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 September 30, 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
              IdentificationNo.)





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 xNo 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 oAccelerated filer oNon-accelerated filer oSmaller Reporting
Company x




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


Yes oNo x




There
were 19,679,400 shares outstanding of the issuer’s common stock, par value
$.0001 per share, as of November 12, 2010.










CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC.


FORM
10-Q QUARTERLY REPORT





TABLE
OF CONTENTS




PagePART
      I - FINANCIAL INFORMATIONITEM
      1.
              
              CONDENSED
      FINANCIAL STATEMENTSCondensed Consolidated Balance Sheets as of September 30, 2010
      (Unaudited) and December 31, 2009
              
              3Condensed Consolidated Statements of Operations and
      Comprehensive Income(Loss) for the Three and Nine Months Ended September
      30, 2010 and 2009 (Unaudited)
              
              4Condensed Consolidated Statements of Cash Flows for the Nine
      Months Ended September 30, 2010 and 2009 (Unaudited)
              
              5Notes to Condensed Consolidated Financial Statements
      (Unaudited)
              
              6ITEM 2.
              
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
              
              15ITEM 3.
              
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
              
              29ITEM 4T.
              
              CONTROLS AND PROCEDURES
              
              29PART II - OTHER INFORMATION
              
              30ITEM 1.
              
              LEGAL PROCEEDINGS
              
              30ITEM 1A.
              
              RISK FACTORS
              
              31ITEM 2.
              
              UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
              
              31ITEM 3.
              
              DEFAULTS UPON SENIOR SECURITIES
              
              31ITEM 4.
              
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              
              31ITEM 5.
              
              OTHER INFORMATION
              
              31ITEM 6.
              
              EXHIBITS
              
              31SIGNATURES
              
              32





2




CHINA SHENGHUO PHARMACEUTICAL
HOLDINGS, INC. AND
SUBSIDIARIES


CONDENSED CONSOLIDATEDBALANCE SHEETS


(Amounts
in USD)





September
      30,
              2010
            
            
            December
      31,
              2009(Unaudited)Assets:Current
      Assets:Cash
      and cash equivalents
            
            $
            1,703,422
            
            
            $
            1,986,540Accounts
      and notes receivable, net
            
            
            13,351,446
            
            
            
            12,104,296Other
      receivables, net
            
            
            7,013,655
            
            
            
            6,694,151Advances
      to suppliers
            
            
            851,322
            
            
            
            394,856Inventories,
      net
            
            
            3,102,937
            
            
            
            3,896,358Due
      from related parties
            
            
            216,503
            
            
            
            417,494Other
      current assets
            
            
            1,177,984
            
            
            
            866,645Total
      Current Assets
            
            
            27,417,269
            
            
            
            26,360,340Property,
      plant and equipment, net
            
            
            14,414,495
            
            
            
            12,065,552Other
      non-current assets
            
            
            1,718,147
            
            
            
            1,497,421$
            43,549,911
            
            
            $
            39,923,313Liabilities
      and Equity:Current
      Liabilities:Accounts
      payable
            
            $
            3,240,471
            
            
            $
            4,744,919Other
      payables and accrued expenses
            
            
            9,587,565
            
            
            
            10,099,497Deposits
      payable
            
            
            7,915,267
            
            
            
            7,037,155Short-term
      borrowings
            
            
            5,008,708
            
            
            
            5,455,958Advances
      from customers
            
            
            2,006,222
            
            
            
            916,362Taxes
      and related payables
            
            
            943,701
            
            
            
            1,094,331Current
      portion of long-term borrowings
            
            
            7,013,774
            
            
            
            3,948,985Total
      Current Liabilities
            
            
            35,715,708
            
            
            
            33,297,207Long-term
      borrowings
            
            
            6,327,319
            
            
            
            5,850,34842,043,027
            
            
            
            39,147,555Commitments
      and Contingencies
            
            
            -
            
            
            
            -Equity:Common
      stock, $0.0001 par value, 100,000,000 shares authorized and
      19,679,400 shares outstanding
            
            
            1,968
            
            
            
            1,968Additional
      paid-in capital
            
            
            6,193,927
            
            
            
            6,193,927Appropriated
      retained earnings
            
            
            147,023
            
            
            
            147,023Accumulated
      deficit
            
            
            (6,398,473
            )
            
            
            (7,157,293
            )Accumulated
      other comprehensive income
            
            
            1,614,051
            
            
            
            1,589,047Total
      stockholder's equity
            
            
            1,558,496
            
            
            
            774,672Noncontrolling
      interests
            
            
            (51,612
            )
            
            
            1,086Total
      Equity
            
            
            1,506,884
            
            
            
            775,758$
            43,549,911
            
            
            $
            39,923,313




See notes
to condensed consolidated financial statements




3




CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


(Amounts
in USD, except shares)






Three
      months Ended
              September
      30,
            
            
            Nine
      months ended
              September
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Sales
            
            $
            8,551,182
            
            
            $
            10,558,218
            
            
            $
            23,340,191
            
            
            $
            25,459,077Cost
      of Sales
            
            
            2,996,674
            
            
            
            2,947,511
            
            
            
            7,561,650
            
            
            
            7,643,566Gross
      Margin
            
            
            5,554,508
            
            
            
            7,610,707
            
            
            
            15,778,541
            
            
            
            17,815,511Operating
      Expenses:Selling expenses
            
            
            3,849,347
            
            
            
            6,988,017
            
            
            
            11,869,164
            
            
            
            19,604,857General
      and administrative expenses
            
            
            894,301
            
            
            
            1,063,981
            
            
            
            2,493,749
            
            
            
            5,230,722Research
      and development expense
            
            
            160,795
            
            
            
            10,534
            
            
            
            417,184
            
            
            
            24,4554,904,443
            
            
            
            8,062,532
            
            
            
            14,780,097
            
            
            
            24,860,034Income(Loss)
      from Operations
            
            
            650,065
            
            
            
            (451,825
            )
            
            
            998,444
            
            
            
            (7,044,523
            )Other
      Income (Expenses):Subsidy
      income
            
            
            492,451
            
            
            
            49,723
            
            
            
            654,013
            
            
            
            194,902Interest
      expense
            
            
            (213,683
            )
            
            
            (182,879
            )
            
            
            (653,722
            )
            
            
            (701,581
            )Other
      income
            
            
            42,282
            
            
            
            -
            
            
            
            228,046
            
            
            
            -Other
      expense
            
            
            (22,507
            )
            
            
            (2,847
            )
            
            
            (292,647
            )
            
            
            (22,038
            )298,543
            
            
            
            (136,003
            )
            
            
            (64,310
            )
            
            
            (528,717
            )Income
      (Loss) Before Income Tax
            
            
            948,608
            
            
            
            (587,828
            )
            
            
            934,134
            
            
            
            (7,573,240
            )Income
      tax benefit (expense)
            
            
            (118,370
            )
            
            
            401,012
            
            
            
            (141,001
            )
            
            
            401,012Net
      Income (Loss)
            
            
            830,238
            
            
            
            (186,816
            )
            
            
            793,133
            
            
            
            (7,172,228
            )Net
      income(loss) attributable to noncontrolling interests
            
            
            42,581
            
            
            
            (154,892
            )
            
            
            34,313
            
            
            
            (403,257
            )Net
      Income(Loss) Attributable to Common Stockholders
            
            $
            787,657
            
            
            $
            (31,924
            )
            
            $
            758,820
            
            
            $
            (6,768,971
            )Comprehensive
      Income (Loss):Net
      Income (Loss)
            
            
            830,238
            
            
            
            (186,816
            )
            
            
            793,133
            
            
            
            (7,172,228
            )Foreign
      currency translation adjustment
            
            
            21,221
            
            
            
            (76,185
            )
            
            
            26,135
            
            
            
            (73,064
            )Comprehensive
      Income (Loss):
            
            $
            851,459
            
            
            $
            (263,001
            )
            
            $
            819,268
            
            
            $
            (7,245,292
            )Comprehensive
      income (loss) attributable to noncontrolling interests
            
            
            42,617
            
            
            
            (158,693
            )
            
            
            35,444
            
            
            
            (406,947
            )Comprehensive
      Income (Loss) Attributable to Common Stockholders
            
            
            808,842
            
            
            
            (
      104,308
            )
            
            
            783,824
            
            
            
            (6,838,345
            )Basic
      and diluted earnings (loss) per share
            
            $
            0.04
            
            
            $
            (0.00
            )
            
            $
            0.04
            
            
            $
            (0.34
            )Weighted-average
      number of shares outstanding-basic and diluted
            
            
            19,679,400
            
            
            
            19,679,400
            
            
            
            19,679,400
            
            
            
            19,679,400




See notes
to condensed consolidated financial statements




4





CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)


(Amounts
in USD)






Nine
      months Ended
              September
      30,2010
            
            
            2009Net
      Cash Provided by Operating Activities
            
            
            2,239,891
            
            
            
            878,694Cash
      Flows from Investing Activities:Purchase
      of long-lived assets
            
            
            (5,607,809
            )
            
            
            (738,350
            )Proceeds
      from disposal of property, plant and equipment
            
            
            308,229Net
      Cash Used in Investing Activities
            
            
            (5,299,580
            )
            
            
            (738,350
            )Cash
      Flows from Financing Activities:Due
      to related parties
            
            
            -
            
            
            
            (345,371
            )Proceeds
      from borrowings
            
            
            24,640,172
            
            
            
            21,227,417Payments
      on borrowings
            
            
            (21,904,375
            )
            
            
            (19,915,434
            )Net
      Cash Provided by Financing Activities
            
            
            2,735,797
            
            
            
            966,612Effect
      of exchange rate changes on cash
            
            
            40,775
            
            
            
            4,706Net
      Change in Cash and Cash Equivalents
            
            
            (283,117
            )
            
            
            1,111,662Cash
      and Cash Equivalents at Beginning of Period
            
            
            1,986,540
            
            
            
            1,612,054Cash
      and Cash Equivalents at End of Period
            
            $
            1,703,423
            
            
            $
            2,723,716Supplemental
      InformationCash
      paid for interest
            
            $
            543,799
            
            
            $
            704,242Cash
      paid for income tax
            
            $
            130,489
            
            
            $
            -





See notes
to condensed consolidated financial statements




5




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”), and a 98.18% interest
in Kunming Shenghuo Cosmetics Co., Ltd. (“Cosmetic”). On April 30, 2009,
Shenghuo formed Shi Lin Shenghuo Co., Ltd. (“Shi Lin”) as a wholly owned
subsidiary. Shi Lin 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 September 30, 2010, Shi
Lin had not generated any revenue . All other entities are formed in and operate
within the PRC.





On April
23, 2010, the Company obtained the approval from the government to dissolve
Kunming Beisheng Science and Technology Development Co., Ltd (“Beisheng”), a 70%
owned subsidiary of CSPH. As Beisheng has not generated revenues or conducted
operations, there was no material effect on the condensed consolidated
financial statements of the Company.





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 U.S. generally accepted accounting principles (“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.




6





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 USD8.3 million as of
September 30, 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 management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of the Company’s condensed
consolidated financial position as of September 30, 2010, its condensed
consolidated results of operations for the three and nine-month periods ended
September 30, 2010 and 2009 and its cash flows for the nine-month periods ended
September 30, 2010 and 2009, as applicable, have been made. The interim results
of operations are not necessarily indicative of the operating results for the
full fiscal year or any future periods.




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. That
is, the noncontrolling interest shall continue to be attributed its share of
losses even if that attribution results in a deficit noncontrolling interest
balance.





(b)
            Income
      taxes





The
Company follows Accounting Standards Codification (“ASC”) Topic 740, “Income
Taxes”, 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 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 derecognizing 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 September 30, 2010 and
December 31, 2009.




7





(c)
            Revenue
      recognition





The
Company recognizes revenue in accordance with ASC Topic 605 “Revenue
recognition”. 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
approximated to their fair values because of the short-term maturity of these
financial instruments. Management believes the interest rates on short-term
borrowings and long-term borrowings reflect rates currently available in the
PRC. Thus, the carrying value of these loans approximated to their fair
values.




(e)
            Recently
      enacted accounting standards





Since the
filing of 2009 Form 10-K, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2010-12 through No. 2010-26. 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.





8




NOTE
4 – ACCOUNTS AND NOTES RECEIVABLE, NET





Accounts
and notes receivable consisted of the following:





September
      30,
            
            
            December 31,2010
            
            
            2009(Unaudited)Notes
      receivable
            
            $
            1,000,299
            
            
            $
            852,095Accounts
      receivable
            
            
            14,537,043
            
            
            
            13,307,185Total
            
            
            15,537,342
            
            
            
            14,159,280Less:
      allowance for doubtful accounts
            
            
            2,185,896
            
            
            
            2,054,984$
            13,351,446
            
            
            $
            12,104,296





NOTE
5 – OTHER RECEIVABLES, NET




Other
receivables consisted of the following:





September
      30,
            
            
            December
      31,2010
            
            
            2009(Unaudited)Other
      receivables
            
            $
            8,707,606
            
            
            $
            8,345,350Less:
      allowance for doubtful accounts
            
            1,693,951
            
            
            
            1,651,199$
            7,013,655
            
            
            $
            6,694,151





NOTE 6 – INVENTORIES,
NET




Inventories
consisted of the following:




September
      30,
            
            
            December
      31,2010
            
            
            2009(Unaudited)Raw
      materials
            
            $
            967,865
            
            
            $
            1,048,823Work-in-process
            
            
            1,424,149
            
            
            
            2,267,289Finished
      goods
            
            
            839,664
            
            
            
            706,424Total
      inventories
            
            
            3,231,678
            
            
            
            4,022,536Less:
      allowance
            
            
            128,741
            
            
            
            126,178$
            3,102,937
            
            
            $
            3,896,358




9




NOTE
7 – 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 September 30, 2010 and December 31, 2009:




September 30,
            
            
            December 31,Short-term borrowings
            
            2010
            
            
            2009(Unaudited)Lenders
            
            Maturity
              Date
            
            Interest
              Rate
            
            
            Balance
            
            
            Maturity
              Date
            
            
            Interest
              Rate
            
            
            BalanceChina
      Construction Bank(“ CCB”), secured by land use rights, buildings and
      machinery
            
            April
      2010
            
            
            5.31
            %
            
            $
            -
            
            
            April
      2010
            
            
            
            5.31
            %
            
            $
            3,656,468CCB,
      (note a)
            
            (note
      a)
            
            
            4.86
            %
            
            
            2,230,758
            
            
            (note
      a)
            
            
            
            4.86
            %
            
            
            1,650,992Agricultural
      Bank of China (“ABC”), (note b)
            
            December
      2010
            
            
            5.31
            %
            
            
            89,538
            
            
            
            -
            
            
            
            -
            
            
            
            -ABC,  (note
      b)
            
            May
      2011
            
            
            5.31
            %
            
            
            2,536,897Financial
      bureau, unsecured
            
            Due
      on demand
            
            
            4.50
            %
            
            
            76,900
            
            
            Due
      on demand
            
            
            
            4.50
            %
            
            
            75,369Financial
      bureau, unsecured
            
            Due
      on demand
            
            
            1.80
            %
            
            
            74,615
            
            
            Due
      on demand
            
            
            
            1.80
            %
            
            
            73,129$
            5,008,708
            
            
            
            
            
            
            
            
            
            
            $
            5,455,958




September
      30,
              
              December
      31,Long-term
      borrowings
              
              2010
              
              2009(Unaudited)Lenders
              
              Maturity
                Date
              
              Interest
                Rate
              
              
              Balance
              
              Maturity
                Date
              
              Interest
                Rate
              
              
              BalanceCCB,
      secured by land use rights, buildings and machinery
              
              March
      2010
              
              
              5.40
              %
              
              $
              -
              
              March
      2010
              
              
              5.40
              %
              
              $
              1,462,587ABC,
      (note b)
              
              April
      2012
              
              
              5.40
              %
              
              
              6,327,319ABC,
      (note b)
              
              March
      2010
              
              
              8.316
              %
              
              
              -
              
              March
      2010
              
              
              8.316
              %
              
              
              1,462,587ABC,
      (note b)
              
              April
      2011
              
              
              5.40
              %
              
              
              746,146
              
              April
      2011
              
              
              5.40
              %
              
              
              731,293ABC,
      (note b)
              
              August
      2011
              
              
              5.40
              %
              
              
              5,223,023
              
              August
      2011
              
              
              5.40
              %
              
              
              5,119,055ABC,
      (note b & c)
              
              June
      2010
              
              
              5.40
              %
              
              
              447,688
              
              June
      2010
              
              
              5.40
              %
              
              
              438,776ABC,
      (note b)
              
              December
      2010
              
              
              5.40
              %
              
              
              596,917
              
              December
      2010
              
              
              5.40
              %
              
              
              585,035Total
      long-term borrowings
              
              
              
              
              
              
              
              $
              13,341,093
              
              
              
              
              
              
              
              $
              9,799,333less:
      current maturities of long- term borrowings
              
              
              
              
              
              
              
              
              7,013,774
              
              
              
              
              
              
              
              
              3,948,985L
      long-term borrowings, net of current portion
              
              
              
              
              
              
              
              $
              6,327,319
              
              
              
              
              
              
              
              $
              5,850,348Past
      due borrowing (note c)
              
              
              
              
              
              
              
              $
              447,688
              
              
              
              
              
              
              
              $
              292,517





(a) As of
September 30, 2010, short-term borrowings, amounting to USD2,230,758, were
pledged by accounts receivable, amounting to USD2,788,448 at interest rates of
approximately 4.86%, maturing within three months from withdrawing
dates.




10





(b) As of
September 30, 2010, the short-term and long-term borrowings from ABC was RMB107
million (approximately USD15.97 million), which was secured by land use rights,
buildings, machinery and guaranteed by the CSPH’s 94.95% shares in
Shenghuo.





(c) Of
the aggregate amount USD15.97 million borrowed from ABC, USD447,688 past due in
June 2010. However, based on the Company’s good historical credit record, the
Company reached an oral agreement with the lender to extend the maturity date
for this portion of the loan to December 2010. The Company did not repay the
amount of the loan originally due in June 2010.





NOTE
8 – INCOME TAXES





CSPH and
its consolidated entities each files tax returns individually.





The
Company is not subject to any income tax in the United States. Shenghuo is
qualified to enjoy preferential tax rate under relevant PRC tax laws and
regulations, with effective income tax rate of 10% in 2009, 11% in 2010 and 12%
in 2011. From 2012, Shenghuo will be subject to income tax at a rate of 25%. All
other subsidiaries in the PRC were subject to income tax at a rate of 25% for
the period presented.





For the
three months ended September 30, 2010, the Company recognized an income tax
expense of USD118,370 on pretax income of USD948,608, representing an effective
income tax rate of 12.5%. For the nine months ended September 30, 2010, the
Company recognized an income tax expense of USD141,001 on pretax income of
USD934,134, representing an effective income tax rate of 15.1%. The expenses are
mainly the result of an adjustment in income tax expense to reflect change in
valuation of deferred tax asset of tax loss from Cosmetic, offset by the impact
of tax holiday of Shenghuo.




Income
tax benefit amounted to USD401,012 was recognized for the three and nine months
ended September 30, 2009, on pretax loss of USD587,828 and USD7,573,240 for the
three and nine months ended September 30, 2009 respectively, representing an
effective income tax rate of 68.2% and 5.3% respectively, which were mainly a
result of an adjustment in income tax expense to reflect change in valuation of
deferred tax assets of tax loss from Medicine, offset by the impact of tax
holiday of Shenghuo.




11




NOTE
9 – BASIC AND DILUTED LOSS PER SHARE





Three
      months Ended
              September
      30,
            
            Nine
      months ended
              September
      30,2010
            
            2009
            
            2010
            
            2009(Unaudited)
            
            (Unaudited)
            
            (Unaudited)
            
            (Unaudited)Net
      income (loss) attributable to stockholders
            
            $
            787,657
            
            
            $
            (31,924
            )
            
            $
            758,820
            
            
            $
            (6,768,971
            )Weighted-average
      number of shares outstanding-basic and diluted
            
            
            19,679,400
            
            
            
            19,679,400
            
            
            
            19,679,400
            
            
            
            19,679,400Basic
      and diluted earnings (loss) per share
            
            $
            0.04
            
            
            $
            (0.00
            )
            
            $
            0.04
            
            
            $
            (0.34
            )





NOTE
10 – CONCENTRATIONS




For the
three and nine months ended September 30, 2010, the Company had concentrations
of purchases of raw materials from three vendors accounting for 78.5% and 61.8%
respectively, as compared to 53.78% and 53.83% for the three months and nine
months ended September 30, 2009, respectively.




No
significant concentration on sales from single customer for the three and nine
months ended September 30, 2010 and September 30, 2009,
respectively.





No
significant concentration on accounts receivable from single customer as of
September 30, 2010 and 2009, respectively.




Approximately
91.1% and 89.4% of the sales came from a single product, Xuesaitong Soft
Capsules for the three and nine months ended September 30, 2010, respectively as
compared to approximately 86.7% and 85.8% for the three and nine months ended
September 30, 2009, respectively.




NOTE
11 – 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
12 – COMMITMENTS AND CONTINGENCIES




(a)    Capital
Commitment




The
Company did not have any significant capital commitment as of September 30,
2010.




12




(b)
            Operating
      Lease Commitment





On
September 8, 2010, the Company signed an agreement with Management Commission of
Kunming Shilin Taiwan Farmer Entrepreneur Centre (“Entrepreneur Centre”) to rent
the land for planting suitable-for-cultivating medicinal herb for use in the
production of the Company’s medicinal products and to construct a health
preserving zone and travel service center. The total operating lease amounted to
RMB 30.6 million (approximately USD4.6 million) with a lease term of 20
years.





As of
September 30, the Company has paid USD341,883, and the operating lease
commitment is summarized as below:




Year
            
            Amount2010
            
            
            -2011
            
            
            92,7092012
            
            
            222,5012013
            
            
            222,5012014
            
            
            222,5012014
      thereafter
            
            
            3,467,304Total
            
            
            4,227,516





(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.(HB&M). Both the Company
and HB&M filed motions to dismiss the complaint, but those motions were
denied by the Court. The substantive allegations of the amended consolidated
complaint have previously been summarized in disclosures by the
Company.





On July
21, 2010, in a mediation conducted by Retired Judge Nicolas H. Politan, the
Company entered into an agreement in principle with counsel for plaintiffs in
this litigation and HB&M, in which the parties agreed to settle all claims
by the putative class members in exchange for payments of USD200,000 by the
Company and USD600,000 by HB&M’s professional liability insurer. The
settlement must be approved by the Court to become effective and, on or about
November 2, 2010, the plaintiffs filed a motion with the Court seeking such
approval. It is anticipated that the Court will consider objections to the
settlement, if any, and conduct a hearing in the coming months, after which it
will determine if the settlement is approved. The Company does not have any
reason to believe that the Court will reject the settlement and, accordingly, it
is expected that the settlement will result in the dismissal of the class action
litigation.




13




NOTE
13– SUBSEQUENT EVENTS




Management
has considered all events occurring after September 30, 2010 to the date the
financial statements have been issued, and has determined that there are no such
events that are material to the financial statements.




14




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 89% 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;




15




·
            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;·
            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;




16




·
            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.




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 over 89% of our sales for the nine
months ended September 30, 2010. Even if the Company, as intended, leases
land so it itself can grow Sanqi commencing next spring, it will continue to be
as dependent for the immediate future as it is today on third party suppliers as
Sanqi will take three years to mature from its growing to realize the first
yield.




17




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.





On July
1, 2010, the updated State Insurance Catalogue became effective. Xuesaitong Soft
Capsules, our primary product, was not included in Part B of the State Insurance
Catalogue as it has been since 2005.  Banlangen Tablets, Dansheng Tablets
and Sulfadiazine Silver Ointment remain listed in the updated State Insurance
Catalogue. Patients purchasing medicines included in Part B are entitled to
reimbursement of about 90% of the costs of such medicines. As also
previously disclosed, there is an alternative route to achieve a similar result.
That is, for Xuesaitong Soft Capsules to be included in the Provincial Insurance
Catalog of each of the 31 Chinese provinces. This will allow 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. The Company has applied
for provincial listing in 31 provinces. As of November 12, 2010, Xuesaitong Soft
Capsules has been listed in the 2010 Provincial Insurance Catalogs of the
following eleven provinces: Tianjin, Jiangsu, Hebei, Henan, Shanghai,
Heilongjiang, Fujian, Anhui, Guangdong, Yunnan and Beijing. The total percentage
of sales derived from Xuesaitong Soft Capsules in these provinces account for
60% in 2009 and 66% for the nine months ended September 30, 2010.
 Xuesaitong Soft Capsules has been delisted from the 2010 Provincial
Insurance Catalogs of Zhejiang, Jiangxi, Jilin, Liaoning, Shangdong and Shanxi
provinces where it generates a sales of 17% in 2009 and 15% for the nine
months ended September 30, 2010. The 2010 Provincial Insurance Catalogs for the
rest of the fourteen provinces have not been announced. Thus, Xuesaitong
Soft Capsules remains listed on their 2009 Provincial Insurance Catalogs and
patients continue to be reimbursed. The sales of Xuesaitong Soft Capsules
generated in these provinces account for 23% in 2009 and 19% for the nine months
ended September 30, 2010. Xuesaitong Soft Capsules accounted for 85% of the
Company's revenues in 2009. Should the Company fail to receive provincial
approval in the major provinces in which it is sold, such failure could have a
material adverse impact on the Company. The Company is in the process of
developing a pipeline of proprietary formulations of other drug
compounds. However, such formulations have not been finalized or submitted
to State Food and Drug Administration (“SFDA”) for review and approval. This
process is time-consuming and capital intensive and there is no assurance that
SFDA will accept the data presented by the Company without requiring
additional data and that, ultimately, the application for drug approval will be
successful. Therefore, in the near term the Company is dependent on the sales of
Xuesaitong Soft Capsules and on the efforts to get it listed on the Provincial
Insurance Catalogs of the rest of the fourteen provinces.


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.




18





The
wholesale and retail prices of medicines that are included in the national and
provincial insurance catalogs are subject to price controls administered by the
Price Control Office under the National Development and Reform Commission, or
the NDRC, or their provincial price control authorities. Since Xuesaitong Soft
Capsules is no longer listed in the 2010 State Insurance Catalog and the 2010
Provincial Insurance Catalogs of Zhejiang, Jiangxi, Jilin, Liaoning, Shangdong
and Shanxi provinces, it is no longer subject to the state price control and
provincial price controls in that six provinces. However, since Xuesaitong Soft
Capsules is still listed in the insurance catalogs of the rest of the
twenty-five provinces, its price is still subject to price control administered
by the price control authorities in those provinces. Xuesaitong Soft
Capsulesis 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 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 Yunnan Medicine Co., Guangzhou Medicine Co., Ltd.; Tianjing
Zhongxing Medicine Co., Ltd; and Ltd. And these three wholesale companies’ sales
account for 8.82%, 8.73% and 7.29% of our sales respectively for the nine months
ended September 30, 2010. As noted above, Tianjin, Guangzhou and Yunnan have
included Xuesaitong Soft Capsules in their 2010 Provincial Insurance
Catalogs.





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
September 30, 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 643 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. The gross sales of Lixuwang in the OTC market in Yunnan
province amounted to RMB 9.92 million, resulting in a profit realized by the
Company of approximately RMB 1.98 million during the nine months of 2010. Based
on these positive results, we will continue to expand our presence in the OTC
market in the rest of months of 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.




19





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.





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.




20





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 in China. We have opened a number of retail
specialty counters to offer our cosmetic products at pharmacies and other
locations such as supermarkets and shopping malls throughout Eastern China, with
the ultimate intent of expanding our retail presence across China. As of
September 30, 2010, we have opened approximately 980 retail specialty counters
in more than 30 cities, including Kunming, Nanjing, Chongqing, Chengdu, Wuhan,
Heifei, Yantai and Puer, and so on. 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.





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.




21




Results
of Operations




Three
Months Ended September 30, 2010 and 2009





The
following table sets forth our statements of operations for the three months
ended September 30, 2010 and 2009 in U.S. dollars (unaudited):





Three
      months ended
              September
      30,2010
            
            
            2009
            
            
            Change
      ($)
            
            
            Variance
      (%)Sales
            
            $
            8,551,182
            
            
            $
            10,558,218
            
            
            
            (2,007,036
            )
            
            
            (19
            )%Cost
      of Sales
            
            
            2,996,674
            
            
            
            2,947,511
            
            
            
            49,163
            
            
            
            2
            %Gross
      Margin
            
            
            5,554,508
            
            
            
            7,610,707
            
            
            
            (2,056,199
            )
            
            
            (27
            )%Operating
      Expenses:Selling
      expenses
            
            
            3,849,347
            
            
            
            6,988,017
            
            
            
            (3,138,670
            )
            
            
            (45
            )%General
      and administrative expenses
            
            
            894,301
            
            
            
            1,063,981
            
            
            
            (169,680
            )
            
            
            (16
            )%Research
      and development expenses
            
            
            160,795
            
            
            
            10,534
            
            
            
            150,261
            
            
            
            1426
            %4,904,443
            
            
            
            8,062,532
            
            
            
            (3,158,089
            )
            
            
            (39
            )%Income
      (Loss) from Operations
            
            
            650,065
            
            
            
            (451,825
            )
            
            
            1,101,890
            
            
            
            (244
            )%Other
      Income (Expenses)
            
            
            298,543
            
            
            
            (136,003
            )
            
            
            434,546
            
            
            
            (320
            )%Income
      (Loss) Before Income Tax Expenses
            
            
            948,608
            
            
            
            (587,828
            )
            
            
            1,536,436
            
            
            
            (261
            )%Income
      tax benefit (expense)
            
            
            (118,370
            )
            
            
            401,012
            
            
            
            (519,382
            )
            
            
            (130
            )%Net
      Income (Loss)
            
            
            830,238
            
            
            
            (186,816
            )
            
            
            1,017,054
            
            
            
            (545
            )%Net
      income attributable to noncontrolling interests
            
            
            42,581
            
            
            
            (154,892
            )
            
            
            (197,473
            )
            
            
            (128
            )%Net
      Income (Loss) Attributable to Common Stockholders
            
            $
            787,657
            
            
            $
            (31,924
            )
            
            $
            819,581
            
            
            
            (2567
            )%Basic
      and diluted earnings (loss) per share
            
            $
            0.04
            
            
            $
            (0.00
            )
            
            $
            0.04
            
            
            
            (2567
            )%Weighted-average
      number of shares outstanding-basic and diluted
            
            
            19,679,400
            
            
            
            19,679,400
            
            
            
            -
            
            
            
            0
            %




22




Sales:Sales for the three months ended September 30, 2010 was approximately
$8.55 million, a decrease of approximately $2 million, or 19 %, from
approximately $10.56 million for the three months ended September 30, 2009. The
decrease was mainly due to the Company adjusted our sales commission policy to
decrease the commission to sales representatives, which led to the decrease of
the sales in the third quarter.




Since the
spring of 2010, we faced a challenge of insufficient supply of our major
material-Sanqi in Yunnan Province, where has suffered the worst drought in 50
years from last autumn to this spring. The output of Sanqi decreased sharply,
resulting in the price of Sanqi increased remarkably. In order to release the
pressure from increasing cost, the Company decided to adjust our sales
commission policy to decrease the commission to sales representatives by 10% as
compared to that in the first quarter, which led to the decrease of the sales.
The commission policy is subject to adjustment from time to time according to
the sales in the market. The Company in August has slightly increased its sales
commission, as a result of a slight decrease in its cost of Sanqi.




Cost of sales:Our cost of sales for the three months ended September 30, 2010 was
approximately $3 million, an increase of $0.05 million, or 2%, from
approximately $2.95 million for the three months ended September 30, 2009. The
increase in cost of sales was primarily due to the increase of the price of our
main raw material which was caused by serious drought offset by the decreased
sale volume.




Gross margin:Our gross margin for the three months ended September 30, 2010 was
approximately $5.6 million as compared with approximately $7.6 million for the
three months ended September 30, 2009, a decrease of $2 million, or 27%. Gross
margin as a percentage of revenues was approximately 65% for the three months
ended September, 2010, a decrease of 7.1 % from 72.1% for the three months ended
September 30, 2009. The decrease in gross margin percentage was primarily due to
the increase of raw material price.




Selling
expense: Selling expenses were approximately $3.85 million for the
three months ended September 30, 2010, a decrease of $3.14 million, or 45%, from
approximately $6.99 million for the three months ended September 30, 2009. The
primary reasons for the decrease in selling expenses were: i) our adjustment on
the commission policy to sales representatives as set forth above; ii) the
strengthened control on the travel expense, business entertainment expense,
etc.; iii) the decreased expense on OTC market development as compared to that
of in 2009, since when we started to expand our business into the OTC market in
selected areas around China.




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 $0.89million for the three months ended September 30, 2010, a
decrease of $0.17 million, or 16%, from approximately $1.06 million for the
three months ended September 30, 2009, which was mainly due to strengthened
control on professional fee.




Research and
development expense:Research and development expense for the three
months ended September 30, 2010 was $160,795, as compared to $10,534 for the
period ended September 30, 2009, an increase of approximately $150,261 or 1426%.
The increase was primarily due to the increase in the expenditure on one of our
innovative medicines- Dencichine Hemostat and the cooperation with external
experts since late 2009.




23




Other income
(expenses): Other income were $298,543 for the three months ended
September 30, 2010, which consisted of subsidy income, interest income,
non-operating income offset by interest expense and non-operating expense, an
increase of $434,546, or 320%, from expense of $136,003 for the three months
ended September 30, 2009. The increase was mainly attributable to the subsidy
income we received from the government in the third quarter of
2010.




Net income (loss)
attributable to common shareholders:Net income increased to $787,657 for
the three months ended September 30, 2010 as compared to net loss of $31,924 for
the three months ended September 30, 2009. The increase in net income was
primarily due to the decrease of selling expenses and increase of subsidy
income.




Nine Months Ended September
30, 2010 and 2009




The
following table sets forth our statements of operations for the nine months
ended September 30, 2010 and 2009 in U.S. dollars (unaudited):





Nine
      months ended
              September
      30,2010
            
            
            2009
            
            
            Change
      ($)
            
            
            Variance(%)Sales
            
            $
            23,340,191
            
            
            $
            25,459,077
            
            
            
            (2,118,886
            )
            
            
            (8
            )%Cost
      of Sales
            
            
            7,561,650
            
            
            
            7,643,566
            
            
            
            (81,916
            )
            
            
            (1
            )%Gross
      Margin
            
            
            15,778,541
            
            
            
            17,815,511
            
            
            
            (2,036,970
            )
            
            
            (12
            )%Operating
      Expenses:Selling
      expenses
            
            
            11,869,164
            
            
            
            19,604,857
            
            
            
            (7,735,693
            )
            
            
            (40
            )%General
      and administrative expenses
            
            
            2,493,749
            
            
            
            5,230,722
            
            
            
            (2,736,973
            )
            
            
            (52
            )%Research
      and development expenses
            
            
            417,184
            
            
            
            24,455
            
            
            
            392,729
            
            
            
            1606
            %14,780,097
            
            
            
            24,860,034
            
            
            
            (10,079,937
            )
            
            
            (41
            )%Income
      (Loss) from Operations
            
            
            998,444
            
            
            
            (7,044,523
            )
            
            
            8,042,967
            
            
            
            (114
            )%Other Expenses
            
            
            (64,310
            )
            
            
            (528,717
            )
            
            
            464,407
            
            
            
            (88
            )%Income
      (Loss) Before Income Tax Expenses
            
            
            934,134
            
            
            
            (7,573,240
            )
            
            
            8,507,374
            
            
            
            (112
            )%Income
      tax benefit (expense)
            
            
            (141,001
            )
            
            
            401,012
            
            
            
            (542,013
            )
            
            
            (135
            )%Net
      Income (Loss)
            
            
            793,133
            
            
            
            (7,172,228
            )
            
            
            7,965,361
            
            
            
            (111
            )%Net
      income attributable to noncontrolling interests
            
            
            34,313
            
            
            
            (403,257
            )
            
            
            437,570
            
            
            
            (109
            )%Net
      Income (Loss) Attributable to Common Stockholders
            
            $
            758,820
            
            
            $
            (6,768,971
            )
            
            $
            7,527,791
            
            
            
            (111
            )%Basic
      and diluted earnings (loss) per share
            
            $
            0.04
            
            
            $
            (0.34
            )
            
            $
            0.38
            
            
            
            (112
            )%Weighted-average
      number of shares outstanding-basic and diluted
            
            
            19,679,400
            
            
            
            19,679,400
            
            
            
            -
            
            
            
            0
            %




24




Sales:Sales for the nine months ended September 30, 2010 were approximately
$23.3 million, a decrease of approximately $2.2 million, or 8%, from
approximately $25.5 million for the nine months ended September 30, 2009. The
decrease in sales was primarily due to the adjustment on the commission policy
which had impact on our sales as set forth above.




Cost of sales:Our cost of sales for the nine months ended September 30, 2010 was
approximately $7.56 million, a decrease of $0.82 million, or 1 %, from
approximately $7.64 million for the nine months ended September 30, 2009. The
decrease in cost of sales was primarily due to the decrease of
sales.




Gross margin:Our gross margin for the nine months ended September 30, 2010 was
approximately $15.78 million as compared with approximately $17.82 million for
the nine months ended September 30, 2009. Gross margin as a percentage of
revenues was approximately 68% for the nine months ended September 30, 2010, a
decrease of 2% from 70% for the nine months ended September 30, 2009. The
decrease in gross margin was primarily due to the increase of the price of raw
material, offset by improvement on the manufacturing technique.




Selling expenses:Selling expenses were approximately $11.87 million for the nine months
ended September 30, 2010, a decrease of approximately $7.73 million, or 40%,
from approximately $19.6 million for the nine months ended September 30, 2009.
The primary reasons for the decrease in selling expenses were: i) our adjustment
on the commission policy to sales representatives as set forth above; ii) the
strengthened controlling on the travel expense, business entertainment expense,
etc.; iii) the decreased expense on OTC market development as compared to that
of in 2009, since when we started to expand our business into the OTC market in
selected areas around China.




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 expenses:General and administrative expenses were
approximately $2.49 million for the nine months ended September 30, 2010, a
decrease of approximately $2.74million, or 52%, from approximately $5.23 million
for the nine months ended September 30, 2009. The decrease was primarily due to
the Company has provided significant bad debt provision and incurred large
amount of professional fee related to SEC investigation in 2009.




25





Research and
development expenses: Research and development expense for the nine
months ended September 30, 2010 was $417,184 as compared to $24,455 for the nine
months ended September 30, 2009. The increase was primarily due to our focus on
a few innovative medicines- Dencichine Hemostat and the cooperation with
external experts since late 2009.





Other
expense: Other expense, which includes interest expense and non-operating
expense, offset by subsidy income, interest income, non-operating income, was
$64,310 for the nine months ended September 30, 2010 as compared to $528,717 for
the nine months ended September 30, 2009, a decrease of $464,407 or 88%. The
decrease in other expense was primarily due to i) the increased subsidy income;
ii) gain on disposal of property in 2010; and iii) offset by expenses related to
the settlement of class action lawsuit.





Net income (loss)
attributable to common stockholders: We created a net income of $758,820
for the nine months ended September 30, 2010 as compared to a net loss of $6.77
million for the nine months ended September 30, 2009, an increase of
approximately $7.53 million. The increase in net income was primarily due to the
sharp decrease of $7.7 million in selling expense and the decrease of $2.74
million in general and administrative expense.





Liquidity
and Capital Resources




General –
As of September 30, 2010, we had cash and cash equivalents of $ 1.7 million. We
have historically financed our business operations through bank loans, in
addition to equity offerings. In the third quarter of 2010, the Company created
a net income of $830,238 although we suffered sharp increase of raw material’s
price from this spring.





For the
nine months ended September 30, 2010, we had net cash provided by operating
activities of $2.24 million, an increase of $ 1.4 million from $0.88 million for
the nine months ended September 30, 2009. We believe that we would be able to
obtain more cash flows from operating activities by strengthen control on
working capital management.





Cash
flow




Nine
      months ended
              September
      30,2010
            
            2009Unaudited
            
            Unaudited(in
      thousands)Net
      cash provided by operating activities
            
            $
            2,239
            
            
            $
            879Net
      cash used in investing activities
            
            
            (5,300)
            
            
            
            (738)Net
      cash provided by financing activities
            
            
            2,736
            
            
            
            967Cash
      and Cash Equivalents at End of Period
            
            $
            1,703
            
            
            $
            2,724




26




Operating Activities: Net cash
provided by operating activities for the nine months ended September 30, 2010
was $2.24 million, as compared to net cash provided by operating activities of
$0.88 million for the nine months ended September 30, 2009. This result
reflected the impact i) an increase of approximately $1.8 million in cash
advance from customers and deposits received from sales representatives; ii) a
decrease of aproximately $0.86 million in inventory; iii) offset by increase of
$1.7 million notes and accounts receivables, other receivables and addvance to
suppliers.




Investing Activities: Net cash
used in investing activities was $5.3 million for the nine months ended
September 30, 2010, as compared to net cash used in the amount of $0.74 million
for the nine months ended September 30, 2009. The increase in net cash used in
investing activities was primarily due to the 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. Shenghuo Plaza is expected to completed and put into operation at the end
of this year. The final construction budget of Shenghuo Plaza is approximately
RMB 120 million. In May, 2010, we have entered into an agreement with Kunming
Tianzhiheng Hotel Management Co., Ltd (“Tianzhiheng”) to establish a company to
operate the business hotel. Tianzhiheng agreed to invest RMB25 million into the
construction of the hotel.





Financing Activities: Net cash
provided by financing activities was approximately $2.74 million for the nine
months ended September 30, 2010 compared to net cash provided in the amount of
$0.97 million for the nine months ended September 30, 2009. The increase in cash
provided was primarily due to the increase of loans borrowed from
banks.




Working Capital
Deficiency





Our
consolidated current liabilities exceeded our consolidated current assets by
$8.3 million as of September 30, 2010, and $6.9 million as of December 31,
2009.





As of
September 30, 2010, our net accounts and notes receivable (less allowance for
doubtful accounts of approximately $2.19 million) were approximately $13.35
million, an increase of approximately $1.25 million, from $12.1 million (net of
allowance for doubtful accounts of $2.05 million) as of December 31, 2009. In
order to maintain our existing market and customers and further to expand our
sales in the increasingly competitive business environment, the Company decided
to allow some of our customers historically with good credit to extend their
credit terms, which led to the increase of the accounts receivable.




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-three 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.




27




As of
September 30, 2010, our accounts payable were approximately $3.24 million, a
decrease of $1.50 million, from $4.74 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
$7.92 million as of September 30, 2010, increased $0.88 million, from
approximately $7.04 million as of December 31, 2009, primarily due to the
increase of the accounts receivable set forth above because we don’t return the
deposits to our sales representatives until they collect account receivables
from our customers.




The other
payables and accrued expense decreased by $0.51 million, from $10.1 million as
of December 31, 2009 to $ 9.59 million as of September, 2010. The decrease of
accrued expense balance was primarily due to the decrease in legal counsel fees
attributed to the SEC investigation which started in February 2009 and concluded
in September 2009.




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.




Further,
in May, 2010, we renewed the 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. Under this
renewed factoring agreement, CCB agrees to provide the Company a maximum of RMB
28.8 million ($4.2 million) factoring advance until May 4, 2011. As of September
30, 2010, short-term borrowings, amounting to RMB 15 million (approximately
$2.23 million), were pledged by accounts receivable, amounting to RMB 18.69
million (approximately $2.79 million) under this factoring
agreement.





The
completion of Shenghuo Plaza is expected to generate more cash flows and
increase our ability to obtain additional financing from banks. After the
completion of Shenghuo Plaza by the end of 2010, we plan to borrow an additional
$11.76 million by pledging it.




28





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. This assumes, of which there can be no assurance, that the
remaining provinces in which we sell a significant amount of
Xuesaitong Soft Capsules will list such capsules in their respective 2010
Provincial Insurance catalogs. We will continue to make efforts to expand our
sales to get more cash flow.




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 7 –Borrowings in
the Condensed Consolidated Financial Statements.




Off-Balance
Sheet Arrangements




None.




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 our 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 rates.




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 September 30, 2010.




29





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2010 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.




PART II - OTHER INFORMATION




ITEM 1.
LEGAL
PROCEEDINGS




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. (HB&M). Both the Company
and HB&M filed motions to dismiss the complaint, but those motions were
denied by the Court. The substantive allegations of the amended consolidated
complaint have previously been summarized in disclosures by the
Company.




On July
21, 2010, in a mediation conducted by Retired Judge Nicolas H. Politan, the
Company entered into an agreement in principle with counsel for plaintiffs in
this litigation and HB&M, in which the parties agreed to settle all claims
by the putative class members in exchange for payments of USD200,000 by the
Company and USD600,000 by HB&M’s professional liability insurer. The
settlement must be approved by the Court to become effective and, on or about
November 2, 2010, the plaintiffs filed a motion with the Court seeking such
approval. It is anticipated that the Court will consider objections to the
settlement, if any, and conduct a hearing in the coming months, after which it
will determine if the settlement is approved. The Company does not have any
reason to believe that the Court will reject the settlement and, accordingly, it
is expected that the settlement will result in the dismissal of the class action
litigation.




30




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.




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




None.




ITEM 5. OTHER
INFORMATION




None.




ITEM 6. EXHIBITS




Exhibit
              Number
            
            Description
      of Exhibit10.1
            
            English
      translation of the Lease Agreement between Kunming Shenghuo Pharmaceutical
      (Group) Co.,Ltd and Management Commission of Kunming Shilin Taiwan Farmer
      Entrepreneur Centre dated September 8, 2010.31.1
            
            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.
  31




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)November
      12, 2010
              By:
              /s/
      Gui Hua LanGui
      Hua LanChief
      Executive Officer and
                Chairman
      of the Board
  32