SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
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.