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 March 31, 2010





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





For the
transition period from ______________ to _____________




Commission
file number: 000-51312





SHENGTAI
PHARMACEUTICAL, INC.


(Exact
name of registrant as specified in its charter)




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




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





011-86-536-629-5802


(Registrant’s
telephone number, including area code)










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





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




1





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





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





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





As of May
10, 2010, there are 19,169,805 shares of $0.001 par value common stock issued
and outstanding.





2





FORM
10-Q


SHENGTAI
PHARMACEUTICAL, INC.





INDEX





PagePART
      I.
                  
                  Financial
      Information
                  4Item
      1.  Financial Statements
                  4Consolidated
      Unaudited Balance Sheets as of March 31, 2010 and June 30,
      2009
                  4Consolidated
      Unaudited Statements of Income for the Three Months and Nine Months
      Ended March 31, 2010 and 2009
                  5Consolidated
      Unaudited Statements of Cash Flows for the Nine Months Ended March 31,
      2010 and 2009
                  6Notes
      to Unaudited Consolidated Financial Statements as of March 31,
      2010
                  7Item
      2.  Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                  24Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                  30Item
      4.  Controls and Procedures
                  30PART
      II.
                  
                  Other
      Information
                  31Item
      1.  Legal Proceedings
                  31Item
      1A. Risk Factors
                  31Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                  31Item
      3.  Defaults Upon Senior Securities
                  31Item
      4.  Reserved
                  31Item
      5.  Other Information
                  31Item
      6.  Exhibits
                  32




3





PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements





SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(UNAUDITED)





MARCH
      31,
                                    
                                    
                                    JUNE
      30,2010
                                    
                                    
                                    2009A S S E T SCURRENT
      ASSETS:Cash
      & cash equivalents
                                    
                                    $
                                    3,963,170
                                    
                                    
                                    $
                                    1,779,476Restricted
      cash
                                    
                                    
                                    14,141,627
                                    
                                    
                                    
                                    31,730,382Accounts
      receivable, net of allowance for doubtful accounts of
$678,571
                                      as
      of March 31, 2010, and $946,207 as of June 30, 2009
      respectively
                                    
                                    
                                    7,025,644
                                    
                                    
                                    
                                    6,922,982Notes
      receivable
                                    
                                    
                                    2,508,309
                                    
                                    
                                    
                                    1,074,011Other
      receivables
                                    
                                    
                                    176,189
                                    
                                    
                                    
                                    79,598Loan
      to related party
                                    
                                    
                                    -
                                    
                                    
                                    
                                    439,500Inventories
                                    
                                    
                                    10,669,570
                                    
                                    
                                    
                                    6,215,707Prepayments
                                    
                                    
                                    779,484
                                    
                                    
                                    
                                    211,793Total
      current assets
                                    
                                    
                                    39,263,992
                                    
                                    
                                    
                                    48,453,449PLANT
      AND EQUIPMENT, net
                                    
                                    
                                    66,720,467
                                    
                                    
                                    
                                    69,380,016OTHER
      ASSETS:Investment
      in Changle Shengshi Redian Co., Ltd.
                                    
                                    
                                    6,035,188
                                    
                                    
                                    
                                    3,952,310Advances
      for construction
                                    
                                    
                                    6,880,574
                                    
                                    
                                    
                                    -Intangible
      assets - land use right, net of accumulated amortization
                                    
                                    
                                    3,151,803
                                    
                                    
                                    
                                    3,145,590Total
      other assets
                                    
                                    
                                    16,067,565
                                    
                                    
                                    
                                    7,097,900Total
      assets
                                    
                                    $
                                    122,052,024
                                    
                                    
                                    $
                                    124,931,365LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                    
                                    $
                                    5,715,976
                                    
                                    
                                    $
                                    4,737,156Accounts
      payable and accrued liabilities - related party
                                    
                                    
                                    534,361
                                    
                                    
                                    
                                    437,112Notes
      payable – banks
                                    
                                    
                                    14,963,400
                                    
                                    
                                    
                                    35,218,600Short
      term loans
                                    
                                    
                                    36,909,720
                                    
                                    
                                    
                                    25,637,500Accrued
      liabilities
                                    
                                    
                                    333,085
                                    
                                    
                                    
                                    233,110Other
      payable
                                    
                                    
                                    958,977
                                    
                                    
                                    
                                    424,341Employee
      loans
                                    
                                    
                                    465,940
                                    
                                    
                                    
                                    730,502Other
      payable – officer
                                    
                                    
                                    248,747
                                    
                                    
                                    
                                    248,415Third
      party loan
                                    
                                    
                                    -
                                    
                                    
                                    
                                    248,336Customer
      deposit
                                    
                                    
                                    4,417,682
                                    
                                    
                                    
                                    1,906,177Taxes
      payable
                                    
                                    
                                    2,901,786
                                    
                                    
                                    
                                    2,066,878Long
      term loan-current maturities
                                    
                                    
                                    2,499,791
                                    
                                    
                                    
                                    2,447,783Total
      current liabilities
                                    
                                    
                                    69,949,466
                                    
                                    
                                    
                                    74,335,910LONG
      TERM LIABILITIESOther
      payable – noncurrent
                                    
                                    
                                    3,796,568
                                    
                                    
                                    
                                    5,642,556Total
      long term liabilities
                                    
                                    
                                    3,796,568
                                    
                                    
                                    
                                    5,642,556Total
      liabilities
                                    
                                    
                                    73,746,034
                                    
                                    
                                    
                                    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
                                    
                                    
                                    21,100,109
                                    
                                    
                                    
                                    20,623,655Statutory
      reserves
                                    
                                    
                                    3,176,320
                                    
                                    
                                    
                                    2,894,902Retained
      earnings
                                    
                                    
                                    19,005,454
                                    
                                    
                                    
                                    16,472,689Accumulated
      other comprehensive income
                                    
                                    
                                    5,004,936
                                    
                                    
                                    
                                    4,942,483Total
      shareholders' equity
                                    
                                    
                                    48,305,990
                                    
                                    
                                    
                                    44,952,899Total
      liabilities and shareholders' equity
                                    
                                    $
                                    122,052,024
                                    
                                    
                                    $
                                    124,931,365








The
accompanying notes are an integral part of these statements.




4




SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
THREE AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)




THREE
      MONTHS ENDED MARCH 31,
                                    
                                    NINE
      MONTHS ENDED MARCH 31,2010
                                    
                                    
                                    2009
                                    
                                    
                                    2010
                                    
                                    
                                    2009NET
      SALES
                                    
                                    $
                                    29,407,287
                                    
                                    
                                    $
                                    16,301,522
                                    
                                    
                                    $
                                    81,043,203
                                    
                                    
                                    $
                                    49,220,996COST
      OF SALES
                                    
                                    
                                    23,750,131
                                    
                                    
                                    
                                    15,283,929
                                    
                                    
                                    
                                    67,595,344
                                    
                                    
                                    
                                    43,016,707GROSS
      PROFIT
                                    
                                    
                                    5,657,155
                                    
                                    
                                    
                                    1,017,593
                                    
                                    
                                    
                                    13,447,859
                                    
                                    
                                    
                                    6,204,289SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                                    
                                    
                                    3,078,030
                                    
                                    
                                    
                                    1,322,178
                                    
                                    
                                    
                                    7,358,396
                                    
                                    
                                    
                                    6,074,853INCOME
      (LOSS) FROM OPERATIONS
                                    
                                    
                                    2,579,125
                                    
                                    
                                    
                                    (304,585
                                    )
                                    
                                    
                                    6,089,464
                                    
                                    
                                    
                                    129,436OTHER
      (EXPENSE) INCOME:Earnings
      on equity investment
                                    
                                    
                                    98,366
                                    
                                    
                                    
                                    59,524
                                    
                                    
                                    
                                    445,475
                                    
                                    
                                    
                                    92,936Non-operating
      income
                                    
                                    
                                    28,266
                                    
                                    
                                    
                                    60,364
                                    
                                    
                                    
                                    227,628
                                    
                                    
                                    
                                    115,545Non-operating
      expense
                                    
                                    
                                    (244,326
                                    )
                                    
                                    
                                    (4,428
                                    )
                                    
                                    
                                    (260,672
                                    )
                                    
                                    
                                    (255,540
                                    )Interest
      expense and other charges
                                    
                                    
                                    (1,025,088
                                    )
                                    
                                    
                                    (527,987
                                    )
                                    
                                    
                                    (2,667,406
                                    )
                                    
                                    
                                    (591,493
                                    )Interest
      income
                                    
                                    
                                    (775
                                    )
                                    
                                    
                                    7,548
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    104,221Other
      (expense) income, net
                                    
                                    
                                    (1,143,558
                                    )
                                    
                                    
                                    (404,979
                                    )
                                    
                                    
                                    (2,254,976
                                    )
                                    
                                    
                                    (534,331
                                    )INCOME
      (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES
                                    
                                    
                                    1,435,568
                                    
                                    
                                    
                                    (709,564
                                    )
                                    
                                    
                                    3,834,488
                                    
                                    
                                    
                                    (404,895
                                    )PROVISION
      FOR (BENEFIT FROM) INCOME TAXES
                                    
                                    
                                    457,443
                                    
                                    
                                    
                                    (48,166
                                    )
                                    
                                    
                                    1,020,304
                                    
                                    
                                    
                                    100,594NET
      INCOME (LOSS)
                                    
                                    
                                    978,125
                                    
                                    
                                    
                                    (661,398
                                    )
                                    
                                    
                                    2,814,184
                                    
                                    
                                    
                                    (505,489
                                    )OTHER
      COMPREHENSIVE ITEMS:Foreign
      currency translation adjustments
                                    
                                    
                                    819
                                    
                                    
                                    
                                    (60,568
                                    )
                                    
                                    
                                    62,453
                                    
                                    
                                    
                                    227,158COMPREHENSIVE
      INCOME (LOSS)
                                    
                                    $
                                    978,944
                                    
                                    
                                    $
                                    (721,966
                                    )
                                    
                                    $
                                    2,876,637
                                    
                                    
                                    $
                                    (278,331
                                    )EARNINGS
      (LOSS) PER SHAREBasic
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    0.15
                                    
                                    
                                    $
                                    (0.03
                                    )Diluted
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    0.15
                                    
                                    
                                    $
                                    (0.03
                                    )WEIGHTED
      AVERAGE NUMBER OF SHARESBasic
                                    
                                    
                                    19,169,805
                                    
                                    
                                    
                                    19,169,805
                                    
                                    
                                    
                                    19,169,805
                                    
                                    
                                    
                                    19,129,146Diluted
                                    
                                    
                                    19,169,805
                                    
                                    
                                    
                                    19,169,805
                                    
                                    
                                    
                                    19,169,805
                                    
                                    
                                    
                                    19,129,146





The
accompanying notes are an integral part of these statements.


5


SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
NINE MONTHS ENDED MARCH 31, 2010 AND 2009


(UNAUDITED)





2010
                            
                            
                            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                            
                            $
                            2,814,184
                            
                            
                            $
                            (505,489
                            )Adjustments
      to reconcile net income to cashprovided
      by operating activities:Depreciation
                            
                            
                            5,788,007
                            
                            
                            
                            3,612,903Amortization
                            
                            
                            41,921
                            
                            
                            
                            40,225Allowance
      for bad debts
                            
                            
                            (267,635
                            )
                            
                            
                            50,387Share
      based compensation to employees
                            
                            
                            476,454
                            
                            
                            
                            476,454Loss
      on equipment disposal
                            
                            
                            -
                            
                            
                            
                            159,269Gain
      on disposal of land use right
                            
                            
                            (739
                            )
                            
                            
                            -Earnings
      on equity investment
                            
                            
                            (445,475
                            )
                            
                            
                            (92,936
                            )Amortization
      of discount on capital lease obligation
                            
                            
                            -
                            
                            
                            
                            146,681Change
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            164,973
                            
                            
                            
                            1,076,312Notes
      receivable
                            
                            
                            (1,434,298
                            )
                            
                            
                            310,963Other
      receivables
                            
                            
                            172,506
                            
                            
                            
                            444,622Inventories
                            
                            
                            (4,453,863
                            )
                            
                            
                            (1,869,045
                            )Prepayments
                            
                            
                            (567,691
                            )
                            
                            
                            (471,355
                            )Accounts
      payable
                            
                            
                            978,820
                            
                            
                            
                            (1,614,791
                            )Accrued
      liabilities
                            
                            
                            99,975
                            
                            
                            
                            (49,430
                            )Accounts
      payable - related party
                            
                            
                            97,249
                            
                            
                            
                            (79,896
                            )Other
      payable
                            
                            
                            534,969
                            
                            
                            
                            596,396Customer
      deposit
                            
                            
                            2,511,505
                            
                            
                            
                            921,757Taxes
      payable
                            
                            
                            834,908
                            
                            
                            
                            (2,031,181
                            )Net
      cash provided by operating activities
                            
                            
                            7,345,770
                            
                            
                            
                            1,121,846CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      plant and equipment
                            
                            
                            (3,130,993
                            )
                            
                            
                            (9,679
                            )Proceeds
      from equipment disposal
                            
                            
                            2,535
                            
                            
                            
                            5,125,750Additions
      to construction in progress
                            
                            
                            -
                            
                            
                            
                            (4,810,511
                            )Advances
      for construction
                            
                            
                            (6,880,574
                            )Acquisition
      of land use right
                            
                            
                            (47,395
                            )
                            
                            
                            (480,356
                            )Investment
      in Changle Shengshi Redian Co., Ltd.
                            
                            
                            (1,467,000
                            )
                            
                            
                            -Net
      cash used in investing activities
                            
                            
                            (11,523,426
                            )
                            
                            
                            (174,796
                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Decrease
      in restricted cash
                            
                            
                            17,588,755
                            
                            
                            
                            (2,201,573
                            )Notes
      payable – banks
                            
                            
                            (20,255,200
                            )
                            
                            
                            2,196,750Short
      term loans
                            
                            
                            11,272,220
                            
                            
                            
                            (43,935
                            )Employee
      loans
                            
                            
                            (264,562
                            )
                            
                            
                            (546,488
                            )Other
      receivables – shareholder
                            
                            
                            -
                            
                            
                            
                            (10,252
                            )Borrowings
      on third party loan
                            
                            
                            -
                            
                            
                            
                            113,650Payments
      on third party loan
                            
                            
                            (248,336
                            )
                            
                            
                            (563,715
                            )Payment
      on other payable - equipment purchase
                            
                            
                            -
                            
                            
                            
                            (1,033,127
                            )Proceeds
      from issuance of common stock
                            
                            
                            -
                            
                            
                            
                            750Payment
      on capital lease obligation
                            
                            
                            (1,793,980
                            )
                            
                            
                            -Net
      cash provided by provided by (used in) financing
activities
                            
                            
                            6,298,897
                            
                            
                            
                            (2,087,940
                            )EFFECTS
      OF EXCHANGE RATE CHANGE IN CASH
                            
                            
                            62,453
                            
                            
                            
                            (15,652
                            )INCREASE
      (DECREASE) IN CASH & CASH EQUIVALENTS
                            
                            
                            2,183,694
                            
                            
                            
                            (1,156,542
                            )CASH
      & CASH EQUIVALENTS, beginning of period
                            
                            
                            1,779,476
                            
                            
                            
                            3,405,606CASH
      & CASH EQUIVALENTS, end of period
                            
                            $
                            3,963,170
                            
                            
                            $
                            2,249,064SUPPLEMENTAL
      DISCLOSURECash
      paid for Interest, net of capitalized interest
                            
                            $
                            2,752,591
                            
                            
                            $
                            259,588Cash
      paid for Income taxes
                            
                            $
                            1,673,702
                            
                            
                            $
                            1,134,656Non-cash
      construction in progress transferring into plant and
    equipment
                            
                            $
                            -
                            
                            
                            $
                            36,961,097





The
accompanying notes are an integral part of these statements.




6




SHENGTAI
PHARMACEUTICAL, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31,
2010


(UNAUDITED)




Note
1 - Organization background and principal activities




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




Note
2 - Summary of significant accounting policies




The reporting
entity




The
consolidated financial statements of Shengtai Pharmaceutical, Inc. and its
subsidiaries reflect the activities of the parent and its wholly-owned
subsidiaries Shengtai Holding, Inc., “SHI", and Weifang Shengtai Pharmaceutical
Co., Ltd., “Weifang Shengtai". The Company recorded all normal recurring
adjustments considered necessary to give a fair presentation of operating
results for the periods presented. Interim results are not necessarily
indicative of results for a full year. The information included in this Form
10-Q should be read in conjunction with information included in the 2009 annual
report filed on Form 10-K. The results of the nine-month period ended March 31,
2010 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 stock based compensation, and the collectability of accounts
receivable. Actual results could be materially different from these estimates
upon which the carrying values were based.





Foreign currency
translation




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


Assets
and liabilities were translated at 6.82 RMB and 6.83 RMB to $1.00 at March 31,
2010 and June 30, 2009, respectively. The equity accounts were stated at their
historical rate. The average translation rates applied to income statement for
amounts for the three months ended March 31, 2010 and 2009 were 6.82 RMB and
6.83 RMB to $1.00, and for nine months ended March 31, 2010 and 2009 were 6.82
RMB and 6.83 RMB to $1.00 respectively. Cash flows are also translated at
average translation rates for the period; therefore, amounts reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.




Revenue
recognition




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




7




Shipping and
handling




Shipping
and handling costs related to cost of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs related to cost
of goods sold amounted to $1,094,597 and $182,386 for the three months ended
March 31, 2010 and 2009, respectively. Shipping and handling costs related to
cost of goods sold amounted to $3,368,291 and $1,864,916 for the nine months
ended March 31, 2010 and 2009, respectively.




Financial
instruments




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




Level
      1:
              inputs
      to the valuation methodology are quoted prices (unadjusted) for identical
      assets or liabilities in active markets.


Level
      2:
              inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      assets or liability, either directly or indirectly, for substantially the
      full term of the financial instruments.


Level
      3:
            inputs
      to the valuation methodology are unobservable and significant to the fair
      value.




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




Stock-based
compensation




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


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




Earnings per
share




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




8





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





Three
      months ended
                          March
      31,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Unaudited)Net
      income (loss) for earnings (loss) per share
                        
                        $
                        978,125
                        
                        
                        $
                        (661,398)Weighted
      average shares used in basic computation
                        
                        
                        19,169,805
                        
                        
                        
                        19,169,805Diluted
      effect of warrants
                        
                        
                        -
                        
                        
                        
                        -Weighted
      average shares used in diluted computation
                        
                        
                        19,169,805
                        
                        
                        
                        19,169,805Earnings
      (loss) per shareBasic
                        
                        $
                        0.05
                        
                        
                        $
                        (0.03)Diluted
                        
                        $
                        0.05
                        
                        
                        $
                        (0.03)





Nine
      months ended
                        March
      31,2010
                      
                      
                      2009(Unaudited)
                      
                      
                      (Unaudited)Net
      income (loss) for earnings per share
                      
                      $
                      2,814,184
                      
                      
                      $
                      (505,489
                      )Weighted
      average shares used in basic computation
                      
                      
                      19,169,805
                      
                      
                      
                      19,129,146Diluted
      effect of warrants
                      
                      
                      -
                      
                      
                      
                      -Weighted
      average shares used in diluted computation
                      
                      
                      19,169,805
                      
                      
                      
                      19,129,146Earnings
      (loss) per shareBasic
                      
                      $
                      0.15
                      
                      
                      $
                      (0.03
                      )Diluted
                      
                      $
                      0.15
                      
                      
                      $
                      (0.03
                      )





For the
three and nine months ended March 31, 2010 and 2009, no warrants or stock
options were included in the calculation of diluted earnings per share because
there are no dilution effects for the three and nine months ended March 31,
2010.




Cash and cash
equivalents




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




Restricted
cash





The
Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions. As of March 31, 2010 and
June 30, 2009, these amounts totaled $14,141,627 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 when certain
criteria are met. As of March 31, 2010 and June 30, 2009, the undisbursed
amounts were $205,127 and $203,582, respectively, which are included in
restricted cash in the consolidated balance sheets.




9





Accounts
receivable





In the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests.Management reviews its
accounts receivable at each reporting period to provide for an allowance against
accounts receivable for an amount that could become uncollectible. This review
process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company's estimation
process. These impacts may be material. Certain accounts receivable amounts are
charged against allowances after designated period of collection efforts.
Subsequent cash recoveries are recognized as income in the period when they
occur. The allowance for doubtful accounts amounted to $678,571 and $946,207 as
of March 31, 2010 and June 30, 2009, respectively.





Concentration of
risks




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




Management
believes the credit risk on bank deposits is limited because the counterparties
are banks with high credit- ratings assigned by international credit-rating
agencies, or state-owned banks in China. Cash includes cash on hand and demand
deposits in accounts maintained with state-owned banks within the PRC and the
United States of America. The cash deposits in U.S. financial institutions
exceed the amounts insured by the U.S. government. Balances at financial
institutions or state owned banks within the PRC are not covered by insurance.
Non-performance by these institutions could expose the Company to losses for
amounts in excess of insured balances. At March 31, 2010 and June 30, 2009, the
Company's bank balances exceeded government insured limits or were not covered
by insurance by approximately $17,894,746 and $32,880,229, respectively. The
Company has not experienced, nor does it anticipate, nonperformance by these
institutions.




The
Company's concentration of credit risk is primarily in trade accounts receivable
and accounts payable. For the three and nine months ended March 31, 2010 and
2009, there were no customers that individually comprised 10% or more of the
Company's total revenues. For the three and nine months ended March 31, 2010 and
2009, there were no vendors that individually accounted for over 10% or more of
the Company's total purchases.


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






The
following table summarizes financial information for the three and nine months
ended March 31, 2010 and 2009, concerning the Company’s revenues based on
geographic area:





For the
three months ended:





Revenue
                                          
                                          March
      31,
                                            2010
                                          
                                          
                                          March
      31,
                                            2009(Unaudited)
                                          
                                          
                                          (Unaudited)China
                                          
                                          $
                                          21,803,054
                                          
                                          
                                          $
                                          13,867,243International
                                          
                                          
                                          7,604,231
                                          
                                          
                                          
                                          2,434,279Total
                                          
                                          $
                                          29,407,287
                                          
                                          
                                          $
                                          16,301,522




For the
nine months ended:


Revenue
                      
                      March
      31,
                        2010
                      
                      March
      31,
                        2009(Unaudited)
                      
                      (Unaudited)China
                      
                      $
                      63,205,440
                      
                      
                      $
                      42,869,605International
                      
                      
                      17,837,763
                      
                      
                      
                      6,351,391Total
                      
                      $
                      81,043,203
                      
                      
                      $
                      49,220,996





Inventories





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




March
      31,
                      2010
                    
                    
                    June
      30,
                      2009(Unaudited)Raw
      materials
                    
                    $
                    3,312,588
                    
                    
                    $
                    1,523,654Work-in-progress
                    
                    
                    3,808,821
                    
                    
                    
                    1,709,595Finished
      goods
                    
                    
                    3,548,161
                    
                    
                    
                    2,982,458Total
                    
                    $
                    10,669,570
                    
                    
                    $
                    6,215,707




The
Company reviews its inventory periodically for possible obsolete goods and to
determine if any reserves are necessary. As of March 31, 2010, the Company has
determined that no reserves are necessary.




Prepayments




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




Advances for
construction




As of
March 31, 2010 and June 30, 2009, advances for construction amounted to
$6,880,574 and $0, respectively.  Advances for construction are paid
to unrelated parties, interest free, and with no collateral and no
guarantee.




Plant and
equipment




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


Estimated
useful lives of the assets are as follows:




10


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 March
31, 2010, the Company expects these assets to be fully
recoverable.





Investment in unconsolidated
affiliate


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




Intangible
assets




Intangible
assets consist of the following:




March
      31, 2010
                      
                      
                      June
      30, 2009(Unaudited)Land
      use rights:
                      
                      $
                      3,370,643
                      
                      
                      $
                      3,346,110Less:
      accumulated amortization
                      
                      
                      (224,572
                      )
                      
                      
                      (206,407
                      )Land
      use rights, net
                      
                      
                      3,146,071
                      
                      
                      
                      3,139,703Software
                      
                      
                      7,757
                      
                      
                      
                      7,325Less:
      accumulated amortization
                      
                      
                      (2,025
                      )
                      
                      
                      (1,438
                      )Software,
      net
                      
                      
                      5,732
                      
                      
                      
                      5,887Total
      intangible assets, net
                      
                      $
                      3,151,803
                      
                      
                      $
                      3,145,590





Intangible
assets are primarily comprised of land use rights which are pledged as
collateral for bank loans as of March 31, 2010. All land in the PRC is owned by
the Chinese government. However, the government grants "land use rights" for
terms ranging from 20 to 50 years. From March 2000 to June 2008, the Company
acquired various land use rights for approximately $3,291,000. From July 2008 to
March 2009, the Company acquired various land use rights for approximately
$480,520. The Company amortizes the cost of land use rights over the usage terms
using the straight- line method.




11





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





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




Intangible
assets are reviewed at least annually, and more often if circumstances dictate,
to determine whether their carrying value has become impaired. The Company
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of March 31, 2010, the Company
determined that there had been no impairment. Total amortization expense for the
nine months ended March 31, 2010 and 2009, amounted to $41,921 and $40,225,
respectively. Total amortization expense for the three months ended March 31,
2010 and 2009, amounted to $13,757 and $14,115, respectively.




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





Years
      ended March 31,
                  
                  Amount2011
                  
                  $
                  54,9752012
                  
                  
                  54,9752013
                  
                  
                  54,9752014
                  
                  
                  54,9752015
                  
                  
                  54,975Thereafter
                  
                  
                  2,876,928Total
                  
                  $
                  3,151,803





Income
taxes





The
Company accounts for income taxes in accordance with ASC 740 (formerly SFAS 109,
"Accounting for Income Taxes").  Under the asset and liability method
as required by ASC 740, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under ASC
740, the effect on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance
is recognized if it is more likely than not that some portion, or all of, a
deferred tax asset will not be realized. As of March 31, 2010 and June 30, 2009,
the Company did not have any deferred tax assets or liabilities, and as such, no
valuation allowances were recorded at March 31, 2010 and June 30,
2009.


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





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




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




Value Added
Tax




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




12




VAT on
sales and VAT on purchases amounted to $3,360,667 and $3,053,788, respectively,
for the three months ended March 31, 2010 and $2,184,923 and $2,031,772,
respectively, for the three months ended March 31, 2009.  VAT on sales
and VAT on purchases amounted to $9,758,780 and $9,279,263, respectively, for
the nine months ended March 31, 2010 and $4,833,264 and $2,899,729,
respectively, for the nine months ended March 31, 2009.  Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax holiday
in the PRC.




Guarantees




From time
to time, the Company guarantees the debt of others unrelated to the Company.
Pursuant to ASC 460 (formerly FIN 45, "Guarantor's Accounting for and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others"), the Company must record guarantees at the fair value of the expected
future payments. However, the Company estimates that it will not be required to
make any payments under these guarantees based on the past experience and the
financial condition of the companies to which the guarantees were
made.




Recently issued accounting
pronouncements





In
January 2010, FASB issued ASU No. 2010-01– Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and
Earnings Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The adoption of this ASU did not have impact on the
Company’s consolidated financial statements.





In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements





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





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




13





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





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





Note
3 - Plant and equipment


Plant and
equipment consist of the following:





March
      31, 2010
                      
                      
                      June
      30, 2009(Unaudited)Buildings
                      
                      $
                      21,655,458
                      
                      
                      $
                      21,612,750Machinery
      and equipment
                      
                      
                      64,560,652
                      
                      
                      
                      62,209,134Automobile
      facilities
                      
                      
                      530,023
                      
                      
                      
                      519,560Electronic
      equipment
                      
                      
                      492,161
                      
                      
                      
                      446,399Construction
      in progress
                      
                      
                      701,411
                      
                      
                      
                      -Total
                      
                      
                      87,939,704
                      
                      
                      
                      84,787,843Accumulated
      depreciation
                      
                      
                      (21,219,237
                      )
                      
                      
                      (15,407,827
                      )Total
                      
                      $
                      66,720,467
                      
                      
                      $
                      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 March 31,
2010 and 2009 amounted to $1,957,539 and $1,488,617, respectively. Interest cost
capitalized into construction in progress for the three months ended March 31,
2010 and 2009, amounted to $0 and $149,964, respectively. Depreciation expense
for the nine months ended March 31, 2010 and 2009 amounted to $5,788,007 and
$3,612,903, respectively. Interest costs totaling $78,468 and $1,589,457 were
capitalized into construction in progress for the nine months ended March 31,
2010 and 2009, respectively.




14




Note
4 - Investment in unconsolidated affiliate




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





Summarized
unaudited financial information of Changle Shengshi for the three months ended
March 31, 2010 and 2009, is as follows:





March
      31,
                      
                      
                      June
      30,2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)Current
      assets
                      
                      $
                      18,632,425
                      
                      
                      $
                      12,116,940Non-current
      assets
                      
                      
                      46,112,035
                      
                      
                      
                      34,455,506Total
      assets
                      
                      
                      64,744,460
                      
                      
                      
                      46,572,446Current
      liabilities
                      
                      
                      39,258,090
                      
                      
                      
                      24,818,492Non-current
      liabilities
                      
                      
                      997,560
                      
                      
                      
                      1,992,400Shareholders'
      equity
                      
                      
                      24,488,811
                      
                      
                      
                      19,761,554Total
      liabilities and shareholders' equity
                      
                      $
                      64,744,460
                      
                      
                      $
                      46,572,446





Summarized
financial information of Changle Shengshi for the nine months ended March 31,
2010 and 2009, is as follows:





March
      31,2010
                          
                          
                          2009(unaudited)
                          
                          
                          (unaudited)Net
      sales
                          
                          $
                          37,132,454
                          
                          
                          $
                          32,396,099Gross
      profit
                          
                          $
                          5,903,459
                          
                          
                          $
                          2,302,830Income
      before taxes
                          
                          $
                          4,077,990
                          
                          
                          $
                          778,979Net
      income
                          
                          $
                          3,051,161
                          
                          
                          $
                          581,710Percentage
      of ownership
                          
                          
                          20
                          %
                          
                          
                          20
                          %Company
      share of income
                          
                          $
                          610,232
                          
                          
                          $
                          116,342Elimination
      of intercompany payable
                          
                          $
                          (164,757
                          )
                          
                          $
                          23,406Company’s
      share of net income
                          
                          $
                          445,475
                          
                          
                          $
                          92,936





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




15




Note
5 - Related party transactions





The
Company’s utilities (electricity and steam) are mostly provided by Changle
Shengshi (See Note 4). As of March 31, 2010 and June 30, 2009, the Company’s
accounts payable due to Changle Shengshi were approximately $534,361 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 $5,261,978 and $2,742,707 for the three months ended March 31,
2010 and 2009, respectively. The utilities expense amounted to approximately
$12,504,449 and $5,636,269 for the nine months ended March 31, 2010 and 2009,
respectively.





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





March
      31,
                    2010
                  
                  
                  June
      30,
                    2009(Unaudited)Due
      on September 14, 2009, unsecured, 7.60% interest rate per
      annum
                  
                  $
                  -
                  
                  
                  $
                  439,500





This
receivable amount from the loan contract has been collected as of March 31,
2010.





Note
6 - Debt




Short term loans




Short
term loans represent amounts due to various banks which are due within one year.
These loans can generally be renewed. The Company's short term bank loans
consisted of the following:





March
      31,
                          
                          
                          June
      30,2010
                          
                          
                          2009(Unaudited)Loans
      from Bank of China, due various dates from April 2010 to March 2011;
      monthly interest only payments; interest rates ranging from 5.0445% to
      5.5755% per annum, secured by certain properties.
                          
                          $
                          14,670,000
                          
                          
                          $
                          13,185,000Loans
      from Industrial and Commercial Bank of China, due on various dates from
      April 2010 to February 2011; monthly interest only payments; interest
      rates ranging from 5.31% to 6.372% per annum, guaranteed by an unrelated
      third party and secured by certain properties.
                          
                          
                          6,542,820
                          
                          
                          
                          6,592,500Loan
      from Agriculture Bank of China, due from June to December 2010; monthly
      interest only payments; interest rates ranging from 5.5755% to 5.841% per
      annum, guaranteed by an unrelated third party, unsecured
                          
                          
                          8,802,000
                          
                          
                          
                          2,930,000Loan
      from Qingdao Bank, due December 2010, monthly interest only payments;
      interest rate of 5.31% per annum, guaranteed by an unrelated third party,
      unsecured
                          
                          
                          2,934,000
                          
                          
                          
                          -Loan
      from Shenzhen Development Bank, due March 2011, monthly interest only
      payments; interest rate of 5.5755% per annum, guaranteed by an unrelated
      third party, unsecured
                          
                          
                          3,227,400
                          
                          
                          
                          -Loan
      from Dezhi Zheng, an individual, from March 5, 2010 to March 4, 2011;
      monthly interest of 0.7%; principal and interest payments due on March 4,
      2011; guaranteed by Mr. Qingtai Liu
                          
                          
                          733,500
                          
                          
                          
                          -Loan
      from Xingye Bank, due October 2009; monthly interest only payments;
      interest rate of 7.9695% per annum, guaranteed by an unrelated third
      party, unsecured.
                          
                          
                          -
                          
                          
                          
                          1,465,000Loan
      from ShangHai PuDong Development Bank, due November 2009; monthly
      interest-only payments; interest rate of 6.66% per annum, guaranteed by an
      unrelated third party, unsecured.
                          
                          
                          -
                          
                          
                          
                          1,465,000Total
                          
                          $
                          36,909,720
                          
                          
                          $
                          25,637,500





16





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





March
      31,
                      2010Buildings
      and improvements
                    
                    $
                    21,655,458Land
      use rights
                    
                    
                    3,146,071Total
                    
                    $
                    24,801,529





Notes payable -
banks


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








March
      31,
                        
                        
                        June
      30,2010
                        
                        
                        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.
                        
                        $
                        -
                        
                        
                        $
                        1,465,000Shanghai
      PuDong Development Bank, due in October 2009, 0.05% transaction fee,
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
                        
                        
                        -
                        
                        
                        
                        1,465,000Bank
      of China, due on various dates from November 2009 to June 2010, 0.05%
      transaction fee, and restricted cash required 50% to 100% of loan amount,
      guaranteed by an unrelated third party.
                        
                        
                        8,802,000
                        
                        
                        
                        23,440,000Industrial
      and Commercial Bank of China, due on various dates from August to August
      2010, 0.05% transaction fee, restricted cash required 50% of loan amount,
      guaranteed by an unrelated third party.
                        
                        
                        3,227,400
                        
                        
                        
                        7,383,600Industrial
      and Commercial Bank of China, due in June 2010, 0.05% transaction fee,
      restricted cash required 100% of loan amount, guaranteed by an unrelated
      third party.
                        
                        
                        -
                        
                        
                        
                        1,465,000Bank
      of QingDao, due in July 2010, 0.05% transaction fee, and restricted cash
      required 100% of loan amount, guaranteed by an unrelated third
      party.
                        
                        
                        2,934,000
                        
                        
                        
                        -Total
                        
                        $
                        14,963,400
                        
                        
                        $
                        35,218,600





Employee
loans




From time
to time, the Company borrows monies from certain employees for cash flow
purposes. These loans do not require collateral, and the principal is due upon
demand. Before January 1, 2009, the interest rate was at 7.2% for the first six
months, and then 10.8% thereafter until the full principal amounts are paid by
the Company. After January 1, 2009, the interest rate was changed to 7.2% for
the loan period. Employee loans amounted to $465,940 and $730,502 as of March
31, 2010 and June 30, 2009, respectively. Interest expense related to these
loans amounted to $18,700 and $70,466 for the nine months ended March 31, 2010,
and 2009, respectively. Interest expense related to these loans amounted to $0
and $35,233 for the three months ended March 31, 2010, and 2009,
respectively.




17




Employee loans -
officers





From time to time, the Company borrows
monies from Qingtai Liu, the Company's CEO and President, for cash flow
purposes of the Company. The loans do not require collateral and the principal
is due upon demand. Before January 1, 2009, the interest rate was at 7.2% for
the first six months, and then 10.8% thereafter until the full principal amounts
are paid by the Company. After January 1, 2009, the interest rate was changed to
7.2% for the loan period. Employee loans from officers amounted to $248,747 and
$248,415 as of March 31, 2010 and June 30, 2009, respectively. Interest expense
related to these loans was de minimis for the three and nine months ended March
31, 2010, and 2009, respectively.




Third party
loans





From time
to time, the Company borrows monies from an unrelated individual for use in
operations. The loans do not require collateral. Before January 1, 2009, the
interest rate was 7.2% for the first six months, and then 10.8% thereafter until
the full principal amounts are paid by the Company. After January 1, 2009, the
interest rate was changed to 7.2% for the loan period. The principal is due upon
demand. Balance on these loans as of March 31, 2010 and June 30, 2009 was $0 and
$248,336, respectively. Interest expense related to these loans was de minimis
for the three and nine months ended March 31, 2010, and 2009,
respectively.




Interest





Total
interest expense and financial charges, net of capitalized interest, on all debt
for the three months ended March 31, 2010 and 2009, amounted to $1,025,088 and
$439,084, respectively. Interest capitalized into construction-in-progress
totaled $0 and $149,964 for the three months ended March 31, 2010 and 2009,
respectively. Total interest expense and financial charges, net of capitalized
interest, on all debt for the nine months ended March 31, 2010 and 2009,
amounted to $2,667,406 and $479,903, respectively. Interest capitalized into
construction-in-progress totaled $13,097 and $1,589,457 for the nine months
ended March 31, 2010 and 2009, respectively.




Note
7 - Income taxes




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




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




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




The key
changes are:




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


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





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





Income
tax (benefits) provision for the three months ended March 31, 2010 and 2009
amounted to $457,443 and $(48,166), respectively. During the nine months ended
March 31, 2010 and 2009, the provision for income taxes was $1,020,304 and
$100,594, respectively.




18




The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate for the nine months ended March 31:




2010
                            
                            2009(Unaudited)
                            
                            (Unaudited)U.S.
      Statutory rates
                            
                            
                            34.0
                            %
                            34.0
                            %Foreign
      income not recognized in USA
                            
                            
                            (34.0
                            )
                            (34.0
                            )Chinese
      income taxes
                            
                            
                            25.0
                            
                            25.0Chinese
      income exemption (a)
                            
                            
                            0.0
                            
                            (13.0)Other
      items (b)
                            
                            
                            1.6
                            
                            0.0Total
      provision for income taxes
                            
                            
                            26.6
                            %
                            12.0
                            .%




(a)
            The
      13.0% represents special tax credits from the local government due to
      government enforced regulations. They expired in September
      2009.(b)
            The
      1.6% represents the fact that certain expenses (such as stock option
      expense) incurred by the Company and Shengtai Holding, Inc. which were not
      deductible in the PRC for the nine months ended March 31,
      2010.





For the
nine months ended March 31, 2010, the Company’s effective tax rate was 26.6%.
For the nine months ended March 31, 2009, the Company incurred losses before
income taxes. Income before income taxes includes losses from non-Chinese
entities, which are not deductible.





Tax
exemptions by the local government expired in September 2009.





Shengtai
Pharmaceutical, Inc. and Shengtai Holding, Inc. were incorporated in the United
States and for the United States income tax purposes, have accumulated net
operating loss carry forwards estimated at $2,429,268 as of March 31, 2010 and
$399,226 for the nine months and three months ended March 31, 2010,
respectively. For the United States income tax purposes, the tax benefits
from the net operating loss carry forwards are estimated at $825,951 as of March
31, 2010 and $103,546 for the nine months and three months ended March 31, 2010,
respectively. Before expiration from 2027 through 2030, the net operating loss
carry forwards are available to reducing of taxable income in the
future.  The Company’s management believes that the utilization of the
tax benefits from the net operating loss carry forwards appears uncertain due to
the Company’s limited operating history and continuing losses expected at
Shengtai Pharmaceutical, Inc. and Shengtai Holding, Inc., therefore,
the Company has applied 100% valuation allowance to the deferred tax
benefits to reduce the deferred asset to zero.





As
of March 31, 2010, the Company’s foreign subsidiary has cumulative
undistributed earnings of $19,834,105 that are included in consolidated retained
earnings and will continue to be indefinitely reinvested in foreign operations.
No provision has been made for the United States deferred taxes related to
future repatriation of these cumulative undistributed earnings, nor is it
practicable to estimate the amount of income taxes that would incur if the
Company concluded that such earnings will be remitted in the
future.





Taxes
payable




March
      31,
                        2010
                      
                      
                      June
      30,
                        2009(Unaudited)VAT
      payable
                      
                      $
                      2,767,522
                      
                      
                      $
                      1,622,859Individual
      income tax withheld
                      
                      
                      20,426
                      
                      
                      
                      423Income
      tax payable
                      
                      
                      54,408
                      
                      
                      
                      387,299Housing
      property tax payable
                      
                      
                      13,170
                      
                      
                      
                      10,098Others
                      
                      
                      46,260
                      
                      
                      
                      46,199Total
      taxes payable
                      
                      $
                      2,901,786
                      
                      
                      $
                      2,066,878




19




Note
8 - Commitments and contingent liabilities





Guarantees





As of
March 31, 2010, 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 is $4.8 million for Yuanli, including
accrued interest. The Company did not record a liability for the guarantee
because management knows that Yuanli is current in its payment obligations, and
the likelihood of the Company having to make payments under the guarantee is
remote.


Details
of guarantee amounts to the unrelated party as of March 31, 2010 are 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, management believes that the outcome of the
legal matters will not have a materially adverse effect on the consolidated
results of operations or consolidated financial position of the
Company.




Note 9-Shareholders'equity




Warrants





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





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


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




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




20





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,
      March 31, 2010 (unaudited)
                      
                      
                      4,398,945
                      
                      
                      
                      4,
      398,945
                      
                      
                      $
                      2.60
                      
                      
                      
                      2.22





Stock
options




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


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




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




The
assumptions used in calculating the fair value of options granted 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




21





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





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





Weighted
      average risk-free interest rate
                  
                  
                  1.34
                  %Expected
      term
                  
                  3
      yearsExpected
      volatility
                  
                  
                  149
                  %Expected
      dividend yield
                  
                  
                  0
                  %Weighted
      average grant-date fair value per option
                  
                  $
                  2.60





The stock
option activity was as follows:





Options
                        outstanding
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Aggregate
                        Intrinsic
                        ValueOutstanding,
      June 30, 2008
                      
                      
                      660,000
                      
                      
                      $
                      3.34
                      
                      
                      $Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding,
      June 30, 2009
                      
                      
                      660,000
                      
                      
                      $
                      3.34
                      
                      
                      $
                      -Granted
                      
                      
                      300,000
                      
                      
                      
                      2.60
                      
                      
                      
                      -Forfeited
                      
                      
                      275,000
                      
                      
                      
                      3.34
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding,
      March 31, 2010
                      
                      
                      685,000
                      
                      
                      $
                      3.02
                      
                      
                      $
                      -





22





Following
is a summary of the status of options outstanding at March 31,
2010:





Outstanding
      Options
                                              
                                              
                                              Vested
      OptionsAverage
                                                Exercise  Price
                                              
                                              Outstanding
                                                Options
                                              
                                              
                                              Average
                                                Remaining
                                                Contractual Life
                                              
                                              
                                              Average
                                                Exercise Price
                                              
                                              
                                              Options$
      3.00
                                              
                                              
                                              685,000
                                              
                                              
                                              
                                              3.03
                                              
                                              
                                              
                                              $3.02
                                              
                                              
                                              
                                              385,000





Compensation
expense from stock options recognized for the three and nine months ended March
31, 2010 and 2009 were $158,818 and $476,454, respectively. As of March 31,
2010, approximately $1,255,308 of estimated expense with respect to unvested
stock-based awards has yet to be recognized and will be recognized as an expense
over the employee's remaining weighted average service period.




Note
10 - Statutory reserves




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





Surplus reserve
fund




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




The
transfer to this reserve must be made before distribution of any dividends to
shareholders. For the three months ended March 31, 2010 and 2009, the Company
transferred $16,638 and $0, respectively, to this reserve. For the nine months
ended March 31, 2010 and 2009, the Company transferred $281,418 and $109,106,
respectively, to this reserve. The surplus reserve fund is non-distributable
other than during liquidation and can be used to fund previous years’' losses,
if any, and may be utilized for business expansion or converted into share
capital by issuing new shares to existing shareholders in proportion to their
shareholding or by increasing the par value of the shares currently held by
them, provided that the remaining reserve balance after such issue is not less
than 25% of the registered capital.




Pursuant
to the Company's articles of incorporation, the Company is required to
appropriate, annually, 10% of its net profits as statutory surplus reserve up to
$7,500,000. As of March 31, 2010, the Company had appropriated to the statutory
reserve approximately $3,200,000. The Company plans to contribute a total of
$4,300,000 in the future.




Enterprise
fund




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




Note
11 Sale Leaseback




Capital
lease




On
December 10, 2008, the Company entered into a sale leaseback arrangement and
sold part of its equipment to an unrelated third party for approximately
$5,134,500. The leaseback has been accounted for as a capital lease with the
same third party to lease the same equipment for 4 years, with total payments of
approximately $8,119,845. The title of the equipment will be transferred back to
the Company upon the last payment and after the third party receives a one time
payment of $44,010 from the Company. A one time processing fee of $51,345 was
paid by the Company related to this lease. A loss of $202,138 realized on this
transaction has been recognized in non-operating expense since the carrying
value of the equipment sold exceeded its fair value used as the sale price. The
minimum payments for the remaining lease term of 33 months from April 2010 to
December 2012 are as follows.





Total
      lease payments outstanding as of December 31, 2009
                    
                    $
                    6,988,788Payments
      from January 1, 2010 to March 31, 2010
                    
                    
                    448,902Total
      lease payments outstanding as of March 31, 2010
                    
                    
                    6,539,886Less:
      imputed interest
                    
                    
                    1,657,861Total
      lease payments outstanding as of March 31, 2010
                    
                    
                    4,882,025Less:
      current payment maturity outstanding
                    
                    
                    1,085,457Non-current
      payment maturity outstanding as of March 31, 2010
                    
                    $
                    3,796,568




23




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 nine months ended March 31, 2010 and 2009, the Company made
contributions in the amounts of $265,220 and $298,283, respectively, to the
Company’s retirement plan. For the three months ended March 31, 2010 and 2009,
the Company made contributions in the amounts of $86,778 and $84,632,
respectively.




Note
13 - Subsequent event




The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions in the consolidated financial statements as of March 31,
2010.




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




Forward-Looking
Statements




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




Overview




The
Company is, through its wholly-owned subsidiary, Shengtai Holding Inc., and its
wholly-owned subsidiary in the People's Republic of China, the "PRC", Weifang
Shengtai Pharmaceutical Co., Ltd., a leading manufacturer and supplier of
pharmaceutical grade glucose in the PRC. Based on its assessment, the Company
believes that it is a market leader and preferred domestic supplier of
pharmaceutical grade glucose with about 40% market share in mainland China. The
Company also manufactures glucose, cornstarch and other products for the food
and beverage industry.




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




During
the nine months ended March 31, 2010, the Company produced a total of 150,102
metric tons of cornstarch, of which 90,130 metric tons were used to satisfy its
own glucose production needs. The excess cornstarch was or will be sold to
outside customers in the pharmaceutical, food and beverage, and other
industries. The cornstarch sales amounted to $19.085 million and accounted for
23.55% of the Company’s total net sales for the nine months ended March 31,
2010.




The
Company’s business can be severely affected by movements in the commodity
markets. Corn is the principal raw material for the Company’s cornstarch and the
price of cornstarch as a commodity tends to follow the price of corn. From
mid-2007 to September 2008, corn and other food prices climbed at an annual
inflation rate of 15% in China. In order to maintain a stable corn price, the
Chinese government has put restrictions on the development of industrial uses of
corn, such as the conversion of corn into ethanol. Also the Chinese government
has placed its own corn reserve into the market to help to maintain corn prices.
Since September 2008, in a sharp reversal, corn prices have been decreasing due
to large corn harvests. Beginning in July 2009, corn prices started to increase.
Corn prices for the three months ended March 31, 2010 were approximately 26.3%
higher than for the same period last year. Corn prices for the nine months ended
March 31, 2010 were approximately 17.1% higher than for the same period last
year. Average corn prices for the three months ended March 31, 2010 were 1.7%
higher than those for the three months ended December 31, 2009.




24




The
Company believes that these government policies have had and will continue to
have mixed effects on its operations. Management believes that stable corn
prices will help maintain the availability of the Company’s raw materials and
tend to stabilize its gross profit margin over time, although market and
economic conditions may continue to have negative effects on its operations. For
the nine months ended March 31, 2010, the Company’s profit margin has risen from
12.6% to 16.6% compared to the same period last year, as discussed below. The
principal raw material for glucose is cornstarch.  By using the
cornstarch manufactured from its own cornstarch production facility, the Company
can help to ensure its glucose products’ quality and consistency. Also, because
the Company’s cornstarch manufacturing facility is located next to its glucose
manufacturing facilities, the Company is able to eliminate shipping costs and
lower glucose products’ manufacturing costs.




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




During
the nine months ended March 31, 2010, the Company produced a total of 97,630
metric tons of glucose, and the Company’s sales of pharmaceutical grade glucose
and other glucose products were $42.060 million, or 51.90%, of its net
sales.




In
addition to its pharmaceutical glucose and cornstarch series of products, the
Company also produces other products such as dextrin, corn embryo, fibers, corn
meals, and phytin, which are used for pharmaceutical industry, food and
beverage, and other production purposes. The net sales generated from these
products were $19.899 million, and constituted approximately 24.55% of the
Company’s total net sales for the nine months ended March 31, 2010.




Management
believes that better living standards in China should lead to higher consumption
of its pharmaceutical glucose products in the PRC, especially the Dextrose
Monohydrate Transfusion Solution. In January 2009, the Chinese government
announced its medical stimulus plan to spend a total of 850 billion RMB, or
approximately US$ 123 billion, by 2011 to provide universal primary medical
services. Over the next three years, the health care investment plan is aimed at
expanding the government sponsored medical insurance network to provide
accessible and affordable health care coverage to over 90% of the population.
Under the plan, each person covered by the system will receive a larger amount
of annual subsidy after 2010. The focus of this plan is on providing basic
healthcare to many more people, and not on expensive high-tech equipment. This
should increase demand for glucose, which is a basic and relatively low-cost
element of healthcare in clinics and hospitals. In addition, PRC government
intends to build hospitals and improve medical services in rural and
underdeveloped areas. At the same time, despite the current deceleration in
growth, the Company believes that the continuing economic growth in China, the
rising purchasing power of China's domestic market, as well as the public
awareness of quality healthcare products, will increase demand for the Company’s
pharmaceutical glucose products.





The
Company believes that production capacity and product quality are key factors in
maintaining and improving its competitive position and enhancing its long term
competitiveness. As a result, the Company has emphasized (i) product quality
control, (ii) enhancement of operating efficiency and employee competence, (iii)
expansion of geographical coverage and diversification of customer base, and
(iv) expansion of its production capacity utilization.





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




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




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




For the
three months ended March 31, 2010, the Company has exported its products to
around 43 countries, with Korea, Indonesia, Thailand, Bangladesh and Pakistan as
leading purchasers. For the nine months ended March 31, 2010, the Company’s
international sales comprised approximately 22.01% of its total net
sales.




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


The
Company constantly strives to broaden and diversify its customer base. The
Company believes that a broader customer base will mitigate its reliance on
certain customers. The Company believes that a broader market for its products
can increase demand for its products, reduce its vulnerability to market
changes, and provide additional areas of growth in the future. For the nine
months ended March 31, 2010, the Company’s top ten customers accounted for
30.65% of the Company’s total net sales.




25




Results
of Operations




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





The
following table shows the Company’s operating results for the three months ended
March 31, 2010 and 2009:





Three
      months
                      ended
                      March
      31,
                      2010
                    
                    
                    Three
      months
                      ended
                      March
      31,
                      2009Net
      Sales
                    
                    $
                    29,407,287
                    
                    
                    $
                    16,301,522Cost
      of Sales
                    
                    
                    23,750,131
                    
                    
                    
                    15,283,929Gross
      Profit
                    
                    
                    5,657,155
                    
                    
                    
                    1,017,593Selling,
      General and Administrative Expenses
                    
                    
                    3,078,030
                    
                    
                    
                    1,322,178Income
      (Loss) From Operations
                    
                    
                    2,579,125
                    
                    
                    
                    (304,585
                    )Other
      (Expense) Income, Net
                    
                    
                    (1,143,558
                    )
                    
                    
                    (404,979
                    )Income
      (Loss) Before Provision For (Benefit From) Income Taxes
                    
                    
                    1,435,568
                    
                    
                    
                    (709,564
                    )Provision
      For (Benefit From) Income Taxes
                    
                    
                    457,443
                    
                    
                    
                    (48,166
                    )Net
      Income (Loss)
                    
                    $
                    978,125
                    
                    
                    $
                    (661,398
                    )




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





Products
                                
                                Metric
      Tons
                                  Three
      months ended
                                  March
      31, 2010
                                
                                
                                Metric
      Tons
                                  Three
      months ended
                                  March
      31, 2009
                                
                                
                                Net
      Sales (%)
                                  Three
      months ended
                                  March
      31, 2010
                                
                                
                                Net
      Sales (%)
                                  Three
      months ended
                                  March
      31, 2009Glucose
      –Sales
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                14,659,235
                                
                                
                                $
                                8,427,84832,731
                                
                                
                                
                                22,407
                                
                                
                                
                                (49.85)
                                %
                                
                                
                                (51.70)
                                %Cornstarch-Self
      use
                                
                                
                                25,169
                                  (51.99)
                                %
                                
                                
                                28,172
                                  (66.20)
                                %Cornstarch-Sales
                                
                                
                                23,244
                                
                                
                                
                                14,384
                                
                                
                                $
                                7,465,044
                                
                                
                                $
                                3,594,010(48.01)
                                %
                                
                                
                                (33.80)
                                %
                                
                                
                                (25.39)
                                %
                                
                                
                                (22.05)
                                %Total
      Cornstarch
                                
                                
                                48,413
                                  (100)
                                %
                                
                                
                                42,556
                                  (100)
                                %Other
      Sales
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                7,283,008
                                  (24.77)
                                %
                                
                                $
                                4,279,664
                                  (26.25)
                                %Total
      Sales
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                29,407,287
                                  (100)
                                %
                                
                                $
                                16,301,522
                                  (100)
                                %




Net sales
for the three months ended March 31, 2010 were $29,407,287, an increase of
$13,105,765, or 80.40%, compared with the same period in 2009. The increase in
net sales primarily resulted from the increase of the Company’s sales volume and
selling prices.





Net sales
from exports for the three months ended March 31, 2010 increased approximately
212% compared with the same period in 2009. The increase is attributable to the
recovery of the global economy and the Company’s exporting department
reorganization in fiscal year 2009, resulting in an increase in the
international demand for the Company’s glucose and corn meal products compared
to the same period last year. Domestic sales of cornstarch and other products
for the three months ended March 31, 2010 increased approximately 88% compared
with the same period last year. The increase in domestic sales was attributable
to the higher demand for cornstarch and increase in unit sales price for
cornstarch.




Cost of
sales for the three months ended March 31, 2010 was $23,750,131, an increase of
$8,466,202, or 55.39%, compared with the same period in 2009. The increase in
cost of sales was lower than the increase in net sales. As a result, the gross
profit for the three months ended March 31, 2010 was $5,657,155, an increase of
$4,639,562, or 455.93%, compared with the same period in 2009, and the gross
profit margin for the three months ended March 31, 2010 was 19.2%, an increase
from 6.2% for the same period in 2009.





While the
local government of Changle County, Shandong has stated that its Finance Bureau
will repay the amount of $837,684 that the Company paid in the last quarter of
calendar year 2009 as guarantor to Agriculture Bank of China on behalf of
bankrupt Yong Chang Food Industry Ltd. Co., no payment had been received by the
Company at March 31, 2010. The $837,684 was fully written off in the three
months ended March 31, 2010. When it is paid by the Finance Bureau, the $837,684
will be booked as income. The $837,684 is included in selling, general and
administrative expenses.




26





Selling,
general and administrative expenses were $3,078,030 for the three months ended
March 31, 2010 compared to $1,322,178 for the three months ended March 31, 2009.
The increase was due largely to the write-off of the payment of $837,684
described above. After deducting the write-off, selling, general and
administrative expenses for the three months ended March 31, 2010 were
$2,240,346, an increase of $918,168, or 69.4%, from the three months ended March
31, 2009.The much lower
selling, general and administrative expenses in the three months ended March 31,
2009 reflected the slowdown of the Company’s operations due to domestic and
international economic conditions at that time.





The
Company incurred $158,818 in non-cash stock option expenses for the three months
ended March 31, 2010, which are included in selling, general and administrative
expenses.





Net
income for the three months ended March 31, 2010 was $978,125, an increase of
$1,639,523 compared with a net loss of $661,398 for the same period in 2009. The
increase in net income was primarily attributable to the increase in the sales
volume of the Company’s products and the selling prices of the Company’s
products.





Nine
Months Ended March 31, 2010 Compared with nine Months Ended March 31,
2009





The
following table shows the Company’s operating results for the nine months ended
March 31, 2010 and 2009.





Nine
      months
                      ended
                      March
      31,
                      2010
                    
                    
                    Nine
      months
                      ended
                      March
      31,
                      2009Net
      Sales
                    
                    $
                    81,043,203
                    
                    
                    $
                    49,220,996Cost
      of Sales
                    
                    
                    67,595,344
                    
                    
                    
                    43,016,707Gross
      Profit
                    
                    
                    13,447,859
                    
                    
                    
                    6,204,289Selling,
      General and Administrative Expenses
                    
                    
                    7,358,396
                    
                    
                    
                    6,074,853Income
      from Operations
                    
                    
                    6,089,464
                    
                    
                    
                    129,436Other
      (Expense) Income, Net
                    
                    
                    (2,254,976
                    )
                    
                    
                    (534,331
                    )Income
      (Loss) Before Provision for Income Taxes
                    
                    
                    3,834,488
                    
                    
                    
                    (404,895
                    )Provision
      for Income Taxes
                    
                    
                    1,020,304
                    
                    
                    
                    100,594Net
      Income (Loss)
                    
                    $
                    2,814,184
                    
                    
                    $
                    (505,489
                    )





The
following table shows the breakdown of production and sales by product
categories, and between self use of Weifang Shengtai and sales of cornstarch,
for the nine months ended March 31, 2010 and 2009.





Products
                          
                          Metric
      Tons
                            Nine
      months ended
                            March
      31, 2010
                          
                          
                          Metric
      Tons
                            Nine
      months ended
                            March
      31, 2009
                          
                          
                          Net
      Sales (%)
                            Nine
      months ended
                            March
      31, 2010
                          
                          
                          Net
      Sales (%)
                            Nine
      months ended
                            March
      31, 2009Glucose
      –Sales
                          
                          
                          97,600
                          
                          
                          
                          63,918
                          
                          
                          $
                          42,060,458
                            (51.90)
                          %
                          
                          $
                          25,887,701
                            (52.60)
                          %Cornstarch-Self
      use
                          
                          
                          90,130
                            (60.05)
                          %
                          
                          
                          68,063
                            (63.00)
                          %Cornstarch-Sales
                          
                          
                          59,972
                            (39.95)
                          %
                          
                          
                          39,971
                            (37.00)
                          %
                          
                          $
                          19,085,135
                            (23.55)
                          %
                          
                          $
                          10,801,539
                            (21.94)
                          %Total
      Cornstarch
                          
                          
                          150,102
                            (100)
                          %
                          
                          
                          108,034
                            (100)
                          %Other
      Sales
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          19,897,610
                            (24.55)
                          %
                          
                          $
                          12,531,756
                            (25.46)
                          %Total
      Sales
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          81,043,203
                            (100)
                          %
                          
                          $
                          49,220,996
                            (100)
                          %





Net sales
for the nine months ended March 31, 2010 were $81,043,203, an increase of
$31,822,207, or 64.65%, compared with the same period in 2009. The increase in
sales revenue resulted from the increase of the Company’s sales volume and
selling prices.





Net sales
from exports for the nine months ended March 31, 2010 increased approximately
181% compared with the same period in 2009. The increase is attributable to the
recovery of the global economy and the Company’s exporting department
reorganization, resulting in an increase in the international demand for the
Company’s glucose and corn meal products compared to the same period last year.
Domestic sales for cornstarch and other products for the nine months ended March
31, 2010 increased approximately 138% compared with the same period last year.
The increase in domestic sales was attributable to the higher demand for the
Company’s products and increase in unit sales prices.




27





Cost of
sales for the nine months ended March 31, 2010 was $67,595,344, an increase of
$24,578,637, or 57.14%, compared with the same period in 2009. The increase in
cost of sales was lower than the increase in net sales. As a result, the gross
profit for the nine months ended March 31, 2010 was $13,447,859, an increase of
$7,243,570, or 116.75%, compared with the same period in 2009, and the gross
profit margin for the nine months ended March 31, 2010 was 16.6%, an increase
from 12.6% for the same period in 2009.





While the
local government of Changle County, Shandong has stated that its Finance Bureau
will repay the amount of $837,684 that the Company paid in the last quarter of
calendar year 2009 as guarantor to Agriculture Bank of China on behalf of
bankrupt Yong Chang Food Industry Ltd. Co., no payment had been received by the
Company at March 31, 2010. The $837,684 was fully written off in the nine months
ended March 31, 2010. When it is paid by the Finance Bureau, the $837,684 will
be booked as income. The $837,684 is included in selling, general and
administrative expenses.





Selling,
general and administrative expenses were $7,358,396 for the nine months ended
March 31, 2010 compared to $6,074,853 for the nine months ended March 31, 2009.
The increase was due largely to the write-off of the payment of $837,684
described above. After deducting the write-off, selling, general and
administrative expenses for the nine months ended March 31, 2010 were
$6,520,712, an increase of $445,859, or 7.3%, from the nine months ended March
31, 2009.





The
Company incurred $476,454 in non-cash stock option expenses for the nine months
ended March 31, 2010, which are included in selling, general and administrative
expenses.




While the
Company’s fiscal year is from July 1 of a year to June 30 of the next year,
Weifang Shengtai’s tax year is a calendar year. An adjustment of $193,168 was
identified for Weifang Shengtai’s previous tax year and is included in
non-operating expense for the nine months ended March 31, 2010.





Net
income for the nine months ended March 31, 2010 was $2,814,184, an increase of
$3,319,673 compared with a net loss of $505,489 for the same period in 2009. The
increase in net income was primarily due to the increase in the sales volume of
the Company’s products and the selling prices of the Company’s
products.





Liquidity and Capital
Resources





Operating
Activities





Net cash
provided by operating activities for the nine months ended March 31, 2010 was
$7,345,770, an increase of 554.79%, or $6,223,924 from $1,121,846 provided
by operating activities for the same period in 2009. The increase was primarily
due to the increase in the Company’s net sales.





Investing
Activities





Net cash
used in investing activities for the nine months ended March 31, 2010 was
$11,523,426, an increase of 6492.50%, or $11,348,630, from $174,796, as there
were very few investing activities in the same period in 2009. The increase in
net cash used in investing activities resulted from more capital expenditures
for acquisition of fixed assets and intangible assets. Under the current
circumstances, management believes that the Company will have limited capital
expenditures during the balance of the fiscal 2010 year.





Financing
Activities





Net cash
provided by financing activities for the nine months ended March 31, 2010 was
$6,298,897, an increase of 401.68%, or $8,386,837, from $2,087,940 used in
financing activities for the same period in fiscal 2009. The increase in net
cash provided by financing activities is mainly attributable to an increase in
the Company’s borrowings on short term loans for the nine months ended March 31,
2010.







28


Loans





Other
than the Company’s private placement financing in 2007, the Company has financed
its operations primarily through bank loans and operating income. The Company
had a total of $36,909,720 short term loans outstanding as of March 31, 2010.
Except for the loan from Dezhi Zheng, the loans were secured by the Company’s
properties or guaranteed by unrelated third parties. The terms of all these
short term loans are for one year. The Company has never defaulted on any of
these loans.





The
Company has $3,796,568 of non-current payables as of March 31, 2010 and
$5,642,556 as of June 30, 2009.





Guarantees





The
Company has guaranteed certain borrowings of other unrelated third parties
including short term bank loans. The total guaranteed amounts were $4,401,000 as
of March 31, 2010. The total amount of guarantees provided to the Company by
unrelated third parties is $12,029,400 as of March 31, 2010.





Future
Cash Commitments and Needs





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





Critical
Accounting Policies and Estimates




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




Revenue
recognition




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




Use of
estimates




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





Accounts
receivable




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




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.




29




Property
and equipment




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




Foreign
currency translation




The
Company’s functional currency is Renminbi (or "RMB"). Foreign currency
transactions are translated at the applicable rates of exchange in effect at the
transaction dates. Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated at the applicable rates of
exchange in effect at that date. Revenues and expenses are translated at the
average exchange rates in effect during the reporting period.




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




Recently
Issued Accounting Pronouncements




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




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




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





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




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




Item
3. Quantitative and Qualitative Disclosures about Market Risk.




Not
applicable.




Item
4. Controls and Procedures.


Disclosure Controls and
Procedures




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




30




Changes in Internal Control
over Financial Reporting




During
the nine months ended March 31, 2010, there has been no material change in
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect the Company’s internal control over
financial reporting.





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





PART
II - OTHER INFORMATION





Item 1.Legal
Proceedings.





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




Item1A Risk Factors.





Not
Applicable.





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





None.





Item 3.Defaults upon Senior
Securities





None.





Item 4.Reserved.





Item 5.Other
Information





Not applicable.




31





Item 6.Exhibits





Exhibit
      No.
                                      Title
      of Document31.1
                                      Certification
      of the Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                                      Certification
      of the Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                                      Certification
      of the Principal Executive Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*32.2
                                      Certification
      of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*




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








32





SIGNATURES





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


Date: May
17, 2010




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




33