UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended December 31, 2010





 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
  ACT





For the
transition period from ______________ to _____________





Commission
file number: 000-51312





SHENGTAI
PHARMACEUTICAL, INC.


(Exact
name of registrant as specified in its charter)




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




Changda
      Road East, Development District,
                Changle
      County, Shandong, The People’s Republic of China
              
              262400(Address
      of principal executive offices)
              
              (Zip
      Code)





011-86-536-6295802


(Registrant’s
telephone number, including area code)




(Former
      name, former address and former fiscal year, if changed since last
      report)





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





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





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





Large
      accelerated filer
             ̈
            Accelerated
      filer
             ̈Non-accelerated
      filer
             ̈
            Smaller
      reporting company
            x





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





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:


Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.


Yes    ̈  No   ̈





APPLICABLE
ONLY TO CORPORATE ISSUERS:


Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





As of
February 14, 2011, there are 9,584,912 shares of $0.001 par value common
stock issued and outstanding.





FORM
10-Q


SHENGTAI
PHARMACEUTICAL, INC.





INDEX





PagePART
      I.
                    
                    Financial
      Information
                    
                    3Item
      1.  Financial Statements
                    
                    3Consolidated
      Unaudited Balance Sheets as of December 31, 2010 and June 30,
      2010
                    
                    3Consolidated
      Unaudited Statements of Income and Other Comprehensive Income for the
      Three and Six Months Ended December 31, 2010 and 2009
                    
                    4Consolidated
      Unaudited Statements of Cash Flows for the Six Months Ended December 31,
      2010 and 2009
                    
                    5Notes
      to Unaudited Consolidated Financial Statements as of December 31,
      2010
                    
                    6Item
      2.  Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                    
                    26Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                    
                    32Item
      4.  Controls and Procedures
                    
                    32PART
      II.
                    
                    Other
      Information
                    
                    32Item
      1.  Legal Proceedings
                    
                    32Item
      1A. Risk Factors
                    
                    32Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                    
                    32Item
      3.  Defaults Upon Senior Securities
                    
                    32Item
      4.  (Removed and Reserved)
                    
                    32Item
      5.  Other Information
                    
                    32Item
      6.  Exhibits
                    
                    33


2


PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements




SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS OF
DECEMBER 31, 2010 AND JUNE 30,2010
 (UNAUDITED)
 
 DECEMBER 31,
                            
                            
                            JUNE
      30,2010
                            
                            
                            2010(UNAUDITED)ASSETSCURRENT
      ASSETS:Cash
      & cash equivalents
                            
                            $
                            6,827,127
                            
                            
                            $
                            4,121,541Restricted
      cash
                            
                            
                            3,640,800
                            
                            
                            
                            16,556,904Accounts
      receivable, net of allowance for doubtful accounts of $2,211,523 as of
      December 31, 2010 and $1,306,268 as of June 30, 2010,
      respectively
                            
                            
                            14,064,809
                            
                            
                            
                            8,365,822Notes
      receivable
                            
                            
                            1,124,023
                            
                            
                            
                            2,410,512Other
      receivables
                            
                            
                            682,528
                            
                            
                            
                            450,284Inventories
                            
                            
                            16,539,263
                            
                            
                            
                            11,072,170Prepayments
      and other assets
                            
                            
                            1,246,806
                            
                            
                            
                            545,590Total
      current assets
                            
                            
                            44,125,357
                            
                            
                            
                            43,522,824PLANT
      AND EQUIPMENT, net
                            
                            
                            80,261,536
                            
                            
                            
                            75,373,851OTHER
      ASSETS:Investment
      in Changle Shengshi Redian Co., Ltd.
                            
                            
                            6,859,927
                            
                            
                            
                            6,372,294Advances
      for construction
                            
                            
                            1,349,722
                            
                            
                            
                            2,334,748Intangible
      assets - land use right, net of accumulated amortization
                            
                            
                            3,216,590
                            
                            
                            
                            3,150,894Total
      other assets
                            
                            
                            11,426,238
                            
                            
                            
                            11,857,936Total
      assets
                            
                            $
                            135,813,131
                            
                            
                            $
                            130,754,611LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable and accured liabilities
                            
                            $
                            13,508,036
                            
                            
                            $
                            9,508,631Accounts
      payable and accrued liabilities - related party
                            
                            
                            1,061,947
                            
                            
                            
                            252,017Notes
      payable - banks
                            
                            
                            7,281,600
                            
                            
                            
                            17,823,300Short
      term loans
                            
                            
                            47,724,820
                            
                            
                            
                            40,153,980Accrued
      liabilities
                            
                            
                            652,370
                            
                            
                            
                            412,555Other
      payable
                            
                            
                            1,070,235
                            
                            
                            
                            1,315,797Employee
      loans
                            
                            
                            385,339
                            
                            
                            
                            396,404Other
      payable - officer
                            
                            
                            531,116
                            
                            
                            
                            515,856Customer
      deposit
                            
                            
                            7,685,913
                            
                            
                            
                            4,162,046Taxes
      payable
                            
                            
                            700,172
                            
                            
                            
                            1,456,474Long
      term loan-current matunties
                            
                            
                            640
                            
                            
                            
                            2,314,983Total
      current liabilities
                            
                            
                            80,602,188
                            
                            
                            
                            78,312,043LONG
      TERM LIABILITIESOther
      payable - noncurrent
                            
                            
                            -
                            
                            
                            
                            3,346,336Total
      long term liabilities
                            
                            
                            -
                            
                            
                            
                            3,346,336Total
      liabilities
                            
                            
                            80,602,188
                            
                            
                            
                            81,658,379COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 2,500,000 shares authorized, no shares issued and
      outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $0.001 par value, 50,000,000 shares authorized, 9,584,912 shares
      issued and outstanding
                            
                            
                            9,585
                            
                            
                            
                            19,170Additional
      paid-in capital
                            
                            
                            21,498,295
                            
                            
                            
                            21,305,230Statutory
      reserves
                            
                            
                            3,713,669
                            
                            
                            
                            3,214,800Retained
      earnings
                            
                            
                            23,192,455
                            
                            
                            
                            19,351,772Accumulated
      other comprehensive income
                            
                            
                            6,796,940
                            
                            
                            
                            5,205,259Total
      shareholders' equity
                            
                            
                            55,210,943
                            
                            
                            
                            49,096,231Total
      liabilities and shareholders' equity
                            
                            $
                            135,813,131
                            
                            
                            $
                            130,754,611
 
 The
accompanying notes are an integral part of this statement.
  3
  SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES
 CONSOLIDATE
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
THREE AND SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
 (UNAUDITED)
 
 THREE MONTHS ENDED DECEMBER 31
                    
                    
                    SIX MONTHS ENDED DECEMBER 312010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009NET
      SALES
                    
                    $
                    49,044,856
                    
                    
                    $
                    28,508,859
                    
                    
                    $
                    83,689,428
                    
                    
                    $
                    51,635,916COST
      OF SALES
                    
                    
                    43,145,306
                    
                    
                    
                    24,039,512
                    
                    
                    
                    71,770,521
                    
                    
                    
                    43,845,212GROSS
      PROFIT
                    
                    
                    5,899,550
                    
                    
                    
                    4,469,347
                    
                    
                    
                    11,918,907
                    
                    
                    
                    7,790,704SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                    
                    
                    2,103,390
                    
                    
                    
                    2,195,676
                    
                    
                    
                    4,683,194
                    
                    
                    
                    4,280,366INCOME
      FROM OPERATIONS
                    
                    
                    3,796,160
                    
                    
                    
                    2,273,671
                    
                    
                    
                    7,235,713
                    
                    
                    
                    3,510,338OTHER
      (EXPENSE) INCOME:Earnings
      on equity investment
                    
                    
                    144,244
                    
                    
                    
                    200,963
                    
                    
                    
                    231,133
                    
                    
                    
                    347,109Non-operating
      income
                    
                    
                    54,614
                    
                    
                    
                    (24,229
                    )
                    
                    
                    77,611
                    
                    
                    
                    199,362Non-operating
      expense
                    
                    
                    (94,804
                    )
                    
                    
                    (9,076
                    )
                    
                    
                    (201,852
                    )
                    
                    
                    (16,346
                    )Interest
      expense and other charges
                    
                    
                    (427,576
                    )
                    
                    
                    (913,532
                    )
                    
                    
                    (1,550,692
                    )
                    
                    
                    (1,642,318
                    )Interest
      income
                    
                    
                    70,770
                    
                    
                    
                    (607
                    )
                    
                    
                    72,034
                    
                    
                    
                    775Other
      income (expense), net
                    
                    
                    (252,752
                    )
                    
                    
                    (746,481
                    )
                    
                    
                    (1,371,764
                    )
                    
                    
                    (1,111,418
                    )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                    
                    
                    3,543,408
                    
                    
                    
                    1,527,190
                    
                    
                    
                    5,863,949
                    
                    
                    
                    2,398,920PROVISION
      FOR INCOME TAXES
                    
                    
                    846,940
                    
                    
                    
                    474,964
                    
                    
                    
                    1,524,397
                    
                    
                    
                    562,861NET
      INCOME
                    
                    
                    2,696,468
                    
                    
                    
                    1,052,226
                    
                    
                    
                    4,339,552
                    
                    
                    
                    1,836,059OTHER
      COMPREHENSIVE ITEMS:Foreign
      currency translation adjustments
                    
                    
                    763,135
                    
                    
                    
                    332
                    
                    
                    
                    1,591,681
                    
                    
                    
                    61,634COMPREHENSIVE
      INCOME
                    
                    $
                    3,459,603
                    
                    
                    $
                    1,052,558
                    
                    
                    $
                    5,931,233
                    
                    
                    $
                    1,897,693EARNINGS
      PER SHAREBasic
                    
                    $
                    0.28
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.45
                    
                    
                    $
                    0.19Diluted
                    
                    $
                    0.27
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.45
                    
                    
                    $
                    0.19WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                    
                    
                    9,584,912
                    
                    
                    
                    9,584,903
                    
                    
                    
                    9,584,912
                    
                    
                    
                    9,584,903Diluted
                    
                    
                    9,809,676
                    
                    
                    
                    9,584,903
                    
                    
                    
                    9,732,089
                    
                    
                    
                    9,584,903
 
 The
accompanying notes are an integral part of this statement.
  4
  SHENGTAI PHARMACEUTICAL INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
 (UNAUDITED)
 
 2010
                      
                      
                      2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      4,339,552
                      
                      
                      $
                      1,836,059Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
                      
                      
                      3,560,415
                      
                      
                      
                      3,830,468Amortization
                      
                      
                      27,949
                      
                      
                      
                      28,164Allowance
      for bad debts
                      
                      
                      851,731
                      
                      
                      
                      (254,370
                      )Share
      based compensation to employees
                      
                      
                      183,480
                      
                      
                      
                      317,636Loss
      on equipment disposal
                      
                      
                      111,874
                      
                      
                      
                      -Gain
      on disposal of land use right
                      
                      
                      -
                      
                      
                      
                      (739
                      )Earnings
      on equity investment
                      
                      
                      (231,133
                      )
                      
                      
                      (347,109
                      )Change
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (5,357,856
                      )
                      
                      
                      1,872,130Notes
      receivable
                      
                      
                      1,450,732
                      
                      
                      
                      (263,189
                      )Other
      receivables
                      
                      
                      (876,791
                      )
                      
                      
                      (227,480
                      )Inventories
                      
                      
                      (5,111,530
                      )
                      
                      
                      (1,725,029
                      )Prepayments
      and advance to employees
                      
                      
                      (308,910
                      )
                      
                      
                      (186,545
                      )Accounts
      payable
                      
                      
                      3,653,269
                      
                      
                      
                      739,842Accrued
      liabilities
                      
                      
                      228,578
                      
                      
                      
                      18,125Accounts
      payable - related party
                      
                      
                      788,967
                      
                      
                      
                      146,971Other
      payable
                      
                      
                      (746,316
                      )
                      
                      
                      1,134,035Customer
      deposit
                      
                      
                      3,342,622
                      
                      
                      
                      789,599Taxes
      payable
                      
                      
                      (786,417
                      )
                      
                      
                      1,025,045Net
      cash provided by operating activities
                      
                      
                      5,120,215
                      
                      
                      
                      8,733,614CASH
      FLOWS FROM INVESTING ACTIVITIES:Advances-Short
      term loan receivable
                      
                      
                      -
                      
                      
                      
                      (837,341
                      )Purchase
      plant and equipment
                      
                      
                      (1,204,598
                      )
                      
                      
                      (2,258,175
                      )Proceeds
      from equipment disposal
                      
                      
                      (0
                      )
                      
                      
                      2,535Additions
      to construction in progress
                      
                      
                      (5,059,744
                      )
                      
                      
                      (5,517,268
                      )Advances
      for construction
                      
                      
                      1,037,108
                      
                      
                      
                      -Acquisition
      of land use right
                      
                      
                      -
                      
                      
                      
                      (43,415
                      )Loan
      to related party - non-current
                      
                      
                      (851,731
                      )
                      
                      
                      -Net
      cash used in investing activities
                      
                      
                      (6,078,966
                      )
                      
                      
                      (8,653,664
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      in restricted cash
                      
                      
                      12,916,104
                      
                      
                      
                      20,557,383Borrowings
      on notes payable - banks
                      
                      
                      -
                      
                      
                      
                      13,197,600Principal
      payments on notes payable - banks
                      
                      
                      (10,888,680
                      )
                      
                      
                      (35,252,256
                      )Borrowings
      on short term loans
                      
                      
                      12,231,120
                      
                      
                      
                      14,018,784Principal
      payments on short term loans
                      
                      
                      (5,966,400
                      )
                      
                      
                      (6,393,504
                      )Principal
      payments on employee loans
                      
                      
                      (22,523
                      )
                      
                      
                      (266,991
                      )Borrowings
      on third party loan
                      
                      
                      335,610
                      
                      
                      
                      11,986Principal
      payments on third party loan
                      
                      
                      -
                      
                      
                      
                      69,381Borrowings
      on long term loans
                      
                      
                      4,778,788
                      
                      
                      
                      -Payments
      on long term loans
                      
                      
                      (4,778,788
                      )
                      
                      
                      -Payment
      on capital lease obligation
                      
                      
                      (5,732,806
                      )
                      
                      
                      (1,929,709
                      )Net
      cash provided by financing activities
                      
                      
                      2,872,424
                      
                      
                      
                      4,012,675EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                      
                      
                      791,911
                      
                      
                      
                      3,737INCREASE
      IN CASH & CASH EQUIVELENTS
                      
                      
                      2,705,584
                      
                      
                      
                      4,096,362CASH
      & CASH EQUIVELENTS, beginning of period
                      
                      
                      4,121,543
                      
                      
                      
                      1,779,476CASH
      & CASH EQUIVELENTS, end of period
                      
                      $
                      6,827,127
                      
                      
                      $
                      5,875,838SUPPLEMENTAL
      DISCLOSURECash
      paid for Interest, net of capitalized interest
                      
                      $
                      1,361,124
                      
                      
                      $
                      1,827,539Cash
      paid for Income taxes
                      
                      $
                      1,672,926
                      
                      
                      $
                      -Non-cash
      construction in progress transferring into plant and
    equipment
                      
                      $
                      575,344
                      
                      
                      $
                      -
 
 The
accompanying notes are an integral part of this statement.
  5




SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER
31, 2010
 (UNAUDITED)
 
 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 direct and indirect 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 manufacturing operations are in the
People's Republic of China, the "PRC,” and the Company sells its products both
in China and overseas.
 
 Note
2 - Summary of significant accounting policies
 
 The reporting
entity
 
 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.” The Company recorded all normal recurring
adjustments considered necessary to give a fair presentation of operating
results for the periods presented. Interim results are not necessarily
indicative of results for a full year. The information included in this Form
10-Q should be read in conjunction with information included in the 2010 annual
report filed on Form 10-K. The results of the three-month period ended December
31, 2010 are not necessarily indicative of the results to be expected for the
full fiscal year ending June 30, 2011.
 
 Basis of
presentation
 
 The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
All material inter-company transactions and balances have been eliminated in the
consolidation.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made in the preparation
of the Company's consolidated financial statements relate to the assessment of
the fair value of stock based compensation, and the collectability of accounts
receivable. Actual results could be materially different from these estimates
upon which the carrying values were based.
 
 Foreign currency
translation
 
 The
reporting currency of the Company is the US dollar. The Company uses the Chinese
Renminbi, "RMB,” as its functional currency. In accordance with Statement of
Financial Accounting Standards "SFAS" 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.
  6
 
 Assets
and liabilities were translated at 6.59 RMB and 6.81 RMB to $1.00 at December
31, 2010 and June 30, 2010, respectively. The equity accounts were stated at
their historical rate. The average translation rates applied to income statement
for the six months ended December 31, 2010 and 2009 were 6.70 RMB and 6.82
RMB to $1.00. 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.
 
 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. The Company
allows its customers to return products only if its products 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. Shipping and handling costs related to
costs of good sold amounted to $1,314,754 and $1,123,730 for the three months
ended December 31, 2010 and 2009, respectively. Shipping and handling costs
amounted to $2,272,840 and $2,273,694 for the six months ended December 31, 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).
  7
 
 Stock-based
compensation
 
 The
Company records stock-based compensation expense pursuant to ASC 718 (Originally
issued 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. 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 pricing model
may not provide an accurate measure of the fair value of the Company’s employee
stock options. Although the fair value of employee stock options is determined
in accordance with SFAS 123R using an option pricing model, that value may not
be indicative of the fair value observed in a willing buyer/willing seller
market transaction.
 
 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 (Originally issued 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
(Originally issued SFAS No. 128 (“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:
 
 Threemonthsended
                    December31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Net
      income for earnings per share
                  
                  $
                  2,696,468
                  
                  
                  $
                  1,052,226Weighted
      average shares used in basic computation
                  
                  
                  9,584,912
                  
                  
                  
                  9,584,903Diluted
      effect of warrants
                  
                  
                  224,764
                  
                  
                  
                  -Weighted
      average shares used in diluted computation
                  
                  
                  9,809,676
                  
                  
                  
                  9,584,903Earnings
      per shareBasic
                  
                  $
                  0.28
                  
                  
                  $
                  0.11Diluted
                  
                  $
                  0.27
                  
                  
                  $
                  0.11
  8
 
 Sixmonthsended
                    December31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Net
      income for earnings per share
                  
                  $
                  4,339,552
                  
                  
                  $
                  1,836,059Weighted
      average shares used in basic computation
                  
                  
                  9,584,912
                  
                  
                  
                  9,584,903Diluted
      effect of warrants
                  
                  
                  147,177
                  
                  
                  
                  -Weighted
      average shares used in diluted computation
                  
                  
                  9,732,089
                  
                  
                  
                  9,584,903Earnings
      per shareBasic
                  
                  $
                  0.45
                  
                  
                  $
                  0.19Diluted
                  
                  $
                  0.45
                  
                  
                  $
                  0.19
 
 For the
three and six months ended December 31, 2009, no warrants or stock options were
included in the calculation of diluted earnings per share because there are no
diluted effects for the three and six months ended December 31,
2010.
 
 For the
three and six months ended December 31, 2010, 4,398,945 shares of warrants were
included in the calculation of diluted earnings per share. No stock options were
included in the calculation of diluted earnings per share because there are no
diluted effects for the three and six months ended December 31,
2010.
 
 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. As of December 31, 2010 and
June 30, 2010, these amounts totaled $3,640,800 and $16,556,904, respectively. A
large amount of cash was released from the Restricted cash account after bank
notes matured.
 
 In
accordance with the Escrow Agreement and the Share Purchase Agreement signed by
Shengtai Holding Inc., West Coast Car Company, Chinamerica Fund LP and Tri-State
Title & Escrow, LLC, the "Escrow Agent,” the Company was required to deposit
with the Escrow Agent $5,500,000 immediately on the Closing Date of the Share
Purchase Agreement. This fund can only be disbursed when certain criteria are
met. As of December 31, 2010 and June 30, 2010, the undisbursed amounts were $0
and $206,604, respectively.  On August 25, 2010, after full compliance with
the Escrow Agreement, a total amount of $ 207,216 was released from the Escrow
account under Tri-State Title & Escrow, LLC., and the Escrow account was
closed.
 
 Accounts
receivable
  In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests.  Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material. Certain accounts receivable amounts are
charged off against allowances after designated period of collection efforts.
Subsequent cash recoveries are recognized as income in the period when they
occur. The allowance for doubtful accounts amounted to $2,211,523 and $1,306,268
as of December 31, 2010 and June 30, 2010, respectively.
  9
 
 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 PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. The Company's results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among others.
  Management
believes the credit risk on bank deposits is limited because the counterparties
are banks with high credit-ratings assigned by international credit-rating
agencies, or state-owned banks in China. Cash includes cash on hand and demand
deposits in accounts maintained with state-owned banks within the PRC and the
United States of America. The cash deposits in U.S. financial institutions
exceed the amounts insured by the U.S. government. Balances at financial
institutions or state owned banks within the PRC are not covered by insurance.
Non-performance by these institutions could expose the Company to losses for
amounts in excess of insured balances. At December 31, 2010 and June 30, 2010,
the Company’s bank balances exceeded government insured limits or not covered by
insurance by approximately $10,409,470 and $20,470,585, respectively. The
Company has not experienced, nor does it anticipate, nonperformance by these
institutions.
 
 The
Company’s concentrations of credit risk are primarily in trade accounts
receivable and accounts payable. For the three and six months ended December 31,
2010 and 2009, there were no customers that individually comprised 10% or more
of the Company’s total revenues. For the three and six months ended December 31,
2010 and 2009, there were no vendors that individually accounted for over 10% or
more of the Company’s total purchases.
 
 For
export sales, we frequently require significant down payments or letter of
credit by our 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 three and six months
ended December 31, 2010 and 2009, concerning the Company’s revenues based on
geographic area:
 
 For the
three months ended:
 
 Revenue
                  
                  December 31,
                    2010
                  
                  December31,
                    2009(Unaudited)
                  
                  (Unaudited)China
                  
                  $
                  40,835,070
                  
                  
                  $
                  21,363,310International
                  
                  
                  8,209,786
                  
                  
                  
                  7,145,549Total
                  
                  $
                  49,044,856
                  
                  
                  $
                  28,508,859
  10
  For the six months ended:
 
 Revenue
                  
                  December31,
                    2010
                  
                  December31,
                    2009(Unaudited)
                  
                  (Unaudited)China
                  
                  $
                  69,498,700
                  
                  
                  $
                  41,402,386International
                  
                  
                  14,190,728
                  
                  
                  
                  10,233,530Total
                  
                  $
                  83,689,428
                  
                  
                  $
                  51,635,916
 
 Inventories
 
 Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:
 
 December 31,
                            2010
                          
                          
                          June30,
                            2010(Unaudited)Raw
      materials
                          
                          $
                          10,027,917
                          
                          
                          $
                          2,739,503Work-in-progress
                          
                          
                          4,613,152
                          
                          
                          
                          4,343,957Finished
      goods
                          
                          
                          1,898,194
                          
                          
                          
                          3,988,710Total
                          
                          $
                          16,539,263
                          
                          
                          $
                          11,072,170
 
 The
Company reviews its inventory periodically for possible obsolete goods or to
determine if any reserves are necessary. As of December 31, 2010, the Company
has determined that no reserves are necessary.
 
 Prepayments
 
 Prepayments
represent partial payments or deposits for inventory purchases. These advances
are interest free and unsecured.
  Advance for
construction
 
 Advance
for construction represent advance for construction. As of December 31, 2010 and
June 30, 2010, the advance for construction amounted to $1,349,722 and
$2,334,748. Advance 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.
  11
 
 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
December 31, 2010, the Company expects these assets to be fully
recoverable.
 
 Investment in unconsolidated
affiliate
 
 Equity
method investments are recorded at original cost and adjusted to recognize the
Company’s proportionate share of the investee’s net income or losses 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:
 
 December 31,
                      2010
                    
                    
                    June 30,
                      2010(Unaudited)Land
      use rights:
                    
                    $
                    3,554,723
                    
                    
                    $
                    3,451,619Less:
      accumulated amortization
                    
                    
                    (343,381
                    )
                    
                    
                    (306,261
                    )Land
      use rights, net
                    
                    
                    3,211,342
                    
                    
                    
                    3,145,385Software
                    
                    
                    8,022
                    
                    
                    
                    7,789Less:
      accumulated amortization
                    
                    
                    (2,774
                    )
                    
                    
                    (2,254
                    )Software,
      net
                    
                    
                    5,248
                    
                    
                    
                    5,536Total
      intangible assets, net
                    
                    $
                    3,216,590
                    
                    
                    $
                    3,150,894
 
 Intangible
assets are primarily comprised of land use rights which are pledged as
collateral for bank loans as of December 31, 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 acquired 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 December 31,
2010, 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.
  12
 
 Intangible
assets are reviewed at least annually and more often if circumstances dictate,
to determine whether their carrying value has become impaired. The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of December 31, 2010, the Company
determined that there had been no impairment. Total amortization expense for the
six months ended December 31, 2010 and 2009 amounted to $27,949 and $28,164
respectively. Total amortization expense for the three months ended December 31,
2010 and 2009 amounted to $14,205 and $14,257
respectively.
 
 The
following table consists of the expected amortization expenses for the next five
years:
 
 Years ended December 31,
                  
                  Amount2011
                  
                  $
                  56,0002012
                  
                  
                  56,0002013
                  
                  
                  56,0002014
                  
                  
                  56,0002015
                  
                  
                  56,000Thereafter
                  
                  
                  2,936,590Total
                  
                  $
                  3,216,590
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with ASC 740 (Originally
issued SFAS 109, “Accounting for Income Taxes.”) Under the asset and
liability method as required by ASC 740 (Originally issued SFAS 109),
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under 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 December 31, 2010and June 30, 2010, the Company did not have any
deferred tax assets or liabilities, and as such, no valuation allowances were
recorded at December 31, 2010 and June 30, 2010.
 
 ASC 740
(Originally issued 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.
 
 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 appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
 
 The
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.
  13
 
 Value Added
Tax
 
 Enterprises
or individuals who sell products, engage in repair and maintenance or import and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The standard value added tax rate is 17% of the gross sales price,
however, for the Company’s corn, the VAT rate is 13%. A credit is available
whereby VAT paid on the purchases of semi-finished products, raw materials used
in the production of the Company’s finished products, and payment
of freight expenses can be used to offset the VAT due on sales of the
finished products.
 
 VAT on
sales and VAT on purchases amounted to $6,443,295 and $6,216,854 for the three
months ended December 31, 2010, and  $2,969,214 and $2,954,912 for the
three months ended December 31, 2009, respectively. VAT on sales and VAT on
purchases amounted to $10,955,557 and $10,776,688 for the six months ended
December 31, 2010, and  $6,398,113 and $6,225,475 for the six months
ended December 31, 2009, respectively. Sales and purchases are recorded net
of VAT collected and paid as the Company acts as an agent for the 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.
 
 Recently issued accounting
pronouncements
  In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): Multiple Deliverable Revenue
Arrangements- A
Consensus of the FASB Emerging Issues Task Force.” This update provides
application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be allocated
to one or more units of accounting. This update establishes a selling price
hierarchy for determining the selling price of a deliverable. The selling price
used for each deliverable will be based on vendor-specific objective evidence,
if available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor-specific or third-party
evidence is available. The Company will be required to apply this guidance
prospectively for revenue arrangements entered into or materially modified after
January 1, 2011; however, earlier application is permitted. Management is in the
process of evaluating the impact of adopting this ASC update on the Company’s
financial statements.
 
 In January 2010, the FASB issued
Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements
and Disclosures which amends ASC Topic 820, adding new requirements for
disclosures for Levels 1 and 2, separate disclosures of purchases, sales,
issuances, and settlements relating to Level 3 measurements and
clarification of existing fair value disclosures. ASU 2010-06 is effective for
interim and annual periods beginning after December 15, 2009, except for
the requirement to provide Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal
year beginning after December 15, 2010 (the Company’s fiscal year 2011);
early adoption is permitted. The Company is currently evaluating the impact of
adopting ASU -2010-06 on its financial statements.
 
 In July
2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20,
“Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses” ASU No. 2010-20 amends the guidance with ASC Topic 310,
“Receivables” to facilitate financial statement users’ evaluation of (1) the
nature of credit risk inherent in the entity’s portfolio of financing
receivables; (2) how that risk is analyzed and assessed in arriving at the
allowance for credit losses; and (3) the changes and reasons for those changes
in the allowance for credit losses. The amendments in ASU No. 2010-20 also
require an entity to provide additional disclosures such as a rollforward
schedule of the allowance for credit losses on a portfolio segment basis, credit
quality indicators of financing receivables and the aging of past due financing
receivables. The adoption of ASU No. 2010-20 did not have an impact on the
financial statements and footnotes.
  14
 
 Note 3 - Plant and equipment
 
 Plant and
equipment consist of the following:
 
 December 31,
                    2010
                  
                  
                  June30,
                    2010(Unaudited)Buildings
                  
                  $
                  23,242,508
                  
                  
                  $
                  22,028,136Machinery
      and equipment
                  
                  
                  65,419,377
                  
                  
                  
                  65,019206Automobile
      facilities
                  
                  
                  636,271
                  
                  
                  
                  656,544Electronic
      equipment
                  
                  
                  585,072
                  
                  
                  
                  527,609Construction
      in progress
                  
                  
                  16,023,962
                  
                  
                  
                  10,533,083Total
                  
                  
                  105,907,190
                  
                  
                  
                  98,764,578Accumulated
      depreciation
                  
                  
                  (25,645,654
                  )
                  
                  
                  (23,390,727
                  )Total
                  
                  $
                  80,261,536
                  
                  
                  $
                  75,373,851
 
 Construction-in-progress
represents the costs incurred in connection with the construction of buildings
or new additions to the Company’s plant facilities. No depreciation is provided
for construction-in-progress until such time as the assets are completed and
placed into service. Depreciation expense for the three months ended December
31, 2010 and 2009 amounted to $1,665,369 and $1,912,106, respectively. Interest
costs totaling $422,571 and $65,371 were capitalized into
construction-in-progress for the three months ended December 31, 2010 and 2009,
respectively. Depreciation expense for the six months ended December 31, 2010
and 2009 amounted to $3,560,415 and $3,830,468, respectively. Interest costs
totaling $422,571 and $78,468 were capitalized into
construction-in-progress for the six months ended December 31, 2010 and 2009,
respectively.
 
 Note
4 - Investment in unconsolidated affiliate
 
 On
September 16, 2003, the Company entered into a joint venture partnership with
Weifang City Investment Company and Changle Century Sun Paper Industry Co., Ltd,
and formed Changle Shengshi Redian Co., Ltd (“Changle Shengshi”). Changle
Shengshi was incorporated in Weifang City, Shandong Province, PRC. Changle
Shengshi’s principal activity is to produce and sell electricity and heat. The
Company accounts for this 20% investment under the equity method of
accounting.
  Summarized
unaudited financial information of Changle Shengshi is as follows:
 
 December 31,
                  
                  
                  June 30,2010
                  
                  
                  2010(unaudited)
                  
                  
                  (unaudited)Current
      assets
                  
                  $
                  28,535,090
                  
                  
                  $
                  24,083814Non-current
      assets
                  
                  
                  63,132,192
                  
                  
                  
                  51,248,756Total
      assets
                  
                  
                  91,667,282
                  
                  
                  
                  75,332,569Current
      liabilities
                  
                  
                  58,048,450
                  
                  
                  
                  43,098,908Non-current
      liabilities
                  
                  
                  596,350
                  
                  
                  
                  1,164,071Shareholders'
      equity
                  
                  
                  33,022,482
                  
                  
                  
                  31,069,590Total
      liabilities and shareholders' equity
                  
                  $
                  91,667,282
                  
                  
                  $
                  75,332,569
  15
 
 Summarized
financial information of Changle Shengshi for the six months ended December 31,
2010 and 2009 is as follows:
 
 December31,2010
                  
                  
                  2009(unaudited)
                  
                  
                  (unaudited)Net
      sales
                  
                  $
                  33,949,108
                  
                  
                  $
                  24,602,890Gross
      profit
                  
                  $
                  4,074,735
                  
                  
                  $
                  4,435,025Income
      before taxes
                  
                  $
                  1,948,723
                  
                  
                  $
                  3,295,270Net
      income
                  
                  $
                  1,461,542
                  
                  
                  $
                  2,464,121Percentage
      of ownership
                  
                  
                  20
                  %
                  
                  
                  20
                  %Company
      share of income
                  
                  $
                  292,308
                  
                  
                  $
                  492,824Elimination
      of intercompany profit
                  
                  $
                  61,176
                  
                  
                  $
                  (145,715Company’s
      share of net income
                  
                  $
                  231,133
                  
                  
                  $
                  347,109
 
 Note
5 - Related party transactions
 
 The
Company’s utilities are mostly provided by Changle Shengshi (See Note 4). As of
December 31, 2010 and June 30, 2010, the Company’s accounts payable due to
Changle Shengshi was approximately $1,061,947 and $252,017, respectively, which
related to a portion of the Company’s utilities being provided by Changle
Shengshi. The utilities expense amounted to approximately $3,518,879 and
$2,664,024 for the three months ended December 31, 2010 and 2009, respectively.
The utilities expense amounted to approximately $7,170,278 and $7,242,471 for
the six months ended December 31, 2010 and 2009, respectively.
 
 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. The Company’s short
term bank loans consisted of the following:
  16
 
 December 31,
                        2010
                      
                      
                      June 30,
                        2010(Unaudited)Loans
      from Bank of China, due various dates from February 2010 to June 2011;
      monthly interest only payments; interest rates are 5.5755% per annum,
      guaranteed by an unrelated party and secured by certain properties.
                      
                      $
                      15,170,000
                      
                      
                      $
                      14,730,000Loans
      from Industrial and Commercial Bank of China, due various dates from
      February 2010 to June 2011; monthly interest only payments; interest rate
      ranging from 5.31% to 6.372% per annum, guaranteed by an unrelated third
      party and secured by certain properties.
                      
                      
                      11,013,420
                      
                      
                      
                      9,662,880Loan
      from Agriculture Bank of China, due from June 2010 to December 2011;
      monthly interest only payments; interest rates ranging from 5.841% to
      6.116% per annum, guaranteed by an unrelated third party,
      unsecured
                      
                      
                      7,585,000
                      
                      
                      
                      8,838,000Loan
      from China Merchants Bank, due from October 2010 to October 2011, monthly
      interest only payments; interest rate of 5.56% per annum, secured by
      certain properties.
                      
                      
                      3,034,000
                      
                      
                      
                      -Loan
      from Qingdao Bank, due from December  2010to December 2011,
      monthly interest only payments; interest ratesare 6.116% per annum,
      guaranteed by an unrelated third party, unsecured
                      
                      
                      3,034,000
                      
                      
                      
                      2,946,000Loan
      from Minsheng Bank, due from September 2010 to September 2011; monthly
      interest only payments; interest rate of 5.841% per annum, guaranteed by
      an unrelated third party, unsecured.
                      
                      
                      1,517,000
                      
                      
                      
                      -Loan
      from Zhongxin Bank, due March 2011, monthly interest only payments;
      interest rates ranging from 5.61% to 6.116% per annum, guaranteed by an
      unrelated third party, unsecured
                      
                      
                      3,034,000
                      
                      
                      
                      3,240,600Loan
      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
                      
                      
                      3,337,400
                      
                      
                      
                      3,240,600Loan
      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
                      
                      
                      -
                      
                      
                      
                      736,500Total
                      
                      $
                      47,724,820
                      
                      
                      $
                      40,153,980
 
 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. The Company’s notes
payables consisted of the following:
 
 December 31,
                      2010
                    
                    
                    June 30,
                      2010(Unaudited)Weifang
      Bank, due from October 2010 to June 2011, 0.05% transaction fee,
      restricted cash required 50% of loan amount, guaranteed by an unrelated
      third party.
                    
                    $
                    6,068,000
                    
                    
                    $
                    -Bank
      of China, due on various dates from November 2009 to April 2010, 0.05%
      transaction fee, and restricted cash required 50% to 100% of loan amount,
      guaranteed by an unrelated third party.
                    
                    
                    -
                    
                    
                    
                    8,383,000Industrial
      and Commercial Bank of China, due on various dates from August to October
      2009, 0.05% transaction fee, restricted cash required 50% of loan amount,
      guaranteed by an unrelated third party.
                    
                    
                    -
                    
                    
                    
                    1,767,600Industrial
      and Commercial Bank of China, due from September 2010 to March 2011, 0.05%
      transaction fee, restricted cash required 50% of loan amount, guaranteed
      by an unrelated third party.
                    
                    
                    1,213,600
                    
                    
                    
                    1,178,400Bank
      of Qingdao, due in July 2010, 0.05% transaction fee, and restricted cash
      required 100% of loan amount, guaranteed by an unrelated third
      party.
                    
                    
                    -
                    
                    
                    
                    2,946,000Loan
      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.
                    
                    
                    -
                    
                    
                    
                    3,039,300Total
                    
                    $
                    7,281,600
                    
                    
                    $
                    17,823,300
  17
 
 Employee
loans
 
 From time
to time, the Company borrows monies from certain employees for cash flow
purposes. 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 $385,339 and $396,404 as of December
31, 2010 and June 30, 2010, respectively. Interest expense related to these
loans amounted to $0 and $18,700 for the six months ended December 31, 2010, and
2009, respectively. Interest expense related this loan was de minimis for the
three and six months ended December 31, 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 loan does 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 $531,116 and $515,856 as of December 31, 2010 and June 30,
2010, respectively. Interest expense related this loan was de minimis for the
three and six months ended December 31, 2010, and
2009, respectively.
 
 Third party
loan
 
 From time
to time, the Company borrows money from unrelated third parties for use in
operations. The loan does not require collateral, interest free, and the
principal is due upon demand. Balances as of December 31, 2010 and June 30, 2010
were $341,325 and $0, respectively. Interest expense related this loan was
de minimis for the three and six months ended December 31, 2010, and 2009,
respectively.
 
 Interest
 
 Total
interest expense and financial charges, net of capitalized interest, for the
three months ended December 31, 2010 and 2009 on all debt, amounted to $427,576
and $913,532, respectively. Interest capitalized into construction-in-progress
totaled $422,571,and $0 for the three months ended December 31, 2010 and 2009,
respectively. Total interest expense and financial charges, net of
capitalized interest, for the six months ended December 31, 2010 and 2009 on all
debt, amounted to $1,550,692 and $1,642,318, respectively. Interest capitalized
into construction-in-progress totaled $422,571 and $13,097 for the six months
ended December 31, 2010 and 2009, respectively.
  18
 
 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 with a special income tax rate of 24%. With the approval of the local
government, the Company is subject to income taxes at a reduced rate of 12% from
September 2006 to August 2009, after the two-year 24% exemption for income taxes
until its exemption and reduction periods expire in August
2009.
 
 Beginning
on January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the
existing laws for Domestic Enterprises (“DES”) and Foreign Investment
Enterprises.
 
 The key
changes are:
 
 a.
              The
      new standard EIT rate of 25% will replace the 33% rate currently
      applicable to both DES and FIEs, except for High Tech companies who pays a
      reduced rate of 15%;
 
 b.
              Companies
      established before March 16, 2007 will continue to enjoy tax holiday
      treatment approved by 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 was subject to a 25% income tax rate pursuant to the new
income tax laws. During the six months ended December 31, 2010 and 2009, the
provision for income taxes was $1,524,397 and $562,862, respectively. During the
three months ended December 31, 2010 and 2009, the provision for income taxes
was $846,940 and $474,964, respectively.
 
 The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended December 31:
 
 2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Unaudited)U.S.
      Statutory rates
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %Foreign
      income not recognized in USA
                        
                        
                        (34.0
                        )
                        
                        
                        (34.0
                        )China
      income taxes
                        
                        
                        25.0
                        
                        
                        
                        25.0China
      income exemption (a)
                        
                        
                        -
                        
                        
                        
                        (7.0
                        )Other
      items (b)
                        
                        
                        1.0
                        
                        
                        
                        5.0Total
      provision for income taxes
                        
                        
                        26.0
                        %
                        
                        
                        23.0
                        %
  19
  (a)
              The
      7% represents the special tax credits from the local government due to
      government enforced regulation that expired in September
    2009.
 (b)
              Other
      item is for operating expenses incurred by Shengtai that are not
      deductible in the PRC and expenses incurred by other subsidiaries that are
      not deductible on the consolidated level, which resulted in change in
      effective tax rate of (1% and 5% for the six months ended December 31,
      2010 and 2009, respectively.)
  The
estimated tax savings for the three months ended December 31, 2010 and 2009
amounted to $0  and $0, respectively. The net effect on basic
earnings per share if the income tax had been applied would decrease basic
earnings per share for the three months ended December 31, 2010 and 2009 by
$0.00 and $0.00, respectively. The net effect on diluted earnings per share if
the income tax had been applied would decrease diluted earnings per share for
the three months ended December 31, 2010 and 2009 by $0.00 and $0.00,
respectively. The estimated tax savings for the six months ended December 31,
2010 and 2009 amounted to $0 and $239,803, respectively. The net effect on basic
earnings per share if the income tax had been applied would decrease basic
earnings per share for the six months ended December 31, 2010 and 2009 by $0.00
and $0.01, respectively. The net effect on diluted earnings per share if the
income tax had been applied would decrease diluted earnings per share for the
six months ended December 31, 2010 and 2009 by $0.00 and $0.01,
respectively.
 
 Shengtai
Pharmaceutical, Inc. and Shengtai Holding, Inc. were incorporated in the United
States and have incurred estimated net operating loss for income tax purposes
for 2011..The estimated net operating loss carry forwards for United States
income taxes amounted to $2,475,103 which may be available to reduce future
years’ taxable income. These carry forwards will expire, if not utilized, from
2027 through 2030.  Management believes that the realization of the
benefits from these losses appears uncertain due to the Company’s limited
operating history and continuing losses for United States income tax
purposes.  Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax benefit to reduce the asset to zero. The
valuation allowance at December 31, 2010 amounted to $841,535.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $35,588,675 as of December 31, 2010, is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if the Company concluded that such earnings will be remitted in the
future.
 
 Taxes
payable
 
 Taxes
payable consisted of the following:
 
 December 31,
                          2010
                        
                        
                        June 30,
                          2010(Unaudited)VAT
      payable
                        
                        $
                        322,818
                        
                        
                        $
                        1,622,859Individual
      income tax withheld
                        
                        
                        18,072
                        
                        
                        
                        423Income
      tax payable
                        
                        
                        286,578
                        
                        
                        
                        387,299Housing
      property tax payable
                        
                        
                        17,399
                        
                        
                        
                        10,098Others
                        
                        
                        55,305
                        
                        
                        
                        46,199Total
      taxes payable
                        
                        $
                        700,172
                        
                        
                        $
                        2,066,878
  20
 
 Note
8 - Commitments and Contingent liabilities
 
 Guarantees
 
 As of
December 31, 2010, the Company has guaranteed $4.5 million short term loans for
an unrelated party, Yuanli Chemical Engineering Inc. (“Yuanli”).
 
 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 are about $4.8 million for Yuanli,
including accrued interests. The Company did not record a liability for the
guarantee because management knows Yuanli is current in its payment obligations,
and the likelihood of the Company having to make good on the guarantee is
remote.
 
 Detail of
guarantee amount to the unrelated party as of December 31, 2010 is as
follows:
 
 Short
      TermCompany
                  
                  Bank LoansYuanli
      Chemical Engineering Inc.
                  
                  $
                  4,551,000Total
                  
                  $
                  4,551,000
  Litigation
 
 In the
Company’s ordinary course of business, the Company may be subject to certain
legal proceedings. After review and consultation with the Company’s legal
counsel, management believes that the outcome of the legal matters will not have
a materially adverse effect on the consolidated results of operations or
consolidated financial position of the Company.
  Note
9 - Shareholders’ equity
 
 On
November 9, 2010, the Company effected a 1-for-2 reverse stock split of its
issued and outstanding shares of Common Stock; reducing the number of its
authorized shares of Common Stock and Preferred Stock by the same reverse stock
split ratio.  The reverse stock split and the reduction of the number of
authorized shares of Common Stock and Preferred Stock were authorized by the
stockholders of the Company at its annual general meeting of stockholders held
on October 26, 2010.  As of November 12, 2010, the outstanding and issued
shares were approximately 9,584,903 shares (prior to the reverse stock split the
number outstanding was 19,169,805), before rounding up fractional shares. 
The authorized number of shares of Common Stock was reduced from 100,000,000 to
50,000,000, and the authorized number of shares of Preferred Stock was reduced
from 5,000,000 to 2,500,000.  These financial statements have been adjusted
retroactively to reflect the reverse stock split.
 
 Warrants
 
 On May
15, 2007, in connection with the Share Purchase Agreement, the 4,375,000
warrants (“Investor Warrants”) carry an exercise price of $2.60 and a 5-year
term. The Investor Warrants are callable if the Company’s shares trade at or
above $8.00 per share for 20 consecutive trading days and underlying shares are
registered for resale. The Investor Warrants contain standard adjustment
provisions upon stock dividend, stock split, stock combination,
recapitalization, and a change of control transaction. During the year ended
June 30, 2008, a total of 194,805 warrants were exercised from three
shareholders.
  21
 
 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 for 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.
 
 All
Investor Warrants, Placement Agent Warrants, and Lead Investor Warrants meet the
conditions for equity classification pursuant to ASC 815 (Originally
issued SFAS No. 133 “Accounting for Derivatives”) and ASC 815
(Originally issued 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
                      
                      
                      AverageRemaining
                        Contractual
                        LifeOutstanding,
      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
                      
                      
                      
                      2.22Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding,
      December 31, 2010 (unaudited)
                      
                      
                      4,398,945
                      
                      
                      
                      4, 398,945
                      
                      
                      $
                      2.60
                      
                      
                      
                      1.72
 
 Stock options
 
 On
January 4, 2008, the Company adopted “Shengtai Pharmaceutical, Inc. 2007 Stock
Incentive Plan” (the “Stock Incentive Plan”). The Company believes that such
awards better align the interests of its 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 is the closing price on the date of grant, and expire five
years after the date of grant. All options vest over a period of three years on
a quarterly basis from the date of grant.
  22
 
 The
Company uses the Black-Scholes option pricing model which was developed for use
in estimating the fair value of options. Option pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a
period equal to or greater than the expected life of the options. Because
changes in the subjective assumptions can materially affect the estimated value
of the Company’s employee stock options, it is management’s opinion that the
Black-Scholes option valuation model may not provide an accurate measure of
the fair value of the Company’s employee stock options. Although the fair value
of employee stock options is determined in accordance with SFAS 123R using an
option pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
  The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option pricing model are as follows:
 
 Weighted
      average risk-free interest rate
                  
                  
                  3.22
                  %Expected
      term
                  
                  4yearsExpected
      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 (Originally issued 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.
  In the
Chief Financial Officer 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 1st, 2010 and
terminating 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 15th, 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
 
 The
Company terminated the Chief Financial Officer Employment Agreement between the
Company and Mr. Hu Ye in December 2010, and the 300,000 options granted were
forfeited.
  23
 
 The stock
option activity was as follows:
 
 Options
                    outstanding
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding,
      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
                  
                  
                  $
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (335,000
                  )
                  
                  
                  2.60
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding, December 31,
      2010
                  
                  
                  350,000
                  
                  
                  $
                  3.34
                  
                  
                  $
                  -
 
 Following
is a summary of the status of options outstanding at December 31, 2010:
  Average
                            Exercise 
      Price
                          
                          Outstanding
                            Options
                          
                          
                          Average
                            Remaining
                            Contractual 
      Life
                          
                          
                          Average
                            Exercise 
      Price
                          
                          
                          Exercisable
                            Options$
                          3.34
                          
                          
                          350,000
                          
                          
                          
                          2.37
                          
                          
                          $
                          3.34
                          
                          
                          
                          350,000
 
 For the
three and six months ended December 31, 2010, $83,304 and $183,480 were expensed
and recorded as compensation expense in the Company’s income statements,
respectively. For the three and six months ended December 31, 2009, $158,818 and
$317,636 were expensed as compensation expense in the Company’s income
statements.
 
 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 accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital.
  24
 
 The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the three months ended December 31, 2010 and 2009, the Company
transferred $457,319 and $142,055 to this reserve respectively. For the six
months ended December 31, 2010 and 2009, the Company transferred $457,319 and
$264,780 to this reserve respectively. 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 of December
31, 2010 the Company had appropriated to the statutory reserve approximately
$3,672,000. The Company plans to contribute $3,828,000 in the
future.
 
 Enterprise
fund
 
 The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required and the Company has not made any contribution to this
fund.
 
 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
lease matured in July 2010, and the total payments of principal and interest are
$8,285,895.
 
 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 six months ended December 31, 2010 and 2009, the Company made
contributions in the amounts of $169,006 and $178,442, respectively to the
Company’s retirement plan. For the three months ended December 31, 2010 and
2009, the Company made contributions in the amounts of $30,343 and $90,826,
respectively to the Company’s retirement plan.
 
 Note
13 - Subsequent event
 
 In
January 2011, the Company obtained a short term loan of $1,517,000 from
Industrial and Commercial Bank of China, due November 2011; monthly interest
only payments; interest rates are 5.81% per annum, guaranteed by an unrelated
third party, unsecured.
 
 In
January 2011, the Company obtained a short term loan of $1,517,000 from Bank of
China, due January 2012; monthly interest only payments; interest rates are
5.81% per annum, guaranteed by an unrelated third party, unsecured.
 
 In
January 2011, the Company has returned $1,517,000 short term loan from
Industrial and Commercial Bank of China and $1,517,000 short term loan from Bank
of China.




25




Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.





Forward-Looking
Statements





The
following is a discussion and analysis of the financial condition and results of
operations of Shengtai Pharmaceutical, Inc., the ("Company”) and should be read
in conjunction with the Company’s financial statements and related notes
contained in this Form 10-Q. This Form 10-Q contains forward looking statements
that involve risks and uncertainties. You can identify these statements by the
use of forward-looking words such as "may,” "will,” "expect,” "anticipate,”
"estimate,” "believe,” "continue,” or other similar words. You should read
statements that contain these words carefully because they discuss the Company’s
future expectations, contain projections of the Company’s future results of
operation or financial condition or state other “forward-looking" information.
The Company believes that it is important to communicate its future expectations
to its investors. However, there may be events in the future that the Company is
unable to accurately predict or control. Those events as well as any cautionary
language in this Form 10-Q provide examples of risks, uncertainties and events
that may cause the Company’s actual results to differ materially from the
expectations the Company describes in its forward-looking statements. You should
be aware that the occurrence of the events described in this Form 10-Q could
have a material adverse effect on the Company’s business, operating results and
financial condition. Actual results may differ materially from current
expectations.


Overview





We are,
through our wholly owned subsidiary, Shengtai Holding Inc., and its wholly owned
subsidiary in the People's Republic of China, the ("PRC”), Weifang Shengtai
Pharmaceutical Co., Ltd., a leading manufacturer and supplier of pharmaceutical
grade glucose in the PRC. We believe that we are a market leader and preferred
domestic supplier of pharmaceutical grade glucose, with about 40% market share
in Mainland China. We also manufacture glucose, cornstarch and other products
for the food and beverage industry.





Our
cornstarch production facility used to have a maximum capacity of 300,000 metric
tons. As of January 12, 2011, we completed an expansion of our cornstarch
production facility and have now increased our production capacity to 400,000
metric tons.  The new production line is used to manufacture
non-pharmaceutical grade cornstarch products. This facility is located next to
our glucose production plants.  We believe the new cornstarch facility will
help us to meet the increasing demand for our cornstarch products and their
byproducts. By using the cornstarch manufactured from our own cornstarch
production facility, we can ensure our glucose products’ quality and
consistency. Also, because our cornstarch manufacturing facility is located next
to our glucose manufacturing facilities, we are able to eliminate shipping costs
and lower glucose products’ manufacturing costs.





We have
been improving dextrose anhydrous and animal feeds production lines and building
an additional warehouse to store purchased corn.  The warehouse has been
completed and can be used to store an additional 22,000 tons of corn. Because
corn prices have been increasing since 2009, the expansion of the warehouse
capacity will allow us to store more corn and better control the cost of
production.





During
the six months ended December 31, 2010, we produced a total of 150,936 metric
tons of cornstarch, of which 73,734 metric tons were used to satisfy our own
glucose production needs. The excess cornstarch was or will be sold to outside
customers in the pharmaceutical, food and beverage and other industries.
Cornstarch sales amounted to $28.17 million and accounted for 33.66% of our
total net sales for the six months ended December 31, 2010.





Our
business may be severely affected by movements in the commodity markets. Corn is
the principal raw material for our cornstarch and the price of cornstarch as a
commodity tends to follow the price of corn. Corn prices have fluctuated over
10% each year in the last 4 years. Beginning September 2008, corn prices began
decreasing due to large corn harvests.  In contrast, by July 2009, corn
prices began to increase. This trend continued into 2010. Corn prices for the
twelve months ended December 31, 2010 were approximately 18.30% higher than the
same period in 2009. Corn prices for the three months ended December 31, 2010
were approximately 12.96% higher than for the same period in 2009. Corn prices
for the six months ended December 31, 2010 were approximately 12.13% higher than
for the same period in 2009. While it is hard to accurately predict the trend of
corn prices, we remain focused on improving our pricing ability and maintaining
a stable profit. In the quarter ended December 31, 2010, we completed a new
storage facility for corn, and are currently building more corn storage
facilities to further improve our ability to store raw material and reduce the
impact of fluctuating corn prices.





Recently
the Chinese government has placed its own corn reserve into the market to help
maintain corn prices. We believe that these government policies have had and
will continue to have mixed effects on our operations. Stable corn prices will
help maintain the availability of raw materials and tend to stabilize our gross
profit margin over time, although market and economic conditions may continue to
have negative effects on our operations.





During
the six months ended December 31, 2010, we sold a total of 72,323.07
metric tons of glucose, and our sales of pharmaceutical grade glucose and other
glucose products was $34.84 million, or 41.63%, of our net sales. During the
three months ended December 31, 2010, we sold a total of 40,811 metric tons
of glucose, and our sales of pharmaceutical grade glucose and other glucose
products was $20.52 million, or 41.29%, of our net sales.





In
addition to our pharmaceutical glucose and cornstarch products, we also produce
other products such as dextrin, corn embryo, fibers, corn meals, and phytin,
which are used in the pharmaceutical industry, for food and beverages, and for
other production purposes. The net sales generated from these products was
$20.68 million, and constituted approximately 24.71% of our total net sales for
the six months ended December 31, 2010.





Management
believes that better living standards in China should lead to higher consumption
of our pharmaceutical glucose products in the PRC, especially the Dextrose
Monohydrate Transfusion Solution. In January 2009, the Chinese government
announced its medical stimulus plan to spend a total of 850 billion RMB, or
approximately $123 billion, by 2011 to provide universal primary medical
services. This plan, together with the continuing economic growth in China, the
rising purchasing power of China's domestic market, as well as the public
awareness of quality healthcare products, has increased demand for glucose,
which is a basic and relatively low-cost element of healthcare in clinics and
hospitals.   We expect continued increase of demand of our glucose
products.





We
believe that production capacity and product quality are key factors in
maintaining and improving our competitive position and enhancing our long-term
competitiveness. As a result, we emphasize (i) product quality control, (ii)
enhancement of operating efficiency and employee competence, (iii) expansion of
geographical coverage and diversification of customer base and (iv) expansion of
our production capacity utilization.


26


We have a
three-tier quality control system and a well-equipped quality inspection center
to ensure timely detection and reprocessing of non-conforming
products.





Our
glucose production facility passed GMP inspection and our facilities and many of
our products are fully certified for GMP, IS09001:2000 and HACCP international
quality standards and globally certified Halal, Kosher and NON-GMO
IP.





Our sales
network presently covers almost all provinces of Mainland China except the Tibet
Autonomous Region.





For the
six months ended December 31, 2010, we exported products to around 67 countries,
with Korea, Indonesia, Thailand, Bangladesh and Pakistan as leading purchasers.
For the six months ended December 31, 2010, our international sales comprised
approximately 16.96% of our total net sales. During the same period in 2009, our
international sales comprised approximately 19.82% of our total net sales. For
the three months ended December 31, 2010, our international sales comprised
approximately 16.74% of our total net sales.  During the same period in
2009, our international sales comprised approximately 25.06% of our total net
sales





Our
target customers are drug makers, medical supply companies, medical supply
exporters and food and beverage companies. We
constantly strive to broaden and diversify our customer base. We believe that a
broader customer base will mitigate our reliance on certain major customers. We
believe that a broader market for our products can increase demand for our
products, reduce our vulnerability to market changes and provide additional
areas of growth in the future. For the six months ended December 31, 2010, our
top ten customers accounted for 37.66% of our total net sales. For the three
months ended December 31, 2010, our top ten customers accounted for 35.86% of
our total net sales





Results
of Operations





Three
Months Ended December 31, 2010 Compared with Three Months Ended December 31,
2009





The
following table shows our operating results for the three months ended December
31, 2010 and 2009:





Three months
                      ended
                      December 31,
                      2010
                    
                    
                    Three months
                      ended
                      December 31,
                      2009Net
      Sales
                    
                    $
                    49,044,856
                    
                    
                    $
                    28,508,859Cost
      of Sales
                    
                    
                    43,145,306
                    
                    
                    
                    24,039,512Gross
      Profit
                    
                    
                    5,899,550
                    
                    
                    
                    4,469,347Selling,
      General and Administrative Expenses
                    
                    
                    2,103,390
                    
                    
                    
                    2,195,676Income
      From Operations
                    
                    
                    3,796,160
                    
                    
                    
                    2,273,671Other
      Expense, Net
                    
                    
                    (252,751
                    )
                    
                    
                    (746,481)Income
      Before Provision For Income Taxes
                    
                    
                    3,543,409
                    
                    
                    
                    1,527,190Provision
      For Income Taxes
                    
                    
                    846,940
                    
                    
                    
                    474,964Net
      Income
                    
                    $
                    2,696,468
                    
                    
                    $
                    1,052,226





The
following table shows the breakdown of production and sales by product
categories, and between self-use by Weifang Shengtai and the sales of
cornstarch, for the three months ended December 31, 2010 and 2009:





Products
                                                        
                                                        Metric Tons Three
                                                          months ended
                                                          December 31, 2010
                                                        
                                                        
                                                        Metric Tons
                                                          Three months ended
                                                          December 31, 2009
                                                        
                                                        
                                                        Net Sales (%)
                                                          Three months
                                                          ended
                                                          December 31,
                                                          2010
                                                        
                                                        
                                                        Net Sales (%)
                                                          Three months
                                                          ended
                                                          December 31,
                                                          200920,252,164
                                                        
                                                        
                                                        $
                                                        13,893,774Glucose–Sales
                                                        
                                                        
                                                        40,811
                                                        
                                                        
                                                        
                                                        34,212
                                                        
                                                        
                                                        $
                                                        (41.29
                                                        )%
                                                        
                                                        $
                                                        (48.73
                                                        )%Cornstarch-Self
      use
                                                        
                                                        
                                                        35,854(45.01
                                                        )%
                                                        
                                                        
                                                        35,380(61.78
                                                        )%16,205,781
                                                        
                                                        
                                                        
                                                        6,999,359Cornstarch-Sales
                                                        
                                                        
                                                        43,809(54.99
                                                        )%
                                                        
                                                        
                                                        21,887(38.22
                                                        )%
                                                        
                                                        $
                                                        (33.04
                                                        )%
                                                        
                                                        $
                                                        (24.56
                                                        )%Total
      Cornstarch
                                                        
                                                        
                                                        79,663(100
                                                        )%
                                                        
                                                        
                                                        57,267(100
                                                        )%12,586,911
                                                        
                                                        
                                                        
                                                        7,615,726Other
      Sales
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        (25.67
                                                        )%
                                                        
                                                        $
                                                        (26.71
                                                        )%49,044,856
                                                        
                                                        
                                                        
                                                        28,508,859Total
      Sales
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        (100
                                                        )%
                                                        
                                                        $
                                                        (100
                                                        )%


27


Net sales
for the three months ended December 31, 2010 were $49,044,856, an increase of
$20,535,997, or 72.03%, compared with the same period in 2009. The increase in
net sales primarily resulted from increased demand of our products in all
product lines and increased unit selling prices of our glucose and cornstarch
products. For the three months ended December 31, 2010 compared to the same
period last year, the quantity of our glucose products sold increased about
21.44%, while the average unit selling price of our glucose products increased
about 19.42%. For the three months ended December 31, 2010 compared to the same
period last year, the quantity of our cornstarch products sold increased about
100%, while the average unit selling price of our cornstarch products increased
about 13%.  Particular mention must be made for our Slurry sales which
increased approximately $5,361,000 or 660% for the three months ended December
31, 2010 compared to the same period last year. The increase is due to higher
production of byproducts and higher demand.  Slurry is a byproduct produced
in the process of cornstarch production that when dried, becomes
cornstarch.  For the three months ended December 31, 2010 compared to the
same period last year, the quantity of our other products sold increased about
63%, while the average unit selling price of our other products maintained the
same. The increase in domestic sales is due to the improved economic environment
compared with the same period last year, increased demand for glucose products
due to the execution of the government stimulus plan, as well as our efforts to
develop new clients.  International sales have also increased by
14.89%.





Net sales
from exports for the three months ended December 31, 2010 increased
approximately14.89% compared with the same period in 2009. The increase is
mainly attributable to the recovery of the global economy resulting in an
increase in the international demand for our glucose products compared to the
same period last year.





Cost of
sales for the three months ended December 31, 2010 was $43,145,306, an increase
of $19,105,794, or 79.48%, compared with the same period in 2009. The increase
in cost of sales was in line with the increase in net sales as well as in line
with the increase in the price of corn, our main raw material.





Gross
profit for the three months ended December 31, 2010 was $5,899,550, an increase
of $1,430,203, or 32.00%, compared with the same period in 2009. The increase of
gross profit is mainly in line with the increased sales.





Gross
profit margin for the three months ended December 31, 2010 was 12.03%, a
decrease from 15.68% for the same period in 2009. The reason for the decrease of
gross profit margin is mainly because the price of corn, our main raw material,
increased approximately 12% for the three months ended December 31, 2010
compared to the same period last year where the average selling prices did not
increase much. The decrease is also due to the change of product mix. In the
three months ended December 31, 2010, more low profit products, such as Slurry,
were sold compared to the same period last year when more profitable products,
such as glucose, accounted for a larger percentage of total revenue. We believe
that increased sales of cornstarch and byproducts are bringing more positive
cash flow to the Company. We are also working on improving pricing and profit
control to improve gross profit margin. At the same time, we have built and are
building raw material storage facilities to reduce the impact of fluctuation on
the price of our raw materials.





For the
three months ended December 31, 2010, selling, general and administrative
expenses were $2,103,390, a decrease of $92,286, or 4.20%, compared to
$2,195,676 for the three months ended December 31, 2009.  The selling,
general, and administrative expenses remain stable as selling expenses increased
due to increased sales while general and administrative expenses decreased due
to cost control.





We
incurred $83,304 and $158,818 non-cash stock option expenses for the three
months ended December 31, 2010 and 2009, respectively. The option expenses are
included in selling, general and administrative expenses.





Net
income for the three months ended December 31, 2010 was $2,696,468, an increase
of $1,644,242 compared with $1,052,226 for the same period in 2009. The increase
in net income was primarily attributable to the increased sales.





Six
Months Ended December 31, 2010 Compared with Six Months Ended December 31,
2009





The
following table shows our operating results for the six months ended December
31, 2010 and 2009:





Six months
                      ended
                      December 31,
                      2010
                    
                    
                    Six months
                      ended
                      December 31,
                      2009Net
      Sales
                    
                    $
                    83,689,428
                    
                    
                    $
                    51,635,916Cost
      of Sales
                    
                    
                    71,770,521
                    
                    
                    
                    43,845,213Gross
      Profit
                    
                    
                    11,918,907
                    
                    
                    
                    7,790,704Selling,
      General and Administrative Expenses
                    
                    
                    4,683,194
                    
                    
                    
                    4,280,364Income
      From Operations
                    
                    
                    7,235,713
                    
                    
                    
                    3,510,338Other
      (Expense) Income, Net
                    
                    
                    (1,371,764
                    )
                    
                    
                    (1,111,418)Income
      Before Provision For Income Taxes
                    
                    
                    5,863,949
                    
                    
                    
                    2,398,920Provision
      For Income Taxes
                    
                    
                    1,524,397
                    
                    
                    
                    562,861Net
      Income
                    
                    $
                    4,339,552
                    
                    
                    $
                    1,836,059


28


The
following table shows the breakdown of production and sales by product
categories, and between self-use by Weifang Shengtai and the sales of
cornstarch, for the six months ended December 31, 2010 and 2009:





Products
                                                              
                                                              Metric Tons
                                                                Six months ended
                                                                December 31, 2010
                                                              
                                                              
                                                              Metric Tons
                                                                Six months ended
                                                                December 31,
                                                                2009
                                                              
                                                              
                                                              Net Sales (%)
                                                                Six months
                                                                ended
                                                                December 31,
                                                                2010
                                                              
                                                              
                                                              Net Sales (%)
                                                                Six months
                                                                ended
                                                                December 31,
                                                                2009$
                                                              34,837,156
                                                              
                                                              
                                                              $
                                                              27,401,222Glucose–Sales
                                                              
                                                              
                                                              72,323
                                                              
                                                              
                                                              
                                                              68,392
                                                              
                                                              
                                                              
                                                              (41.63
                                                              )%
                                                              
                                                              
                                                              (53.07
                                                              )%Cornstarch-Self
      use
                                                              
                                                              
                                                              73,734(48.85
                                                              )%
                                                              
                                                              
                                                              64,961(63.71
                                                              )%$
                                                              28,170,845
                                                              
                                                              
                                                              $
                                                              11,620,091Cornstarch-Sales
                                                              
                                                              
                                                              77,202(51.15
                                                              )%
                                                              
                                                              
                                                              37,003(36.29
                                                              )%
                                                              
                                                              
                                                              (33.66
                                                              )%
                                                              
                                                              
                                                              (22.50
                                                              )%Total
      Cornstarch
                                                              
                                                              
                                                              150,936
                                                              
                                                              
                                                              
                                                              101,964$
                                                              20,681,427
                                                              
                                                              
                                                              $
                                                              12,614,603Other
      Sales
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (24.71
                                                              )%
                                                              
                                                              
                                                              (24.43
                                                              )%$
                                                              83,689,428
                                                              
                                                              
                                                              $
                                                              51,635,916Total
      Sales
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              (100
                                                              )%
                                                              
                                                              
                                                              (100
                                                              )%





Net sales
for the six months ended December 31, 2010 were $83,689,428, an increase of
$32,053,512, or 62.08%, compared with the same period in 2009. The increase in
net sales primarily resulted from increased demand of our products in all
product lines and increased unit selling prices of our glucose and cornstarch
products.  For the six months ended December 31, 2010 compared to the same
period last year, the quantity of our glucose products sold increased about
11.44%, while the average unit selling price of our glucose products increased
about 18%. For the six months ended December 31, 2010 compared to the same
period last year, the quantity of our cornstarch products sold increased about
109%, while the average unit selling price of our cornstarch products increased
about 14%.  Especially our Slurry sales increased $7,000,000 or 890% for
the six months ended December 31, 2010 compared to the same period last
year.  The increase is due to higher production of byproducts and higher
demand due to improvment in the global economic environment. For the six months
ended December 31, 2010 compared to the same period last year, the quantity of
our other products sold increased about 67.39%, while the average unit selling
price of our other products maintained the same. The increase in domestic sales
is due to the improved economic environment compared with the same period last
year, increased demand for glucose products due to the government stimulus plan
which invested in healthcare by building more clinics and providing a larger
healthcare coverage, as well as our efforts to develop new clients.





Net sales
from exports for the six months ended December 31, 2010 increased approximately
38.67% compared with the same period in 2009. The increase is mainly
attributable to the recovery of the global economy resulting in an increase in
the international demand for our glucose products compared to the same period
last year.





Cost of
sales for the six months ended December 31, 2010 was $71,770,521, an increase of
$27,925,308, or 63.69%, compared with the same period in 2009. The increase in
cost of sales was in line with the increase in net sales as well as in line with
the increase in price of corn, our main raw material.





Gross
profit for the six months ended December 31, 2010 was $11,918,907, an increase
of $4,128,203, or 52.99%, compared with the same period in 2009. The increase of
gross profit is mainly in line with the increased sales.





Gross
profit margin for the six months ended December 31, 2010 was 14.24%, a decrease
from 15.09% for the same period in 2009. The reason for the decrease of gross
profit margin is mainly because the price of corn, our main raw material,
increased approximately 13% for the three months ended December 31, 2010
compared to the same period last year, while the average selling prices did not
increase as high.





For the
six months ended December 31, 2010, selling, general and administrative expenses
were $4,683,194, an increase of  $402,830, or 9.41%, compared to
$4,280,364 for the six months ended December 31, 2009.  The increase is
mainly due to increased selling expenses such as increased shipping and handling
expenses and commission expenses due to increased sales.


29


We
incurred $183,480 and $317,636 non-cash stock option expenses for the six months
ended December 31, 2010 and 2009, respectively. The option expenses are included
in selling, general and administrative expenses.





Net
income for the six months ended December 31, 2010 was $4,339,552, an increase of
$2,503,493, or 136.35%, compared with $1,836,059 for the same period in 2009.
The increase in net income was primarily attributable to the increased
sales.





Liquidity
and Capital Resources





Operating
Activities





Net cash
provided by operating activities for the six months ended December 31, 2010 was
$5,120,215, a decrease of 41.37%, or $3,613,399 from $8,733,614 provided by
operating activities for the same period in 2009. The decrease of cash provided
by the operating activities is mainly due to increased accounts
receivable.





Investing
Activities





Net cash
used in investing activities for the six months ended December 31, 2010 was
$6,078,966, a decrease of $2,574,698, or 29.75%, from $8,653,664 provided by
investing activities for the same period in 2009. The decrease of cash used in
investing activities is mainly due to less expenditure on plant and equipment
and construction in process.


.


Financing
Activities





Net cash
used for financing activities for the six months ended December 31, 2010 was
$2,872,424, compared with $ 4,012,675 used in financing activities for the same
period in 2009. The decrease of cash used in investing activities is mainly due
to a decrease of restricted cash and more payments of debts.





Loans





Other
than our private placement financing in 2007, we have financed our operations
primarily through bank loans and operating income. We have a total of
$47,724,820 short-term loans outstanding as of December 31, 2010.  The
terms of all these short-term loans are for one year. We have never defaulted on
any of these loans.





We have
$0 of non-current payables as of December 31, 2010 and $3,346,336 as of
June 30, 2010.





Guarantees





We have
guaranteed certain borrowings of other unrelated third parties including
short-term bank loans. The total guaranteed amounts were $4,551,000 as of
December 31, 2010. The total amount of guarantees provided to us by unrelated
third parties is $4,551,000 as of December 31, 2010.





Future
Cash Commitments and Needs





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





Critical
Accounting Policies and Estimates





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





Revenue
recognition





We
recognize 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 our 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 us on raw materials and
other materials included in the cost of producing our finished products and
certain freight expenses. We allow our customers to return products only if our
products are 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
receivable





In the
normal course of business, we extend credit to our customers without requiring
collateral or other security interests. Management reviews our 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. We estimate 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 our estimation process. These impacts may be
material.





Certain
accounts receivable amounts are charged off against allowances after a
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 the Renminbi (or "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.




31


Recently
Issued Accounting Pronouncements


In
February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement
that, for listed companies, financial statements clearly disclose the date
through which subsequent events have been evaluated. Subsequent events must
still be evaluated through the date of financial statement issuance; however,
the disclosure requirement has been removed to avoid conflicts with other SEC
guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted
in February 2010.





In July
2010, the FASB issued Accounting Standards Update 2010-20, which amend
“Receivables” (Topic 310). ASU 2010-20 is intended to provide additional
information to assist financial statement users in assessing an entity’s risk
exposures and evaluating the adequacy of its allowance for credit losses. The
disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures
about activity that occurs during a reporting period are effective for interim
and annual reporting periods beginning on or after December 15, 2010. The
amendments in ASU 2010-20 encourage, but do not require, comparative disclosures
for earlier reporting periods that ended before initial adoption. However, an
entity should provide comparative disclosures for those reporting periods ending
after initial adoption. We do not expect the adoption of ASU 2010-20 to have a
significant impact on our consolidated financial statements.





We have
reviewed the Accounting Standards Updates up through 2010-29.


In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A
Consensus of the FASB Emerging Issues Task Force.” This update provides
application guidance on whether multiple deliverables exist, how the
deliverables should be separated and how the consideration should be allocated
to one or more units of accounting. This update establishes a selling price
hierarchy for determining the selling price of a deliverable. The selling price
used for each deliverable will be based on vendor-specific objective
evidence, if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither
vendor-specific or third-party evidence is available. The Company will be
required to apply this guidance prospectively for revenue arrangements
entered into or materially modified after January 1, 2011; however, earlier
application is permitted. Management is in the process of evaluating the
impact of adopting this ASC update on the Company’s financial
statements.
 
 In
January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU
2010-06), Fair Value Measurements and Disclosures which amends ASC Topic
820, adding new requirements for disclosures for Levels 1 and 2, separate
disclosures of purchases, sales, issuances, and settlements relating to
Level 3 measurements and clarification of existing fair value disclosures. ASU
2010-06 is effective for interim and annual periods beginning after
December 15, 2009, except for the requirement to provide Level 3 activity of
purchases, sales, issuances, and settlements on a gross basis, which will
be effective for fiscal year beginning after December 15, 2010 (the Company’s
fiscal year 2011); early adoption is permitted. The Company is currently
evaluating the impact of adopting ASU -2010-06 on its financial
statements.
 
 In July
2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20,
“Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses” ASU No. 2010-20 amends the guidance with ASC Topic
310, “Receivables” to facilitate financial statement users’ evaluation of
(1) the nature of credit risk inherent in the entity’s portfolio of financing
receivables; (2) how that risk is analyzed and assessed in arriving at the
allowance for credit losses; and (3) the changes and reasons for those changes
in the allowance for credit losses. The amendments in ASU No. 2010-20 also
require an entity to provide additional disclosures such as a rollforward
schedule of the allowance for credit losses on a portfolio segment basis,
credit quality indicators of financing receivables and the aging of past due
financing receivables. The adoption of ASU No. 2010-20 did not have an
impact on the financial statements and footnotes.


Item
3. Quantitative and Qualitative Disclosures about Market Risk.





Not
applicable.





Item
4. Controls and Procedures.





Disclosure
Controls and Procedures





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





Changes
in Internal Control over Financial Reporting





During
the quarter ended December 31, 2010, other than the impacts by the resignations
of our chief financial officer, there has been no material change in internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect our internal control over financial
reporting.





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





PART
II - OTHER INFORMATION





Item
1. Legal Proceedings.





From time
to time, we become involved in various lawsuits and legal proceedings that arise
in the ordinary course of business. While the ultimate outcome of these lawsuits
and legal proceedings cannot be determined at this time, it is the opinion of
management that the resolution of these actions will not have a material adverse
effect on our financial condition, results of operations or cash
flows.





Item
1A. Risk Factors.





Not
Applicable.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.





None.





Item
3.  Defaults upon Senior Securities.





None.


Item
4.  (Removed and Reserved).





Item
5.  Other Information.





Not
Applicable.


32


Item
6.  Exhibits.





Exhibit
      No.
            
            Title
      of Document31.1
            
            Certification
      of the Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certification
      of the Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            
            Certification
      of the Principal Executive Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            
            Certification
      of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


33


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Date:
February 14, 2011





SHENGTAI
      PHARMACEUTICAL, INC.By:
                /s/
      Qingtai
      LiuQingtai
      LiuChief
      Executive Officer(Principal
      Executive Officer)By:
                /s/
      Yongqiang
      WangYongqiang
      WangFinancial
      Controller(Principal
      Financial Officer)


34