			$	172,585,052

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

Unaudited

 

		THREE MONTHS ENDED SEPTEMBER 30
		2012				2011
NET SALES		$	48,744,643			$	40,055,448
COST OF SALES			43,686,665				36,670,401
GROSS PROFIT			5,057,978				3,385,047
SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES			3,289,698				2,152,615
INCOME FROM OPERATIONS			1,768,280				1,232,432
OTHER INCOME (EXPENSE) :
Earnings on equity investment			239,009				273,914
Non-operating income			2,991				591,467
Non-operating expense			(160,787	)			(7,481	)
Interest expense and other charges			(1,681,995	)			(843,111	)
Interest income			125,128				4,726
Other income (expense) , net			(1,475,654	)			19,514
INCOME BEFORE PROVISION FOR INCOME TAXES			292,626				1,251,946
PROVISION FOR INCOME TAXES			96,326				368,389
NET INCOME			196,301				883,557
OTHER COMPREHENSIVE ITEMS:
Foreign currency translation adjustments			(120,872	)			473,875
COMPREHENSIVE INCOME			75,429				1,357,432
EARNINGS PER SHARE
Basic and diluted		$	0.02			$	0.09
WEIGHTED AVERAGE NUMBER OF SHARES
Basic and diluted			9,584,912				9,584,912

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

		THREE MONTHS ENDED SEPTEMBER 30
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	196,301			$	883,557
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation			2,272,344				1,896,910
Amortization			15,260				14,689
Bad debt (reduction) provision			389,134				(371,317	)
Share based compensation to employees			-				6,900
Earnings on equity investment			(239,009	)			(273,914	)
Change in operating assets and liabilities:
Accounts receivable			1,800,161				1,088,222
Notes receivable			338,489				(4,076,734	)
Other receivables			2,927,509				(5,395,534	)
Inventories			(2,803,715	)			(587,134	)
Prepayments and other assets			(965,770	)			1,635,692
Accounts payable and accrued liabilities			(351,711	)			(5,993,088	)
Accounts payable and accrued liabilities - related party			562,960				(586,610	)
Other payable			(351,258	)			(719,296	)
Customer deposit			920,524				(1,283,359	)
Taxes payable			159,023				(385,814	)
Net cash provided by (used in) operating activities			4,870,243				(14,146,831	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in equity investment			-				(1,249,440	)
Purchase of plant and equipment			(1,079	)			(1,076	)
Additions to construction in progress			(0	)			(6,054	)
Increase in land use right			(10,323	)			(2,476	)
Advances for construction			701,048				(13,732	)
Loan to related party - non-current			-				-
Net cash provided by (used in) investing activities			689,646				(1,272,779	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash			6,074,390				-
Borrowings on notes payable - banks			5,635,740				-
Principal payments on notes payable - banks			(14,847,369	)			-
Borrowings on short term loans			29,705,345				18,116,880
Principal payments on short term loans			(27,506,837	)			(3,201,690	)
Borrowings on employee loans			-				31,236
Principal payments on employee loans			(1,581	)			-
Net cash (used in) provided by financing activities			(940,312	)			14,946,426
EFFECTS OF EXCHANGE RATE CHANGE IN CASH			(35,116	)			39,147
INCREASE (DECREASE) IN CASH & CASH EQUIVELENTS			4,584,461				(434,036	)
CASH & CASH EQUIVALENTS, beginning of year			4,903,303				4,051,349
CASH & CASH EQUIVALENTS, end of year		$	9,487,764			$	3,617,312
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest Paid		$	1,433,176			$	783,614
Income taxes		$	1,070			$	404,936
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Decrease of other receivable for acquisition of plant and equipment		$	221			$	20,569
Transfers of construction in progress-related inventory to plant and equipment		$	114,073			$	61,400
Acquisition of plant and equipment on credit		$	2,782,286			$	779,368
Completion of construction-in-progress (transferred to plant and equipment)		$	733,283			$	73,204

 

The accompanying notes are an integral part of these unaudited condensed 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 2012 Form 10-K filed on September 28, 2012 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.

 

Note 3 – Earnings per share

 

Basic earnings per share is 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 per share consisted of the following:

 

		Three months ended September 30,
		2012				2011
Net income for earnings per share		$	196,301			$	883,557
Weighted average shares used in basic and diluted computation			9,584,912				9,584,912
Earnings per share, basic and diluted:		$	0.02			$	0.09

    

The Company’s warrants and stock options were not included in the calculation of diluted earnings per share for the three months ended September 30, 2012 and 2011 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 September 30, 2012 and June 30, 2012, the Company’s bank balances with the banks and cash in hand in PRC amounted to $16,486,679 and $17,987,762, respectively, which are uninsured and subject to credit risk. The Company has not experienced nonperformance by these institutions.

 

 

For the three months ended September 30, 2012 and 2011, there were no customers that individually comprised 10% or more of the Company’s total revenues.

 

The Company has one vendor, Changle Shengshi Redian Co.,Ltd. that individually comprised 10.96% or $5,336,545 of the Company’s total purchase for the three months ended September 30, 2012. The Company has one vendor, Dezhou No.5 Grain and Cooking Oil Warehouse that individually comprised 33.06% or $11,516,774 of the Company’s total purchase for the three months ended September 30, 2011.

 

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
		September 30
		2012				2011
Revenue
China		$	40,088,318			$	32,471,895
International			8,656,325				7,583,553
Total		$	48,744,643			$	40,055,448

   

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 $7,010,195 and $13,084,586 as of September 30, 2012 and June 30, 2012, respectively.

   

Note 6 - Other receivables

 

Other receivables include receivables from unrelated parties for transactions other than sales. Other receivables amounted to $5,918,337 and $8,862,789 as of September 30, 2012 and June 30, 2012, respectively.

 

The other receivables include Company's advances to employees of $4,220,343 and $8,029,394 to purchase corn as of September 30, 2012 and June 30, 2012, 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 the Company’s CEO as the guarantee extended by him.

 

Note 7 - Inventories

 

Inventories are stated at the lower of cost (weighted average basis) or market and consisted of the following:

 

		September 30,				June 30,
		2012				2012
Raw materials		$	2,234,040			$	8,511,716
Work-in-progress			13,754,810				12,782,232
Finished goods			16,094,974				8,164,032
Total		$	32,083,824			$	29,457,980

 

 

The Company reviews its inventory periodically for possible obsolete goods or to determine if any reserves are necessary. As of September 30, 2012, 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. Prepayments and other assets mainly represent partial payments or deposits for repairing parts, decorating fee, monitoring system, consulting services, gardening fee, and other fees. Prepayments and other assets amounted to $1,986,828 and $1,023,154 as of September 30, 2012 and June 30, 2012, respectively.

   

Note 9 - Plant and equipment and construction-in-progress

 

Plant and equipment and construction-in-progress consisted of the following:

 

		September 30,   2012				June 30, 2012
Buildings		$	39,820,140			$	39,894,378
Machinery and equipment			79,923,096				79,344,073
Automobile			802,577				804,128
Electronic equipment			793,451				793,370
Construction-in-progress			3,409,340				1,213,540
Total			124,748,604				122,049,489
Accumulated depreciation and amortization			(42,844,386	)			(40,650,721	)
Plant and equipment, net and construction-in-progress		$	81,904,218			$	81,398,768

 

Construction-in-progress represents the costs incurred in connection with the construction of buildings or new additions to the Company’s plant facilities. No depreciation is provided for construction-in-progress until such time as the assets are completed and placed into service. Depreciation expense for the three months ended September 30, 2012 and 2011 amounted to $2,272,344 and $1,896,910, respectively. Interest costs totaling $63,569 and $81,049 were capitalized into construction-in-progress for the three months ended September 30, 2012 and 2011, respectively.

 

Note 10 - Equity investment

 

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 for the use of their own production. Weifang Shengtai owns 20% of Changle Shengtai and the Company accounts for this 20% investment under the equity method of accounting.

 

 

Summarized financial information of Changle Shengshi is as follows:

 

		September 30,				June 30,
		2012				2012
Current assets		$	50,141,383			$	44,428,796
Non-current assets			77,101,123				77,391,817
Total assets		$	127,242,506			$	121,820,613
Current liabilities		$	64,596,262			$	65,866,866
Non-current liabilities			2,690,607				499,181
Stockholders' equity			59,955,637				55,454,566
Total liabilities and stockholders' equity		$	127,242,506			$	121,820,613

 

Equity Investment Reconciliation is as follows as of September 30, 2012 and June 30, 2012:

 

		September 30, 2012				June 30, 2012
Beginning balance		$	11,704,050			$	9,132,725
Additional investment			-				1,418,958
Company's share of net income			239,009				921,730
Translation adjustment			29,269				230,637
Ending balance		$	11,972,328			$	11,704,050

 

Summarized financial information of Changle Shengshi is as follows for the three months ended September 30, 2012 and 2011:

 

		Three Months Ended September 30,
		2012				2011
Net sales		$	25,872,540			$	24,428,105
Gross profit			5,431,575				3,031,766
Income before taxes			1,939,237				2,041,377
Net Income			1,454,428				1,531,033
Company's share of net income			290,886				306,207
Elimination of intercompany profit			51,877				32,293
Company's share of net income as reported in statements of income		$	239,009			$	273,914

 

In order to meet increasing demands for electricity and steam by Weifang Shengtai and Changle Paper, during the year ended June 30, 2012, the Company increased investment in Changle Shengshi by 8,000,000 RMB (approximately $1.26 million) and Changle Paper invested a corresponding amount such that Weifang Shengtai and Changle Sunshine Paper Ltd. continue to be 20% and 80% owners, respectively, of Changle Shengshi. After the investment, the Company still owns 20% of Changle Shengshi.

  

Note 11 - Advance for construction

 

Advances amounted to $1,483,711 and $2,188,892 as of September 30, 2012 and June 30 2012, respectively. 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:

 

		September 30,  2012				June 30,  2012
Land use rights		$	3,703,878			$	3,711,034
Less: accumulated amortization			(459,796	)			(446,084	)
Land use rights, net			3,244,081				3,264,950
Software			21,186				10,886
Less: accumulated amortization			(5,364	)			(4,689	)
Software, net			15,822				6,197
Total intangible assets, net		$	3,259,903			$	3,271,147

 

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 September 30, 2012 and June 30, 2012, the Company determined that there had been no impairment. For the three months ended September 30, 2012 and June 30, 2012, amortization expense relating to these intangible assets amounted to $15,260 and $59,368, respectively. The Company increased $10,322 and $2,511 for software upgrade during the quarter ended September 30, 2012 and during the year ended June 30, 2012, respectively.

 

The following table consists of the expected amortization expenses for the next five years:

 

Years ended September 30,		Amount
2013		$	56,000
2014			56,000
2015			56,000
2016			56,000
2017			56,000
Thereafter			2,979,903
Total		$	3,259,903

  

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 $6,627,171 and $6,870,394, respectively, for the three month ended September 30, 2012. VAT on sales and VAT on purchases amounted to $ 5,384,598 and $5,878,878 , respectively, for the three months ended September 30, 2011. 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 September 30, 2012 and June 30, 2012, the Company’s notes payables consisted of the following:

 

		September 30,				June 30,
		2012				2012
Bank of China, due various dates from October 2012 to February 2013, and restricted cash required 100% of loan amount; $584,842 was returned in October 2012.		$	2,742,433			$	4,184,153
Shenzhen Development Bank, due September 2012, and restricted cash required 100% of loan amount			-				3,167,414
Weifang Bank, due August 2012, and restricted cash required 50% of loan amount			-				6,334,827
China Merchants Bank, due July 2012, and restricted cash required 100% of loan amount			-				190,045
Bank of Communication, due February 2013, and restricted cash required 100% of loan amount			1,896,783				-
Zhongxin Bank, due March 2013, and restricted cash required 50% of loan amount			3,161,306				3,167,414
Qingdao Bank, due November 2012 and returned in full as of reporting date, and restricted cash required 100% of loan amount.			790,326				791,583
Total		$	8,590,848			$	17,835,706

 

 

Note 15 - Short term bank loans

 

Short term bank 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 September 30, 2012 and June 30, 2012, the Company’s short term bank loans consisted of the following:

  

		September 30				June 30
		2012				2012
Loans from Bank of China, due various dates from September 2012 to May 2013; $4,741,958 was returned in October 2012; quarterly interest only payments; interest rates ranging from 6.10% to 7.544% per annum, guaranteed by an unrelated third party, unsecured.		$	20,059,606			$	20,271,447
Loans from Industrial and Commercial Bank of China, due various dates from November 2012 to July 2013; monthly interest only payments; interest rates ranging from 6.60% to 7.216% per annum, guaranteed by an unrelated third party and certain collateral, unsecured.			15,490,398				15,520,327
Loan from Agriculture Bank of China, due from November 2012 to September 2013; monthly interest only payments; interest rates ranging from 7.20% to 7.216% per annum, guaranteed by an unrelated third party, unsecured.			6,322,611				6,334,827
Loan from Qingdao Bank, due December 2012, monthly interest only payments; interest rates of 7.0% per annum, guaranteed by an unrelated third party, unsecured.			2,370,979				-
Loan from Shenzhen Development Bank, due September 2013, monthly interest only payments; interest rates of 6.6% per annum, guaranteed by an unrelated third party, unsecured.			3,477,436				3,484,155
Loan from China Merchants Bank, due April 2013, monthly interest only payments; interest rate of 7.544% per annum, secured by certain properties.			3,161,306				3,167,414
Loan from Bank of Communications, due August 2013, monthly interest only payments; interest rates of 6.6% per annum, guaranteed by an unrelated third party, unsecured			4,741,958				4,751,120
Loan from China Construction Bank, due from October 2012 to July 2013, $3,951,632 was returned in October 2012; monthly interest only payments; interest rate ranging from 6.56% to 7.2% per annum, guaranteed by certain collateral, unsecured			15,174,267				15,203,586
Loan from Minsheng Bank, due October 2012, and returned in full as of reporting date, monthly interest only payments; interest rates ranging from 6.56% to 8.528% per annum, guaranteed by an unrelated third party, unsecured			3,161,306				3,167,414
Loan from Zhongxin Bank, due March 2013, monthly interest only payments; interest rate ranging from 6.56% to 7.872% per annum, guaranteed by certain collateral, unsecured			1,580,653				1,583,707
Total		$	75,540,520			$	73,483,997

 

 

Short term bank loan interest expenses, net of capitalized interest amounted to $1,433,176 and $783,614 for the three months ended September 30, 2012 and 2011, respectively.

  

Note 16 - Employee loans

 

From time to time, the Company borrows money 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. Employee loans amounted to $292,926 and 295,076 as of September 30, 2012 and June 30, 2012, respectively. Interest expense related to these loans were approximately $7,031 and $6,597 for the three months ended September 30, 2012 and 2011, respectively. 

   

Note 17 - Income taxes

 

Our effective tax rates were approximately 33% and 29% for the three months ended September 30, 2012 and 2011, 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 September 30, 2012, the Company had guaranteed loans on behalf of the unrelated party. The Company is obligated to perform under the guarantee if the guarantee company fails to pay principal and interest payments when due. The maximum potential amount of future undiscounted payments under the guarantee is $1.66 million for the guarantee company, including accrued interest. However, the guarantee 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 the company is current in the 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 September 30, 2012 are as follows:

 

		Short Term
Company		Bank Loans
Qingdao Shizhan Technology Co., Ltd		$	1,580,653
Total		$	1,580,653

 

 

As of September 30, 2012, Weifang Century-Light Industry Co., Ltd and Yuanli Chemical Engineering Inc. guaranteed $6,638,742 and $4,741,958 for the Company, respectively.

 

Litigation

 

In April 2012, several law firms announced investigation of the Company in connection with the receipt of a going private proposal from Chairman and Chief Executive Officer Mr. Liu to acquire common stock at $1.65 per share in cash. To the best of our knowledge, no actions have been filed against the Company or its current officers and directors as of the date of this quarterly report. 

 

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.

 

 

All warrants were expired as of June 30, 2012. No warrants were issued for three months ending September 30, 2012.

  

		Warrants  Outstanding				Warrants  Exercisable				Weighted Average Exercise Price				Average  Remaining  Contractual Life
Outstanding, June 30, 2011			2,199,473				2,199,473			$	5.20				0.88
Expired			(2,199,473	)			(2,199,473	)
Granted			-				-				-				-
Forfeited			-				-				-				-
Exercised			-				-				-				-
Outstanding, June 30, 2012			-				-			$	-				-

    

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 shareholders. Option awards are generally granted with an exercise price equal to the fair value of the Company's stock at the date of grant.

 

On May 14, 2008, the Company granted 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.

 

In the Chief Financial Officer Employment Agreement, the “Employment Agreement,” entered into on March 1, 2010 between the Company and Mr. Hu Ye, the former Chief Financial Officer, the Company granted Mr. Hu Ye an option to purchase 150,000 shares of common stock of the Company. The shares vest over 3 years starting March 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, which represents 130 % of the fair market value being calculated in the private placement price on May 15, 2007. The fair values of stock options granted to the CFO were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

Weighted average risk-free interest rate			2.79	%
Expected term			6.5 years
Expected volatility			149	%
Expected dividend yield			0	%
Weighted average grant-date fair value per option		$	5.20

 

The Chief Financial Officer Employment Agreement between the Company and Mr. Hu Ye was terminated in December 2010, and the 150,000 options granted were forfeited.

 

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 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 September 30, 2012:

 

		Options  outstanding				Weighted  Average  Exercise  Price				Aggregate  Intrinsic  Value
Outstanding, June 30, 2011			255,000			$	6.22			$	1,274,500
Granted
Forfeited			(65,000	)			5.74				-
Exercised			-				-				-
Outstanding, June 30, 2012			190,000				6.31				903,500
Granted			-				-				-
Forfeited			-				-				-
Exercised			-				-				-
Outstanding, September 30, 2012			190,000			$	6.31			$	895,900

   

The Company’s forfeiture rate for the year ended September 30, 2012 is 0%.

 

Following is a summary of the status of options outstanding at September 30, 2012:

 

Outstanding Options												Vested Options
Average  Exercise Price				Outstanding  Options				Average  Remaining  Contractual Life				Average  Exercise Price				Options
$	6.31				190,000				6.17			$	6.39				176,667

 

 

Compensation expense from stock options recognized for the three months ended September 30, 2012 and 2011 were $0 and $6,900, respectively. As of September 30, 2012, there is $27,602 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 September 30, 2012 and 2011, the Company transferred $31,324 and $110,517 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 September 30, 2012 the Company had appropriated to the statutory reserve $4,257,449.

 

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 September 30, 2012.

 

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 September 30, 2012 and 2011, the Company made contributions in the amounts of $155,251 and $141,372, 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 September 30, 2012 and June 30, 2012, the Company’s accounts payable due to Changle Shengshi was $980,243 and $405,926, 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 $4,614,102 and $3,434,972 for the three months ended September 30, 2012 and 2011, respectively.

 

   

From time to time, the Company borrows money 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 nine 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 $36,965 and $37,027 as of September 30, 2012 and June 30, 2012, respectively. Interest expense related to this loan was approximately $767 and $3,056 for the three months ended September 30, 2012 and June 30, 2012, respectively.

 

As of September 30, 2012, the other receivable includes Company's advances of $4,220,343, 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 October 2012, the Company obtained a short bank loan of $3,894,370 from China Construction Bank, due April 2013; monthly interest only payments; interest rate of 5.5784% per annum; guaranteed by certain collateral, unsecured.

 

In October 2012, the Company obtained a note of $6,322,611 from Weifang Bank,due April 2013,and restricted cash required 50% the loan amount.

  

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.

 

 

Our 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.

 

In October 2011, we completed the construction of an additional warehouse which can 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. The expansion of our warehousing capacity will allow us to have the ability to store more corn and better control the cost of production.

 

In July 2008, we built our dextrose anhydrous production lines and came into use, which design capacity 60,000 tons.

 

During the three months ended September 30, 2012, we used internally 35,643 metric tons of cornstarch 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 $17.95 million and accounted for 36.83% of our total net sales for the three months ended September 30, 2012. Our business may be severely affected by movements in the commodity markets. Corn is the principal raw material for cornstarch and the price of cornstarch as a commodity tends to follow the price of corn. In 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. The prices decreased slighted in fiscal year 2013. Our corn purchase prices for the three months ended September 30, 2012 were approximately 1.72% lower than for the same period in 2011. 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 increasing its efforts 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 three months ended September 30, 2012, we sold a total of 32,533 metric tons of glucose, and our sales of pharmaceutical grade glucose and other glucose products were $18.14 million, or 37.21% 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 $12.66 million, and constituted approximately 25.96% of our total net sales for the three months ended September 30, 2012.

 

We believe that production capacity and product quality are the 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 three months ended September 30, 2012, we exported products to approximately 52 countries, with the Netherlands, Korea and Thailand being the leading importers. For the three months ended September 30, 2012, our international sales comprised approximately 17.76% of our total net sales. During the same period in 2011, our international sales comprised approximately 18.93% of our total net sales. Glucose, cornstarch, and other products equal 32.04%, 0%, and 67.96% of the total exporting sales for the three months ended September 30, 2012, respectively. Glucose, cornstarch, and other products equal 33.88%, 0.48%, and 65.63% of the total exporting sales for the three months ended September 30, 2011, 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 three months ended September 30, 2012, our top ten customers accounted for 46.29% of our total net sales.

 

Below is list of customers whose sales account for more than 5% of our total net sales for the three months ended September 30, 2012.

 

Three months ended September 30, 2012
Customer Name		AR				Sales				%
Shanghai Pulihua Trade Development  Co., Ltd.		$	894,226			$	3,529,785				7.24	%
Weifang Century-light Industry Co.,Ltd.		$	1,990,156			$	3,567,680				7.32	%
H.K.W		$	1,437,587			$	3,535,997				7.25	%
Toyata Trading Co.,Ltd.		$	221,339			$	2,653,056				5.44	%

 

Results of Operations

 

Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

 

The following table shows our operating results for the three months ended September 30, 2012 and 2011:

 

		Three months Ended September 30, 2012				Three months Ended September 30, 2011
Net Sales		$	48,744,643			$	40,055,448
Cost of Sales			43,686,665				36,670,401
Gross Profit			5,057,978				3,385,047
Selling, General and Administrative Expenses			3,289,698				2,152,615
Income From Operations			1,768,280				1,232,432
Other (Expense) Income,Net			(1,475,654	)			19,514
Income Before Provision For Income Taxes			292,626				1,251,946
Provision For Income Taxes			96,326				368,389
Net Income		$	196,301			$	883,557

 

 

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 September 30, 2012 and 2011:

 

Products		Metric Tons Three months ended September 30, 2012				Metric Tons Three months ended September 30, 2011				Net Sales (%) Three months ended September 30, 2012				Net Sales (%) Three months ended September 30, 2011
Glucose–Sales			32,533				30,743			$	18,137,336(37.21	)%			$  17,859,223 (44.59	)%
Cornstarch-Self use			35,643(45.93	)%			36,768(57.31	)%
Cornstarch-Sales			41,963(54.07	)%			27,384(42.69	)%		$	19,951,359(36.83	)%			$  11,575,360 (28.90	)%
Total Cornstarch			77,606(100	)%			64,152(100	)%
Other Sales			32,579							$	12,655,948(25.96	)%			$  10,620,865 (26.51	)%
Total Sales										$	48,744,643(100	)%		$	40,055,448(100	)%

 

Net sales for the three months ended September 30, 2012 were $48,744,643, an increase of $ 8,689,195 or 21.69%, compared with $40,055,448 for the same period in 2011. The increase in net sales primarily resulted from increased cornstarch sales for the three months ended September 30, 2012, compared to the same period last year. For the three months ended September 30, 2012 compared to the same period last year, the quantities of our glucose products, cornstarch products and other products sold increased approximately 5.82%, 53.24%, and 18.69%, respectively. The increased sales quantities of cornstarch is due to a substantial increase of our Slurry sales, which increased approximately $3,257,921 or 1654.77% for the three months ended September 30, 2012 compared to $194,507 for the same period last year. The increased sales of our cornstarch products are also caused by increased new clients and a higher demand as market supplies decreased, as some smaller competitors stop their operation or supply due to market competition. Net sales from exports for the three months ended September 30, 2012 were $8,656,325, an increase of approximately 14.15%, compared with $7,583,553 for the same period in 2011. The increase is mainly attributable to the increased exporting sales of corn germ meal during the three months ended September 30, 2012 compared to the same period last year, when the export of corn germ meal was nil.

 

Cost of sales for the three months ended September 30, 2012 was $43,686,665, an increase of $7,016,264 or 19.13%, compared with $36,670,401 for the same period in 2011. The increase in cost of sales was mainly due to the increase of sales offset by the decrease in the price of corn, our main raw material.

 

 

Gross profit for the three months ended September 30, 2012 was $ 5,057,978, an increase of $1,672,931 or 49.42%, compared with $3,385,047 for the same period in 2011. The increase of gross profit is mainly because the average corn prices increased less than the unit selling prices of our products. Gross profit margin for the three months ended September 30, 2012 was 10.38%, an increase by 1.93% as compared to the gross profit margin of 8.45% for the same period in 2011. The reason for the increase of gross profit margin is mainly because the price of corn, our main raw material, decreased approximately 1.72% for the three months ended September 30, 2012 compared to the same period last year whereas the average sales prices of glucose products, cornstarch products and other products decreased by 5.19%, 0.02%, 1.49% as compared to the same period last year. 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, benefited us in improving our profitability.

 

For the three months ended September 30, 2012, selling, general and administrative expenses were $3,289,698, an increase of $1,137,082 or 52.82%, compared to $2,152,615 for the three months ended September 30, 2011. The in crease of selling, general, and administrative expenses is caused by increased selling, general and administrative expenses in PRC, offset by decreased selling, general and administrative expenses in the United States. The Company’s selling, general and administrative expenses in the United States ended September 30, 2012 decreased by $104,743 compared to the same period in 2011. The decrease is mainly due to decreased salary expenses of $56,625 and decreased option expenses of $6,900 and decreased taxation expenses of $25,478. The Company incurred $0 and $6,900 non-cash stock option expenses for the three months ended September 30, 2012 and 2011, respectively. The selling, general and administrative expenses from our PRC operating entities increased by $1,241,826 for the three months ended September 30, 2012 compared to $1,931,003 for the same period in 2011. The selling expenses from our PRC operating entities increased by $816,210 or 50.15% in the quarter ended September 30, 2012 compared to the same period in 2011. The increase in selling expenses is mainly attributable to the increase in shipping and handling expenses of $771,713 as a result of increased gas price. The general and administrative expenses incurred in PRC increased $425,616 in the quarter ended September 30, 2012 compared to $303,320 for the same period in 2011. The increase is mainly attributable to the increase in salary expenses of $75,521 and loss for bad debt of 49,068 and other expenses of $172,171 .

 

Net income for the three months ended September 30, 2012 was $196,301 , a decrease of $687,256 or 77.78%, compared with $883,557 for the same period in 2011. The decrease in net income was primarily attributable to the increased interest expenses of $863,147.

 

Liquidity and Capital Resources

 

Operating Activities

 

Net cash provided by operating activities for the three months ended September 30, 2012 was $ 4,870,273 , an increase of 134.43%, or $19,017,074 comp ared with $14,146,831 used in operating activities for the same period in 2011. The increased cash provided by operating activities is mainly due to increased payments to acquire inventories, offset by increased bad debt provision, decreased other receivable, decreased prepayments and other assets and decreased customer deposit during the quarter ended September 30, 2012 compared to the same period in 2011.

 

Investing Activities

 

Net cash provided by investing activities for the three months ended September 30, 2012 was $689,646, an increase of 154.18%, or $1,962,425, compared with $1,272,779 used in investing activities for the same period in 2011. The increase is due to reduced advance for construction during the quarter ended September 30, 2012 compared to the same period in 2011.

 

 

Financing Activities

 

Net cash used in financing activities for the three months ended September 30, 2012 was $940,312, a decrease of 106.29%, or $15,886,738, compared with $14,946,442 provided by financing activities for the same period in 2011. The decrease is due to more net payments made for short term bank loans and notes payable-bank, offset by decreased restricted cash during the three months ended September 30, 2012 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 $75,540,520 and $73,483,997 short term bank loans outstanding as of September 30, 2012 and June 30, 2012, 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 $8,590,848 and $17,835,706 in short-term notes due to the banks as of September 30, 2012 and June 30, 2012, respectively. These notes were due within one year and secured by 50% to 100% of the loan amount in restricted cash. Some loans 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 September 30, 2012 and June 30, 2012, 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 $1,580,653 and $7,918,534 as of September 30, 2012 and June 30, 2012. Some unrelated third parties have guaranteed approximately $11,380,700 and $11,402,689 of our debt, as of September 30, 2012 and June 30, 2012, 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 three years, product returns have been insignificant throughout all of our product lines. Therefore, we do not estimate deductions or allowance for sales returns. Sales returns are taken against revenue when products are returned from customers. Sales are presented net of any discounts given to customers.

 

 

Use of estimates

 

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

 

Accounts receivable

 

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 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.

 

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 Chief Financial Officer, and 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 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 fiveyears, the Company’s officers concluded that disclosure controls and procedures were not effective and was 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 September 30, 2012, 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 April through October 2012, several law firms announced investigation of the Company in connection with the receipt of a going private proposal from Chairman and Chief Executive Officer Mr. Liu to acquire common stock at $1.65 per share in cash. To the best of our knowledge, no actions have been filed against the Company or its current officers and directors as of the date of this quarterly report.

  

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.		Title of Document
3.1		Amended and Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on March 10, 2004, as amended to date (incorporated by reference to Exhibit 3.1 to the registrant’s Form 10-SB filed on September 26, 2005 in commission file number 000-51312).
3.2		Certificate of Amendment filed with Secretary of State of Delaware on November 9, 2010 (incorporated by reference to Exhibit 99.1 to the registrant's Form 8-K filed on November 12, 2010).
3.3		Bylaws of the registrant (incorporated by reference to Exhibit 3.2 to the registrant’s Form 10-SB filed on September 26, 2005 in commission file number 000-51312).
4.1		Form of Warrants to Investors (incorporated by reference to Exhibit 4.1 to the registrant’s Form 8-K filed on May 21, 2007 in commission file number 000-51312).

 

 

10.1		Share Exchange Agreement dated May 15, 2007 by and among the Company and Shengtai Holding, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K filed on May 21, 2007 in commission file number 000-51312).
10.2		Share Purchase Agreement dated as of May 15, 2007 between the Company and the Purchasers (incorporated by reference to Exhibit 10.2 to the registrant’s Form 8-K filed on May 21, 2007 in commission file number 000-51312).
10.3		Research and Development Agreement between Hebei University and Technology of the Company, dated December 8, 2010 (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-K filed on October 6, 2011 in commission file number 000-51312).
10.4		Employment Agreement between the Company and Qingtai Liu, dated July 8th , 2009 (incorporated by reference to Exhibit 10.4 to the registrant’s Form 10-K filed on October 6, 2011 in commission file number 000-51312).
10.5		Employment Agreement between the Company and Yongqiang Wang, dated September 1st, 2009 (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-K/A filed on April 9, 2012 in commission file number 000-51312).
10.6		2010 Addendum between the Company and Qingtai Liu, dated June 30, 2010 (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-K/A filed on April 9, 2012 in commission file number 000-51312).
10.7		2010 Addendum between the Company and Yongqiang Wang, dated June 30, 2010 (incorporated by reference to Exhibit 10.3 to the registrant’s Form 10-K/A filed on April 9, 2012 in commission file number 000-51312).
10.8		2011 Addendum between the Company and Qingtai Liu, dated June 30, 2011 (incorporated by reference to Exhibit 10.8 to the registrant’s Form 10-K/A filed on April 9, 2012 in commission file number 000-51312).
10.9		2011 Addendum between the Company and Qingtai Liu, dated June 30, 2011 (incorporated by reference to Exhibit 10.8 to the registrant’s Form 10-K/A filed on April 9, 2012 in commission file number 000-51312).
10.10		2012 Addendum between the Company and Qingtai Liu, dated June 30, 2012 (incorporated by reference to Exhibit 10.10 to the registrant’s Form 10-K filed on September 28, 2012 in commission file 000-51312).
10.11		2012 Addendum between the Company and Yongqiang Wang, dated June 30, 2012 (incorporated by reference to Exhibit 10.10 to the registrant’s Form 10-K filed on September 28, 2012 in commission file 000-51312).
16.1		Letter dated October 20, 2009 from Moore Stephens Wurth Frazer and Torbet, LLP (incorporated by reference to Exhibit 16.1 to the registrant’s Form 8-K filed on October 21, 2009 in commission file number 000-51312).
21.1		List of subsidiaries of the registrant (incorporated by reference to Exhibit 21.1 to the registrant’s Form 8-K filed on May 21, 2007 in commission file number 000-51312).
31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

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
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
101.INS		XBRL Instance Document*
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*

 

*

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.

 

 

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: November 14, 2012

 

	SHENGTAI PHARMACEUTICAL, INC.
	By:	/s/ Qingtai Liu
		Qingtai Liu
		Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Yongqiang Wang
		Yongqiang Wang
		Financial Controller
		(Principal Financial Officer)