UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)




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




For the
quarterly period ended September 30, 2010




or




 ̈
            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 - 86-536-629 - 5802




(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 o
    No x




As of
November 15, 2010, there are 9,584,903 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 September 30, 2010 and June 30,
      2010
              3Consolidated
      Unaudited Statements of Income for the Three Months Ended September
      30, 2010 and 2009
              4Consolidated
      Unaudited Statements of Cash Flows for the Three Months Ended September
      30, 2010 and 2009
              5Notes
      to Unaudited Consolidated Financial Statements as of September 30,
      2010
              6Item
      2.  Management's Discussion and Analysis of Financial Condition and
      Results of Operations
              23Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
              28Item
      4.  Controls and Procedures
              28PART II.
              Other
      Information
              28Item
      1.  Legal Proceedings
              28Item
      1A. Risk Factors
              28Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
              28Item
      3.  Defaults Upon Senior Securities
              28Item
      4.  Reserved
              28Item
      5.  Other Information
              28Item
      6.  Exhibits
              29


2


PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS




SEPT. 30,
                                
                                
                                JUNE 30,2010
                                
                                
                                2010ASSETS
                                (Unaudited)
                                
                                
                                (Audited)CURRENT
      ASSETS:Cash
      & cash equivalents
                                
                                $
                                3,800,894
                                
                                
                                $
                                4,121,541Restricted
      cash
                                
                                
                                598,800
                                
                                
                                
                                16,556,904Accounts
      receivable, net of allowance for doubtful accounts of
      $2,182,366
                                  as
      of September 30, 2010, and $1,306,268 as of June 30, 2010,
      respectively
                                
                                
                                6,610,663
                                
                                
                                
                                8,365,822Notes
      receivable
                                
                                
                                3,615,731
                                
                                
                                
                                2,410,512Other
      receivables
                                
                                
                                3,593,790
                                
                                
                                
                                450,284Loan
      to related party
                                
                                
                                -
                                
                                
                                -Inventories
                                
                                
                                16,062,141
                                
                                
                                
                                11,072,170Prepayments
                                
                                
                                826,387
                                
                                
                                
                                545,590Total
      current assets
                                
                                
                                35,108,406
                                
                                
                                
                                43,522,824PLANT
      AND EQUIPMENT, net
                                
                                
                                75,565,826
                                
                                
                                
                                75,373,851OTHER
      ASSETS:Investment
      in Changle Shengshi Redian Co., Ltd.
                                
                                
                                6,593,140
                                
                                
                                
                                6,372,294Advances
      for construction
                                
                                
                                1,331,927
                                
                                
                                
                                2,334,748Intangible
      assets - land use right, net of accumulated amortization
                                
                                
                                3,188,207
                                
                                
                                
                                3,150,894Total
      other assets
                                
                                
                                11,113,274
                                
                                
                                
                                11,857,936Total
      assets
                                
                                $
                                121,787,507
                                
                                
                                $
                                130,754,611LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable and accrued liabilities
                                
                                $
                                8,851,630
                                
                                
                                $
                                9,508,631Accounts
      payable and accrued liabilities - related party
                                
                                
                                1,103,163
                                
                                
                                
                                252,017Notes
      payable – banks
                                
                                
                                -
                                
                                
                                
                                17,823,300Short
      term loans
                                
                                
                                39,610,620
                                
                                
                                
                                40,153,980Accrued
      liabilities
                                
                                
                                546,076
                                
                                
                                
                                412,555Other
      payable
                                
                                
                                4,481,601
                                
                                
                                
                                1,315,797Employee
      loans
                                
                                
                                387,743
                                
                                
                                
                                396,404Other
      payable – officer
                                
                                
                                524,180
                                
                                
                                
                                515,856Customer
      deposit
                                
                                
                                8,994,877
                                
                                
                                
                                4,162,046Taxes
      payable
                                
                                
                                571,295
                                
                                
                                
                                1,456,474Long
      term loan-current maturities
                                
                                
                                494,564
                                
                                
                                
                                2,314,983Total
      current liabilities
                                
                                
                                65,565,749
                                
                                
                                
                                78,312,045LONG
      TERM LIABILITIESOther
      payable – noncurrent
                                
                                
                                4,553,721
                                
                                
                                
                                3,346,336Total
      long term liabilities
                                
                                
                                4,553,721
                                
                                
                                
                                3,346,336Total
      liabilities
                                
                                
                                70,119,470
                                
                                
                                
                                81,658,381COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 2,500,000 shares authorized, no shares issued and
      outstandingCommon
      stock, $0.001 par value, 50,000,000 shares authorized, 9,584,903 shares
      issued and outstanding*
                                
                                
                                19,170
                                
                                
                                
                                19,170Additional
      paid-in capital
                                
                                
                                21,405,406
                                
                                
                                
                                21,305,230Statutory
      reserves
                                
                                
                                3,214,800
                                
                                
                                
                                3,214,800Retained
      earnings
                                
                                
                                20,994,856
                                
                                
                                
                                19,351,772Accumulated
      other comprehensive income
                                
                                
                                6,033,805
                                
                                
                                
                                5,205,259Total
      shareholders' equity
                                
                                
                                51,668,036
                                
                                
                                
                                49,096,231Total
      liabilities and shareholders' equity
                                
                                $
                                121,787,507
                                
                                
                                $
                                130,754,611
 
 The
accompanying notes are an integral part of these statements.
  3
  SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (UNAUDITED)
  THREE MONTHS ENDED
                              SEPTEMBER 30,2010
                            
                            
                            2009NET
      SALES
                            
                            $
                            34,644,572
                            
                            
                            $
                            23,127,057COST
      OF SALES
                            
                            
                            28,625,215
                            
                            
                            
                            19,805,701GROSS
      PROFIT
                            
                            
                            6,019,357
                            
                            
                            
                            3,321,356SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                            
                            
                            2,579,804
                            
                            
                            
                            2,084,689INCOME
      FROM OPERATIONS
                            
                            
                            3,439,553
                            
                            
                            
                            1,236,667OTHER
      INCOME (EXPENSE):Earnings
      on equity investment
                            
                            
                            86,889
                            
                            
                            
                            146,146Non-operating
      income
                            
                            
                            22,997
                            
                            
                            
                            223,591Non-operating
      expense
                            
                            
                            (107,049
                            )
                            
                            
                            (7,270
                            )Interest
      expense and other charges
                            
                            
                            (1,123,116
                            )
                            
                            
                            (728,786
                            )Interest
      income
                            
                            
                            1,266
                            
                            
                            1,382Other
      expense, net
                            
                            
                            (1,119,012
                            )
                            
                            
                            (364,936
                            )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                            
                            
                            2,320,541
                            
                            
                            
                            871,731PROVISION
      FOR INCOME TAXES
                            
                            
                            677,457
                            
                            
                            
                            87,897NET
      INCOME
                            
                            
                            1,643,084
                            
                            
                            
                            783,833OTHER
      COMPREHENSIVE ITEMS:Foreign
      currency translation adjustments
                            
                            
                            828,546
                            
                            
                            
                            61,302COMPREHENSIVE
      INCOME
                            
                            $
                            2,471,630
                            
                            
                            $
                            845,135EARNINGS PER
      SHAREBasic
                            
                            $
                            0.17
                            
                            
                            $
                            0.08Diluted
                            
                            $
                            0.17
                            
                            
                            $
                            0.08WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                            
                            
                            9,584,903
                            
                            
                            
                            9,584,903Diluted
                            
                            
                            9,584,903
                            
                            
                            
                            9,584,903
  The
accompanying notes are an integral part of these statements.
  4
  SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 (UNAUDITED)
 
 2010
                                                            
                                                            
                                                            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                                            
                                                            $
                                                            1,643,084
                                                            
                                                            
                                                            $
                                                            783,833Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
                                                            
                                                            
                                                            1,895,046
                                                            
                                                            
                                                            
                                                            1,918,362Amortization
                                                            
                                                            
                                                            13,856
                                                            
                                                            
                                                            
                                                            13,907Allowance
      for bad debts
                                                            
                                                            
                                                            844,536
                                                            
                                                            
                                                            
                                                            (646
                                                            )Share
      based compensation to employees
                                                            
                                                            
                                                            100,176
                                                            
                                                            
                                                            
                                                            158,818Gain
      on disposal of land use right
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (739
                                                            )Earnings
      on equity investment
                                                            
                                                            
                                                            (200,846
                                                            )
                                                            
                                                            
                                                            (146,146
                                                            )Change
      in operating assets and liabilities:Accounts
      receivable
                                                            
                                                            
                                                            1,156,815
                                                            
                                                            
                                                            
                                                            (19,117
                                                            )Notes
      receivable
                                                            
                                                            
                                                            (1,151,924
                                                            )
                                                            
                                                            
                                                            (1,085,154
                                                            )Other
      receivables
                                                            
                                                            
                                                            (3,143,542
                                                            )
                                                            
                                                            
                                                            (59,533
                                                            )Inventories
                                                            
                                                            
                                                            (4,989,971
                                                            )
                                                            
                                                            
                                                            (1,032,279
                                                            )Prepayments
                                                            
                                                            
                                                            (280,797
                                                            )
                                                            
                                                            
                                                            (205,488
                                                            )Accounts
      payable
                                                            
                                                            
                                                            (657,002
                                                            )
                                                            
                                                            
                                                            (885,086
                                                            )Accrued
      liabilities
                                                            
                                                            
                                                            133,521
                                                            
                                                            
                                                            
                                                            (24,153
                                                            )Accounts
      payable - related party
                                                            
                                                            
                                                            851,146
                                                            
                                                            
                                                            
                                                            143,788Other
      payable
                                                            
                                                            
                                                            4,381,514
                                                            
                                                            
                                                            
                                                            586,245Customer
      deposit
                                                            
                                                            
                                                            4,832,831
                                                            
                                                            
                                                            
                                                            660,533Taxes
      payable
                                                            
                                                            
                                                            (885,179
                                                            )
                                                            
                                                            
                                                            23,473Net
      cash provided by operating activities
                                                            
                                                            
                                                            4,470,009
                                                            
                                                            
                                                            
                                                            830,620CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      plant and equipment
                                                            
                                                            
                                                            (2,087,021
                                                            )
                                                            
                                                            
                                                            (2,094,456
                                                            )Proceeds
      from equipment disposal
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            2,535Advances
      for construction
                                                            
                                                            
                                                            1,002,821
                                                            
                                                            
                                                            
                                                            (448,627
                                                            )Acquisition
      of intangible assets
                                                            
                                                            
                                                            (37,568
                                                            )
                                                            
                                                            
                                                            (43,407
                                                            )Loan
      to Related Party - noncurrent
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Net
      cash used in investing activities
                                                            
                                                            
                                                            (1,121,768
                                                            )
                                                            
                                                            
                                                            (2,583,954
                                                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      in restricted cash
                                                            
                                                            
                                                            15,958,104
                                                            
                                                            
                                                            
                                                            21,990,729Net
      payments on notes payable - banks
                                                            
                                                            
                                                            (17,823,300
                                                            )
                                                            
                                                            
                                                            (21,991,500
                                                            )Net
      (payments) proceeds from short-term loans
                                                            
                                                            
                                                            (543,360
                                                            )
                                                            
                                                            
                                                            3,958,470Payments
      on employee loans
                                                            
                                                            
                                                            (8,661
                                                            )
                                                            
                                                            
                                                            (211,649
                                                            )Proceeds
      from third-party loan
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            83,193Payments
      on third party loan
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (331,715
                                                            )Net
      (payments) proceeds from long-term loans
                                                            
                                                            
                                                            (1,820,419
                                                            )
                                                            
                                                            
                                                            -Payments
      on capital lease obligations
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (516,026
                                                            )Net
      cash (used in) provided by financing activities
                                                            
                                                            
                                                            (4,237,636
                                                            )
                                                            
                                                            
                                                            2,981,502EFFECTS
      OF EXCHANGE RATE ON CASH BALANCE
                                                            
                                                            
                                                            425,947
                                                            
                                                            
                                                            
                                                            2,785(DECREASE)
      INCREASE IN CASH & CASH EQUIVALENTS
                                                            
                                                            
                                                            (320,647
                                                            )
                                                            
                                                            
                                                            1,230,953CASH
      & CASH EQUIVALENTS, beginning of period
                                                            
                                                            
                                                            4,121,541
                                                            
                                                            
                                                            
                                                            1,779,476CASH
      & CASH EQUIVALENTS, end of period
                                                            
                                                            $
                                                            3,800,894
                                                            
                                                            
                                                            $
                                                            3,010,429SUPPLEMENTAL
      DISCLOSURECash
      paid for Interest, net of capitalized interest
                                                            
                                                            $
                                                            807,673
                                                            
                                                            
                                                            $
                                                            820,759Cash
      paid for Income taxes
                                                            
                                                            $
                                                            853,195
                                                            
                                                            
                                                            $
                                                            -
 
 The
accompanying notes are an integral part of these statements.
  5
  SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 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 September
30, 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.
 
 Assets
and liabilities were translated at 6.70 RMB and 6.81 RMB to $1.00 at
September 30, 2010 and June 30, 2010, respectively. The equity accounts were
stated at their historical rates. The average translation rates applied to
income statement for amounts for the three months ended September 30, 2010 and
2009 were 6.78 RMB and 6.84 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.
  6
  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 cost of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs related to cost
of goods sold amounted to $1,458,086 and $1,149,964 for the three months ended
September 30, 2010 and 2009, respectively.
 
 Financial
instruments
 
 ASC 825
(formerly SFAS 107, "Disclosures about Fair Value of Financial Instruments"),
defines financial instruments and requires disclosure of the fair value of those
instruments.  ASC 820 (formerly SFAS 157, "Fair Value Measurements"),
adopted July 1, 2008, defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
balance sheets for current receivables and payables, including short term loans,
qualify as financial instruments and are a reasonable estimate of fair value
because of the short period of time between the origination of such instruments
and their expected realization and, if applicable, the stated rate of interest
is equivalent to rates currently available. The three levels are defined as
follows:
  Level 1:
              inputs to the valuation
      methodology are quoted prices (unadjusted) for identical assets or
      liabilities in active
markets.
 
 Level 2:
              inputs to the valuation
      methodology include quoted prices for similar assets and liabilities in
      active markets, and inputs that are observable for the assets or
      liability, either directly or indirectly, for substantially the full term
      of the financial
instruments.
 
 Level 3:
              inputs to the valuation
      methodology are unobservable and significant to the fair
      value.
 
 The
Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with ASC 820
(formerly SFAS 157).
 
 Stock-based
compensation
 
 The
Company records stock-based compensation expense pursuant to ASC 718 (formerly
SFAS 123R, "Share Based Payment").  The Company uses the Black-Scholes
option pricing model that 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 (formerly SFAS 123R) requires forfeitures to be estimated at
the time of grant and revised in subsequent periods, if necessary, if actual
forfeitures differ from those estimates.
 
 Earnings per
share
 
 The
Company reports earnings per share in accordance with the provisions of ASC 260
(formerly SFAS 128, "Earnings Per Share").  ASC 260 requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
  7
  The
following is a reconciliation of the basic and diluted earnings per share
computation:
 
 Three months ended
                          September 30,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Unaudited)Net
      income (loss) for earnings (loss) per share
                        
                        $
                        1,643,084
                        
                        
                        $
                        783,833Weighted
      average shares used in basic computation
                        
                        
                        9,584,903
                        
                        
                        
                        9,584,903Weighted
      average shares used in diluted computation
                        
                        
                        9,584,903
                        
                        
                        
                        9,584,903Earnings
      (loss) per shareBasic
                        
                        $
                        0.17
                        
                        
                        $
                        0.08Diluted
                        
                        $
                        0.17
                        
                        
                        $
                        0.08
 Note: The
common stock issued has been retroactively restated to reflect a reverse stock
split, effective November 9, 2010. The number of shares outstanding and
authorized, as referred to in these financial statements, have been restated
where applicable to give retroactive effect of the reverse stock split. Please
see “Part 1, Item 1. Financial Statements-Notes to Unaudited Consolidated
Financial Statements of September 30, 2010-Note 13-Subsequent Event” for a
discussion of the reverse stock split.
 For the
three months ended September 30, 2010 and 2009, no warrants or stock options
were included in the calculation of diluted earnings per share because there are
no dilution effects for the three months ended September 30, 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 September 30, 2010
and June 30, 2010, these amounts totaled $598,800 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 September 30, 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 $ 207,215.87 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 receivable at each reporting period to provide for an allowance against
accounts receivable for an amount that could become uncollectible. This review
process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company's estimation
process. These impacts may be material. Certain accounts receivable amounts are
charged against allowances after designated period of collection efforts.
Subsequent cash recoveries are recognized as income in the period when they
occur. The allowance for doubtful accounts amounted to $2,182,366 and $1,306,268
as of September 30, 2010 and June 30, 2010, respectively.
  8
  Concentration of
risks
 
 The
Company's operations are in the PRC. Accordingly, the Company's business,
financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the Chinese economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. The Company's results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among others.
 
 Management
believes the credit risk on bank deposits is limited because the counterparties
are banks with high credit-ratings assigned by international credit-rating
agencies, or state-owned banks in China. Cash includes cash on hand and demand
deposits in accounts maintained with state-owned banks within the PRC and the
United States of America. The cash deposits in U.S. financial institutions
exceed the amounts insured by the U.S. government. Balances at financial
institutions or state owned banks within the PRC are not covered by insurance.
Non-performance by these institutions could expose the Company to losses for
amounts in excess of insured balances. At September 30, 2010 and June 30, 2010,
the Company's bank balances exceeded government insured limits or were not
covered by insurance by approximately $4,256,270 and $20,470,585, respectively.
The Company has not experienced, nor does it anticipate, nonperformance by these
institutions.
 
 The
Company's concentration of credit risk is primarily in trade accounts receivable
and accounts payable. For the three months ended September 30, 2010 and 2009,
there were no customers that individually comprised 10% or more of the Company's
total revenues. For the three months ended September 30, 2010 and 2009, there
were no vendors that individually accounted for over 10% or more of the
Company's total purchases.
 
 For
export sales, the Company frequently requires significant down payments or
letter of credit by its customers prior to shipment. During the year, the
Company maintains export credit insurance to protect the Company against the
risk that the overseas customers may default on settlement.
 
 The
following table summarizes financial information for the three months ended
September 30, 2010 and 2009, concerning the Company’s revenues based on
geographic area:
 
 For the
three months ended:
 
 Revenue
                              
                              September 30,
                                2010
                              
                              
                              September 30,
                                2009(Unaudited)
                              
                              
                              (Unaudited)China
                              
                              $
                              28,663,630
                              
                              
                              $
                              20,039,076International
                              
                              
                              5,980,942
                              
                              
                              
                              3,087,981Total
                              
                              $
                              34,644,572
                              
                              
                              $
                              23,127,057
 
 Inventories
 
 Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:
  September 30,
                                2010
                              
                              
                              June 30,
                                2010(Unaudited)Raw
      materials
                              
                              $
                              3,917,233
                              
                              
                              $
                              2,739,503Work-in-progress
                              
                              
                              8,777,418
                              
                              
                              
                              4,343,957Finished
      goods
                              
                              
                              4,367,490
                              
                              
                              
                              3,988,710Total
                              
                              $
                              16,062,141
                              
                              
                              $
                              11,072,170
  9
  The
Company reviews its inventory periodically for possible obsolete goods and to
determine if any reserves are necessary. As of September 30, 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.
 
 Advances for
construction
 
 As of
September 30, 2010 and June 30, 2010, advances for construction amounted to
$1,331,927 and $2,334,748, respectively.  Advances for construction
are paid to unrelated parties, interest free, and with no collateral and no
guarantee.
 
 Plant and
equipment
 
 Plant and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to property and equipment accounts are recorded at cost.
Maintenance, repairs, and minor renewals are charged directly to expense as
incurred. Major additions and improvements to property and equipment accounts
are capitalized. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets with 3% residual value.
 
 Estimated
useful lives of the assets are as follows:
  Estimated Useful LifeBuildings
                      
                      
                      5-20
                      
                      YearsMachinery
      and equipment
                      
                      
                      5-10
                      
                      YearsAutomobile
      facilities
                      
                      
                      5-10
                      
                      YearsElectronic
      equipment
                      
                      
                      5-7
                      
                      Years
 
 Long-lived
assets of the Company are reviewed at least annually or more often if
circumstances dictate, to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
also re-evaluates the periods of depreciation to determine whether subsequent
events and circumstances warrant revised estimates of useful lives. As of
September 30, 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 any other than temporary decline in the value of
the investment exists.
 
 Intangible
assets
 
 Intangible
assets consist of the following:
  September 30,
                              2010
                            
                            
                            June 30, 2010(Unaudited)Land
      use rights:
                            
                            $
                            3,507,857
                            
                            
                            $
                            3,451,619Less:
      accumulated amortization
                            
                            
                            325,025
                            
                            
                            
                            (306,261
                            )Land
      use rights, net
                            
                            
                            3,182,805
                            
                            
                            
                            3,145,385Software
                            
                            
                            7,916
                            
                            
                            
                            7,789Less:
      accumulated amortization
                            
                            
                            2,514
                            
                            
                            
                            (2,254
                            )Software,
      net
                            
                            
                            5,402
                            
                            
                            
                            5,536Total
      intangible assets, net
                            
                            $
                            3,188,207
                            
                            
                            $
                            3,150,894
  10
  Intangible
assets are primarily comprised of land use rights which are pledged as
collateral for bank loans as of September 30, 2010. All land in the PRC is owned
by the Chinese government. However, the government grants "land use rights" for
terms ranging from 20 to 50 years. From March 2000 to June 2008, the Company
acquired various land use rights for approximately $3,291,000. From July 2008 to
March 2009, the Company 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. Total proceeds have
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.
 
 Intangible
assets are reviewed at least annually, and more often if circumstances dictate,
to determine whether their carrying value has become impaired. The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of September 30, 2010, the Company
determined that there had been no impairment. Total amortization expense for the
three months ended September 30, 2010 and 2009, amounted to $13,744 and $13,907,
respectively.
 
 The
following table consists of the expected amortization expenses for the next five
years:
 
 Years
      ended September 30,
                  
                  Amount2011
                  
                  $
                  54,9752012
                  
                  
                  54,9752013
                  
                  
                  54,9752014
                  
                  
                  54,9752015
                  
                  
                  54,975Thereafter
                  
                  
                  2,913,332Total
                  
                  $
                  3,188,207
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109,
"Accounting for Income Taxes").  Under the asset and liability method
as required by ASC 740, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under ASC
740, the effect on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance
is recognized if it is more likely than not that some portion, or all of, a
deferred tax asset will not be realized. As of September 30, 2010 and June 30,
2010, the Company did not have any deferred tax assets or liabilities, and as
such, no valuation allowances were recorded at September 30, 2010 and June 30,
2010.
 
 ASC 740
(formerly FIN 48) clarifies the accounting and disclosure for uncertain tax
positions and prescribes a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return. ASC 740 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.
 
 Under ASC
740, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeal or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
 
 The
Company's operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company's worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.
  11
  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 embryo, the VAT rate is 13% and for the
company's fiber, the VAT rate is 0%. 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 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 $4,512,262 and $4,559,834, respectively,
for the three months ended September 30, 2010 and $2,969,214 and $2,954,912, for
the three months ended September 30, 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
January 2010, FASB issued ASU No. 2010-01– Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and
Earnings Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have impact on the
Company’s consolidated financial statements.
 
 In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary–a Scope Clarification. The amendments in
this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements
 
 January
2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic 820-10 that requires
new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU, however, the
Company does not expect the adoption of this ASU to have a material impact on
its consolidated financial statements.
 
 In
February 2010, FASB issued ASU No. 2010-9 –Amendments to Certain Recognition and
Disclosure Requirements. This update addresses certain implementation issues
related to an entity’s requirement to perform and disclose subsequent-events
procedures, removes the requirement that public companies disclose the date of
their financial statements in both issued and revised financial statements.
According to the FASB, the revised statements include those that have been
changed to correct an error or conform to a retrospective application of U.S.
GAAP. The amendment is effective for interim and annual reporting periods in
fiscal year ending after June 15, 2010. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial
statements.
  12
  In March
2010, FASB issued ASU No. 2010-10 –Amendments for Certain Investment Funds. This
update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.
 
 In March
2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit
Derivatives. Embedded credit-derivative features related only to the transfer of
credit risk in the form of subordination of one financial instrument to another
are not subject to potential bifurcation and separate accounting as clarified by
recently issued FASB guidance. Other embedded credit-derivative features are
required to be analyzed to determine whether they must be accounted for
separately. This update provides guidance on whether embedded credit-derivative
features in financial instruments issued by structures such as collateralized
debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and
separate accounting. The guidance is effective at the beginning of a company’s
first fiscal quarter beginning after June 15, 2010. The adoption of this ASU did
not have a material impact on the Company’s consolidated financial
statements.
 
 Note
3 - Plant and equipment
 
 Plant and
equipment consist of the following:
 
 Sept. 30, 2010
                        
                        
                        June 30, 2010(Unaudited)Buildings
                        
                        $
                        22,388,574
                        
                        
                        $
                        22,028,136Machinery
      and equipment
                        
                        
                        64,229,267
                        
                        
                        
                        65,019,206Automobile
      facilities
                        
                        
                        627,883
                        
                        
                        
                        656,544Electronic
      equipment
                        
                        
                        564,641
                        
                        
                        
                        527,609Construction-in-progress
                        
                        
                        11,449,338
                        
                        
                        
                        10,533,083Total
                        
                        
                        99,259,703
                        
                        
                        
                        98,764,578Accumulated
      depreciation
                        
                        
                        (23,693,877
                        )
                        
                        
                        (23,390,727
                        )Total
                        
                        $
                        75,565,826
                        
                        
                        $
                        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 September
30, 2010 and 2009 amounted to $1,895,046 and $1,918,362, respectively. Interest
cost capitalized into construction in progress for the three months ended
September 30, 2010 and 2009, amounted to $0 and $13,097,
respectively.
 
 Note
4 - Investment in unconsolidated affiliate
 
 On
September 16, 2003, Weifang Shengtai entered into a joint venture partnership
with Weifang City Investment Company and Changle Century Sun Paper Industry Co.,
Ltd, “Changle Paper,” and formed Changle Shengshi Redian Co., Ltd, "Changle
Shengshi.”  Changle Shengshi was incorporated in Weifang City,
Shandong Province, the PRC. Changle Shengshi's principal activity is to produce
and sell electricity and steam to Weifang Shengtai and Changle Paper for the use
by their own production. Weifang Shengtai owns 20% of Changle Shengtai and the
Company accounts for this 20% investment under the equity method of
accounting.
  13
  Summarized
unaudited financial information of Changle Shengshi for the three months
ended September 30, 2010 is as follows:
 
 September 30,
                              
                              
                              June 30,2010
                              
                              
                              2010(unaudited)
                              
                              
                              (unaudited)Current
      assets
                              
                              $
                              31,617,221
                              
                              
                              $
                              24,083,814Non-current
      assets
                              
                              
                              56,660,223
                              
                              
                              
                              51,248,756Total
      assets
                              
                              
                              88,277,444
                              
                              
                              
                              75,332,569Current
      liabilities
                              
                              
                              52,799,234
                              
                              
                              
                              43,098,908Non-current
      liabilities
                              
                              
                              56,570,937
                              
                              
                              
                              1,164,071Shareholders'
      equity
                              
                              
                              31,706,508
                              
                              
                              
                              31,069,590Total
      liabilities and shareholders' equity
                              
                              $
                              88,277,444
                              
                              
                              $
                              75,332,569
 
 In order
to meet increasing demands for electricity and steam by Weifang Shengtai and
Changle Paper, Weifang Shengtai invested $1,467,000 in Changle Shengshi in March
2010 and Changle Paper invested a corresponding amount, such that Weifang
Shengtai and Changle Paper continue to be 20% and 80% owners, respectively, of
Changle Shengtai.
 
 Note
5 - Related party transactions
 
 The
Company’s utilities (electricity and steam) are mostly provided by Changle
Shengshi (See Note 4). As of September 30, 2010 and June 30, 2010, the Company’s
accounts payable due to Changle Shengshi were approximately $1,103,163 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 $3,651,339 and $4,578,447 for the three months ended September 30,
2010 and 2009, respectively.
 
 Note
6 - Debt
 
 Short term
loans
 
 Short
term loans represent amounts due to various banks which are due within one year.
These loans can generally be renewed. The Company's short term bank loans
consisted of the following:
 
 September
      30,
                      
                      
                      June
      30,2010
                      
                      
                      2010(Unaudited)Loans
      from Bank of China, due various dates from April 2010 to March 2011;
      monthly interest only payments; interest rates ranging from 5.0445% to
      5.5755% per annum, secured by certain properties.
                      
                      $
                      14,970,000
                      
                      
                      $
                      14,730,000Loans
      from Industrial and Commercial Bank of China, due on various dates from
      April 2010 to February 2011; monthly interest only payments; interest
      rates ranging from 5.31% to 6.372% per annum, guaranteed by an unrelated
      third party and secured by certain properties.
                      
                      
                      10,868,220
                      
                      
                      
                      9,662,880Loan
      from Agriculture Bank of China, due from June to December 2010; monthly
      interest only payments; interest rates ranging from 5.5755% to 5.841% per
      annum, guaranteed by an unrelated third party, unsecured
                      
                      
                      7,485,000
                      
                      
                      
                      8,838,000Loan
      from Qingdao Bank, due December 2010, monthly interest only payments;
      interest rate of 5.31% per annum, guaranteed by an unrelated third party,
      unsecured
                      
                      
                      2,994,000
                      
                      
                      
                      2,946,000Loan
      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
                      
                      
                      3,293,400
                      
                      
                      
                      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
                      
                      
                      -
                      
                      
                      
                      736,500Loan
      from Xingye Bank, due October 2009; monthly interest only payments;
      interest rate of 7.9695% per annum, guaranteed by an unrelated third
      party, unsecured.
                      
                      
                      -Loan
      from ShangHai PuDong Development Bank, due November 2009; monthly
      interest-only payments; interest rate of 6.66% per annum, guaranteed by an
      unrelated third party, unsecured.
                      
                      
                      -Total
                      
                      $
                      39,610,620
                      
                      
                      $
                      40,153,980
  14
  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 payable
consisted of the following:
 
 September 30,
                        
                        
                        June 30,2010
                        
                        
                        2010(Unaudited)China
      Agriculture Bank, due in August 2009, 0.05% transaction fee, restricted
      cash required 100% of loan amount, guaranteed by an unrelated third
      party.
                        
                        $
                        -
                        
                        
                        $Shanghai
      PuDong Development Bank, due in October 2009, 0.05% transaction fee,
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
                        
                        
                        -Bank
      of China, due on various dates from November 2009 to June 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 August
      2010, 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 in June 2010, 0.05% transaction fee,
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
                        
                        
                        -
                        
                        
                        
                        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.
                        
                        
                        -
                        
                        
                        
                        3,093,300Total
                        
                        $
                        -
                        
                        
                        $
                        17,823,300
 
 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 $387,743 and $396,404 as of
September 30, 2010 and June 30, 2010, respectively. Interest expense related to
these loans amounted to $6,979 and $9,349 for the three months ended September
30, 2010, and 2009, respectively.
  15
  Employee loans -
officers
 
 From time
to time, the Company borrows monies from Qingtai Liu, the Company ' s CEO and
President, for cash flow purposes of the Company. The loans do not require
collateral and the principal is due upon demand. Before January 1, 2009, the
interest rate was at 7.2% for the first six months, and then 10.8% thereafter
until the full principal amounts are paid by the Company. After January 1, 2009,
the interest rate was changed to 7.2% for the loan period. Employee loans from
officers amounted to $524,180 and $515,856 as of September 30, 2010 and June 30,
2010, respectively. Interest expense related to these loans was de minimis for
the three months ended September 30, 2010, and 2009, respectively.
 
 Third party
loans
 
 From time
to time, the Company borrows monies from an unrelated individual for use in
operations. The loans do not require collateral. Before January 1, 2009, the
interest rate was 7.2% for the first six months, and then 10.8% thereafter until
the full principal amounts are paid by the Company. After January 1, 2009, the
interest rate was changed to 7.2% for the loan period. The principal is due upon
demand. Balance on these loans as of September 30, 2010 and June 30, 2010 was $0
and $ 0, respectively.
 
 Interest
 
 Total
interest expense and financial charges, net of capitalized interest, on all debt
for the three months ended September 30, 2010 and 2009, amounted to $1,123,116
and $728,786, respectively. Interest capitalized into construction-in-progress
totaled $0 and $13,097 for the three months ended September 30, 2010 and 2009,
respectively.
 
 Note
7 - Income taxes
 
 Before
January 1, 2008, the Company was governed by the Income Tax Law of the PRC
concerning Foreign Investment Enterprises, "FIEs,” and Foreign Enterprises and
various local income tax laws, the "Income Tax Laws.” Under the Income Tax Laws,
FIEs are generally subject to an effective income tax of 33%, 30% state income
taxes plus 3% local income taxes, on income as reported in their statutory
financial statements after appropriate tax adjustments, unless the enterprise is
located in specially designated regions of cities for which more favorable
effective tax rates apply.
 
 In
February 2004, the Company became a Sino-foreign joint venture. In August 2004,
the state government granted the Company income tax exemptions as follows: 100%
exemption for the first two years from September 2004 to August 2006, and 50%
exemption for three years from September 2006 to August 2009. In addition, the
Company is located in a Special Economic Zone and the PRC tax authority has
offered it a special income tax rate of 24%. With the approval of the local
government, the Company is subject to income taxes at a reduced rate of 12% from
September 2006 to August 2009, after the two-year 24% exemption for income taxes
until its exemption and reduction periods expire in August 2009.
 
 Beginning
on January 1, 2008, the new Enterprise Income Tax ("EIT") law replaced the
existing laws for Domestic Enterprises ("DES") and Foreign Investment
Enterprises.
 
 The key
changes are:
  -
              The new standard EIT rate of 25%
      will replace the 33% rate currently applicable to both DES and FIEs,
      except for High Tech companies, which pay a reduced rate of 15%;
      and
 
 -
              Companies established before
      March 16, 2007 will continue to enjoy tax holiday treatment approved by
      the local government for a grace period of the next 5 years or until the
      tax holiday term is completed, whichever is
  sooner.
 
 The
Company's subsidiary, Weifang Shengtai, was established before March 16, 2007,
and therefore is qualified to continue to be taxed at the reduced rate as
described above until the tax holiday term is completed. Starting on September
1, 2009, the Company will be subject to a 25% income tax rate pursuant to the
new income tax laws.
 
 Income
tax (benefits) provision for the three months ended September 30, 2010 and 2009
amounted to $677,457 and $87,897, respectively.
  16





The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the three months ended September 30:





2010
                              
                              
                              2009(Unaudited)
                              
                              
                              (Unaudited)U.S.
      Statutory rates
                              
                              
                              34.0
                              %
                              
                              
                              34.0
                              %Foreign
      income not recognized in USA
                              
                              
                              (34.0
                              )
                              
                              
                              (34.0
                              )Chinese
      income taxes
                              
                              
                              25.0
                              
                              
                              
                              25.0Chinese
      income exemption (a)
                              
                              
                              0.0
                              
                              
                              
                              (4.3
                              )Other
      items (b)
                              
                              
                              8.0
                              
                              
                              
                              -Total
      provision for income taxes
                              
                              
                              33
                              %
                              
                              
                              20.7.
                              %




(a)
            The 4.3% represents special tax
      credits from the local government due to government enforced regulations.
      They expired in September
2009.


(b)
            The 8.0% represents certain
      expenses (such as stock option expense) incurred by the Company and
      Shengtai Holding, Inc. which were not deductible in the PRC for the year
      ended September 30, 2010.





For the
three months ended September 30, 2010, the Company’s effective tax rate was 33%.
For the three months ended September 30, 2009, the Company incurred losses
before income taxes. Income before income taxes includes losses from non-Chinese
entities, which are not deductible.





Tax
exemptions by the local government expired in September 2009.





Shengtai
Pharmaceutical, Inc. and Shengtai Holding, Inc. were incorporated in the United
States and for the United States income tax purposes, have accumulated net
operating loss carry forwards estimated at $390,383as of September 30, 2010
for the three months ended September 30, 2010. For the United States
income tax purposes, the tax benefits from the net operating loss carry forwards
are estimated at $128,826 as of September 30, 2010 for the three months ended
September 30, 2010. Before expiration from 2027 through 2030, the net operating
loss carry forwards are available for reducing taxable income in the
future.  The Company’s management believes that the utilization of the
tax benefits from the net operating loss carry forwards appears uncertain due to
the Company’s limited operating history and continuing losses expected at
Shengtai Pharmaceutical, Inc. and Shengtai Holding, Inc. Therefore,
the Company has applied 100% valuation allowance to the deferred tax
benefits to reduce the deferred asset to zero.





As
of September 30, 2010, the Company’s foreign subsidiary has cumulative
undistributed earnings of $25,976,068 that are included in consolidated retained
earnings and will continue to be indefinitely reinvested in foreign operations.
No provision has been made for the United States deferred taxes related to
future repatriation of these cumulative undistributed earnings, nor is it
practicable to estimate the amount of income taxes that would incur if the
Company concluded that such earnings will be remitted in the
future.


17





Taxes
payable




September 30,2010
                      
                      
                      June 30,2010(Unaudited)VAT
      payable
                      
                      $
                      241,132
                      
                      
                      $
                      954,552Individual
      income tax withheld
                      
                      
                      12,841
                      
                      
                      
                      10,354Income
      tax payable
                      
                      
                      231,099
                      
                      
                      
                      401,326Housing
      property tax payable
                      
                      
                      16,126
                      
                      
                      
                      15,867Others
                      
                      
                      47,207
                      
                      
                      
                      74,375Total
      taxes payable
                      
                      $
                      571,295
                      
                      
                      $
                      1,456,474




Note
8 - Commitments and contingent liabilities





Guarantees





As of
September 30, 2010, the Company has guaranteed $2,994,000 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 is $3.2 million for Yuanli, including
accrued interest. The Company did not record a liability for the guarantee
because management knows that Yuanli is current in its payment obligations, and
the likelihood of the Company having to make payments under the guarantee is
remote.





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





Short
      TermCompany
                
                Bank LoansYuanli
      Chemical Engineering Inc.
                
                $
                2,994,000Total
                
                $
                2,994,000




Litigation




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




Note 9  -  Shareholders ' equity




Warrants





On May
15, 2007, in connection with the Share Purchase Agreement, the Company issued
4,375,000 warrants, "Investor Warrants,” which carry an exercise price of $2.60
and a 5-year term. The Investor Warrants are callable if the Company's shares
trade at or above $8.00 per share for 20 consecutive trading days and underlying
shares are registered for resale. The Investor Warrants contain standard
adjustment provisions upon stock dividend, stock split, stock combination,
recapitalization and a change of control transaction. During the year ended June
30, 2008, a total of 194,805 warrants were exercised by three
shareholders.




18


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





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




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





Warrants
                      Outstanding
                    
                    
                    Warrants
                      Exercisable
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Average
                      Remaining
                      Contractual
                      LifeOutstanding,
      June 30, 2009 (audited)
                    
                    
                    4,398,945
                    
                    
                    
                    4,398,945
                    
                    
                    $
                    2.60
                    
                    
                    
                    2.72No
      activity during they year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding,
      June 30, 2010 (audited)
                    
                    
                    4,398,945
                    
                    
                    
                    4,398,945
                    
                    
                    $
                    2.60
                    
                    
                    
                    2.22No
      activity during they year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding,
      September 30, 2010 (unaudited)
                    
                    
                    4.398,945
                    
                    
                    
                    4,398,945
                    
                    
                    $
                    2.60
                    
                    
                    
                    1.97





Stock
options




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





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




The
Company uses the Black-Scholes option pricing model which was developed for use
in estimating the fair value of options. Option pricing models require the input
of highly complex and subjective variables including the expected life of
options granted and the Company's expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes in
the subjective assumptions can materially affect the estimated value of the
Company's employee stock options, it is management's opinion that the
Black-Scholes option valuation model may not provide an accurate measure of the
fair value of the Company's employee stock options. Although the fair value of
employee stock options is determined in accordance with ASC 718 (formerly SFAS
123R) using an option pricing model, that value may not be indicative of the
fair value observed in a willing buyer/willing seller market
transaction.




19


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




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





The
volatility of the Company's common stock was estimated by management based on
the historical volatility, the risk free interest rate was based on Treasury
Constant Maturity Rates published by the U.S. Federal Reserve for periods
applicable to the estimated life of the options, and the expected dividend yield
was based on the current and expected dividend policy. The fair value of the
options was based on the Company's common stock price on the date the options
were granted. ASC 718 (formerly SFAS 123R) allows use of the "simplified" method
to determine the term when other information is not available. Because the
Company does not have sufficient applicable history of employee stock options
activity, the Company uses the simplified method to estimate the life of the
options by taking the sum of the vesting period and the contractual life and
then calculating the midpoint, which is the estimated term of the
options.





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




20


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
                                                  
                                                  
                                                  (20,000
                                                  )
                                                  
                                                  
                                                  3.34
                                                  
                                                  
                                                  
                                                  -Exercised
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Outstanding,
      September 30, 2010
                                                  
                                                  
                                                  665,000
                                                  
                                                  
                                                  $
                                                  3.01
                                                  
                                                  
                                                  $
                                                  -








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





Outstanding
      Options
                    
                    
                    Vested
      OptionsAverage
                      Exercise  Price
                    
                    Outstanding
                      Options
                    
                    
                    Average
                      Remaining
                      Contractual Life
                    
                    
                    Average
                      Exercise Price
                    
                    
                    Options$
                    3.00
                    
                    
                    665,000
                    
                    
                    
                    2.62
                    
                    
                    $
                    3.01
                    
                    
                    
                    365,000





Compensation
expense from stock options recognized for the three months ended September 30,
2010 and 2009 were $100,176 and $158,818. As of September 30, 2010,
approximately $1,488,004 of estimated expense with respect to unvested
stock-based awards has yet to be recognized and will be recognized as an expense
over the employee's remaining weighted average service period.




Note
10 - Statutory reserves




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





Surplus reserve
fund




The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company's registered
capital.




The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the three months ended September 30, 2010 and 2009, the
Company transferred $0
and $ 122,271to
this reserve. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years’ losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.




21


Pursuant
to the Company's articles of incorporation, the Company is required to
appropriate, annually, 10% of its net profits as statutory surplus reserve up to
$7,500,000. As of September 30, 2010, the Company had appropriated to the
statutory reserve approximately $3,300,000. The Company plans to contribute a
total of $4,300,000 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 three months ended September 30, 2010 and 2009, the Company made
contributions in the amounts of $138,663 and $87,616,
respectively.




Note
13 - Subsequent event




The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions in the consolidated financial statements as of September 30,
2010.




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.




22


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




The
Company is, through its 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. The Company believes that it is a
market leader and preferred domestic supplier of pharmaceutical grade glucose,
with about 40% market share in mainland China. The Company also manufactures
glucose, cornstarch and other products for the food and beverage
industry.




The
Company’s cornstarch production facility has a maximum capacity to produce
300,000 metric tons of cornstarch. This facility is located next to the
Company’s glucose production plants.  The Company is in the process of
building additional capacity to produce dextrose anhydrous and animal feeds and
a warehouse to store corns purchased.




During
the three months ended September 30, 2010, the Company produced a total of
69,840.24metric tons
of cornstarch, of which 37,779.28 metric tons were used to satisfy its own
glucose production needs. The excess cornstarch was or will be sold to outside
customers in the pharmaceutical, food and beverage and other industries. The
cornstarch sales amounted to $11.38 million and accounted for 32.84% of the
Company’s total net sales for the three months ended September 30,
2010.




The
Company’s business can be severely affected by movements in the commodity
markets. Corn is the principal raw material for the Company’s cornstarch and the
price of cornstarch as a commodity tends to follow the price of corn. From
mid-2007 to September 2008, corn and other food prices climbed at an annual
inflation rate of 15% in China. In order to maintain a stable corn price, the
Chinese government has put restrictions on the development of industrial uses of
corn, such as the conversion of corn into ethanol. Also the Chinese government
has placed its own corn reserve into the market to help to maintain corn prices.
Since September 2008, in a sharp reversal, corn prices have been decreasing due
to large corn harvests. Beginning in July 2009, corn prices started to increase.
Corn prices for the three months ended September 30, 2010 were
approximately13.90%
higher than for the same period last year. Average corn prices for the three
months ended September 30, 2010 were 14.74% higher than those for the three
months ended December 31, 2009.





The
Company believes that these government policies have had and will continue to
have mixed effects on its operations. Management believes that stable corn
prices will help maintain the availability of the Company’s raw materials and
tend to stabilize its gross profit margin over time, although market and
economic conditions may continue to have negative effects on its operations. For
the three months ended September 30, 2010, the Company’s profit margin has risen
from 14% to 17% compared to
the same period last year, as discussed below. The principal raw material for
glucose is cornstarch.  By using the cornstarch manufactured from its
own cornstarch production facility, the Company can help to ensure its glucose
products’ quality and consistency. Also, because the Company’s cornstarch
manufacturing facility is located next to its glucose manufacturing facilities,
the Company is able to eliminate shipping costs and lower glucose products’
manufacturing costs.




At the
end of July 2008, the Company completed construction of a new glucose
manufacturing facility to boost its production capacity. At the end of September
2008, the facility passed GMP inspection. The facility has a production capacity
of 120,000 tons. In April 2009, the Company transferred its sodium gluconate
production line to an oral glucose production line with annual production
capacity of 12,000 tons. The Company has the capacity to produce 300,000 tons of
cornstarch per year.




During
the three months ended September 30, 2010, the Company produced a total of
31,511.74 metric tons of glucose, and the Company’s sales of pharmaceutical
grade glucose and other glucose products were $14.58 million, or42.10%, of its net
sales.




In
addition to its pharmaceutical glucose and cornstarch series of products, the
Company also produces other products such as dextrin, corn embryo, fibers, corn
meals, and phytin, which are used for pharmaceutical industry, food and beverage
and other production purposes. The net sales generated from these products were
$8.09 million, and constituted approximately 23.36% of the Company’s total net
sales for the three months ended September 30, 2010.




23


Management
believes that better living standards in China should lead to higher consumption
of its 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. Over the next three years, the health care investment plan is aimed at
expanding the government sponsored medical insurance network to provide
accessible and affordable health care coverage to over 90% of the population.
Under the plan, each person covered by the system will receive a larger amount
of annual subsidy after 2010. The focus of this plan is on providing basic
healthcare to many more people, and not on expensive high-tech equipment. This
should increase demand for glucose, which is a basic and relatively low-cost
element of healthcare in clinics and hospitals. In addition, PRC government
intends to build hospitals and improve medical services in rural and
underdeveloped areas. At the same time, despite the current deceleration in
growth, the Company believes that 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, will increase demand for the Company’s
pharmaceutical glucose products.





The
Company believes that production capacity and product quality are key factors in
maintaining and improving its competitive position and enhancing its long term
competitiveness. As a result, the Company has emphasized (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 its production capacity utilization.





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




As set
forth above, the Company’s new glucose production facility passed GMP
inspection, and the Company’s facilities and many of its products are fully
certified for GMP, IS09001:2000 and HACCP international quality standards and
globally certified Halal, Kosher and NON-GMO IP.




The
Company’s sales network presently covers almost all provinces of mainland China
except the Tibet Autonomous Region.




For the
three months ended September 30, 2010, the Company has exported its products to
around 47 countries, with Korea, Indonesia, Thailand, Bangladesh and Pakistan as
leading purchasers. For the three months ended September 30, 2010, the Company’s
international sales comprised approximately17.27% of its total net
sales.




The
target customers of the Company are drug makers, medical supply companies,
medical supply exporters and food and beverage companies.


The
Company constantly strives to broaden and diversify its customer base. The
Company believes that a broader customer base will mitigate its reliance on
certain customers. The Company believes that a broader market for its products
can increase demand for its products, reduce its vulnerability to market changes
and provide additional areas of growth in the future. For the three months ended
September 30, 2010, the Company’s top ten customers accounted for 40.16% of the
Company’s total net sales.





Results
of Operations




Three
Months Ended September 30, 2010 Compared with Three Months Ended September 30,
2009





The
following table shows the Company’s operating results for the three months ended
September 30, 2010 and 2009:





Three months
                  ended
                  September 30,
                  2010
                
                
                Three months
                  ended
                  September 30,
                  2009Net
      Sales
                
                $
                34,644,572
                
                
                $
                23,127,057Cost
      of Sales
                
                
                28,625,215
                
                
                
                19,805,701Gross
      Profit
                
                
                6,019,357
                
                
                
                3,321,356Selling,
      General and Administrative Expenses
                
                
                2,579,804
                
                
                
                2,084,689Income
      (Loss) From Operations
                
                
                3,439,559
                
                
                
                1,236,667Other
      (Expense) Income, Net
                
                
                (1,019,082
                )
                
                
                (364,936
                )Income
      (Loss) Before Provision For (Benefit From) Income Taxes
                
                
                2,320,541
                
                
                
                871,731Provision
      For (Benefit From) Income Taxes
                
                
                677,457
                
                
                
                87,897Net
      Income (Loss)
                
                $
                1,643,084
                
                
                $
                783,833




24


The
following table shows the breakdown of production and sales by product
categories, and between self use of Weifang Shengtai and the sales of
cornstarch, for the three months ended September 30, 2010 and 2009:





Products
                  
                  Metric Tons
                    Three months ended
                    September 30, 2010
                  
                  
                  Metric Tons
                    Three months ended
                    September 30, 2009
                  
                  
                  Net Sales (%)
                    Three months ended
                    September 30, 2010
                  
                  
                  Net Sales (%)
                    Three months ended
                    September 30, 2009Glucose–Sales
                  
                  
                  31,512
                  
                  
                  
                  31,294
                  
                  
                  $
                  14,584,992
                    (42.10
                  )%
                  
                  $
                      $
                  13,507,448
                    (58.41
                  )%Cornstarch-Self
      use
                  
                  
                  37,779(54.09
                  )%
                  
                  
                  29,581(65.72
                  )%Cornstarch-Sales
                  
                  
                  32,061(45.91
                  )%
                  
                  
                  15,432(34.28
                  )%
                  
                  $
                  11,376,343
                    (32.84
                  )%
                  
                  $
                  4,645,221
                    (20.09
                  )%Total
      Cornstarch
                  
                  
                  69,840(100
                  )%
                  
                  
                  45,013(100
                  )%Other
      Sales
                  
                  
                  28,200
                  
                  
                  
                  
                  
                  
                  $
                  8,683,237
                    (25.06
                  )%
                  
                  $
                  4,974,388
                    (21.50
                  )%Total
      Sales
                  
                  
                  91,773
                  
                  
                  
                  
                  
                  
                  $
                  34,644,572
                    (100
                  )%
                  
                  $
                  23,127,057
                    (100
                  )%




Net sales
for the three months ended September 30, 2010 were $34,644,572, an increase of
$11,517,515, or 49.80%, compared with the same period in 2009. The increase in
net sales primarily resulted from the increase of the Company’s sales volume and
selling prices.





Net sales
from exports for the three months ended September 30, 2010 increased
approximately 93.68% compared with the same period in 2009. The increase is
attributable to the recovery of the global economy resulting in an increase in
the international demand for the Company’s glucose and corn meal products
compared to the same period last year. Domestic sales of cornstarch and other
products for the three months ended September 30, 2010 increased
approximately16.31%
compared with the same period last year. The increase in domestic sales was
attributable to the higher demand for cornstarch and increase in unit sales
price for cornstarch.




Cost of
sales for the three months ended September 30, 2010 was $28,625,215, an increase
of $8,819,514, or 44.53%, compared with the same period in 2009. The increase in
cost of sales was lower than the increase in net sales. As a result, the gross
profit for the three months ended September 30, 2010 was $6,019,357, an increase
of $2,698,001, or 81.23%, compared with the same period in 2009, and the gross
profit margin for the three months ended September 30, 2010 was 17.37%, an
increase from 3.01% for the same period in 2009.





Selling,
general and administrative expenses were $2,579,804 for the three months ended
September 30, 2010 compared to $2,084,689 for the three months ended September
30, 2009. It increased by $495,115, or 23.75 % due to a larger increase in our
business and sales revenue.





The
Company incurred $100,176 in non-cash stock option expenses for the three months
ended September 30, 2010, which are included in selling, general and
administrative expenses.





Net
income for the three months ended September 30, 2010 was $1,643,084, an increase
of $859,251compared
with $783,833 for the same
period in 2009. The increase in net income was primarily attributable to the
increase in the sales volume of the Company’s products and the selling prices of
the Company’s products.





Liquidity and Capital
Resources





Operating
Activities





Net cash
provided by operating activities for the three months ended September 30, 2010
was $4,470,009 an increase of 438%, or $3,639,389 from $830,620 provided by
operating activities for the same period in 2009.





Investing
Activities





Net cash
used in investing activities for the three months ended September 30, 2010 was
$1,121,768, a decrease of $1,462,186 from $2,583,954.




25


Financing
Activities





Net
cash used for financing activities for the three months ended
September 30, 2010 was $4,237,636 compared with $2,981,502 used in
financing activities for the same period in fiscal 2009, as the Company managed
to pay part of its bank borrowings.




Loans





Other
than the Company’s private placement financing in 2007, the Company has financed
its operations primarily through bank loans and operating income. The Company
had a total of $39,610,620 short term loans outstanding as of September 30,
2010.  The terms of all these short term loans are for one year. The
Company has never defaulted on any of these loans.





The
Company has $4,553,721 of non-current payables as of September 30, 2010 and
$3,346,336 as of June 30, 2010.  The loan is from Shandong Rong Shi
Hua Leasing Company, via Minsheng Bank of China, at an interest rate of 21.2548%
and with terms from July 5, 2010 to February 5, 2013。





Guarantees





The
Company has guaranteed certain borrowings of other unrelated third parties
including short term bank loans. The total guaranteed amounts were $2,994,000 as
of September 30, 2010. The total amount of guarantees provided to the Company by
unrelated third parties is $2,994,000 as of September 30, 2010.





Future
Cash Commitments and Needs





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





Critical
Accounting Policies and Estimates




The
Company has disclosed in the notes to its financial statements those accounting
policies that it considers to be significant in determining its results of
operations and its financial position which are incorporating by reference
herein. The Company believes that the following reflect the more critical
accounting policies that currently affect its financial condition and results of
operations.




Revenue
recognition




The
Company recognizes revenue when the goods are delivered, title has passed,
pricing is fixed and collection is reasonably assured. Sales revenue represents
the invoiced value of goods, net of value-added tax ("VAT"), and estimated
returns of product from customers. Most of the Company's products sold in the
PRC are subject to a VAT rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by VAT paid by
the Company on raw materials and other materials included in the cost of
producing their finished products and certain freight expenses. 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 over the past three years, 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.




Use
of estimates




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





Accounts
receivable




In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Management reviews its
accounts 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.




26


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





Property
and equipment




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




Foreign
currency translation




The
Company’s 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.




Recently
Issued Accounting Pronouncements




In June
2009, the FASB issued ASC 105 (formerly SFAS 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
("GAAP”) - a replacement of FASB Statement No. 162”), which will become the
source of authoritative accounting principles generally accepted in the United
States recognized by the FASB to be applied to nongovernmental entities. The
Codification is effective in the third quarter of 2009, and accordingly, the
Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all
subsequent public filings will reference the Codification as the sole source of
authoritative literature. The Company does not believe that this will have a
material effect on its consolidated financial statements.




In June
2009, the FASB issued ASC 855 (formerly SFAS 165, “Subsequent Events”), which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date but before the financial statements are
issued or available to be issued. It is effective for interim and annual periods
ending after June 15, 2009. There was no material impact upon the adoption of
this standard on the Company’s consolidated financial
statements.




In June
2009, the FASB issued ASC 860 (formerly SFAS 166, "Accounting for Transfers of
Financial Assets"), which requires additional information regarding transfers of
financial assets, including securitization transactions, and where companies
have continuing exposure to the risks related to transferred financial assets.
SFAS 166 eliminates the concept of a "qualifying special-purpose entity,"
changes the requirements for derecognizing financial assets, and requires
additional disclosures. ASC 860 is effective for fiscal years beginning after
November 15, 2009. The Company does not believe this pronouncement will impact
its financial statements.





In June
2009, the FASB issued ASC 810 (formerly SFAS 167) for determining whether to
consolidate a variable interest entity. These amended standards eliminate a
mandatory quantitative approach to determine whether a variable interest gives
the entity a controlling financial interest in a variable interest entity in
favor of a qualitatively focused analysis, and require an ongoing reassessment
of whether an entity is the primary beneficiary. These amended standards are
effective for the Company beginning in the first quarter of fiscal year 2010.
The Company does not believe this pronouncement will impact its financial
statements.




In August
2009, the FASB issued Accounting Standards Update ("ASU") 2009-05, which amends
ASC Topic 820, Measuring
Liabilities at Fair Value , which provides additional
guidance on the measurement of liabilities at fair value. These amended
standards clarify that in circumstances in which a quoted price in an active
market for the identical liability is not available, the Company is required to
use the quoted price of the identical liability when traded as an asset, quoted
prices for similar liabilities, or quoted prices for similar liabilities when
traded as assets. If these quoted prices are not available, the Company is
required to use another valuation technique, such as an income approach or a
market approach. These amended standards are effective for the Company beginning
in the fourth quarter of fiscal year 2009 and are not expected to have a
significant impact on the Company’s consolidated financial
statements.




27


Item
3. Quantitative and Qualitative Disclosures about Market Risk.




Not
applicable.




Item
4. Controls and Procedures.




Disclosure Controls and
Procedures




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





Changes in Internal Control
over Financial Reporting




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





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





PART
II - OTHER INFORMATION





Item 1. Legal
Proceedings.





From time
to time, the Company becomes 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 the Company’s 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. Reserved.





Item 5. Other
Information





Not
applicable.


28


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
      2002*32.2
              
              Certification
      of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*




* This
Exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, the "Exchange Act,” or otherwise subject to liability
under that section, nor shall it be deemed incorporated by reference in any
filing under the Securities Act of 1933, as amended, or the Exchange Act, except
as expressly set forth by specific reference in such filing.




29




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:
November16,
2010




SHENGTAI
      PHARMACEUTICAL, INC.By:
            /s/ Qingtai LiuChief
      Executive Officer(Principal
      Executive Officer)By:
            /s/ Hu YeHu
      YeChief
      Financial Officer(Principal
      Financial Officer)




30