UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10 -K




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


For the
fiscal year ended June 30,
2010


or




 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 incorporation or
                  organization
                
                (I.R.S.
      Employer
                  Identification
      No.)Changda
      Road East, Development District, Changle County, 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.   ̈ Yes  x No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   ̈ Yes  x No




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.  x  Yes    ̈ No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   ̈Yes   ̈ 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.   ̈  Yes   x No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
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  ̈
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   ̈  Yes   x No




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates* computed by reference to the price of $1.20 per share of common
stock at which the common equity was last sold on June 30, 2010, the last day of
our most recently completed fourth fiscal quarter, as reported on www.yahoo.com
was: $10,539,480.




*
Excludes 8,782,900 shares of common stock held by executive officers, directors
and stockholders whose individual ownership exceeds 10% of common stock
outstanding on June 30, 2010.




There were 19,169,805 shares of Common
Stock, par value $0.001, issued and outstanding as of September 23,
2010.




DOCUMENTS
INCORPORATED BY REFERENCE


None.










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.





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





Shengtai
Pharmaceutical, Inc., the “Company,” was incorporated in 2004 in the State of
Delaware.  The Company, through its direct and indirect subsidiaries
in China, manufactures and distributes glucose and starch as pharmaceutical raw
materials, other starch products and other glucose products such as corn meals,
food and beverage glucose and dextrin.  Most of the Company’s sales
are made in the People’s Republic of China, 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.





Approximately
49.08% of our revenues for the fiscal year ended June 30, 2010 were attributable
to sales of glucose products.





Approximately
26.43% of our sales revenues for the fiscal year ended June 30, 2010 were
attributable to sales of starch products.





Our
Products





We
manufacture products in three categories: (i) raw materials for pharmaceutical
and medicinal companies or purposes, (ii) raw materials for the food and
beverage industries and (iii) other products.


2





Raw
materials for pharmaceutical and medicinal companies or purposes:





These
products accounted for 29.02% of our sales for the fiscal year ended June 30,
2010. Set forth below is a list of our major pharmaceutical and medical grade
products:





·
            Dextrose
      Monohydrate





·
            Dextrose
      Anhydrous





·
            Dextrin





·
            Pharmaceutical Grade
      Cornstarch





Raw
Materials for the Food and Beverage and Processing Industries:





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





·
            Rough Glucose for Other
      Processing Purposes





·
            Dextrose Monohydrate
      Oral





·
            Food and Beverage Grade
      Cornstarch





Other
Products





·
            Fibers





·
            Corn
  Embryo





·
            Corn
  Meals





·
            Mother
    Liquid





·
            Phytin





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 widely used in
pharmaceutical, construction and chemistry industries. We transferred this
product line into a Dextrose Monohydrate Oral production line in May 2009
because we did not achieve economies of scale in the production of sodium
gluconate and decided to focus our resources on a main product
lines.




3


Sales
of Products by Types and Geographic Locations





Sales
      by Products
                
                FY
      06/30/2009
                
                
                FY
      06/30/2010Dextrose
      Monohydrate (DMH)
                
                
                16,739,854
                
                
                
                22.83
                %
                
                
                20,550,972
                
                
                
                17.72
                %Dextrose
      Anhydrous
                
                
                8,113,813
                
                
                
                11.07
                %
                
                
                8,505,783
                
                
                
                7.34
                %Dextrose
      Monohydrate Oral
                
                
                9,371,832
                
                
                
                12.78
                %
                
                
                22,530,617
                
                
                
                19.43
                %Pharmaceutical
      Grade Cornstarch
                
                
                1,934,937
                
                
                
                2.64
                %
                
                
                2,463,110
                
                
                
                2.12
                %Rough
      Glucose for Other Processing Purposes
                
                
                2,530,772
                
                
                
                3.45
                %
                
                
                5,323,891
                
                
                
                4.59
                %Food
      and Beverage Grade Cornstarch
                
                
                15,110,883
                
                
                
                20.61
                %
                
                
                24,398,245
                
                
                
                21.04
                %Emulsion
                
                
                714,764
                
                
                
                0.97
                %
                
                
                3,792,297
                
                
                
                3.27
                %Mother
      Liquid
                
                
                485,373
                
                
                
                0.66
                %
                
                
                535,740
                
                
                
                0.46
                %Dextrin
                
                
                1,368,214
                
                
                
                1.87
                %
                
                
                2,134,177
                
                
                
                1.84
                %Corn
      Embryo
                
                
                6,763,477
                
                
                
                9.22
                %
                
                
                10,100,453
                
                
                
                8.71
                %Corn
      Meals
                
                
                6,063,931
                
                
                
                8.27
                %
                
                
                9,166,708
                
                
                
                7.91
                %Fibers
                
                
                3,754,462
                
                
                
                5.12
                %
                
                
                6,270,504
                
                
                
                5.41
                %Others
                
                
                369,550
                
                
                
                0.50
                %
                
                
                181,451
                
                
                
                0.16
                %Total
                
                
                73,321,862
                
                
                
                
                
                
                
                115,953,948





Approximately
80% of our revenues for the fiscal year ended June 30, 2010 were attributable to
domestic sales made in the PRC.





Set forth
below is a breakdown of the principal products we sold over the previous two
fiscal years and the revenues from such sales.





Sales
      by Principal Products
                                        
                                        FY
      06/30/2009
                                          (Revenue)    
      $
                                        
                                        
                                        %
      of Total
                                          Sales
                                        
                                        
                                        FY
      06/30/2010
                                          (Revenue)   
      $
                                        
                                        
                                        %
      of Total
                                          SalesDextrose
      Monohydrate (DMH)Domestic
                                        
                                        
                                        15,387,809
                                        
                                        
                                        
                                        20.99
                                        
                                        
                                        
                                        18,732,404
                                        
                                        
                                        
                                        16.16International
                                        
                                        
                                        1,352,045
                                        
                                        
                                        
                                        1.84
                                        
                                        
                                        
                                        1,818,568
                                        
                                        
                                        
                                        1.57Dextrose
      AnhydrousDomestic
                                        
                                        
                                        4,888,540
                                        
                                        
                                        
                                        6.67
                                        
                                        
                                        
                                        4,337,312
                                        
                                        
                                        
                                        3.74International
                                        
                                        
                                        3,225,273
                                        
                                        
                                        
                                        4.40
                                        
                                        
                                        
                                        4,168,471
                                        
                                        
                                        
                                        3.59Dextrose
      Monohydrate OralDomestic
                                        
                                        
                                        6,500,689
                                        
                                        
                                        
                                        8.87
                                        
                                        
                                        
                                        13,710,775
                                        
                                        
                                        
                                        11.82International
                                        
                                        
                                        2,871,143
                                        
                                        
                                        
                                        3.92
                                        
                                        
                                        
                                        8,819,842
                                        
                                        
                                        
                                        7.61Pharmaceutical
      Grade CornstarchDomestic
                                        
                                        
                                        1,883,655
                                        
                                        
                                        
                                        2.57
                                        
                                        
                                        
                                        2,432,190
                                        
                                        
                                        
                                        2.10International
                                        
                                        
                                        51,282
                                        
                                        
                                        
                                        0.07
                                        
                                        
                                        
                                        30,921
                                        
                                        
                                        
                                        0.03




4




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, 2010, all the provinces in the
mainland PRC (except Tibet) have been covered by our domestic sales network.
Historically, we have exported our products to customers in over seventy
countries. We plan to increase our global sales.





Delivery
Methods





Our
products are delivered by ground transportation, including by rail. Products
sold internationally are shipped by sea. We generally bear the costs of
transportation. During the quarter ended March 31, 2009 we requested to
most of our customers that they bear the cost of transportation. As
most of our customers prefer to have us arrange transportation and
bear the costs of shipment, we recommenced bearing this cost in April
2009.





The
Glucose Production Process





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





Glucose
is produced from cornstarch in the following steps:





·
            Cornstarch is converted into an
      emulsion;





·
            Alpha-amylase glucoamylase is
      then added;





·
            The emulsion from the chemical
      reaction made by Alpha-Amylase Glucoamylase is then filtered, discolored,
      ion-exchanged, inspissated, crystallized, separated and dried;
      and





·
            The cleaned and dried
      end-products are glucose.





Under
normal circumstances, the conversion ratio from cornstarch to glucose is close
to 100%, with no rejects and wastes. In case of a power outage or equipment
malfunction, sub-standard output, when it is detected by our quality control
procedures, is re-processed.





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:





Cornstarch





Cornstarch
Manufacturing Facility





The
Company’s cornstarch production facility has a maximum capacity of 300,000 tons
per year.  During the fiscal year ended June 30, 2010, the
Company used internally 138,425 metric tons of corn starch, and sold
88,130 metric tons of corn starch.


5





During
fiscal year 2010, approximately 61% of the cornstarch production plant’s output
was used as raw materials for glucose production within the Company, and the
other 39% 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
      treatment facilities for
sewage





Enzyme
Preparations





We
purchased a total of 238.26 tons of enzyme preparations during the previous two
fiscal years.





Active
Carbon





Fujian
Sha County Qingshan Chemical Carbon Corporation is one of the major active
carbon producers in the PRC. We purchased a total of 1,778.45 tons of active
carbon from it over the past two 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 single supplier for raw materials and machinery, nor
have we ever experienced a shortage in the supply of raw materials or
machinery.





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. Our glucose production capacity is 170,000 tons per year.
During the fiscal year ended June 30, 2010, the Company has sold 131,651 metric
tons of glucose products.





Quality
Control





Our PRC
production facilities are fully certified by applicable PRC regulations for GMP,
ISO9001:2000 (ISO9002:2008,ISO22000:2005) and HACCP international quality
standards.





We have
implemented a three-tier quality control system: production team level,
workshop level, and management accountability for quality.  We combine
this with strict quality-oriented procedures to ensure that all products are
produced in a pollution-free, contamination-free and efficient production
environment. A team of workers on-duty is responsible for the smooth operation
of the production process by adhering to proper procedures. The intermediate
output from each production step is sampled and checked to ensure that the final
output meets specified quality standards. Equipment is regularly
checked and maintained to ensure proper operation. The quality of the water
used in the production process and the level of airborne particles and
microbes in the production sites are also regularly checked to
eliminate contamination. The quality of all output is reviewed by the General
Manager of the Quality Control Department, and ultimately approved by the CEO. A
full set of written quality control records is maintained.





The
quality indices of our manufactured glucose are as follows:





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


·
            Specific
      rotatory power:
      +52.0 degrees— +53.5 degrees


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


6





·
            Alcohol-insoluble
      matter:≤5mg


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


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





The
quality indices of our Dextrose Monohydrate Transfusion (liquid glucose) are 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
process of 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)





·
            Nutritional
      transfusion





·
            Dialyzate





·
            Plasma
      expander





·
            Therapeutic transfusion
      (including herbal
transfusion)





Dextrose
Monohydrate is widely used medically and clinically 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.


7





Glucose
exists in many forms in nature, including in plants, fruits, honey and animal
products. In human bodies, every 100 ml 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
different reaction mechanisms, different types of chemical compounds are
produced, by the self-oxidation and combination mechanism to produce calcium
gluconate, zinc gluconate, and glucorone; by the hydro-reduction mechanism to
produce sorbic alcohol and manno-alcohol, or to produce Vitamin B2, glutamine,
ribose, and other vitamins.





Target
Market





Our
principal customers are:





·
            Healthcare
      Institutions





·
            Medical supply
      companies





·
            Pharmaceutical
      companies





·
            Medical supply
      exporters





·
            Food and beverage
      companies





We market
our products within the PRC and plan to expand our export business as we
increase our production capabilities.





Our
competitiveness is reflected in the following:





·
            High quality, pharmaceutical
      grade products





·
            Certified product
      reliability





·
            On-time
      deliveries





·
            New and improved medicinal
      products and packaging





·
            Excellent service and
      support





·
            Excellent
      referrals




8


Domestic and International
Market




We
continue to plan to export more products to overseas markets. Our export
revenues of Dextrose Monohydrate, anhydrous glucose and oral glucose from top
four export markets are summarized as follows:





South
Korea





Products
exported: Dextrose Monohydrate Oral and Dextrose Anhydrous





FY2009
                            
                            
                            FY2010$1,204,513
                            
                            
                            $5,722,804




India




Products
exported: Dextrose Monohydrate Oral, Dextrose Monohydrate
transfusion





FY2009
                            
                            
                            FY2010$56,790
                            
                            
                            $3,361,530




Bangladesh




Product
exported: Dextrose Monohydrate Oral




FY2009
                            
                            
                            FY2010$536,864
                            
                            
                            $1,897,385




Indonesia




Products
exported: Dextrose Monohydrate




FY2009
                            
                            
                            FY2010$90,900
                            
                            
                            $1,253,158





Competition





Some of
our competitors and their main products are listed below.





·
            Dong Ping Rui Xing Petrochemical
      Company Ltd (trans)





·
            North China Pharmaceutical
      Production Company Ltd
(trans)





·
            Ci Feng Pharmaceutical Production
      Company Ltd (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)




9





·
            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)




(trans – competitor in Dextrose
Monohydrate transfusion solution)


(oral – competitor in oral
Dextrose Monohydrate)


(andh– competitor in Dextrose
Anhydrous)





Among our
domestic competitors, we are the largest manufacturer of pharmaceutical grade
glucose. Internationally, we have the following significant
advantages.





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 receiving a steady supply of raw
materials nearby with low transportation costs.





In
Changle County where we are located, there is plenty of land for us to
expand.





We 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 can be competitive in terms of product price, delivery lead-time and customer
service responsiveness.





With our
cornstarch facility close to the existing glucose manufacturing facility and the
new glucose manufacturing facility, we are able to stabilize our glucose’ raw
material costs and production, and enable our glucose production facility to
function at maximum capacity for both domestic and export markets.





We are
one of the leading producers of pharmaceutical Dextrose Monohydrate products in
the PRC, with an estimated 30% of the overall PRC market share and have
production lines for a full set of Dextrose Monohydrate products. Other
suppliers of pharmaceutical Dextrose Monohydrate products do not have production
lines for a full set of Dextrose Monohydrate products.





Backlog





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





Growth
Initiative





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





•
            Vertical integration of our
      manufacturing capabilities from cornstarch to
    glucose




10





Our
cornstarch plant can lower production costs and improve profit margin because
higher-quality and lower cost raw materials can be produced in-house and there
is little transportation cost because the cornstarch processing plant is
situated next to and connected to the glucose production factories. This will,
to a certain extent, shield us from external cornstarch price fluctuation, thus
protecting or improving profit margins.





•
            Increase glucose production
      capabilities to meet market
demands





Overseas
demand of our glucose products had not been fully satisfied in the past before
the economic crisis because our products have been sold out at home due to a
strong domestic demand in the PRC.  Our cornstarch processing plant
will supply enough raw materials to produce additional glucose to fulfill more
overseas orders.  In line with this, we completed our new glucose
manufacturing facility in July 2008, which is ramping up its production
capacity.





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





We (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., the word, "glucose,” on Google, 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. Our principal customers are
hospitals and pharmaceutical companies. Below is a list of our largest PRC
customers:





•
            Shandong Xiwang Food Co
      Ltd





•
            Qingdao Chenyu Biochemistry
      Technology Co Ltd





•
            Qingdao Shizhan Technology Co
      Ltd





•
            Luogaite (China) Fine Chemical Co
      Ltd





•
            Weifang Phoenix Paper Co
      Ltd





•
            Shandong Xinxinhai Cereals and
      Oil Industrial Co Ltd





•
            Shandong Fufeng Zymosis Co
      Ltd





•
            Anhui Shuanghe Pharmaceutical Co
      Ltd





•
            Weifang Yongchang Feedstuff Co
      Ltd





•
            Weifang Xingda Feedstuff Co
      Ltd





No
customer accounted for more than 10% of our sales for fiscal years ended June
30, 2010, and 2009.





Intellectual
Property





Ownership
of the trademark, "Heng De Bao," was transferred to us at no charge from Changle
Medical Starch Factory (our State-owned predecessor company) on or about July
28, 2000.


11




Insurance





We
purchased automobile insurance with third party liability coverage for our
vehicles and liabilities insurance for our key personnel and company. 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 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 Dextrose Monohydrate oral glucose, Dextrose
Monohydrate glucose, and Anhydrous glucose and the GMP Certificate is valid
through November 10, 2013 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.





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 were issued
Certificates of Qualification.





Employees





As of
June 30, 2010, we employed approximately 740 full-time employees. Of these,
there are 8 directors, approximately 28 in sales, approximately 136 performing
operating and administrative functions and approximately 568 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).


12





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.





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;




13





•
            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 5.9% and as
low as -1.4%. (Statistics Bulletin, National Bureau of Statistics, the People’s
Republic of China, http://www.stats.gov.cn/tjgb/index.htm) 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.





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.


14





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, Mr. Hu Ye, Mr. Fei He and Mr.
Yaojun Liu, 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.





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.


15





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.





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.


16





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.





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.




17




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 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
      function 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
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 had conducted an evaluation of our
internal control over financial reporting, and assisted us in designing enhanced
processes and procedures to improve our internal control over financial
reporting.





2. 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.





3. We had
set up a team comprised of staff from different departments to conduct internal
audit function periodically. 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.





4. We
have appointed Mr. Hu Ye as CFO, who has held positions of CFO at companies that
operate in China and are listed on NYSE AMEX and OTC BB in the US.





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.


18





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 2010
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 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.





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. Recent economic slowdown since 2008 had affected our
business, especially our cornstarch related business. While we believe that the
economy is recovering, and although we believe that the demand for our products
is not totally 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.


19





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





A
potential outbreak of widespread public health problem in the PRC, such as H1N1
flu, could force us temporarily to stop our operations, and thus 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 four of our five
directors and all of our 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.





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
$115,953,948 for the year ended June 30, 2010. Our continued growth is dependent
upon our ability to raise capital from outside sources and improvement of
profitability. 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.





With 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.




20





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.





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 implementing 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.





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.


21





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 38.49% 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."





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 NYSE Alternext. 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.




22


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.





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. From July 2008 to June 2010, the Company
incurred additional cost relating to various land use rights for approximately
$480,520 and sold a piece of land use right for approximately $474,610. 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 252,275 square meters (62.34 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
                                
                                
                                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




23





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. Reserved.





PART
II





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





Market
Information





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 23, 2010,
the last reported bid price of our common stock was $1.20 per share and the last
reported ask price was $1.20 per share.





CALENDAR
      QUARTER ENDED
                    
                    HIGH
      BID(S)
                    
                    
                    LOW
      BID(S)September
      30, 2009
                    
                    $
                    0.95
                    
                    
                    $
                    0.90December
      31, 2009
                    
                    $
                    1.11
                    
                    
                    $
                    1.05March
      31, 2010
                    
                    $
                    1.65
                    
                    
                    $
                    1.35June
      30, 2010
                    
                    $
                    1.20
                    
                    
                    $
                    1.10





Holders





As of
September 23, 2010, there were 19,169,805 shares of our common stock issued and
outstanding and there were 31 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.





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 23, 2010, we had 4,398,945 outstanding warrants to purchase 4,398,945
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 common stock 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 .


24





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. In June 2008, Jeff Jenson exercised the
25,000 warrants issued to him. In November 2008, Chinamerica Fund, LP exercised
the 75,000 warrants issued to the fund.





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.





In the
Chief Financial Officer employment agreement, the “Employment Agreement,”
entered into on March 1, 2010 between the Company and Mr. Hu Ye, the Chief
Financial Officer, the Company granted Mr. Hu Ye an option to purchase 300,000
shares of common stock of the Company. The shares vest over 3 years starting
March 1, 2010 and terminate on the third anniversary of the date of issuance of
the option. The Company valued the shares at $2.60 per share, which represents
130% of the fair market value being calculated in the private placement price on
May 15, 2007.





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
      issuance under 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
                  
                  
                  685,000
                  
                  
                  $
                  3.02
                  
                  
                  
                  2,068,700Total
                  
                  
                  685,000
                  
                  
                  $
                  3.02
                  
                  
                  
                  2,068,700





Item
6. Selected Financial Data.





The
following selected financial data for the fiscal years ended 2010, 2009, 2008,
2007 and 2006 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
                
                2010
                
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006Sales
      revenue
                
                $
                115,953,948
                
                
                $
                73,321,862
                
                
                $
                90,871,223
                
                
                $
                51,706,215
                
                
                $
                36,029,179Cost
      of good sold
                
                
                98,276,190
                
                
                
                65,799,486
                
                
                
                70,613,757
                
                
                
                39,527,662
                
                
                
                27,568,092Gross
      profit
                
                
                17677,759
                
                
                
                7,522,376
                
                
                
                20,257,466
                
                
                
                12,178,553
                
                
                
                8,461,087Research
      and development expense
                
                ____—
                
                
                
                365,689
                
                
                
                —
                
                
                
                —
                
                
                
                —Selling,
      general and administrative expenses
                
                
                10,281,788
                
                
                
                8,607,560
                
                
                
                7,390,623
                
                
                
                4,674,679
                
                
                
                3,831,778Operating
      income (loss)
                
                
                7,395,970
                
                
                
                (1,450,873
                )
                
                
                12,866,843
                
                
                
                7,503,874
                
                
                
                4,629,309Other
      income (expense), net
                
                
                (2,598,285
                )
                
                
                (1,213,015
                )
                
                
                (1,810,530
                )
                
                
                524,088
                
                
                
                (418,398
                )Income
      (loss) before income taxes
                
                
                4,797,685
                
                
                
                (2,663,888
                )
                
                
                11,056,313
                
                
                
                8,027,962
                
                
                
                4,210,911Provision
      for income taxes
                
                
                1,598,704
                
                
                
                —
                
                
                
                645,988
                
                
                
                878,836
                
                
                
                —Net
      income (loss)
                
                $
                3,198,981
                
                
                $
                (2,663,888
                )
                
                $
                10,410,325
                
                
                $
                7,149,126
                
                
                $
                4,210,911Foreign
      Currency Translation Adjustment
                
                
                262,776
                
                
                
                225,362
                
                
                
                3,890,123
                
                
                
                641,596
                
                
                
                185,402Comprehensive
      Income (loss)
                
                $
                3,461,757
                
                
                $
                (2,438,526
                )
                
                $
                14,300,448
                
                
                $
                7,790,722
                
                
                $
                4,396,313Earning
      (loss) per share - basic
                
                $
                0.17
                
                
                $
                (0.14
                )
                
                $
                0.55
                
                
                $
                0.64
                
                
                $
                0.42Earning
      (loss) per share - diluted
                
                $
                0.17
                
                
                $
                (0.14
                )
                
                $
                0.52
                
                
                $
                0.62
                
                
                $
                0.42Basic
      weighted average common shares outstanding
                
                
                19,169,805
                
                
                
                19,139,394
                
                
                
                18,993,789
                
                
                
                11,251,712
                
                
                
                10,125,000Diluted
      weighted average common shares outstanding
                
                
                19,169,805
                
                
                
                19,139,394
                
                
                
                19,874,486
                
                
                
                11,477,545
                
                
                
                10,125,000




25





Year
      Ended June 30,Consolidated
      Balance Sheets
                                                  
                                                  2010
                                                  
                                                  
                                                  2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006Current
      Assets
                                                  
                                                  $
                                                  43,522,824
                                                  
                                                  
                                                  $
                                                  48,453,449
                                                  
                                                  
                                                  $
                                                  24,282,846
                                                  
                                                  
                                                  $
                                                  31,266,489
                                                  
                                                  
                                                  $
                                                  12,149,634Total
      Assets
                                                  
                                                  
                                                  130,754,611
                                                  
                                                  
                                                  
                                                  124,931,365
                                                  
                                                  
                                                  
                                                  101,313,662
                                                  
                                                  
                                                  
                                                  73,760,133
                                                  
                                                  
                                                  
                                                  31,271,457Current
      Liabilities
                                                  
                                                  
                                                  78,312,045
                                                  
                                                  
                                                  
                                                  74,335,910
                                                  
                                                  
                                                  
                                                  51,904,264
                                                  
                                                  
                                                  
                                                  38,468,085
                                                  
                                                  
                                                  
                                                  23,612,427Total
      Liabilities
                                                  
                                                  
                                                  81,658,381
                                                  
                                                  
                                                  
                                                  79,978,466
                                                  
                                                  
                                                  
                                                  54,558,259
                                                  
                                                  
                                                  
                                                  42,129,557
                                                  
                                                  
                                                  
                                                  24,614,027Total
      Stockholders’ Equity
                                                  
                                                  
                                                  49,096,231
                                                  
                                                  
                                                  
                                                  44,952,899
                                                  
                                                  
                                                  
                                                  46,755,403
                                                  
                                                  
                                                  
                                                  31,630,576
                                                  
                                                  
                                                  
                                                  6,657,430





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, you can 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 generally, 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.


26





Overview





Shengtai
Pharmaceutical, Inc., the “Company,” was incorporated in 2004 in the State of
Delaware.  The Company, through its direct and indirect subsidiaries
in China, manufactures and distributes glucose and starch as pharmaceutical raw
materials, other starch products and other glucose products such a corn meals,
food and beverage glucose and dextrin.  Most of the Company’s sales
are made in the People’s Republic of China, the “PRC.”





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 medical prescriptions in the PRC and 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.





Our
cornstarch production capacity has been enhanced to 300,000 tons a year. This
complex is close to our existing glucose production plant and new glucose
production complex which was completed in July 2008. The new facility of glucose
allows us to use self-produced cornstarch to produce glucose and to be able to
ensure the adequacy and quality of the cornstarch we use. Since cornstarch is
produced on our premises, we are able to eliminate costs to ship the cornstarch
to our glucose production facility, thus resulting in lower manufacturing
costs.





In
addition to our pharmaceutical glucose series of products, we also have produced
other product lines of glucose and starch products such as industrial glucose,
cornstarch, Avermectins, dextrin, and other products which are used for food,
beverage and industrial production. In May 2008, we stopped producing
Avermectins because we cannot 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.





The
analysis of the consumption of glucose products by the China Starch Industry
Association and the disposable income per capita from China National Statistics
Bureau indicates that there is a strong correlation between the consumption of
glucose products and the disposable income per capita.





Higher
living standards are predicted to lead to higher consumption of pharmaceutical
dextrose. The recovering economic growth, the rising purchasing power of
domestic market, the government 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, our revenues and 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 of management are essentially for maintaining our
competitiveness.





The
Company’s new glucose production facility passed GMP inspection, and the
Company’s facilities and many of its products are fully certified for GMP,
IS09001:2000 and HACCP international quality standards, and globally certified
Halal, Kosher and NON-GMO IP. The rate of quality output, output conforming to
pharmaceutical-grade glucose product specifications, is maintained at
100%.




The
Company has a three-tier quality control system and a well equipped quality
inspection center to ensure timely detection and 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. 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.


27





In April
2007, we acquired the rights to use a piece of land measuring 85,880 square
meters in the Changle Economic and Technology Development Zone. We developed the
land and built a new glucose production complex with an expected production
capacity of 120,000 tons per year. The construction has been finished at the end
of July 2008. The new facility is 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. This land was
sold in the year ended June 30, 2009.





During
the reporting period under review, we managed to successfully expand our
domestic sales network. As of June 30, 2010, the Company’s sales network covered
almost all provinces of mainland China except the Tibet Autonomous Region.
Historically, we exported 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 30.44% for our total sales for the fiscal year ended June 30,
2010.





With the
recovery of the world and China economy, management has seen increased sales
trend that would improve our market and financial positions. We will continue to
identify and pursue product quality and innovative technology to increase our
market share and optimize our cost structure. Barring unforeseen circumstances,
we anticipate continued growth in our sales growth in next few years. Our
ability to meet increased customer demand and stay profitable will however still
depend on factors such as world and china economic recovery, market demand, our
production capacity, and working capital.





Result
of Operations





Year
Ended June 30, 2010 Compared with Year Ended June 30, 2009





The
following table shows our operating results for the fiscal years ended June 30,
2010 and 2009.





Fiscal
      Year ended
                    June
      30, 2010
                  
                  
                  Fiscal
      Year ended
                    June
      30, 2009Sales
      Revenue
                  
                  $
                  115,953,948
                  
                  
                  $
                  73,321,862Costs
      of Goods Sold
                  
                  
                  98,276,190
                  
                  
                  
                  65,799,486Gross
      Profit
                  
                  
                  17,677,759
                  
                  
                  
                  7,522,376Research
      and development expense
                  
                  
                  —
                  
                  
                  
                  365,689Sales,
      General and Administrative Expenses
                  
                  
                  10,281,788
                  
                  
                  
                  8,607,560Operating
      Income (Loss)
                  
                  
                  7,395,970
                  
                  
                  
                  (1,450,873
                  )Other
      Income (Expense), Net
                  
                  
                  (2,598,285
                  )
                  
                  
                  (1,213,015
                  )Income
      (loss) before Income Taxes
                  
                  
                  4,797,685
                  
                  
                  
                  (2,663,888
                  )Provision
      for Income Taxes
                  
                  
                  1,598,704
                  
                  
                  
                  —Net
      Income (loss)
                  
                  
                  3,198,981
                  
                  
                  
                  (2,663,888
                  )





Sales
revenue for the fiscal year ended June 30, 2010 was $ 115,953,948, an increase
of $ 42,632,086, or 58% compared with the corresponding period in 2009. The
increase in sales revenue resulted from the increase of the Company’s sales
volume and selling prices. Net sales from exports for the year ended June 30,
2010 increased approximately 131% compared with the same period in 2009. The
increase is attributable to the recovery of the global economy and the Company’s
reorganization of its exporting department, resulting in an increase in
international demand for the Company’s glucose and corn meal products compared
to the same period last year. Domestic sales for cornstarch and other products
for the year ended June 30, 2010 increased approximately 55% compared with the
same period last year. The increase in domestic sales was attributable to the
higher demand for the Company’s products and increase in unit sales
prices.




Costs of
goods sold for the year ended June 30, 2010 was $98,276,190, an increase of
$32,476,704, or 49% compared with the corresponding period in 2009. The increase
in cost of sales was lower than the increase in net sales. As a result, the
gross profit for the year ended June 30, 2010 was $17,677,759, an increase of
$10,155,383, or 135%, compared with the same period in 2009, and the gross
profit margin for the year ended June 30, 2010 was 15.2%, an increase from 5.0%
for the same period in 2009.




28




While the
local government of Changle County, Shandong has stated that its Finance Bureau
will repay the amount of $837,684 that the Company paid in the last quarter of
calendar year 2009 as guarantor to Agriculture Bank of China on behalf of
bankrupt Yong Chang Food Industry Ltd. Co., no payment had been received by the
Company on June 30, 2010. Hence, the $837,684 was fully written off in the year
ended June 30, 2010. When it is paid by the Finance Bureau, the $837,684 will be
booked as income. The $837,684 is included in selling, general and
administrative expenses.




Selling,
general and administrative expenses were $10,281,788 for the year ended June 30,
2010 compared to $8,607,560 for the year ended June 30, 2009. The increase was
due largely to the write-off of the payment of $837,684 described above and
other year-end adjustments. After deducting the write-off, selling, general and
administrative expenses for the year ended June 30, 2010 were $9,444,104, an
increase of $836,544, or 10 %, from the year ended June 30, 2009. The Company
incurred $635,272 in non-cash stock option expenses for the year ended June 30,
2010, which are included in selling, general and administrative
expenses.




Net
income for the year ended June 30, 2010 was $3,198,981, an increase of
$5,862,869, compared with a net loss of $2,663,888 for the same period in 2009.
The increase in net income was primarily due to the increase in the sales volume
of the Company’s products and the selling prices of the Company’s
products.




Liquidity
and Capital Resources





Operating
Activities





Net cash
provided by operating activities for fiscal year 2010 was $9,578,970 compared to
$1,287,385 used in operating activities for fiscal year 2009. The increase was
mostly due to the increase of sales volume of our products and the increase in
selling prices of our products. Cash paid for income taxes was $1,134,656 in
2009 and $1,674,045 in 2010.  No payments for past years are expected
in the future, but, as disclosed in Note 7, the effective tax rate will rise
from 12% to 25% in August 2009, when the Company’s tax exemptions will
expire.




Investing
Activities





Net cash
used in investing activities for fiscal 2010 was $16,576,493 compared to
$1,432,818 used in investing activities for fiscal year 2009.  The
investing activities helped the Company increase its production capacity via
purchase of equipment and optimization in production process.




Financing
Activities





Net cash
provided by financing activities for fiscal 2010 was $9,702,081 compared to
$1,087,699 provided by financing activities for fiscal year 2009.




Contractual
    obligations
                                  
                                  Payments due
                                    by periodTotal
                                  
                                  
                                  Less than 1 year
                                  
                                  
                                  1-3 years
                                  
                                  
                                  3-5 years
                                  
                                  
                                  More than 5
                                    yearsLong-Term
      Debt Obligations
                                  
                                  $
                                  964,228
                                  
                                  
                                  $
                                  964,228
                                  
                                  
                                  $
                                  0
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —Capital
      Lease Obligations
                                  
                                  
                                  4,697,091
                                  
                                  
                                  
                                  1,350,755
                                  
                                  
                                  
                                  3,346,336
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Operating
      Lease Obligations
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Purchase
      Obligations
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Other
      Long-Term Liabilities Reflected on the Registrant's Balance Sheet under
      GAAP
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Total
                                  
                                  $
                                  5,661,319
                                  
                                  
                                  $
                                  2,314,983
                                  
                                  
                                  $
                                  3,346,336
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —




29




Loans





Other
than the equity financing in 2008, 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
$40,153,980, and $25,637,500 short term bank loans outstanding as of June 30,
2010, and 2009, 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.  In
addition Weifang Shengtai had $17,823,300 and $35,218,600 in short-term notes
due to banks as of June 30, 2010 and 2009, respectively.  These notes
were due within one year and secured by 50% to 100% of the loan amount in
restricted cash.  Some were guaranteed by unrelated third
parties.





Weifang
Shengtai does not have any long term loans from local banks. The outstanding
long-term loans, or the non-current portion of payables, and the non-current
portion of capital lease obligation, which can be classified as long term
liabilities, were $3,346,336, and $5,642,556, as of June 30, 2010 and 2009,
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 $2,946,000, and $10,108,500 as of June 30, 2010, and 2009. Some unrelated
third parties have guaranteed approximately $ 8,838,000, and $47,671,100 of our
debt, as of June 30, 2010 and 2009 respectively.





Future
cash commitments





The
Company estimates the need for capital to run new production facilities. The
exact amount will be determined based on both the market demand for the
Company’s products and the time needed for these facilities to run at full
capacity. The Company will carefully review its financial condition and consider
financing with internally generated cash, bank loans or additional
equity.  The Company expects that its proceeds from operating cash
flows and its cash balances, together with amounts available under its loans,
will be sufficient to meet its anticipated liquidity needs for the next twelve
months.




Critical
Accounting Policies and Estimates





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





Revenue
recognition





The
Company recognizes revenue when the goods are delivered, title has passed,
pricing is fixed, and collection is reasonably assured. Sales revenue represents
the invoiced value of goods, net of value-added tax (“VAT”), and estimated
returns of product from customers. Most of the Company’s products sold in the
PRC are subject to a VAT rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by VAT paid by
the Company on raw materials and other materials included in the cost of
producing their finished products and certain freight expenses. We allow our
customers to return products only if our product is later determined by us to be
ineffective. Based on our historical experience over the past three years,
product returns have been insignificant throughout all of our product lines.
Therefore, we do not estimate deductions or allowance for sales returns. Sales
returns are taken against revenue when products are returned from customers.
Sales are presented net of any discounts given to customers.




30


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





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.





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.





Property
and equipment





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





Foreign
currency translation





Our
functional currency is Renminbi, “RMB.” Foreign currency transactions are
translated at the applicable rates of exchange in effect at the transaction
dates. Monetary assets and liabilities denominated in foreign currencies at the
balance sheet date are translated at the applicable rates of exchange in effect
at that date. Revenues and expenses are translated at the average exchange rates
in effect during the reporting period.





Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated Other
Comprehensive Income.” Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.





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 collectability
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 economic crisis since 2008 has certain effect on the
growth of the China economy. The PRC government has implemented various measures
to encourage economic growth and guide the allocation of resources. In February
2009, the National Development and Reform Commission (NDRC) stated that it will
allocate RMB 10 billion (US$1.46 billion) from the central budget to build 2,000
township hospitals and 29,000 urban community health service centers. The funds
are part of the central government's RMB 850-billion commitment to financing the
country's health care reform plan. The plan will be implemented over the course
of next three years. With that as a backdrop, we believe the long-term prospect
for pharmaceutical grade glucose is very good despite the near-term challenges.
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.


31





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, 2010, there were no changes in and disagreements
with accountants and financial disclosure.





Item
9A Controls and Procedures





Evaluation
of Disclosure Controls and Procedures




Mr.
Qingtai Liu, the Company’s Chief Executive Officer, and Mr. Hu Ye, the Company’s
current Chief Financial Officer, have evaluated the effectiveness of the design
and operation of the Company’s disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the
period covered by this Report.  Based on that evaluation which, among
other things, identified personnel turnover in the areas concerned, the
Company’s officers concluded that disclosure controls and procedures were not
effective and are not adequately designed to ensure that the information
required to be disclosed by the Company in the Company’s reports submitted under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the applicable rules and forms and that such information
was accumulated and communicated to the Company’s chief executive officer and
chief financial officer in a manner that allowed for timely decisions regarding
required disclosure.




Changes
in Internal Control over Financial Reporting




During
the year ended June 30, 2010, there has been no material change in internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect the Company’s internal control over financial
reporting.




A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.




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.




32




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, 2010. This evaluation was performed using theInternal Control – Evaluation
Framework developed 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.




•
            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, 2010, our independent auditor proposed material adjustments to
allowance for bad debt, interest expenses from the capital lease equipment,
unrecorded restricted cash and notes payable.




Management
Remediation Plan




During
its audit of our consolidated financial statements for the fiscal year ended
June 30, 2010, 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
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 had conducted an evaluation of our
internal control over financial reporting, and assisted us in designing enhanced
processes and procedures to improve our internal control over financial
reporting.




2. We
plan to train our internal accountants 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.




3. 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.




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 make any changes that our management deems
appropriate.




33




Changes
in Internal Control Over Financial Reporting





No change
in our internal control over financial reporting has occurred during the quarter
ended June 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





Auditor
Attestation





The
management's report was not subject to attestation by our registered public
accounting firm pursuant to rules of the Securities and Exchange Commission
regarding smaller reporting companies.





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.





Directors
      and Executive Officers
                    
                    Position/Title
                    
                    AgeQingtai
      Liu
                    
                    Chief
      Executive Officer / Director
                    
                    53Yongqiang
      Wang*
                    
                    Director
                    
                    41Chris
      W. Wang**
                    
                    Director
                    
                    39Changxin
      Li***
                    
                    Director
                    
                    50Winfred
      Lee
                    
                    Director
                    
                    49Yaojun
      Liu****
                    
                    Director
                    
                    34Fei
      He****
                    
                    Director
                    
                    42Yiru
      Shi*****
                    
                    Chief
      Financial Officer
                    
                    37Hu
      Ye******
                    
                    Chief
      Financial Officer
                    
                    48





*Mr.
Yongqiang Wang was appointed chief financial officer in November 2009 and
resigned in March 2010.


**Mr.
Chris Wang resigned as a director on October 31, 2009.


***Mr.
Changxin Li resigned as a director on May 31, 2010.


****Mr.
Yaojun Liu and Mr. Fei He were appointed directors on June 1, 2010.


*****Ms.
Shi resigned as chief financial officer in November 2009.


******Mr.
Hu Ye was appointed chief financial officer in March 2010.





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





Qingtai Liu, 53, 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.  Mr. Liu has not
been involved in legal proceeding for the past ten years.




34




Yongqiang Wang, 41, graduated
with an Associates degree from the Shandong Economic and Management Institute.
Mr. Wang joined Weifang Shengtai in April 2006 as Assistant to the Chief
Executive Office with major responsibilities in supervising the Finance
Department.  He assumed the position of Manager of the Finance
Department of Weifang Shengtai in February 2007.  Before he joined
Weifang Shengtai, Mr. Wang was Finance Manager at Shandong Lehua Group Co., Ltd
from January 1996 to April 2006, and Finance Manager at Shandong Hongxiang Food
General Factory from January 1994 to December 1995.  Mr. Wang has not
been involved in legal proceeding for the past ten years.





Wenbing Christopher Wang, 39, has served as Chief
Financial Officer of Fushi Copperweld, Inc. since December 13, 2005 and on
January 21, 2008 was appointed as its President and director. Mr. Wang has
served as Chief Financial Officer of Dalian Fushi since March
2005.  Prior to Fushi, Mr. Wang was an Executive Vice President of
Redwood Capital, Inc. from November 2004 to March 2005 and an Assistant VP ofPortfolio Management at China Century Investment Corporation
from October 2002 to September 2004. Mr. Wang worked for Credit Suisse First
Boston (HK) Ltd in 2001. From 1999 to 2000, Mr. Wang worked for VCChina as a
Management Analyst. Fluent in both English and Chinese, Mr. Wang holds an MBA in
Finance and Corporate Accounting from Simon Business School of University of
Rochester. Mr. Wang was named one of the top ten CFO’s of 2007 in China by CFO
magazine. Mr. Wang resigned from the board of directors of the Company with
effect from October 31, 2009.





Changxin Li, 50, has been the
Medical Director of both the Echocardiography Laboratory and Cardiopulmonary
Department of the Otsego Memorial Hospital since 2005, Medical Director, Cardiac
Rehabilitation since January 2009 and Medical Director, Intensive Care Unit
since July 2009. 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).  Mr. Li resigned
from the board of directors of the Company with effect from June 1,
2010.





Winfred Lee, 49, 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.  Mr.
Lee has not been involved in legal proceeding for the past ten
years.





Yaojun Liu,34, is currently a partner at
Global Law Office, a law firm based in Beijing, the PRC since 2006. Prior to
that, between 2003 and 2006, Mr. Liu served as an attorney at Jingtian &
Gongcheng Law Firm, a law firm based in Beijing, the PRC. Before practicing law,
Mr. Liu was a senior project manager at the Investment Banking Headquarter of
Haitong Securities Co., Ltd. Mr. Liu graduated with a Master of Economic Law
from Renmin University, Beijing, China in 2001. He then graduated with a LL.M.
of Commercial Law from University of Sheffield, UK in 2003. Mr. Liu is a
Qualified Practice Lawyer and also a Certified Public Accountant in China. Since
June 2008, Mr. Liu has been the Board member of Yuhe International, Inc. Mr. Liu
has not been involved in legal proceeding for the past ten years.





Fei He,42, is a Strategy and
M&A director of DSM (China) Limited responsible for strategy and mergers and
acquisitions since 2007.  Mr. He worked for A.T. Kearney in China and
led the strategic consultation for several merger and acquisition projects in
the hi-tech industries in China. Before going back to China, Mr. He was a
director of the WOLVERINE Venture Capital Fund in the United States between 2002
and 2005. Prior to that, Mr. He worked for Pfizer in the United States since
1998 in several positions as post-doctoral researcher, senior scientist and
business development manager. Mr. He graduated with a Bachelor of Science from
Beijing University, Beijing, China in 1990. He then graduated with a Ph. D. of
Chemistry from University of California, Davis in 1998. Mr. He also obtained a
Master of Business Administration from University of Michigan Ross School of
Business in 2004. Mr. He has not been involved in legal proceeding for the past
ten years.





Yiru Shi, 37, 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.  Ms. Shi resigned in
November 2009.





Hu Ye,48, served as the
CFO of China Shen Zhou Mining & Resources, Inc. from June 2008 to March 2009
and the CFO of Si Mei Te Food Ltd. from May 2009 to September
2009.  He worked in China as the CFO of Odysys International Ltd. from
December 2003 to March 2006, CFO of BOCO Enterprises Ltd. from March 2006 to
March 2007 and from December 2007 to May 2008, and CFO of EMarket Holding Group
Corp. from March 2007 to November 2007. From January 2002 to September 2003 Mr.
Ye was a consultant at Securitization Finance, CIT Group, Inc. in Canada. From
June 1999 to March 2001 Mr. Ye was an Assistant Vice-President in Finance,
Corporate and Institutional Client Group of Merrill Lynch Canada. From January
1990 to June 1999, Mr. Ye worked as a financial analyst of Finance and Tax, and
a Financial Control Administrator at Mackenzie Financial Corporation in Canada.
Mr. Ye has been serving as Non-Executive Board Member of Beijing Heidrick &
Struggles International Management Consulting Co. Ltd. since July 2006;
Non-Executive Board Member of CIC Mining Resources Ltd. since February 2009. Mr.
Ye has not been involved in legal proceeding for the past ten
years.




35




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:





 ̈
            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,





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





 ̈
            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





 ̈
            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 2010, or written representations from certain reporting persons, we
believe that our directors, officers and persons who own more than ten percent
of a registered class of our equity securities have complied with all applicable
Section 16(a) filing requirements..





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.




36




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 Fei He (Chairman),
Yaojun Liu and Winfred Lee.  The Board has determined that all members
of the compensation committee are independent directors under the rules of the
Nasdaq Stock Market or NYSE Amex, as applicable. The compensation committee
administers the Company’s benefit plans, reviews and administers all
compensation arrangements for executive officers, and establishes and reviews
general policies relating to the compensation and benefits of our officers and
employees. The compensation committee operates under a written charter that is
made available on the website mentioned above.





Summary
Compensation Table




The
following is a summary of the compensation we paid for each of the two years
ended June 30, 2010, and 2009, respectively (i) to the person who acted as our
principal executive officer during our fiscal years ended June 30, 2010 and
2009, 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.


Name andPrincipalPosition
                                      
                                      Year
                                      
                                      Salary($)
                                      
                                      
                                      Bonus($)
                                      
                                      
                                      StockAwards($)
                                      
                                      
                                      OptionAwards($)
                                      
                                      
                                      Non EquityIncentive PlanCompensation($)
                                      
                                      
                                      Change inPension ValueandNonqualifiedDeferredCompensationEarnings ($ )
                                      
                                      
                                      All OtherCompensation($)
                                      
                                      
                                      Total ($)Qingtai
      Liu (1)
                                      
                                      2010
                                      
                                      
                                      120,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      120,0002009
                                      
                                      
                                      120,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      120,000Ye
      Hu (2)
                                      
                                      2010
                                      
                                      
                                      48,831
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      46,303
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      95,1342009
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Yiru
      Shi (3)
                                      
                                      2010
                                      
                                      
                                      57,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      57,0002009
                                      
                                      
                                      108,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      108,000Yongqiang
      Wang (4)
                                      
                                      2010
                                      
                                      
                                      24,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      24,0002009
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —





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


(2)
            Mr.
      Hu Ye joined us as our Chief Financial Officer in March
    2010.





In the
Chief Financial Officer Employment Agreement,  the “Employment
Agreement,” entered into on March 1, 2010 between the Company and Mr. Hu Ye, the
Chief Financial Officer, the Company granted Mr. Hu Ye an option to purchase
300,000 shares of common stock of the Company. The shares vest over 3 years
starting March 1, 2010 and terminate on the third anniversary of the date of
issuance of this option. The Company valued the shares at $2.60 per share, which
represents 130 % of the fair market value being calculated in the private
placement price on May 15, 2007. The fair values of stock options granted to the
CFO were estimated at the date of grant with the following
assumptions:




Weighted
      average risk-free interest rate
                
                
                2.79%Expected
      term
                
                6.5
      yearsExpected
      volatility
                
                
                149%Expected
      dividend yield
                
                
                0%Weighted
      average grant-date fair value per option
                
                $
                2.60




37




(3)
            Ms. Yiru Shi joined us as our
      Chief Financial Officer in May 2008 and resigned in November,
      2009.


(4)
            Mr.
      Wang was appointed chief financial officer in November 2009 and resigned
      in March 2010.





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.





Outstanding
Equity Awards at 2010 Fiscal Year End





As of
June 30, 2010, there are 685,000 shares of options outstanding.





Equity
Compensation Plan Information at June 30, 2010





The
following table sets forth information as of June 30, 2010 regarding
compensation plans under which the Company’s equity securities are authorized
for issuance.





(a)
                          
                          
                          (b)
                          
                          
                          (c)Plan Category
                          
                          Number ofsecurities to beissued uponexercise ofoutstandingequity awards
                          
                          
                          Weighted-averageexercise price ofoutstandingequity awards($)
                          
                          
                          Number ofsecuritiesremainingavailable forfuture issuanceunder equitycompensationplans (excludingsecuritiesreflected incolumn(a))Equity compensation
      plans approved by security holders
                            Shengtai Pharmaceutical, Inc.
      2007 Stock Incentive Plan.
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          —Equity
      compensation plans not approved by security holdersIssuances of non-qualified
      options to employees
                          
                          
                          685,000
                          
                          
                          $
                          3.02
                          
                          
                          
                          2,068,700Total
                          
                          
                          685,000
                          
                          
                          $
                          3.02
                          
                          
                          
                          2,068,700





Option
Exercises and Stock Vested in Fiscal 2010.





There
were no option exercises or stock vested in 2010.





Employment
Agreements





We have
employment agreements with Qingtai, Liu, our chief executive officer, and with
Hu Ye, our Chief Financial Officer.




38




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:





 ̈
            annual compensation of $30,000;
      and





 ̈
            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,
2010.





Name and Address of Beneficial Owner
                                                                                                                                                                                                                
                                                                                                                                                                                                                Title of Class
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                Amount and Nature 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
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                38.49
                                                                                                                                                                                                                %Yiru
      Shi (3)Former
      Chief Financial OfficerHi-Tech Industrial Park of
      Changle County, Shandong Province, PRC
      262400
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —Yongqiang
      Wang (3)Director/Former
      Chief Financial OfficerHi-Tech Industrial Park of
      Changle County, Shandong Province, PRC
      262400
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —Hu
      Ye (3)Chief
      Financial OfficerHi-Tech Industrial Park of
      Changle County, Shandong Province, PRC
      262400
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                
                                                                                                                                                                                                                —




39




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
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Yaojun
      Liu (3)directorHi-Tech Industrial Park of
      Changle County, Shandong Province, PRC
      262400
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Fei
      He (3)directorHi-Tech Industrial Park of
      Changle County, Shandong Province, PRC
      262400
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —China
      Private Equity Partners Co., Limited15 Church Street, Alpine, NJ
      07620 Common
      Stock
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    
                                                                    1,025,000
                                                                    
                                                                    
                                                                    
                                                                    5.35
                                                                    %Pope
      Investments LLC5150 Poplar Avenue, Suite 805,
      Memphis, TN
      38137
                                                                    
                                                                    Common
      Stock
                                                                    
                                                                    
                                                                    
                                                                    2,650,000
                                                                    
                                                                    
                                                                    
                                                                    13.82
                                                                    %




(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.




40




(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. Mr Wang
was appointed as our Chief Financial Officer in December 2009. Mr Ye was
appointed as our Chief Financial Officer in March 2010. Mr. Lee was appointed
directors of the Company on June 22, 2007. Messrs. Liu and He were appointed
directors of the Company on June 1, 2010.





(4) Based
on 19,169,805 shares of common stock issued and outstanding on June 30, 2010. In
addition, in determining the percent of common stock owned by a person on June
30, 2010, (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,
2010, 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.





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 $20,511,525. As of
June 30, 2010, Weifang Shengtai invested approximately $4,102,305 towards its
registered capital, which accounts for a 20% share of Changle Shengshi’s paid-in
capital.





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 $252,017, and $437,112 of accounts payable and accrued
liabilities to Changle Shengshi at June 30, 2010, and 2009, respectively. The
utilities expenses amounted to $12,585,381, and $8,612,090, for the years ending
June 30, 2010, and 2009, respectively.





The
Company loaned money to Changle Shengshi and entered into a loan contract as
follows:




June 30, 2010
                      
                      
                      June 30, 2009Due
      on September 14, 2009, unsecured, 7.6% interest rate per
    annum
                      
                      $
                      -
                      
                      
                      $
                      439,500Total
                      
                      $
                      -
                      
                      
                      $
                      439,500





This
receivable amount from the loan contract has been collected as of June 30,
2010.




41


Item
14. Principal Accounting Fees and Services.





Aggregate
fees billed by our current principal accountants, Kabani & Company, Inc.,
and former principal accountants, Moore Stephens Wurth Frazer and Torbet, LLP
for audit services related to the most recent fiscal years, and for other
professional services were as follows:




Fiscal 2010
                      
                      
                      Fiscal 2009Audit
      Fees (1)
                      
                      $
                      107,500
                      
                      
                      $
                      202,150Audit-Related
      Fees
                      
                      
                      -
                      
                      
                      
                      -Tax
      Fees (2)
                      
                      
                      -
                      
                      
                      
                      8,000All
      Other Fees
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      107,500
                      
                      
                      $
                      210,150




(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.




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. Yaojun Liu and the other members are Fei He
and Winfred Lee. 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.




42





PART IV





Item
15. Exhibits, Financial Statement Schedules.





(a)
            Financial
      Statements and Financial Statement
Schedules




Report
      of Independent Registered Public Accounting Firm
                  
                  F-1Consolidated
      Balance Sheets as of June 30, 2010 and 2009
                  
                  F-3Consolidated
      Statements of Operations and Other Comprehensive Income (loss) for the
      Years Ended June 30, 2010, and 2009
                  
                  F-4Consolidated
      Statements of Shareholders' Equity for the Years Ended June 30, 2010, and
      2009
                  
                  F-5Consolidated
      Statements of Cash Flows for the Years Ended June 30, 2010, and
      2009
                  
                  F-6Notes
      to Consolidated Financial Statements
                  
                  F-7





All 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.




43




SIGNATURES





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
capacity and on the date indicated.





SHENGTAI
      PHARMACEUTICAL, INC.(Registrant)Date:
      September 28, 2010
                        By:
                        /s/
      Qingtai LiuQingtai
      LiuChief
      Executive Officer(Principal
      Executive
Officer)





By:
                      /s/
      Hu YeHu
      YeChief
      Financial Officer(Principal
      Financial and Accounting
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
                                
                                September
      28, 2010Qingtai
      Liu
                                
                                Officer)
      and Director/s/
      Hu Ye
                                
                                Chief
      Financial Officer (Principal Financial and
                                
                                September
      28, 2010Hu
      Ye
                                
                                Accounting
      Officer)/s/
      Yongqiang Wang
                                
                                Director
                                
                                September
      28, 2010Yongqiang
      Wang/s/
      Yaojun Liu
                                
                                Director
                                
                                September
      28, 2010Yaojun
      Liu/s/
      Fei He
                                
                                Director
                                
                                September
      28, 2010Fei
      He/s/
      Winfred Lee
                                
                                Director
                                
                                September
      28, 2010Winfred
      Lee




44





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders of
 Shengtai
Pharmaceutical, Inc. and subsidiaries
   We have
audited the accompanying consolidated balance sheet of Shengtai Pharmaceutical,
Inc. and Subsidiaries as of June 30, 2010, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
June 30, 2010. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
  We
conducted our audit 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Shengtai
Pharmaceutical, Inc. and Subsidiaries as of June 30, 2010, and the results of
their operations and their cash flows for the year ended June 30, 2010, in
conformity with U.S. generally accepted accounting principles.
   /s/
Kabani & Company, Inc.
  Certified
Public Accountants
  Los
Angeles, California
  September
28, 2010


F-1





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, 2009 and 2008, and the related
consolidated statements of operations and other comprehensive income (loss),
shareholders’ equity and cash flows for each of the years in the two-year period
ended June 30, 2009. Shengtai Pharmaceutical, Inc.’s management is responsible
for these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial position of Shengtai
Pharmaceutical, Inc. and Subsidiaries as of June 30, 2009 and 2008, and the
results of its operations and cash flows for each of the years in the two-year
period ended June 30, 2009 in conformity with accounting principles generally
accepted in the United States of America.
  
 /s/
Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and Torbet,
LLP, see Form 8-K filed on January 7, 2010)
 
 Brea,
California
  September
28, 2009


F-2




SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
JUNE 30, 2010 AND 2009




2010
                                                                                                                  
                                                                                                                  
                                                                                                                  2009ASSETSCURRENT
      ASSETS:Cash
      & cash equivalents
                                                                                                                  
                                                                                                                  $
                                                                                                                  4,121,541
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  1,779,476Restricted
      cash
                                                                                                                  
                                                                                                                  
                                                                                                                  16,556,904
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  31,730,382Accounts
      receivable, net of allowance for doubtful accounts of
      $1,306,268and
      $946,207 as of June 30, 2010 and 2009, respectively
                                                                                                                  
                                                                                                                  
                                                                                                                  8,365,822
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6,922,982Notes
      receivable
                                                                                                                  
                                                                                                                  
                                                                                                                  2,410,512
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1,074,011Other
      receivables
                                                                                                                  
                                                                                                                  
                                                                                                                  450,284
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  79,598Loan
      to related party
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  439,500Inventories
                                                                                                                  
                                                                                                                  
                                                                                                                  11,072,170
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6,215,707Prepayments
                                                                                                                  
                                                                                                                  
                                                                                                                  545,590
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  211,793Total
      current assets
                                                                                                                  
                                                                                                                  
                                                                                                                  43,522,824
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  48,453,449PLANT
      AND EQUIPMENT, net
                                                                                                                  
                                                                                                                  
                                                                                                                  75,373,851
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  69,380,016OTHER
      ASSETS:Equity
      investment in Changle Shengshi Redian Co., Ltd.
                                                                                                                  
                                                                                                                  
                                                                                                                  6,372,294
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,952,310Advances
      for construction
                                                                                                                  
                                                                                                                  
                                                                                                                  2,334,748
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  -Intangible
      assets - net of accumulated amortization
                                                                                                                  
                                                                                                                  
                                                                                                                  3,150,894
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,145,590Total
      other assets
                                                                                                                  
                                                                                                                  
                                                                                                                  11,857,936
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  7,097,900Total
      assets
                                                                                                                  
                                                                                                                  $
                                                                                                                  130,754,611
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  124,931,365LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,508,631
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  4,737,156Accounts
      payable and accrued liabilities- related party
                                                                                                                  
                                                                                                                  
                                                                                                                  252,017
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  437,112Notes
      payable - banks
                                                                                                                  
                                                                                                                  
                                                                                                                  17,823,300
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  35,218,600Short
      term loans
                                                                                                                  
                                                                                                                  
                                                                                                                  40,153,980
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  25,637,500Accrued
      liabilities
                                                                                                                  
                                                                                                                  
                                                                                                                  412,555
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  233,110Other
      payable
                                                                                                                  
                                                                                                                  
                                                                                                                  1,315,797
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  424,341Employee
      loans
                                                                                                                  
                                                                                                                  
                                                                                                                  396,404
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  730,502Other
      payable - officer
                                                                                                                  
                                                                                                                  
                                                                                                                  515,856
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  248,415Third
      party loan
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  248,336Customer
      deposit
                                                                                                                  
                                                                                                                  
                                                                                                                  4,162,046
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1,906,177Taxes
      payable
                                                                                                                  
                                                                                                                  
                                                                                                                  1,456,474
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,066,878Long
      term loan - current maturities
                                                                                                                  
                                                                                                                  
                                                                                                                  2,314,983
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,447,783Total
      current liabilities
                                                                                                                  
                                                                                                                  
                                                                                                                  78,312,045
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  74,335,910LONG
      TERM LIABILITIESOther
      payable - noncurrent
                                                                                                                  
                                                                                                                  
                                                                                                                  3,346,336
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  5,642,556Total
      long term liabilities
                                                                                                                  
                                                                                                                  
                                                                                                                  3,346,336
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  -Total
      liabilities
                                                                                                                  
                                                                                                                  
                                                                                                                  81,658,381
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  79,978,466COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized,no
      shares issued and outstanding
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  -Common
      stock, $0.001 par value, 100,000,000 shares authorized,19,169,805
      shares issued and outstanding
                                                                                                                  
                                                                                                                  
                                                                                                                  19,170
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  19,170Additional
      paid-in capital
                                                                                                                  
                                                                                                                  
                                                                                                                  21,305,230
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  20,623,655Statutory
      reserves
                                                                                                                  
                                                                                                                  
                                                                                                                  3,214,800
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,894,902Retained
      earnings
                                                                                                                  
                                                                                                                  
                                                                                                                  19,351,772
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  16,472,689Accumulated
      other comprehensive income
                                                                                                                  
                                                                                                                  
                                                                                                                  5,205,259
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  4,942,483Total
      shareholders' equity
                                                                                                                  
                                                                                                                  
                                                                                                                  49,096,231
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  44,952,899Total
      liabilities and shareholders' equity
                                                                                                                  
                                                                                                                  $
                                                                                                                  130,754,611
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  124,931,365




F-3





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)


FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009




2010
                                  
                                  
                                  2009NET
      SALES
                                  
                                  $
                                  115,953,948
                                  
                                  
                                  $
                                  73,321,862COST
      OF SALES
                                  
                                  
                                  98,276,190
                                  
                                  
                                  
                                  65,799,486GROSS
      PROFIT
                                  
                                  
                                  17,677,759
                                  
                                  
                                  
                                  7,522,376RESEARCH
      AND DEVELOPMENT EXPENSE
                                  
                                  
                                  -
                                  
                                  
                                  
                                  365,689SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                                  
                                  
                                  10,281,788
                                  
                                  
                                  
                                  8,607,560INCOME
      (LOSS) FROM OPERATIONS
                                  
                                  
                                  7,395,970
                                  
                                  
                                  
                                  (1,450,873
                                  )OTHER
      (EXPENSE) INCOME:Earnings
      on equity investment
                                  
                                  
                                  727,804
                                  
                                  
                                  
                                  251,539Non-operating
      income
                                  
                                  
                                  291,203
                                  
                                  
                                  
                                  695,728Non-operating
      expense
                                  
                                  
                                  (263,812
                                  )
                                  
                                  
                                  (357,407
                                  )Interest
      expense and other charges
                                  
                                  
                                  (3,660,474
                                  )
                                  
                                  
                                  (1,945,778
                                  )Interest
      income
                                  
                                  
                                  306,994
                                  
                                  
                                  
                                  142,903Other
      income(expense), net
                                  
                                  
                                  (2,598,285
                                  )
                                  
                                  
                                  (1,213,015
                                  )INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
                                  
                                  
                                  4,797,685
                                  
                                  
                                  
                                  (2,663,888
                                  )PROVISION
      FOR INCOME TAXES
                                  
                                  
                                  1,598,704
                                  
                                  
                                  
                                  -NET
      INCOME (LOSS)
                                  
                                  
                                  3,198,981
                                  
                                  
                                  
                                  (2,663,888
                                  )OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustments
                                  
                                  
                                  262,776
                                  
                                  
                                  
                                  225,362COMPREHENSIVE
      INCOME (LOSS)
                                  
                                  $
                                  3,461,757
                                  
                                  
                                  $
                                  (2,438,526
                                  )EARNINGS
      (LOSS) PER SHAREBasic
                                  
                                  $
                                  0.17
                                  
                                  
                                  $
                                  (0.14
                                  )Diluted
                                  
                                  $
                                  0.17
                                  
                                  
                                  $
                                  (0.14
                                  )WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                  
                                  
                                  19,169,805
                                  
                                  
                                  
                                  19,139,394Diluted
                                  
                                  
                                  19,169,805
                                  
                                  
                                  
                                  19,139,394





F-4





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009




Common stock
                                  
                                  
                                  
                                  
                                  
                                  Retained earnings
                                  
                                  
                                  Accumulated otherPaid-in
                                  
                                  
                                  Statutory
                                  
                                  
                                  
                                  
                                  
                                  comprehensiveShares
                                  
                                  
                                  Par value
                                  
                                  
                                  capital
                                  
                                  
                                  reserves
                                  
                                  
                                  Unrestricted
                                  
                                  
                                  income
                                  
                                  
                                  TotalsBALANCE,
      June 30, 2008
                                  
                                  
                                  19,094,805
                                  
                                  
                                  $
                                  19,095
                                  
                                  
                                  $
                                  19,987,708
                                  
                                  
                                  $
                                  2,894,902
                                  
                                  
                                  $
                                  19,136,577
                                  
                                  
                                  $
                                  4,717,121
                                  
                                  
                                  $
                                  46,755,403Exercised
      warrants
                                  
                                  
                                  75,000
                                  
                                  
                                  
                                  75
                                  
                                  
                                  
                                  675
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  750Option
      issued to employees
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  635,272
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  635,272Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (2,663,888
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (2,663,888
                                  )Adjustment
      to statutory reserve
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Foreign
      currency translation adjustments
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  225,362
                                  
                                  
                                  
                                  225,362BALANCE,
      June 30, 2009
                                  
                                  
                                  19,169,805
                                  
                                  
                                  $
                                  19,170
                                  
                                  
                                  $
                                  20,623,655
                                  
                                  
                                  $
                                  2,894,902
                                  
                                  
                                  $
                                  16,472,689
                                  
                                  
                                  $
                                  4,942,483
                                  
                                  
                                  $
                                  44,952,899Option
      issued to employees
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  681,575
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  681,575Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,198,981
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,198,981Adjustment
      to statutory reserve
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  319,898
                                  
                                  
                                  
                                  (319,898
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Foreign
      currency translation adjustments
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  262,776
                                  
                                  
                                  
                                  262,776BALANCE,
      June 30, 2010
                                  
                                  
                                  19,169,805
                                  
                                  
                                  $
                                  19,170
                                  
                                  
                                  $
                                  21,305,230
                                  
                                  
                                  $
                                  3,214,800
                                  
                                  
                                  $
                                  19,351,772
                                  
                                  
                                  $
                                  5,205,259
                                  
                                  
                                  $
                                  49,096,231





F-5





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009




2010
                                              
                                              
                                              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                              
                                              $
                                              3,198,981
                                              
                                              
                                              $
                                              (2,663,888
                                              )Adjustments
      to reconcile net income (loss) to cashprovided
      by (used in) operating activities:Depreciation
                                              
                                              
                                              7,993,751
                                              
                                              
                                              
                                              5,588,306Amortization
                                              
                                              
                                              307,195
                                              
                                              
                                              
                                              53,963Bad
      debt expense
                                              
                                              
                                              1,300,681
                                              
                                              
                                              
                                              503,693Share
      based compensation to employees
                                              
                                              
                                              681,575
                                              
                                              
                                              
                                              635,272Loss
      on equipment disposal
                                              
                                              -
                                              
                                              
                                              
                                              160,233Gain
      on disposal of land use right
                                              
                                              
                                              (738
                                              )
                                              
                                              
                                              (530,509
                                              )Earnings
      on equity investment
                                              
                                              
                                              (727,804
                                              )
                                              
                                              
                                              (329,562
                                              )Amortization
      of discount on installment payment for purchase of
    equipment
                                              
                                              
                                              354,546
                                              
                                              
                                              
                                              638,245Amortization
      of discount on capital lease obligation
                                              
                                              
                                              1,037,393
                                              
                                              
                                              
                                              530,864Changes
      in operating assets and liabilities:Accounts
      receivable
                                              
                                              
                                              (1,752,404
                                              )
                                              
                                              
                                              218,874Notes
      receivable
                                              
                                              
                                              (1,324,945
                                              )
                                              
                                              
                                              (613,496
                                              )Other
      receivables
                                              
                                              
                                              (190,006
                                              )
                                              
                                              
                                              614,460Inventories
                                              
                                              
                                              (4,801,895
                                              )
                                              
                                              
                                              (1,155,705
                                              )Prepayments
                                              
                                              
                                              (331,299
                                              )
                                              
                                              
                                              99,428
                                              )Accounts
      payable
                                              
                                              
                                              4,725,352
                                              
                                              
                                              
                                              (2,964,113
                                              )Accrued
      liabilities
                                              
                                              
                                              177,957
                                              
                                              
                                              
                                              (280,603
                                              )Accounts
      payable - related party
                                              
                                              
                                              (186,681
                                              )
                                              
                                              
                                              (28,923
                                              )Other
      payable
                                              
                                              
                                              (2,574,855
                                              )
                                              
                                              
                                              148,284Customer
      deposit
                                              
                                              
                                              2,235,856
                                              
                                              
                                              
                                              671,213Taxes
      payable
                                              
                                              
                                              (543,691
                                              )
                                              
                                              
                                              (2,583,421
                                              )Net
      cash provided by (used in)operating activities
                                              
                                              
                                              9,578,970
                                              
                                              
                                              
                                              (1,287,385
                                              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Increase
      in equity investment
                                              
                                              
                                              (1,466,700
                                              )
                                              
                                              
                                              -Purchase
      plant and equipment
                                              
                                              
                                              (2,967,898
                                              )
                                              
                                              
                                              (4,944,308
                                              )Proceeds
      from building and equipment disposal
                                              
                                              -
                                              
                                              
                                              
                                              5,173,910Advances
      for construction
                                              
                                              
                                              (10,488,033
                                              )
                                              
                                              -Acquisition
      of  intangible assets
                                              
                                              (43,425
                                              )
                                              
                                              
                                              (493,350
                                              )Proceeds
      from disposal of land use right
                                              
                                              
                                              -
                                              
                                              
                                              
                                              879,000Lease
      payments for equipment purchase
                                              
                                              
                                              (2,050,447
                                              )
                                              
                                              
                                              (2,048,070
                                              )Loan
      to related party - non-current
                                              
                                              
                                              440,010
                                              
                                              
                                              -Net
      cash used in investing activities
                                              
                                              
                                              (16,576,493
                                              )
                                              
                                              
                                              (1,432,818
                                              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      (increase) in restricted cash
                                              
                                              
                                              15,279,992
                                              
                                              
                                              
                                              (24,939,882
                                              )Borrowing
      on notes payable - banks
                                              
                                              
                                              13,346,970
                                              
                                              
                                              
                                              43,276,100Principal
      payments on notes payable - banks
                                              
                                              
                                              (30,859,368
                                              )
                                              
                                              
                                              (19,045,000
                                              )Borrowing
      on short term loans
                                              
                                              
                                              41,008,932
                                              
                                              
                                              
                                              27,102,500Principal
      payments on short term loans
                                              
                                              
                                              (26,693,940
                                              )
                                              
                                              
                                              (24,216,450
                                              )Borrowings
      on employee loans
                                              
                                              -
                                              
                                              
                                              
                                              35,772Principal
      payments on employee loans
                                              
                                              
                                              (336,641
                                              )
                                              
                                              
                                              (693,242
                                              )Borrowings
      on employee loan - officer
                                              
                                              -
                                              
                                              
                                              
                                              194,611Borrowings
      on third party loan
                                              
                                              -
                                              
                                              
                                              
                                              38,179Principal
      payments on third party loan
                                              
                                              
                                              (248,624
                                              )
                                              
                                              
                                              (432,704
                                              )Cash
      proceeds from warrants exercised
                                              
                                              -
                                              
                                              
                                              
                                              750Payment
      on capital lease obligation
                                              
                                              
                                              (1,795,241
                                              )
                                              
                                              
                                              (232,935
                                              )Net
      cash provided by financing activities
                                              
                                              
                                              9,702,081
                                              
                                              
                                              
                                              1,087,699EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                                              
                                              
                                              (362,493
                                              )
                                              
                                              
                                              6,374INCREASE
      (DECREASE) IN CASH & CASH EQUIVALENT
                                              
                                              
                                              2,342,065
                                              
                                              
                                              
                                              (1,626,130
                                              )CASH
      & CASH EQUIVALENT, beginning of period
                                              
                                              
                                              1,779,476
                                              
                                              
                                              
                                              3,405,606CASH
      & CASH EQUIVALENT, end of period
                                              
                                              $
                                              4,121,541
                                              
                                              
                                              $
                                              1,779,476SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for interest, net of capitalized interest
                                              
                                              $
                                              3,105,226
                                              
                                              
                                              $
                                              1,674,768Cash
      paid for income taxes
                                              
                                              $
                                              1,674,045
                                              
                                              
                                              $
                                              1,134,656SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING ACTIVITIESConstruction
      in progress transferred to fixed assets
                                              
                                              $
                                              2,179,927
                                              
                                              
                                              $
                                              5,127,500





F-6





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30,
2010





Note
1 - Organization background and principal activities




Shengtai
Pharmaceutical, Inc, the "Company,” was incorporated in March 2004 in the State
of Delaware. The Company, through its subsidiaries, manufactures and
distributes glucose and starch as pharmaceutical raw materials, other starch
products and other glucose products such as corn meals, food and beverage
glucose and dextrin. The Company's primary business operations are conducted in
the People's Republic of China, the "PRC.”




Note
2 - Summary of significant accounting policies




Principles of
consolidation




The
consolidated financial statements of Shengtai Pharmaceutical, Inc. and its
subsidiaries reflect the activities of the parent and its wholly-owned
subsidiaries Shengtai Holding, Inc., “SHI,” and Weifang Shengtai Pharmaceutical
Co., Ltd., “Weifang Shengtai.”




Basis of
presentation




The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and have been consistently applied. 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.




Foreign currency
translation




The
reporting currency of the Company is the US dollar. The Company uses Renminbi,
"RMB,” as its functional currency. In accordance with Statement of Financial
Accounting Standards "SFAS" 52, "Foreign Currency Translation," results of
operations and cash flows are translated at average exchange rates during the
period, and assets and liabilities are translated at the unified exchange rates
at the balance sheet dates, and equity is translated at the historical exchange
rates. As a result, amounts related to assets and liabilities reported on the
statements of cash flows will not necessarily agree with changes in the
corresponding accounts on the balance sheets. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the
statements of shareholders' equity. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as
incurred.




Assets
and liabilities were translated at 6.81 RMB and 6.83 RMB to $1.00 at June 30,
2010 and 2009, respectively. The equity accounts were stated at their historical
rate. The average translation rates applied to income statement for amounts for
the years ended June 30, 2010 and 2009 were 6.84 RMB and 6.83 RMB to $1.00,
respectively. Cash flows are also translated at average translation rates for
the period; therefore, amounts reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.




F-7




Revenue
recognition




The
Company recognizes revenue when the goods are shipped, 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. The Company allows its customers
to return products only if they are later determined by the Company to be
ineffective. Based on the Company’s historical experience, product returns have
been insignificant throughout all of its product lines. Therefore, the Company
does not estimate deductions or allowance for sales returns. Sales returns are
taken against revenue when products are returned from customers. Sales are
presented net of any discounts given to customers.




Shipping and
handling




Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. For the years ended June 30, 2010 and 2009,
shipping and handling costs amounted to $4,498,260 and $3,047,289
respectively.




Research and
development




Research
and development costs are expensed as incurred.  These costs consist
primarily of cost of materials used and salaries paid for the development of the
Company’s products. Research and development costs amounted to $0 and $365,689
for the years ended June 30, 2010 and 2009 respectively.




Financial
instruments




ASC 825
(formerly SFAS 107, "Disclosures about Fair Value of Financial Instruments"),
defines financial instruments and requires disclosure of the fair value of those
instruments.  ASC 820 (formerly SFAS 157, "Fair Value Measurements"),
adopted July 1, 2008, defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
balance sheets for current receivables and payables, including short term loans,
qualify as financial instruments and are a reasonable estimate of fair value
because of the short period of time between the origination of such instruments
and their expected realization and, if applicable, the stated rate of interest
is equivalent to rates currently available. The three levels are defined as
follows:




Level
      1:
              inputs
      to the valuation methodology are quoted prices (unadjusted) for identical
      assets or liabilities in active
markets.
  Level
      2:
              inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      assets or liability, either directly or indirectly, for substantially the
      full term of the financial
instruments.
  Level
      3:
              inputs
      to the valuation methodology are unobservable and significant to the fair
      value.


The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with ASC 820
(formerly SFAS 157).




F-8




Stock-based
compensation




The
Company records stock-based compensation expense pursuant to ASC 718 (formerly
SFAS 123R, "Share Based Payment").  The Company uses the Black-Scholes
option pricing model which requires 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.




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. ASC 718 (formerly SFAS 123R) requires forfeitures to be estimated at
the time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.




Earnings per
share




The
Company reports earnings per share in accordance with the provisions of ASC 260
(formerly SFAS 128, "Earnings Per Share").  ASC 260 requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.




The
following is a reconciliation of the basic and diluted earnings per share
computation for the years ended June 30, 2010 and 2009:




2010
                          
                          
                          2009N
      Net income (loss) for earnings per share
                          
                          $
                          3,198,981
                          
                          
                          $
                          (2,663,888
                          )Weighted
      average shares used in basic computation
                          
                          
                          19,169,805
                          
                          
                          
                          19,139,394Diluted
      effect of warrants
                          
                          
                          -
                          
                          
                          
                          -Weighted
      average shares used in diluted computation
                          
                          
                          19,169,805
                          
                          
                          
                          19,139,394Earnings
      (loss) per share:Basic
                          
                          $
                          0.17
                          
                          
                          $
                          (0.14
                          )Diluted
                          
                          $
                          0.17
                          
                          
                          $
                          (0.14
                          )




F-9




At June
30, 2010, no warrants or stock options were included in the calculation of
diluted earnings per share due to out-of-money status of the warrants and 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 agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions. These amounts were
$16,556,904 and $31,730,382 as of June 30, 2010 and 2009,
respectively.




Accounts
receivable




In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Management reviews its
accounts receivable at each reporting period to provide for an allowance against
accounts receivable for an amount that could become uncollectible. This review
process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company's estimation
process. These impacts may be material. Certain accounts receivable amounts are
charged 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 for trade accounts receivable
is as follows for the years ended June 30, 2010 and 2009:




2010
                                
                                
                                2009Beginning
      allowance for doubtful accounts
                                
                                $
                                946,207
                                
                                
                                $
                                440,701Additions
      charged to bad debt expense
                                
                                
                                713,665
                                
                                
                                
                                503,693Write-off
      charged against allowance
                                
                                
                                (360,288
                                )
                                
                                
                                –Foreign
      currency translation adjustments
                                
                                
                                6,684
                                
                                
                                
                                1,813Ending
      allowance for doubtful accounts
                                
                                $
                                1,306,268
                                
                                
                                $
                                946,207




F-10




Concentrations of
risk




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




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. The cash deposits in U.S. financial institutions
exceed the amounts insured by the U.S. government. Balances at financial
institutions or state owned banks within the PRC are not covered by insurance.
Non-performance by these institutions could expose the Company to losses for
amounts in excess of insured balances. At June 30, 2010 and 2009, the Company’s
bank balances including restricted cash exceeded government insured limits by
approximately $20,470,585 and $32,880,229, respectively. The Company has not
experienced nonperformance by these institutions.




The
Company’s concentrations of credit risk also relate to trade accounts receivable
and accounts payable. There were no customers that individually comprised 10% or
more of the revenues for the years ended June 30, 2010 and 2009, or trade
accounts receivable as of June 30, 2010 and 2009. There were no vendors that
individually comprised 10% or more of the Company’s total purchase for the year
ended June 30, 2010 and 2009.




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




The
following table summarizes financial information for the years ended June 30,
2010 and 2009, concerning the Company’s revenues based on geographic
area:




2010
                        
                        
                        2009RevenueChina
                        
                        $
                        92,906,391
                        
                        
                        $
                        63,358,429International
                        
                        
                        23,047,557
                        
                        
                        
                        9,963,433Total
                        
                        $
                        115,953,948
                        
                        
                        $
                        73,321,862




F-11




Inventories




Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following as of June 30, 2010 and 2009:




2010
                      
                      
                      2009Raw
      materials
                      
                      $
                      2,739,503
                      
                      
                      $
                      1,523,654Work-in-progress
                      
                      
                      4,343,957
                      
                      
                      
                      1,709,595Finished
      goods
                      
                      
                      3,988,710
                      
                      
                      
                      2,982,458Total
                      
                      $
                      11,072,170
                      
                      
                      $
                      6,215,707




The
Company reviews its inventory periodically for possible obsolescence or
determination if any reserves are necessary. As of June 30, 2010 and 2009, the
Company determined that no reserves were necessary.




Prepayments




Prepayments
represent partial payments or deposits for inventory purchases. These advances
are interest free and unsecured.




Advances for
construction




As of
June 30, 2010 and 2009, advances for construction amounted to $2,334,748 and $0,
respectively. Advances for construction are paid to unrelated parties, interest
free, and with no collateral and no guarantee.




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
                
                
                5-20
                
                YearsMachinery
      and equipment
                
                
                5-10
                
                YearsAutomobile
      facilities
                
                
                5-10
                
                YearsElectronic
      equipment
                
                
                5-7
                
                Years




Long-lived
assets of the Company are reviewed at least annually 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 depreciation to determine whether subsequent
events and circumstances warrant revised estimates of useful lives. As of June
30, 2010, the Company expects these assets to be fully recoverable.




F-12


Investment in unconsolidated
affiliate




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




Intangible
assets




Intangible
assets consist of the following:




June 30, 2010
                  
                  
                  June 30, 2009Land
      use rights
                  
                  $
                  3,451,619
                  
                  
                  $
                  3,346,110Less:
      accumulated amortization
                  
                  
                  (306,261
                  )
                  
                  
                  (206,407
                  )Land
      use rights, net
                  
                  
                  3,145,385
                  
                  
                  
                  3,139,703Software
                  
                  
                  7,789
                  
                  
                  
                  7,325Less:
      accumulated amortization
                  
                  
                  (2,254
                  )
                  
                  
                  (1,438
                  )Software,
      net
                  
                  
                  5,536
                  
                  
                  
                  5,887Total
      intangible assets, net
                  
                  $
                  3,150,894
                  
                  
                  $
                  3,145,590




Intangible
assets are primarily comprised of land use rights which are pledged as
collateral for bank loans as of June 30, 2010. All land in the PRC is owned by
the Chinese government. However, the government grants "land use rights" for
terms ranging from 20 to 50 years. From March 2000 to June 2008, the Company
acquired various land use rights for approximately $3,291,000. From July 2008 to
March 2009, the Company incurred additional cost relating to various
land use rights for approximately $480,520. The Company amortizes the cost of
land use rights over the usage terms using the straight-line
method.




In April
2009, the Company sold a land use right. At the time of the sale, the net book
value of the land use right was $348,491, and the sale price for the land use
right was $879,000, for a gain of approximately $530,509. As of June 30, 2009,
total proceeds had been received.




In August
2009, the Company increased one land use right by paying to the government
approximately $43,434 for expenses related to processing the land
certificate.




F-13


Intangible
assets are reviewed at least annually and more often if circumstances dictate,
to determine whether their carrying value has become impaired. The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2010, the Company
determined that there had been no impairment. For the years ended June 30, 2010
and 2009, amortization expense relating to these intangible assets amounted to
$307,195 and $53,963, respectively.




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




AmountYears
      ending June 30,2011
                  
                  $
                  54,9752012
                  
                  
                  54,9752013
                  
                  
                  54,9752014
                  
                  
                  54,9752015
                  
                  
                  54,975Thereafter
                  
                  
                  2,876,109Total
                  
                  $
                  3,150,894





Income
taxes




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.




The
Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109,
"Accounting for Income Taxes").  Under the asset and liability method
as required by ASC 740, 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 ASC
740, 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, 2010 and 2009, the
Company did not have any deferred tax assets or liabilities, and as such, no
valuation allowances were recorded at June 30, 2010 and 2009.




ASC 740
(formerly FIN 48) clarifies the accounting and disclosure for uncertain tax
positions and prescribes a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. ASC 740 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.




F-14




Under ASC
740, 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 appeal or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.




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




Value Added
Tax




Enterprises
or individuals who sell products, engage in repair and maintenance or import and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The standard value added tax rate is 17% of the gross sales price;
however, for the Company’s corn, 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 $14,432,433 and $14,587,812 respectively,
for the year ended June 30, 2010. VAT on sales and VAT on purchases amounted to
$9,888,662 and $9,189,800 respectively, for the year ended June 30, 2009. 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 ASC 460 (formerly 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.




Recent accounting
pronouncements




In June
2009, the FASB issued SFAS 166, “ Accounting for Transfers of Financial Assets —
an amendment of FASB Statement No. 140 ” (“FAS 166”), which requires entities to
provide more information regarding sales of securitized financial assets and
similar transactions, particularly if the entity has continuing exposure to the
risks related to transferred financial assets. SFAS 166 eliminates the concept
of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets and requires additional disclosures. SFAS 166 is
effective for fiscal years beginning after November 15, 2009. The Company is
currently assessing the impact of the standard on its consolidated financial
statements.




In June
2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R),”
which modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. SFAS 167 clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. SFAS
167 requires an ongoing reassessment of whether a company is the primary
beneficiary of a variable interest entity. SFAS 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS 167 is
effective for fiscal years beginning after November 15, 2009. The Company is
currently assessing the impact of the standard on its consolidated financial
statements.




F-15




In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements,” now codified under FASB ASC Topic 605, “Revenue Recognition,”
(“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted. Management
is currently evaluating the potential impact of ASU2009-13 on our financial
statements.




In
October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing,”
now codified under FASB ASC Topic 470 “Debt,” (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of issuance, a
share-lending arrangement entered into on an entity’s own shares should be
measured at fair value in accordance with Topic 820 and recognized as an
issuance cost, with an offset to additional paid-in capital. Loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs. The amendments also require several
disclosures including a description and the terms of the arrangement and the
reason for entering into the arrangement. The effective dates of the amendments
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15, 2009. Management is
currently evaluating the potential impact of ASU 2009-15 on our financial
statements.




In
December, 2009, under FASB ASC Topic 860, “Transfers and Servicing.” New
authoritative accounting guidance under ASC Topic 860, “Transfers and
Servicing,” amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial assets.
The new authoritative accounting guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010 and is not
expected to have a significant impact on the Company’s financial
statements.




F-16




January
2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic 820-10 that requires
new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company does not believe that this will have a material impact on its
consolidated financial statements.




In
February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and
Disclosure Requirements. This update addresses certain implementation issues
related to an entity’s requirement to perform and disclose subsequent-events
procedures, removes the requirement that public companies disclose the date of
their financial statements in both issued and revised financial statements.
According to the FASB, the revised statements include those that have been
changed to correct an error or conform to a retrospective application of U.S.
GAAP. The amendment is effective for interim and annual reporting periods in
fiscal year ending after June 15, 2010. The Company does not believe that this
will have a material impact on its consolidated financial
statements.




F-17




In March
2010, FASB issued ASU No. 2010-10 –Amendments for Certain Investment Funds. This
update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.




In March
2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit
Derivatives. Embedded credit-derivative features related only to the transfer of
credit risk in the form of subordination of one financial instrument to another
are not subject to potential bifurcation and separate accounting as clarified by
recently issued FASB guidance. Other embedded credit-derivative features are
required to be analyzed to determine whether they must be accounted for
separately. This update provides guidance on whether embedded credit-derivative
features in financial instruments issued by structures such as collateralized
debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and
separate accounting. The guidance is effective at the beginning of a company’s
first fiscal quarter beginning after June 15, 2010. The Company does not expect
the adoption of this ASU to have a material impact on the Company’s consolidated
financial statements.




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.




Note
3 - Plant and equipment




Plant and
equipment consist of the following at June 30, 2010 and 2009:




2010
                
                
                2009Buildings
      and improvements
                
                $
                22,028,136
                
                
                $
                21,612,750Machinery
      and equipment
                
                
                65,019,206
                
                
                
                62,209,134Automobile
      facilities
                
                
                656,544
                
                
                
                519,560Electronic
      equipment
                
                
                527,609
                
                
                
                446,399Construction-in-progress
                
                
                10,533,083
                
                
                
                -Total
                
                
                98,764,578
                
                
                
                84,787,843Accumulated
      depreciation
                
                
                (23,390,727
                )
                
                
                (15,407,827
                )Plant
      and equipment, net
                
                $
                75,373,851
                
                
                $
                69,380,016




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, 2010 and
2009 amounted to $7,993,751 and $5,588,306 respectively. Interest costs totaling
$313,943 and $1,205,040 were capitalized into construction-in-progress for the
years ended June 30, 2010 and 2009, respectively.




F-18


Note
4 - Investment in unconsolidated affiliate




On
September 16, 2003, Weifang Shengtai entered into a joint venture partnership
with Weifang City Investment Company and Changle Century Sun Paper Industry Co.,
Ltd, “Changle Paper,” and formed Changle Shengshi Redian Co., Ltd, "Changle
Shengshi.”  Changle Shengshi was incorporated in Weifang City,
Shandong Province, the PRC. Changle Shengshi's principal activity is to produce
and sell electricity and steam to Weifang Shengtai and Changle for the use of
their own production. Weifang Shengtai owns 20% of Changle Shengtai and the
Company accounts for this 20% investment under the equity method of
accounting.




Summarized
financial information of Changle Shengshi is as follows as of June 30, 2010 and
2009:




2010
                  
                  
                  2009Current
      assets
                  
                  $
                  24,083,814
                  
                  
                  $
                  12,116,940Non-current
      assets
                  
                  
                  51,248,756
                  
                  
                  
                  34,455,506Total
      assets
                  
                  
                  75,332,569
                  
                  
                  
                  46,572,446Current
      liabilities
                  
                  
                  43,098,908
                  
                  
                  
                  24,818,492Non-current
      liabilities
                  
                  
                  1,164,071
                  
                  
                  
                  1,992,400Shareholders'
      equity
                  
                  
                  31,069,590
                  
                  
                  
                  19,761,554Total
      liabilities and shareholders' equity
                  
                  $
                  75,332,569
                  
                  
                  $
                  46,572,446




Summarized
financial information of Changle Shengshi is as follows for the years ended June
30, 2010 and 2009:




2010
                  
                  
                  2009Net
      sales
                  
                  $
                  50,589,883
                  
                  
                  $
                  43,607,856Gross
      profit
                  
                  
                  7,313,684
                  
                  
                  
                  4,449,815Income
      before taxes
                  
                  
                  4,699,019,
                  
                  
                  
                  2,187,939Net
      income
                  
                  $
                  3,639,019
                  
                  
                  $
                  1,647,808Company’s
      share of income
                  
                  
                  727,804
                  
                  
                  
                  329,562Elimination
      of intercompany profit
                  
                  
                  -
                  
                  
                  
                  (78,023)Company's
      share of net income
                  
                  $
                  727,804
                  
                  
                  $
                  251,539


F-19




In order
to meet increasing demands for electricity and steam by Weifang Shengtai and
Changle Paper, Weifang Shengtai invested $1,467,000 in Changle Shengshi in March
2010 and Changle Paper invested a corresponding amount such that Weifang
Shengtai and Changle Sunshine Paper Ltd. continue to be 20% and 80% owners,
respectively, of Changle Shengshi




Note
5 - Related party transactions




The
Company’s utilities (electricity and steam) are mostly provided by Changle
Shengshi (See Note 4). As of June 30, 2010 and 2009, the Company’s accounts
payable due to Changle Shengshi was $252,017 and $437,112, respectively, which
related to a portion of the Company’s utilities being provided by Changle
Shengshi. The Company’s utilities expense amounted to approximately $12,585,381
and $8,612,090 for the years ended June 30, 2010 and 2009,
respectively.




As of
June 30, 2010 and 2009, the Company’s receivables from a loan contract with
Changle Shengshi were as follows:




June 30, 2010
                    
                    
                    June 30, 2009Due
      on September 14, 2009, unsecured, 7.60% interest rate per
      annum
                    
                    $
                    —
                    
                    
                    $
                    439,500Total
                    
                    $
                    —
                    
                    
                    $
                    439,500




This
receivable amount from the loan contract has been collected as of June 30,
2010.


F-20


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, 2010 and
2009, the Company’s short term bank loans consisted of the
following:




2010
                    
                    
                    2009Loans
      from Bank of China, due various dates from February 2010 to June2011;
      monthly interest onlypayments;
      interest rates of 5.5755% per annum, secured by the Company’s buildings
      andimprovements/land
      use rights.
                    
                    $
                    14,730,000
                    
                    
                    $
                    13,185,000Loans
      from Industrial and Commercial Bank of China, due on various dates from
      October 2009 to February 2011; monthly interest only payments; interest
      rates of 5.31% per annum, guaranteed by an unrelated third party and
      secured by the Company’s buildings and improvements/land use rights
      .
                    
                    
                    9,662,880
                    
                    
                    
                    6,592,500Loan
      from Agriculture Bank of China, due from September 2009 to June 2011;
      monthly interest only payments; interest rates ranging from 5.5755% to
      5.841% per annum, guaranteed by an unrelated third party,
      unsecured
                    
                    
                    8,838,000
                    
                    
                    
                    2,930,000Loan
      from Qingdao Bank, due December 2010, monthly interest only payments;
      interest rate of 5.31% per annum, guaranteed by an unrelated third party,
      unsecured
                    
                    
                    2,946,000
                    
                    
                    
                    -Loan
      from Shenzhen Development Bank, due March 2011, monthly interest only
      payments; interest rate of 5.5755% per annum, guaranteed by an unrelated
      third party, unsecured
                    
                    
                    3,240,600
                    
                    
                    
                    -Loan
      from Dezhi Zheng, an individual, from March 5, 2010 to March 4, 2011;
      monthly interest of 0.7%; principal and interest payments due on March 4,
      2011; guaranteed by Mr. Qingtai Liu
                    
                    
                    736500
                    
                    
                    
                    -Loan
      from Xingye Bank, due October 2009; monthly interest only payments;
      interest rate of 7.9695% per annum, guaranteed by an unrelated third
      party, unsecured.
                    
                    
                    -
                    
                    
                    
                    1,465,000Loan
      from Shanghai PuDong Development Bank, due November 2009; monthly
      interest-only payments; interest rate of 6.66% per annum, guaranteed by an
      unrelated third party, unsecured.
                    
                    
                    -
                    
                    
                    
                    1,465,000Total
                    
                    $
                    40,153,980
                    
                    
                    $
                    25,637,500


F-21


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, 2010 and
2009, the Company’s notes payables consisted of the following:




2010
                      
                      
                      2009China
      Agriculture Bank, due in August 2009, 0.05% transaction fee, restricted
      cash required 100% of loan amount, guaranteed by an unrelated third
      party.
                      
                      $
                      -
                      
                      
                      $
                      1,465,000Shanghai
      PuDong Development Bank, due in October 2009, 0.05% transaction fee,
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
                      
                      
                      -
                      
                      
                      
                      1,465,000Bank
      of China, due on various dates from December 2009 to June 2010, 0.05%
      transaction fee, and restricted cash required 100% of loan amount,
      guaranteed by an unrelated third party.
                      
                      
                      8,838,000
                      
                      
                      
                      23,440,000Industrial
      and Commercial Bank of China, due on various dates from February to August
      2010, 0.05% transaction fee, restricted cash required 50% of loan amount,
      guaranteed by an unrelated third party.
                      
                      
                      1,767,600
                      
                      
                      
                      7,383,600Industrial
      and Commercial Bank of China, due in March 2010, 0.05% transaction fee,
      restricted cash required 50% of loan amount, guaranteed by an unrelated
      third party.
                      
                      
                      1,178,400
                      
                      
                      
                      1,465,000Bank
      of QingDao, due from January to July 2010, 0.05% transaction fee, and
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
                      
                      
                      2,946,000
                      
                      
                      
                      -Loan
      from Shenzhen Development Bank, due from March 2010 to September 2010,
      0.05% transaction fee, and restricted cash required for 100% of loan
      amount, and guaranteed by an unrelated third party.
                      
                      $
                      3,093,300
                      
                      
                      $Total
                      
                      $
                      17,823,300
                      
                      
                      
                      35,218,600


F-22


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 the
principal is due upon demand. Before January 1, 2009, the interest rate was at
7.2% for the first six months, and then 10.8% thereafter until the full
principal amounts are paid by the Company. After January 1, 2009, the interest
rate was changed to 7.2% for the loan period. Employee loans amounted to
$396,404 and $730,502 as of June 30, 2010 and 2009, respectively. Interest
expense related to these loans amounted to $115,127 and $107,503 for the years
ended June 30, 2010 and 2009, respectively.




Employee loan -
officer




From time
to time, the Company borrows monies from Qingtai Liu, the Company’s CEO and
President, for cash flow purposes of the Company. The loans do not require
collateral and the principal is due upon demand. Before January 1, 2009, the
interest rate was at 7.2% for the first six months, and then 10.8% thereafter
until the full principal amounts are paid by the Company. After January 1, 2009,
the interest rate was changed to 7.2% for the loan period. Employee loan from
officer amounted to $515,856 and $248,415 as of June 30, 2010 and 2009,
respectively. Interest expense related this loan was de minimis for the years
ended June 30, 2010 and 2009, respectively.




Third party
loan




From time
to time, the Company borrows monies from an unrelated individual for use in
operations. The loans do not require collateral. Before January 1, 2009, the
interest rate was 7.2% for the first six months, and then 10.8% thereafter until
the full principal amounts are paid by the Company. After January 1, 2009, the
interest rate was changed to 7.2% for the loan period. The principal is due upon
demand. Balance on this loan as of June 30, 2010 and 2009 was $0 and $248,336,
respectively. Interest expense related this loan was de minimis for the years
ended June 30, 2010 and 2009, respectively.




Interest




Total
interest expense and financial charges, net of capitalized interest, on all debt
for the years ended June 30, 2010 and 2009, amounted to $3,419,169 and
$1,545,720 respectively. Interest capitalized into construction-in-progress
totaled $313,943 and $1,205,040 for the years ended June 30, 2010 and 2009,
respectively.




Note
7 - Income taxes




Before
January 1, 2008, the Company was governed by the Income Tax Law of the PRC
concerning Foreign Investment Enterprises, "FIEs,” and Foreign Enterprises and
various local income tax laws, the "Income Tax Laws.” Under the Income Tax Laws,
FIEs are generally subject to an effective income tax of 33%, 30% state income
taxes plus 3% local income taxes, on income as reported in their statutory
financial statements after appropriate tax adjustments, unless the enterprise is
located in specially designated regions of cities for which more favorable
effective tax rates apply.




In
February 2004, the Company became a Sino-foreign joint venture. In August 2004,
the state government granted the Company income tax exemptions as follows: 100%
exemption for the first two years from September 2004 to August 2006, and 50%
exemption for three years 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 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 Investment
Enterprises.


F-23




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, which pay
      a reduced rate of 15%; and




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




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




Income
tax (benefits) provision for the years ended June 30, 2010 and 2009 amounted to
$1,598,704 and $ 0, respectively, as follows:


2010
                  
                  
                  2009Current
      tax
                  
                  $
                  1,598,704
                  
                  
                  
                  -Deferred
      tax
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  1,598,704
                  
                  
                  $
                  -


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




2010
                
                
                2009U.S.
      Statutory rates
                
                
                34.0
                %
                
                
                34.0
                %Foreign
      income not recognized in USA
                
                
                (34.0
                )
                
                
                (34.0
                )Chinese
      income taxes
                
                
                25.0
                
                
                
                25.0Chinese
      income exemption (a)
                
                
                0.0
                
                
                
                (13.0
                )Other
      items (b)
                
                
                8.0
                
                
                
                (12.0
                )Total
      provision for income taxes
                
                
                33.0
                %
                
                
                (0.0
                )%




(a)
              The
      13.0% represents special tax credits from the local government due to
      government enforced regulations. They expired in September
      2009.


(b)
            The
      8.0% represents the fact that certain expenses (such as stock option
      expense) incurred by the Company and Shengtai Holding, Inc. which were not
      deductible in the PRC for the year ended June 30, 2010. The 12.0%
      represents the deduction in the PRC for the year ended June 30, 2009 due
      to the net loss incurred.




F-24




For the
year ended June 30, 2010, the Company’s effective tax rate was 33%. For the year
ended June 30, 2009, the Company incurred losses before income taxes and
therefore no provision for income taxes are recorded. The Company received
special tax credits from the local government due to government enforced
regulation. In addition, income before income taxes includes losses from
non-Chinese entities, which are not deductible.  After excluding the
special tax credits and adjusting the non-Chinese entities losses, the Company’s
effective rate was equivalent to the effective rate in China.




The
estimated tax savings due to the tax exemption for the years ended June 30, 2010
and 2009 amounted to $0 and $0 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, 2010 and 2009 by $0.00 and $0.00,
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, 2010 and 2009 by $0.00 and $0.00, respectively. Tax exemptions by the local
government expired in September 2009.




Shengtai
Pharmaceutical, Inc. and Shengtai Holding, Inc. were incorporated in the United
States and for the United States income tax purposes, have accumulated net
operating loss carry forwards estimated at $1,597,132 as of June 30, 2010 and $0
for the year ended June 30, 2010, respectively. For the United States income tax
purposes, the tax benefits from the net operating loss carry forwards are
estimated at $522,557 as of June 30, 2010 which may be available to reduce
future years’ taxable income. The Company’s management believes that the
utilization of the tax benefits from the net operating loss carry forwards
appears uncertain due to the Company’s limited operating history and continuing
losses expected at Shengtai Pharmaceutical, Inc. and Shengtai Holding, Inc.,
therefore, the Company has applied 100% valuation allowance to the deferred tax
benefits to reduce the deferred asset to zero.




As of
June 30, 2010, the Company’s foreign subsidiary has cumulative undistributed
earnings of $19,185,550 that are included in consolidated retained earnings and
will continue to be indefinitely reinvested in foreign operations. No provision
has been made for the United States deferred taxes related to future
repatriation of these cumulative undistributed earnings, nor is it practicable
to estimate the amount of income taxes that would incur if the Company concluded
that such earnings will be remitted in the future.




F-25




Taxes
payable




Taxes
payable consisted of the following as of June 30, 2010 and 2009:




2010
                  
                  
                  2009VAT
      payable
                  
                  $
                  954,552
                  
                  
                  $
                  1,622,859Individual
      income tax withheld
                  
                  
                  10,354
                  
                  
                  
                  423Income
      tax payable
                  
                  
                  401,326
                  
                  
                  
                  387,299Housing
      property tax payable
                  
                  
                  15,867
                  
                  
                  
                  10,098Others
                  
                  
                  74,375
                  
                  
                  
                  46,199Total
      taxes payable
                  
                  $
                  1,456,474
                  
                  
                  $
                  2,066,878




Note
8 - Commitments and Contingencies




Guarantees




As of
June 30, 2010, the Company has guaranteed $2.9 million short term loans on
behalf of an unrelated party, Yuanli Chemical Engineering Inc., "Yuanli,” that
were borrowed out of its maximum borrowing limit of $5.8 million.




The
Company is obligated to perform under the guarantee if Yuanli fails to pay
principal and interest payments when due. The maximum potential amount of future
undiscounted payments under the guarantee is $3.4 million for Yuanli, including
accrued interest. The Company did not record a liability for the guarantee
because management knows that Yuanli is current in its payment obligations, and
the likelihood of the Company having to make payments under the guarantee is
remote.


F-26


Details
of guarantee amounts to the unrelated party as of June 30, 2010 are as
follows:




Short TermCompany
                  
                  Bank LoansYuanli
      Chemical Engineering Inc.
                  
                  $
                  2,946,000Total
                  
                  $
                  2,946,000




The
Company guaranteed the debt for the unrelated parties because the Company will
use other parties to guarantee for the Company's debt from time to
time.




Litigation




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




Note
9 - Shareholders’ equity




Stock
issuance




For the
years ended June 30, 2010 and 2009, 0 and 75,000 shares of warrants were
exercised and converted, respectively, to the Company’s common
stock.




Warrants




On May
15, 2007, in connection with the Share Purchase Agreement, the Company issued
4,375,000 warrants, "Investor Warrants,” which 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. During the year ended
June 30, 2008, a total of 194,805 warrants were exercised by three
shareholders.




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, the "Lead Investor Warrants,” to compensate Chinamerica Fund LLP
as the lead investor and Jeff Jenson in assisting in providing the shell
company, West Coast Car Company. These Lead Investor Warrants have the same
terms as the Investor Warrants except that they have an exercise price of $0.01
per share. In June 2008, Jeff Jenson exercised the 25,000 warrants issued to
him. In November 2008, Chinamerica Fund, LLP exercised the 75,000 warrants
issued to the fund.


F-27


All
Investor Warrants, Placement Agent Warrants and Lead Investor Warrants meet the
conditions for equity classification pursuant to ASC 815 (formerly SFAS 133,
"Accounting for Derivatives") and ASC 815 (formerly EITF 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock").  Therefore, these warrants were classified as
equity and accounted for as common stock issuance cost.




Warrants
                    Outstanding
                  
                  
                  Warrants
                    Exercisable
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Average
                    Remaining
                    Contractual
                    LifeOutstanding,
      June 30, 2008
                  
                  
                  4,473,945
                  
                  
                  
                  4,473,945
                  
                  
                  $
                  2.54
                  
                  
                  
                  3.88Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  75,000
                  
                  
                  
                  75,000
                  
                  
                  
                  0.01
                  
                  
                  
                  -Outstanding,
      June 30, 2009
                  
                  
                  4,398,945
                  
                  
                  
                  4,398,945
                  
                  
                  $
                  2.60
                  
                  
                  
                  2.97Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      June 30, 2010
                  
                  
                  4,398,945
                  
                  
                  
                  4,
      398,945
                  
                  
                  $
                  2.60
                  
                  
                  
                  2.22




F-28




Stock
options




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




On May
14, 2008, the Company granted 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 was the closing price on the date of grant, and expire
five years after the date of grant. All options vest over a period of three
years on a quarterly basis from the date of grant.




The
Company uses the Black-Scholes option pricing model which was developed for use
in estimating the fair value of options. Option pricing models require the input
of highly complex and subjective variables, including the expected life of
options granted and the Company's expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company's employee stock options, it is management's opinion that the
Black-Scholes option valuation model may not provide an accurate measure of the
fair value of the Company's employee stock options. Although the fair value of
employee stock options is determined in accordance with ASC 718 (formerly 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 in 2008 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. ASC 718 (formerly 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.




F-29




In the
Chief Financial Officer Employment Agreement,  the “Employment
Agreement,” entered into on March 1, 2010 between the Company and Mr. Hu Ye, the
Chief Financial Officer, the Company granted Mr. Hu Ye an option to purchase
300,000 shares of common stock of the Company. The shares vest over 3 years
starting March 1, 2010 and terminate on the third anniversary of the date of
issuance of this option. The Company valued the shares at $2.60 per share, which
represents 130 % of the fair market value being calculated in the private
placement price on May 15, 2007. The fair values of stock options granted to the
CFO were estimated at the date of grant using the Black-Scholes option-pricing
model with the following assumptions:




Weighted
      average risk-free interest rate
                
                
                2.79
                %Expected
      term
                
                6.5 yearsExpected
      volatility
                
                
                149
                %Expected
      dividend yield
                
                
                0
                %Weighted
      average grant-date fair value per option
                
                $
                2.60


F-30




The stock
option activity was as follows for the year ended June 30, 2010:




Options
                  outstanding
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding,
      June 30, 2008
                
                
                660,000
                
                
                $
                3.34
                
                
                $Granted
                
                
                -
                
                
                
                -
                
                
                
                -Forfeited
                
                
                -
                
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding,
      June 30, 2009
                
                
                660,000
                
                
                $
                3.34
                
                
                $
                -Granted
                
                
                300,000
                
                
                
                2.60
                
                
                
                -Forfeited
                
                
                (275,000
                )
                
                
                3.34
                
                
                
                -Exercised
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding,
      June 30, 2010
                
                
                685,000
                
                
                $
                3.02
                
                
                $
                -


F-31




Following
is a summary of the status of options outstanding at June 30, 2010:




Outstanding Options
                              
                              
                              Vested OptionsAverage
                                Exercise  Price
                              
                              Outstanding
                                Options
                              
                              
                              Average
                                Remaining
                                Contractual Life
                              
                              
                              Average
                                Exercise Price
                              
                              
                              Options$
                              3.00
                              
                              
                              685,000
                              
                              
                              
                              4.56
                              
                              
                              $
                              3.02
                              
                              
                              
                              385,000





Compensation
expense from stock options recognized for the years ended June 30, 2010 and 2009
were $681,575 and $635,272, respectively. As of June 30, 2010, approximately
$1,588,180 of estimated expense with respect to unvested stock-based awards has
yet to be recognized and will be recognized as an expense over the employee's
remaining weighted average service period.




Note
10 - Statutory reserves




The laws
and regulations of the PRC require that before a Sino-foreign cooperative joint
venture enterprise distributes profits to its partners, it must first satisfy
all tax liabilities, provide for losses in previous years, and make allocations
in proportions determined at the discretion of the board of directors, after the
statutory reserves. The statutory reserves include the surplus reserve fund, and
the enterprise fund. These statutory reserves represent restricted retained
earnings.




Surplus reserve
fund




The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC’s accounting rules and regulations, to a statutory
surplus reserve fund until such reserve balance reaches 50% of the Company’s
registered capital. The transfer to this reserve must be made before
distribution of any dividends to shareholders. For the years ended June 30, 2010
and 2009, the Company transferred $319,898 and $0, 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.




Pursuant
to the Company’s articles of incorporation, the Company is to appropriate 10% of
its net profits as statutory surplus reserve up to $7,500,000. As June 30, 2010
the Company had appropriated to the statutory reserve approximately $3,300,000.
The Company plans to contribute $4,200,000 in the future.




Enterprise
fund




The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expand production and operations of the Company. No minimum
contribution is required and the Company has not made any contribution to this
fund as of June 30, 2010.




F-32


Note
11 – Sale Leaseback




Capital
lease




On
December 10, 2008, the Company entered into a sale leaseback arrangement and
sold part of its equipment to an unrelated third party for approximately
$5,134,500. The leaseback has been accounted for as a capital lease with the
same third party to lease the same equipment for 4 years, with total payments of
approximately $8,119,845. The title of the equipment will be transferred back to
the Company upon the last payment and after the third party receives a one time
payment of $44,010 from the Company. A one time processing fee of $51,345 was
paid by the Company related to this lease. A loss of $202,138 realized on this
transaction has been recognized in non-operating expense since the carrying
value of the equipment sold exceeded its fair value used as the sale
price.




The
minimum payments for the remaining lease term of 30 months from July 2010 to
December 2012 are as follows.




Total
      lease payments outstanding as of June 30, 2010
                
                
                7,116,417Minimum
      payment in 2010
                
                
                3,221,532Minimum
      payment in 2011
                
                
                2,596,590Minimum
      payment in 2012
                
                
                1,298,295




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, 2010 and 2009, the Company made contributions in
the amounts of $388,446 and $395,354, respectively, to the Company’s retirement
plan.




F-33


Note
13 - Subsequent events




The
Company has performed an evaluation of subsequent events through September 28,
2010, which is the date the financial statements were issued.




An annual
general meeting is scheduled to be held on October 26, 2010.




The
Company repaid the following notes pursuant to their terms during the period
from July 1, 2010 to September 28, 2010:




·
            $1,767,600
      to Industrial and Commercial Bank of China, due on various dates from
      February to August 2010, 0.05% transaction fee, restricted cash required
      for 50% of loan amount and guaranteed by an unrelated third
      party;




·
            $2,946,000
      to Bank of QingDao, due from January to July 2010, 0.05% transaction fee,
      restricted cash required for 100% of loan amount and guaranteed by an
      unrelated third party;




·
            $3,093,3000
      to Shenzhen Development Bank, due from March 2010 to September 2010, 0.05%
      transaction fee, restricted cash required for 100% of loan amount and
      guaranteed by an unrelated third
party.




The
Company borrowed the following loans and notes during the period from July 1,
2010 to September 28, 2010:




·
            $2,445,180
      from Industrial and Commercial Bank of China, from various dates to June
      2011, monthly interest only payments; interest rate of 6.3720% per annum,
      guaranteed by an unrelated third party and
  unsecured;




·
            $2,798,700
      from Industrial and Commercial Bank of China, due July 2011, monthly
      interest only payments; interest rate of 6.3720% per annum, guaranteed by
      an unrelated third party and
unsecured;




·
            $1,473,000
      from Agriculture Bank of China, due Sept 2011, monthly interest only
      payment; interest rate of 5.8410% per annum, guaranteed by an unrelated
      third party and unsecured;




·
            $589,200
      from Industrial and Commercial Bank of China, due in February 2011, 0.05%
      transaction fee, restricted cash required 100% of loan amount and
      guaranteed by an unrelated third
party.




F-34


EXHIBIT
INDEX





Exhibit
                  No.
                
                Description3.1
                
                Amended
      and Restated Certificate of Incorporation as filed with the Secretary of
      State of the State of Delaware on March 10, 2004, as amended to date.
      [incorporated by reference to Exhibit 3.1 to the registrant’s Form 10-SB
      filed on September 26, 2005 in commission filenumber000-51312]3.2
                
                Bylaws
      of the registrant. [incorporated by reference to Exhibit 3.2 to the
      registrant’s Form 10-SB filed on September 26, 2005 in commission filenumber000-51312]4.1
                
                Form
      of Warrants to Investors. [incorporated by reference to Exhibit 4.1 to the
      registrant’s Form 8-K filed on May 21, 2007 in commission filenumber000-51312]10.1
                
                Share
      Exchange Agreement dated May 15, 2007 by and among the Company and
      Shengtai Holding, Inc. [incorporated by reference to Exhibit 10.1 to the
      registrant’s Form 8-K filed on May 21, 2007 in commission filenumber000-51312]10.2
                
                Share
      Purchase Agreement dated as of May 15, 2007 between the Company and the
      Purchasers. [incorporated by reference to Exhibit 10.2 to the registrant’s
      Form 8-K filed on May 21, 2007 in commission filenumber000-51312]16.1
                
                Letter
      dated October 20, 2009 from Moore Stephens Wurth Frazer and Torbet, LLP.
      [incorporated by reference to Exhibit 16.1 to the registrant’s Form 8-K
      filed on October 21, 2009 in commission filenumber000-51312]21.1
                
                List
      of subsidiaries of the registrant [incorporated by reference to Exhibit
      21.1 to the registrant’s Form 8-K filed on May 21, 2007 in commission filenumber000-51312]23.1
                
                Consent
      of Kabani & Company, Inc*23.1
                
                Consent
      of Frazer Frost, LLP*31.1
                
                Certification
      of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a),
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*31.2
                
                Certification
      of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a),
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.*32.1
                
                Certification
      of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*32.2
                
                Certification
      of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*





* filed
herewith