UNITED
  STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.   20549




Amendment
No. 1




to




FORM
10 -K




þ
            ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15 ( d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the fiscal year ended
June   30,  
2008




OR




o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE S E CURITI E S EXCHA N GE
      ACT OF 1934





For   the   transition  
period   from to





Commission
file number: 000- 51312




SHENGTAI
PHARMACEUTICAL, INC.


(formerly
known as West Coast Car Company)


(Exact
name of registrant as specified in its charter
)





Delaware
            
            54-2155579State or other jurisdiction of
              organization
            
            (I.R.S. Employer incorporation or
              identification No.)







ChangdaRoadEast,DevelopmentDistrict,ChangleCounty,Shandong,P.R.C.
            
            262400(Address of principal executive offices)
            
            (Zip Code)





Registrant’s
telephone number, including; area code 011 - 86 - 536 -
6295802





Securities
  registered   pursuant to   Section 12(b)   of the
Act:





Title of each class
            
            Name of each exchange on which registered


Securities
registered pursuant to section 12(g) of the Act:




Common
Stock


par value
$0.001


(Title of
class)




Indicate
by check mark
if
the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities  Act.  ̈  Ye s þ No





Indicateby check markifthe registrant isnot required to file reports
pursuanttoSection13 or Section 15(d)of the Act. ̈YesþNo




Note- Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  þ Yes    ̈No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  þ Yes    ̈No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and smaller
reporting companies in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              Do
      not check if a smaller reporting company
            Smaller
      reporting company þ




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   ̈ Yes   þNo




The
aggregate market value of the voting and no n -voting common equity held by
non-affiliates* (8,041,780 shares of common s tock) computed by reference to the
price of $3.16 per share of common stock at which the common equity was last
sold on December 31, 2007, the last day of our most recently completed second
fiscal quarter, as reported on www.yahoo.com was: $25,412,025.




*
Excludes common stock held by executive officers, directors and stockholders
whose individual ownership exceeds 10 % of common stock outstanding on June 30,
2008.




There were19,094,805 shares of Common Stock,par value $0.001, issuedandoutstandingas of September 24,2008.




DOCUMENTS
INCORPORATED BY REFERENCE




List here
under the following documents if incorporated by reference and the Part of the
Form 1 0 -K (e.g., Part I, Part II, etc.) in t o which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).





None.








EXPLANATORY
      NOTEThe
      purpose of this Amendment No.1 to the Annual Report on Form 10-K is to
      respond to the SEC comments which requested that we amend certain
      disclosures regarding our internal control, management’s disclosure and
      analysis, consolidated statements of cash flows, notes to the consolidated
      financial statements, risk factors and other sections. This Amendment does
      not modify or update disclosures in the original 10-K affected by
      subsequent events.




PART
I





Item
1. Business.





This
Annual Report on Form 10-K (including the section regarding Management’s
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as “expects,” “anticipates,”
“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-K.
Additionally, statements concerning future matters are forward-looking
statements.





Although
forward-looking statements in this Annual Report on Form 10-K reflect our good
faith judgment, such statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are inherently subject to
risks and uncertainties and actual results and outcomes may differ materially
from the results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to such differences in
results and outcomes include, without limitation, those specifically addressed
in Item 1A—“Risks Factors” below, as well as those discussed elsewhere in this
Annual Report on Form 10-K. Readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. We file reports with the SEC. We make available on our web
site under “Investor Relations/SEC Filings,” free of charge, our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after we
electronically file such materials with or furnish them to the SEC. You can also
read and copy any materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site ( www.sec.gov) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including us.


1





We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this Annual Report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.





All
references to “us,” “we,” the “Company” and “Shengtai” refer to Shengtai
Pharmaceutical, Inc., and its subsidiaries, Weifang Shengtai Pharmaceutical Co.,
Ltd., a wholly foreign owned entity in the PRC (“Weifang Shengtai”) and Shengtai
Holding Inc., a New Jersey Corporation. All references to “China” or the “PRC”
refer to the People’s Republic of China.





Overview





We are
through our wholly-owned subsidiary, Weifang Shengtai, a PRC-based company, a
leading manufacturer and supplier of glucose products in the PRC. Our products
include pharmaceutical grade glucose used for medical purposes, and glucose and
starch products for the food and beverage industry, and for industrial
production. Most of our sales are made domestically in the PRC.




Dextrose
(a form of glucose) is one of the most important carbohydrates and the chief
source of energy in the human body. As such, dextrose monohydrate is used in a
wide array of pharmaceutical products such as transfusions and intravenous drips
for restorative and nutritional purposes. (Source: A survey by the China Starch
Industry Association.) (Source: An extract from “China’s Starch, Modified Starch
and Crystallized Glucose Production Summary, 2006 edition”, published in July
2007 by the China Starch Industry Association).





Approximately
38.0% of our revenues for the fiscal year ended June 30, 2008, were attributable
to sales of glucose products.





Approximately
31.7% of our sales revenues for the fiscal year ended June 30, 2008, were
attributable to sales of starch products.





In
addition to our pharmaceutical glucose series of products, we also produce the
other medicinal product lines described below and glucose and starch products
such as industrial glucose, starch, avermectins, and dextrin, which are used for
food, beverage and industrial production .





We
believe that the global market for pharmaceutical grade glucose (dextrose) is
growing and is likely to continue to grow.





In the
PRC alone, from 2002 to 2004, the annual demand for glucose has increased from
approximately 250,000 tons to 800,000 tons per year, and the annual demand for
glucose is expected to increase to 1.7 million tons per year by 2009 (Source: An
extract from “Analysis on Present Situation and Prospect of Chinese Starch Sugar
Industry” published by Starch
and Sugar, Volume I of 2007).


2





Our
Products





We
manufacture two categories of products (i) pharmaceutical and medicinal grade
products and (ii) raw materials for the food and beverage processing
industries.




Pharmaceutical
and medicinal grade products:





These
products accounted for 32.6% of our sales for the fiscal year ended June 30,
2008. Set forth below is a list of our major pharmaceutical and medical grade
products:





·
            Dextrose Monohydrate Transfusion
      (25kg/bag)





·
            Dextrose Anhydrous
      (25kg/bag)





·
            Dextrin
      (25kg/bag)





·
            Pharmaceutical Grade Cornstarch
      (25kg/bag)





Raw
Materials for the Food and Beverage and Processing Industries:





We
produce the following raw materials for the food and beverage and processing
industries:





·
            Industrial Glucose
      (25kg/bag,40kg/bag,500kg/bag)





·
            Dextrose Monohydrate Oral
      (25kg/bag)





·
            Food and Beverage Grade
      Cornstarch (25kg/bag,
500kg/bag)





·
            Fibers
      (25kg/bag,30kg/bag)





·
            Corn
      Embryo(30kg/bag)





·
            Protein
      Powders(50kg/bag)




3





·
            Phytin
    (Block)




Other
Products





At the
end of June 2007, we set up a new product line to manufacture sodium gluconate.
This non-corrosive, non-toxic and highly pure gluconate is gaining popularity as
a chelating agent in the PRC and is widely used in pharmaceutical, construction
and chemistry industries. However, we temporarily discontinued this product line
in May 2008 because we did not achieve economies of scale for this product and
we wanted to focus our limited resources on our main product lines. We plan to
recover the production when the market is more profitable and when we have more
resources to allow such operations. Currently, we estimate the production will
be recovered in a larger scale in the year ending June 30, 2010.





Sales
of Products by Type and Geographic Locations





Approximately
89.3% of our revenues for the fiscal year ended June 30, 2008 were attributable
to domestic sales made in the PRC.Set forth below is a breakdown of the
principal products sold by us in different geographic locations over the
previous three fiscal years and the revenues from such sales.






SalesbyProduct
                      DextroseMonohydrate(DMH)
                    
                    FY
                      06/30/2006
                      (Revenue)$
                    
                    %ofTotal
                    
                    FY06/30/2007
                      (Revenue)$
                    
                    %ofTotal
                    
                    FY06/30/2008
                      (Revenue)$
                    
                    %ofTotalDomestic
                    
                    
                    9,474,787.00
                    
                    26.70
                    
                    
                    14,110,347.00
                    
                    27.00
                    
                    
                    15,895,933.82
                    
                    17.49International
                    
                    
                    1,363,569.00
                    
                    3.90
                    
                    
                    1,516,334.00
                    
                    2.90
                    
                    
                    1,399,039.25
                    
                    1.54Dextrose
      AnhydrousDomestic
                    
                    
                    762,238.00
                    
                    2.20
                    
                    
                    1,409,117.00
                    
                    2.70
                    
                    
                    3,801,014.49
                    
                    4.18International
                    
                    
                    534,253.00
                    
                    1.40
                    
                    
                    1,009,844.00
                    
                    1.90
                    
                    
                    3,376,338.41
                    
                    3.72Dextrose
      Monohydrate OralDomestic
                    
                    
                    17,123,772.00
                    
                    47.50
                    
                    
                    11,398,510.00
                    
                    22.00
                    
                    
                    2,974,842.00
                    
                    3.30International
                    
                    
                    2,431,263.00
                    
                    6.70
                    
                    
                    2,553,863.00
                    
                    4.90
                    
                    
                    4,341,758.00
                    
                    4.80Pharmaceutical
      Grade CornstarchDomestic
                    
                    
                    768,148.00
                    
                    2.10
                    
                    
                    1,845,796.00
                    
                    3.60
                    
                    
                    2,579,995.00
                    
                    2.80International
                    
                    
                    1,685.00
                    
                    0.01
                    
                    
                    8,436.00
                    
                    0.02
                    
                    
                    236,814.00
                    
                    0.30




Sales
and Marketing




Sales are
carried out directly by our sales department and we are not dependent on
distributors or middlemen. As of June 30, 2008, all the provinces except Tibet
in the mainland PRC have been covered by our domestic sales network. We have
established representative offices in 4 cities (Chengdu, Hangzhou, Nanchang, and
Guangzhou) to fortify our domestic sales network. We believe that these offices
help us to better interact with our customers, reinforce our sales force, and
improve our corporate image. We export our products to customers to over seventy
countries, and we plan to increase our global sales.


4





In July,
2008, we restructured our sales department to better serve our customers and
better accommodate expansion. We hired additional sales staff and subdivided the
sales department into five separate sales departments, four of which represent
different product lines: monohydrate glucose, anhydrous glucose, dextrose
anhydrate oral and corn starch. Our fifth sales department focuses on sales
outside of the PRC.





Delivery
Methods





We
utilize the following delivery methods: ground transportation, shipment by sea
and by rail. Products sold internationally are shipped by sea. Approximately
89.3% of our products are delivered by ground transportation. We generally bear
the costs and risks of transportation unless a customer specifies another mode
of delivery.





The
Glucose Production Process





Our
glucose is made from enzyme-converted cornstarch. The glucose that we produce
has the following characteristics: low heat, endotoxin in bacteria lower than
0.125Eu/ml, high purity, and a production standard of lower than
0.06Eu/ml.





The steps
required to produce glucose from cornstarch are:





·
            The cornstarch is converted into
      an emulsion;





·
            Alpha-Amylase Glucoamylase is
      added;





·
            The emulsion from the chemical
      reaction from the combination of the two above is cleaned and dried after
      filtering,
      discoloring, ion exchange, inspissation, crystallization and separation;
      and





·
            The cleaned and dried end-product
      of the above process is
glucose





Under
normal operating conditions, the finished product rate is 100%, with no rejects
and wasted products. In case of a power outage or equipment malfunction,
sub-standard output is detected by our quality control procedures, and is placed
back into the production process for re- processing.





Major
Suppliers





The three
principal ingredients for glucose production are cornstarch, enzyme
preparations, and active carbon. The major suppliers for these raw materials are
as follows:


5





Cornstarch


Cornstarch
Manufacturing Facility





Last year
we completed the construction of a new cornstarch production complex with an
annual production capacity of 240,000 tons, which can be expanded to 300,000
tons per year, if necessary. The complex is close to our existing glucose
production plant. It started producing cornstarch in January, 2007.





During
fiscal year 2008, approximately 37.13% of the new cornstarch production plant’s
output was used as raw materials for glucose production, and the other 62.87%
was sold to customers in the food and beverage, pharmaceutical and industrial
industries.





Our
cornstarch production complex consists of the following areas:





·
            Corn
    storage





·
            Cornstarch production
      line





·
            Warehouse for finished product
      (cornstarch)





·
            Logistical and delivery
      coordination center





·
            Environmentally friendly waste
      water treatment
      facilities





Our new
cornstarch production has the following benefits:





·
            Low-cost and stable supply of
      high-quality raw materials for glucose
  production





·
            The stable supply of cornstarch
      will enable our existing glucose production plant to operate at full
      capacity





·
            Reduced transportation costs of
      raw materials





·
            Quality assurance of cornstarch
      since we are producing our own
cornstarch




6





Enzyme
Preparations





We
purchased a total of 278 tons of enzyme preparations from our sole supplier,
Novozymes (China) Biotechnology Co. Ltd., during the previous three fiscal
years. Although we have not purchased enzyme preparations from any other source,
there are a number of other suppliers from whom we can make purchases, if
necessary.





Active
Carbon





We
believe that Fujian Sha County Qingshan Chemical Carbon Corporation is one of
the major active carbon producers in the PRC. We purchased a total of 3,327 tons
of active carbon from it over the past three fiscal years. There are a number of
other suppliers of active carbon from whom we can make purchases, if
necessary.





We are
not dependent on any one supplier of raw materials and machinery, nor have we
ever experienced a shortage of supply of raw materials or
machinery.





New
Glucose Manufacturing Facility





In July
2008, we completed construction of a new glucose manufacturing facility to boost
our production capacity and at the end of September, 2008, the facility passed
its GMP inspection. The facility has a production capacity of 120,000 tons, and
with our pre-existing facility, we can produce a total of 180,000 tons (we can
increase capacity in the old facility by 30,000 tons, if necessary, for a total
of 210,000 tons). The final cost was approximately $32 million, out
of which the building accounted for approximately $10 million and machinery
and equipment approximately $22 million.. We are commencing start up operations
in the new facility in stages with small amounts first and building up to larger
quantities.





Quality
Control





Our PRC
production facilities are fully certified by applicable PRC regulations for GMP,
ISO9002 and HACCP international quality standards. The rate of quality output
(output conforming to pharmaceutical-grade glucose product specifications) is
maintained at 100% because non- conforming products can be
reprocessed.





A
three-tier quality control system (production team level, workshop level, and
management accountability for quality) ensures that all products are produced in
a pollution-free, contamination-free and efficient production environment
following strict quality-oriented procedures:





·
            A team of workers on-duty is
      responsible for the smooth operation of the production process by adhering
      to proper procedures. The intermediate outputfrom each production step is
      sampled and checked to ensure that the final output is of specified
      quality standards.





·
            Equipment is checked regularly
      and maintained to ensure proper operation. The quality of the water used
      in the production process is regularly checked as well. The
      level of airborne particles and microbes in the production sites is
      regularly checked to eliminate
  contamination.




7





·
            The quality of all output is
      reviewed by the General Manager of the Quality Control Department, andultimately approved
      by the CEO. Afullset of written quality control
      records is maintained.





The
qualities of our manufactured glucose can be summarized as follows:





Properties: white
crystal, granular powder, odorless, sweet taste, easy soluble in water, slightly
soluble in alcohol


Specific rotatory power: +52.0 degrees— +53.5degrees


Dry loss: ≤9.5%
Chloride:<0.02% Sulfate:<0.02%


Alcohol- insoluble matter:≤5mg


Ferrous salt:<0.002% Ignition residue:0.08% Heavy
metal:≤20ppm Arsenide:<2ppm


Sulfite and soluble starch:appear yellow when added to an iodine test solution.





The
qualities of our Dextrose Monohydrate Transfusion (liquid glucose) may be
summarized as follows: Perceptual index:





Appearance:colorless
without the impurity that can be seen by the naked eye


Odor:no unusual
odor


Taste:Clear
sweet





Physical
and chemical index Solid substance:more
than 84% DE:38-42


PH:4.6
-6.0


Maltose content:8% -
20% Transmittance
(426nm):more than 94


Coke Temperature:more than or equal to 125


Ash:no more than
0.3%





Hygienic
index:


As:not more than
0.5mg/Kg


Pb:not more than
0.5mg/Kg


Bacterium total:not
more than 1,000/g E.
coli:not more than 30/100g Pathogen:No





Market
Analysis





Industry
Overview and Trends





The
pharmaceutical transfusion was first put to use in 1832. Since then clinical
transfusion has grown from its rather limited choice of original physiological
brine to more than 200 different kinds of transfusion media.




The
diverse range of transfusion media can be grouped into five
categories:





·
            Body fluid balance
      (Isohydria)




8





·
            Nutritional
      transfusion





·
            Dialyzate





·
            Plasma
      expander





·
            Therapeutic transfusion
      (including herbal
transfusion)





Dextrose
Monohydrate is widely used in the medical and clinical environment for
restorative and nutritional purposes. For example, a solution of pure glucose
(Dextrose or D-glucose) has been recommended for use by subcutaneous injection
as a restorative measure after major operations or as a nutritive measure in
debilitating diseases.





Dextrose
Monohydrate is widely used in hospitals and clinical institutions in the PRC and
is covered by the PRC Government-subsidized Medical Insurance
Scheme.





Glucose
exists in many forms in nature, including in plants, fruits, honey and animal
products. In humans, every 100ml of blood typically contains 80-120 mg glucose.
Glucose is the ingredient for many saccharide compounds such as saccharose,
maltose, starch, glycogen and vitamins. The properties of glucose are summarized
as: white crystal with sweet taste, easily soluble in water, difficult to
dissolve in alcohol, insoluble in organic solvents such as ether, chloroform and
neutral reaction to litmus.





Liquid
glucose is a transparent and viscous liquid, and is produced by the action of
enzymes on refined cornstarch. Glucose is formed by the hydrolysis of many
carbohydrates, including sucrose, maltose, cellulose, starch and glycogen.
Fermentation of glucose by yeast produces ethyl alcohol and carbon dioxide.
Glucose is made industrially by the hydrolysis of starch under the influence of
diluted aid, or more commonly, under that of enzymes.





Glucose
is used for many different purposes, as a raw material for many food and
beverage products and as a substitute for sucrose. With the technological
advances in food and beverage production, and as also in response to the demand
from consumers for healthier food and drinks, producers are using more and more
glucose as a raw material. Glucose is also used in veterinary medicine as a
carrier of animal medicines.





Glucose
is used by the pharmaceutical and chemical industries in a variety of ways. By
using different reaction mechanisms, different types of chemical compounds are
produced, using the self-oxidation and combination mechanism to produce calcium
gluconate, zinc gluconate, and glucorone; using the hydro-reduction mechanism to
produce sorbic alcohol and manno-alcohol, or to produce Vitamin B2, glutamine,
ribose, and other vitamins.


9




World
Pharmaceutical Market





The
global market for pharmaceutical products is growing at a significant rate and
is projected to continue to do so in the immediate future. Pharmaceutical Market
Trends, 2006-2010 by BioPortfolio forecast an increase in the global
pharmaceutical market to $842 billion in 2010. IMS Health estimates the global
pharmaceutical market at $712 in 2007. It estimates global market growth in 2007
at 6.4% with 13.3% in Asia, including 25.7% in China. IMS Media Advisory April
16, 2008. In its 2008 forecast, IMS identifies the following key market
dynamics: The seven markets of China, Brazil, Mexico, South Korea, India, Turkey
and Russia are expected to grow 12 - 13 percent in 2008. “In these markets,
there is significantly greater access both to generic and innovative new
medicines as primary care improves and becomes more available in rural areas,
and as private health insurance becomes more commonly held.” IMS Health's 2008
Global Pharmaceutical Market and Therapy Forecast November 1, 2007.





The
Pharmaceutical Business Review reported, “ Positive economic growth, stabilizing political
structures, growing patient populations, and increasing direct foreign
investment in the emerging markets of Brazil, Russia, India and China (BRIC) are
creating significant opportunities for pharmaceutical companies to
expand into these markets and maximize
future revenue potential. Pharmaceutical sales across the BRIC economies grew by
22.3% in 2005, compared to single digit growth in the major markets of the US,
Europe and Japan.”





According
to IMS, a leading forecast provider of market intelligence to the pharmaceutical
and healthcare industries, 2007 total global pharmaceutical sales grew 6.4% at
constant exchange rates, to $712 billion. In the top ten major markets, audited
growth was 5.1% in 2007. IMS audits covers 95% of the market, while the
remaining 5% are estimates.





The
PRC Pharmaceutical Market





With
annual growth rates in the PRC pharmaceutical industry exceeding 15% per year,
the PRC has become a critically important market (see “China’s Pharmaceutical
Market is World’s Ninth Largest,” October 22, 2005, available on www.100md.com).
Our expectation of similar growth rate also comes from a demographic analysis.
The PRC has the most aged citizens in the world. In 2004, it had 143 million
people aged 60 and above. This number will be 200 million in 2014 and 300
million in 2026. (See article titled “China’s ageing problem and seven
features”, dated February 24, 2006, available on www.china.org.cn). We believe
that an aging population will necessarily call for the demand of more
pharmaceutical and medicinal products to meet its needs. Demand for better drugs
and medical equipment is driving this market. We believe it will continue to
grow as the country modernizes and provides healthcare to a population of 1.3
billion people. Currently, the population of the PRC is served by approximately
310,000 medical and clinical institutions.





The PRC
is one of the top 10 emerging pharmaceutical markets of the world, and is the
second largest market in Asia after Japan as reported in an article dated May 6,
2005, titled “Experts Forecast China will become the World’s Fifth Biggest
Medicine Market in 2010” on the Chinese Small- Medium Enterprises web site
(http://www.ynetc.gov.cn/Art icle_Show.asp?ArticleID=387). By 2010, it is believed the PRC will become the world’s fifth largest
pharmaceutical market after the USA, Japan, Germany, and France according to a
report dated November 13, 2002 titled “Asia Pacific Medical Industrial Council
Forecasts China will become the World’s Fifth Largest Pharmaceutical Market by
2010” on People’s Web site (www.people.com.cn). It is projected that the PRC
pharmaceutical market would be valued at $75 billion by 2010, accounting for 10%
of global demand, and $120 billion by 2020 (Source:
www.http://managert.bokee.com/4173614.html).


10





The value
of PRC pharmaceutical goods produced in 1970 was only $21.7 billion. (as
reported on the Szechuan News Web site, www.newssc.org, in an article titled
“Discussion on the Development and State of China’s Pharmaceutical Industry”).
Currently the PRC pharmaceutical market produces goods with a value of over
$54.6 billion, according to an article in the July/August 2006 edition of the
magazine Pharmaceutical Manufacturing. The PRC produces a little less than 25%
of what is produced by the U.S. pharmaceutical market, which is valued at
web site (www.yd210.com)).




We
believe that the global demand for pharmaceuticals is likely to continue to
increase, with developing countries now being economically more prosperous and
capable of spending more money on improving healthcare.





Major
Import and Export Markets for Pharmaceutical Products





The major
producers of chemical pharmaceutical raw materials are Western Europe, North
America, Japan, China and India. Western Europe is a net exporter with 50% of
its total production being exported. North America is a major importer, with its
own products only able to satisfy 20% of its total demand. Japan is believed to
be evolving to become a net importer. The PRC and India have emerged into two
major exporters for pharmaceutical raw materials, exporting 30-40% of its total
output. (Source: Article titled “2002-2003 Analysis of the World’s
Pharmaceutical Market” as reported on the Shanghai Information Services Platform
web site, http://www.istis.sh.cn/)




The total
annual chemical drug-base production of the PRC is approximately 500,000 tons,
consisting of raw materials for the production of anti-biotic, vitamins,
pain-killers and hormonal and other drugs, and is second only to United States.
The PRC and India are emerging as the major exporters in these product and raw
material categories.





The
Pharmaceutical Raw Materials Manufacturing Industry in the PRC





The PRC,
as a country, has put a lot of emphasis on the production of pharmaceutical raw
materials in the past 40-50 years. Additionally, in the past ten years, a number
of large international pharmaceutical companies have moved their productions to
the PRC, such as Cargill, CPI and Roquette. Both factors have contributed to the
growth of this specific segment in the PRC.





This
industry segment can be categorized into three groups: first, the state-owned or
government-subsidized pharmaceutical companies taking up 30% of market share;
second, the foreign-owned or Sino-foreign Joint ventures taking up 60% of market
share, and with the bulk of smaller firms competing for the remaining 10%. We
fall into the second category.





Market
Analysis and Projections for Clinical Transfusion Products in the
PRC





Transfusion
solutions are one of most commonly used clinical prescriptions in hospitals and
healthcare institutions. Dextrose Monohydrate is one of the five most important
types of medical prescriptions in the PRC and is one of the most widely used
pharmaceutical products.





The total
production volume of transfusion solutions grew from 1.38 billion bottles in
1995 to 2.91 billion bottles in 2001, i.e. annual growth of around 16.1%
(source: http://www.chinapharm.com.en/html/scfx/20034815219.html). The types of
transfusion solutions grew from 40 to more than 80 types of medical transfusion
formulations.


11





There are
more than 200 types of transfusion solutions developed and used in overseas
countries, and the annual per capital consumption is more than 3 bottles. The
PRC has only approximately 50 types of transfusion products, and the per capital
consumption is around 2.15 bottles. Most of the consumption is for Dextrose
Monohydrate. (Source: Report titled “Major Transportation of Liquid
Pharmaceutical Products: Entering the Speedway” dated April 21, 2003 published
on Chinapharm web site, www.chinapharm.com.cn)





We
believe that we are one of the top producers of Dextrose Monohydrate transfusion
solutions as well as Dextrose Anhydrous solutions. These products are the raw
materials or base solutions for pharmaceutical manufacturers to add specific
medical formulations to produce medicated transfusion. Our industrial customers
are producers of medical transfusion solutions.





The
growth in demand for Dextrose Monohydrate transfusion solutions is co-related to
the growth of the pharmaceutical production and consumption trends and patterns.
Medical transfusion is a common and well-accepted treatment routine all over the
PRC for many ailments, ranging from the common cold, influenza, and intestinal
disorders to clinical restorative or recuperative prescriptions after surgical
operations. There are altogether 310,000 medical service providers such as
hospitals, clinics, and health-care institutions serving the 1.3 billion people
in the PRC.





Based on
our analysis of the consumption of glucose products carried out by the China
Starch Industry Association and the disposable income per capita from China
National Statistics Bureau, we believe that there is a strong correlation
between the consumption of glucose products and the disposable income per
capita.





We
predict that higher living standards would lead to higher consumption of
pharmaceutical dextrose. It is our understanding that the robust and continuing
economic growth, the rising purchasing power of the domestic market, as well as
the public awareness of quality healthcare products, are all drivers to the
demand for our products. The strong growth in the PRC pharmaceutical industry
will also help increase the selling prices of our major products, and enhance
our revenues and increase our gross profit margin.





Target
Market





Our
principal customers are:





·
            Healthcare
      Institutions





·
            Medical supply
      companies





·
            Physician
      offices





·
            Pharmaceutical
      companies




12





·
            Medical supply
      exporters





·
            Food and beverage
      companies





We market
our products to these types of businesses within the PRC and plan to expand our
export business as we increase our production capabilities, particularly in
wholesale sales to foreign distributors.





We
utilize the following factors/incentives to encourage the purchase of our
products:





·
            High quality, pharmaceutical
      grade products





·
            Certified product
      reliability





·
            On-time
      deliveries





·
            New and improved
      medicinal products
      and packaging





·
            Excellent service and
      support





·
            Excellent
      referrals





Domestic
and International Market





The
market in the PRC for our products is very large and growing rapidly. There are
more than 310,000 medical service providers such as hospitals and healthcare
institutions all over the PRC.





We
believe that the export market is a lucrative market that we plan to further
develop and expand. Due to the strong domestic demand for our products and our
prior production constraints, we are able to only serve a fraction of the export
market.





Our
export revenues for the Dextrose Monohydrate series of products (which also
includes anhydrous glucose and oral glucose) derived from our top four export
markets are summarized as follows:


13




South
Korea





Import
approval permit issued in 2003


Products
exported: Dextrose Monohydrate Oral and Dextrose Anhydrous





FY2006
                    
                    FY2007
                    
                    
                    FY2008$
                    370,467
                    
                    $
                    548,172
                    
                    
                    $
                    3,103,805





Russia





Import
approval permit issued in 2004


Products
exported: Dextrose Monohydrate Oral, Dextrose Monohydrate
transfusion





FY2006
                    
                    FY2007
                    
                    
                    FY2008$
                    258,115
                    
                    $
                    1,006,133
                    
                    
                    $
                    1,248,805




Australia





Import
approval permit issued in 2003


Product
exported: Dextrose Monohydrate Oral





FY2006
                    
                    FY2007
                    
                    
                    FY2008$
                    278,202
                    
                    $
                    813,746
                    
                    
                    $
                    433,312.6




Singapore
  (plus   re-export   to   Thailand)




Import
approval permit issued in 2003


Products
  exported: Dextrose   Monohydrate   Injection




FY2006
                  
                  FY2007
                  
                  
                  FY2008$
                  28,285
                  
                  $
                  29,345
                  
                  
                  $
                  60,573




Competition





Some of
our competitors of its main products are listed below. They are coded as
follows:





(trans =
competitor in Dextrose Monohydrate transfusion solution)


(oral =
competitor in oral Dextrose Monohydrate)


(andh =
competitor in Dextrose Anhydrous)


14





·
            Dong Ping Rui Xing Petrochemical
      Company Ltd (trans)





·
            North China Pharmaceutical
      Production Company Ltd
(trans)





·
            Ci Feng Pharmaceutical Production
      CompanyLtd
      (trans)




•
            Yi
      Kan Pharmaceutical Production Company Ltd
  (trans)





•
            Hebei
      Shengxue Company Ltd (andh)





•
            Northern
      China Kan Yin Pharmaceutical Product Company Ltd
  (trans)





•
            Shandong
      Xi Wang Company Ltd (oral)





•
            QingHuangDao
      Lihua Glucose Company Ltd (oral)





•
            Hebei
      Hua Ying Glucose Company Ltd (oral)





•
            Cargill
      USA (trans), (oral)





•
            CPI
      USA (oral) ,(andh)





•
            Roquette
      (trans), (andh)





•
            Cerestar
      (trans), (andh)





•
            Hebei
      Zhou Ping Rui Xue Glucose Company Ltd
(andh)





•
            Hebei
      Linhua Glucose and Medicinal Production Company Ltd
  (andh)





Among our
domestic competitors, we believe that we are the largest manufacturer of
pharmaceutical grade glucose. Internationally, although our foreign competitors
may be better-capitalized, we have significant   advantages as
follows:





Competitive
Advantages





With the
PRC being a major corn-producing region of Asia, and Shandong being the major
corn-producing province of the PRC, our operating subsidiary Weifang Shengtai,
located in Shandong, has the advantage of a steady supply of raw materials,
which are located nearby with low transportation costs.





Among our
assets is a total of 292,275 square meters of land, of which approximately only
81.29% is being utilized, leaving room for expansion. We have only started to
export to markets such as South Korea, Russia, Australia and Singapore and
seventy other countries. Taking into consideration the geographical proximity
and cross-cultural similarities with the Northern and South-Eastern Asian
markets, we believe that we can be competitive in terms of product price,
delivery lead-time and customer service responsiveness.


15




With our
new cornstarch facility, the existing glucose manufacturing facility and the new
glucose manufacturing facility, we believe that we will be able to stabilize our
raw material costs and production, enable our glucose production facility to
function at maximum capacity and produce more products for both the domestic and
export markets.





We
believe that we are one of the leading producers of Dextrose Monohydrate
transfusion solution in the PRC, with an estimated 30% of the overall PRC market
share (Source: "Compilation of the Means of Production for Starch, Modified
Starch, Crystal Glucose and Liquid Starch Sugars in 2005" published by the China
Starch Industry Association in July 2006). The other suppliers of Dextrose
Monohydrate transfusion solutions have pharmaceutical production lines with a
diversified range of medicinal products. We believe that we are the only
manufacturer that has our primary focus on producing high-quality Dextrose
Monohydrate transfusion solutions in the PRC.





The other
competitors are manufacturing companies with a diversified range of industrial
glucose and cornstarch products. We believe that most of our competitors put
more emphasis on volume production of medium to low value-added products, while
we focus more on production of high value-added products.





Backlog





Our
orders are processed on a made to order basis and we do not have any backlog of
orders.





Growth
Initiative





We have
developed and are implementing the following initiatives to achieve our goals
for growth:





•
            Vertical integration of our
      manufacturing capabilities by building and operating a cornstarch
  plant.





We
believe the cornstarch plant can lower production costs and improve profit
margin because higher-quality and lower cost raw materials could be produced
in-house and there is no transportation costs because the cornstarch processing
plant is next to the glucose production line. This will somewhat shield us from
external cornstarch price fluctuation, thus protecting or improving its profit
margins.





•
            Increase its glucose production
      capabilities to be able to meet market
  demand





Overseas
demand had not been fully satisfied in the past because our products have been
sold out due to strong domestic demand in the PRC. We believe that our 240,000
tons (it can be easily expanded to 300,000 tons) cornstarch processing plant
will supply enough raw materials to increase production volumes and sales to an
expanding domestic client base and fulfill more overseas orders which offer
higher profit margins. In line with this, we commenced construction of our new
glucose manufacturing facility, which was completed in July
2008.


16




•
            Expand our marketing and sales
      efforts to identify and secure additional domestic customers and increase
      our export sales





We plan
to (i) optimize our web site to describe and promote our business, (ii)
reorganize sales department, (iii) buy advertisements for various search words
and phrases (e.g. "glucose") on Google and Yahoo and major PRC search engines,
(iv) conduct seminars at various trade show events to promote our products, and
(v) optimize our web site so that people doing ‘natural’ searches will see the
web site link on the first page of the search by refining the Search Engine
Optimization





Major
Customers





Our
customers are principally located in the PRC but we hope to expand our
international customer base. Our principal customers are hospitals and
pharmaceutical companies. Below is a list of our largest PRC
customers:





•
            Zhejiang
      Hsin Pharmaceutical Co Ltd





•
            Shouguang
      Tianli Biological Technology Co Ltd





•
            Guangdong
      Weishiya Health Food Co Ltd





•
            Lianyungang
      Roquette Co Ltd





•
            Sichuan
      Kelun Pharmaceutical Co Ltd





•
            Beijing
      Double-Crane Pharmaceutical Co Ltd





•
            Huayuan
      Changfu Pharmaceutical Group





•
            Anhui
      Fengyuan Pharmaceutical Group





•
            Huayu
      Wuxi Pharmaceutical Co Ltd





•
            Chengdu
      Qingshan Pharmaceutical Co Ltd





•
            Guangdong
      Duole Dairy Co Ltd





•
            Hong
      Kong Xiehe Group





•
            Redox
      Australia





•
            PBI
      Thailand





•
            SGN
      Korea


17





No one
customer accounted for more than 10% of our sales for fiscal years ended June
30, 2008, 2007, and 2006.





Intellectual
Property





We
formally acquired the registered "Heng De Bao" trademark from Changle Medical
Starch Factory on or about July 28, 2000. The trademark was assigned by the
Chinese Trademark Bureau and registered under classes 31 (pharmaceutical starch
and white dextrin) and 5 (pharmaceutical glucose). The class 31 registration is
valid through June 10, 2009, while the class 5 registration was renewed and
valid till May 9, 2011. International Class Code 5 covers pharmaceuticals,
veterinary and sanitary preparations; dietetic substances adapted for medical
use; food for babies; plasters, materials for dressings; material for stopping
teeth, dental wax; disinfectants; preparations for destroying vermin;
fungicides, herbicides. International Class Code 31 covers agricultural,
horticultural, and forestry products and grains not included in other classes;
live animals, fresh fruits and vegetables; seeds, natural plants, and flowers;
and malt which is animal food.





Insurance





We
purchased automobile insurance with third party liability coverage for our
vehicles and life insurance for our key personnel. We do not have other
insurance such as property insurance, business liability or disruption insurance
coverage for our operations in the PRC. While a lawsuit against a company such
as Weifang Shengtai in the PRC would be rare, we cannot make any assurance that
we will not have exposure for liability in the event of a lawsuit.





Government
Regulations





Because
we manufacture medicinal and pharmaceutical products, we are subject to the laws
governing the Good Practice in the Manufacturing and Quality Control of Drugs
(as amended in 1998) as promulgated by the PRC State Food and Drug
Administration on March 18, 1999.





We are
also subject to business license and approval regulations that are required for
all corporations in the PRC.





We have
obtained Certificates of Good Manufacturing Practices for Pharmaceutical
Products ("GMP Certificates") issued by the PRC State Food and Drug
Administration. The GMP Certificates certify that we have complied with the
requirements of Chinese Current Good Manufacturing Practices for Pharmaceutical
Products in the manufacture of bulk Dextrose Monohydrate, glucose and anhydrous
glucose and the GMP Certificates are valid through May 18, 2009, February 14,
2013, and April 18, 2009, respectively.




Additionally,
we have obtained Drug Registration Certificates for glucose and glucose pro oral
from the State Food and Drug Administration in accordance with the PRC Medical
Products Governance Law and its implementing regulations.


18




Environmental
Compliance




We are
subject to PRC environmental laws, rules and regulations that are standard to
manufacturing facilities.





All of
our production lines including the new glucose production lines have passed
inspection by the Environmental Protection Bureau of the PRC and was issued a
Certificate of Qualification.





Employees





As of
June 30, 2008, we employed approximately 825 full-time employees. Of these, 7
are group administrators, 20 are managers, approximately 45 are in sales,
approximately 50 perform administrative functions, and approximately 703 are in
production, storage and distribution.





Item
1A. Risk Factors.





Investment
in our common stock involves risks. You should carefully consider the risks we
describe below before deciding to invest. The market price of our common stock
could decline due to any of these risks, in which case you could lose all or
part of your investment. In assessing these risks, you should also refer to the
other information included in this Annual Report, including our consolidated
financial statements and the accompanying notes. You should pay particular
attention to the fact that we are a holding company with substantial operations
in China and are subject to legal and regulatory environments that in many
respects differ from that of the United States. Our business, financial
condition or results of operations could be affected materially and adversely by
any of the risks discussed below and any others not foreseen. This discussion
contains forward-looking statements.





Risks
related to doing business in the People’s Republic of China





Our
business operations are conducted primarily in the PRC. Because PRC laws,
regulations and policies are continually changing, our PRC operations will face
several risks summarized below.





Our
ability to operate in the PRC may be harmed by changes in its laws and
regulations





Our
offices and manufacturing plants are located in the PRC and the production, sale
and distribution of our products are subject to PRC rules and regulations. In
particular, the manufacture and supply of pharmaceutical grade and medicinal
products are subject to the PRC rules and regulations, such as the Good Practice
in the Manufacturing and Quality Control of Drugs (as amended in 1998) as
promulgated by the PRC State Food and Drug Administration on March 18, 1999 and
the PRC Medical Products Governance Law. In addition, because we operate a
cornstarch production facility which produces waste water, we are subject to the
environmental rules and regulations such as the Integrated Wastewater Discharge
Standard (GB8978-1996).


19





The PRC
only recently has afforded provincial and local economic autonomy and permitted
private economic activities. The PRC government has exercised and continues to
exercise substantial control over virtually every sector of the PRC economy
through regulation and state ownership.





Our
ability to operate in the PRC may be harmed by changes in its laws and
regulations, including those relating to manufacturing, taxation, import and
export tariffs, environmental regulations, land use rights, property and other
matters.





Our
production and manufacturing facility is subject to PRC regulation and
environmental laws. The PRC government has been active in regulating the
pharmaceutical and medicinal goods industry. Our business and products are
subject to government regulations mandating the use of good manufacturing
practices. Changes in these laws or regulations in the PRC, or other
countries we sell into, that govern or apply to our operations could have a
materially adverse effect on our business. For example, the law could change so
as to prohibit the use of certain chemical agents in our products. If such
chemical agents are found in our products, then such a change would reduce our
productivity of that product.





We are a
state-licensed corporation. If we were to lose our state-licensed status, we
would no longer be able to manufacture our products in the PRC.





There
is no assurance that PRC economic reforms will not adversely affect our
operations in the future





As a
developing nation, the PRC's economy is more volatile than that of developed
Western industrial economies. It differs significantly from that of the U.S. or
a Western European country in such respects as structure, level of development,
capital reinvestment, resource allocation and self- sufficiency. Only in recent
years has the PRC economy moved from what had been a command economy through the
1970s to one that during the 1990s encouraged substantial private economic
activity. Although the PRC government still owns the majority of productive
assets in the PRC, in the past several years the government has implemented
economic reform measures that emphasize decentralization and encourage private
economic activity.





In 1993,
the Constitution of the PRC was amended to reinforce such economic reforms. The
trends of the 1990s indicate that future policies of the Chinese government will
emphasize greater utilization of market forces. The PRC government has confirmed
that economic development will follow the model of a market economy. For
example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinated to the state-owned companies, which are the
mainstay of the Chinese economy. However, there can be no assurance that, under
some circumstances, the government's pursuit of economic reforms will not be
restrained or curtailed. Actions by the central government of the PRC could have
a significant adverse effect on economic conditions in the country as a whole
and on the economic prospects for our Chinese operations. Economic reforms could
either benefit or damage our operations and profitability. Some of the things
that could have this effect are: (i) level of government involvement in the
economy; (ii) control of foreign exchange; (iii) methods of allocating
resources; (iv) international trade restrictions; and (v) international
conflict.





Under the
present direction, we believe that the PRC will continue to strengthen its
economic and trading relationships with foreign countries and business
development in the PRC will follow market forces. While we believe that this
trend will continue, there can be no assurance that this will be the case. A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports or
sources of supplies, or the expropriation or nationalization of private
enterprises and could require us to divest ourselves of any interest we then
hold in Chinese properties or businesses. Although the PRC government has been
pursuing economic reform policies for more than two decades, there is no
assurance that the government will continue to pursue these policies or that
these policies may not be significantly changed, especially in the event of a
change in leadership, social or political disruption, or other circumstances
affecting the PRC's political, economic and social life.


20





Because
these economic reform measures may be inconsistent, ineffectual or temporary,
there are no assurances that:





•
            we will be able to capitalize on
      economic reforms;




•
            the Chinese government will
      continue its pursuit of economic reform
  policies;




•
            the economic policies, even if
      pursued, will be successful;




•
            economic policies will not be significantly
      altered from time to time;
and




•
            business operations in the PRC
      will not become subject to the risk of
    nationalization.





Anti-inflation
measures may be ineffective or harm our ability to do business in the
PRC





Since
1979, the PRC government has continued to reform its economic system. Because
many reforms are unprecedented or experimental, they are expected to be refined
and improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation, or
in the disparities in per capita wealth between regions within the PRC, could
lead to further readjustment of the reform measures. This refining and
readjustment process may instead negatively affect our operations and there is
no guarantee that it will be effective.





Over the
last few years, the PRC's economy has registered a high growth rate. During the
past ten years, the rate of inflation in the PRC has been as high as 20.7% and
as low as -2.2%. Recently, there have been indications that rates of inflation
have increased. In response, the PRC government recently has taken measures to
curb this excessively expansive economy. These corrective measures were designed
to restrict the availability of credit or regulate growth and contain
inflation. These measures have included devaluations of the PRC currency, the
Renminbi (RMB), restrictions on the availability of domestic credit, reducing
the purchasing capability of certain of its customers, and limited
re-centralization of the approval process for purchases of some foreign
products. These austere measures alone may not succeed in slowing down the
economy's excessive expansion or control inflation, and may result in severe
dislocations in the PRC economy. The PRC government may adopt additional
measures to further combat inflation, including the establishment of freezes or
restraints on certain projects or markets. Such measures could harm the market
for our products and inhibit our ability to conduct business in the
PRC.





The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors





The PRC
legal and judicial system may negatively impact foreign investors. In 1982, the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist, or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.


21





The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in PRC enterprises. There can be no assurance that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting the PRC's political, economic or social life, will not affect the PRC
government's ability to continue to support and pursue these reforms. Such a
shift could have a material adverse effect on our business and our
prospects.





The
practical effect of the PRC legal system on our business operations in the PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly, the
PRC accounting rules mandate accounting practices, which are not consistent
with U.S. generally accepted accounting principles. PRC’s accounting rules
require that an annual "statutory audit" be performed in accordance with PRC
accounting standards and that the books of accounts of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting rules. Article
14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law
requires a wholly foreign-owned enterprise to submit certain periodic fiscal
reports and statements to designated financial and tax authorities, at the risk
of business license revocation. Weifang Shengtai is a wholly foreign-owned
enterprise. Second, while the enforcement of substantive rights may appear less
clear than United States procedures, the Foreign Invested Enterprises and Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same
status as other Chinese registered companies in business-to-business dispute
resolution.





Since the
Articles of Association of Weifang Shengtai do not provide for the resolution of
disputes the parties are free to proceed to either the Chinese courts, or if
they are in agreement, to arbitration.





Any award
rendered by an arbitration tribunal is enforceable in accordance with the United
Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958). Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.





In
addition, some of our present and future executive officers and our directors,
most notably, Mr. Qingtai Liu, Mr. Yongqiang Wang, Ms. Yiru Shi, and Mr. Chris
Wang, may be residents of the PRC and not of the United States, and
substantially all the assets of these persons are located outside the U.S. As a
result, it could be difficult for investors to effect service of process in the
United States, or to enforce a judgment obtained in the United States against us
or any of these persons.


22





The PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings. We
and any future subsidiaries are considered foreign persons or foreign funded
enterprises under PRC laws, and as a result, we are required to comply with PRC
laws and regulations. These laws and regulations are sometimes vague and may be
subject to future changes, and their official interpretation and enforcement may
involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may have on
our business.





Governmental
control of currency conversion may affect the value of your
investment.





The
majority of our revenues will be settled in Renminbi and U.S. dollars, and any
future restrictions on currency exchanges may limit our ability to use revenues
generated in Renminbi to fund any future business activities outside the PRC or
to make dividend or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises like us
may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in the PRC authorized to conduct foreign exchange
business.





In
addition, conversion of Renminbi for capital account items, including direct
investment and loans, is subject to governmental approval in the PRC, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the PRC regulatory
authorities will not impose more stringent restrictions on the convertibility of
the Renminbi.




The
value of our securities and your ability to receive dividends may be affected by
the foreign exchange rates between U.S. dollars and Renminbi and the PRC
government’s control over the Renminbi.





The value
of our common stock will be affected by the foreign exchange rates between U.S.
dollars and Renminbi, and between those currencies and other currencies in which
our sales may be denominated. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, our
business, and the price of our common stock may be harmed. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiary in the PRC would be reduced.





The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenues in Renminbi which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of the PRC to pay capital expenses, such as the repayment of bank loans
denominated in foreign currencies.


23





The PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain expenses as they come
due.





The
fluctuation of the Renminbi may materially and adversely affect your
investment.





The value
of the Renminbi against the U.S. Dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC's political and economic
conditions. As we rely almost entirely on revenues earned in the PRC—most of our
sales occur in the PRC—any significant revaluation of the Renminbi may
materially and adversely affect our cash flows, revenues and financial
condition. For example, to the extent that we need to convert U.S. Dollars we
receive from an offering of our securities into Renminbi for our
operations, appreciation of the Renminbi against the U.S. Dollar could have a
material adverse effect on our business, financial condition and results of
operations. Conversely, if we decide to convert our Renminbi into U.S. Dollars
for the purpose of making payments for dividends on our common shares or for
other business purposes and the U.S. Dollar appreciates against the Renminbi,
the U.S. Dollar equivalent of the Renminbi we convert would be reduced. In
addition, the depreciation of significant U.S. Dollar denominated assets could
result in a charge to our income statement and a reduction in the value of these
assets.




On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. Dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
certain foreign currencies. This change in policy has resulted in appreciation
of the Renminbi against the U.S. Dollar. While the international reaction to the
Renminbi revaluation has generally been positive, there remains significant
international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant
appreciation of the Renminbi against the U.S. Dollar.





Recent
PRC regulations relating to the establishment of offshore special purpose
companies by PRC domestic residents and registration requirements for employee
stock ownership plans or share option plans may subject our PRC resident
beneficial owners or the plan participants to personal liability, limit our
ability to inject capital into our PRC subsidiaries, limit our subsidiaries’
ability to increase their registered capital or distribute profits to us, or may
otherwise adversely affect us.




The China
State Administration of Foreign Exchange ("SAFE") issued a public notice in
October 2005 requiring PRC domestic residents to register with the local SAFE
branch before establishing or controlling any company outside of China for the
purpose of capital financing with assets or equities of PRC companies, referred
to in the notice as an "offshore special purpose company." PRC domestic
residents who are shareholders of offshore special purpose companies and have
completed round trip investments but did not make foreign exchange registrations
for overseas investments before November 1, 2005 were retroactively required to
register with the local SAFE branch before March 31, 2006. PRC resident
shareholders are also required to amend their registrations with the local SAFE
in certain circumstances. After consultation with China counsel, we do not
believe that any of our PRC domestic resident shareholders are subject to the
SAFE registration requirement, however, we cannot provide any assurances that
all of our shareholders who are PRC residents will not be required to make or
obtain any applicable registrations or approvals required by these SAFE
regulations in the future. The failure or inability of our PRC resident
shareholders to comply with the registration procedures set forth therein may
subject us to fines and legal sanctions, restrict our cross-border investment
activities, or limit our PRC subsidiaries’ ability to distribute dividends or
obtain foreign-exchange-dominated loans to our company.





As it is
uncertain how the SAFE regulations will be interpreted or implemented, we cannot
predict how these regulations will affect our business operations or future
strategy. For example, we may be subject to more stringent review and approval
process with respect to our foreign exchange activities, such as remittance of
dividends and foreign-currency-denominated borrowings, which may adversely
affect our results of operations and financial condition. In addition, if we
decide to acquire a PRC domestic company, we cannot assure you that we or the
owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the
SAFE regulations. This may restrict our ability to implement our acquisition
strategy and could adversely affect our business and prospects.


24





In
December 2006, the People’s Bank of China promulgated the Implementation Rules
of the Administrative Measures for Individual Foreign Exchange, or the
Individual Foreign Exchange Rules, setting forth the respective requirements for
foreign exchange transactions by PRC individuals under either the current
account or the capital account. In January 2007, SAFE issued implementing rules
for the Individual Foreign Exchange Rules, which, among other things, specified
approval requirements for certain capital account transactions such as a PRC
citizen’s participation in the employee stock ownership plans or stock option
plans of an overseas publicly-listed company. On March 28, 2007, SAFE
promulgated the Application Procedure of Foreign Exchange Administration for
Domestic Individuals Participating in Employee Stock Holding Plan or Stock
Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the
Stock Option Rule, PRC citizens who are granted stock options by an overseas
publicly-listed company are required, through a PRC agent or PRC subsidiary of
such overseas publicly-listed company, to register with SAFE and complete
certain other procedures. We and our PRC employees who may be granted stock
options are subject to the Stock Option Rule. If we or our PRC optionees fail to
comply with these regulations, we or our PRC optionees may be subject to fines
and legal sanctions.





The
new provisions of the PRC Employment Contract Law may substantially increase our
labor-related costs in the future.





The PRC
Employment Contract Law, which became effective as of January 1, 2008, contains
many more provisions favorable to employees than existing labor regulations in
effect in China. This may substantially increase our labor-related costs in our
future operations. According to the new law, an employee is entitled to
terminate his or her employment relationship with his or her employer for
certain causes, such as delay in payment of wages or social insurance
contribution or dissatisfactory labor protection, and under such circumstances
the employer is liable to pay compensation to the employee. The amount of such
compensation payment shall be one month's salary for each year that the employee
has served the employer, subject to a cap of twelve months' salary. An employer
shall also be liable to compensate an employee when the employer decides not to
renew an existing employment contract that is about to expire, unless the
employee refuses to renew the employment contract even though the employer
offers equal or more favorable terms than those in the existing employment
contract. In addition, an employer is obligated to conclude an open-ended
employment contract with an employee after two consecutive terms of fixed-term
employment, which means the employer will be liable to pay damages to an
employee if it terminates this employee without cause, until the employee
reaches an age at which he or she is eligible for pension payment. We may have
greater difficulty terminating underperforming employees and may incur higher
levels of labor costs in order to comply with the provisions of the new law,
which may have a material adverse effect on our business, financial condition
and operating results.





Risks
related to our business





We
cannot give any assurance that any plans for future expansion will be
implemented or that they will be successful.





While we
have expansion plans, which include making full use of the newly built
cornstarch manufacturing plant (partially completed and operational since
January 2007), upgrading our existing glucose manufacturing facility, building a
new glucose manufacturing facility and expanding our sales overseas, there is no
guarantee that such plans will be implemented or that they will be successful.
These plans are subject to, among other things, their feasibility to meet the
challenges we face, our ability to arrange for sufficient funding and the
ability to hire qualified and capable employees to carry out these expansion
plans.


25





We
have a limited operating history and limited historical financial information
upon which you may evaluate our performance.





Our
operating subsidiary, Weifang Shengtai, was incorporated in 1999 and our
operations have been largely confined to the PRC. In addition, while we have had
some experience in managing a cornstarch manufacturing facility, we may not be
adequately prepared to manage and operate a larger, more modern
facility.





We are in
our early stages of development and face risks associated with a new company in
a growth industry. We may not successfully address these risks and uncertainties
or successfully implement our operating strategies. If we fail to do so, it
could materially harm our business to the point of having to cease operations
and could impair the value of our common stock to the point investors may lose
their entire investment. Even if we accomplish these objectives, we may not
generate positive cash flows or the profits we anticipate in the
future.





Although
our revenues have grown rapidly since our inception from the growing demand for
our glucose products, we cannot assure you that we will maintain our
profitability or that we will not incur net losses in the future. We expect that
our operating expenses will increase as we expand. Any significant failure to
realize anticipated revenue growth could result in significant operating losses.
We will continue to encounter risks and difficulties frequently experienced by
companies at a similar stage of development, including our potential failure
to:




•
            expand
      our product offerings and maintain the high quality of our
      products;





•
            manage
      our expanding operations, including the integration of any future
      acquisitions;





•
            obtain
      sufficient working capital to support our expansion and to fill customers'
      orders in time;





•
            maintain
      adequate control of our expenses;





•
            implement
      our product development, marketing, sales, and acquisition strategies and
      adapt and modify them as needed;
and





•
            anticipate
      and adapt to changing conditions in the dextrose monohydrate and glucose
      products markets in which we operate as well as the impact of any changes
      in government regulation, mergers and acquisitions involving our
      competitors, technological developments and other significant competitive
      and market dynamics.


26





We
may have difficulty establishing adequate management, legal and financial
controls in the PRC, and such difficulties could reduce the value of any
investment in our common stock.





The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, or a modern western style of banking, computer
and other control systems. We may have difficulty in hiring and retaining a
sufficient number of employees qualified in these areas to work for our
operating company in the PRC. As a result of these factors, we have had, and may
continue to have difficulty in establishing management, legal and financial
controls, collecting financial data and preparing financial statements, books of
account and corporate records and instituting business practices relating to our
PRC operations that meet Western standards.




We
have recently discovered material weaknesses in our internal control over
financial reporting and cannot assure you that additional material weaknesses
will not be identified in the future.  We concluded that our internal
control over financial reporting and disclosure controls and procedures are not
effective, although we believe that the financial statements included in our
past filings correctly present our financial condition, results of operations
and cash flows for the fiscal years covered thereby in all material
respects.  Accordingly in the future there may be errors in our
financial statements that could require a restatement or our filings may not be
timely and investors may lose confidence in our reported financial information,
which could lead to a decline in our stock price.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.





A
significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness; yet important enough to merit attention by those responsible for
oversight of the Company’s financial reporting.





Material
weaknesses related to:





•
Accounting and Finance Personnel Weaknesses - US GAAP expertise - The current
staff in the accounting department is relatively new and inexperienced, and
needs substantial training so as to meet with the higher demands of being a U.S.
public company. The accounting skills and understanding necessary to fulfill the
requirements of U.S. GAAP-based reporting, including the skills of subsidiary
financial statements consolidation, are inadequate and were inadequately
supervised.





• Lack of
internal audit function - The Company lacks qualified resources to perform the
internal audit functions properly.  In addition, the scope and
effectiveness of the internal audit function are yet to be
developed.





The steps
we have taken to remediate these weaknesses include the following:





1. In May
2008, we engaged Ms. Yiru Shi, a CPA with experience as an independent auditor
as well as financial experience at Sun Microsystems and Hewlett Packard, to
serve as our chief financial officer. Ms. Yiru Shi has extensive experience in
internal control and U.S. GAAP reporting compliance and an MBA from the
University of California-Irvine and together with our chief executive officer
will oversee and manage our the financial reporting process and required
training of the accounting staff.





2. In
July, 2008 we engaged independent consultants to assist the Company in improving
the internal control system based on the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. The consultants are currently in the process of conducting
an evaluation of our internal control over financial reporting, and designing
and implementing enhanced processes and procedures to improve our internal
control over financial reporting.





3. We
plan to train our internal accountants well in U.S. GAAP principles and
reporting. Although our accounting staff is professional and experienced in
accounting requirements and procedures generally accepted in the PRC, management
has determined that they require additional training and assistance in U.S. GAAP
matters.


27





4. We are
also planning to establish an internal audit unit to establish effective
internal control. We plan to allocate sufficient resources to achieve an
effective internal audit function.





5. We
plan to recruit and train additional accounting personnel with experience in
U.S. GAAP.





We plan
for the above policy to be consistently followed, which we hope will provide for
much greater credibility and consistency in the financial
statements.





However,
as a result of these material weaknesses and deficiencies in our disclosure
controls and procedures, current and potential stockholders could lose
confidence in our financial reporting and disclosures made in our public
filings, which would harm our business and the trading price of our stock.




Standards
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.





Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our company's independent registered public
accountants.  The SEC extended the compliance dates for
non-accelerated filers like us.  Accordingly, the annual assessment of
our internal controls first applied to our  annual report for the 2009
fiscal year and the attestation requirement of management's assessment by
independent registered public accountants will first apply to our annual report
for the 2010 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards.  We may encounter problems or delays
in completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in the future in completing the implementation of any requested
improvements and receiving an attestation of our assessment by our independent
registered public accountants.  Since we cannot assess our internal
control over financial reporting as effective, and our independent registered
public accountants are unlikely to be able to provide an unqualified attestation
report, investor confidence and share value may be negatively
impacted.





We
face stiff competition, some of which may be from companies which may be better
capitalized and more experienced than us.





We face
competition from other domestic and global manufacturers and suppliers of
pharmaceutical grade dextrose monohydrate and glucose. Although we view
ourselves in a favorable position vis-à-vis our competition, some of the other
companies that sell into our markets may be more successful than us and/or have
more experience and financial resources than we do. This additional experience
and financial backing may enable our competitors to produce more cost-effective
products and market their products with more success than we are able to, which
would decrease our sales. We expect that we will be required to continue to
invest in product development and productivity improvements to compete
effectively in our markets. However, we cannot assure you that we can
successfully remain competitive. If our competitors develop a more efficient
product or undertake more aggressive and costly marketing campaigns than us,
this could have a material adverse effect on our business, results of operations
or financial condition.


28





A
slowdown in the PRC economy may adversely affect our operations.





As all of
our operations are conducted in the PRC and most of our revenues are generated
from sales in the PRC, a slowdown or other adverse developments in the PRC
economy could materially and adversely affect our customers, demand for our
products, and our business. Although the PRC economy has grown significantly in
recent years, we cannot assure you that such growth will continue. While we
believe the demand for our products is not dependent on the health of the
economy, we do not know how sensitive we are to a slowdown in economic growth or
other adverse changes in the PRC economy. A slowdown in overall economic growth,
an economic downturn or recession or other adverse economic developments in the
PRC may materially reduce the demand for our products and materially and
adversely affect our business.





Our major
competitors may be better able than us to successfully endure downturns in our
sector. In periods of reduced demand for our products, we can either choose to
maintain market share by reducing our selling prices to meet competition or
maintain selling prices, which would likely sacrifice market share. Sales and
overall profitability would be reduced under either scenario. In addition, we
cannot assure you that additional competitors will not enter our existing
markets, or that we will be able to compete successfully against existing or new
competition.





Inflation
in the PRC could negatively affect our profitability and growth.





While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth. In October 2004, the People's Bank of China, the PRC's
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the PRC economy. Repeated rises in interest rates by the central bank would
likely slow economic activity in the PRC which could, in turn, materially
increase our costs and also reduce demand for our products.





A
widespread health problem in the PRC could negatively affect our
operations





A renewed
outbreak of SARS or another widespread public health problem in the PRC, such as
bird flu, where a major portion of our revenue is derived, could have an adverse
effect on our operations. Our operations may be impacted by a number of
health-related factors, including quarantines or closures of some offices that
would adversely disrupt our operations. Any of the foregoing events or other
unforeseen consequences of public health problems could adversely affect our
operations.




Enforcement
against us or our directors and officers may be difficult





Because
our principal assets are located outside of the U.S. and almost all our
directors and officers reside outside of the U.S., it may be difficult for you
to enforce your rights based on U.S. Federal securities laws against us and our
officers and some directors or to enforce a U.S. court judgment against us
or them in the PRC.





In
addition, our operating subsidiary is located in the PRC and substantially all
of its assets are located outside of the U.S. It may, therefore, be difficult
for investors in the U.S. to enforce their legal rights based on the civil
liability provisions of the U.S. Federal securities laws against us in the
courts of either the U.S. or the PRC, even if civil judgments are obtained in
U.S. courts to enforce such judgments in PRC courts. Further, it is unclear if
extradition treaties now in effect between the U.S. and the PRC would permit
effective enforcement against us or our officers and directors of criminal
penalties under the U.S. Federal securities laws or otherwise.


29





We
have identified significant deficiencies in our internal controls.





As set
forth in Item 9A, below, we have identified significant deficiencies in our
internal controls. While we are taking steps to address these significant
deficiencies, there can be no assurance that such steps will be adequate to
entirely cure the deficiencies.




Inadequate
funding for our capital expenditures may affect our growth and
profitability




Our sales
revenues have increased from $19,999,826 for the year ended June 30, 2004, to $
90,871,223 for the year ended June 30, 2008. Our continued growth is dependent
upon our ability to raise capital from outside sources. Our ability to obtain
financing will depend upon a number of factors, including:




•
            our
      financial condition and results of
operations;





•
            the
      condition of the PRC economy and the healthcare sector in the
      PRC;





•
            conditions
      in relevant financial markets; and





•
            relevant
      PRC laws and regulations.





If we are
unable to obtain financing, as needed, on a timely basis and on acceptable terms
to our investors or lenders, our financial position,competitive position, growth
and profitability may be adversely affected.




We
may not be able to effectively control and manage our growth.





If our
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. We may not have the requisite
experience to manage and operate a larger, more modern cornstarch manufacturing
plant and a bigger glucose production line. In addition, we may face challenges
in managing expanding product offerings and in integrating acquired businesses
with our own. These events would increase demands on our existing management,
workforce and facilities. Failure to satisfy these increased demands
could interrupt or adversely affect our operations and cause production
backlogs, longer product development time frames and administrative
inefficiencies.





Significant
fluctuations in raw material prices may have a material adverse effect on
us





We do not
have any long-term supply contracts with our raw materials suppliers. Any
significant fluctuation in price of our raw materials could have a material
adverse effect on the manufacturing cost of our products. We are subject to
market conditions and although raw materials are generally available and we have
not experienced any raw materials shortage in the past, we cannot assure you
that the necessary materials will continue to be available to us at prices
currently in effect or acceptable to us.


30




We may
have limited options in the short-term for alternative supplies if our suppliers
fail for any reason, including their business failure or financial difficulties,
to continue the supply of raw materials. Moreover, identifying and accessing
alternative sources may increase our costs.




Although
we are in the corn-producing region in the Shandong province, there is no
guarantee that we will not face a shortage of corn because of some natural
calamity or other reasons beyond our control.




We had
also mitigated the risks of a shortage in cornstarch by managing a
cornstarch-producing company, Shouguang Shengtai Starch Company, and implemented
a vertical integration manufacturing program, which includes building our own
cornstarch processing plant, in which the plant is now operational. This will
not only lower production costs and improve profit margins, but it will also
allow Weifang Shengtai to produce higher quality, lower-cost cornstarch. We
cannot guarantee these measures will be effective in eliminating all risks
attendant to the supply of raw materials. In the event that our cost of
materials increase, we may have to raise prices of our products, making us less
competitive in price.




We may
not be able to adjust our product prices, especially in the short-term, to
recover the costs of any increases in raw materials. Our future profitability
may be adversely affected to the extent we are unable to pass on higher raw
materials costs to our customers.





Potential
environmental liability could have a material adverse effect on our operations
and financial condition.





To the
knowledge of management, neither the production nor the sale of our products
constitute activities, or generate materials in a material manner, that requires
our operation to comply with the PRC environmental laws. Although it has not
been alleged by PRC government officials that we have violated any current
environmental regulations, we cannot assure you that the PRC government will not
amend the current PRC environmental protection laws and regulations. Our
business and operating results may be materially and adversely affected if we
were to be held liable for violating existing environmental regulations or if we
were to increase expenditures to comply with environmental regulations affecting
our operations.





We
rely on Mr. Qingtai Liu, our Chief Executive Officer and President, for the
management of our business, and the loss of his services may significantly harm
our business and prospects.




We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Qingtai Liu, our Chief
Executive Officer and President, for the direction of our business. The loss of
the services of Mr. Liu, for any reason, may have a material adverse effect on
our business and prospects. We cannot assure you that the services of Mr. Liu
will continue to be available to us, or that we will be able to find a suitable
replacement for Mr. Liu. We have not entered into an employment contract with
Mr. Liu. We do not have key man insurance policy on Mr. Qingtai Liu. If Mr. Liu
dies and we are unable to replace Mr. Liu for a prolonged period of time, we may
be unable to carry out our long term business plan and our future prospect for
growth, and our business may be harmed.







We
may not be able to hire and retain qualified personnel to support our growth and
if we are unable to retain or hire such personnel in the future, our ability to
improve our products and implement our business objectives could be adversely
affected.




Our
future success depends heavily upon the continuing services of the members of
our senior management team, in particular our Chief Executive Officer and
President, Mr. Qingtai Liu. If one or more of our senior executives or other key
personnel is/are unable or unwilling to continue in his/her/their present
positions, we may not be able to replace them easily or at all, and our business
may be disrupted and our financial condition and results of operations may be
materially and adversely affected. Competition for senior management and
personnel is intense, the pool of qualified candidates is very limited, and we
may not be able to retain the services of our senior executives or senior
personnel, or attract and retain high-quality senior executives or senior
personnel in the future. This failure could materially and adversely affect our
future growth and financial condition.


31




We
have inadequate insurance coverage





We do not
presently maintain product liability insurance, and our property and equipment
insurance does not cover the full value of our property and equipment, which
leaves us with exposure in the event of loss or damage to our properties or
claims filed against us.





We
currently do not carry any product liability or other similar insurance. We
cannot assure you that we would not face liability in the event of the failure
of any of our products. This is particularly true given our plan to
significantly expand our sales into international markets, such as the United
States, where product liability claims are more prevalent.





Except
for automobile insurance, and Directors & Officers Liability and Company
Reimbursement Insurance, we do not have other insurance such as business
liability or disruption insurance coverage for our operations in the
PRC.





We do not
maintain a reserve fund for warranty or defective products claims. Our costs
could substantially increase if we experience a significant number of warranty
claims. We have not established any reserve funds for potential warranty claims
since historically we have experienced few warranty claims for our products so
that the costs associated with our warranty claims have been low. If we
experience an increase in warranty claims or if our repair and replacement costs
associated with warranty claims increase significantly, it would have a material
adverse effect on our financial condition and results of
operations.




Risks
related to an investment in our common stock





Our
Chief Executive Officer and President controls us through his position and stock
ownership and his interests may differ from other stockholders




Our Chief
Executive Officer and President, Mr. Qingtai Liu, beneficially owns
approximately 38.64% of our common stock. As a result, although Mr. Liu is not
the holder of a majority of the outstanding shares, Mr. Liu may be able to
influence the outcome of stockholder votes on various matters, including the
election of directors and extraordinary corporate transactions, including
business combinations. Mr. Liu's interests may differ from other
stockholders.




We
do not intend to pay cash dividends in the foreseeable future





We
currently intend to retain all future earnings for use in the operation and
expansion of our business. We do not intend to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary based in the PRC, Weifang Shengtai.
Our operating subsidiary, from time to time, may be subject to restrictions on
its ability to make distributions to us, including as a result of restrictions
on the conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions. See "Risks related to doing business in the
People’s Republic of China."


32





There
is currently a limited trading market for our common stock





Our
common stock has been quoted on the over-the-counter Bulletin Board since
January 2007. Because we were formerly a shell company, our bid and ask
quotations have not regularly appeared on the OTC Bulletin Board for any
consistent period of time. There is a limited trading market for our common
stock and our common stock may never be included for trading on any stock
exchange or through any other quotation system, including, without limitation,
the American Stock Exchange. You may not be able to sell your shares due to the
absence of an established trading market.





Our
common stock is subject to the Penny Stock Regulations





Our
common stock is, and will continue to be, subject to the SEC's "penny stock"
rules to the extent that the price remains less than $5.00. Those rules, which
require delivery of a schedule explaining the penny stock market and the
associated risks before any sale, may further limit your ability to sell your
shares.





The SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price of less than $5.00 per share. Our common stock,
when and if a trading market develops, may fall within the definition of penny
stock and subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000, or annual incomes exceeding $200,000 or $300,000, together with
their spouse).





For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common stock and may affect the ability of investors to sell their
common stock in the secondary market.





Our
common stock is illiquid and subject to price volatility unrelated to our
operations





The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.


33





A large
number of shares of common stock will be issuable for future sale which will
dilute the ownership percentage of our current holders of common stock. We have
successfully registered for public resale 8,750,000 shares (as well as 4,375,000
shares issuable on exercise of the attached warrants) belonging to our investors
and the availability for public resale of those shares may depress our stock
price.





Also as a
result, there will be a significant number of new shares of common stock on the
market in addition to the current public float. Sales of substantial amounts of
common stock, or the perception that such sales could occur, and the existence
of warrants to purchase shares of common stock at prices that may be below the
then current market price of the common stock, could adversely affect the market
price of our common stock and could impair our ability to raise capital through
the sale of our equity securities.





Item
1B. Unresolved Staff Comments.





Not
applicable.





Item
2. Properties.





Our
facility in the PRC is located at the Hi-Tech Industrial Park of Changle County,
Shandong Province, PRC 262400.





All land
in the PRC is owned by the government and cannot be sold to any individual or
entity. Instead, the government grants or allocates landholders a "land use
right." From March 2000 to June 2007 Weifang Shengtai purchased various land use
rights in succession for a total price of approximately $2,243,000. Weifang
Shengtai obtained another land use right in July 2007 for a price of
approximately $314,000. Weifang Shengtai obtained a new land use right in March
2008 for a price of $346,410. In May 2008, the Company paid approximately
$734,000 to a local government which enabled the land use right to be classified
from industrial use to commercial use. As a result Weifang Shengtai has the
right to use various parcels of land that range from 20 to 50 years in term, all
of which are currently being used by Weifang Shengtai for its
business.





Weifang
Shengtai occupies an area of approximately 292,275 square meters (72 acres) in
Changle Economic and Technology Development Zone. Set forth below is the
detailed information regarding the land:





Location
                            
                            Area
                              (square
      meters)
                            
                            Construction
      on the
                              Land
                            
                            ExpirationChangle
      Economic and Technology Development Zone
                            
                            
                            85,880.43
                            
                            New
      glucose production complex
                            
                            April
      20,2057Changle
      Economic and Technology Development Zone
                            
                            
                            14,696
                            
                            (Reserved
      for future growth)
                            
                            January
      14, 2030Changle
      Economic and Technology Development Zone
                            
                            
                            73,313.38
                            
                            Old
      glucose production facility
                            
                            April
      28, 2052Changle
      Economic and Technology Development Zone
                            
                            
                            40,000
                            
                            (Reserved
      for future growth)
                            
                            March
      10, 2058Changle
      Economic and Technology Development Zone
                            
                            
                            19,692.4
                            
                            Office
      and staff buildings
                            
                            September
      21, 2052Changle
      Economic and Technology Development Zone
                            
                            
                            58,692
                            
                            Cornstarch
      processing plant (11,800 sq meters)
                            
                            April
      2,
2054




34





Item
3.  Legal  Proceedings.





We know
of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.




Item
4. Submission of Matters to a Vote of Security Holders.




None.





PART II





Item
5. Market for Registrant’s Common Equity, Related Stock holder Matters and
Issuer Purchases of Equity
Securities.





Market
  I n format i on




We began
trading on the Over the Counter Bulletin Board on January 12, 2007, and our
symbol is "SGTI.OB." Prior to that, there had never been any established public
market for shares of our common stock. The following table sets forth for the
period indicated the prices of the common stock in the over-the-counter market,
as reported and summarized by the OTC Bulletin Board. Such prices are based on
inter-dealer bid and asked prices, without markup, markdown, commissions, or
adjustments and may not represent actual transactions. As of September 24, 2008,
the last reported bid price of our common stock was $2.50 per share and the last
reported ask price was $2.70 per share.




CALENDAR QUARTER ENDED
                
                HIGH BID(S)
                
                
                LOW BID(S)September
      30, 2007
                
                $
                6
                
                
                $
                1.01December
      31, 2007
                
                $
                5.51
                
                
                $
                2.45March
      31, 2008
                
                $
                3.45
                
                
                $
                2.61June
      30, 2008
                
                $
                3.5
                
                
                $
                2.75




Holders




As of
September 24, 2008, there were 19,094,805 shares of our common stock issued and
outstanding and there were 46 holders of record of our common
stock.





Dividends





Since our
incorporation, no dividends have been paid on our common stock. We intend to
retain any earnings for use in our business activities, so it is not expected
that any dividends on our common stock will be declared and paid in the
foreseeable future.


35





As a
holding company, our ability to pay dividends is dependent on the receipt of
dividends from SHI and our PRC based operating company Weifang Shengtai. The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenues in Renminbi which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations.





Equity
Compensation Plan Information and Warrants and Options





As of
September 24, 2008 we had 4,473,945 outstanding warrants to purchase 4,473,945
shares of common stock. Set forth below is a description of our outstanding
warrants.





On May
15, 2007, we entered into a share purchase agreement and completed a private
placement of our shares and warrants. Under the share purchase agreement we sold
to the Selling Stockholders for $2.00 per share (or a total of $17,500,000) an
aggregate of 8,750,000 shares of commons tock and 4,375,000 warrants to
purchase 4,375,000 shares of common stock. The exercise price of the
warrants is $2.60 per share, as adjusted, and the warrants expire on May 15,
2012 .





On May
15, 2007, we issued to Chinamerica Fund, L.P. 75,000 warrants and Jeff Jenson
25,000 warrants to compensate the former as lead investor and the latter in
assisting in providing the shell. These warrants have an exercise price of $0.01
per share and a term of five years.





As part
of their consideration for acting as placement agent for the May 15, 2007,
private placement, Brill Securities, Inc .received five year warrants
to purchase 218,750 shares of common stock at an exercise price of 2.60 per
share, as adjusted. These have the same terms as the warrants issued to the
Selling Stockholders in the May 15, 2007, private placement.





On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”).





On May
14, 2008, the Company granted 500,000 stock options and 160,000 non-qualified
stock options pursuant to the Stock Incentive Plan. All options have an exercise
price of $3.34, which is the closing price on the date of grant, and expire five
years after the date of grant. All options vest over a period of three years
from the date of grant.




Plan
                      category
                    
                    Number of securities to be issued
                      upon exercise of outstanding
                      options, warrants and rights
                    
                    Weighted-average exercise price
                      of outstanding options, warrants
                      and rights
                    
                    Number of securities remaining available for
                      future issuanceunder equity compensation
                      plans (excluding securities reflected in column
                      (a))(a)
                    
                    (b)
                    
                    (c)Equity
      compensation plans approved by security holders
                    
                    0
                    
                    
                    0
                    
                    0Equity
      compensation plans not approved by security holders
                    
                    660,000
                    
                    $
                    3.34
                    
                    1,340,000Total
                    
                    660,000
                    
                    $
                    3.34
                    
                    1,340,000




36





Item
6. Selected Financial Data.





The
following selected financial data for the fiscal years ended 2008,2007, 2006,
2005 and2004 are derived from our audited consolidated financial statements. The
data should be read in conjunction with our consolidated financial statements
and notes thereto and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in this
report.





Consolidated Statements of
      Operations
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(audited)
                  
                  
                  (audited)
                  
                  
                  (audited)
                  
                  
                  (audited)
                  
                  
                  (audited)Sales
      revenue
                  
                  $
                  90,871,223
                  
                  
                  $
                  51,706,215
                  
                  
                  $
                  36,029,179
                  
                  
                  $
                  24,860,399
                  
                  
                  $
                  19,999,826Cost
      of good sold
                  
                  
                  70,613,757
                  
                  
                  
                  39,527,662
                  
                  
                  
                  27,568,092
                  
                  
                  
                  19,557,743
                  
                  
                  
                  16,487,240Gross
      profit
                  
                  
                  20,257,466
                  
                  
                  
                  12,178,553
                  
                  
                  
                  8,461,087
                  
                  
                  
                  5,302,656
                  
                  
                  
                  3,512,586Selling,
      general and administrative expenses
                  
                  
                  7,390,623
                  
                  
                  
                  4,674,679
                  
                  
                  
                  3,831,778
                  
                  
                  
                  3,242,330
                  
                  
                  
                  2,474,813Operating
      Income
                  
                  
                  12,866,843
                  
                  
                  
                  7,503,874
                  
                  
                  
                  4,629,309
                  
                  
                  
                  2,060,326
                  
                  
                  
                  1,037,773Other
      net income
                  
                  
                  (1,810,530
                  )
                  
                  
                  524,088
                  
                  
                  
                  (418,398
                  )
                  
                  
                  (445,169
                  )
                  
                  
                  (550,196
                  )Income
      before Income taxes
                  
                  
                  11,056,313
                  
                  
                  
                  8,027,962
                  
                  
                  
                  4,210,911
                  
                  
                  
                  1,615,157
                  
                  
                  
                  487,577Provision
      for Income Taxes
                  
                  
                  645,988
                  
                  
                  
                  878,836
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      income
                  
                  $
                  10,410,325
                  
                  
                  $
                  7,149,126
                  
                  
                  $
                  4,210,911
                  
                  
                  $
                  1,615,157
                  
                  
                  $
                  487,577Foreign
      Currency Translation Adjustment
                  
                  
                  3,890,123
                  
                  
                  
                  641,596
                  
                  
                  
                  185,402
                  
                  
                  
                  —
                  
                  
                  
                  —Comprehensive
      Income
                  
                  $
                  14,300,448
                  
                  
                  $
                  7,790,722
                  
                  
                  $
                  4,396,313
                  
                  
                  $
                  11,615,157
                  
                  
                  $
                  487,577Earning
      per share - basic
                  
                  $
                  0.55
                  
                  
                  $
                  0.64
                  
                  
                  $
                  0.42
                  
                  
                  $
                  0.16
                  
                  
                  $
                  0.05Earning
      per share - diluted
                  
                  $
                  0.52
                  
                  
                  $
                  0.62
                  
                  
                  $
                  0.42
                  
                  
                  $
                  0.16
                  
                  
                  $
                  0.05Basic
      weighted average common shares outstanding
                  
                  
                  18,993,789
                  
                  
                  
                  11,251,712
                  
                  
                  
                  10,125,000
                  
                  
                  
                  10,125,000
                  
                  
                  
                  10,125,000Diluted
      weighted average common shares outstanding
                  
                  
                  19,874,486
                  
                  
                  
                  11,477,545
                  
                  
                  
                  10,125,000
                  
                  
                  
                  10,125,000
                  
                  
                  
                  10,125,000




37





Year Ended June 30,Consolidated Balance Sheets
                    
                    2008
                    
                    2007
                    
                    2006
                    
                    2005
                    
                    2004(audited)
                    
                    (audited)
                    
                    (audited)
                    
                    (audited)
                    
                    (audited)Current
      Assets
                    
                    
                    $
                    24,282,846
                    
                    
                    $
                    31,266,489
                    
                    
                    $
                    12,149,634
                    
                    
                    $
                    11,981,783
                    
                    
                    $
                    7,900,644Total
      Assets
                    
                    
                    
                    101,313,662
                    
                    
                    
                    73,760,133
                    
                    
                    
                    31,271,457
                    
                    
                    
                    23,672,498
                    
                    
                    
                    17,644,345Current
      Liabilities
                    
                    
                    
                    51,904,264
                    
                    
                    
                    38,468,085
                    
                    
                    
                    23,612,427
                    
                    
                    
                    19,564,316
                    
                    
                    
                    14,447,904Total
      Liabilities
                    
                    
                    
                    54,558,259
                    
                    
                    
                    42,129,557
                    
                    
                    
                    24,614,027
                    
                    
                    
                    20,411,316
                    
                    
                    
                    16,141,904Total
      Stockholders’ Equity
                    
                    
                    
                    46,755,403
                    
                    
                    
                    31,630,576
                    
                    
                    
                    6,657,430
                    
                    
                    
                    3,261,182
                    
                    
                    
                    1,502,441




Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.





This
report contains forward-looking statements. These statements relate to future
events or our future financial performance. In some cases, youcan identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or
“continue,” the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
Factors that may cause our results to differ include, but are not limited to:
changes in the scope or timing of our projects; slowdown in the demand for
pharmaceutical grade glucose and glucose and starch products genereally, which
could reduce revenues and profit margins.





Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we, nor any other person, assume
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this Annual Report on Form 10-K to conform such
statements to actual results or to changes in our expectations.




The
following discussion should be read in conjunction with our audited consolidated
financial statements and the related notes and other financial information
appearing elsewhere in this Form 10-K and other reports and filings made with
the Securities and Exchange Commission. Readers are also urged to carefully
review and consider the various disclosures made by us which attempt to advise
interested parties of the factors which affect our business, including without
limitation the disclosures made under the caption “Management’s Discussion and
Analysis of Financial


Condition
and Results of Operations,” and Item 1A—Risk Factors.





Overview





We are,
through our wholly-owned subsidiary, Shengtai Holding Inc. and its wholly-owned
subsidiary in the PRC, Weifang Shengtai Pharmaceutical Co., Ltd, a leading
manufacturer and supplier of pharmaceutical grade glucose in the PRC. We also
manufacture glucose and starch products for food and beverage industry for
domestic market.





During
the reporting period, we increased our production of pharmaceutical grade
glucose products, in particular dextrose monohydrate. Dextrose monohydrate is
one of the five most important types of medical prescriptions in the PRC and is
one of the most widely used pharmaceutical products for restorative and
nutritional purposes. It is used as a raw material in a wide array of
pharmaceutical products such as transfusions and intravenous
drips.


38


Our
cornstarch production facility with the design capacity to produce 240,000 tons
of cornstarch a year was completed and started production in January 2007. This
new complex is close to our existing glucose production plant and new glucose
production complex which was completed in July, 2008. Additionally, this new
facility allows us to produce our own cornstarch and replace our suppliers of
cornstarch. We are able to ensure the adequacy and quality of the cornstarch we
use and also meet our increasing demand for quality cornstarch. Since cornstarch
is produced on our premises, we are able to eliminate shipping costs to
transport the cornstarch to our glucose production facility and operating costs,
thus resulting in lower manufacturing costs.





In
addition to our pharmaceutical glucose series of products, we also have produced
other product lines of glucose and starch products such as industrial glucose,
syrup, starch, Avermectins, and dextrin, which are used for food, beverage and
industrial production. In May 2008 we stopped producing Avermectins because we
can not currently produce and sell this product on an efficient scale and we
want to focus our limited resources to our main product line for the time
being.





Based on
our analysis of the consumption of glucose products carried out by the China
Starch Industry Association and the disposable income per
capita from China National Statistics Bureau, we believe that there is a strong
correlation between the consumption of glucose products and the disposable
income per capita.





We
predict that higher living standards would lead to higher consumption of
pharmaceutical dextrose. It is our understanding that the robust and continuing
economic growth, the rising purchasing power of domestic market, as well as the
public awareness of quality healthcare products, are


all
drivers to the demand for our products. The strong growth in the PRC
pharmaceutical industry will also help increase the selling prices of our major
products, and enhance our revenues and increase our gross profit
margin.





Management
has been placing emphasis on (i) product quality control (ii) enhancement of
operating efficiency (iii) expansion of geographical coverage and
diversification of customer base, and (iv) new product development. We believe
that these points are essentially for maintaining our
competitiveness.





Our
production facilities have been fully certified GMP (Good Manufacturing Practice
for Drugs), ISO9002 and HACCP. The rate of quality output (output conforming to
pharmaceutical-grade glucose product specifications) is maintained at 100%. We
have a three-tier quality control system and a well equipped quality inspection
center to ensure timely detection and then reprocessing of non-conforming
products.





Our
production lines are vertically integrated. Our production facilities are all
inter-connected by an enclosed pipeline system to enhance overall production
efficiency, minimize wastage of water and raw materials, and to avoid production
contamination.





We are
currently developing new production technology to recycle our waste water and
byproducts. At the same time, we are improving overall production efficiency by
analyzing and ameliorating inefficient production processes. We believe that
environment protection and production efficiency are important in our
growth.





At the
end of calendar year 2006, the Changle local government negotiated with us and
required us to surrender the land use right of our old factory in the downtown
Changle for their municipal construction. The land we occupied was 27,396 square
meters. We were offered a bigger parcel of land in Changle Economic and
Technology Development Zone with 85,880 square meters as described
below.


39





In April
2007, we acquired the rights to use a piece of land measuring 85,880 square
meters in the Changle Economic and Technology evelopment Zone. We developed the
land and built a new glucose production complex with an expected production
capacity of 120,000 tons per year ( It can expanded to 150,000 if necessary).
The construction has been finished at the end of July 2008. The new facility
will be used to produce pharmaceutical grade glucose.





In July
2007, we acquired the right to use a piece of land measuring 40,000 square
meters in the Changle Economic and Technology Development Zone. We plan to use
the land as reserve for future development. During the reporting period under
review, we managed to successfully expand our domestic sales network. As of June
30, 2008, all the provinces except Tibet in the PRC have been covered by our
domestic sales network. We have established representative offices in 4
provinces to fortify our domestic sales network. We believe that these offices
help us to better interact with our customers, reinforce our sales force and
improve our corporate image. In the meantime, we export our products to
customers in over seventy countries, and we plan to increase our global sales in
the coming years.





We
constantly strive to broaden and diversify our customer base. A broader customer
base can not only mitigate our reliance on certain big customers, but also bring
us more opportunities. We believe a broader market for our products can increase
demand for our products, reduce our vulnerability to market changes, and provide
additional areas of growth in the future. Our top ten customers accounted
for only 34.08% for our total sales for the fiscal year ended June 30,
2008.





Management
is not aware of any adverse trends that would materially affect our market and
financial position. We will continue to identify and pursue innovative products
and technology to our increase market share and optimize our cost structure.
Barring unforeseen circumstances, we anticipate continued growth in our sales
growth. Our ability to meet increased customer demand and stay profitable will
however still depend on factors such as our production capacity and working
capital.





Result
of Operations





Year
Ended June 30, 2008 Compared with Year Ended June 30, 2007





The
following table shows our operating results for the fiscal years ended June 30,
2008 and 2007.





Fiscal Year ended
                  June 30, 2008
                
                
                Fiscal Year ended
                  June 30, 2007Sales Revenue
                
                $
                90,871,223
                
                
                $
                51,706,215Costs
      of Goods Sold
                
                
                70,613,757
                
                
                
                39,527,662Gross
      Profit
                
                
                20,257,466
                
                
                
                12,178,553Sales,
      General and Administrative Expenses
                
                
                7,390,623
                
                
                
                4,674,679Operating
      Income
                
                
                12,866,843
                
                
                
                7,503,874Other
      Net Income (Expense)
                
                
                (1,810,530
                )
                
                
                524,088Income
      before Income Taxes
                
                
                11,056,313
                
                
                
                8,027,962Provision
      for Income Taxes
                
                
                645,988
                
                
                
                878,836Net
      income
                
                
                10,410,325
                
                
                
                7,149,126




40





Sales
revenue for the fiscal year ended June 30, 2008 was $90,871,223, an increase of
$37,165,008, or 75.75% compared with the corresponding period in 2007. This
increase was mostly the result of the increase in sales of our corn starch and
other products which include Fibers, Dextrin, corn embryo, Protein Powders, and
Phytin. The increased revenue of these two categories is mainly because we
completed the new cornstarch plant in September, 2006, and the cornstarch plant
production capacity achieved 73.33% utilization rate in FY 2008. Glucose
revenues did not increase because our old glucose plant has reached full
production capacity. In addition, the sales prices increased, especially the
price of the other products which include Fibers, Dextrin, corn embryo, Protein
Powders, and Phytin.




Costs of
goods sold for the year ended June 30, 2008 was $70,613,757, an increase of
$31,086,095, or 78.64% compared with the corresponding period in 2007. The
increase in cost of goods sold is in tandem with the increase in sales of our
products and because of the increase of our main raw material -
corn.





Gross
profit for the year ended June 30, 2008 was $20,257,466, an increase of
$8,078,913, or 66.34% compared with the corresponding period in 2007. The reason
for the increase in gross profit was mostly due to the economies of scale
resulting from the expansion of our production output and enhanced
operating efficiency.





However,
the profit margin of 2008 is lower than 2007. Gross profit margin for the year
ended June 30, 2008 was 22.3%, while it was 23.6% for the same period in 2007.
The decreased gross profit margin is because of the increased corn price and
increased sales of lower gross profit margin corn products. As the product
capacity of cornstarch is improved, we produced a large scale of cornstarch, and
the new plant of glucose had not been completed, we cannot use most of the
cornstarch, so we have to sell most of the cornstarch, and the sales composition
of our products changed. We expect after the completion of our new glucose
plant, most cornstarch will be consumed internally, and the sales of glucose
will increase, so the sales will be composed of mainly higher gross profit
margin products. Then the total gross profit margin should be
higher.





Selling,
general and administrative expenses for the year ended June 30, 2008 was
$7,390,623, an increase of $2,715,944, or 58.10% compared with the corresponding
period in 2007. The increase in our selling, general and administrative expenses
was the result of the expansion of our production output, especially the
expansion of domestic sales network. The higher worker insurance requirements
related expenditures are also the causes of higher general and administrative
expenses. However, the percentage of increase in our expenses is much lower than
the percentage increase in our gross profit because of greater efficiencies of
scale from a larger production output and our strict cost control. In addition,
the expense of stock options $317,636 was also a part of selling, general and
administrative expenses.





Net
income for the year ended June 30, 2008 was $10,410,325, an increase of
$3,261,199, or 45.62% compared with the corresponding period in 2007. The
increase of net income was due to our increase in production output, sales
volume and gross profit.


41





Fiscal
Year Ended June 30, 2007 and Fiscal Year Ended June 30, 2006





The
following table shows our operating results for the fiscal years ended June 30,
2006 and 2007.





Fiscal Year ended
                  June 30, 2007
                
                
                Fiscal Year ended
                  June 30, 2006Sales Revenue
                
                $
                51,706,215
                
                
                $
                36,029,179Costs
      of Goods Sold
                
                
                39,527,662
                
                
                
                27,568,092Gross
      Profit
                
                
                12,178,553
                
                
                
                8,461,087Sales,
      General and Administrative Expenses
                
                
                4,674,679
                
                
                
                3,831,778Operating
      Income
                
                
                7,503,874
                
                
                
                4,629,309Other
      Net Income (Expense)
                
                
                524,088
                
                
                
                (418,398
                )Income
      before Income Taxes
                
                
                8,027,962
                
                
                
                4,210,911Provision
      for Income Taxes
                
                
                878,836
                
                
                
                —Net
      income
                
                
                7,149,126
                
                
                
                4,210,911




Sales
revenue for the fiscal year ended June 30, 2007 was $51,706,215, an increase of
$15,677,036, or 43.5% compared with the corresponding period in 2006. This
increase was mostly the result of the increase in sales of our glucose products
and higher product prices. In addition, our new cornstarch plant began
production in 2007 resulting in maximizing the production of our glucose
manufacturing facility and the sale of additional excess cornstarch to outside
customers. Accordingly, the total sales of both glucose and cornstarch were both
increased.





Costs of
goods sold for the year ended June 30, 2007 was $39,527,662, an increase of
$11,959,570, or 43.4% compared with the corresponding period in 2006. The
increase in cost of goods sold is in tandem with the increase in sales of our
products.





Gross
profit for the year ended June 30, 2007 was $12,178,553, an increase of
$3,717,466, or 43.9% compared with the corresponding period in 2006. The reason
for the increase in gross profit was mostly due to the economies of scale
resulting from the expansion of our production output and enhanced operating
efficiency. Although product cost increased as a result of price increases of
corn and other raw materials, the selling price was higher than the price
increase of corn, thus making our gross profit higher.





However,
there is not significant increase of gross profit margin from fiscal 2006 to
2007. Gross profit margin for the year ended June 30, 2007 was 23.6%, while it
was 23.5% for the same period in 2006. We produced some new products with high
profit margins, but at the same time the sales of lower profit margin products
to outside customers, such as cornstarch, averaged down our overall gross profit
margin.





Selling,
general and administrative expenses for the year ended June 30, 2007 was
$4,674,679, an increase of $842,901, or 22% compared with the corresponding
period in 2006. The increase in our selling, general and administrative expenses
was the result of the expansion of our production output, especially the
expansion of domestic sales network. The higher worker insurance requirements
and environment related expenditures are also the causes of higher general and
administrative expenses. However, the percentage of increase in our expenses is
much lower than the percentage increase in our gross profit because of greater
efficiencies of scale from a larger production output and our strict cost
control.


42





Net
income for the year ended June 30, 2007 was $7,149,126, an increase of
$2,938,215, or 69.8% compared with the corresponding period in 2006. The
increase of net income was due to our increase in production output, sales
volume and gross profit margin, as well as the gain derived from surrendering
our land use rights in the piece of property in downtown Changle to the Changle
local government.





Liquidity
and Capital Resources





Operating
Activities





Fiscal
Year Ended June 30, 2008 compared to Fiscal Year Ended June
30, 2007





Net cash
provided by operating activities for fiscal year 2008 was $3,580,467, compared
to $8,345,730 provided by operating activities for fiscal year 2007. The
decrease of net cash provided by operations was mostly because of the following
reasons: We have increased sales. More other receivables have been
collected offset by decrease of accounts payable as we have acquired plant and
equipment through accounts payable.  Notes receivable and other
receivables are classified as operating cash flows because these assets are used
for operating purposes. These assets are mainly used to purchase our raw
materials and fund our normal operations.





Investing
Activities





Fiscal
Year Ended June 30, 2008 compared to Fiscal Year Ended June 30,
2007





Net cash
used in investing activities for fiscal 2008 was $10,084,751, compared to
$23,944,638 used in investing activities for fiscal 2007. The decrease of net
cash used in investing activities is because we spent most of our capital
expenditures for building our cornstarch and glucose factories in fiscal year
2007. In fiscal year 2008, we are in the process of completing the glucose
factory and there is less capital expenditure. The glucose factory was completed
in July 2008.





Financing
Activities





Fiscal
Year Ended June 30, 2008 Compared to Fiscal year Ended June 30,
2007





Net cash
provided by financing activities for fiscal 2008 was $3,176,334 compared to
$21,677,695 for the same period in fiscal 2007. The decrease was mostly because
there was an equity financing of $15,256,428 in 2007 while there was no equity
financing in 2008.


43





Contractual obligationsPayments due
                    by periodTotal
                  
                  
                  Less than 1 year
                  
                  
                  1-3 years
                  
                  
                  3-5 years
                  
                  
                  More than 5
                    yearsLong-Term Debt Obligations
                  
                  $
                  5,099,205
                  
                  
                  $
                  2,039,682
                  
                  
                  $
                  3,059,523
                  
                  
                  $
                  —
                  
                  
                  $
                  —Capital
      Lease Obligations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Operating
      Lease Obligations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Purchase
      Obligations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Other
      Long-Term Liabilities Reflected on the Registrant's Balance Sheet under
      GAAP
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  5,099,205
                  
                  
                  $
                  2,039,682
                  
                  
                  $
                  3,059,523
                  
                  
                  $
                  —
                  
                  
                  $
                  —




Loans





Other
than the equity financing last year, our PRC operating subsidiary, Weifang
Shengtai financed its operations and capital expenditure requirements primarily
through bank loans and operating income. Weifang Shengtai had a total of
$22,658,270,$18,870, 250, and $8,576,200 short term bank loans outstanding as of
June 30, 2008, 2007, and 2006, respectively. The loans were secured by Weifang
Shengtai’s properties and accounts receivable. The terms of all these short term
loans were for one year. Weifang Shengtai has never defaulted on any
loans.





Weifang
Shengtai does not have any long term loans from local banks. The outstanding
long-term loans, or the non-current portion of payables, which can be classified
as long term liabilities, were $2,653,995, $3,661,472, and $1,001,600 as of June
30, 2008, 2007, and 2006, respectively.





Guarantees





We have
guaranteed certain borrowings of other unrelated third parties including short
term bank loans, lines of credit and bank notes. The total guaranteed amounts
were $7,295,000, $8,560,650 and $14,270,880 as of June 30, 2008, 2007 and 2006.
Some unrelated third parties have guaranteed approximately $ 13,729,190, $
14,925,250 and $ 5,158,240 of our debt, as of June 30, 2008, 2007 and
2006.





Future
cash commitments





We
estimate the need for $6 million to $10 million to run the new glucose
facilities. The exact amount will be determined based on both the market demand
of our products and the time needed for these facilities to run at full
capacity. We may carefully review our financial condition and consider financing
either with the cash internally generated, bank loans, or with additional
equity.





Critical
Accounting Policies and Estimates





We have
disclosed in the notes to our financial statements those accounting policies
that we consider to be significant in determining our results of operations and
our financial position which are incorporating by reference herein. We believe
that the following reflect the more critical accounting policies that currently
affect our financial condition and results of operations.


44





Revenue
recognition





We
utilize the accrual method of accounting. Revenue is recognized when the
products are delivered, title has passed, pricing is fixed and collectibility is
reasonably assured. Sales revenue represents the invoiced value of goods, net of
value-added tax (VAT) and estimated returns of product from
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
Receivables





Accounts
receivables are stated at net realizable value. Any allowance for doubtful
accounts is established based on the management’s assessment of the
recoverability of accounts and other receivables. Management reviews our
accounts receivable on a regular basis to determine if the bad debt allowance is
adequate. An estimate for doubtful accounts is made when collection of the full
amount is no longer probable. Known bad debts are written off as
incurred.





Property
and equipment





Property
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed using straight-line method, with 3% residual value, over the estimated
useful lives of the assets.





Foreign
currency translation





Our
functional currency is the Chinese 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.


45





Item7A.
Quantitative and Qualitative Disclosures About Market Risk.





Credit
Risk.





We are
exposed to credit risk from our cash at bank, fixed deposits and contract
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Contract
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the
collectibility of contract receivables by assessing, among other factors, the
customer’s willingness or ability to pay, repayment history, general economic
conditions and our ongoing relationship with the customers.





Country
Risk.





Substantial
portion of our business, assets and operations are located and conducted in the
PRC. While the PRC’s economy has experienced significant growth in the past
twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some of these
measures benefit the overall economy of the PRC, but may also have a negative
effect on us. For example, our operating results and financial condition may be
adversely affected by government control over capital investments or changes in
regulations applicable to us. If there are any changes in any policies by the
PRC government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits, will
also be negatively affected.





Foreign
Currency Risk.




Substantially
all of our operations are conducted in the PRC. Our sales and purchases are
conducted within the PRC in Renminbi. Conversion of the Renminbi into foreign
currencies is regulated by the People’s Bank of China through a unified floating
exchange rate system. Although the PRC government has stated its intention to
support the value of the Renminbi, there can be no assurance that such
exchange rate will not again become volatile or that the Renminbi will not
devalue significantly against the U.S. dollar. Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and
income derived from our operations in the PRC. In addition, the Renminbi is not
freely convertible into foreign currency and all foreign exchange transactions
must take place through authorized institutions.





Item
8. Financial Statements and Supplementary Data.





The
information required by this Item 8 is included in Item 15 of this Form
10-K.





Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.





During
the fiscal year ended June 30, 2008, there were no changes in and disagreements
with accountants and financial disclosure.


46





Item
9A Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Mr.
Qingtai Liu, our Chief Executive Officer and Ms. Yiru Melody Shi, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of the end of the period covered by this
Report. Based on that evaluation, our officers concluded that due to the
material weaknesses in the internal control over financial reporting as
disclosed below in the Section of “Management’s Report on Internal Control over
Financial Reporting,” our disclosure controls and procedures were ineffective
and are not adequately designed to ensure that the information required to be
disclosed by us in the reports we submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
applicable rules and forms and that such information was accumulated and
communicated to our chief executive officer and chief financial officer, in a
manner that allowed for timely decisions regarding required
disclosure.





Notwithstanding
management’s assessment that our internal control over financial reporting was
ineffective as of June 30, 2008 due to the material weakness described below
under Management’s Report on Internal Control Over Financial Reporting, we
believe that the consolidated financial statements included in this Annual
Report on Form 10-K correctly present our financial condition, results of
operations and cash flows for the fiscal years covered thereby in all material
respects after all the adjustments proposed by our auditors were accepted and
made by the Company.





Management’s
Report on Internal Control over Financial Reporting





Internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Management is responsible for
establishing and maintaining adequate internal control over financial
reporting.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, the application of any evaluation of
effectiveness to future periods is subject to the risk that controls may become
inadequate because of changes in conditions, or that compliance with the
policies or procedures may deteriorate.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.





A
significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness; yet important enough to merit attention by those responsible for
oversight of the Company’s financial reporting.





We have
evaluated the effectiveness of our internal control over financial reporting as
of June 30, 2008. This evaluation was performed using the Internal Control – Evaluation
Frameworkdeveloped by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on such evaluation, management concluded
that the Company’s internal control over financial reporting was not effective
and identified the material weaknesses in the Company’s internal control over
financial reporting as stated below.





Material
weaknesses related to:





•
Accounting and Finance Personnel Weaknesses - US GAAP expertise - The current
staff in the accounting department is relatively new and inexperienced, and
needs substantial training so as to meet with the higher demands of being a U.S.
public company. The accounting skills and understanding necessary to fulfill the
requirements of U.S. GAAP-based reporting, including the skills of subsidiary
financial statements consolidation, are inadequate and were inadequately
supervised.


47





• Lack of
internal audit function - The Company lacks qualified resources to perform the
internal audit functions properly.  In addition, the scope and
effectiveness of the internal audit function are yet to be
developed.





Due to
those above material weaknesses, during the annual audit process for the year
ended June 30, 2008, our independent auditor proposed material adjustments to
allowance for bad debt, interest expenses from the capital lease equipment and
additional liability due from the asset purchase.





Management
Remediation Plan





During
its audit of our consolidated financial statements for the fiscal year ended
June 30, 2008, our independent registered public accounting firm reported
material weakness in our financial statement reporting process.





In order
to correct the foregoing material weaknesses, we have taken the following
remedial measures:





1. In May
2008, we engaged Ms. Yiru Shi, a CPA with experience as an independent auditor
as well as financial experience at Sun Microsystems and Hewlett Packard, to
serve as our chief financial officer. Ms. Yiru Shi has extensive experience in
internal control and U.S. GAAP reporting compliance and an MBA from the
University of California-Irvine and together with our chief executive officer
will oversee and manage our the financial reporting process and required
training of the accounting staff.





2. In
July, 2008 we engaged independent consultants to assist the Company in improving
the internal control system based on the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. The consultants are currently in the process of conducting
an evaluation of our internal control over financial reporting, and designing
and implementing enhanced processes and procedures to improve our internal
control over financial reporting.





3. We
plan to train our internal accountants well in U.S. GAAP principles and
reporting. Although our accounting staff is professional and experienced in
accounting requirements and procedures generally accepted in the PRC, management
has determined that they require additional training and assistance in U.S. GAAP
matters.





4. We are
also planning to establish an internal audit unit to establish effective
internal control. We plan to allocate sufficient resources to achieve an
effective internal audit function.





5. We
plan to recruit and train additional accounting personnel with experience in
U.S. GAAP.





We
believe that the steps we are taking are necessary for remediation of the
material weaknesses identified above, and we will continue to monitor the
effectiveness of these steps and to make any changes that our management deems
appropriate.





Changes
in Internal Control Over Financial Reporting





No change
in our internal control over financial reporting has occurred during the quarter
ended June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





Auditor
Attestation





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this annual
report.


48





Item
9B. Other Information.





None.





PART
III





Item
10. Directors, Executive Officers and Corporate Governance.





Below are
our executive officers and directors. Most of our executive officers and
directors are residents of the PRC. As a result, it may be difficult for
investors to effect service of process within the United States upon them or to
enforce court judgments obtained against them in the United States
courts.





DirectorsandExecutiveOfficers
            
            Position/Title
            
            AgeQingtai Liu
            
            Chief Executive   Officer / Director
            
            50Yongqiang Wang
            
            Director
            
            39Chris W. Wang
            
            Director
            
            37Changxin  Li
            
            Director
            
            48Winfred Lee
            
            Director
            
            48Yiru Shi
            
            Chief Financial Officer
            
            35





The
following is a summary of the biographical information of our directors and
officers:





Qingtai Liu, 50, graduated
from the Electrical Engineering Faculty of the Shandong Technical University
with a Bachelor of Science degree in February 1982. He became the workshop
director and head of the production department of Changle Wireless Device
Factory until 1988, whereupon he assumed the position of Head of Science and
Technology at the Changle Power Factory. In 1990, Mr. Liu became the Director of
Weifang Fifth Pharmaceutical Plant. From January 1999 to present day, he is the
Chairman and Chief Executive Officer of Weifang Shengtai Pharmaceutical Co.,
Ltd. Under his leadership, the Company successfully developed unique production
techniques for the production of glucose and medicinal coating products, and has
won Technology Innovation awards issued by the Chang Le County, Weifang City and
the Shandong provincial government offices. The medicinal coating material
technology that Mr Liu jointly developed with the Shandong University has
been certified by the Technology Development Bureau of the Shandong Province to
be of international standard. Over the years, Mr Liu has been endorsed by the
Weifang City Government office as a Leading Technology Innovator and a
Distinguished Pharmaceutical Production Director. He also is the deputy to the
People’s Conference of both Weifang City and Changle County.




Yongqiang Wang, 39, graduated
with an Associates degree from the Shandong Economic and Management Institute.
He joined Weifang Shengtai in April 2006 as the assistant to the General Manager
of the Accounts Department and was in charged of the finance department. He
assumed the position of Deputy General Manager of the Accounts Department in
February 2007. Prior to joining us, Mr. Wang worked as a financial manager for
various enterprises.


49





Chris W. Wang, 37, has served
as the Chief Financial Officer of Fushi International, Inc. since December 13,
2005. Since March 2005, Mr. Wang also serves as the Chief Financial Officer of
Dalian Fushi. Mr. Wang served as an Executive Vice President of Redwood Capital,
Inc. from November 2004 o March 2005, with specific focus on providing strategic
and financial advisory services to PRC-based clients seeking access to the U.S.
capital markets. Mr. Wang previously served as Assistant VP of Portfolio
Management at China Century Investment Corporation from October 2002 to
September 2004. Prior to that, Mr. Wang worked for Credit Suisse First Boston
(HK) Ltd. Fluent in both English and Chinese, Mr. Wang holds an MBA in Finance
and Corporate Accounting from Simon Business School of University of
Rochester.





Changxin Li, 48, has been the
Chief of the Department of Medicine, member of the Credentials Committee and
Medical Director of both the Echocardiography Laboratory and Cardiopulmonary
Department of the Otsego Memorial Hospital since 2005. He has also been an
internist with the Otsego Memorial Hospital since 1995. Mr. Li graduated with an
MB from the Weifang (formerly Changwei) Medical College, Weifang, Shandong,
China in 1982 and a PhD from the Department of Physiology, University of
Alberta, Edmonton, Alberta, Canada in 1990. He is a Fellow of the American
College of Physicians (USA).





Winfred Lee, 48, has been a
Contract Administrator with Tenet Healthsystems for South Bay Medical Center,
North Hollywood Medical Center, Midway Hospital, Century City Hospital, and
Brotman Medical Center from 1997. Mr. Lee graduated with a Bachelor of Science
in Business Management from Brigham Young University, Provo, Utah in 1984. He
then graduated with a Doctor of Medicine from the Medical College of Wisconsin,
Milwaukee, Wisconsin, in 1988 and a Doctor of Jurisprudence from the J. Reuben
Clark Law School at Brigham Young University, Provo, Utah, in 1992. Mr. Lee is a
member of the California Bar and the Phi Delta Phi Legal Society





Yiru Shi, 35, Served as audit
manager for Kabani & Co., Inc., Controller at Aroa Marketing, Channel
Program Manager at Sun Microsystems and financial analyst at Hewlett Packard
China, obtained MBA from University of California, Irvine, Bachelors degrees in
Computer Science and International Trade and Business from Beijing Polytechnic
University and is a Certified Public Accountant





All of
our directors hold offices until the next annual meeting of the shareholders of
the Company, and until their successors have been qualified after being elected
or appointed. Officers serve at the discretion of the board of
directors.





There are
no family relationships among our directors or executive officers. There is no
arrangement or understanding between or among our officers and directors
pursuant to which any director or officer was or is to be selected as a director
or officer, and there is no arrangement, plan or understanding as to whether
non-management shareholders will exercise their voting rights to continue to
elect the current Board of Directors.





Our
directors and executive officers have not, during the past five
years:





ཫ
            had any bankruptcy petition
      foiled by or against any business of which was a general partner or
      executive officer, either at the time of the bankruptcy or within two
      years prior to that time,




50





ཫ
            been convicted in a criminal
      proceeding and is not subject to a pending criminal
      proceeding,





ཫ
            been subject to any order,
      judgment or decree, not subsequently reversed, suspended or vacated, of
      any court of competent jurisdiction, permanently or temporarily enjoining,
      barring, suspending or otherwise limiting his involvement in any type
      of business, securities, futures, commodities or banking activities;
      or





ཫ
            been found by a court of
      competent jurisdiction (in a civil action), the Securities Exchange
      Commission or the Commodity Futures Trading Commission to have violated a federal
      or state securities or commodities law, and the judgment has not been
      reversed, suspended or
vacated.





Section 16(A) Beneficial
Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who own more than 10% of a registered class of our
equity securities to file initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission (the "SEC"). Such persons
are required by SEC regulation to furnish us with copies of all Section 16(a)
forms they file.





Based
solely on review of the copies of such forms received by us with respect to
fiscal year 2007, or written representations from certain reporting persons, we
believe that all filing requirements applicable to its directors, officers and
persons who own more than ten percent of a registered class of our equity
securities have been complied.





Item
11. Executive Compensation.





Compensation
Discussion and Analysis





We
endeavor to provide our “named executive officers” (as defined in Item 402 of
Regulation S-K) with a competitive base salary that is in- line with their roles
and responsibilities when compared to peer companies of comparable size in the
same or similar locality.





It is not
uncommon for PRC private corporations in that locality to have base salaries as
the sole and only form of compensation. The base salary level is established and
reviewed based on the level of responsibilities, the experience and tenure of
the individual and the current and potential contributions of the individual.
The base salary is compared to the list of similar positions within comparable
peer companies and with consideration of the executive’s relative
experience in his or her position. Base salaries are reviewed periodically
and at the time of promotion or other changes in responsibilities.





We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. This compensation program shall be comparative to our peers in
the industry and aimed to retain and attract talented
individuals.


51





We have
formed a Compensation Committee of the Board of Directors comprised solely of
independent directors to oversee the compensation of our named executive
officers. The members of our Compensation Committee are Wenbing Christopher Wang
(Chairman) Changxin Li; and Winfred Lee.





Summary
Compensation Table





The
following is a summary of the compensation we paid for each of the two years
ended June 30, 2008, and 2007, respectively (i) to the person who acted as our
principal executive officer during our fiscal year ended June 30, 2008 and (ii)
to the former employee who received compensation in excess of $100,000 for one
of these years . None of our other executive officers received compensation in
excess of $100,000 for any of these two years.




Nameand
                          PrincipalPosition
                        
                        Year
                        
                        Salary
                          ($)
                        
                        Bonus($)
                        
                        Stock
                          Awards($)
                        
                        Option
                          Awards($)
                        
                        NonEquity
                          Incentive
                          Plan
                          Compensation
                          ($)
                        
                        Changein
                          Pension
                          Valueand
                          Nonqualified
                          Deferred
                          Compensation
                          Earnings($)
                        
                        AllOther
                          Compension
                          ($)
                        
                        Total($)Qingtai
      Liu (1)
                        
                        
                        2008
                        
                        133,714
                        
                        
                        —
                        
                        —
                        
                        
                        96,253
                        
                        —
                        
                        
                        —
                        
                        —
                        
                        
                        229,9672007
                        
                        19,662
                        
                        
                        —
                        
                        —
                        
                        
                        —
                        
                        —
                        
                        
                        —
                        
                        —
                        
                        
                        19,662Yizhao
      Zhang (2)
                        
                        
                        2008
                        
                        105,500
                        
                        
                        —
                        
                        —
                        
                        
                        77,003
                        
                        —
                        
                        
                        —
                        
                        —
                        
                        
                        207,0032007
                        
                        12,000
                        
                        
                        —
                        
                        —
                        
                        
                        —
                        
                        —
                        
                        
                        —
                        
                        —
                        
                        
                        12,000





(1)
            Chairman and Chief Executive
      Officer (Principal
      Executive Officer).





(2)
            Mr. Zhang joined us as our Chief
      Financial Officer in May 2007 and resigned in May
    2008.




Grants
of Plan-Based Awards in Fiscal 2008





On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”).





On May
14, 2008, the Company granted 500,000 stock options and 160,000 non-qualified
stock options pursuant to the Stock Incentive Plan. All options have an exercise
price of $3.34, which is the closing price on the date of grant, and expire five
years after the date of grant. All options vest over a period of three years
from the date of grant.


52





Outstanding
Equity Awards at 2008 Fiscal Year End





As of
June 30, 2008, there are 660,000 shares of options outstanding.





Equity
Compensation Plan Information at June 30, 2008




The
following table sets forth information as of June 30, 2008 regarding
compensation plans under which the Company’s equity securities are authorized
for issuance.





(a)
                
                
                (b)
                
                
                (c)Plan Category
                
                Numberof
                  securitiestobe
                  issuedupon
                  exerciseof
                  outstanding
                  equityawards
                
                
                Weighted-average
                  exercisepriceof
                  outstanding
                  equityawards($)
                
                
                Numberof
                  securities
                  remaining
                  availablefor
                  futureissuance
                  underequity
                  compensation
                  plans(excluding
                  securities
                  reflectedin
                  column(a))Equity
      compensation plans approved by security holders
                  Shengtai
      Pharmaceutical, Inc. 2007 Stock Incentive Plan.
                
                
                —
                
                
                
                
                
                
                —Equity compensation plans not
      approved by security holders
                  Issuances
      of non-qualified options to employees
                
                
                660,000
                
                
                $
                3.34
                
                
                
                1,340,000Total
                
                
                660,000
                
                
                $
                3.34
                
                
                
                1,340,000





Option
Exercises and Stock Vested in Fiscal 2008.





There
were no option exercises or stock vested in 2008.





Employment
Agreements





We have
no employment agreements with any executive officer, except for our employment
agreement dated May 1, 2008 with Yiru (Melody) Shi, our Chief Financial
Officer.





Compensation
of Directors.





Our
current non-executive directors are compensated for all services they perform as
directors , including attendance at Board of Directors meetings and service as
members of committees of the Board of Directors to which they are appointed.
Executive officers are not compensated for services they perform as directors of
the Company. The details of such compensation are:




ཫ
            annual compensation of
      $15,000;




53





ཫ
            additional annual compensation of
      $15,000 if the director serves as the Chairman of the Audit Committee;
      and





ཫ
            we may also grant the
      non-executive directors certain options to purchase our shares, the amount
      and terms of which
      shall be determined by the Board of
  Directors.





The
non-executive directors are also reimbursed for all of their out-of-pocket
expenses in traveling to and attending meetings of the Board of Directors and
committees on which they would serve.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.





The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities by (i) any person or group owning more than
5% of any class of voting securities, (ii) each director, (iii) our chief
executive officer and the Company’s top three most highly compensated officers
and (iv) all executive officers and directors as a group as of June 30,
2008.





NameandAddressofBeneficialOwner
                                                                      
                                                                      Title ofClass
                                                                      
                                                                      AmountandNature
                                                                        ofBeneficial
                                                                        Ownership(1)(2)
                                                                      
                                                                      Percent of
                                                                        Class(4)Qingtai
      Liu (3)Chief
      Executive officer and PresidentHi-Tech
      Industrial Park of Changle County, Shandong Province, PRC
      262400
                                                                      
                                                                      Common Stock
                                                                      
                                                                      
                                                                      7,378,025
                                                                      
                                                                      38.64
                                                                      %Yiru
      Shi (3)Chief
      Financial Officer, President and a directorHi-Tech
      Industrial Park of Changle County, Shandong Province, PRC
      262400
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      —Yongqiang
      Wang (3)directorHi-Tech
      Industrial Park of Changle County, Shandong Province, PRC
      262400
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      —Chris
      Wenbing Wang (3)directorHi-Tech
      Industrial Park of Changle County, Shandong Province, PRC
      262400
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      —Winfred
      Lee (3)directorHi-Tech
      Industrial Park of Changle County, Shandong Province, PRC
      262400
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      —Changxin
      Li (3)directorHi-Tech
      Industrial Park of Changle County, Shandong Province, PRC
      262400
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      —China
      Private Equity Partners Co., Limited15
      Church Street, Alpine, NJ 07620Common Stock
                                                                      
                                                                      Common Stock
                                                                      
                                                                      
                                                                      1,025,000
                                                                      
                                                                      5.37
                                                                      %Pope
      Investments LLC5150
      Poplar Avenue, Suite 805, Memphis, TN 38137
                                                                      
                                                                      Common Stock
                                                                      
                                                                      
                                                                      2,650,000
                                                                      
                                                                      13.88
                                                                      %




54




(1) On
May 15, 2007, we entered into the share exchange agreement. Under the share
exchange agreement Messrs. Qingtai Liu and Chenghai Du, holders of all the
issued and outstanding shares of common stock of Shengtai Holding, Inc. (SHI),
exchanged their SHI shares for 8,212,500 and 912,500 newly-issued shares of the
Company’s common stock (representing approximately 91% of the issued and
outstanding shares then outstanding). The share exchange closed on May 15, 2007.
Mr. Qingtai Liu entered into an agreement dated May 8, 2006 with certain foreign
finders and Hickey Turner Capital, Inc. in which Mr. Liu agreed to transfer
446,175 shares of the our common stock for the benefit of the foreign finders
and Hickey Turner Capital, Inc. and/or its designees for consulting services. In
addition to transferring these shares, on May 15, 2007, he also transferred an
aggregate of 776,600 shares to his wife and minor child equally on the same date
(which shares are deemed to be beneficially owned by Mr. Liu).





(2) On
May 15, 2007, we entered into and closed on a share purchase agreement. Under
the share purchase agreement, certain investors purchased for $2.00 per share
(or a total of $17,500,000) an aggregate of 8,750,000 shares of common stock and
4,375,000 attached five year warrants.





(3)
Messrs. Qingtai Liu and Yongqiang Wang were appointed directors of the Company
on May 15, 2007. Mr. Zhang was appointed as our Chief Financial Officer in May
2007. Ms Shi was appointed as our Chief Financial Officer in May 2008. Messrs.
Wang, Li and Lee were appointed directors of the Company on June 22,
2007.





(4) Based
on 19,094,805 shares of common stock issued and outstanding on June 30, 2008. In
addition, in determining the percent of common stock owned by a person on June
30, 2008, (a) the numerator is the number of shares of the class beneficially
owned by such person and includes shares which the beneficial owner may acquire
within 60 days upon conversion or exercise of a derivative security, and (b) the
denominator is the sum of (i) the shares of that class outstanding on June 30,
2008, and (ii) the total number of shares that the beneficial owner may acquire
upon conversion or exercise of a derivative security within such 60 day period.
Unless otherwise stated, each beneficial owner has sole power to vote and
dispose of the shares.





Item
13. Certain Relationships and Related Transactions, and Director
Independence.





Weifang
Shengtai entered into a joint venture partnership with Weifang City Investment
Company and Changle Century Sun Paper Industry Co., Ltd on September 16, 2003
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated at Weifang City, Shandong Province, People’s Republic
of China. Changle Shengshi’s principal activity is to produce and sell
electricity and heat.


55





Weifang
Shengtai owned a 30% interest in Changle Shengshi as of June 30, 2004. On April
12, 2005, its percentage ownership in Changle Shengshi was diluted from 30% to
20% due to an additional investment into Changle Shengshi from another party.
Changle Shengshi has a registered capital of approximately $10,800,000. Weifang
Shengtai invested approximately $2,200,000 towards its registered capital, which
accounts for a 20% share of Changle Shengshi’s stock. As of June 30, 2008, total
investment of approximately $3,607,912 represents 20% of Changle Shengshi’s
paid-in capital, which includes earnings on equity investment.





As an
investor and shareholder of Changle Shengshi, Weifang Shengtai enjoys a
preferential discount of 19.7% off the market price of electricity supplied by
the plant to Weifang Shengtai. The intercompany profits were eliminated on our
financial statements.





Weifang
Shengtai had a total of $714,776, $858,881 and $348,366 of accounts payable to
Changle Shengshi at June 30, 2008,2007 and 2006, respectively. The utilities
expenses amounted to $9,851,833 $4,958,249 and $1,705,675, for the years ending
June 30, 2008,2007 and 2006, respectively.




The Company loaned money toChangle Shengshi and enteredinto two loan contracts as
follows:





June 30, 2008
                  
                  
                  June 30, 2007Due
      on November 19, 2007, unsecured, 7.95% interest rate per
    annum
                  
                  $
                  —
                  
                  
                  $
                  657,500Due
      on September 14, 2009, unsecured, 7.6% interest rate per
    annum
                  
                  
                  437,700
                  
                  
                  
                  394,500Total
                  
                  $
                  437,700
                  
                  
                  $
                  1,052,000





The
Company also loaned money to Changle Shengshi in June 2007, for temporary cash
flow needs. This transaction is recurring in nature. The Company does not charge
interest on these receivables and it is due on demand. As of June 30, 2007,
total receivable due from Changle Shengshi was $1,499,207. This balance was
repaid by Changle Shengshi in July 2007. As of June 30, 2008, total receivable
due from Changle Shengshi was $0.





Item
14. Principal Accounting Fees and Services.





Aggregate
fees billed by our current principal accountants, Moore Stephens Wurth Frazer
and Torbet, LLP for audit services related to the most recent fiscal year, and
for other professional services billed in the most recent fiscal year, were as
follows:




Fiscal 2007
                  
                  
                  Fiscal 2008 (3)Audit
      Fees (1)
                  
                  $
                  145,000
                  
                  
                  $
                  145,000Audit-Related
      Fees
                  
                  
                  —
                  
                  
                  
                  —Tax
      Fees (2)
                  
                  
                  —
                  
                  
                  
                  5,000All
      Other Fees
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  145,000
                  
                  
                  $
                  150,000




56





(1)
            Comprised the audit of the
      Company's annual financial statements and reviews of the Company's
      quarterly financial statements, as well as consents related to and reviews
      of other documents filed with the Securities and Exchange
      Commission.





(2)
            Comprised preparation of all
      federal and state corporate income tax returns for the Company and its
      subsidiaries.





(3)
            In our Annual Report on Form
      10-KSB filed on March 27, 2007, we reported that our Board of Directors,
      pursuant to our Bylaws, approved a change in our fiscal year end
      from December 31 to June 30. Disclosure of the fees billed by our current
      accountants, Moore Stephens Wurth Frazer and Torbet, LLP is for the fiscal
      year ended June 30, 2008.





Aggregate
fees billed by our previous principal accountants, Mantyla McRoberts LLC, for
audit services related to the most recent two fiscal years, and for other
professional services billed in the most recent two fiscal years, were as
follows:




Fiscal 2006(3)Audit
      Fees   (1)
                  
                  $
                  10,792Audit-Related
      Fees
                  
                  
                  —Tax
        Fees   (2)
                  
                  $
                  250All
      Other Fees
                  
                  
                  —Total
                  
                  $
                  11,042







(1)
            Comprised the audit of the
      Company's annual financial statements and reviews of the Company's
      quarterly financial
      statements, as well as consents related to and reviews of other documents
      filed with the Securities and Exchange
  Commission.





(2)
            Comprised preparation of all
      federal and state corporate income tax returns for the Company and its
      subsidiaries.





(3)
            In our Annual Report on Form
      10-KSB filed on March 27, 2007, we reported that our Board of Directors,
      pursuant to our Bylaws, approved a change in our fiscal year end from
      December 31 to June 30. Disclosure of the fees billed by our ex
      accountants, Mantyla
      McRoberts LLC is for the fiscal years ended December 31, 2006 and
      2005.





Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our
independent accountants must now be approved in advance by our Audit Committee
to assure that such services do not impair our accountants' independence . Our
Audit Committee’s Chairman is Mr. Chris Wang and the other members are Changxin
Li and Winfred Li. Our Audit Committee reviews and recommends to our Board of
Directors for approval audit and permissible non-audit services performed by
Moore Stephens Wurth Frazer and Torbet, LLP as well as fees charged by them for
such services. Previously when we did not have an Audit Committee, our Board of
Directors carried out this function.


57





PART
IV





Item
15. Exhibits, Financial Statement Schedules.





(a)
            Financial Statements and
      Financial Statement
Schedules





(1)
            Report of Independent Registered
      Public Accounting Firm




Report
      of Independent Registered Public Accounting Firm
                F-1Consolidated
      Balance Sheets as of June 30, 2008 and 2007
                F-2Consolidated
      Statements of Income and Other Comprehensive Income for the Years Ended
      June 30, 2008, 2007 and 2006
                F-3Consolidated
      Statements of Shareholders' Equity for the Years Ended June 30, 2008, 2007
      and 2006
                F-4Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2008, 2007 and
      2006
                F-5Notes
      to Consolidated Financial Statements
                F-6All
      other schedules for which provision is made in the applicable accounting
      regulations of the SEC are not required under the related instructions or
      are inapplicable and therefore have been
  omitted.




58




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


Shengtai
Pharmaceutical Inc. and Subsidiaries





We have
audited the accompanying consolidated balance sheets of Shengtai Pharmaceutical
Inc. and subsidiaries (the “Company”) as of June 30, 2008 and 2007, and the
related consolidated statements of income and other comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year
period ended June 30, 2008. Shengtai Pharmaceutical Inc.’s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Shengtai Pharmaceutical Inc.
and subsidiaries as of June 30, 2008 and 2007, and the results of its operations
and its cash flows for each of the years in the three-year period ended June 30,
2008 in conformity with accounting principles generally accepted in the United
States of America.





/s/ Moore
Stephens Wurth Frazer and Torbet, LLP


Walnut,
California


September
26, 2008


F-1


SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
JUNE 30, 2008 AND 2007





2008
                      
                      
                      2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                      
                      $
                      3,405,606
                      
                      
                      $
                      6,420,439Restricted
      cash
                      
                      
                      6,763,500
                      
                      
                      
                      6,128,500Accounts
      receivable, net of allowance for doubtful accounts of $440,701 and
      $431,178 as of June 30, 2008 and 2007, respectively
                      
                      
                      7,614,236
                      
                      
                      
                      5,779,967Notes
      receivable
                      
                      
                      458,630
                      
                      
                      
                      984,675Other
      receivables
                      
                      
                      691,215
                      
                      
                      
                      2,984,484Other
      receivables - related parties
                      
                      
                      —
                      
                      
                      
                      2,491,656Other
      receivables - shareholder
                      
                      
                      —
                      
                      
                      
                      1,229,625Loan
      to related party
                      
                      
                      —
                      
                      
                      
                      657,500Inventories
                      
                      
                      5,039,278
                      
                      
                      
                      4,449,267Prepayments
                      
                      
                      310,381
                      
                      
                      
                      140,376Total
      current assets
                      
                      
                      24,282,846
                      
                      
                      
                      31,266,489PLANT
      AND EQUIPMENT, net
                      
                      
                      69,943,021
                      
                      
                      
                      30,178,074OTHER
      ASSETS:Investment
      in unconsolidated affiliate
                      
                      
                      3,607,912
                      
                      
                      
                      2,675,678Loan
      to related party - non-current
                      
                      
                      437,700
                      
                      
                      
                      394,500Prepayments
      - non-current
                      
                      
                      —
                      
                      
                      
                      7,429,371Intangible
      assets, net
                      
                      
                      3,042,183
                      
                      
                      
                      1,816,021Total
      other assets
                      
                      
                      7,087,795
                      
                      
                      
                      12,315,570Total
      assets
                      
                      $
                      101,313,662
                      
                      
                      $
                      73,760,133LIABILITIES
      AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                      
                      $
                      7,669,728
                      
                      
                      $
                      3,807,997Accounts
      payable - related party
                      
                      
                      714,776
                      
                      
                      
                      949,992Notes
      payable - banks
                      
                      
                      10,942,500
                      
                      
                      
                      8,942,000Short
      term loans
                      
                      
                      22,658,270
                      
                      
                      
                      18,870,250Accrued
      liabilities
                      
                      
                      261,187
                      
                      
                      
                      229,643Other
      payable
                      
                      
                      2,146,108
                      
                      
                      
                      1,526,903Employee
      loans
                      
                      
                      1,382,287
                      
                      
                      
                      596,516Employee
      loan - officer
                      
                      
                      53,605
                      
                      
                      
                      —Third
      party loan
                      
                      
                      640,228
                      
                      
                      
                      318,274Customer
      deposits
                      
                      
                      804,323
                      
                      
                      
                      796,228Long
      term loan - current maturities
                      
                      
                      —
                      
                      
                      
                      381,350Taxes
      payable
                      
                      
                      4,631,252
                      
                      
                      
                      2,048,932Total
      current liabilities
                      
                      
                      51,904,264
                      
                      
                      
                      38,468,085LONG
      TERM LIABILITIESOther
      payable - noncurrent
                      
                      
                      2,653,995
                      
                      
                      
                      3,661,472Total
      long term liabilities
                      
                      
                      2,653,995
                      
                      
                      
                      3,661,472Total
      liabilities
                      
                      
                      54,558,259
                      
                      
                      
                      42,129,557COMMITMENTS
      AND CONTINGENCIES
                      
                      
                      —
                      
                      
                      
                      —SHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and
      outstanding
                      
                      
                      —
                      
                      
                      
                      —Common
      stock, $0.001 par value, 100,000,000 shares authorized, 19,094,805 and
      18,875,000 shares issued and outstanding as June 30, 2008 and 2007,
      respectively
                      
                      
                      19,095
                      
                      
                      
                      18,875Paid-in
      capital
                      
                      
                      19,987,708
                      
                      
                      
                      19,163,549Statutory
      reserves
                      
                      
                      2,894,902
                      
                      
                      
                      1,735,484Retained
      earnings
                      
                      
                      19,136,577
                      
                      
                      
                      9,885,670Accumulated
      other comprehensive income
                      
                      
                      4,717,121
                      
                      
                      
                      826,998Total
      shareholders' equity
                      
                      
                      46,755,403
                      
                      
                      
                      31,630,576Total
      liabilities and shareholders' equity
                      
                      $
                      101,313,662
                      
                      
                      $
                      73,760,133




F-2





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006





2008
                  
                  
                  2007
                  
                  
                  2006SALES
      REVENUE
                  
                  $
                  90,871,223
                  
                  
                  $
                  51,706,215
                  
                  
                  $
                  36,029,179COST
      OF SALES
                  
                  
                  70,613,757
                  
                  
                  
                  39,527,662
                  
                  
                  
                  27,568,092GROSS
      PROFIT
                  
                  
                  20,257,466
                  
                  
                  
                  12,178,553
                  
                  
                  
                  8,461,087SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  7,390,623
                  
                  
                  
                  4,674,679
                  
                  
                  
                  3,831,778INCOME
      FROM OPERATIONS
                  
                  
                  12,866,843
                  
                  
                  
                  7,503,874
                  
                  
                  
                  4,629,309OTHER
      (EXPENSE) INCOME:Equity
      in income of unconsolidated affiliate
                  
                  
                  272,239
                  
                  
                  
                  131,420
                  
                  
                  
                  41,635Gain
      from sales of land use rights
                  
                  
                  —
                  
                  
                  
                  1,647,833
                  
                  
                  
                  —Other
      income
                  
                  
                  584,749
                  
                  
                  
                  121,798
                  
                  
                  
                  181,874Other
      expense
                  
                  
                  (391,858
                  )
                  
                  
                  (225,898
                  )
                  
                  
                  (214,641
                  )Interest
      expense and other charges
                  
                  
                  (2,447,608
                  )
                  
                  
                  (1,270,418
                  )
                  
                  
                  (555,572
                  )Interest
      income
                  
                  
                  171,948
                  
                  
                  
                  119,353
                  
                  
                  
                  128,306Other
      income (expense), net
                  
                  
                  (1,810,530
                  )
                  
                  
                  524,088
                  
                  
                  
                  (418,398
                  )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  11,056,313
                  
                  
                  
                  8,027,962
                  
                  
                  
                  4,210,911PROVISION
      FOR INCOME TAXES
                  
                  
                  645,988
                  
                  
                  
                  878,836
                  
                  
                  
                  —NET
      INCOME
                  
                  
                  10,410,325
                  
                  
                  
                  7,149,126
                  
                  
                  
                  4,210,911OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustments
                  
                  
                  3,890,123
                  
                  
                  
                  641,596
                  
                  
                  
                  185,402COMPREHENSIVE
      INCOME
                  
                  $
                  14,300,448
                  
                  
                  $
                  7,790,722
                  
                  
                  $
                  4,396,313EARNINGS
      PER SHAREBasic
                  
                  $
                  0.55
                  
                  
                  $
                  0.64
                  
                  
                  $
                  0.42Diluted
                  
                  $
                  0.52
                  
                  
                  $
                  0.62
                  
                  
                  $
                  0.42WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                  
                  
                  18,993,789
                  
                  
                  
                  11,251,712
                  
                  
                  
                  10,125,000Diluted
                  
                  
                  19,874,486
                  
                  
                  
                  11,477,545
                  
                  
                  
                  10,125,000




F-3





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


FOR THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006





Common stock
                      
                      
                      
                      
                      
                      Capital
                      
                      
                      Retained earnings
                      
                      
                      Accumulated 
      otherPaid-in
                      
                      
                      contribution
                      
                      
                      Statutory
                      
                      
                      
                      
                      
                      comprehensiveShares
                      
                      
                      Par value
                      
                      
                      capital
                      
                      
                      receivable
                      
                      
                      reserves
                      
                      
                      Unrestricted
                      
                      
                      income
                      
                      
                      TotalsBALANCE,
      June 30, 2005
                      
                      
                      10,125,000
                      
                      
                      $
                      10,125
                      
                      
                      $
                      3,915,871
                      
                      
                      $
                      (1,925,996
                      )
                      
                      $
                      384,832
                      
                      
                      $
                      876,350
                      
                      
                      $
                      —
                      
                      
                      $
                      3,261,182Dividends
      declared
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,000,065
                      )
                      
                      
                      
                      
                      
                      
                      (1,000,065
                      )Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,210,911
                      
                      
                      
                      
                      
                      
                      
                      4,210,911Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      616,256
                      
                      
                      
                      (616,256
                      )
                      
                      
                      
                      
                      
                      
                      —Foreign
      currency translation adjustments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      185,402
                      
                      
                      
                      185,402BALANCE,
      June 30, 2006
                      
                      
                      10,125,000
                      
                      
                      $
                      10,125
                      
                      
                      $
                      3,915,871
                      
                      
                      $
                      (1,925,996
                      )
                      
                      $
                      1,001,088
                      
                      
                      $
                      3,470,940
                      
                      
                      $
                      185,402
                      
                      
                      $
                      6,657,430Issuance
      of common stock
                      
                      
                      8,750,000
                      
                      
                      
                      8,750
                      
                      
                      
                      15,247,678
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      15,256,428Capital
      contribution received
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,925,996
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,925,996Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      7,149,126
                      
                      
                      
                      
                      
                      
                      
                      7,149,126Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      734,396
                      
                      
                      
                      (734,396
                      )
                      
                      
                      
                      
                      
                      
                      —Foreign
      currency translation adjustments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      641,596
                      
                      
                      
                      641,596BALANCE,
      June 30, 2007
                      
                      
                      18,875,000
                      
                      
                      $
                      18,875
                      
                      
                      $
                      19,163,549
                      
                      
                      $
                      —
                      
                      
                      $
                      1,735,484
                      
                      
                      $
                      9,885,670
                      
                      
                      $
                      826,998
                      
                      
                      $
                      31,630,576Issuance
      of common stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      —Exercised
      warrants
                      
                      
                      219,805
                      
                      
                      
                      220
                      
                      
                      
                      506,523
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      506,743Option
      issued to employees
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      317,636
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      317,636Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      10,410,325
                      
                      
                      
                      
                      
                      
                      
                      10,410,325Adjustment
      to statutory reserve
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,159,418
                      
                      
                      
                      (1,159,418
                      )
                      
                      
                      
                      
                      
                      
                      —Foreign
      currency translation adjustments
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,890,123
                      
                      
                      
                      3,890,123BALANCE,
      June 30, 2008
                      
                      
                      19,094,805
                      
                      
                      $
                      19,095
                      
                      
                      $
                      19,987,708
                      
                      
                      $
                      —
                      
                      
                      $
                      2,894,902
                      
                      
                      $
                      19,136,577
                      
                      
                      $
                      4,717,121
                      
                      
                      $
                      46,755,403




F-4





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006





2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                        
                                        $
                                        10,410,325
                                        
                                        
                                        $
                                        7,149,126
                                        
                                        
                                        $
                                        4,210,911Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
                                        
                                        
                                        2,964,678
                                        
                                        
                                        
                                        2,239,157
                                        
                                        
                                        
                                        1,478,734Amortization
                                        
                                        
                                        57,254
                                        
                                        
                                        
                                        42,644
                                        
                                        
                                        
                                        41,454Bad
      debt expense
                                        
                                        
                                        93,557
                                        
                                        
                                        
                                        271,602
                                        
                                        
                                        
                                        114,780Stock
      option expense
                                        
                                        
                                        317,636
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —(Gain)
      loss on building and equipment disposal
                                        
                                        
                                        (169,726
                                        )
                                        
                                        
                                        186,470
                                        
                                        
                                        
                                        —Gain
      on disposal of land use right
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (1,647,833
                                        )
                                        
                                        
                                        —Equity
      in income of unconsolidated investment
                                        
                                        
                                        (603,261
                                        )
                                        
                                        
                                        (131,420
                                        )
                                        
                                        
                                        (41,635
                                        )Change
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        (1,127,048
                                        )
                                        
                                        
                                        (2,288,351
                                        )
                                        
                                        
                                        (261,286
                                        )Notes
      receivable
                                        
                                        
                                        (2,274,840
                                        )
                                        
                                        
                                        (591,936
                                        )
                                        
                                        
                                        (126,992
                                        )Other
      receivables
                                        
                                        
                                        1,994,157
                                        
                                        
                                        
                                        (582,008
                                        )
                                        
                                        
                                        1,567Inventories
                                        
                                        
                                        (304,476
                                        )
                                        
                                        
                                        (2,394,250
                                        )
                                        
                                        
                                        173,225Prepayments
                                        
                                        
                                        (165,981
                                        )
                                        
                                        
                                        99,957
                                        
                                        
                                        
                                        (28,710
                                        )Prepayments
      - related party
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,409,944
                                        
                                        
                                        
                                        301,037Accounts
      payable
                                        
                                        
                                        (7,730,549
                                        )
                                        
                                        
                                        1,773,031
                                        
                                        
                                        
                                        176,458Accounts
      payable - related party
                                        
                                        
                                        (320,156
                                        )
                                        
                                        
                                        390,986
                                        
                                        
                                        
                                        200,660Accrued
      liabilities
                                        
                                        
                                        (781,690
                                        )
                                        
                                        
                                        130,238
                                        
                                        
                                        
                                        (65,014
                                        )Other
      payable
                                        
                                        
                                        (906,285
                                        )
                                        
                                        
                                        410,174
                                        
                                        
                                        
                                        166,860Customer
      deposit
                                        
                                        
                                        (74,646
                                        )
                                        
                                        
                                        492,586
                                        
                                        
                                        
                                        201,045Taxes
      payable
                                        
                                        
                                        2,201,518
                                        
                                        
                                        
                                        1,385,613
                                        
                                        
                                        
                                        (14,792
                                        )Net
      cash provided by operating activities
                                        
                                        
                                        3,580,467
                                        
                                        
                                        
                                        8,345,730
                                        
                                        
                                        
                                        6,528,302CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in affiliate
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (909,439
                                        )
                                        
                                        
                                        (124,020
                                        )Proceeds
      from building and equipment disposal
                                        
                                        
                                        139,163
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Acquisition
      of plant and equipment
                                        
                                        
                                        (14,517,157
                                        )
                                        
                                        
                                        (11,041,561
                                        )
                                        
                                        
                                        (6,232,594
                                        )Acquisition
      of intangible assets
                                        
                                        
                                        (296,893
                                        )
                                        
                                        
                                        (949,900
                                        )
                                        
                                        
                                        —Advances
      on plant and equipment purchase
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (7,225,790
                                        )
                                        
                                        
                                        (1,155,999
                                        )Loan
      to related party
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (3,817,948
                                        )
                                        
                                        
                                        —Repayments
      on loan to related party
                                        
                                        
                                        4,590,136
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Net
      cash used in investing activities
                                        
                                        
                                        (10,084,751
                                        )
                                        
                                        
                                        (23,944,638
                                        )
                                        
                                        
                                        (7,512,613
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Increase
      in restricted cash
                                        
                                        
                                        (524,140
                                        )
                                        
                                        
                                        (2,024,720
                                        )
                                        
                                        
                                        (279,045
                                        )Borrowings
      on notes payable - banks
                                        
                                        
                                        11,703,650
                                        
                                        
                                        
                                        8,710,120
                                        
                                        
                                        
                                        12,201,088Principal
      payments on notes payable - banks
                                        
                                        
                                        (10,739,820
                                        )
                                        
                                        
                                        (7,173,040
                                        )
                                        
                                        
                                        (10,743,853
                                        )Borrowings
      on short term loans
                                        
                                        
                                        21,383,257
                                        
                                        
                                        
                                        24,785,415
                                        
                                        
                                        
                                        8,979,048Principal
      payments on short term loans
                                        
                                        
                                        (19,758,515
                                        )
                                        
                                        
                                        (15,178,665
                                        )
                                        
                                        
                                        (8,358,948
                                        )Borrowings
      on employee loans
                                        
                                        
                                        1,458,353
                                        
                                        
                                        
                                        384,224
                                        
                                        
                                        
                                        431,111Principal
      payments on employee loans
                                        
                                        
                                        (778,444
                                        )
                                        
                                        
                                        (458,632
                                        )
                                        
                                        
                                        (113,060
                                        )Borrowings
      on employee loan - officer
                                        
                                        
                                        53,605
                                        
                                        
                                        
                                        1,281
                                        
                                        
                                        
                                        —Principal
      payments on employee loan - officer
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (96,580
                                        )
                                        
                                        
                                        —Borrowings
      on third party loan
                                        
                                        
                                        3,139,855
                                        
                                        
                                        
                                        251,378
                                        
                                        
                                        
                                        57,319Principal
      payments on third party loan
                                        
                                        
                                        (2,868,909
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Borrowings
      on long term loan
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        992,160Principal
      payments on long term loan
                                        
                                        
                                        (399,301
                                        )
                                        
                                        
                                        (1,549,889
                                        )
                                        
                                        
                                        (868,140
                                        )Proceeds
      from issuance of common stock
                                        
                                        
                                        506,743
                                        
                                        
                                        
                                        15,256,428
                                        
                                        
                                        
                                        —Payments
      of amounts due officer
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (1,925,996
                                        )
                                        
                                        
                                        —Proceeds
      from capital contribution receivable
                                        
                                        
                                        —
                                        
                                        
                                        
                                        696,371
                                        
                                        
                                        
                                        —Dividends
      paid to shareholders
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (1,664,503
                                        )Net
      cash provided by financing activities
                                        
                                        
                                        3,176,334
                                        
                                        
                                        
                                        21,677,695
                                        
                                        
                                        
                                        633,177EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                                        
                                        
                                        313,117
                                        
                                        
                                        
                                        (160,805
                                        )
                                        
                                        
                                        25,408(DECREASE)
      INCREASE IN CASH
                                        
                                        
                                        (3,014,833
                                        )
                                        
                                        
                                        5,917,982
                                        
                                        
                                        
                                        (325,726
                                        )CASH,
      beginning of year
                                        
                                        
                                        6,420,439
                                        
                                        
                                        
                                        502,457
                                        
                                        
                                        
                                        828,183CASH,
      end of year
                                        
                                        $
                                        3,405,606
                                        
                                        
                                        $
                                        6,420,439
                                        
                                        
                                        
                                        502,457SUPPLEMENTAL
      DISCLOSURECash
      paid for Interest, net of capitalized interest
                                        
                                        $
                                        1,901,531
                                        
                                        
                                        $
                                        1,270,418
                                        
                                        
                                        $
                                        555,572Cash
      paid for Income taxes
                                        
                                        $
                                        14,809
                                        
                                        
                                        $
                                        125,782
                                        
                                        
                                        $
                                        —Non-cash
      investing and financing activities -Acquisition
      of land use right in exchange for other receivable
                                        
                                        $
                                        692,304
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —Non
      cash reclassification transactions of plant and
equipments:Acquisition
      of plant and equipment through assets other than plant and
      equipments
                                        
                                        $
                                        3,366,350
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Reclassification
      of advances on equipment purchase to plant and equipment upon receipt of
      purchase
                                        
                                        $
                                        7,793,173
                                        
                                        
                                        $
                                        1,183,010
                                        
                                        
                                        $
                                        -Acquisition
      of plant and equipment through liabilities
                                        
                                        $
                                        12,141,833
                                        
                                        
                                        $
                                        4,698,714
                                        
                                        
                                        $
                                        -




F-5





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES


NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2008





Note
1 - Organization background and principal activities





Shengtai
Pharmaceutical, Inc. (the “Company”), formerly known as West Coast Car Company,
was incorporated in March 2004 in the state of Delaware as West Coast Car
Company.





On May
15, 2007, the Company entered into a share exchange agreement (the “Share
Exchange Agreement”) with the shareholders of Shengtai Holding, Inc. (“SHI”).
Contemporaneously, on May 15, 2007, the Company entered into and consummated a
share purchase agreement (the “Share Purchase Agreement”) with nineteen
accredited investors (the “Purchasers”). Pursuant to the Share Exchange
Agreement, Qingtai Liu and Chenghai Du, shareholders of all the issued and
outstanding shares of common stock of SHI, exchanged all SHI’s common stock for
9,125,000 newly-issued shares of the Company. Pursuant to the Share Purchase
Agreement, the Purchasers acquired 8,750,000 shares of common stock and
4,375,000 attached warrants for $2.00 per unit (or an aggregate purchase price
of $17,500,000) and for total net proceeds of $15,256,428. The exercise price of
the warrants is $2.60 per share and the term of the warrants is five years. As a
result of the Share Exchange Agreement and the Share Purchase Agreement, the
Company acquired all of the outstanding capital stock of SHI. Because SHI owns
100% of Weifang Shengtai Pharmaceutical Co., Ltd (hereinafter known as “Weifang
Shengtai”), Weifang Shengtai is now an indirect wholly-owned subsidiary of the
Company. For accounting purposes, the acquisition of SHI has been treated as a
recapitalization of SHI with SHI as the acquirer. The historical financial
statements prior to May 15, 2007, are those of SHI.





In
conjunction with the Share Purchase Agreement, Qingtai Liu, the controlling
shareholder and Chief Executive Officer of the Company, placed an aggregate
5,000,000 shares of common stock in an escrow account held with Tri-State Title
& Escrow, LLC upon closing of the Share Purchase Agreement. Pursuant to the
Share Purchase Agreement, one half of the escrowed shares are to be released to
the Purchasers on a pro-rated basis if the audited consolidated financial
statements of the Company prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”) do not reflect
after-tax net income of at least $7,000,000 or fully diluted earnings per
share of $0.33 for the fiscal year ended June 30, 2007. If the audited
consolidated financial statements of the Company prepared in accordance with US
GAAP do not reflect an after-tax net income of at least $9,000,000 or fully
diluted earnings per share of $0.43 for the fiscal year ending June 30,
2008, the second half of the escrowed shares will be distributed on a pro-rated
basis to the Purchasers. The Company determined that the thresholds for the two
years ended June 30, 2008 and 2007 have been met.


F-6





SHI was
incorporated in the state of New Jersey on February 27, 2006. The Company,
through its Chinese subsidiary, Weifang Shengtai, manufactures and distributes
raw drug materials (e.g., glucose, dehydrated glucose) and drug supplements
(e.g., starch, dextrin, polyacrylic acid resin). The Company’s primary business
operations are conducted in the People’s Republic of China (“PRC”).





Weifang
Shengtai was established in Changle County, Weifang City, Shandong Province, in
People’s Republic of China on February 4, 1999. Qingtai Liu and his management
team were the original shareholders of Weifang Shengtai.





On April
19, 2006, pursuant to a shareholders’ resolution, 37 Chinese shareholders
(“Original Shareholders”) of Weifang Shengtai transferred their 17.95% interest
in the Company to Qingtai Liu for RMB 5,628,880 ($703,610). On June 3, 2006, the
equity exchange was approved by the local branch of the Ministry of Commerce
(“MOC”) in Weifang City.





On June
20, 2006, SHI signed an agreement to acquire Bio-One Corporation’s (“Bio-One”)
51% interest in Weifang Shengtai and Qingtai Liu’s 49% interest in Weifang
Shengtai. Qingtai Liu, a founding shareholder of Weifang Shengtai, sold his 49%
interest in Weifang Shengtai to SHI for RMB 15,000,000 (USD $1,925,996), and
this amount was paid in May 2007. Bio-One sold its 51% interest in Weifang
Shengtai to SHI for $1,000,000 in cash and the return of 4,180,000 Series A
preferred stock of Bio-One owned by Qingtai Liu. Weifang Shengtai became a
wholly foreign owned entity (“WFOE”) and obtained the approval of the local
branch of the MOC in Weifang City on June 21, 2006. The business term is 20
years beginning on February 10, 2004, the date Bio-One acquired its 51% in
Weifang Shengtai. In accordance with the laws governing foreign acquisitions of
a Chinese registered company, SHI contributed the $1,925,996 as required to
Weifang Shengtai, and as a result of this transaction, SHI exercised control
over Weifang Shengtai.





On May
26, 2007, Weifang Shengtai increased its registered capital from $3,920,000 to
$15,000,000. In May and June 2007, SHI contributed $11,080,000 towards the
additional registered capital. This transaction was approved by the local branch
of the MOC in Weifang City and the Company obtained a new business license on
July 16, 2007, for a term of 20 years.





Note
2 - Summary of significant accounting policies





The reporting
entity





The
consolidated financial statements of Shengtai Pharmaceutical Inc. and
Subsidiaries reflect the activities of the parent and its wholly-owned
subsidiaries SHI and Weifang Shengtai. The purchase of SHI has been accounted
for as a reverse acquisition and a recapitalization. The assets and liabilities
of SHI were transferred at historical cost under the equity structure of
the Company due to the reverse acquisition on May 15, 2007. The consolidated
financial statements have been presented as if the acquisition occurred at June
30, 2005. The Company recorded all normal recurring adjustments considered
necessary to give a fair presentation of operating results for the periods
presented.


F-7





Basis of
presentation





The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material inter-company transactions and balances have been eliminated in
consolidation.





Use of
estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made in the preparation
of the Company’s consolidated financial statements relate to the assessment of
the carrying values of accounts receivable. Actual results could be materially
different from these estimates upon which the carrying values were
based.





Foreign currency
translation





The
reporting currency of the Company is the US dollar. The Company uses the Chinese
Renminbi (“RMB”) as its functional currency. In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation,”
results of operations and cash flows are translated at average exchange rates
during the period, and assets and liabilities are translated at the unified
exchange rates at the balance sheet dates, and equity is translated at the
historical exchange rates. As a result, amounts related to assets and
liabilities reported on the statements of cash flows will not necessarily agree
with changes in the corresponding accounts on the balance sheets. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the statements of shareholders’ equity. Translation
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.





Translation
adjustments amounted to $4,717,121 and $826,998 as of June 30, 2008 and 2007,
respectively. Assets and liabilities were translated at 6.85 RMB and 7.60 RMB to
$1.00 at June 30, 2008 and 2007, respectively. The average translation rates
applied to consolidated statements of income for the years ended June 30, 2008,
2007 and 2006 were 7.26 RMB, 7.81 RMB and 8.06 RMB to $1.00 US dollar,
respectively.





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.


F-8





Shipping and
handling





Shipping
and handling cost related to costs of goods sold are included in selling,
general and administrative expenses. For the years ended June 30, 2008, 2007,
and 2006, shipping and handling costs amounted to $3,097,843, $1,927,118, and
$1,980,055, respectively,





Financial
instruments





SFAS No.
107 (“SFAS 107”), “Disclosures about Fair Value of Financial Instruments”
requires disclosure of the fair value of financial instruments held by the
Company. SFAS 107 defines the fair value of financial instruments as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. The Company considers the carrying amount of cash, accounts
receivable, notes receivable, other receivables,
prepayments, accounts payable, other payables, accrued liabilities, customer
deposits, taxes payable, and loans to approximate their fair values because of
the short period of time between the origination of such instruments and their
expected realization and their current market rates of interest.





Stock-based
compensation





The
Company records stock-based compensation expense pursuant to SFAS No. 123R
(“SFAS 123R”), “Share Based Payment.” The Company estimates the fair value of
the award using the Black-Scholes option pricing model. Under SFAS 123R, the
Company’s expected volatility assumption is based on the historical volatility
of Company’s stock. The expected life assumption is primarily based on
historical exercise patterns and employee post-vesting termination behavior. The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.





Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. FAS 123R requires forfeitures to be estimated at the time of grant and
revised in subsequent periods, if necessary, if actual forfeitures differ from
those estimates.





Earnings per
share





The
Company reports earnings per share in accordance with the provisions of SFAS No.
128 (“SFAS 128”), "Earnings Per Share." SFAS 128 requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.


F-9





The
following is a reconciliation of the basic and diluted earnings per share
computation for the years ended June 30, 2008, 2007, and 2006:




2008
                  
                  
                  2007
                  
                  
                  2006N
      Net income for earnings per share
                  
                  $
                  10,371,154
                  
                  
                  $
                  7,149,126
                  
                  
                  $
                  4,210,911Weighted
      average shares used in basic computation
                  
                  
                  18,993,789
                  
                  
                  
                  11,251,712
                  
                  
                  
                  10,125,000Diluted
      effect of warrants
                  
                  
                  880,697
                  
                  
                  
                  225,833
                  
                  
                  
                  —Weighted
      average shares used in diluted computation
                  
                  
                  19,874,486
                  
                  
                  
                  11,477,545
                  
                  
                  
                  10,125,000Earnings
      per share:Basic
                  
                  $
                  0.55
                  
                  
                  $
                  0.64
                  
                  
                  $
                  0.42Diluted
                  
                  $
                  0.52
                  
                  
                  $
                  0.62
                  
                  
                  $
                  0.42





At June
30, 2008 and 2007, all outstanding warrants were included in the calculation of
diluted earnings per share. At June 30, 2006, the Company did not have any
outstanding warrants or stock options.





Cash and cash
equivalents





The
Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.





Restricted
cash





The
Company, through its bank agreement, is required to keep certain amounts on
deposit that are subject to withdrawal restrictions. These amounts were
$6,565,500 and $5,628,500 as of June 30, 2008 and 2007,
respectively.





In
accordance with the Escrow Agreement and the Share Purchase Agreement by and
among Shengtai Holding Inc., West Coast Car Company, Chinamerica Fund LLP, and
Tri-State Title & Escrow, LLC (the “Escrow Agent”), the Company was required
to deposit with the Escrow Agent $5,500,000 immediately on the Closing Date of
the Share Purchase Agreement. This fund can only be disbursed when certain
criteria are met. As of June 30, 2008 and June 30, 2007, the undisbursed amounts
were $198,000 and $500,000, respectively, and these are included in restricted
cash in the consolidated balance sheets.





Accounts
receivable





In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material.


F-10





Certain
accounts receivable amounts are charged off against allowances after designated
period of collection efforts. Subsequent cash recoveries are recognized as
income in the period when they occur.





The
activities in the allowance for doubtful accounts are as follows for the years
ended June 30, 2008 and 2007:





2008
                  
                  
                  2007Beginning
      allowance for doubtful accounts
                  
                  $
                  431,178
                  
                  
                  $
                  357,970Additions
      charged to bad debt expense
                  
                  
                  93,557
                  
                  
                  
                  271,602Write-off
      charged against the allowance
                  
                  
                  (129,130
                  )
                  
                  
                  (217,838
                  )Foreign
      currency translation adjustments
                  
                  
                  45,096
                  
                  
                  
                  19,444Ending
      allowance for doubtful accounts
                  
                  $
                  440,701
                  
                  
                  $
                  431,178





Concentrations of
risk





The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.





The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
others.





Management
believes the credit risk on bank deposits is limited because the counterparties
are banks with high credit-ratings assigned by international credit-rating
agencies, or state-owned banks in China. Cash includes cash on hand and demand
deposits in accounts maintained with state-owned banks within the PRC and the
United States of America. Certain financial instruments, which subject the
Company to concentration of credit risk, consist of cash. The Company maintains
cash deposits in financial institutions that 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
June 30, 2008 and 2007, the Company’s bank balances exceeded government insured
limits by approximately $10,175,000 and $12,130,000, respectively. The Company
has not experienced, nor does it anticipate, nonperformance by these
institutions.





The
Company’s concentrations of credit risk are primarily in trade accounts
receivable and accounts payable. There were no customers that individually
comprised 10% or more of the revenues or trade accounts receivable at June 30,
2008, and 2007. For the year ended June 30, 2008, two vendors accounted for
approximately 23% of the Company’s total purchases. As of June 30, 2008,
accounts payable for these vendors amounted to $362,807. For the years ended
June 30, 2007 and 2006, one vendor accounted for approximately 22% and 77%,
respectively, of the Company’s total purchases. There were no accounts payable
balance for this vendor as of June 30, 2007.


F-11





For
export sales, management frequently requires significant down payments or letter
of credit prior to shipment. For these sales, the Company maintains export
credit insurance to protect against the risk that the overseas customers may
default on settlement.





The
following table summarizes financial information for the years ended June 30,
2008, 2007 and 2006, concerning the Company’s revenues based on geographic
area:





Revenue
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006China
                  
                  $
                  81,160,283
                  
                  
                  $
                  46,607,204
                  
                  
                  $
                  31,282,456International
                  
                  
                  9,710,940
                  
                  
                  
                  5,099,011
                  
                  
                  
                  4,746,723Total
                  
                  $
                  90,871,223
                  
                  
                  $
                  51,706,215
                  
                  
                  $
                  36,029,179





Inventories





Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following as of June 30, 2008 and 2007:




2008
                  
                  
                  2007Raw
      materials
                  
                  $
                  1,409,577
                  
                  
                  $
                  2,297,901Work-in-progress
                  
                  
                  1,688,161
                  
                  
                  
                  1,130,900Finished
      goods
                  
                  
                  1,941,540
                  
                  
                  
                  1,020,466Total
                  
                  $
                  5,039,278
                  
                  
                  $
                  4,449,267





The
Company reviews its inventory periodically for possible obsolescence or to
determine if any reserves are necessary. As of June 30, 2008 and 2007, the
Company determined that no reserves were necessary.





Prepayments





Prepayments
represent partial payments or deposits for inventory and property and equipment
purchases. Certain of the prepayments are for those anticipated purchases,
primarily property and equipment, that are scheduled to occur beyond the
one-year time frame.


F-12





Plant and
equipment





Plant and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to property and equipment accounts are recorded at cost.
Maintenance, repairs, and minor renewals are charged directly to expense as
incurred. Major additions and betterments to property and equipment accounts are
capitalized. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets with 3% residual value.





Estimated
useful lives of the assets are as follows:





Estimated Useful LifeBuildings
      and improvements
              
              
              5-20
              
              yearsMachinery
      and equipment
              
              
              5-10
              
              yearsAutomobile
      facilities
              
              
              5-10
              
              yearsElectronic
      equipment
              
              
              5-7
              
              years





Impairment of long-lived
assets





Long-lived
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2008, the Company
expects these assets to be fully recoverable.





Investment in unconsolidated
affiliate





Equity
method investments are recorded at original cost and adjusted to recognize the
Company’s proportionate share of the investee’s net income or losses, additional
contributions made and distributions received, and amortization of basis
differences. The Company recognizes a loss if it is determined that other than
temporary decline in the value of the investment exists.





Intangible
assets





Intangible
assets are primarily comprised of land use rights. All land in the PRC is owned
by the Chinese government. However, the government grants “land use rights” for
terms ranging from 20 to 50 years. From March 2000 to June 2007, the Company
acquired various land use rights for approximately $2,243,000. The Company
obtained another land use right in July 2007 for approximately $314,000. In
May 2008, the Company paid approximately $734,000 to a local government which
enabled the land use right to be classified from industrial use to commercial
use. The Company amortizes the cost of land use rights over the usage terms
using the straight-line method.





On June
30, 2007, the Company sold a land use right at an auction due to relocation of
one of the Company’s manufacturing plants. At the time of the sale, the net book
value of the land use right was $306,984, and the sale price for the land use
right was $1,954,817, for a gain of approximately $1,648,000. As of June 30,
2008, total proceeds had been received.


F-13





Intangible
assets of the Company are reviewed at least annually, more often if
circumstances dictate, to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
also re-evaluates the periods of amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful lives. As of June
30, 2008, the Company determined that there had been no impairment. For the
years ended June 30, 2008, 2007 and 2006, amortization expense relating to these
intangible assets amounted to $57,254, $42,644 and $41,454
respectively.





Income
taxes





The
Company accounts for income taxes in accordance with SFAS N o. 109 (“SFAS 109”),
“Accounting for Income Taxes.” Under the asset and liability method as required
by SFAS 109, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under SFAS 109, the effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recognized if
it is more likely than not that some portion, or all of, a deferred tax asset
will not be realized. As of June 30, 2008 and 2007, the Company did not have any
deferred tax assets or liabilities, and as such, no valuation allowances were
recorded at June 30, 2008 and 2007.





In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109," which clarifies the accounting and
disclosure for uncertain tax positions. This interpretation is effective for
fiscal years beginning after December 15, 2006, and the Company has implemented
this interpretation as of July 1, 2007. FIN 48 prescribes a recognition
threshold and measurement attribute for recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.





Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.





The
adoption of FIN 48 at July 1, 2007, did not have a material effect on the
Company's consolidated financial statements.





The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.


F-14





Value Added
Tax





Enterprises
or individuals who sell products, engage in repair and maintenance or import and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The standard value added tax rate is 17% of the gross sales price,
however, for the Company’s corn plumules products, the VAT rate is 13%. A credit
is available whereby VAT paid on the purchases of semi-finished products, raw
materials used in the production of the Company’s finished products, and payment
of freight expenses can be used to offset the VAT due on sales of the finished
products.





VAT on
sales and VAT on purchases amounted to $13,794,406 and $9,840,077, respectively,
for the year ended June 30, 2008. For the year ended June 30, 2007, VAT on sales
and VAT on purchases amounted to $7,453,346 and $6,991,599, respectively. For
the year ended June 30, 2006, VAT on sales and VAT on purchases amounted to
$5,571,553 and $4,545,708, respectively. 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.





Guarantees





From time
to time, the Company guarantees the debt of others unrelated to the Company.
Pursuant to FIN 45, “Guarantor’s Accounting for and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others,” the
Company must record guarantees at the fair value of the expected future
payments. However, the Company estimates that it will not be required to make
any payments under these guarantees based on the past experience and the
financial condition of the companies to which the guarantees were
made.





Recently issued accounting
pronouncements





In
September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value
Measurements. SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of this statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. SFAS 157 is effective for
financial statements for fiscal years beginning after November 15, 2007, with
earlier adoption permitted. The Company is evaluating the impact, if any, that
the adoption of this statement will have on its consolidated results of
operations and financial position.





On
February 14, 2008, the FASB issued FASB Staff Position No. FAS 157-1 ("FSP FAS
157-1"), "Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13". FSP FAS
157-1 does not apply under FASB Statement No. 13 (“Statement 13”), "Accounting
for Leases," and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under Statement
13. This scope exception does not apply to assets acquired and liabilities
assumed in a business combination that are required to be measured at fair value
under SFAS No. 141 or SFAS No. 141R, regardless of whether those assets and
liabilities are related to leases.





On
February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2 ("FSP FAS
157-2"), "Effective Date of FASB Statement No. 157." With the issuance of FSP
FAS 157-2, the FASB agreed to: (a) defer the effective date in SFAS No. 157 for
one year for certain nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), and (b) remove certain leasing
transactions from the scope of SFAS No. 157. The deferral is intended to provide
the FASB time to consider the effect of certain implementation issues that have
arisen from the application of SFAS No. 157 to these assets and
liabilities.


F-15





In
February 2007, the FASB issued SFAS No. 159, (“SFAS 159”), “The Fair Value
Option for Financial Assets and Financials Liabilities — Including an Amendment
of FASB Statement No. 115.” This standard permits measurement of certain
financial assets and financial liabilities at fair value. If the fair value
option is elected, the unrealized gains and losses are reported in earnings at
each reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements. The
standard is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is currently evaluating the impact, if
any, that the adoption of SFAS 159 will have on its consolidated results of
operations or financial position.




In
December 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces Question 6
of Section D.2 of Topic 14, Share-Based Paymentof the
Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007. The Company currently uses
the “simplified” method to estimate the expected term for share option grants as
the Company does not have enough historical experience to provide a reasonable
estimate. The Company intends on using the “simplified” method until the Company
has enough historical experience to provide a reasonable estimate of expected
term in accordance with SAB 110. The Company adopted SAB 110 on January 1, 2008,
and the Company is currently assessing the impact, if any, of this
adoption.




In
December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" ("SFAS
141R"). The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in the purchase accounting as well as
requiring the expensing of acquisition-related costs as incurred. Furthermore,
SFAS 141R provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141R is effective for fiscal
years beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company is evaluating the impact, if any, that the adoption of this
statement will have on its consolidated results of operations or financial
position.





In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Noncontrolling
Interests in Consolidated Financial Statements — An Amendment of ARB No. 51.”
SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It is intended to eliminate the diversity in practice regarding the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160
also establishes a single method of accounting for changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation,
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption permitted, and it is to be applied
prospectively. SFAS 160 is must be applied prospectively as of the beginning of
the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements, which must be applied retrospectively for all
periods presented. The Company has not yet evaluated the impact that SFAS 160
will have on its consolidated financial position or results of
operations.


F-16


In March
2008, the FASB issued SFAS No. 161 ("SFAS 161"), "Disclosures about Derivative
Instruments and Hedging Activities." SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for interim
periods and fiscal years beginning after November 15, 2008. The Company does not
anticipate that the adoption of SFAS 161 will have a material impact on its
consolidated results of operations or financial position.





In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company does not
expect the adoption of SFAS 162 will have a material impact on its consolidated
results of operations or financial position.





On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)." FSP APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of
APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB14-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The Company has not yet evaluated
the impact that FSP APB 14-1 will have on its consolidated results of operations
or financial position.





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF No. 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS 133 “Accounting for Derivatives and Hedging Activities”
specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and
(b) classified in stockholders’ equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer’s own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard
triggers liability accounting on all options and warrants exercisable at strike
prices denominated in any currency other than the functional currency of
the operating entity in the PRC (Renminbi). Management is currently evaluating
the impact of adoption of EITF 07-5 on the accounting for related warrants
transactions.





Reclassifications





Certain
prior period amounts have been reclassified to conform to the current period
presentation with no impact on the previously reported net income or cash
flows.


F-17


Note
3 - Plant and equipment





Plant and
equipment consist of the following at June 30, 2008 and 2007:





2008
                  
                  
                  2007Buildings
      and improvements
                  
                  $
                  6,343,954
                  
                  
                  $
                  5,272,190Machinery
      and equipment
                  
                  
                  37,239,847
                  
                  
                  
                  22,257,978Automobile
      facilities
                  
                  
                  562,039
                  
                  
                  
                  487,319Electronic
      equipment
                  
                  
                  368,550
                  
                  
                  
                  307,391Construction-in-progress
                  
                  
                  36,373,688
                  
                  
                  
                  9,055,482Total
                  
                  
                  80,888,078
                  
                  
                  
                  37,380,360Accumulated
      depreciation
                  
                  
                  (10,945,057
                  )
                  
                  
                  (7,202,286
                  )Total
                  
                  $
                  69,943,021
                  
                  
                  $
                  30,178,074





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 years ended June 30, 2008,
2007 and 2006 amounted to $2,964,678, $ 2,239,157 and $1,478,734, respectively.
Interest costs totaling $598,953, $759,372 and $189,904 was capitalized into
construction-in-progress for the years ended June 30, 2008, 2007 and 2006
respectively.





Note
4 - Investment in unconsolidated affiliate





On
September 16, 2003, the Company entered into a joint venture partnership with
Weifang City Investment Company and Changle Century Sun Paper Industry Co., Ltd,
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated in Weifang City, Shandong Province, PRC. Changle
Shengshi’s principal activity is to produce and sell electricity and heat. The
Company accounts for this investment under the equity method of
accounting.





On April
12, 2005, the Company’s ownership percentage in Changle Shengshi was reduced
from 30% to 20% as a result of an additional investment to Changle Shengshi by
another party. This did not have any material impact on the Company’s
consolidated financial statements.





Summarized
financial information of Changle Shengshi is as follows as of June 30, 2008 and
2007:





2008
                  
                  
                  2007Current
      assets
                  
                  $
                  14,117,813
                  
                  
                  $
                  8,065,168Non-current
      assets
                  
                  
                  27,231,806
                  
                  
                  
                  23,027,549Total
      assets
                  
                  
                  41,349,619
                  
                  
                  
                  31,092,717Current
      liabilities
                  
                  
                  20,333,700
                  
                  
                  
                  14,137,526Non-current
      liabilities
                  
                  
                  2,976,360
                  
                  
                  
                  3,576,800Shareholders'
      equity
                  
                  
                  18,039,559
                  
                  
                  
                  13,378,391Total
      liabilities and shareholders' equity
                  
                  $
                  41,349,619
                  
                  
                  $
                  31,092,717


F-18


Summarized
financial information of Changle Shengshi is as follows for the years ended June
30, 2008, 2007, and 2006:




2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006Net
      sales
                                        
                                        $
                                        31,653,752
                                        
                                        
                                        $
                                        17,366,341
                                        
                                        
                                        $
                                        7,622,505Gross
      profit
                                        
                                        $
                                        6,247,654
                                        
                                        
                                        $
                                        3,586,157
                                        
                                        
                                        $
                                        1,249,000Income
      before taxes
                                        
                                        $
                                        4,571,573
                                        
                                        
                                        $
                                        2,308,837
                                        
                                        
                                        $
                                        431,747Net
      income
                                        
                                        $
                                        3,016,305
                                        
                                        
                                        $
                                        1,546,921
                                        
                                        
                                        $
                                        430,682Company
      share of income
                                        
                                        
                                        603,261
                                        
                                        
                                        
                                        309,384
                                        
                                        
                                        
                                        86,136Elimination
      of intercompany profit
                                        
                                        
                                        (331,022
                                        )
                                        
                                        
                                        (177,964
                                        )
                                        
                                        
                                        (44,501
                                        )Company's
      share of net income
                                        
                                        $
                                        272,239
                                        
                                        
                                        $
                                        131,420
                                        
                                        
                                        $
                                        41,635





Note
5 - Related party transactions





Through
September 2006, the Company purchased certain volume of starch from Shouguang
Shengtai Starch Co. Ltd. (“Shouguang Shengtai”), an entity in which Qingtai Liu,
the Company’s Chief Executive Officer, has a 40% interest. From September 2006,
the Company began its own production of starch, and no additional purchases were
made from Shouguan Shengtai for the procurement of starch. As Shouguang Shengtai
is partially owned by the Company’s Chief Executive Officer, prepayments made by
the Company has been reclassified to other receivable - related party, as the
balance was to be refunded by Shouguang Shengtai. As of June 30, 2007, other
receivable - related party was $992,449. For the years ended June 30, 2007 and
2006, the Company made purchases of approximately from Shouguang Shengtai
$7,652,465 and $13,794,612, respectively, which was approximately 22% and 77% of
the Company’s total purchases of raw materials. For the year ended June 30,
2008, the Company did not make any purchases from Shouguang
Shengtai.





In
connection with the Company’s purchase of Qingtai Liu’s 49% interest in Weifang
Shengtai as described in Note 1, and the 17.95% ownership interest transfer from
the Original Shareholders of Weifang Shengtai to Qingtai Liu on April 19, 2006,
Qingtai Liu assumed the liabilities of the Original Shareholders’ capital
contribution and was entitled to contribute this amount as a capital
contribution to the Company. On December 20, 2007, Qingtai Liu repaid the
remaining balance of $1,229,625.





The
Company’s utilities are partially provided by Changle Shengshi. (See Note 4). As
of June 30, 2008 and 2007, the Company’s accounts payable due to Changle
Shengshi was approximately $715,000 and $950,000, respectively, which related to
a portion of the Company’s utilities being provided by Changle Shengshi. The
utilities expense amounted to approximately $9,852,000, $4,958,000 and
$1,706,000 for the years ended June 30, 2008, 2007 and 2006,
respectively.





F-19


As of
June 30, 2008 and 2007, the Company’s receivables from two loan contracts with
Changele Shengshi were as follows:





June 30, 2008
                  
                  
                  June 30, 2007Due
      on November 19, 2007, unsecured, 7.95% interest rate per
    annum
                  
                  $
                  —
                  
                  
                  $
                  657,500Due
      on September 14, 2009, unsecured, 7.60% interest rate per
      annum
                  
                  
                  437,700
                  
                  
                  
                  394,500Total
                  
                  $
                  437,700
                  
                  
                  $
                  1,052,000





Periodically,
the Company advances monies to Changle Shengshi for temporary cash flow
purposes. This transaction is recurring in nature and the Company does not
charge interest on these advances, which are due on demand. As of June 30, 2007,
total receivable due from Changle Shengshi was $1,499,207. As of June 30, 2008,
the Company did not have any amounts due from Changle Shengshi.





The
following table summarizes other receivable - related parties as of June 30,
2008 and 2007 is as follows:





2008
                  
                  
                  2007Changle
      Shengshi Redian Co., Ltd
                  
                  $
                  —
                  
                  
                  $
                  1,499,207Shouguang
      Shengtai Starch Co. Ltd
                  
                  
                  —
                  
                  
                  
                  992,449Total
                  
                  $
                  —
                  
                  
                  $
                  2,491,656





Note
6 - Debt





Short term
loans





Short
term loans represent amounts due to various banks which are normally due within
one year, and these loans can be renewed with the banks. As of June 30, 2008 and
2007, the Company’s short term bank loans consisted of the
following:




2008
                  
                  
                  2007Loan
      from Bank of China, due various dates from January 2008 to June 2009;
      monthly interest only payments; interest rates ranging from 7.47% to 8.96%
      per annum, guaranteed by an unrelated third party and secured by certain
      properties.
                  
                  $
                  13,656,240
                  
                  
                  $
                  10,993,400Loan
      from Industrial and Commercial Bank of China, due various dates from
      August 2007 to May 2009; monthly interest only payments; interest rates
      ranging from 7.47% to 8.96% per annum, guaranteed by an unrelated third
      party and secured by certain properties.
                  
                  $
                  3,895,530
                  
                  
                  $
                  3,945,000Loan
      from Agriculture Bank of China, due various dates from February 2008 to
      February 2009; monthly interest only payments; interest rate of 8.96% per
      annum, guaranteed by an unrelated third party and secured by certain
      properties
                  
                  $
                  2,188,500
                  
                  
                  $
                  1,959,350Loan
      from Communication Bank, due July 2007; monthly interest only payments;
      interest rate of 7.2% per annum, guaranteed by an unrelated third party.
                  
                  $
                  —
                  
                  
                  $
                  1,972,500Loan
      from Commercial Bank, due July 2008; monthly interest-only payments;
      interest rate at 8.019% per annum, guaranteed by an unrelated third party,
      unsecured.
                  
                  $
                  1,459,000
                  
                  
                  $
                  —Loan
      from ShangHai PuFa Bank, due October 2008; monthly interest-only payments;
      interest rate of 8.384% per annum, guaranteed by an unrelated third party,
      unsecured.
                  
                  $
                  1,459,000
                  
                  
                  $
                  —Total
                  
                  $
                  22,658,270
                  
                  
                  $
                  18,870,250


F-20


The loans
are secured by buildings and improvements, machinery and equipment, and land use
rights with carrying values as follows:





June 30,
                      2008Buildings
      and improvements
                    
                    $
                    4,637,104Machinery
      and equipment
                    
                    
                    4,150,330Land
      use rights
                    
                    
                    4,860,224Total
                    
                    $
                    13,647,658





Notes payable -
banks





Notes
payable represent amounts due to various banks which are normally due within one
year, and these notes can be renewed with the banks. As of June 30, 2008 and
2007, the Company’s notes payables consisted of the following:





2008
                  
                  
                  2007Bank
      of China, due November 2008, 0.05% transaction fee, restricted cash
      required 100% of loan amount, guaranteed by an unrelated third party.
                  
                  $
                  729,500
                  
                  
                  $
                  4,997,000Industrial
      and Commercial Bank of China, due in September 2008, 0.05% transaction
      fee, restricted cash required 50% of loan amount, guaranteed by an
      unrelated third party.
                  
                  
                  4,377,000
                  
                  
                  
                  3,945,000Shenzhen
      Development Bank, due in December 2008, 0.05% transaction fee, restricted
      cash required 50% of loan amount, guaranteed by an unrelated third party.
                  
                  
                  4,377,000
                  
                  
                  
                  —Shenzhen
      Development Bank, due in December 2008, 0.05% transaction fee, restricted
      cash required 100% of loan amount, guaranteed by an unrelated third party.
                  
                  
                  1,459,000
                  
                  
                  
                  —Total
                  
                  $
                  10,942,500
                  
                  
                  $
                  8,942,000





Employee
loans





From time
to time, the Company borrows monies from certain employees for cash flow
purposes of the Company. These loans do not require collateral and bear interest
at 7.2% for the first six months, and then 10.8% thereafter until the full
principal amounts are paid by the Company and the principal is due upon demand.
Employee loans amounted to $1,382,287 and $596,516 as of June 30, 2008 and June
30, 2007, respectively. Interest expense amounted to $105,672, $45,856, and
$56,425 for the years ended June 30, 2008, 2007, and 2006, respectively. These
loans are payable upon demand.


F-21


Employee loan -
officer





From time
to time, the Company has borrowed monies from Qingtai Liu for cash flow purposes
of the Company. The loan does not require collateral and bear interest at 7.2%
for the first six months, and then 10.8% until the full principal amount is paid
by the Company and the principal is due upon demand. Employee loan from officer
amounted to $53,605 and $0 as of June 30, 2008 and June 30, 2007, respectively.
Interest expense was de minimis on this loan for the years ended June 30, 2008,
2007, and 2006.





Third party
loan





From time
to time, the Company borrowed money from an unrelated individual for use in
operations. The loan does not require collateral and bears interest at 7.2% for
the first six months, and then 10.8% until the full principal amount is paid by
the Company . The principal is due upon demand. Balance on this loan as of June
30, 2008 and 2007 was $640,228 and $318,274, respectively.





Long term loan - current
portion





Long term
loan - current portion represents an amount due to a bank which was normally due
within one year. During the year ended June 30, 2008, the outstanding amount was
paid in full. As of June 30, 2008 and 2007, long term loan - current portion
was:




June 30, 2008
                  
                  
                  June 30, 2007Agricultural
      Credit Union, interest at 7.84% per annum, due May 2008
                  
                  $
                  —
                  
                  
                  $
                  381,350




Interest





Total
interest expense, net of capitalized interest, for the years ended June 30,
2008, 2007, and 2006 on all debt, amounted to $1,901,531, $1,270,418, and
$555,572 respectively. Interest capitalized into construction-in-progress
totaled $598,953, $759,372 and $189,904 for the years ended June 30, 2008, 2007
and 2006, respectively.





Note
7 - Income taxes





The
Company is governed by the Income Tax Law of the PRC concerning Foreign
Investment Enterprises (“FIEs”) and Foreign Enterprises and various local income
tax laws (the “Income Tax Laws”). Under the Income Tax Laws, FIEs are generally
subject to an effective income tax of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments, unless the enterprise is located in specially
designated regions of cities for which more favorable effective tax rates apply.
Upon approval by the PRC tax authorities, FIEs scheduled to operate for a period
of 10 years or more and engaged in manufacturing and production may be exempt
from income taxes for up to two years, commencing with their first profitable
year of operations, after taking into account any losses brought forward from
prior years, and thereafter with a 50% exemption for the next three
years.


F-22


In
February 2004, the Company became a Sino-foreign joint venture. In August 2004,
the state government granted the Company income tax exemptions as follows: 100%
exemption for the first two years from September 2004 to August 2006, and 50%
exemption for years three to five from September 2006 to August 2009. In
addition, the Company is located in a Special Economic Zone and the PRC tax
authority has offered it with a special income tax rate of 24%. With the
approval of the local government, the Company is subject to income taxes at a
reduced rate of 12% from September 2006 to August 2009, after the two-year 24%
exemption for income taxes until its exemption and reduction periods expire in
August 2009.





Beginning
on January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).





The key
changes were:





a.
            The new standard EIT rate of 25%
      will replace the 33% rate currently applicable to both DES and FIEs,
      except for High Tech companies who pay a reduced rate of
      15%;





b.
            Companies established before
      March 16, 2007, will continue toenjoy tax holiday treatment
      approved by local government for a grace period of the next five years or
      until the tax holiday term is completed, whichever is
      sooner.





The
Company’s subsidiary, Weifang Shengtai was established before March 16, 2007,
and therefore is qualified to continue to be taxed at the reduced rate as
described above until the tax holiday term is completed. Starting on September
1, 2009, the Company will be subject to a 25% income tax rate pursuant to the
new income tax laws.





For the
years ended June 30, 2008, 2007, and 2006, provision for income taxes was
$645,988, $878,836 and $0, respectively,





The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended June 30:


2008
                                
                                
                                2007
                                
                                
                                2006U.S.
      statutory rates
                                
                                
                                34.0
                                %
                                
                                
                                34.0
                                %
                                
                                
                                34.0
                                %Foreign
      income not recognized in the U.S.
                                
                                
                                (34.0
                                )
                                
                                
                                (34.0
                                )
                                
                                
                                (34.0
                                )China
      income taxes
                                
                                
                                29.0
                                
                                
                                
                                33.0
                                
                                
                                
                                33.0China
      income tax exemption
                                
                                
                                (17.0
                                )
                                
                                
                                (21.0
                                )
                                
                                
                                (33.0
                                )Other
      items (a)
                                
                                
                                (6.0
                                )
                                
                                
                                (1.0
                                )
                                
                                
                                -Applicable
      income tax rate
                                
                                
                                6.0
                                %
                                
                                
                                11.0
                                %
                                
                                
                                -
                                %





(a) In
2008, the Company received special tax credits from the local government due to
government enforced regulation. The Company was a tax-exempt entity until
September 2006. As the Company’s fiscal year began in July 2006, the Company was
not subject to income taxes for two months for the year-ended June 30,
2007.





The
estimated tax savings due to the tax exemption for the years ended June 30,
2008, 2007 and 2006 amounted to $1,468,820, $1,537,963 and $1,389,601,
respectively. The net effect on basic earnings per share if income taxes had
been applied would decrease basic earnings per share for the years ended June
30, 2008, 2007 and 2006 by $0.08, $0.13 and $0.14 respectively. The net effect
on diluted earnings per share if income taxes had been applied would decrease
diluted earnings per share for the years ended June 30, 2008, 2007 and 2006 by
$0.07, $0.13 and $0.14 respectively.


F-23


Taxes
payable





Taxes
payable consisted of the following as of June 30, 2008 and 2007:





2008
                
                
                2007VAT
      payable
                
                $
                3,049,000
                
                
                $
                1,273,390Individual
      income tax withheld
                
                
                767
                
                
                
                1,316Income
      tax payable
                
                
                1,518,278
                
                
                
                764,827Housing
      property tax payable
                
                
                9,903
                
                
                
                7,306Others
                
                
                53,304
                
                
                
                2,093Total
      taxes payable
                
                $
                4,631,252
                
                
                $
                2,048,932





Note
8 - Dividends





Prior to
June 30, 2006, the Board of Directors of Weifang Shengtai approved and declared
dividends of $2,468,400. As of June 30, 2008, the Company does not have any
outstanding dividends payable. As of, and for the years ended June 30, 2008,
2007 and 2006, the dividends paid or declared by the company to its original
shareholders were as follows:





June 30,
                  2008
                
                
                June 30,
                  2007
                
                
                June 30,
                  2006Dividends
      payable, beginning
                
                $
                —
                
                
                $
                389,216
                
                
                $
                1,000,065Dividends
      declared
                
                
                —
                
                
                
                —
                
                
                
                1,000,065Dividends
      paid
                
                
                —
                
                
                
                (389,216
                )
                
                
                (1,664,503
                )Foreign
      currency translation adjustment
                
                
                —
                
                
                
                —
                
                
                
                53,589Dividends
      payable, ending
                
                $
                —
                
                
                $
                —
                
                
                $
                389,216





Note
9 - Shareholders’ equity





Warrants





In
connection with the Share Purchase Agreement, the 4,375,000 warrants (“Investor
Warrants”) carry an exercise price of $2.60 and a 5-year term. The Investor
Warrants are callable if the Company’s shares trade at or above $8.00 per share
for 20 consecutive trading days and underlying shares are registered for resale.
The Investor Warrants contain standard adjustment provisions upon stock
dividend, stock split, stock combination, recapitalization, and a change of
control transaction.


F-24


Also in
connection with the Share Purchase Agreement, the Company issued 218,750
warrants (“Placement Agent Warrants”) to Brill Securities, the Placement Agent.
These Placement Agent Warrants have the same terms as the Investor Warrants.
These warrants were issued on August 8, 2007.





Concurrent
with the offering related to the Share Purchase Agreement, the Company issued
75,000 warrants to Chinamerica Fund, LLP and 25,000 warrants to Jeff Jenson
(collectively as “Lead Investor Warrants”) to compensate Chinamerica Fund LLP as
the lead investor and for Jeff Jenson in assisting in providing the shell
of West Coast Car Company. These warrants have the same terms as the Investor
Warrants except with an exercise price of $0.01 per share. In June 2008, Jeff
Jenson exercised the 25,000 warrants issued to him.





All
Investor Warrants, Placement Agent Warrants, and Lead Investor Warrants meet the
conditions for equity classification pursuant to SFAS No. 133 “Accounting for
Derivatives” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock.” Therefore,
these warrants were classified as equity and accounted for as common stock
issuance cost.





WarrantsOutstanding
                              
                              WarrantsExercisable
                              
                              WeightedAverage
                                  ExercisePrice
                              
                              AverageRemaining
                                Contractual
                                LifeOutstanding,
      June 30, 2006
                              
                              
                              —
                              
                              —
                              
                              $
                              —
                              
                              —Granted
                              
                              
                              4,475,000
                              
                              4,475,000
                              
                              
                              2.54
                              
                              5.00Forfeited
                              
                              
                              —
                              
                              —
                              
                              
                              —
                              
                              —Exercised
                              
                              
                              —
                              
                              —
                              
                              
                              —
                              
                              —Outstanding,
      June 30, 2007
                              
                              
                              4,475,000
                              
                              4,475,000
                              
                              $
                              2.54
                              
                              4.87Granted
                              
                              
                              218,750
                              
                              218,750
                              
                              
                              2.60
                              
                              5.00Forfeited
                              
                              
                              —
                              
                              —
                              
                              
                              —
                              
                              —Exercised
                              
                              
                              219,805
                              
                              219,805
                              
                              
                              2.31
                              
                              —Outstanding,
      June 30, 2008
                              
                              
                              4,473,945
                              
                              4,473,945
                              
                              $
                              2.54
                              
                              3.88





Stock
options





On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”). The Company believes that such
awards better align the interests of its employee with those of its
shareholders. Option awards are generally granted with an exercise price equal
to the fair value of the Company’s stock at the date of grant.


F-25


On May
14, 2008, the Company granted 500,000 stock options and 160,000 non-qualified
stock options pursuant to the Stock Incentive Plan. All options have an exercise
price of $3.34, which is the closing price on the date of grant, and expire five
years after the date of grant. All options vest over a period of three years on
a quarterly basis from the date of grant.





The
Company uses the Black-Scholes option pricing model which was developed for use
in estimating the fair value of options. Option pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes
in the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option valuation model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using an
option pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.





The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option pricing model are as follows:





Weighted
      average risk-free interest rate
                  
                  
                  3.22
                  %Expected
      term
                  
                  4
      yearsExpected
      volatility
                  
                  
                  146
                  %Expected
      dividend yield
                  
                  
                  0
                  %Weighted
      average grant-date fair value per option
                  
                  $
                  3.34





The
volatility of the Company’s common stock was estimated by management based on
the historical volatility; the risk free interest rate was based on Treasury
Constant Maturity Rates published by the U.S. Federal Reserve for periods
applicable to the estimated life of the options; and the expected dividend yield
was based on the current and expected dividend policy. The fair value of the
options was based on the Company’s common stock price on the date the options
were granted. SFAS 123R allows use of the “simplified” method to determine the
term when other information is not available. Because the Company does not have
sufficient applicable history of employee stock options activity, the Company
uses the simplified method to estimate the life of the options by taking the sum
of the vesting period and the contractual life and then calculating the midpoint
which is the estimated term of the options.





The stock
option activity was as follows for the year ended June 30, 2008:




Options
                  outstanding
                
                
                Weighted
                  Average
                  Exercise Price
                
                
                Aggregate
                  Intrinsic ValueOutstanding,
      June 30, 2007
                
                
                —
                
                
                
                —
                
                
                
                —Granted
                
                
                660,000
                
                
                $
                3.34
                
                
                $
                —Forfeited
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Outstanding,
      June 30, 2008
                
                
                660,000
                
                
                $
                3.34
                
                
                $
                —


F-26


As the
options were first granted in May 2008, there was no stock option activity for
the year ended June 30, 2007, and prior.





Following
is a summary of the status of options outstanding at June 30, 2008:





Outstanding Options
                  
                  
                  Exercisable OptionsAverage
                    Exercise Price
                  
                  Outstanding Options
                  
                  
                  Average Remaining
                    Contractual Life
                  
                  
                  Average
                    Exercise Price
                  
                  
                  Exercisable
                    Options$
                  3.34
                  
                  
                  660,000
                  
                  
                  
                  4.87
                  
                  
                  $
                  3.34
                  
                  
                  
                  —





Compensation
expense from stock options recognized for the year ended June 30, 2008 was
$317,636 .There were no
such expenses recognized for the years ended June 30, 2007 and
2006.





Note
10 - Commitments and Contingencies





Guarantees





During
the year ended June 30, 2008, the Company guaranteed $7.3 million of short term
bank loans for an unrelated party, Shangdong Kuangji Group, Inc. (Shangdong
Kuangji”). The Company is obligated to perform under the guarantee if Shangdong
Kuangji fails to pay principal and interest payments when due. The maximum
potential amount of future undiscounted payments under the guarantee is $8.0
million including accrued interest. As of June 30, 2008, the Company did not
record a liability for the guarantee because management believes Shangdong
Kuangji is current in its payment obligations, and the likelihood of the Company
having to make good on the guarantee is remote. As of June 30, 2008, Shangdong
Kuangji’s outstanding short term bank loan balance was $7,295,000





Litigation





In the
Company’s ordinary course of business, the Company may be subject to certain
legal proceedings. After review and consultation with the Company’s legal
counsel, management believes that the outcome of the legal matters will not have
a materially adverse effect on the consolidated results of operations or
consolidated financial position of the Company.





Note
11 - 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, the
common welfare fund, and the enterprise fund. These statutory reserves
represent restricted retained earnings.


F-27


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
shareholders. For the years ended June 30, 2008, 2007, and 2006, the Company
transferred $1,159,418, $734,396, and $616,256, respectively, to this reserve.
The surplus reserve fund is non-distributable other than during liquidation and
can be used to fund previous years’ losses, if any, and may be utilized for
business expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholding or by increasing the
par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered
capital.





Enterprise
fund





The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expand production and operations of the Company. No minimum
contribution is required and the Company has not made any contribution to this
fund.





Note
12 - 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 years ended June 30, 2008, 2007 and 2006, the Company made
contributions in the amounts of $308,399, $207,308, and $170,533, respectively
to the Company’s retirement plan.





Note
13- Subsequent event




Short term
loans




In July
2008, the Company paid in full the outstanding amount of $1,459,000 to
Commercial Bank, in satisfaction of its loan terms. In August 2008, the Company
paid $977,530 to Industrial and Commercial Bank of China in accordance with the
loan agreement.




In
September 2008, the Company borrowed $1,459,854 loan from Commercial Bank, due
June 2009, monthly interest-only payments; interest rate at 9.71% per annum,
secured by certain properties.




Notes
payable




By
September 2008, the Company paid in full the outstanding amount of $4,377,000 to
Industrial and Commercial Bank of China, in satisfaction of its loan
terms.




In
September 2008, the Company borrowed $1,956,204 notes payable from Industrial
and Commercial Bank of China, due in March 2009, 0.05% transaction fee,
restricted cash required 50% of loan amount, secured by certain
properties.


F-28





(2)
            Exhibits





Incorporated by
Reference





FilingExhibit
                                  
                                  
                                  
                                  
                                  
                                  Date /
      periodNumber
                                  
                                  Exhibit Description
                                  
                                  Form
                                  
                                  End Date3.1
                                  
                                  Amended
      and Restated Certificate of Incorporation
                                  
                                  Form
      10-SB
                                  
                                  September
      26, 20063.2
                                  
                                  By
      Laws
                                  
                                  Form
      10-SB
                                  
                                  September
      26, 20064.1
                                  
                                  Form
      of Warrants to Investors
                                  
                                  Form
      8-K
                                  
                                  May
      21, 200710.1
                                  
                                  Share
      Exchange Agreement dated May 1 5, 2007 by and among the Company and
      Shengtai Holding, Inc
                                  
                                  Form
      8-K
                                  
                                  May
      21, 200710.2
                                  
                                  SharePurchaseAgreement datedas of May 15, 2007 between the
      Company and the Purchasers
                                  
                                  Form
      8-K
                                  
                                  May
      21, 200710.3
                                  
                                  Employment
      Agreement dated May 1, 2008 between the Company and Yiru
    Shi
                                  
                                  Form
      10-K
                                  
                                  May
      29, 200816.1
                                  
                                  Letter dated May 17, 2007from West Coast Car Companyto Mantyla McRobers
      LLC
                                  
                                  Form
      8-K
                                  
                                  May
      21, 200716.2
                                  
                                  Letter dated May 23, 2007from Mantyla McReynoldsLLC to the Securities and
      Exchange Commission
                                  
                                  Form
      8-K/A
                                  
                                  May
      24, 200721.1
                                  
                                  List
      of Subsidiaries
                                  
                                  Form
      8-K
                                  
                                  May
      21, 200731.1
                                  
                                  CERTIFICATION
      - SECTION 302 - CEO
                                  
                                  Form
      10-K
                                  
                                  May
      29, 200831-2
                                  
                                  CERTIFICATION
      - SECTION 302 - CFO
                                  
                                  Form
      10-K
                                  
                                  May
      29, 200832-1
                                  
                                  Certification
      – Section 906- CEO
                                  
                                  Form
       10-K
                                  
                                  May
       29, 200832-2
                                  
                                  Certification
      – Section 906- CFO
                                  
                                  Form
       10-K
                                  
                                  May
       29, 200899.1
                                  
                                  Press
      release dated May 21, 2007 issued by West Coast Car
Company
                                  
                                  Form
      8-K
                                  
                                  May
      21,
2007


59


SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following person on behalf of the registrant and in the
capacity and on the date indicated.




SHENGTAI
      PHARMACEUTICAL, INC.(Registrant)By:
                /s/
      Qingtai LiuQingtai
      LiuChief
      Executive Officer(Principal
      Executive Officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




Signature
                                  
                                  Title
                                  
                                  Date/s/
      Qingtai Liu
                                  
                                  Chief
      Executive Officer (Principal Executive
                                  
                                  August
      7, 2009Qingtai Liu
                                  
                                  Officer)
      and Director/s/
      Yiru Shi
                                  
                                  Chief Financial Officer (Principal Financial and
                                  
                                  August
      7, 2009Yiru
      Shi
                                  
                                  Accounting Officer)/s/
      Yongqiang Wang
                                  
                                  Director
                                  
                                  August
      7, 2009Yongqiang Wang/s/
      Wenbing Christopher Wang
                                  
                                  Director
                                  
                                  August
      7, 2009Wenbing
      Christopher Wang/s/
      Changxin Li
                                  
                                  Director
                                  
                                  August
      7, 2009Changxin Li/s/ Winfred Lee
                                  
                                  Director
                                  
                                  August
      7, 2009Winfred
      Lee


60