UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWASHINGTON,
      D.C. 20549FORM
      10-QxQUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE
                SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended March 31, 2010ORoTRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE
                SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from ______________ to
  ______________Commission file number
      001-33537CHINA
      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.
      EmployerIdentification
              No.)No. 2 , Jing You
      Road,Kunming National Economy
      &Technology
      Developing DistrictPeople’s
      Republic of China 650217
            
            N/A(Address
      of Principal Executive Offices)
            
            (Zip
      Code)0086-871-728-2628(Registrant’s
      Telephone Number, Including Area
Code)





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


Yes x No o




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




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




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


Yes o No x




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







CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC.


FORM
10-Q QUARTERLY REPORT




TABLE
OF CONTENTS





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








CHINA SHENGHUOPHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Amounts
in USD)





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(unaudited)Assets:Current
      Assets:Cash
      and cash equivalents
                  
                  $
                  863,805
                  
                  
                  $
                  1,986,540Accounts
      and notes receivable, net
                  
                  
                  12,740,156
                  
                  
                  
                  12,104,296Other
      receivables, net
                  
                  
                  6,994,607
                  
                  
                  
                  6,694,151Advances
      to suppliers
                  
                  
                  601,121
                  
                  
                  
                  394,856Inventories,
      net
                  
                  
                  3,349,714
                  
                  
                  
                  3,896,358Due
      from related parties
                  
                  
                  214,679
                  
                  
                  
                  417,494Current
      deferred tax assets
                  
                  
                  870,130
                  
                  
                  
                  866,645Total
      Current Assets
                  
                  
                  25,634,212
                  
                  
                  
                  26,360,340Property,
      plant and equipment, net
                  
                  
                  12,876,850
                  
                  
                  
                  12,065,552Other
      non-current assets
                  
                  
                  1,543,665
                  
                  
                  
                  1,497,421$
                  40,054,727
                  
                  
                  $
                  39,923,313Liabilities
      and Equity:Current
      Liabilities:Accounts
      payable
                  
                  $
                  2,944,117
                  
                  
                  $
                  4,744,919Other
      payables and accrued expenses
                  
                  
                  11,067,764
                  
                  
                  
                  10,099,497Deposits
      payable
                  
                  
                  7,506,667
                  
                  
                  
                  7,037,155Short-term
      borrowings
                  
                  
                  8,310,480
                  
                  
                  
                  5,455,958Advances
      from customers
                  
                  
                  1,555,139
                  
                  
                  
                  916,362Taxes
      payable and other current liabilities
                  
                  
                  1,018,401
                  
                  
                  
                  1,094,331Current
      portion of long-term borrowings
                  
                  
                  1,023,976
                  
                  
                  
                  3,948,985Total
      Current Liabilities
                  
                  
                  33,426,544
                  
                  
                  
                  33,297,207Long-term
      borrowings
                  
                  
                  5,851,289
                  
                  
                  
                  5,850,34839,277,833
                  
                  
                  
                  39,147,555Commitments
      and ContingenciesEquity:Common
      stock, $0.0001 par value, 100,000,000 shares authorized and 19,679,400
      shares issued and outstanding, both periods
                  
                  
                  1,968
                  
                  
                  
                  1,968Additional
      paid-in capital
                  
                  
                  6,193,927
                  
                  
                  
                  6,193,927Appropriated
      retained earnings
                  
                  
                  147,023
                  
                  
                  
                  147,023Accumulated
      deficit
                  
                  
                  (7,154,938
                  )
                  
                  
                  (7,157,293
                  )Accumulated
      other comprehensive income
                  
                  
                  1,590,015
                  
                  
                  
                  1,589,047Total
      stockholder's equity
                  
                  
                  777,995
                  
                  
                  
                  774,672Noncontrolling
      interest
                  
                  
                  (1,101
                  )
                  
                  
                  1,086Total
      Equity
                  
                  
                  776,894
                  
                  
                  
                  775,758$
                  40,054,727
                  
                  
                  $
                  39,923,313




See notes
to condensed consolidated financial statements.


1




CHINA SHENGHUO PHARMACEUTICALHOLDINGS, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE LOSS (UNAUDITED)


(Amounts
in USD, except shares)





Three months ended March
      31,2010
                  
                  
                  2009Sales
                  
                  $
                  7,907,002
                  
                  
                  $
                  6,770,526Cost
      of Goods Sold
                  
                  
                  2,076,353
                  
                  
                  
                  2,301,525Gross
      Margin
                  
                  
                  5,830,649
                  
                  
                  
                  4,469,001Operating
      Expenses:Selling
      expenses
                  
                  
                  5,051,714
                  
                  
                  
                  6,395,577General
      and administrative expenses
                  
                  
                  684,259
                  
                  
                  
                  1,046,442Research
      and development expense
                  
                  
                  80,851
                  
                  
                  
                  7,2815,816,824
                  
                  
                  
                  7,449,300Income(Loss)
      from Operations
                  
                  
                  13,825
                  
                  
                  
                  (2,980,299
                  )Other
      Income (Expenses):Subsidy
      income
                  
                  
                  153,598
                  
                  
                  
                  25,568Interest
      and other income (expense)
                  
                  
                  (196,602
                  )
                  
                  
                  (254,863
                  )(43,004
                  )
                  
                  
                  (229,295
                  )Loss
      Before Income Tax Expenses
                  
                  
                  (29,179
                  )
                  
                  
                  (3,209,594
                  )Income
      tax benefit
                  
                  
                  29,984
                  
                  
                  
                  -Net
      Income (Loss)
                  
                  
                  805
                  
                  
                  
                  (3,209,594
                  )Net
      loss attributable to noncontrolling interests
                  
                  
                  (1,550
                  )
                  
                  
                  (248,322
                  )Net
      Income(Loss) Attributable to Stockholders
                  
                  $
                  2,355
                  
                  
                  $
                  (2,961,272
                  )Comprehensive
      Income (Loss):Net
      Income (Loss )
                  
                  
                  805
                  
                  
                  
                  (3,209,594
                  )Foreign
      currency translation adjustment
                  
                  
                  331
                  
                  
                  
                  182Comprehensive  Income
      (Loss)
                  
                  $
                  1,136
                  
                  
                  $
                  (3,209,412
                  )Comprehensive
      loss attributable to  noncontrolling interests
                  
                  
                  (2,187
                  )
                  
                  
                  (248,308
                  )Comprehensive
      Income(Loss) Attributable to Stockholders
                  
                  
                  3,323
                  
                  
                  
                  (2,961,104
                  )Basic
      and diluted earnings (loss) per share
                  
                  $
                  0.00
                  
                  
                  $
                  (0.15
                  )Weighted-average
      number of shares outstanding -basic and diluted
                  
                  
                  19,679,400
                  
                  
                  
                  19,679,400





See notes
to condensed consolidated financial statements.


2


CHINA SHENGHUOPHARMACEUTICAL HOLDINGS, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(Amounts
in USD)





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





See notes
to condensed consolidated financial statements.


3


CHINA SHENGHUOPHARMACEUTICAL HOLDINGS, INC. AND
SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements




NOTE
1 – ORGANIZATION AND NATURE OF OPERATIONS




(a)
            Nature
      of Business




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




(b)
              Organization





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




NOTE
2 – BASIS OF PRESENTATION




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





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





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


4




NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




(a)
            Principle
      of consolidation





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





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





(b)
            Income
      taxes





CSPH and
its consolidated entities each files tax returns separately.





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





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




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




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




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




5




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




(c)
            Revenue
      recognition





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




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




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




(d)
            Fair
      value of financial instruments




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




(e)
            Recently
      enacted accounting standards





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





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





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





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


6


NOTE
4 – INVENTORIES, NET




Inventories
consisted of the following:




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




NOTE
5 – BORROWINGS




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




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


7





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





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





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





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





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




8




NOTE
7 – CONCENTRATIONS




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









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




NOTE
8–SEGMENT REPORTING




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




NOTE
9 – COMMITMENTS AND CONTINGENCIES




(a)
            Operating
      lease commitment




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




(b)
            Capital
      Commitment




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




(c)
            Class
      Action Lawsuits




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




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




9




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




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




NOTE
10– SUBSEQUENT EVENTS




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




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




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








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




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




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




10




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




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




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




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




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




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





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





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





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





•
            our
      ability to collect on advances to sales
  representatives;





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





•
            our
      ability to effectively grow
management;





•
            our
      dependence on key personnel;





•
            our
      ability to establish and maintain a strong
  brand;





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





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


11





•
            our
      ability to collect on trade
receivables;





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





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





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





•
            protection
      of our intellectual property
rights;





•
            loss
      of certain tax concessions;





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





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





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





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





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





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





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





•
            volatility
      of the market for our common stock;





•
            the
      possibility of substantial sales of our common
  stock;





•
            influence
      of our principal stockholder;





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





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





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




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




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


12




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




Overview





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




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




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





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





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


13




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





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




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





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





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





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





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





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


14





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





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





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





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





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





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




15





Critical
Accounting Policies and Estimates





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




Results
of Operations




Three Months Ended March 31,
2010 and 2009




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




Three months endedMarch31,2010
                
                
                2009
                
                
                Change ($)
                
                
                Variance(%)Unaudited
                
                
                UnauditedSales
                
                $
                7,907,002
                
                
                $
                6,770,526
                
                
                
                1,136,476
                
                
                
                17
                %Cost
      of Sales
                
                
                2,076,353
                
                
                
                2,301,525
                
                
                
                (225,172
                )
                
                
                (10
                )%Gross
      Margin
                
                
                5,830,649
                
                
                
                4,469,001
                
                
                
                1,361,648
                
                
                
                30
                %Operating
      Expenses:Selling
      expenses
                
                
                5,051,714
                
                
                
                6,395,577
                
                
                
                (1,343,863
                )
                
                
                (21
                )%General
      and administrative expenses
                
                
                684,259
                
                
                
                1,046,442
                
                
                
                (362,183
                )
                
                
                (35
                )%Research
      and development expenses
                
                
                80,851
                
                
                
                7,281
                
                
                
                73,570
                
                
                
                1010
                %5,816,824
                
                
                
                7,449,300
                
                
                
                (1,632,476
                )
                
                
                (22
                )%Income (Loss) from
      Operations
                
                
                13,825
                
                
                
                (2,980,299
                )
                
                
                2,994,124
                
                
                
                (100
                )%Other
      Expenses
                
                
                (43,004
                )
                
                
                (229,295
                )
                
                
                186,291
                
                
                
                (81
                )%Loss
      Before Income Tax Expenses
                
                
                (29,179
                )
                
                
                (3,209,594
                )
                
                
                3,180,415
                
                
                
                (99
                )%Income
      taxes benefit
                
                
                29,984
                
                
                
                -
                
                
                
                29,984
                
                
                
                100
                %Net  Income (Loss)
                
                
                805
                
                
                
                (3,209,594
                )
                
                
                3,210,399
                
                
                
                (100
                )%Net
      loss attributable to noncontrolling interests
                
                
                (1,550
                )
                
                
                (248,322
                )
                
                
                (246,772
                )
                
                
                (99
                )%Net
      Income (Loss ) Attributable to Stockholders
                
                $
                2,355
                
                
                $
                (2,961,272
                )
                
                
                2,963,627
                
                
                
                (100
                )%Basic
      and diluted earnings (loss)per share
                
                $
                0.00
                
                
                $
                (0.15
                )
                
                
                0.15
                
                
                
                (100
                )%Weighted-average
      number of shares outstanding-basic and diluted
                
                
                19,679,400
                
                
                
                19,679,400
                
                
                
                —
                
                
                
                0
                %-




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


16




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




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




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




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




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




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




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




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




Liquidity and Capital
Resources




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




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




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


17





Cash
flow


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





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




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




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




Working Capital
Deficiency





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




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




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




18




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




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




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




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




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




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




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




Off-Balance
Sheet Arrangements




None.


19




Foreign
Currency Risk




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




Interest
Rate Risk




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




ITEM 3.QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




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




ITEM 4T.CONTROLSAND PROCEDURES





Disclosure
controls and procedures





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





Changes
in Internal Control over Financial Reporting





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


20




PART II - OTHERINFORMATION




ITEM 1.LEGALPROCEEDINGS





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




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





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




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




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




ITEM 1A.RISKFACTORS




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.UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS




None.




ITEM 3.DEFAULTSUPON SENIOR SECURITIES




None.


21




ITEM 4.SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS




None.




ITEM 5.OTHERINFORMATION




None.




ITEM 6.EXHIBITS


Exhibit
              Number
            
            Description of Exhibit10.1
            
            Employment
      Agreement dated October 26, 2009 by and between Lei Lan and the Company
      (translated into English)10.2
            
            Employment
      Agreement dated October 23, 2009 by and between Feng Lan and the Company
      (translated into English).10.3
            
            Engagement
      Letter dated December 24, 2009 by and between Zhengyi Wang and the Company
      (translated into English).10.4
            
            Joint
      Venture Contract dated March 23, 2010 by and between the Company and
      Kunming Tianzhiheng Hotel Management Co., Ltd. (translated into
      English).10.5
            
            Factoring
      Agreement dated May 14, 2010 by and between Kunming Shenghuo
      Pharmaceuticals Co., Ltd. and Heping Branch, China Construction Bank
      (translated into English).10.6
            
            Insurance
      Policy dated May 4, 2010 issued by China Ping An Insurance Co., Ltd. in
      favor of Kunming Shenghuo Pharmaceuticals Co., Ltd. (translated into
      English).10.7
            
            Agreement
      on Indemnities Transfer, dated May 4, 2010 by and among Kunming Shenghuo
      Pharmaceuticals Co., Ltd., China Ping An Insurance Co., Ltd. and Kunming
      Heping Branch of China Construction Bank (translated into
      English).10.8
            
            Agreement
      on Registration of Accounts Receivable Transfer, dated May 14, 2010 by and
      between Kunming Shenghuo Pharmaceuticals Co., Ltd. and Heping Branch,
      China Construction Bank (translated into English).10.9
            
            Loan
      contract dated May 11, 2010 by and between Kunming Shenghuo (Group) Co.,
      Ltd. and the Agricultural Bank of China Limited Inc. (translated into
      English).10.10
            
            Mortgage
      Contract dated May 11, 2010 by and between Kunming Shenghuo (Group) Co.,
      Ltd. and the Agricultural Bank of China Limited Inc. (translated into
      English).31.1
            
            Certification
      of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or
      15d-14(a).31.2
            
            Certification
      of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or
      15d-14(a).32.1
            
            Certification
      pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
      Sarbanes Oxley Act of 2002.*




*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of that
section, nor shall it be deemed incorporated by reference in any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.


22


SIGNATURES





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





CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.(Registrant)May
      24, 2010
                    
                    By:
                    /s/ Gui Hua LanGui
      Hua LanChief
      Executive Officer and Chairman of theBoard


23