China Shenghuo Pharmaceutical (KUN) 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-33537

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-2903562
(State or Other Jurisdiction of Incorporation or Organization)	(IR.S. Employer Identification No.)
No. 2 , Jing You Road,
Kunming National Economy &
Technology Developing District
People’s Republic of China 650217	N/A
(Address of Principal Executive Offices)	(Zip Code)
0086-871-728-2628
(Registrant’s Telephone Number, Including Area Code)

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

Yes x No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company x

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

Yes o No x

There were 19,679,400 shares outstanding of the issuer’s common stock, par value $.0001 per share, as of May 14, 2010.

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION			1
ITEM 1.	CONDENSED FINANCIAL STATEMENTS		1
	Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited)and December 31, 2009		1
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2010 and 2009 (Unaudited)		2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)		3
	Notes to Condensed Consolidated Financial Statements (Unaudited)		4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		11
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		20
ITEM 4T.	CONTROLS AND PROCEDURES		20
PART II - OTHER INFORMATION			21
ITEM 1.	LEGAL PROCEEDINGS		21
ITEM 1A.	RISK FACTORS		21
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		21
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		21
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		22
ITEM 5.	OTHER INFORMATION		22
ITEM 6.	EXHIBITS		22
SIGNATURES			23

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in USD)

	March 31,			December 31,
	2010			2009
	(unaudited)
Assets:
Current Assets:
Cash and cash equivalents	$	863,805		$	1,986,540
Accounts and notes receivable, net		12,740,156			12,104,296
Other receivables, net		6,994,607			6,694,151
Advances to suppliers		601,121			394,856
Inventories, net		3,349,714			3,896,358
Due from related parties		214,679			417,494
Current deferred tax assets		870,130			866,645
Total Current Assets		25,634,212			26,360,340
Property, plant and equipment, net		12,876,850			12,065,552
Other non-current assets		1,543,665			1,497,421
	$	40,054,727		$	39,923,313
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	2,944,117		$	4,744,919
Other payables and accrued expenses		11,067,764			10,099,497
Deposits payable		7,506,667			7,037,155
Short-term borrowings		8,310,480			5,455,958
Advances from customers		1,555,139			916,362
Taxes payable and other current liabilities		1,018,401			1,094,331
Current portion of long-term borrowings		1,023,976			3,948,985
Total Current Liabilities		33,426,544			33,297,207
Long-term borrowings		5,851,289			5,850,348
		39,277,833			39,147,555
Commitments and Contingencies
Equity:
Common stock, $0.0001 par value, 100,000,000 shares authorized and 19,679,400 shares issued and outstanding, both periods		1,968			1,968
Additional paid-in capital		6,193,927			6,193,927
Appropriated retained earnings		147,023			147,023
Accumulated deficit		(7,154,938	)		(7,157,293	)
Accumulated other comprehensive income		1,590,015			1,589,047
Total stockholder's equity		777,995			774,672
Noncontrolling interest		(1,101	)		1,086
Total Equity		776,894			775,758
	$	40,054,727		$	39,923,313

See notes to condensed consolidated financial statements.

1

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS (UNAUDITED)

(Amounts in USD, except shares)

	Three months ended March 31,
	2010			2009
Sales	$	7,907,002		$	6,770,526
Cost of Goods Sold		2,076,353			2,301,525
Gross Margin		5,830,649			4,469,001
Operating Expenses:
Selling expenses		5,051,714			6,395,577
General and administrative expenses		684,259			1,046,442
Research and development expense		80,851			7,281
		5,816,824			7,449,300
Income(Loss) from Operations		13,825			(2,980,299	)
Other Income (Expenses):
Subsidy income		153,598			25,568
Interest and other income (expense)		(196,602	)		(254,863	)
		(43,004	)		(229,295	)
Loss Before Income Tax Expenses		(29,179	)		(3,209,594	)
Income tax benefit		29,984			-
Net Income (Loss)		805			(3,209,594	)
Net loss attributable to noncontrolling interests		(1,550	)		(248,322	)
Net Income(Loss) Attributable to Stockholders	$	2,355		$	(2,961,272	)
Comprehensive Income (Loss):
Net Income (Loss )		805			(3,209,594	)
Foreign currency translation adjustment		331			182
Comprehensive  Income (Loss)	$	1,136		$	(3,209,412	)
Comprehensive loss attributable to  noncontrolling interests		(2,187	)		(248,308	)
Comprehensive Income(Loss) Attributable to Stockholders		3,323			(2,961,104	)
Basic and diluted earnings (loss) per share	$	0.00		$	(0.15	)
Weighted-average number of shares outstanding -basic and diluted		19,679,400			19,679,400

See notes to condensed consolidated financial statements.

2

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Amounts in USD)

	Three months ended March 31,
	2010			2009
Net Cash Provided by Operating Activities		2,022,198			890,299
Cash Flows from Investing Activities:
Purchase of long-lived assets		(3,205,176	)		(29,467	)
Proceeds from disposal of Property		131,913			-
Net Cash Used in Investing Activities		(3,073,263	)		(29,467	)
Cash Flows from Financing Activities:
Due to related parties		-			(105,643	)
Proceeds from borrowings		9,563,858			-
Payments on borrowings		(9,636,020	)		(1,460,572	)
Net Cash Used in Financing Activities		(72,162	)		(1,566,215	)
Effect of exchange rate changes on cash and cash equivalents		492			1,925
Net Decrease in Cash and Cash Equivalents		(1,122,735	)		(703,458	)
Cash and Cash Equivalents at Beginning of Period		1,986,540			1,612,054
Cash and Cash Equivalents at End of Period	$	863,805		$	908,596
Supplemental Information
Cash paid for interest	$	261,726		$	300,237
Cash paid for income taxes	$	-		$	11,399

See notes to condensed consolidated financial statements.

3

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

(a) Nature of Business

China Shenghuo Pharmaceutical Holdings, Inc, (“CSPH”), incorporated in Delaware, United States of America, through its subsidiaries (collectively the “Company”), designs, develops, markets, sells and exports pharmaceutical, nutritional supplements and cosmetic products mainly in the People’s Republic of China (“PRC”). The Company also conducts research and development using the medicinal herb Panax notoginseng, also known as Sanqi, Sanchi, or Tienchi, which is grown in two provinces in the PRC. Sales from the cosmetic products represent less than 10% of total sales of the Company.

(b) Organization

The CSPH owns a 94.95% equity interest in Kunming Shenghuo Pharmaceuticals Co., Ltd. (“Shenghuo”). Shenghuo owns a 99% equity interest in Kunming Shenghuo Medicine Co., Ltd. (“Medicine”), a 99% equity interest in Kunming Pharmaceutical Importation and Exportation Co., Ltd. (“Import/Export”), a 98.18% interest in Kunming Shenghuo Cosmetics Co., Ltd. (“Cosmetic”), and a 70% interest in Kunming Beisheng Science and Technology Development Co., Ltd (“Beisheng”). On April 30, 2009, Shenghuo formed Shi Ling Shenghuo Co., Ltd. (“Shi Ling”) as a wholly owned subsidiary. Shi Ling was formed for the purpose of purchasing or leasing land suitable for cultivating the medicinal herb Panax notoginseng for use in the production of the Company’s medicinal products. As of March 31, 2010, Shi Lin  had not started its operation and Beisheng is in the process of dissolution. All other entities are formed in and operate within the PRC.

NOTE 2 – BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements (“condensed consolidated financial statements”) have been prepared in accordance with the accounting policies described in the Company’s Form 10-K filed on April 14, 2010 (“2009 Form 10-K”), and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s 2009 Form 10-K.

The condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate throughout the next twelve months as a going concern.  The Company’s consolidated current liabilities exceeded its consolidated current assets by approximate USD7.8 million as of March 31, 2010, and USD6.9 million as of December 31, 2009.  Based on future projections of the Company’s cash inflows from operations, reasonable estimate of revolving effect of deposits received, and the anticipated ability of the Company to obtain continued bank financing to finance its continuing operations, Management has prepared the condensed consolidated financial statements on a going concern basis.

In the opinion of the management of the Company (“Management”), all normal recurring adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full year.

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NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principle of consolidation

The condensed consolidated financial statements include the financial statements of the CSPH and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Noncontrolling interests represents the ownership interests in the subsidiaries that are held by owners other than the parent and is part of the equity of the consolidated group. The noncontrolling interests are reported in the condensed consolidated balance sheets within equity, separately from the parent’s equity. Net income or loss and comprehensive income or loss is attributed to the parent and the noncontrolling interests.  If losses attributable to the parent and the noncontrolling interests in a subsidiary exceed their interests in the subsidiary’s equity, the excess, and any further losses attributable to the parent and the noncontrolling interests, is attributed to those interests.

(b) Income taxes

CSPH and its consolidated entities each files tax returns separately.

The Company follows SFAS No. 109, “Accounting for Income Taxes” (“ASC Topic 740”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company follows Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“ASC Topic 740”). ASC Topic 740 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income tax in interim periods, and income tax disclosures. The Company did not have any interest and penalties associated with tax positions and did not have any significant unrecognized uncertain tax positions as of December 31, 2009 and 2008.

The Company is not subject to any income tax in the United States, but was subject to corporate income tax in the PRC at a unified rate of 25% for 2008. However, because Shenghuo is located in a special region of the PRC, it has a 15% corporate income tax rate and has been granted a “tax holiday” of two years tax-exemption beginning from the year of 2007 and followed by 50% reduction on the applicable income tax rate for three years.

In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income. On March 16, 2007, the National People’s Congress of China enacted a new Enterprise Income Tax Law (“Enterprise Income Tax Law”) under which foreign invested enterprises and domestic companies would be subject to Enterprise Income Tax Law at a uniform rate of 25%. The Enterprise Income Tax Law became effective on January 1, 2008.

As a result of the above change in the income tax laws, the phase-in income tax rate for Shenghuo is 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011, 25% for 2012 and after, and it will continue to enjoy the tax holiday mentioned above. Medicine, Import/Export, Cosmetics, Beisheng and Shi Lin are taxed at the new 25% rate effective January 1, 2008 for the year of 2009.

5

For the three months ended March 31, 2010, the Company recognized an income tax benefit of USD29,984 on pretax loss of USD29,179, representing an effective income tax rate of -103 %, which was mainly the result of an adjustment in income tax expense to reflect the impact of tax holiday of Shenghuo.

(c) Revenue recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB") No. 104 (“ASC Topic 605”). All of the following criteria must exist in order for the Group to recognize revenue: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

Delivery does not occur until products have been shipped to the wholesale companies, risk of loss has transferred to the wholesale companies and wholesale companies’ acceptance has been obtained, or the Company has objective evidence that the criteria specified in wholesale companies’ acceptance provisions have been satisfied. The sales price is not considered to be fixed or determinable until all contingencies related to the sale have been resolved.

In general, the Company does not allow wholesale companies to return products unless there are defects in manufacturing or workmanship. Sales returns are subject to a strict process and have to be authorized by Management. Sales returns are netted against sales when occurred. Historically, the amounts of sales returns have been immaterial.

(d) Fair value of financial instruments

The carrying amounts reported in the consolidated balance sheets for accounts and notes receivable, other receivables, advances to suppliers, accounts payable, advances from customers, other payables and accrued expenses, deposits payable approximate fair value because of the immediate or short-term maturity of these financial instruments. Management believes the interest rates on short-term notes payable and long-term debt reflect rates currently available in the PRC. Thus, the carrying value of these loans approximates fair value.

(e) Recently enacted accounting standards

The Financial Accounting Standards Board (“FASB”) establishes the Accounting Standards Codification (“ASC”).

In June 2009, FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets”, (ASC Topic 810). This updated guidance removed the concept of a qualifying special-purpose entity and removed the exception from applying consolidation guidance to these entities. This update also clarified the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2009. Management does not believe the adoption does not have a material effect on the Company’s condensed consolidated financial statements.

In February 2010, FASB issued ASU No. 2010-09 “Subsequent Events” (“ASC Topic 855”) which removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements. This amendment shall be applied prospectively for interim or annual financial periods ending after June 15, 2010. Management does not believe the adoption will have a material effect on the Company’s condensed consolidated financial statements.

Since the filing of 2009 Form 10-K, the FASB issued ASU No. 2010-12 through No. 2010-19. These ASUs entail technical corrections to existing guidance or affect guidance related to specialized industries or entities and therefore have minimal, if any, impact on the Company.

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NOTE 4 – INVENTORIES, NET

Inventories consisted of the following:

	March 31,		December 31,
	2010		2009
	(Unaudited)
Raw materials	$	1,057,264	$	1,048,823
Work-in-process		1,848,031		2,267,289
Finished goods		570,619		706,424
Total inventories		3,475,914		4,022,536
Less: allowance		126,200		126,178
	$	3,349,714	$	3,896,358

NOTE 5 – BORROWINGS

The Company’s borrowings are payable to banks and governmental financial bureaus. The following summarizes the Company’s debt obligations and respective balances as of March 31, 2010 and December 31, 2009:

Short-term borrowings	March 31,							December 31,
	2010							2009
	(Unaudited)
Lenders	Maturity Date		Interest Rate			Balance		Maturity Date	Interest Rate			Balance
China Construction Bank ("CCB"), secured by land use rights,  buildings and machinery		-		-		$	-	April 2010		5.31	%	$	3,656,468
CCB, (note a)	(note a)			4.86	%		1,579,257	(note a)		4.86	%		1,650,992
Financial bureau, unsecured	Due on demand			4.50	%		75,381	Due on demand		4.50	%		75,369
Financial bureau, unsecured	Due on demand			1.80	%		73,141	Due on demand		1.80	%		73,129
Financial bureau, secured by buildings	April 2010			4.86	%		5,119,879						-
Agricultural Bank of China ("ABC"), (note b)	January 2011			5.31	%		1,462,822						-
						$	8,310,480					$	5,455,958

7

Long-term borrowings	March 31,						December 31,
	2010						2009
	(Unaudited)
Lenders	Maturity Date	Interest Rate			Balance		Maturity Date	Interest Rate			Balance
ABC, (note b)						-	March 2010		8.316	%	$	1,462,587
CCB, secured by land use rights, buildings and machinery						-	March 2010		5.40	%		1,462,587
ABC, (note b)	April 2011		5.40	%		731,411	April 2011		5.40	%		731,293
ABC, (note b)	August 2011		5.40	%		5,119,878	August 2011		5.40	%		5,119,055
ABC, (note b)	June 2010		5.40	%		438,847	June 2010		5.40	%		438,776
ABC, (note b)	December 2010		5.40	%		585,129	December 2010		5.40	%		585,035
Total long-term borrowings					$	6,875,265					$	9,799,333
Less: current maturities of long- term borrowings						1,023,976						3,948,985
Long-term borrowings, net of current portion					$	5,851,289					$	5,850,348
Past due borrowing					$	-					$	292,517

(a) As of March 31, 2010, short-term borrowings, amounting to USD 1,579,257, were pledged by accounts receivable, amounting to USD1,974,071 at interest rates of approximately 4.86%, maturing within three months from withdrawing dates.

(b) On August 6, 2009, the Company obtained a one-year line of credit from ABC amounting to RMB110 million (approximately USD16 million) based on the ABC’s assessment of the Company’s operations and unencumbered assets. As of March 31, 2010, the balance of borrowings from ABC was RMB57 million (approximately USD8.3 million), among which, borrowing amounting to USD1.5 million was secured by land use rights and buildings, while aggregate amount of USD6.9 million was guaranteed by the CSPH’s 94.95% shares in Shenghuo. The unused line of credit as of March 31, 2010 was RMB53 million (approximately USD 7.7 million) which requires additional collaterals.

NOTE 6 – BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

	Three Months Ended March 31,
	2010		2009
	(Unaudited)		(Unaudited)
Net income(loss) attributable to stockholders	$	2,355	$	(2,961,272	)
Weighted-average number of shares outstanding-basic and diluted		19,679,400		19,679,400
Basic and diluted earnings (loss) per share	$	0.00	$	(0.15	)

8

NOTE 7 – CONCENTRATIONS

For the three months ended March 31, 2010, the Company had concentrations of purchases raw materials from three vendor accounting for 52.4% of total purchases and concentration of sales from one customer accounting for 11.52% of total sales.

As of March 31, 2010, no significant concentration on accounts receivables from single customer.

Approximately 92% of the sales came from a single product, Xuesaitong Soft Capsules for the three months ended March 31, 2010.

NOTE 8–SEGMENT REPORTING

Management regards “Medicine products” and “Cosmetic products” as their operating segments.  However, no segment reporting is necessary as “Cosmetic products” does not meet the quantitative thresholds for a reportable segment. As the Group primarily generates its revenues from customers in the PRC, no geographical segments are presented.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

(a) Operating lease commitment

The Company signed an agreement with Management Commission of Kunming Shilin Taiwan Farmer Entrepreneur Centre(“Entrepreneur Centre”) in August 2009 to rent land to plant suitable for cultivating the medicinal herb Panax notoginseng for use in the production of the Company’s medicinal products. The total operating lease amount was approximately USD15 million in a lease period of 21 years. However, the Entrepreneur Centre failed to hand over the land and fulfilled the contract terms in time.

(b) Capital Commitment

As of March 31, 2010, capital commitments for constructing new buildings were totalling USD0.75 million, which will be settled within one year.

(c) Class Action Lawsuits

In 2008, putative class action lawsuits were asserted against the Company and certain other parties in the United States District Court for the Southern District of New York (the “Court”). On February 12, 2009, an amended complaint was served on the Company by new lead counsel for the class, consolidating the putative class actions and bearing the caption Beni Varghese, Individually and on Behalf of All Other Similarly Situated v. China Shenghuo Pharmaceutical Holdings, Inc., et al., Index No. 1:08 CIV. 7422. The defendants include the Company, the Company’s controlling shareholders, Lan’s International Medicine Investment Co., Limited, the Company’s chief executive officer, Gui Hua Lan, the Company’s former chief financial officer, Qiong Hua Gao, and the Company’s former independent registered public accounting firm, Hansen, Barnett & Maxwell, P.C. Both the Company and the accounting firm filed motions to dismiss the complaint, but those motions were denied by the Court.  A scheduling order has been entered by the Court anticipating that the parties will engage in substantive discovery in 2010.

The amended consolidated complaint alleges that the Company failed to take adequate steps to ensure its financial reporting comported with U.S. GAAP and, as a result, the Company was required to restate what are alleged to be materially false and misleading financials for accounting periods during the alleged class period from August 2007 through August 20, 2008. The amended consolidated complaint further alleges, among other things, that certain of the Company’s SEC filings and other public statements contained false and misleading statements that resulted in damages to the plaintiffs and the members of the purported class when they purchased the Company’s securities. On the basis of those allegations, plaintiffs in each of the actions seek an unspecified amount of damages under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated there under.

9

The Company believes the allegations in the amended consolidated complaint are without merit, and intends to vigorously defend the class action lawsuits. The Company does not believe the outcome of this suit will have a material adverse effect on the Company. However, the Company is unable at this time to predict the outcome of this litigation or whether the Company will incur any liability associated with the litigation, or to estimate the effect such outcome would have on the financial condition, results of operations, or cash flows of the Company based on the opinion of the counsel.

Other litigation has arisen in the normal course of the Company’s business, none of which is deemed to be material.

NOTE 10– SUBSEQUENT EVENTS

As ofMay 24, 2010, which is the financialstatement issuance date, Management identified the following subsequent events:

On April 7, 2010, The Company obtained long-term borrowing amounting to USD6,202,367 with maturity date of April, 2012 from ABC under the unused loan line of credit and repaid the short-term borrowing from the financial bureau amounting to USD5,119,879 on April 15, 2010.

On April 23, 2010, the Company obtained the approval from the government to dissolve Beisheng. As Beisheng has not generated revenues or conducted operations, no material effect on the condensed consolidated financial statements of the Company.

On April 27 2010, the Company repaid the short-term borrowing from ABC amounting to USD1,462,822, which originally fell due in January 2011.

On July 20, 2009, the Company appeared before a court sitting in the Tianhe District of Guangzhou, Guandong Province, PRC, to defend itself in an action brought by Mingying Co., Ltd. for allegedly failing to satisfy payment obligations for advertising services. Mingying Co., Ltd. is seeking a judgment in the amount of approximately USD68,000. The Company lost the lawsuit in the trial of first instance, which was held in September. The Company has applied for a retrial and the retrial was held on November 20, 2009. On May 10, 2010, the Company and Mingying agreed to close the lawsuit with a settlement under the court’s mediation, in which the Company agreed to pay Mingying Co, Ltd USD52,662 no later than May 25,2010,The liability was recognized in the financial statement as of March 31, 2010.

On May 12, 2010, the Company signed a framework agreement with Management Commission of Kunming Shilin Taiwan Farmer Entrepreneur Centre (“Entrepreneur Centre”) to rent land to construct a health preserving zoneand travel service center. The lease agreement is subject to further negotiation.

On May 20, 2010, the Company obtained short-term borrowings amounting to USD2,574,567 from ABC under the unused loan line of credit. The borrowing amounting to USD87,769 and USD2,486,798 will fall due in December 2010 and  May 2011,  respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of China Shenghuo Phamaceutical holdings Inc. Throughout this document, references to “we,” “our,” the “Company” refer to China Shenghuo Phamaceutical holdings Inc and its subsidiaries. MD&A should be read in conjunction with our interim condensed consolidated financial statements and the accompanying notes, and the other financial information included in this report

The information contained in this quarterly report, including in the documents incorporated by reference into this quarterly report, includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our company’s and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements contained in this quarterly report are based on current expectations and beliefs concerning future developments and the potential effects on the Company. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:

• our reliance on one product for over 92% of our revenues;

• our reliance on limited suppliers for Sanchi, a scarce plant that is the primary ingredient in almost all of our products;

• replacement of our primary product by other medicines or the removal of our primary product from China’s Insurance Catalogue;

• our ability to raise additional capital needed for working capital, future operations and research and development;

• our ability to collect on advances to sales representatives;

• our reliance on our three largest customers for a significant percentage of our sales;

• our ability to effectively grow management;

• our dependence on key personnel;

• our ability to establish and maintain a strong brand;

• the ability of our products to effectively compete with those of our competitors;

• continued receipt and maintenance of regulatory approvals, certificates, permits and licenses required to conduct business in China;

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• our ability to collect on trade receivables;

• our ability to develop and market new products, including those with high profit margins;

• additional products being subject to price controls by the Chinese government;

• our ability to obtain all necessary government certifications and/or licenses to conduct our business;

• protection of our intellectual property rights;

• loss of certain tax concessions;

• our lack of insurance to cover losses due to fire, casualty or theft;

• changes in the laws of the PRC that affect our operations;

• changes in the foreign currency exchange rate between U.S. dollars and RMB;

• cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations;

• the effect on our operations of costs associated with the Restatement, including litigation costs;

• a downturn in the economy of the PRC or inflation in the PRC;

• our ability to establish and maintain adequate management, legal and financial controls, including effective internal controls over financial reporting;

• volatility of the market for our common stock;

• the possibility of substantial sales of our common stock;

• influence of our principal stockholder;

• cooperation of the minority shareholder of our principal operating subsidiary;

• The pledge of the stock of our operating subsidiaries to secure the bank loan entered into in August 2009; and

• other factors listed from time to time in our filings with the Securities and Exchange Commission, including without limitation, our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent reports on Form 8-K.

The risks included above are not exhaustive. Other sections of this quarterly report may include additional factors that could adversely impact our business and operating results. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward looking statements.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.

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You should read this quarterly report, and the documents that we reference in this quarterly report and have filed as exhibits to this quarterly report with the Securities and Exchange Commission, completely and with the understanding that our actual future results, levels of activity, performance and achievements may materially differ from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

We are primarily engaged in the research, development, manufacture, and marketing of pharmaceutical, nutritional supplement and cosmetic products. Almost all of our products are derived from the medicinal herb Panax notoginseng, also known as Sanqi, Sanchi or Tienchi. Panax notoginseng is the root of a greyish-brown or greyish-yellow plant that only grows in a few geographic locations, including Yunnan Province in southwest China where we are located.  Yunnan Province accounts for 90% of the global production of Panax notoginseng. The main root of Panax notoginseng is cylindrically shaped and is most commonly one-to-six centimeters long and one-to-four centimeters in diameter. Panax notoginseng saponins (PNS), the active ingredients in Panax notoginseng, are extracted from the plant using high-tech equipment and in accord with Good Manufacturing Practice (GMP) standards. Our main product, Xuesaitong Soft Capsules, accounted for more than 92% of our sales for the three months ended March 31, 2010.

We earn revenues mainly from the production and sale of our products and external processing. We hope to increase profits as a result of making new products and increasing sales, since the sale of products is our main source for generating cash. Our business involves a significant degree of risk as a result of the opportunities and challenges we face in selling our products. We have traditionally focused on research and development of products serving cardiovascular and cerebrovascular disease, peptic ulcer disease and health products markets, but we intend to devote additional resources to research and development and to continue to evaluate and develop additional product candidates to expand our pipeline where we perceive an unmet need and commercial potential, as well as to improve existing products to enhance their efficacy.

With intense price competition among many similar or identical products in the industry, we believe that building brand equity is the primary means to generate and sustain profitable growth in the future. Our brand strategy is centered on “Lixuwang” – the brand under which most of our products are sold. We believe that our relationships within the Chinese pharmaceutical industry are key to building brand equity, and we believe we can benefit from developing and maintaining relationships with professionals within the industry, especially physicians and hospitals.

Since 2005, our primary product, Xuesaitong Soft Capsules has been listed in Part B of the State Insurance Catalogue.  Xuesaitong Soft Capsules represented approximately 92% of our sales for the three months ended March 31, 2010.  In addition to the State Insurance Catalogue, each of the 31 Chinese provinces establishes its own provincial insurance catalogues (each, a “PIC”).  A drug listed on the PIC will result in the patient purchasing such drug to receive the same 90% reimbursement as if such drug were listed on Part B of the State Insurance Catalogue. In November 2009, the Ministry of Labor and Social Security in China announced the updated State Insurance Catalogue, which takes effect on July 1, 2010, and the Xuesaitong Soft Capsules will no longer be listed.  Therefore, until the effective date of the updated State Insurance Catalogue, the Xuesaitong Soft Capsules will remain in Part B of the State Insurance Catalogue.  We are seeking to have other products listed in the State Insurance Catalogue.  At present, it has been announced that Banlangen Tablets, Dansheng Tablets and Sulfadiazine Silver Ointment have already been approved to be listed in the newly announced State Insurance Catalogue.  The Ministry of Labor and Social Security in China plans to update the State Insurance Catalogue every two years, but since 2000, the catalog has been updated only twice.

In order to mitigate the negative impact the removal from the State Insurance Catalogue may have on the Company, we have been coordinating with various provinces to list the Xuesaitong Soft Capsules on the various PICs and our communications with various provinces are great.  It is expected that the various provinces will make a decision on their individual listings by May 30, 2010.

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Further, the Department of Heath in China, which makes an independent assessment of the drugs available, publishes an “essential drug list” as to what drugs are basic and prevalent and can satisfy the ordinary need for drugs to all the people. If a drug is listed on the “essential drug list,” it is automatically included in Part A of the State Insurance Catalogue.  The Company’s Xuesaitong Soft Capsules were listed on the “essential drug list” in 2000 and 2004 and the Company is attempting to have the drug relisted on that list in 2010 to mitigate and even improve its position with respect to drug reimbursement for patients.

Xuesaitong Soft Capsules are subject to wholesale and retail price controls by the Chinese government, are primarily sold in China, but the product is also sold in various developing countries, including Malaysia, Indonesia and Kyrgyzstan. Sales of the product in China are regulated by the State Food and Drug Administration (“SFDA”) as a prescription drug and therefore must be sold to consumers through hospital pharmacies and cannot be advertised, thus limiting the ability of the Company to market the brand. We sell Xuesaitong Soft Capsules to wholesale companies who resell them to hospital pharmacies. Our three main customers are Tianjing Zhongxing Medicine Co., Ltd., Guangzhou Medicine Co., Ltd, Beijing Ai Xing Wei Ye Medicine Co., Ltd and these three wholesale companies’ sales account for 11.52%, 9.45% and 4.62% of our sales respectively for the three months ended March 31, 2010.

 We have established sales offices in many cities in China that manage sales representatives according to our internal management rules and sales policy. Because the main product “Xuesaitong” capsule is sold to hospitals through regional wholesale companies located in the various cities of China and because China has thousands of wholesale companies, we employ a large number of sales representatives to expand into new markets and gain new customers.

As of March 31, 2010, our medicine marketing team maintains sales offices or agents in approximately 31 provinces throughout China. The sales network covers approximately 210 cities and is staffed by approximately 617 sales representatives. We intend to grow our internal marketing and sales function and increase our relationships with other national wholesale companies to expand the distribution and presence of our non-prescription brands and cosmetics.

We started to expand our business into the OTC market in selected areas around China since 2009.  For example, the gross sales of Lixuwang in the OTC market in Yunnan province amounted to RMB 1.14 million, resulting in a profit realized by the Company of about RMB 0.34 million in the first quarter of 2010. Based on these positive results, we will continue to expand our presence in the OTC market in 2010 in provinces such as Jiangsu, Fujian, Guangdong and Zhejiang. The Company reimburses the sales representatives their accrued selling expenses when related accounts receivable are collected.

We hope to further expand sales beyond China into other countries where our products could be affordable treatment options. We intend to focus on the expansion of our cosmetics product line and devote additional marketing and sales resources to that end with the aim that our cosmetics products will account for a larger percentage of our revenue in the future.

Our business is capital intensive, and these research and development, marketing, sales network expansion and cosmetic product expansion initiatives will require us to expend significant cash resources, which could adversely affect our profitability and liquidity. We do face certain challenges and risks, including our relatively high debt ratio, which is one of our main risks. We also regularly incur significant expenses in our efforts to maintain the continued listing status of the Company on an exchange. We have encountered a shortage of working capital and are exploring possible ways to address our short and long term cash needs.

We believe that among the most important economic or industry-wide factors relevant to our growth in the short term are the reform of the medical system in China and the adjustment of medicine prices, which will affect the sale of our main product, Xuesaitong Soft Capsules, in hospitals. In order to increase long-term growth, we previously applied for the designation of Xuesaitong Soft Capsules as a medicine with “good quality worthy of high price,” which designation we received in February 2007. Currently, the Chinese government supports the medical system in urban and rural communities, which we believe will lead to a sustained increase in the sales of prescription medicines in the future.

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According to data from the Yunnan Pharmaceutical Industry Association, the pharmaceutical industry in China grew about 21.02% on a year-over-year basis in 2009. This growth was driven by a number of favorable factors including improving standards of living from an increase in disposable income, an aging population, the improving access and higher participation in the State Basic Medical Insurance System, and the increase in government spending on public health care.

On January 21, 2009, the Chinese government announced a healthcare reform plan pursuant to which the government would spend upward of RMB 850 billion over the next three years to make medical services and products more affordable and accessible to the entire population. We believe the successful implementation of the policies outlined in the plan will have a significant impact on the domestic pharmaceutical sector. There are five key tasks the healthcare reforms are aiming to address: 1) expanding medical insurance coverage and increasing participation rates, 2) initiating a national basic drug system, 3) establishing an extensive public health system, 4) increasing the efficiency and improving the quality of basic medical services, especially in the rural areas, and 5) reforming state-owned hospitals.

Traditional Chinese Medicine (“TCM”), including prescription and over-the-counter pharmaceuticals, has been widely used in China for many years and is an important part of the overall Chinese culture. The recently announced healthcare reform plan contains measures and policies that we believe will help support and promote the growth and development of the domestic TCM market. TCM drug manufacturers are likely to benefit from this reform as we believe the government will add more TCM-related drugs to the national medicine catalogue. In addition, we expect the government will focus on disease prevention as it rolls out the nationwide medical insurance coverage. The TCM market is a vibrant and growing industry despite the challenging economic environment and it will remain a part of mainstream medicine in China.

We hope to stabilize the sales channel into hospitals and widen the reach of sales in urban and rural communities at the same time. Large increases in medicine sales at an average lower price will ensure the growth of general medicinal sales over the next few years. Also, we are focusing our efforts on developing better channels for selling our products to expand our revenue and to counter in fierce market competition. To that extend, we began to build relationships with new high-quality sales agents and terminate our relationships with sales agent with poor historical performances during 2009. We believe that this shift will provide a sound foundation for our operation going forward.

Our 12 WaysTM Chinese Traditional Medicine Beauty Salon Series (“12 Ways”) cosmetic products are sold in a number of cities and provinces outside our local region. We have opened a number of retail specialty counters to offer our cosmetic products at pharmacies throughout Eastern China, eventually expanding our retail presence across China. As of March 31, 2010, we have opened approximately 685 retail specialty counters in more than 30 cities throughout China. In addition, we opened a 12 Ways Chinese Herbal Beauty Salon in Kunming that will feature approximately ten traditional Chinese medicine practitioners and beauticians that provide a variety of services, including acupuncture, body massage, foot massage and other services. All products used in the salon will be supplied by us. Management hopes that the opening of this salon and the opening of retail counters will allow us to increase our brand recognition and strengthen marketing. Our ability to effectively open and operate new retail locations depends on several factors, including, among others, our ability to identify suitable counter locations, the availability of which is outside our control; our ability to prepare counters for opening within budget; our ability to hire, train and retain personnel; our ability to secure required governmental permits and approvals; our ability to contain payroll costs; and our ability to generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund short term cash needs and our expansion plans.

There is potential for growth in production and sales due to the growth of new products and expansion of new channels into urban and rural communities. However, it will be uncertain which of our new products will pass the applicable tests and receive clinical approval without difficulty because of the uncertainty of test results and clinical approvals. Over the last three years, the price of the main raw material we use - Sanchi - has risen. We expect this trend to continue and will likely increase our cost of product sold. In addition, our expected increased expenses for research and development, marketing and sales may have a short-term adverse affect on future profit levels and available cash resources.

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Critical Accounting Policies and Estimates

The details of the critical accounting policies and estimates relevant to the Company are set out in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Results of Operations

Three Months Ended March 31, 2010 and 2009

The following table sets forth our statements of operations for the three months ended March 31, 2010 and 2009 in U.S. dollars (unaudited):

	Three months ended March 31,
	2010			2009			Change ($)			Variance (%)
	Unaudited			Unaudited
Sales	$	7,907,002		$	6,770,526			1,136,476			17	%
Cost of Sales		2,076,353			2,301,525			(225,172	)		(10	)%
Gross Margin		5,830,649			4,469,001			1,361,648			30	%
Operating Expenses:
Selling expenses		5,051,714			6,395,577			(1,343,863	)		(21	)%
General and administrative expenses		684,259			1,046,442			(362,183	)		(35	)%
Research and development expenses		80,851			7,281			73,570			1010	%
		5,816,824			7,449,300			(1,632,476	)		(22	)%
Income (Loss) from Operations		13,825			(2,980,299	)		2,994,124			(100	)%
Other Expenses		(43,004	)		(229,295	)		186,291			(81	)%
Loss Before Income Tax Expenses		(29,179	)		(3,209,594	)		3,180,415			(99	)%
Income taxes benefit		29,984			-			29,984			100	%
Net  Income (Loss)		805			(3,209,594	)		3,210,399			(100	)%
Net loss attributable to noncontrolling interests		(1,550	)		(248,322	)		(246,772	)		(99	)%
Net Income (Loss ) Attributable to Stockholders	$	2,355		$	(2,961,272	)		2,963,627			(100	)%
Basic and diluted earnings (loss)per share	$	0.00		$	(0.15	)		0.15			(100	)%
Weighted-average number of shares outstanding-basic and diluted		19,679,400			19,679,400			—			0	%-

Sales: Sales for the three months ended March 31, 2010 was approximately $7.9 million, an increase of approximately $1.13 million, or 17 %, from approximately $6.77 million for the three months ended March 31, 2009. The increase in sales was primarily due to the Company’s main product Xuesaitong’s sales increasing. The new sales policy has stimulated the enthusiasm of sales representatives, resulted in the increased sales of products. Tianjing, Yunnan, Jiangshu, Beijing, Guangdong and Guangxi provinces have impressive sales results.

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Cost of sales: Our cost of sales for the three months ended March 31, 2010 was approximately $2.07 million, a decrease of $0.23 million, or 10%, from approximately $2.3 million for the three months ended March 31, 2009. The decrease in cost of sales was primarily due to the much stricter controlling on the cost and the improvement on the manufacturing technique in 2009, which resulting in the decrease in the wastage of raw materials.

Gross margin: Our gross margin for the three months ended March 31, 2010 was approximately $5.83 million as compared with approximately $4.47 million for the three months ended March 31, 2009, an increase of $1.36 million, or 30%. Gross margin as a percentage of revenues was approximately 73.7% for the three months ended March 31, 2010, an increase of 7.7 % from 66% for the three months ended March 31, 2009. The increase in gross margin percentage was primarily due to the decrease of cost of sales set forth above.

Selling expense: Selling expenses were approximately $5.05 million for the three months ended March 31, 2010, a decrease of $1.35 million, or 21%, from approximately $6.4 million for the three months ended March 31, 2009. The primary reason for the decrease in selling expenses was the strengthened controlling on the travel expense, business entertainment expense ..etc.

We reimburse the sales representatives their selling and marketing expenses when they submit the appropriate documentation to be reimbursed and their sales are collected. We reimburse the sales representatives their accrued selling expenses when related accounts receivable are collected.

General and administrative expense: General and administrative expenses were approximately $0.68 million for the three months ended March 31, 2010, a decrease of $0.36 million, or 35%, from approximately $1.04 million for the three months ended March 31, 2009. The decrease was primarily due to our strengthened budget control.

Research and development expense: Research and development expense for the three months ended March 31, 2010 was $80,851, as compared to $7,281 for the period ended March 31, 2009, an increase of approximately $73,570. The increase was primarily due to the increase in the expenditure on one of our innovative medicine- Dencichine Hemostat and the cooperation with outside experts in the R&D since late 2009.

Other expenses: Other expenses were $43,004 for the three months ended March 31, 2010, which consisted of interest expense and non-operating expense, off set by subsidy income, interest income and non-operating income, a decrease of $ 186,291, or 81%, from $229,295 for the three months ended March 31, 2009. The decrease was mainly due to we have obtain subsidy income from provincial government to support the small enterprises

Net income (loss) attributable to shareholders: Net income increased to $2,355 for the three months ended March 31, 2010 as compared to net loss of $2,961,272 for the three months ended March 31, 2009. The increase in net income was primarily due to the increase of sales revenue. Also strict sales expenses controlling policy contributes to the positive results.

Liquidity and Capital Resources

General – As of March 31, 2010, we had cash and cash equivalents of $ 0.86 million. We have historically financed our business operations through bank loans, in addition to equity offerings. Although we had a history of negative net income for 2009 and 2008, working capital and retained earnings, we have achieved a net income for the three months ended March 31, 2010 of $805. Our consolidated current liabilities exceeded its consolidated current assets by $7.8 million as of March 31, 2010, and $6.9 million as of December 31, 2009. As of March 31, 2010, capital commitments for constructing new buildings were totaling $0.75 million, which will be settled within one year.

We have expended significant efforts to expand our revenues by assisting our sales representatives and increasing our marketing efforts during fiscal 2009. The net income for the three months ended March 31, 2010 was caused primarily by increased sales and decreased selling expenses as a result of the strengthened controlling on the travel expense, business entertainment expense and business expense.

For the three months ended March 31, 2010, we had net cash provided by operating activities of $2.02 million, an increase of over $ 1.13 million from 0.89 million for the three months ended March 31, 2009. We believe that we would be able to obtain more cash flows from operating activities accompanying the increasing sales volume and advances from customers also can provide short-time cash flow.

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Cash flow 

	Three months ended March 31,
	2010			2009
	Unaudited			Unaudited
	In thousands
Net cash provided by operating activities	$	2,022		$	890
Net cash used in investing activities		(3,073	)		(29	)
Net cash used in financing activities		(72	)		(1,566	)
Cash and Cash Equivalents at End of Period	$	864		$	909

Operating Activities: Net cash provided by operating activities for the three months ended March 31, 2010 was $2.02million, an increase of over $1.13 million as compared to net cash provided in operating activities of $0.89 million for the three months ended March 31, 2009. The increase was mainly due to improving collection of accounts receivable and increasing advance from customers,

Investing Activities: Net cash used in investing activities was $3.07 million for the three months ended March 31, 2010, as compared to net cash used in the amount of $29,467 for the three months ended March 31, 2009. The increase in net cash used in investing activities was primarily due to significant increases in capital expenditures, specifically, the construction of Shenghuo Plaza. After the construction is completed and the Shenghuo Plaza is put into use, part of the Shenghuo Plaza will be used to open a technology demonstration center of 12 Ways Chinese Herbal Beauty Salon, where 12 ways cosmetics will be used and promoted and our beauticians from all over the country will be trained in the center; the remaining part of the Shenghuo Plaza will be opened for business as a business hotel.

Financing Activities: Net cash used in financing activities was approximately $72,162 for the three months ended March 31, 2010 compared to net cash used in the amount of $1.57 million for the three months ended March 31, 2009. The decrease in cash used in financing activities was primarily due to we have obtained more loans during the first quarter of 2010.

Working Capital Deficiency

Our consolidated current liabilities exceeded our consolidated current assets by $7.8 million as of March 31, 2010, and $6.9 million as of December 31, 2009.

As of March 31, 2010 our accounts and notes receivable (less allowance for doubtful accounts of approximately $2.04 million) were approximately $12.7 million, an increase of approximately $0.64 million, from $12.1 million (net of allowance for doubtful accounts of $2.05 million) as of December 31, 2009. The increase of notes and accounts receivables is attributed primarily to the increasing sales.

Before 2009, we made significant cash advances to our sales representatives to assist and encourage them to expand the marketing and sales of our products into new markets and to develop new customers. We believed that the sales representatives would be better able to expand into new markets and to secure new customers if they were advanced funds for their travel, meals and other incidental expenses that arose in connection with their sales activities. Prior to September 2006, we did not ask sales representatives to pay off advances immediately because the Chinese economy has grown quickly and because competition in the pharmaceutical industry is intense. Instead, we encouraged sales representatives to expand their markets and gain more customers. However, beginning in September 2006, we began to more vigorously pursue collection of all sales representative advances. Nonetheless, there are some sales representative advances that have aged so significantly that, based on prior experience, we do not expect to collect on every outstanding advance and have estimated the uncollectible balance based on the age of the advances. Pursuant to the policies adopted at the beginning of 2009, instead of advancing sales representatives money to sustain or develop markets, we reimburse sales representatives their selling and marketing expenses when they present expense vouchers. Management considers this a better way to manage the potential for bad debts on the advances to sales representatives. We pay the accrued selling expenses only when we collect an account receivable for which a sales representative has presented his expense receipts. Because we offer a grace period of one-to-six months to our clients for remitting payments due, the accrued sales expenses may remain outstanding for however long it takes to collect the corresponding accounts receivable.

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As of March 31, 2010, our accounts payable were approximately $2.9 million, a decrease of $1.8million, from approximately $4.7 million as of December 31, 2009. The decrease of accounts payable is mainly attributed to the outstanding payment for construction of Shenghuo plaza as of December 31, 2009 has been settled in the current period.

Our payment cycle is considerably shorter than our receivable cycle, since we typically pay our suppliers all or a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders. We require our sales representatives to pay a certain percentage of the sales price as deposit before we ship products to the customers. The deposit were approximately $7.5 million as of March 31, 2010, increased $0.47 million, from approximately $7.03 million as of December 31, 2009, due to increasing sales volume.

The other payables and accrued expense increased by $0.97 million, from $10.1 million as of December 31, 2009 to $ 11.07 million as of March 31, 2010 due to increasing commission payable which was in line with increasing sales.

To the extent that we cannot satisfy our cash needs, whether from operations or from a financing source, our business may be impaired in that it may be difficult for us to obtain products which could, in turn, impair our ability to generate sales. We have implemented new policies aimed at improving collection of accounts receivable in the future, including more detailed reporting from and increased control over provincial sales offices and representatives, incentives for sales representatives more closely tied to timely collection and more stringent enforcement of payment terms with wholesale companies.

On August 6, 2009, we obtained a one-year line of credit from Agricultural Bank of China (“ABC”) amounting to RMB 110 million (approximately $16 million) based on ABC’s assessment of our operations and unencumbered assets. As of May 24, 2010, balance from ABC amounted to RMB 107 million (approximately $15.7 million) and the remaining unused line of credit was RMB 3 million (approximately $0.4million), which requires additional collaterals.

Further, in July, 2009, we signed a factoring agreement with China Construction Bank (the “CCB”) to transfer our accounts receivable with full recourse, and the proceeds received from CCB being recognized as secured borrowings. As of March 31, 2010, short-term borrowings, amounting to RMB 10.8 million (approximately $1.58 million), were pledged by accounts receivable, amounting to RMB 13.5 million (approximately $1.97 million) under this factoring agreement. This factoring agreement was renewed in May, 2010.  Under this renewed factoring agreement, CCB agrees to provide the Company a maximum of RMB 28,800,000 ($4,213,606) factoring advance between May 14, 2010 and May 4, 2011.

Considering the financial resources presently available, we are confident that we have sufficient working capital for our present requirements and for at least the next 12 months; however, we may require additional capital for acquisitions, for expanding business to related fields, or for the operation of the subsidiaries and there is no assurance that such funding will be available. Please see Note 5 –Borrowings in the Condensed Consolidated Financial Statements.  

Off-Balance Sheet Arrangements

None.

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Foreign Currency Risk

Since all of our operations are conducted in the PRC, we are subject to special considerations and significant risks not typically associated with companies operating in the United States of America. These risks include, among others, the political, economic and legal environments and foreign currency exchange rate fluctuations. Our operational results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to medical reforms and other laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of our net assets and income derived from its operations in the PRC. In addition, all of our revenue is denominated in the Chinese Yuan Renminbi (“RMB”), which must be converted into other currencies before remittance out of the PRC. Both the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad require approval of the PRC government. The effect of the fluctuations of exchange rates is not considered to be material to our business operations.

Interest Rate Risk

We do not have significant interest rate risk, as our debt obligations are primarily fixed interest rate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Smaller reporting companies are not required to provide the information required by this Item.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure controls and procedures

Our management, with the participation of our chief executive officer and chief financial officer, Messrs. Gui Hua Lan and Mr. Chuanxiang Huang respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Mr. Lan and Mr. Huang concluded that despite improvements in areas of previously identified weakness in internal control over financial reporting identified (described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2009), our disclosure controls and procedures were not effective as of March 31, 2010.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Mingying Co., Ltd. Lawsuit – On July 20, 2009, the Company appeared before a court sitting in the Tianhe District of Guangzhou, Guandong Province, People’s Republic of China, to defend itself in an action brought by Mingying Co., Ltd. for allegedly failing to satisfy payment obligations for advertising services. Mingying Co., Ltd. is seeking a judgment in the amount of RMB 465,000 (approximately $68,000). The court has informed Mingying Co., Ltd. that it has failed to meet its burden of proof in support of its claims, however the action is still proceeding. The Company lost the lawsuit in the trial of first instance, which was held in September. The Company has applied for a retrial and the retrial was held on November 20, 2009. On May 10, 2010, the two parties of the lawsuit have agreed to close the lawsuit with a settlement under the court’s mediation. According to the settlement, the Company must pay Mingying Co, Ltd RMB 360,000 (approximately $ 52,662) no later than May 25, 2010.

The Company does not believe the outcome of this suit will have a material adverse effect on the Company.

Class Action Lawsuit – In 2008, putative class action lawsuits were asserted against the Company and certain other parties in the United States District Court for the Southern District of New York (the “Court”). On February 12, 2009, an amended complaint was served on the Company by new lead counsel for the class, consolidating the putative class actions and bearing the caption Beni Varghese, Individually and on Behalf of All Other Similarly Situated v. China Shenghuo Pharmaceutical Holdings, Inc., et al., Index No. 1:08 CIV. 7422. The defendants include the Company, the Company’s controlling shareholders, Lan’s International Medicine Investment Co., Limited, the Company’s chief executive officer, Gui Hua Lan, the Company’s former chief financial officer, Qiong Hua Gao, and the Company’s former independent registered public accounting firm, Hansen, Barnett & Maxwell, P.C.  Both the Company and the accounting firm filed motions to dismiss the complaint, but those motions were denied by the Court.  A scheduling order has been entered by the Court anticipating that the parties will engage in substantive discovery in 2010.

The amended consolidated complaint alleges that the Company failed to take adequate steps to ensure its financial reporting comported with U.S. Generally Accepted Accounting Principles (“GAAP”) and, as a result, the Company was required to restate what are alleged to be materially false and misleading financials for accounting periods during the alleged class period from August 2007 through August 20, 2008. The amended consolidated complaint further alleges, among other things, that certain of the Company’s SEC filings and other public statements contained false and misleading statements which resulted in damages to the plaintiffs and the members of the purported class when they purchased the Company’s securities. On the basis of those allegations, plaintiffs in each of the actions seek an unspecified amount of damages under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

The Company believes the allegations in the amended consolidated complaint are without merit, and intends to vigorously defend the class action lawsuits. The Company does not believe the outcome of this suit will have a material adverse effect on the Company. However, the Company is unable at this time to predict the outcome of this litigation or whether the Company will incur any liability associated with the litigation, or to estimate the effect such outcome would have on the financial condition, results of operations, or cash flows of the Company.

ITEM 1A. RISK FACTORS

Except as reflected in this Form 10-Q, there have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description of Exhibit
10.1	Employment Agreement dated October 26, 2009 by and between Lei Lan and the Company (translated into English)
10.2	Employment Agreement dated October 23, 2009 by and between Feng Lan and the Company (translated into English).
10.3	Engagement Letter dated December 24, 2009 by and between Zhengyi Wang and the Company (translated into English).
10.4	Joint Venture Contract dated March 23, 2010 by and between the Company and Kunming Tianzhiheng Hotel Management Co., Ltd. (translated into English).
10.5	Factoring Agreement dated May 14, 2010 by and between Kunming Shenghuo Pharmaceuticals Co., Ltd. and Heping Branch, China Construction Bank (translated into English).
10.6	Insurance Policy dated May 4, 2010 issued by China Ping An Insurance Co., Ltd. in favor of Kunming Shenghuo Pharmaceuticals Co., Ltd. (translated into English).
10.7	Agreement on Indemnities Transfer, dated May 4, 2010 by and among Kunming Shenghuo Pharmaceuticals Co., Ltd., China Ping An Insurance Co., Ltd. and Kunming Heping Branch of China Construction Bank (translated into English).
10.8	Agreement on Registration of Accounts Receivable Transfer, dated May 14, 2010 by and between Kunming Shenghuo Pharmaceuticals Co., Ltd. and Heping Branch, China Construction Bank (translated into English).
10.9	Loan contract dated May 11, 2010 by and between Kunming Shenghuo (Group) Co., Ltd. and the Agricultural Bank of China Limited Inc. (translated into English).
10.10	Mortgage Contract dated May 11, 2010 by and between Kunming Shenghuo (Group) Co., Ltd. and the Agricultural Bank of China Limited Inc. (translated into English).
31.1	Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
31.2	Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
32.1	Certification pursuant to 18 U.S.C. 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 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
	(Registrant)
May 24, 2010		By:	/s/ Gui Hua Lan
			Gui Hua Lan
			Chief Executive Officer and Chairman of the
			Board

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