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, 2009





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





For the
transition period from ______________ to _____________




Commission
file number: 000-51312





SHENGTAI
PHARMACEUTICAL, INC.


(Exact
name of registrant as specified in its charter)




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




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





011-86-536-6295802


(Registrant’s
telephone number, including area code)






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





Indicate by check mark whether the
registrant (1) has filed reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days.  Yes xNo o





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 o  No o





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
            o
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            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 oNo x








APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS





Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Sections
12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court.     Yes o    No
£





APPLICABLE
ONLY TO CORPORATE ISSUERS





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





As of
October 31, 2009, there are 19,169,805  shares of $0.001 par value common
stock issued and outstanding.













FORM
10-Q


UNIVERSAL
TRAVEL GROUP


INDEX





PagePART
      I.
            
            Financial
      Information
            
            1Item
      1.  Financial Statements (Unaudited)
            
            1Consolidated
      Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
      2008
            
            1Consolidated
      Statements of Income And other Comprehensive Income for the Three Months
      Ended  September 30, 2009 and 2008 (Unaudited)
            
            2Consolidated
      Statements of Cash Flows for the Three Months Ended September 30, 2009 and
      2008 (Unaudited)
            
            3Consolidated
      Statements of Stockholders' Equity
            
            4Notes
      to Consolidated Financial Statements as of September 30, 2009
      (Unaudited)
            
            5Item
      2. Management’s Discussion and Analysis of Financial Condition or Plan of
      Operation
            
            25Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.
            
            32Item
      4. Controls and Procedures
            
            32PART
      II.
            
            Other
      Information
            
            33Item
      1. Legal Proceedings
            
            33Item
      1A. Risk Factors.
            
            33Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds
            
            33Item
      3. Defaults Upon Senior Securities
            
            33Item
      4. Submission of Matters to a Vote of Security Holders.
            
            33Item
      5. Other Information
            
            33Item
      6. Exhibits
            
            33









PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements (Unaudited)




SHENGTAI
      PHARMACEUTICAL INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAS
      OF SEPTEMBER 30, 2009 AND JUNE 30, 2009(UNAUDITED)





SEPTEMBER
      30,
            
            
            JUNE
      30,2009
            
            
            2009ASSETSCURRENT
      ASSETS:Cash
            
            $
            3,010,429
            
            
            $
            1,779,476Restricted
      cash
            
            
            9,769,193
            
            
            
            31,730,382Accounts
      receivable, net of allowance for doubtful accounts of
    $946,852
            
            
            6,952,207
            
            
            
            6,922,982Notes
      receivable
            
            
            2,161,298
            
            
            
            1,074,011Other
      receivables
            
            
            139,277
            
            
            
            79,598Loan
      to related party
            
            
            440,100
            
            
            
            439,500Inventories
            
            
            7,164,005
            
            
            
            6,215,707Prepayments
            
            
            417,676
            
            
            
            211,793Total
      current assets
            
            
            30,054,185
            
            
            
            48,453,449PLANT
      AND EQUIPMENT, net
            
            
            69,649,137
            
            
            
            69,380,016OTHER
      ASSETS:Investment
      in Changle Shengshi Redian Co., Ltd.
            
            
            4,197,043
            
            
            
            3,952,310Intangible
      assets - land use right, net of accumulated amortization
            
            
            3,179,403
            
            
            
            3,145,590Total
      other assets
            
            
            7,376,446
            
            
            
            7,097,900Total
      assets
            
            $
            107,079,767
            
            
            $
            124,931,365LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            3,849,985
            
            
            $
            4,737,156Accounts
      payable and accrued liabilities - related party
            
            
            589,590
            
            
            
            437,112Notes
      payable - banks
            
            
            13,261,680
            
            
            
            35,218,600Short
      term loans
            
            
            29,633,400
            
            
            
            25,637,500Accrued
      liabilities
            
            
            209,238
            
            
            
            233,110Other
      payable
            
            
            620,639
            
            
            
            424,341Employee
      loans
            
            
            519,720
            
            
            
            730,502Other
      payable - officer
            
            
            248,747
            
            
            
            248,415Third
      party loan
            
            
            -
            
            
            
            248,336Customer
      deposit
            
            
            2,569,718
            
            
            
            1,906,177Taxes
      payable
            
            
            2,093,187
            
            
            
            2,066,878Long
      term loan-current matunties
            
            
            2,566,367
            
            
            
            2,447,783Total
      current liabilities
            
            
            56,162,271
            
            
            
            74,335,910LONG
      TERM LIABILITIESOther
      payable - noncurrent
            
            
            4,960,643
            
            
            
            5,642,556Total
      long term liabilities
            
            
            4,960,643
            
            
            
            5,642,556Total
      liabilities
            
            
            61,122,915
            
            
            
            79,978,466COMMITMENTS
      AND CONTINGENCIES
            
            
            -
            
            
            
            -SHAREHOLDERS'
      EQUITY:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock, $0.001 par value, 100,000,000 shares authorized, 19,169,805 shares
      issued and outstanding
            
            
            19,170
            
            
            
            19,170Additional
      paid-in capital
            
            
            20,782,473
            
            
            
            20,623,655Statutory
      reserves
            
            
            3,017,173
            
            
            
            2,894,902Retained
      earnings
            
            
            17,134,251
            
            
            
            16,472,689Accumulated
      other comprehensive income
            
            
            5,003,785
            
            
            
            4,942,483Total
      shareholders' equity
            
            
            45,956,852
            
            
            
            44,952,899Total
      liabilities and shareholders' equity
            
            $
            107,079,767
            
            
            $
            124,931,365





The
accompanying notes are an integral part of this statement.




1




SHENGTAI
      PHARMACEUTICAL INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
      THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008(UNAUDITED)





2009
            
            
            2008NET
      SALES
            
            $
            23,127,057
            
            
            $
            18,123,728COST
      OF SALES
            
            
            19,805,701
            
            
            
            14,931,187GROSS
      PROFIT
            
            
            3,321,356
            
            
            
            3,192,541SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
            
            
            2,084,689
            
            
            
            2,429,790INCOME
      FROM OPERATIONS
            
            
            1,236,667
            
            
            
            762,751OTHER
      (EXPENSE) INCOME:Earnings
      on equity investment
            
            
            146,146
            
            
            
            1,851Non-operating
      income
            
            
            223,591
            
            
            
            11,869Non-operating
      expense
            
            
            (7,270
            )
            
            
            (8,910
            )Interest
      expense and other charges
            
            
            (728,786
            )
            
            
            (21,839
            )Interest
      income
            
            
            1,382
            
            
            
            17,293Other
      income (expense), net
            
            
            (364,936
            )
            
            
            264INCOME
      BEFORE PROVISION FOR INCOME TAXES
            
            
            871,731
            
            
            
            763,015PROVISION
      FOR INCOME TAXES
            
            
            87,897
            
            
            
            133,219NET
      INCOME
            
            
            783,833
            
            
            
            629,796OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustments
            
            
            61,302
            
            
            
            164,273COMPREHENSIVE
      INCOME
            
            $
            845,135
            
            
            $
            794,069EARNINGS
      PER SHAREBasic
            
            $
            0.04
            
            
            $
            0.03Diluted
            
            $
            0.04
            
            
            $
            0.03WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
            
            
            19,169,805
            
            
            
            19,094,805Diluted
            
            
            19,169,805
            
            
            
            19,353,448




The
accompanying notes are an integral part of this statement.




2




SHENGTAI
      PHARMACEUTICAL INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008(UNAUDITED)





2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            783,833
            
            
            $
            629,796Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
            
            
            1,918,362
            
            
            
            951,659Amortization
            
            
            13,907
            
            
            
            13,051Allowance
      for bad debts
            
            
            (646
            )
            
            
            226,911Share
      based compensation to employees
            
            
            158,818
            
            
            
            158,818Gain
      on disposal of land use right
            
            
            (739
            )
            
            
            -Earnings
      on equity investment
            
            
            (146,146
            )
            
            
            (1,851
            )Change
      in operating assets and liabilities:Accounts
      receivable
            
            
            (19,117
            )
            
            
            2,220,604Notes
      receivable
            
            
            (1,085,154
            )
            
            
            (685,757
            )Other
      receivables
            
            
            (59,533
            )
            
            
            (10,957
            )Inventories
            
            
            (1,032,279
            )
            
            
            426,432Prepayments
            
            
            (205,488
            )
            
            
            175,061Deferred
      assets
            
            
            -
            
            
            
            (58,966
            )Accounts
      payable
            
            
            (885,086
            )
            
            
            (1,069,660
            )Accrued
      liabilities
            
            
            (24,153
            )
            
            
            535,069Accounts
      payable - related party
            
            
            143,788
            
            
            
            (727,816
            )Other
      payable
            
            
            586,245
            
            
            
            324,266Customer
      deposit
            
            
            660,533
            
            
            
            606,375Taxes
      payable
            
            
            23,473
            
            
            
            (742,003
            )Net
      cash provided by operating activities
            
            
            830,620
            
            
            
            2,971,032CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      plant and equipment
            
            
            (2,094,456
            )
            
            
            (1,723,339
            )Proceeds
      from equipment disposal
            
            
            2,535
            
            
            
            -Acquisition
      of land use right
            
            
            (43,407
            )
            
            
            -Lease
      payments for equipment purchase
            
            
            (448,627
            )
            
            
            (508,720
            )Net
      cash used in investing activities
            
            
            (2,583,954
            )
            
            
            (2,232,059
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      in restricted cash
            
            
            21,990,729
            
            
            
            1,211,722Borrowings
      on notes payable - banks
            
            
            2,932,200
            
            
            
            1,961,626Payments
      on notes payable - banks
            
            
            (24,923,700
            )
            
            
            (4,391,700
            )Borrowings
      on short term loans
            
            
            3,958,470
            
            
            
            1,463,900Payments
      on short term loans
            
            
            -
            
            
            
            (2,444,713
            )Borrowings
      on employee loans
            
            
            14,661
            
            
            
            201,287Payments
      on employee loans
            
            
            (226,310
            )
            
            
            (293,128
            )Borrowings
      on third party loan
            
            
            83,193
            
            
            
            -Payments
      on third party loan
            
            
            (331,715
            )
            
            
            (279,634
            )Payment
      on capital lease obligation
            
            
            (516,026
            )
            
            
            -Net
      cash provided by provided by (used in) financing
activities
            
            
            2,981,502
            
            
            
            (2,570,640
            )EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
            
            
            2,785
            
            
            
            47,732INCREASE
      (DECREASE) IN CASH
            
            
            1,230,953
            
            
            
            (1,783,935
            )CASH,
      beginning of period
            
            
            1,779,476
            
            
            
            3,405,606CASH,
      end of period
            
            $
            3,010,429
            
            
            $
            1,621,671SUPPLEMENTAL
      DISCLOSURECash
      paid for Interest, net of capitalized interest
            
            $
            820,759
            
            
            $
            -Cash
      paid for Income taxes
            
            $
            -
            
            
            $
            731,950Non-cash
      investing and financing activities -Acquisition
      of plant and equipment through advances on plant and equipments
      purchase
            
            $
            -
            
            
            $
            1,093,496Acquisition
      of plant and equipment in exchange for note receivable
            
            $
            -
            
            
            $
            327,638





The
accompanying notes are an integral part of this statement.




3




SHENGTAI
      PHARMACEUTICAL INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITYFOR
      THE YEARS ENDED JUNE 30, 2009 AND 2008 AND THREE MONTHS ENDED SEPTEMBER
      30, 2009





Common
      stock
            
            
            
            
            
            Retained
      earnings
            
            
            Accumulated
      otherShares
            
            
            Par
              value
            
            
            Paid-incapital
            
            
            Statutoryreserves
            
            
            Unrestricted
            
            
            comprehensive
                income
            
            
            TotalsBALANCE,
      June 30, 2008
            
            
            19,094,805
            
            
            $
            19,095
            
            
            $
            19,987,708
            
            
            $
            2,894,902
            
            
            $
            19,136,577
            
            
            $
            4,717,121
            
            
            $
            46,755,403Option
      issued to employees
            
            
            -
            
            
            
            -
            
            
            
            635,272
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            635,272New
      shares issuance for warrants exchange
            
            
            75,000
            
            
            
            75
            
            
            
            675
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            750Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,663,888
            )
            
            
            -
            
            
            
            (2,663,888
            )Adjustment
      to statutory reserve
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      currency translation adjustments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            225,362
            
            
            
            225,362BALANCE,
      June 30, 2009
            
            
            19,169,805
            
            
            
            19,170
            
            
            
            20,623,655
            
            
            
            2,894,902
            
            
            
            16,472,689
            
            
            
            4,942,483
            
            
            
            44,952,899Option
      issued to employees
            
            
            -
            
            
            
            -
            
            
            
            158,818
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            158,818Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            783,833
            
            
            
            -
            
            
            
            783,833Adjustment
      to statutory reserve
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            122,271
            
            
            
            (122,271
            )
            
            
            -
            
            
            
            -Foreign
      currency translation adjustments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            61,302
            
            
            
            61,302BALANCE,
      September 30, 2009
            
            
            19,169,805
            
            
            $
            19,170
            
            
            $
            20,782,473
            
            
            $
            3,017,173
            
            
            $
            17,134,251
            
            
            $
            5,003,785
            
            
            $
            45,956,852





The
accompanying notes are an integral part of this statement.




4




SHENGTAI
PHARMACEUTICAL INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


SEPTEMBER
30, 2009


(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 pharmaceutical raw materials (e.g., glucose,
dehydrated glucose) and drug supplements (e.g., starch, dextrin, polyacrylic
acid resin). The Company’s primary business operations are conducted in the
People’s Republic of China (“PRC”).





Note
2 - Summary of significant accounting policies




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 2008 annual
report filed on Form 10-K. The results of the three month period ended
September 30, 2009 are not necessarily indicative of the results to be expected
for the full fiscal year ending June 30, 2010.




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 share 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 ASC 830
(Originally issued Statement of Financial Accounting Standards (“SFAS”) No.
52, “Foreign Currency Translation,”) results of operations and cash flows are
translated at average exchange rates during the period, and assets and
liabilities are translated at the unified exchange rates at the balance sheet
dates, and equity is translated at the historical exchange rates. As a result,
amounts related to assets and liabilities reported on the statements of cash
flows will not necessarily agree with changes in the corresponding accounts on
the balance sheets. Translation adjustments resulting from this process are
included in accumulated other comprehensive income in the statements of
shareholders’ equity. Translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.




5




Assets
and liabilities were translated at 6.82 RMB and 6.83 RMB to $1.00 at September
30, 2009 and June 30, 2009, respectively. The equity accounts were stated at
their historical rate. The average translation rates applied to income statement
for the three months ended September 30, 2009 and 2008 were 6.83 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.





Revenue
recognition





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




Shipping and
handling





Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted to
$1,149,964 and $779,336 for the three months ended September 30, 2009 and 2008,
respectively.




Financial
instruments





Pursuant
to ASC 825 (Originally issued SFAS 107, “Disclosures about Fair Value of
Financial Instruments”) defines financial instruments and requires disclosure of
the fair value of those instruments. ASC 820 (Originally issued 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 disclosures 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, 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.




6




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
(Originally issued SFAS 157).





Stock-based
compensation





The
Company records stock-based compensation expense pursuant to ASC 718 (Originally
issued SFAS 123R, “Share Based Payment.”) The Company uses the
Black-Scholes option pricing model which requires the input of highly complex
and subjective variables including the expected life of options granted and the
Company’s expected stock price volatility over a period equal to or greater than
the expected life of the options. Because changes in the subjective assumptions
can materially affect the estimated value of the Company’s employee stock
options, it is management’s opinion that the Black-Scholes option pricing model
may not provide an accurate measure of the fair value of the Company’s employee
stock options. Although the fair value of employee stock options is determined
in accordance with SFAS 123R using an option pricing model, that value may not
be indicative of the fair value observed in a willing buyer/willing seller
market transaction.





Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. ASC 718 (Originally issued SFAS 123R) requires forfeitures to be
estimated at the time of grant and revised in subsequent periods, if necessary,
if actual forfeitures differ from those estimates.




Earnings per
share





The
Company reports earnings per share in accordance with the provisions of ASC 260
(Originally issued SFAS No. 128 (“SFAS 128”), "Earnings Per
Share.") ASC 260 requires presentation of basic and diluted earnings per
share in conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding during the period. Diluted earnings per
share takes into account the potential dilution that could occur if securities
or other contracts to issue common stock were exercised and converted into
common stock.




The
following is a reconciliation of the basic and diluted earnings per
share:




Three
      months ended
              September
      30,2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)Net
      income for earnings per share
            
            $
            783,833
            
            
            $
            629,796Weighted
      average shares used in basic computation
            
            
            19,169,805
            
            
            
            19,094,805Diluted
      effect of warrants
            
            
            -
            
            
            
            258,643Weighted
      average shares used in diluted computation
            
            
            19,169,805
            
            
            
            19,353,448Earnings
      per shareBasic
            
            $
            0.04
            
            
            $
            0.03Diluted
            
            $
            0.04
            
            
            $
            0.03





7




At
September 30, 2009, no warrants or stock options were included the calculation
of diluted earnings per share because there are no diluted effects for the three
months ended September 30, 2009. At September 30, 2008, 4,473,945 shares of
outstanding warrants were included in the three months ended September 30, 2008
calculation of diluted earnings per share and 660,000 shares of outstanding
stock options were excluded from the diluted earnings per share calculation as
they are anti-dilutive.





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, 2009
and June 30, 2009, these amounts totaled $9,769,193 and $31,730,382,
respectively.





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 until certain
criteria are met. As of September 30, 2009 and June 30, 2009, the amount not
disbursed was $204,353 and $203,582, respectively, and these are included in
restricted cash in the consolidated balance sheets.





Accounts
receivable





In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests.   Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible. This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material. Certain accounts receivable amounts are
charged off against allowances after designated period of collection efforts.
Subsequent cash recoveries are recognized as income in the period when they
occur. The allowance for doubtful accounts amounted to $946,852 and $946,207 as
of September 30, 2009 and June 30, 2009, respectively.




Concentrations
of risk





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




8




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, 2009 and June 30, 2009,
the Company’s bank balances exceeded government insured limits or not covered by
insurance by approximately $12,277,373 and $32,880,229, respectively. The
Company has not experienced, nor does it anticipate, nonperformance by these
institutions.





The
Company’s concentrations of credit risk are primarily in trade accounts
receivable and accounts payable. For the three months ended September 30, 2009
and 2008, there were no customers that individually comprised 10% or more of the
Company’s total revenues. For the three months ended September 30, 2009 and
2008, there were no vendors that individually accounted for over 10% or more of
the Company’s total purchases.





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





The
following table summarizes financial information for the three months ended
September 30, 2009 and 2008, concerning the Company’s revenues based on
geographic area:





Revenue
            
            September
      30,
              2009
            
            September
      30,
              2008(Unaudited)
            
            (Unaudited)China
            
            $
            
            20,039,076
            
            
            $
            15,960,750International
            
            
            
            3,087,981
            
            
            
            2,162,978Total
            
            $
            
            23,127,057
            
            
            $
            18,123,728




Inventories





Inventories
are stated at the lower of cost (weighted average basis) or market and consist
of the following:




September
      30,
              2009
            
            
            June
      30,
              2009(Unaudited)Raw
      materials
            
            $
            2,152,267
            
            
            $
            1,523,654Work-in-progress
            
            
            2,294,471
            
            
            
            1,709,595Finished
      goods
            
            
            2,717,267
            
            
            
            2,982,458Total
            
            $
            7,164,005
            
            
            $
            6,215,707





9




The
Company reviews its inventory periodically for possible obsolete goods or to
determine if any reserves are necessary. As of September 30, 2009, the Company
has determined that no reserves are necessary.





Prepayments





Prepayments
represent partial payments or deposits for inventory purchases.





Plant and
equipment





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





Estimated
useful lives of the assets are as follows:





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




Long-lived
assets of the Company are reviewed at least annually or more often if
circumstances dictate, to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
also re-evaluates the periods of depreciation to determine whether subsequent
events and circumstances warrant revised estimates of useful lives. As of
September 30, 2009, the Company expects these assets to be fully
recoverable.





Investment in unconsolidated
affiliate





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




10




Intangible
assets





Intangible
assets consist of the following:




September 30,
              2009
            
            
            June 30,
              2009(Unaudited)Land
      use rights:
            
            $
            3,394,113
            
            
            $
            3,346,110Less:
      accumulated amortization
            
            
            (220,422
            )
            
            
            (206,407
            )Land
      use rights, net
            
            
            3,173,691
            
            
            
            3,139,703Software
            
            
            7,335
            
            
            
            7,325Less:
      accumulated amortization
            
            
            (1,623
            )
            
            
            (1,438
            )Software,
      net
            
            
            5,712
            
            
            
            5,887Total
      intangible assets, net
            
            $
            3,179,403
            
            
            $
            3,145,590




Intangible
assets are primarily comprised of land use rights which are pledged as
collateral for bank loans as of September 30, 2009. 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 $3,688,326. From July 2008 to
March 2009, the Company acquired various land use rights for approximately
$480,520. The Company amortizes the cost of land use rights over the usage terms
using the straight-line method.




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





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





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, 2009, the Company
determined that there had been no impairment. Total amortization expense for the
three months ended September 30, 2009 and 2008 amounted to $ 13,907 and
$13,051 respectively.





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




Years
      ended September 30,
            
            Amount2010
            
            $
            56,4602011
            
            
            56,4602012
            
            
            56,4602013
            
            
            56,4602014
            
            
            56,460Thereafter
            
            
            2,897,103Total
            
            $
            3,179,403




11




Income
taxes





The
Company accounts for income taxes in accordance with ASC 740 (Originally
issued SFAS 109, “Accounting for Income Taxes.”) Under the asset and
liability method as required by ASC 740 (Originally issued SFAS 109),
deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under ASC 740, the effect on deferred
income taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recognized if it is more
likely than not that some portion, or all of, a deferred tax asset will not be
realized. As of September 30, 2009 and June 30, 2009, the Company did not have
any deferred tax assets or liabilities, and as such, no valuation allowances
were recorded at September 30, 2009 and June 30, 2009.





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





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




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





Value Added
Tax





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





VAT on
sales and VAT on purchases amounted to $2,969,214 and $2,954,912 for the three
months ended September 30, 2009, and  $1,884,466 and $2,476,725 for
the three months ended September 30, 2008, 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.




12





Recently issued
accountingpronouncements





In June
2009, the FASB issued ASC 105 (previously SFAS No. 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 (previously SFAS No. 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 (previously SFAS No. 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. SFAS 166 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 (previously SFAS No. 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 us beginning in the first quarter of
fiscal year 2010 and we are currently evaluating the impact that adoption will
have on our consolidated 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, we are 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, we are required to use another valuation
technique, such as an income approach or a market approach. These amended
standards are effective for us beginning in the fourth quarter of fiscal year
2009 and are not expected to have a significant impact on our consolidated
financial statements.




13





Note 3 - Plant and equipment





Plant and
equipment consist of the following:





September
      30,
              2009
            
            
            June
      30,
              2009(Unaudited)Buildings
            
            $
            21,655,458
            
            
            $
            21,612,750Machinery
      and equipment
            
            
            62,369,049
            
            
            
            62,209,134Automobile
      facilities
            
            
            532,113
            
            
            
            519,560Electronic
      equipment
            
            
            477,827
            
            
            
            446,399Construction
      in progress
            
            
            1,962,542
            
            
            
            -Total
            
            
            86,996,989
            
            
            
            84,787,843Accumulated
      depreciation
            
            
            (17,347,852
            )
            
            
            (15,407,827
            )Total
            
            $
            69,649,137
            
            
            $
            69,380,016





Construction-in-progress
represents the costs incurred in connection with the construction of buildings
or new additions to the Company’s plant facilities. No depreciation is provided
for construction-in-progress until such time as the assets are completed and
placed into service. Depreciation expense for the three months ended September
30, 2009 and 2008 amounted to $1,918,362 and $951,659, respectively. Interest
costs totaling $13,097 and $701,621 was capitalized into
construction-in-progress for the three months ended September 30, 2009 and 2008,
respectively.





Note 4 - Investment in unconsolidated
affiliate





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





Summarized
unaudited financial information of Changle Shengshi is as follows:





September
      30,
            
            
            June
      30,2009
            
            
            2009(unaudited)
            
            
            (unaudited)Current
      assets
            
            $
            12,685,584
            
            
            $
            12,116,940Non-current
      assets
            
            
            40,081,896
            
            
            
            34,455,506Total
      assets
            
            
            52,767,480
            
            
            
            46,572,446Current
      liabilities
            
            
            29,560,970
            
            
            
            24,818,492Non-current
      liabilities
            
            
            1,995,120
            
            
            
            1,992,400Shareholders'
      equity
            
            
            21,211,390
            
            
            
            19,761,554Total
      liabilities and shareholders' equity
            
            $
            52,767,480
            
            
            $
            46,572,446




14




Summarized
financial information of Changle Shengshi for the three months ended September
30, 2009 and 2008 is as follows:





September
      30,2009
            
            
            2008(unauditd)
            
            
            (unaudited)Net
      sales
            
            $
            11,769,984
            
            
            $
            10,394,563Gross
      profit
            
            $
            2,178,689
            
            
            $
            360,394Income
      before taxes
            
            $
            1,594,598
            
            
            $
            14,714Net
      income
            
            $
            1,195,948
            
            
            $
            11,035Percentage
      of ownership
            
            
            20
            %
            
            
            20
            %Company
      share of income
            
            $
            239,190
            
            
            $
            2,207Elimination
      of intercompany profit
            
            
            93,043
            
            
            
            356Company’s
      share of net income
            
            $
            146,146
            
            
            $
            1,851





Note
5 - Related party transactions





The
Company’s utilities are partially provided by Changle Shengshi (See Note 4). As
of September 30, 2009 and June 30, 2009, the Company’s accounts payable due to
Changle Shengshi was approximately $589,590 and $437,112, respectively, which
related to a portion of the Company’s utilities being provided by Changle
Shengshi. The utilities expense amounted to approximately $4,578,447 and
$1,676,331 for the three months ended September 30, 2009 and 2008,
respectively.





The
Company’s receivables from one loan contract with Changle Shengshi are as
follows:





September
      30,
              2009
            
            
            June
      30,
              2009(Unaudited)Due
      on September 14, 2009, unsecured, 7.60% interest rate per
      annum
            
            $
            440,100
            
            
            $
            439,500




This amount was not collected as of September 30,
2009. The Company has the right to apply the balance to the future utilities
purchases from this party.




15





Note
6 - Debt





Short term
loans





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




September
      30,
              2009
            
            
            June
      30,
              2009(Unaudited)Loans
      from Bank of China, due various dates from January 2010 to June 2010;
      monthly interest only payments; interest rates ranging from 5.0445% to
      5.31% per annum, secured by certain properties.
            
            $
            13,203,000
            
            
            $
            13,185,000Loans
      from Industrial and Commercial Bank of China, due various dates from
      December 2009 to April 2010; monthly interest only payments; interest
      rates are 6.372% per annum, guaranteed by an unrelated third party and
      secured by certain properties.
            
            
            7,628,400
            
            
            
            6,592,500Loan
      from Agriculture Bank of China, due from June to September 2010; monthly
      interest only payments; interest rate of 5.841% per annum, guaranteed by
      an unrelated third party, unsecured
            
            
            5,868,000
            
            
            
            2,930,000Loan
      from Xingye Bank, due October 2009; monthly interest only payments;
      interest rate of 7.9695% per annum, guaranteed by an unrelated third
      party, unsecured.
            
            
            1,467,000
            
            
            
            1,465,000Loan
      from ShangHai PuDong Development Bank, due November 2009; monthly
      interest-only payments; interest rate of 6.66% per annum, guaranteed by an
      unrelated third party, unsecured.
            
            
            1,467,000
            
            
            
            1,465,000Total
            
            $
            29,633,400
            
            
            $
            25,637,500





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





September
      30,
              2009Buildings
      and improvements
            
            $
            16,712,192Land
      use rights
            
            
            2,580,495Total
            
            $
            19,292,687




16




Notes payable -
banks





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





September
      30,
              2009
            
            
            June
      30,
              2009(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.
            
            $
            1,467,000
            
            
            $
            1,465,000Shanghai
      PuDong Development Bank, due in October 2009, 0.05% transaction fee,
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
            
            
            1,467,000
            
            
            
            1,465,000Bank
      of China, due on various dates from November 2009 to April 2010, 0.05%
      transaction fee, and restricted cash required 100% of loan amount,
      guaranteed by an unrelated third party.
            
            
            5,868,000
            
            
            
            23,440,000Industrial
      and Commercial Bank of China, due on various dates from August to October
      2009, 0.05% transaction fee, restricted cash required 50% of loan amount,
      guaranteed by an unrelated third party.
            
            
            4,459,680
            
            
            
            7,383,600Industrial
      and Commercial Bank of China, due in August 2009, 0.05% transaction fee,
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
            
            
            -
            
            
            
            1,465,000Total
            
            $
            13,261,680
            
            
            $
            35,218,600




Employee
loans





From time
to time, the Company borrows monies from certain employees for cash flow
purposes of the Company. These loans do not require collateral, and the
principal is due upon demand. Before January 1, 2009, the interest rate was at
7.2% for the first six months, and then 10.8% thereafter until the full
principal amounts are paid by the Company. After January 1, 2009, the interest
rate was changed to 7.2% for the loan period. Employee loans amounted to
$519,720 and $730,502 as of September 30, 2009 and June 30, 2009, respectively.
Interest expense related to these loans amounted to $9,349 and $35,233 for the
three months ended September 30, 2009, and 2008, respectively.




Employee loan -
officer





From time
to time, the Company borrows monies from Qingtai Liu, The Company’s CEO and
President for cash flow purposes of the Company. The loan does not require
collateral and the principal is due upon demand. Before January 1, 2009, the
interest rate was at 7.2% for the first six months, and then 10.8% thereafter
until the full principal amounts are paid by the Company. After January 1, 2009,
the interest rate was changed to 7.2% for the loan period. Employee loan from
officer amounted to $248,747 and $248,415 as of September 30, 2009 and June 30,
2009, respectively. Interest expense related this loan was de minimis for the
three months ended September 30, 2009, and 2008,respectively.




17





Third party
loan





From time
to time, the Company borrows money from an unrelated individual for use in
operations. The loan does not require collateral. 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. The principal is due
upon demand. Balance on this loan as of September 30, 2009 and June 30, 2009 was
$0 and $248,336, respectively. Interest expense related this loan was de minimis
for the three months ended September 30, 2008, and 2009,
respectively.





Interest





Total
interest expense and financial charges, net of capitalized interest, for the
three months ended September 30, 2009 and 2008 on all debt, amounted to $728,786
and $21,893, respectively. Interest capitalized into construction-in-progress
totaled $13,097 and $701,621 for the three months ended September 30, 2009 and
2008, respectively.





Note
7 - Income taxes





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





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





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





The key
changes are:





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





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





The
Company’s subsidiary, Weifang Shengtai was established before March 16, 2007,
and therefore is qualified to continue to be taxed at the reduced rate as
described above until the tax holiday term is completed. Starting on September
1, 2009, the Company was subject to a 25% income tax rate pursuant to the new
income tax laws. During the three months ended September 30, 2009 and 2008, the
provision for income taxes was $87,897 and $133,219, respectively.




18





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





2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)U.S.
      Statutory rates
            
            
            34.0
            %
            
            34.0
            %Foreign
      income not recognized in USA
            
            
            (34.0
            )
            
            (34.0
            )China
      income taxes
            
            
            25.0
            
            
            25.0China
      income tax exemption
            
            
            (4.3
            )
            
            (13.0
            )Total
      provision for income taxes
            
            
            20.7
            %
            
            12.0
            %




For the
three months ended September 30, 2008, the Company’s effective tax rate was
12.0%.  The Company received special tax credits from the local
government due to government enforced regulation.  In addition, income
before income taxes includes losses from non-Chinese entities, which are not
deductible.  After excluding the special tax credits and adjusting the
non-Chinese entities losses, the Company’s effective rate was equivalent to the
effective rate in China.





The
estimated tax savings due to the tax exemption for the three months ended
September 30, 2009 and 2008 amounted to $0 and $174,934, respectively. The net
effect on basic earnings per share if the income tax had been applied would
decrease basic earnings per share for the three months ended September 30, 2009
and 2008 by $0.00 and $0.01, respectively. The net effect on diluted earnings
per share if the income tax had been applied would decrease diluted earnings per
share for the three months ended September 30, 2009 and 2008 by $0.00 and $0.01,
respectively.





Shengtai
Pharmaceutical, Inc. and Shengtai Holding, Inc. were incorporated in the United
States and have incurred estimated accumulated net operating losses of $2,
200,814 as of September 30, 2009 and $159,058 for income tax purposes for
the three months ended September 30, 2009 respectively.  The
estimated net operating loss carry forwards for United States income taxes
amounted to $748,277 which may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilized, from 2026 through
2029.  Management believes that the realization of the benefits from
these losses appears uncertain due to the Company’s limited operating history
and continuing losses for United States income tax
purposes.  Accordingly, the Company has provided a 100% valuation
allowance on the deferred tax benefit to reduce the asset to
zero.  The net change in the valuation allowance for the period ended
September 30, 2009 was $54,080 and the valuation allowance as of September 30,
2009 amounted to $748,277.





The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $21,455,257 as of September 30, 2009, is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if the Company concluded that such earnings will be remitted in the
future.




19





Taxes
payable





Taxes
payable consisted of the following:




September
      30,
              2009
            
            
            June
      30,
              2009(Unaudited)VAT
      payable
            
            $
            1,560,608
            
            
            $
            1,622,859Individual
      income tax withheld
            
            
            349
            
            
            
            423Income
      tax payable
            
            
            475,780
            
            
            
            387,299Housing
      property tax payable
            
            
            10,189
            
            
            
            10,098Others
            
            
            46,261
            
            
            
            46,199Total
      taxes payable
            
            $
            2,093,187
            
            
            $
            2,066,878




Note
8 - Commitments and Contingent liabilities





Guarantees





As of
September 30, 2009, the Company has guaranteed $4.4 million short term loans for
an unrelated party, Yuanli Chemical Engineering Inc. (“Yuanli”).





The
Company is obligated to perform under the guarantee if Yuanli fails to pay
principal and interest payments when due. The maximum potential amount of future
undiscounted payments under the guarantee are about $4.6 million for Yuanli,
including accrued interests. The Company did not record a liability for the
guarantee because management knows Yuanli is current in its payment obligations,
and the likelihood of the Company having to make good on the guarantee is
remote.




Detail of
guarantee amount to the unrelated party as of September 30, 2009 is as
follows:





Short
      TermCompany
            
            Bank
      LoansYuanli
      Chemical Engineering Inc.
            
            $
            4,401,000Total
            
            $
            4,401,000





Litigation




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




20





Note
9 - Shareholders’ equity





Warrants





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





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




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





All
Investor Warrants, Placement Agent Warrants, and Lead Investor Warrants meet the
conditions for equity classification pursuant to ASC 815 (Originally
issued SFAS No. 133 “Accounting for Derivatives”) and ASC 815
(Originally issued EITF 00-19), “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.”
Therefore, these warrants were classified as equity and accounted for as common
stock issuance cost.





Warrants Outstanding
            
            
            Warrants Exercisable
            
            
            Weighted Average
              Exercise
              Price
            
            
            Average Remaining Contractual
              LifeOutstanding,
      June 30, 2008
            
            
            4,473,945
            
            
            
            4,473,945
            
            
            $
            2.54
            
            
            
            3.88Granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            75,000
            
            
            
            75,000
            
            
            
            0.01
            
            
            
            -Outstanding,
      June 30, 2009
            
            
            4,398,945
            
            
            
            4,398,945
            
            
            $
            2.60
            
            
            
            2.97Granted
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding,
      September 30, 2009 (unaudited)
            
            
            4,398,945
            
            
            
            4,
      398,945
            
            
            $
            2.60
            
            
            
            2.72




21




Stock
options





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




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





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




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





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





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




22




The stock option activity was as follows:





Options
              outstanding
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Aggregate
              Intrinsic
              ValueOutstanding,
      June 30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -Granted
            
            
            660,000
            
            
            $
            3.34
            
            
            $
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding,
      June 30, 2009
            
            
            660,000
            
            
            $
            3.34
            
            
            $
            -Granted
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding,
      September 30, 2009
            
            
            660,000
            
            
            $
            3.34
            
            
            $
            -





Following
is a summary of the status of options outstanding at September 30, 2009:




Outstanding Options
            
            
            Exercisable
      OptionsAverage
              Exercise
      Price
            
            
            Outstanding
      Options
            
            
            Average
      Remaining
              Contractual
      Life
            
            
            Average
              Exercise
      Price
            
            
            Exercisable
      Options$
            3.34
            
            
            
            660,000
            
            
            
            3.62
            
            
            $
            3.34
            
            
            
            165,000





Compensation
expense from stock options recognized for the three months ended September 30,
2009 and 2008 were both $158,818. As of September 30, 2009,
approximately $952,914 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 of approximately 1.5
years.




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.




23




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, 2009 and 2008, the
Company transferred $122,271 and $0 to this reserve respectively. The surplus
reserve fund is non-distributable other than during liquidation and can be used
to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.





Pursuant
to the Company’s articles of incorporation, the Company is to appropriate 10% of
its net profits as statutory surplus reserve up to $7,500,000. As of September
30, 2009 the Company had appropriated to the statutory reserve approximately
$3,000,000. The Company plans to contribute $4,500,000 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
$5,127,500. 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 $8,109,000 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 $43,950 from the Company. A one time processing fee of $51,275 was
paid by the Company related to this lease. A loss of $201,793 realized on this
transaction has been recognized in non-operating expense since the carrying
value of the equipment sold exceeded its fair value used as the sale price. The
minimum payments for the remaining lease term of 39 months from October 2009 to
December 2012 and are as follows.







Total
      lease payment
            
            $
            7,437,690Less
      imputed interest
            
            
            2,177,146Total
      capital lease obligation as of September 30, 2009
            
            
            5,260,544Less
      current maturity
            
            
            652,927Capital
      lease obligation – long term portion as of September 30,
    2009
            
            $
            4,607,617




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, 2009 and 2008, the Company made
contributions in the amounts of $87,616 and $135,036, respectively to the
Company’s retirement plan.




24





Note 12 - Subsequent event





Short term
loans





In
October 2009, the Company paid the outstanding amount of  $1,467,000
to XINGYE Bank of Weifang, in satisfaction of its loan terms.





In
October 2009, the Company borrowed $1.4 million from Industrial and Commercial
Bank of China, due  August2010; monthly interest only payments;
interest rates are 6.372% per annum, secured by certain properties.





Notes
payable





In
October 2009, the Company paid the outstanding amount of $4,459,680 to
Industrial and Commercial Bank of China, in satisfaction of its loan
terms.




In
October 2009, the Company paid the outstanding amount of $1,467,000 to
Agricultral Bank of China, in satisfaction of its loan terms.




In
November 2009, the Company paid the outstanding amount of $1,467,000
to  Bank of China, in satisfaction of its loan terms.





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 results of operations of 
Shengtai Pharmaceutical, Inc. (the "Company") and should be read in
conjunction with our 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 our future expectations,
contain projections of our future results of operation or financial condition or
state other "forward-looking" information. We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are 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 our actual results to
differ materially from the expectations we describe in our 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 our business, operating
results and financial condition. Actual results may differ materially from
current expectations.





Overview





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





Our
cornstarch production facility, which has a maximum capacity to produce 240,000
metric tons of cornstarch per year, was fully completed at the end of October
2007. This facility is located next to our glucose production
plants.





During
the three months ended September 30, 2009, we produced a total of 45,013 metric
tons of cornstarch, of which 29,581 metric tons were used to satisfy our own
glucose production needs. The excess cornstarch was or will be then sold to
outside customers who are in the pharmaceutical, food and beverage, and
industrial industries. The cornstarch sales amounted to $4.645 million and
accounted for 20.09% of our total sales revenue for the three months ended
September 30, 2009.




25





Our
business can be severely affected by movements in the commodity markets. Corn is
the principal raw material for our cornstarch and the price of cornstarch as a
commodity tends to follow the price of corn. Since 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 put
restrictions to control the development of industrial use of corn, such as the
conversion of corn into ethanol. Also the Chinese government has put its corn
reserve into the market to help to maintain the corn price. Since September
2008, in a sharp reversal, corn prices have been decreasing due to large corn
harvests. From July 2009, the corn prices have been increasing. Corn prices for
the three months ended September 30, 2009 are approximately 4% higher than for
the same period last year. Since October 2009, the corn prices started to
decrease again due to the harvest of the corn.





We
consider these government policies have had and will continue to have mixed
effects on our operations. Management believes that stable corn prices will help
maintain the availability of our raw materials and tend to stabilize our gross
profit margin over time, although market and economic conditions may continue to
have negative effects on our operations. However, in the three months ended
September 30, 2009, our profit margin has fallen from 18% to 14% compared
to the same period last year, as discussed below. The principal raw material for
glucose is cornstarch. By using the cornstarch manufactured from our own
cornstarch production facility, we can ensure our glucose products’ quality and
consistency. Also, because our cornstarch manufacturing facility is located next
to our glucose manufacturing facilities, we are able to eliminate shipping costs
and lower glucose products’ manufacturing costs.




At the
end of July 2008, we completed construction of a new glucose manufacturing
facility to boost our production capacity. At the end of September 2008, the
facility passed its GMP inspection. The facility has a production capacity of
120,000 tons. In April 2009, we have transferred our sodium gluconate production
line to oral glucose production line with annual production capacity of 12,000
tons. We now have a glucose production capacity of a total 192,000 tons (if
necessary, it can be easily expandable to a total of 222,000 tons).





During
the three months ended September 30, 2009, we produced a total of 31,294 metric
tons of glucose, and our sales of pharmaceutical grade glucose and other glucose
products were $13.507 million, or 58.41% of our revenues.





In
addition to our pharmaceutical glucose and cornstarch series of products,
we also produce other products such as dextrin, corn embryo, fibers, protein
powders, and phytin, which are used for food, beverage and industrial
production. The sales revenues generated from these products were $4.974
million, and constituted approximately 21.50% of our total sales revenues for
the three months ended September 30, 2009.





Management
believes that better living standards in China should lead to higher consumption
of our pharmaceutical glucose products in the PRC, especially the Dextrose
Monohydrate Transfusion Solution. In January 2009, the Chinese government
announced its medical stimulus plan to spend a total of 850 billion RMB (USD 123
billion) by 2011 to provide universal primary medical services. Over the next
three years, the multi-billion 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 to provide basic healthcare to more
people—not expensive high tech equipment.  This should increase demand
for glucose, since it is a very basic and relatively low cost element of
healthcare in clinics and hospitals. In addition, the plan will also build
hospitals and improve medical services in the rural and under-developed areas.
That is to say, more people especially more farmers in China can afford
healthcare expenses. At the same time, despite the current deceleration in
growth, we believe that the continuing economic growth in China, the rising
purchasing power of China’s domestic market, as well as increased public
awareness of quality health care products, will be the drivers in the demand for
our pharmaceutical glucose products.




26





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





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





At the
end of September 2009, as set forth above, our new glucose production facility
passed its GMP inspection, and our facilities and many of our products are fully
certified for GMP, ISO9001:2000 and HACCP international quality standards, and
globally certified HALAL, KOSHER and NON-GMO IP.




Our sales
network presently covers almost all provinces of mainland China except the Tibet
Autonomous Region. We have three representative offices in Chengdu, Guangzhou,
and Nanchang to strengthen our domestic sales network. We believe that these
offices will help us to better interact with our customers, reinforce our sales
force and improve our corporate image.




At the
same time, we have exported our products to over 70 countries, including Japan,
Singapore, Korea, Australia, Russia and India. For the three months ended
September 30, 2009, our international sales comprised approximately 13.35% of
our total sales revenues.




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





We
constantly strive to broaden and diversify our customer base. We believe that a
broader customer base will mitigate our reliance on certain customers. We
believe a broader market for our products can increase demand for our products,
reduce our vulnerability to market changes, and provide additional areas of
growth in the future. For the three months ended September 30, 2009, our top ten
customers accounted for 24% for our total sales revenue.





Results
of Operations





The
following table sets forth our statements of operations for the three months
ended September 30, 2009 and 2008:




Three
Months Ended September 30, 2009 Compared with Three Months Ended September 30,
2008





The following table shows our
operating results for the three months ended September 30, 2009 and 2008.




Three
      months
              ended
              September
      30,
              2009
            
            
            Three
      months
              ended
              September
      30,
              2008Sales
      Revenue
            
            
            23,127,057
            
            
            
            18,123,728Costs
      of Goods Sold
            
            
            19,805,701
            
            
            
            14,931,187Gross
      Profit
            
            
            3,321,356
            
            
            
            3,192,541Sales,
      General and Administrative Expenses
            
            
            2,084,689
            
            
            
            2,429,790Operating
      Income
            
            
            1,236,667
            
            
            
            762,751Other
      Net Income (Expense)
            
            
            364,936
            
            
            
            (264
            )Income
      before Income Taxes
            
            
            871,731
            
            
            
            763,015Provision
      for Income Taxes
            
            
            87,897
            
            
            
            133,219Net
      income
            
            
            783,833
            
            
            
            629,796




27




The following table shows the
breakdown of production and sales by product categories, and between internal
use to manufacture glucose products  and external sales of cornstarch,
for the three months ended September 30, 2009 and 2008.




Product
            
            Metric
      Tons
              Three
      months
              ended
      September 30,
              2009
            
            Metric
      Tons
              Three
      months
              ended
      September 30,
              2008
            
            Sales
      Revenue (%)
              Three
      months
              ended
      September 30,
              2009
            
            Sales
      Revenue (%)
              Three
      months
              ended
      September 30,
              2008Glucose
            
            31,294
            
            21,291
            
            $13,507,448
      (58.41%)
            
            $8,207,000(45.3%)Cornstarch-Internal
            
            29,581
      (65.72%)
            
            17,253
      (53.8%)Cornstarch-Sales
            
            15,432
      (34.28%)
            
            14,823
      (46.1%)
            
            $4,645,221
      (20.09%)
            
            $5,181,000
      (28.59%)Total
      Cornstarch
            
            45,013
      (100%)
            
            32,076
      (100%)Other
            
            
            
            
            
            $4,974,388
      (21.50%)
            
            $4,730,000
      (26.1%)Total
            
            
            
            
            
            $23,127,057
      (100%)
            
            $18,123,723
      (100%)




Overview




Sales
revenue for the three months ended September 30, 2009 was $23,127,057, an
increase of $5,003,329, or 27.61% compared with the corresponding period in
2008. The increase in sales revenue resulted from the increase of our glucose
sales. With the government stimulus plan taking effect, and the recovery of the
economy, the demand of our glucose products was increased compared to the same
period last year.




Costs of
goods sold for the three months ended September 30, 2009 was $19,805,701, an
increase of $4,874,514, or 32.65% compared with the corresponding period in
2008. The increase in cost of goods sold primarily resulted from increased
sales.





Gross
profit for the three months ended September 30, 2009 was $3,321,356, an increase
of $128,815, or 4.03% compared with the corresponding period in 2008. The
increase in gross profits resulted from the increase in sales compared with the
same period in 2008.





Gross
profit margin for the three months ended September 30, 2009 was 14.4%, a
decrease from 17.6% for the same period in 2008. The reasons for the decrease in
gross profit margin were because of increased raw material costs, and higher
production cost per unit due to the idle capacity from expanded new
facilities.




28





Selling,
General and Administrative expenses for the three months ended September 30,
2009 were $2,084,689, a decrease of $345,101, or 14.20% compared with the
corresponding period in 2008. The decrease in our Selling, General and
Administrative expenses was mainly the result of our efforts in controlling our
costs . We incurred $158,818 in non-cash stock option expenses for the three
months ended September 30, 2009.




Net
income for the three months ended September 30, 2009 was $783,833, an increase
of $154,037 or 24.46% compared with the corresponding period in 2008. The
increase in net income was primarily due to the increase in our sales, and
decreased selling, general, and administrative expenses.





Liquidity and Capital Resources





Operating
Activities




Three
Months Ended September 30, 2009 and 2008





Net cash
provided by operating activities for the three months ended September 30, 2009
was $830,620, a decrease of 72.04%, or $2,140,412, from $2,971,032 provided by
operating activities for the same period in 2008. The decrease in net cash
provided by operations was principally due to the decrease of accounts
receivable.




Investing
Activities





Three
Months Ended September 30, 2009 and 2008





Net cash
used in investing activities for the three months ended September 30, 2009 was
$2,583,954, an increase of 15.77%, or $351,895 from $2,232,059 used in investing
activities for the same period in 2008. The increase of net cash used in
investing activities resulted from more capital expenditures for acquisition of
fixed assets and intangible assets. Management believes that we will have
limited capital expenditures during the balance of the fiscal 2010
year.




Financing
Activities




Three
Months Ended September 30, 2009 and 2008




Net cash
provided by financing activities for the three months ended September 30, 2009
was $2,981,502, an increase of 215.98%, or $5,552,142 from $2,570,640 used in
the financing activities for the same period in fiscal 2008. The increase of net
cash provided by financing activities is mainly because the Company has more
borrowings of notes payable for the three months ended September 30, 2009 than
for the three months ended September 30, 2008.





Loans





Other
than our private placement financing in 2007, we have financed our operations
primarily through bank loans and operating income. We had a total of $29,633,400
short term bank loans outstanding as of September 30, 2009. The loans were
secured by our properties or guaranteed by unrelated third parties. The terms of
all these short term loans are for one year. We have never defaulted on any of
these loans.





We have
$4,960,643 non-current payables as of September 30, 2009 and $5,642,556 as of
June 30, 2009.




29





Guarantees





We have
guaranteed certain borrowings of other unrelated third parties including short
term bank loans. The total guaranteed amounts were $4,401,000 as of September
30, 2009. The total amount of guarantees provided to us by unrelated third
parties is $14,508,630.





Future
cash commitments





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





Critical
Accounting Policies and Estimates





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





Revenue
recognition




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





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.




30





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 straight-line method with a 3% residual value over the estimated
useful lives of the assets.





Foreign
currency translation





Our
functional currency is 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 (previously SFAS No. 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 (previously SFAS No. 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 (previously SFAS No. 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. SFAS 166 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 (previously SFAS No. 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 us beginning in the first quarter of
fiscal year 2010 and we are currently evaluating the impact that adoption will
have on our consolidated financial statements.




31





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, we are 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, we are required to use another valuation
technique, such as an income approach or a market approach. These amended
standards are effective for us beginning in the fourth quarter of fiscal year
2009 and are not expected to have a significant impact on our consolidated
financial statements.





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





We currently do not hold or use any
derivative or other financial instruments that expose us to substantial market
risk and we have no foreign exchange contracts.





We are exposed to foreign exchange risk
arising from fluctuations in the exchange rate between U.S. Dollars and
Renminbi. Our operations are located in the People’s Republic of China and
substantially all of our revenues and assets are denominated in Renminbi.
However our reporting currency is the U.S. Dollar and some of our expenses are
denominated in U.S. Dollars. As a result, our financial results are potentially
subject to the impact of changes in value between U.S. Dollars and Renminbi. If
the Renminbi depreciates relative to the U.S. Dollar, the value of our revenues,
earnings and assets as reported in our financial statements will
decline.





Item
4. Controls and Procedures.





(a)
Disclosure Controls and Procedures.





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





(b) Changes
in Internal Control over Financial Reporting





During
the three months ended September 30, 2009, there has been no change in internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect our internal control over financial
reporting.




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




32





Other
Information





The
certifications of our Chief Executive Officer and Chief Financial Officer
attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning our
disclosure controls and procedures and internal controls over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of the
matters covered by such certifications.





PART
II - OTHER INFORMATION




Item
1. Legal
Proceedings.







There is no material legal proceeding pending against
us.





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. Submission
of Matters to a Vote of Security Holders.







None.




Item
5. Other
Information







Not
applicable.




Item
6. Exhibits







Copies of
the following documents are included as exhibits to this report pursuant to Item
601 of Regulation S-K.





Exhibit
      No.
            
            SEC Ref.
      No.
            
            Title
      of Document1
            
            31.1
            
            Certification
      of the Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 20022.
            
            31.2
            
            Certification
      of the Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 20023
            
            32.1
            
            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*4
            
            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*





*The Exhibit attached to this Form 10-Q
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.





33




SIGNATURES





In
accordance with the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.




SHENGTAI
      PHARMACEUTICAL, INC.Date: November 15,
      2009
              By:
              /s/ Qingtai LiuQingtai
      LiuChief
      Executive Officer(Principal
      Executive Officer)






By:
              /s/ Yiru ShiYiru
      ShiChief
      Financial Officer(Principal
      Financial Officer)





34