UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





xQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2010





OR





oTRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
the transition period from ______________ to ______________





Commission file number 001-33537





CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
            
            20-2903562(State
      or Other Jurisdiction of Incorporation
              or
      Organization)
            
            (IR.S.
      Employer Identification
              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 August 16, 2010.





CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC.


FORM
10-Q QUARTERLY REPORT





TABLE
OF CONTENTS





PagePART I - FINANCIAL
      INFORMATIONITEM 1.
                                                                      CONDENSED FINANCIAL
      STATEMENTS
                                                                      1Condensed Consolidated Balance
      Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009
                                                                      1Condensed Consolidated Statements
      of Operations and Comprehensive Loss for the Three and  Six
      Months Ended June 30, 2010 and 2009 (Unaudited)
                                                                      2Condensed Consolidated Statements
      of Cash Flows for the Six Months Ended June 30, 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
                                                                      22ITEM 4T.
                                                                      CONTROLS AND
      PROCEDURES
                                                                      22PART II - OTHER
      INFORMATION
                                                                      23ITEM 1.
                                                                      LEGAL
      PROCEEDINGS
                                                                      23ITEM 1A.
                                                                      RISK
    FACTORS
                                                                      24ITEM 2.
                                                                      UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF PROCEEDS
                                                                      24ITEM 3.
                                                                      DEFAULTS UPON SENIOR
      SECURITIES
                                                                      24ITEM 4.
                                                                      SUBMISSION OF MATTERS TO A VOTE
      OF SECURITY HOLDERS
                                                                      24ITEM 5.
                                                                      OTHER
      INFORMATION
                                                                      24ITEM 6.
                                                                      EXHIBITS
                                                                      24SIGNATURES
                                                                      25





CHINA SHENGHUO PHARMACEUTICAL
HOLDINGS, INC. AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Amounts
in USD)





June 30,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)Assets:Current
      Assets:Cash
      and cash equivalents
                      
                      $
                      1,338,088
                      
                      
                      $
                      1,986,540Accounts
      and notes receivable, net
                      
                      
                      12,962,279
                      
                      
                      
                      12,104,296Other
      receivables, net
                      
                      
                      7,059,683
                      
                      
                      
                      6,694,151Advances
      to suppliers
                      
                      
                      834,143
                      
                      
                      
                      394,856Inventories,
      net
                      
                      
                      3,724,462
                      
                      
                      
                      3,896,358Due
      from related parties
                      
                      
                      213,899
                      
                      
                      
                      417,494Other
      current assets
                      
                      
                      800,564
                      
                      
                      
                      866,645Total
      Current Assets
                      
                      
                      26,933,118
                      
                      
                      
                      26,360,340Property,
      plant and equipment, net
                      
                      
                      13,172,121
                      
                      
                      
                      12,065,552Other
      non-current assets
                      
                      
                      1,610,796
                      
                      
                      
                      1,497,421$
                      41,716,035
                      
                      
                      $
                      39,923,313Liabilities
      and Equity:Current
      Liabilities:Accounts
      payable
                      
                      $
                      3,247,331
                      
                      
                      $
                      4,744,919Other
      payables and accrued expenses
                      
                      
                      9,736,081
                      
                      
                      
                      10,099,497Deposits
      payable
                      
                      
                      7,969,681
                      
                      
                      
                      7,037,155Short-term
      borrowings
                      
                      
                      4,074,460
                      
                      
                      
                      5,455,958Advances
      from customers
                      
                      
                      2,066,360
                      
                      
                      
                      916,362Taxes
      and related payables
                      
                      
                      801,843
                      
                      
                      
                      1,094,331Current
      portion of long-term borrowings
                      
                      
                      1,767,071
                      
                      
                      
                      3,948,985Total
      Current Liabilities
                      
                      
                      29,662,827
                      
                      
                      
                      33,297,207Long-term
      borrowings
                      
                      
                      11,397,606
                      
                      
                      
                      5,850,34841,060,433
                      
                      
                      
                      39,147,555Commitments
      and ContingenciesEquity:Common
      stock, $0.0001 par value, 100,000,000 shares authorized and 19,679,400
      shares outstanding
                      
                      
                      1,968
                      
                      
                      
                      1,968Additional
      paid-in capital
                      
                      
                      6,193,927
                      
                      
                      
                      6,193,927Appropriated
      retained earnings
                      
                      
                      147,023
                      
                      
                      
                      147,023Accumulated
      deficit
                      
                      
                      (7,186,130
                      )
                      
                      
                      (7,157,293
                      )Accumulated
      other comprehensive income
                      
                      
                      1,592,866
                      
                      
                      
                      1,589,047Total
      stockholder's equity
                      
                      
                      749,654
                      
                      
                      
                      774,672Noncontrolling
      interests
                      
                      
                      (94,052
                      )
                      
                      
                      1,086Total
      Equity
                      
                      
                      655,602
                      
                      
                      
                      775,758$
                      41,716,035
                      
                      
                      $
                      39,923,313


See notes
to condensed consolidated financial statements


1


CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


AND
COMPREHENSIVE LOSS (UNAUDITED)


(Amounts
in USD, except shares)





Three months Ended June
      30,
                        
                        
                        Six months ended June 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Sales
                        
                        $
                        6,882,007
                        
                        
                        $
                        8,130,333
                        
                        
                        $
                        14,789,009
                        
                        
                        $
                        14,900,859Cost
      of Sales
                        
                        
                        2,488,623
                        
                        
                        
                        2,394,530
                        
                        
                        
                        4,564,976
                        
                        
                        
                        4,696,055Gross
      Margin
                        
                        
                        4,393,384
                        
                        
                        
                        5,735,803
                        
                        
                        
                        10,224,033
                        
                        
                        
                        10,204,804Operating
      Expenses:Selling
      expenses
                        
                        
                        2,968,103
                        
                        
                        
                        6,221,263
                        
                        
                        
                        8,019,817
                        
                        
                        
                        12,616,840General
      and administrative expenses
                        
                        
                        915,189
                        
                        
                        
                        3,120,299
                        
                        
                        
                        1,599,448
                        
                        
                        
                        4,166,741Research
      and development expense
                        
                        
                        175,538
                        
                        
                        
                        6,640
                        
                        
                        
                        256,389
                        
                        
                        
                        13,9214,058,830
                        
                        
                        
                        9,348,202
                        
                        
                        
                        9,875,654
                        
                        
                        
                        16,797,502Income(Loss)
      from Operations
                        
                        
                        334,554
                        
                        
                        
                        (3,612,399
                        )
                        
                        
                        348,379
                        
                        
                        
                        (6,592,698
                        )Other
      Income (Expenses):Subsidy
      income
                        
                        
                        7,964
                        
                        
                        
                        119,611
                        
                        
                        
                        161,562
                        
                        
                        
                        145,179Interest
      and other expense
                        
                        
                        (327,813
                        )
                        
                        
                        (283,030
                        )
                        
                        
                        (524,415
                        )
                        
                        
                        (537,893
                        )(319,849
                        )
                        
                        
                        (163,419
                        )
                        
                        
                        (362,853
                        )
                        
                        
                        (392,714
                        )Income
      (Loss) Before Income Tax
                        
                        
                        14,705
                        
                        
                        
                        (3,775,818
                        )
                        
                        
                        (14,474
                        )
                        
                        
                        (6,985,412
                        )Income
      tax expense
                        
                        
                        (52,615
                        )
                        
                        
                        -
                        
                        
                        
                        (22,631
                        )
                        
                        
                        -Net
      Loss
                        
                        
                        (37,910
                        )
                        
                        
                        (3,775,818
                        )
                        
                        
                        (37,105
                        )
                        
                        
                        (6,985,412
                        )Net
      loss attributable to
                          noncontrolling
      interests
                        
                        
                        (6,718
                        )
                        
                        
                        (43
                        )
                        
                        
                        (8,268
                        )
                        
                        
                        (248,365
                        )Net
      Loss Attributable to Stockholders
                        
                        $
                        (31,192
                        )
                        
                        $
                        (3,775,775
                        )
                        
                        $
                        (28,837
                        )
                        
                        $
                        (6,737,047
                        )Comprehensive
      Loss:Net
      Loss
                        
                        
                        (37,910
                        )
                        
                        
                        (3,775,818
                        )
                        
                        
                        (37,105
                        )
                        
                        
                        (6,985,412
                        )Foreign
      currency translation adjustment
                        
                        
                        4,583
                        
                        
                        
                        2,939
                        
                        
                        
                        4,914
                        
                        
                        
                        3,121Comprehensive
      Loss:
                        
                        $
                        (33,327
                        )
                        
                        $
                        (3,772,879
                        )
                        
                        $
                        (32,191
                        )
                        
                        $
                        (6,982,291
                        )Comprehensive
      income (loss) attributable to noncontrolling
interests
                        
                        
                        (4,986
                        )
                        
                        
                        54
                        
                        
                        
                        (7,173
                        )
                        
                        
                        (248,254
                        )Comprehensive
      Loss Attributable to Stockholders
                        
                        
                        (28,341
                        )
                        
                        
                        (3,772,933
                        )
                        
                        
                        (25,018
                        )
                        
                        
                        (6,734,037
                        )Basic
      and diluted loss per share
                        
                        $
                        (0.00
                        )
                        
                        $
                        (0.19
                        )
                        
                        $
                        (0.00
                        )
                        
                        $
                        (0.34
                        )Weighted-average
      number of shares outstanding-basic and diluted
                        
                        
                        19,679,400
                        
                        
                        
                        19,679,400
                        
                        
                        
                        19,679,400
                        
                        
                        
                        19,679,400


See notes
to condensed consolidated financial statements





2


CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(Amounts
in USD)





Six months Ended Jun 30,2010
                
                
                2009Net
      Cash Provided by Operating Activities
                
                
                1,461,492
                
                
                
                981,447Cash
      Flows from Investing Activities:Payment
      for construction in progress
                
                
                (4,196,635
                )
                
                
                (308,654
                )Proceeds
      from disposal of fixed assets
                
                
                212,373
                
                
                
                -Net
      Cash Used in Investing Activities
                
                
                (3,984,262
                )
                
                
                (308,654
                )Cash
      Flows from Financing Activities:Due
      to related parties
                
                
                -
                
                
                
                (108,835
                )Proceeds
      from borrowings
                
                
                21,382,467
                
                
                
                3,653,246Payments
      on borrowings
                
                
                (19,510,878
                )
                
                
                (5,114,544
                )Net
      Cash Provided by (Used in) Financing Activities
                
                
                1,871,589
                
                
                
                (1,570,133
                )Effect
      of exchange rate changes on cash
                
                
                2,729
                
                
                
                2,420Net
      Decrease in Cash and Cash Equivalents
                
                
                (648,452
                )
                
                
                (894,920
                )Cash
      and Cash Equivalents at Beginning of Period
                
                
                1,986,540
                
                
                
                1,612,054Cash
      and Cash Equivalents at End of Period
                
                $
                1,338,088
                
                
                $
                717,134Supplemental
      InformationCash
      paid for interest
                
                $
                331,511
                
                
                $
                582,854Cash
      paid for income tax
                
                $
                -
                
                
                $
                -





See notes
to condensed consolidated financial statements


3


CHINA
SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES


Notes
to Condensed Consolidated Financial Statements




NOTE
1 – ORGANIZATION AND NATURE OF OPERATIONS




(a)
            Nature
      of Business




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




(b)
            Organization





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





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




NOTE
2 – BASIS OF PRESENTATION




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





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 USD2.7 million as of
June 30, 2010, and USD6.9 million as of December 31, 2009.  Based on
future projections of the Company’s cash inflows from operations, reasonable
estimate of revolving effect of deposits received, and the anticipated ability
of the Company to obtain continued bank financing to finance its continuing
operations, Management has prepared the condensed consolidated financial
statements on a going concern basis.





In the
opinion of the management of the Company (“Management”), all adjustments which
are necessary for a fair presentation of financial position, operating results
and cash flows for the interim periods presented have been made. These
adjustments were of a normal, recurring nature. 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. That
is, the noncontrolling interest shall continue to be attributed its share of
losses even if that attribution results in a deficit noncontrolling interest
balance.





(b)
            Income
      taxes





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 derecognizing of
income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated
with tax positions, accounting for income tax in interim periods, and income tax
disclosures. The Company did not have any interest and penalties associated with
tax positions and did not have any significant unrecognized uncertain tax
positions as of 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.




5




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.




For the
three months ended June 30, 2010, the Company recognized an income tax expense
of USD52,615 on pretax income of USD14,705, representing an effective income tax
rate of 358%. For the six months ended June 30, 2010, the Company recognized an
income tax expense of USD22,631 on pretax loss of USD14,474, representing an
effective income tax rate of -156%. They are mainly the result of an adjustment
in income tax expense to reflect change in valuation of deferred tax asset of
tax loss from Medicine, Cosmetic and Import/Export, offset by the impact of tax
holiday of Shenghuo.




No income
tax expense recognized for the three months and six months ended June 30, 2009,
which were mainly result of adjustment in income tax expense to reflect change
in valuation of deferred tax assets of provision of doubtful accounts, offset by
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
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.


6


Since the
filing of 2009 Form 10-K, the FASB issued ASU No. 2010-12 through No. 2010-21.
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.





NOTE
4 – ACCOUNTS AND NOTES RECEIVABLE, NET




Accounts
and notes receivable consisted of the following:




June 30,
                        
                        
                        December31,2010
                        
                        
                        2009(Unaudited)Notes
      receivable
                        
                        $
                        1,026,896
                        
                        
                        $
                        852,095Accounts
      receivable
                        
                        
                        14,092,374
                        
                        
                        
                        13,307,185Total
                        
                        
                        15,119,270
                        
                        
                        
                        14,159,280Less:
      allowance for doubtful accounts
                        
                        
                        (2,156,991
                        )
                        
                        
                        2,054,984$
                        12,962,279
                        
                        
                        $
                        12,104,296




NOTE
5 – INVENTORIES, NET




Inventories
consisted of the following:




June 30,
                          
                          
                          December 31,2010
                          
                          
                          2009(Unaudited)Raw
      materials
                          
                          $
                          1,033,212
                          
                          
                          $
                          1,048,823Work-in-process
                          
                          
                          1,928,718
                          
                          
                          
                          2,267,289Finished
      goods
                          
                          
                          889,571
                          
                          
                          
                          706,424Total
      inventories
                          
                          
                          3,851,501
                          
                          
                          
                          4,022,536Less:
      allowance
                          
                          
                          127,039
                          
                          
                          
                          126,178$
                          3,724,462
                          
                          
                          $
                          3,896,358




NOTE
6 – 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 June 30, 2010 and December 31, 2009:




7





June 30,
                        
                        
                        December 31,Short-term borrowings
                        
                        2010
                        
                        
                        2009(Unaudited)Lenders
                        
                        Maturity
                          Date
                        
                        
                        Interest
                          Rate
                        
                        
                        Balance
                        
                        
                        Maturity
                          Date
                        
                        
                        Interest
                          Rate
                        
                        
                        BalanceChina
      Construction Bank(“ CCB”), secured by land use rights, buildings and
      machinery
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        April
      2010
                        
                        
                        
                        5.31
                        %
                        
                        $
                        3,656,468CCB,
      (note a)
                        
                        (note
      a)
                        
                        
                        
                        4.86
                        %
                        
                        
                        1,333,245
                        
                        
                        (note
      a)
                        
                        
                        
                        4.86
                        %
                        
                        
                        1,650,992Agricultural
      Bank of China (“ABC”),(note
      b)
                        
                        December
      2010
                        
                        
                        
                        5.31
                        %
                        
                        
                        88,354
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -ABC,  (note
      b)
                        
                        May
      2011
                        
                        
                        
                        5.31
                        %
                        
                        
                        2,503,350Financial
      bureau, unsecured
                        
                        Due
      on demand
                        
                        
                        
                        4.50
                        %
                        
                        
                        75,883
                        
                        
                        Due
      on demand
                        
                        
                        
                        4.50
                        %
                        
                        
                        75,369Financial
      bureau, unsecured
                        
                        Due
      on demand
                        
                        
                        
                        1.80
                        %
                        
                        
                        73,628
                        
                        
                        Due
      on demand
                        
                        
                        
                        1.80
                        %
                        
                        
                        73,129$
                        4,074,460
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        5,455,958





June 30,
                                          
                                          December 31,Long-term
      borrowings
                                          
                                          2010
                                          
                                          2009(Unaudited)Lenders
                                          
                                          Maturity Date
                                          
                                          
                                          Interest Rate
                                          
                                          
                                          Balance
                                          
                                          Maturity Date
                                          
                                          Interest Rate
                                          
                                          
                                          BalanceABC,
      (note b)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          March
      2010
                                          
                                          
                                          8.316
                                          %
                                          
                                          $
                                          1,462,587ABC,
      (note b)
                                          
                                          April
      2012
                                          
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          6,243,650CCB,
      secured by land use rights, buildings and machinery
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          March
      2010
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          1,462,587ABC,
      (note b)
                                          
                                          April
      2011
                                          
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          736,279
                                          
                                          April
      2011
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          731,293ABC,
      (note b)
                                          
                                          August
      2011
                                          
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          5,153,956
                                          
                                          August
      2011
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          5,119,055ABC,
      (note b & c)
                                          
                                          June
      2010
                                          
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          441,768
                                          
                                          June
      2010
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          438,776ABC,
      (note b)
                                          
                                          December
      2010
                                          
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          589,024
                                          
                                          December
      2010
                                          
                                          
                                          5.40
                                          %
                                          
                                          
                                          585,035Total
      long-term borrowings
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          13,164,677
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          9,799,333Less:
      current maturities of long- term borrowings
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,767,071
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,948,985Long-term
      borrowings, net of current portion
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          11,397,606
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          5,850,348Past
      due borrowing (note c)
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          441,768
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          292,517


8




(a) As of
June 30, 2010, short-term borrowings, amounting to USD1,333,245, were pledged by
accounts receivable, amounting to USD1,666,320 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 June 30,
2010, the balance of borrowings from ABC was RMB107 million (approximately
USD15.8 million), which was secured by land use rights, buildings, machinery and
guaranteed by the CSPH’s 94.95% shares in Shenghuo. The unused line of credit as
of June 30, 2010 was RMB3 million (approximately USD 0.4 million) which requires
additional collaterals.





(c) Of
the aggregate amount USD15.8 million borrowed from Agricultural Bank of China,
USD441,768 fell due in June 2010. However, based on the Company’s good
historical credit record, the Company reached an oral agreement with the lender
to extend the maturity date for this portion of the loan to September 2010.
Therefore the Company did not repay the amount of the loan originally due in
June 2010.





NOTE
7 – BASIC AND DILUTED LOSS PER SHARE





Three months Ended June
      30,
                      
                      Six months ended June 30,2010
                      
                      2009
                      
                      2010
                      
                      2009(Unaudited)
                      
                      (Unaudited)
                      
                      (Unaudited)
                      
                      (Unaudited)Net
      loss attributable to stockholders
                      
                      $
                      (31,192
                      )
                      
                      $
                      (3,775,775
                      )
                      
                      $
                      (28,837
                      )
                      
                      $
                      (6,737,047
                      )Weighted-average
      number of shares outstanding-basic and diluted
                      
                      
                      19,679,400
                      
                      
                      
                      19,679,400
                      
                      
                      
                      19,679,400
                      
                      
                      
                      19,679,400Basic
      and diluted loss per share
                      
                      $
                      (
      0.00
                      )
                      
                      $
                      (0.19
                      )
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.34
                      )





NOTE
8 – CONCENTRATIONS




For the
three months and six months ended June 30, 2010, the Company had concentrations
of purchases of raw materials from three vendors accounting for 69% and 63%
respectively, as compared to 62% and 60% for the three months and six months
ended June 30, 2009, respectively.




For the
three months ended June 30, 2010, the Company had concentrations of sales from
three customers accounting for 40% of total sales. For the six months, the
Company had concentrations of sales from one customer accounting for 11% of
total sales. No significant concentration on sales from single customer for the
three months and six months ended June 30, 2009, respectively.




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




Approximately
76% and 85% of the sales came from a single product, Xuesaitong Soft Capsules
for the three months and six months ended June 30, 2010, respectively as
compared to approximately 83% and 73% for the three months and six months ended
June 30, 2009, respectively,




9




NOTE
9 – 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
10 – COMMITMENTS AND CONTINGENCIES




(a)    Capital
Commitment




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




(b) Class
Action Lawsuits




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




On July
21, 2010, in a mediation conducted by Retired Judge Nicolas H. Politan, the
Company entered into an agreement in principle with counsel for plaintiffs in
this litigation and HB&M, in which the parties agreed to settle all claims
by the putative class members in exchange for payments of USD200,000 by the
Company and USD600,000 by HB&M’s professional liability insurer. The
settlement, including its provisions regarding the notification of class members
and administration of any claims, will be entered into in a written stipulation
and agreement of settlement, to be executed by counsel for the parties, and then
must be submitted to the Court for approval. The settlement is expected to
result in the dismissal of the class action litigation.




NOTE
11– SUBSEQUENT EVENTS




As
ofAugust 16, 2010,
which is the financialstatement issuance date,
Management identified the following subsequent events:




As
described in Note 10 (b), on July 21, 2010, the Company entered into an
agreement in principle with counsel for plaintiffs in this litigation and
HB&M, in which the parties agreed to settle all claims by the putative class
members in exchange for payments of USD200,000 by the company and USD600,000 by
HB&M’s professional liability insurer. The liability for the expected loss
on settlement of class action lawsuits was recognized in the consolidated
financial statement as of June 30, 2010.


10




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




SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




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




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




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





•
            our
      reliance on one product for over 85% 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 85% of our sales for the six
months ended June 30, 2010. Even if the Company, as intended, leases land
so it itself can grow Sanqi commencing next spring, it will continue to be as
dependent for the immediate future as it is today on third party suppliers as
Sanqi will take three years to mature from its growing to realize the first
yield.





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





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





On July
1, 2010, the updated State Insurance Catalogue became effective. Xuesaitong Soft
Capsules, our primary product, was not included in Part B of the State Insurance
Catalogue as it has been since 2005.  Banlangen Tablets, Dansheng Tablets
and Sulfadiazine Silver Ointment remain listed in the updated State Insurance
Catalogue.Patients purchasing
medicines included in Part B are entitled to reimbursement of about 90% of the
costs of such medicines.  As also previously disclosed, there is an
alternative route to achieve a similar result. That is, for Xuesaitong Soft
Capsules to be included in the Provincial Insurance Catalog of each of the 31
Chinese provinces. This will allow the patient purchasing such drug to receive
the same 90% reimbursement as if such drug were listed on Part B of the State
Insurance Catalogue.  The Company has applied for provincial listing in 31
provinces. As of August 16, 2010, Xuesaitong Soft Capsules has been listed in
the 2010 Provincial Insurance Catalogs of the following eight provinces:
Tianjin, Jiangsu, Hebei, Shanghai, Heilongjiang, Fujian, Yunnan and Beijing. The
total percentage of sales derived from Xuesaitong Soft Capsules in these
provinces account for 46.72% in 2009 and 47.06% for the six months ended June
30, 2010.  Xuesaitong Soft Capsules has been delisted from the 2010
Provincial Insurance Catalogs of Zhejiang and Jiangxi provinces where it
generates a sales of 3.36% in 2009 and 2.62% for the six months ended June 30,
2010.  The 2010 Provincial Insurance Catalogs for the rest of the
twenty-one provinces have not been announced.  Thus, Xuesaitong Soft
Capsules remains listed on their 2009 Provincial Insurance Catalogs and patients
continue to be reimbursed. The sales of Xuesaitong Soft Capsules generated in
these provinces account for 49.92% in 2009 and 50.32% for the six months ended
June 30, 2010.  Xuesaitong Soft Capsules accounted for 85% of the Company's
revenues in 2009. Should the Company fail to receive provincial approval in the
major provinces in which it is sold, such failure could have a material adverse
impact on the Company. The Company is in the process of developing a pipeline of
proprietary formulations of other drug compounds. However, such formulations
have not been finalized or submitted to State Food and Drug Administration
(“SFDA”) for review and approval. This process is time-consuming and capital
intensive and there is no assurance that SFDA will accept the data presented by
the Company without requiring additional data and that, ultimately, the
application for drug approval will be successful. Therefore, in the near term
the Company is dependent on the sales of Xuesaitong Soft Capsules and on the
efforts to get it listed on the Provincial Insurance Catalogs of the rest of the
twenty-one provinces.


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.





The
wholesale and retail prices of medicines that are included in the national and
provincial insurance catalogs are subject to price controls administered by the
Price Control Office under the National Development and Reform Commission, or
the NDRC, or their provincial price control authorities.  Since
Xuesaitong Soft Capsules is no longer listed in the 2010 State Insurance Catalog
and the 2010 Provincial Insurance Catalogs of Zhejiang and Jiangxi provinces, it
is no longer subject to the state price control and provincial price controls in
that two provinces.  However, since Xuesaitong Soft Capsules is still
listed in the insurance catalogs of the rest of the 29 provinces, its price is
still subject to price control administered by the price control authorities in
those provinces.Xuesaitong Soft Capsulesis primarily sold in China, but
the product is also sold in various developing countries, including Malaysia,
Indonesia and Kyrgyzstan. Sales of the product in China are regulated by the
SFDA as a prescription drug and therefore must be sold to consumers through
hospital pharmacies and cannot be advertised, thus limiting the ability of the
Company to market the brand. We sell Xuesaitong Soft Capsules to wholesale
companies who resell them to hospital pharmacies. Our three main customers are
Guangzhou Medicine Co., Ltd.; Tianjing Zhongxing Medicine Co., Ltd; and Yunnan
Medicine Co., Ltd. And these three wholesale companies’ sales account for
11.34%, 8.02% and 7.78% of our sales respectively for the six months ended June
30, 2010. As noted above, Tianjin and Yunnan have included Xuesaitong Soft
Capsules in their 2010 Provincial Insurance Catalogs.





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





As of
June 30, 2010, our medicine marketing team maintains sales offices or agents in
approximately 31 provinces throughout China. The sales network covers
approximately 210 cities and is staffed by approximately 640 sales
representatives. We intend to grow our internal marketing and sales function and
increase our relationships with other national wholesale companies to expand the
distribution and presence of our non-prescription brands and
cosmetics.





We
started to expand our business into the OTC market in selected areas around
China since 2009.  The gross sales of Lixuwang in the OTC market in
Yunnan province amounted to RMB  2.9 million, resulting in a profit
realized by the Company of approximately RMB 0.58 million during the first half
of 2010. Based on these positive results, we will continue to expand our
presence in the OTC market in the next half of 2010 in provinces such as
Jiangsu, Fujian, Guangdong and Zhejiang. The Company reimburses the sales
representatives their accrued selling expenses when related accounts receivable
are collected.





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.


14





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





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





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





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





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





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.




15




Our 12
WaysTM Chinese
Traditional Medicine Beauty Salon Series (“12 Ways”) cosmetic products are sold
in a number of cities and provinces in China. We have opened a number of retail
specialty counters to offer our cosmetic products at pharmacies and other
locations such as supermarkets and shopping malls throughout Eastern China, with
the ultimate intent of expanding our retail presence across China. As of June
30, 2010, we have opened approximately 980 retail specialty counters in more
than 30 cities, including Kunming, Nanjing, Chongqing, Chengdu, Wuhan, Heifei,
Yantai and Puer, and so on.  In addition, we opened a 12 Ways Chinese
Herbal Beauty Salon in Kunming that will feature approximately ten traditional
Chinese medicine practitioners and beauticians that provide a variety of
services, including acupuncture, body massage, foot massage and other services.
All products used in the salon will be supplied by us. Management hopes that the
opening of this salon and the opening of retail counters will allow us to
increase our brand recognition and strengthen marketing. Our ability to
effectively open and operate new retail locations depends on several factors,
including, among others, our ability to identify suitable counter locations, the
availability of which is outside our control; our ability to prepare counters
for opening within budget; our ability to hire, train and retain personnel; our
ability to secure required governmental permits and approvals; our ability to
contain payroll costs; and our ability to generate sufficient operating cash
flows or secure adequate capital on commercially reasonable terms to fund short
term cash needs and our expansion plans.





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





Critical
Accounting Policies and Estimates





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




Results
of Operations




Three
Months Ended June 30, 2010 and 2009





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





Three
      months ended June 30,2010
                    
                    
                    2009
                    
                    
                    Change
      ($)
                    
                    
                    Variance
                      (%)Sales
                    
                    $
                    6,882,007
                    
                    
                    $
                    8,130,333
                    
                    
                    
                    (1,248,326
                    )
                    
                    
                    (15
                    )%Cost
      of Sales
                    
                    
                    2,488,623
                    
                    
                    
                    2,394,530
                    
                    
                    
                    94,093
                    
                    
                    
                    4
                    %Gross
      Margin
                    
                    
                    4,393,384
                    
                    
                    
                    5,735,803
                    
                    
                    
                    (1,342,419
                    )
                    
                    
                    (23
                    )%Operating
      Expenses:Selling
      expenses
                    
                    
                    2,968,103
                    
                    
                    
                    6,221,263
                    
                    
                    
                    (3,253,160
                    )
                    
                    
                    (52
                    )%General
      and administrative expenses
                    
                    
                    915,189
                    
                    
                    
                    3,120,299
                    
                    
                    
                    (2,205,110
                    )
                    
                    
                    (71
                    )%Research
      and development expenses
                    
                    
                    175,538
                    
                    
                    
                    6,640
                    
                    
                    
                    168,898
                    
                    
                    
                    2544
                    %4,058,830
                    
                    
                    
                    9,348,202
                    
                    
                    
                    (5,289,372
                    )
                    
                    
                    (57
                    )%Income
      (Loss) from Operations
                    
                    
                    334,554
                    
                    
                    
                    (3,612,399
                    )
                    
                    
                    3,946,953
                    
                    
                    
                    (109
                    )%Other Expenses
                    
                    
                    (319,849
                    )
                    
                    
                    (163,419
                    )
                    
                    
                    (156,430
                    )
                    
                    
                    96
                    %Income
      (Loss) Before Income Tax Expenses
                    
                    
                    14,705
                    
                    
                    
                    (3,775,818
                    )
                    
                    
                    3,790,523
                    
                    
                    
                    (100
                    )%Income
      tax expense
                    
                    
                    (52,615
                    )
                    
                    
                    -
                    
                    
                    
                    (52,615
                    )
                    
                    
                    100
                    %Net
      Loss
                    
                    
                    (37,910
                    )
                    
                    
                    (3,775,818
                    )
                    
                    
                    3,737,908
                    
                    
                    
                    (99
                    )%Net
      loss attributable to noncontrolling interests
                    
                    
                    (6,718
                    )
                    
                    
                    (43
                    )
                    
                    
                    (6,675
                    )
                    
                    
                    15523
                    %Net Loss
      Attributable to Stockholders
                    
                    $
                    (31,192
                    )
                    
                    $
                    (3,775,775
                    )
                    
                    $
                    3,744,583
                    
                    
                    
                    (100
                    )%Basic
      and diluted loss per share
                    
                    $
                    (0.00
                    )
                    
                    $
                    (0.19
                    )
                    
                    $
                    0.19
                    
                    
                    
                    (100
                    )%Weighted-average
      number of shares outstanding-basic and diluted
                    
                    
                    19,679,400
                    
                    
                    
                    19,679,400
                    
                    
                    
                    -
                    
                    
                    
                    0
                    %


16




Sales:Sales for the three months ended June 30, 2010 was approximately $6.88
million, a decrease of approximately $1.25 million, or 15 %, from approximately
$8.13 million for the three months ended June 30, 2009.  The decrease
was mainly due to the Company adjusted our sales commission policy to decrease
the commission to sales representatives, which led to the decrease of the sales
in the second quarter. The Company in August has increased its sales commission,
but not to pre-existing levels, as a result as a slight decrease in its cost of
Sanqi.
  Since the
spring of, 2010, we faced a challenge of insufficient supply of our major
material-Sanqi in Yunnan Province, where has suffered the worst drought in 50
years from last autumn to this spring. The output of Sanqi decreased sharply,
resulting in the price of Sanqi increased remarkably. In order to release the
pressure from increasing cost, the Company decided to adjust our sales
commission policy to decrease the commission to sales representatives by 10% as
compared to that in the first quarter, which led to the decrease of the sales.
The commission policy is subject to adjustment from time to time according to
the sales in the market.
  Cost of sales:Our cost of sales for the three months ended June 30, 2010 was
approximately $2.49 million, an increase of $0.94 million, or 4%, from
approximately $2.39 million for the three months ended June 30, 2009. The
increase in cost of sales was primarily due to the increase of the price of our
main raw material which was caused by serious drought.
  Gross margin:Our gross margin for the three months ended June 30, 2010 was
approximately $4.4 million as compared with approximately $5.74 million for the
three months ended June 30, 2009, a decrease of $1.34 million, or 23%. Gross
margin as a percentage of revenues was approximately 63.8% for the three months
ended June, 2010, a decrease of 7.2 % from 71% for the three months ended June
30, 2009. The decrease in gross margin percentage was primarily due to the
increase of raw material price.
  Selling
expense: Selling expenses were approximately $2.97 million for the
three months ended June 30, 2010, a decrease of $3.25 million, or 52%, from
approximately $6.22 million for the three months ended June 30, 2009. The
primary reasons for the decrease in selling expenses were: i) our adjustment on
the commission policy to sales representatives as set forth above; ii) the
strengthened control on the travel expense, business entertainment expense,
etc.
  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 $0.91million for the three months ended June 30, 2010, a decrease
of $2.21 million, or 71%, from approximately $3.12 million for the three months
ended June 30, 2009. The decrease was primarily due to the Company has provided
significant provision for doubtful accounts in 2009.
  Research and
development expense:Research and development expense for the three
months ended June 30, 2010 was $175,538, as compared to $6,640 for the period
ended June 30, 2009, an increase of approximately $168,898. The increase was
primarily due to the increase in the expenditure on one of our innovative
medicines- Dencichine Hemostat and the cooperation with outside experts in the
R&D since late 2009.
  17
  Other
expenses: Other expenses were $319,849 for the three months ended June
30, 2010, which consisted of interest expense and non-operating expense, offset
by subsidy income, interest income, non-operating income, an increase of
$156,430, or 96%, from $163,419 for the three months ended June 30, 2009. The
increase was mainly attributable to the recognition in the consolidated
financial statements as of June 30, 2010 of the payment expected to be made in
connection with the settlement of the class action law suit.
  Net loss
attributable to shareholders:Net loss decreased to $37,910 for the three
months ended June 30, 2010 as compared to net loss of $3,775,818 for the three
months ended June 30, 2009. The decrease in net loss was primarily due to the
decrease of selling expenses and general administrative expenses.
  Six Months Ended June 30,
2010 and 2009
  The
following table sets forth our statements of operations for the six months ended
June 30, 2010 and 2009 in U.S. dollars (unaudited):
  Six
      months ended June 30,2010
                      
                      
                      2009
                      
                      
                      Change
      ($)
                      
                      
                      Variance
                        (%)Sales
                      
                      $
                      14,789,009
                      
                      
                      $
                      14,900,859
                      
                      
                      (111,850)
                      
                      
                      
                      (1
                      )%Cost
      of Sales
                      
                      
                      4,564,976
                      
                      
                      
                      4,696,055
                      
                      
                      
                      (131,079
                      )
                      
                      
                      (3
                      )%Gross
      Margin
                      
                      
                      10,224,033
                      
                      
                      
                      10,204,804
                      
                      
                      
                      19,229
                      
                      
                      
                      0.2
                      %Operating
      Expenses:Selling
      expenses
                      
                      
                      8,019,817
                      
                      
                      
                      12,616,840
                      
                      
                      (4,597,023)
                      
                      
                      
                      (36
                      )%General
      and administrative expenses
                      
                      
                      1,599,448
                      
                      
                      
                      4,166,741
                      
                      
                      
                      (2,567,293
                      )
                      
                      
                      (62
                      )%Research
      and development expenses
                      
                      
                      256,389
                      
                      
                      
                      13,921
                      
                      
                      
                      242,468
                      
                      
                      
                      1742
                      %9,875,654
                      
                      
                      
                      16,797,502
                      
                      
                      
                      (6,921,848
                      )
                      
                      
                      (41
                      )%Income
      (Loss) from Operations
                      
                      
                      348,379
                      
                      
                      
                      (6,592,698
                      )
                      
                      
                      6,941,077
                      
                      
                      
                      (105
                      )%Other Expenses
                      
                      
                      (362,853
                      )
                      
                      
                      (392,714
                      )
                      
                      
                      29,861
                      
                      
                      
                      (8
                      )%Loss
      Before Income Tax Expenses
                      
                      (14,474
                      )
                      
                      
                      (6,985,412
                      )
                      
                      
                      6,970,938
                      
                      
                      
                      (100
                      )%Income
      tax expense
                      
                      
                      (22,631
                      )
                      
                      
                      -
                      
                      
                      
                      (22,631
                      )
                      
                      
                      100
                      %Net
      Loss
                      
                      
                      (37,105
                      )
                      
                      
                      (6,985,412
                      )
                      
                      
                      6,948,307
                      
                      
                      
                      (99
                      )%Net
      loss attributable to noncontrolling interests
                      
                      
                      (8,268
                      )
                      
                      
                      (248,365
                      )
                      
                      
                      240,097
                      
                      
                      
                      (97
                      )%Net Loss
      Attributable to Stockholders
                      
                      $
                      (28,837
                      )
                      
                      $
                      (6,737,047
                      )
                      
                      $
                      6,708,210
                      
                      
                      
                      (100
                      )%Basic
      and diluted loss per share
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.34
                      )
                      
                      $
                      0.34
                      
                      
                      
                      (100
                      )%Weighted-average
      number of shares outstanding-basic and diluted
                      
                      
                      19,679,400
                      
                      
                      
                      19,679,400
                      
                      
                      
                      -
                      
                      
                      
                      0
                      %
  18
 
 Sales:Sales for the six months ended June 30, 2010 were approximately $14.79
million, a decrease of approximately $0.11 million, or 1%, from approximately
$14.9 million for the six months ended June 30, 2009. The decrease in sales was
primarily due to the adjustment on the commission policy which had impact on our
sales as set forth above.
  Cost of sales:Our cost of sales for the six months ended June 30, 2010 was
approximately $4.56 million, a decrease of $0.13 million, or 3 %, from
approximately $4.69 million for the six months ended June 30, 2009. The decrease
in cost of sales was primarily due to the decrease of sales.
  Gross margin:Our gross margin for the six months ended June 30, 2010 was approximately
$10.22 million as compared with approximately $10.2 million for the six months
ended June 30, 2009. Gross margin as a percentage of revenues was approximately
69% for the six months ended June 30, 2010, a increase of 1% from 68% for the
six months ended June 30, 2009. The decrease in gross margin was primarily due
to improvement on the manufacturing technique, offset by the increase of the
price of raw material.
 
 Selling expenses:Selling expenses were approximately $8.02 million for the six months
ended June 30, 2010, a decrease of approximately $4.60 million, or 36%, from
approximately $12.62 million for the six months ended June 30, 2009. The primary
reasons for the decrease in selling expenses were: i) our adjustment on the
commission policy to sales representatives as set forth above; ii) the
strengthened controlling on the travel expense, business entertainment expense,
etc.
  We
reimburse the sales representatives their selling and marketing expenses when
they submit the appropriate documentation to be reimbursed and their sales are
collected. We reimburse the sales representatives their accrued selling expenses
when related accounts receivable are collected.
  General and
administrative expenses:General and administrative expenses were
approximately $1.6 million for the six months ended June 30, 2010, a decrease of
approximately $2.57million, or 62%, from approximately $4.17 million for the six
months ended June 30, 2009. The decrease was primarily due to the Company has
provided significant bad debt provision in 2009.
  Research and
development expenses: Research and development expense for the six months
ended June 30, 2010 was $256,389 as compared to $13,921 for the six months ended
June 30, 2009. The increase was primarily due to our focus on a few innovative
medicines- Dencichine Hemostat and the cooperation with outside experts in the
R&D since late 2009.
 
 Other
expense: Other expense, which includes interest expense and non-operating
expense, offset by subsidy income, interest income, non-operating income, was
$362,853 for the six months ended June 30, 2010 as compared to $392,714 for the
six months ended June 30, 2009, a decrease of $29,861 or 8%. The decrease in
other expense was primarily due to the decrease of the interest expense which
was the result of the decreased interest rate of the borrowings.
 
 Net loss
attributable to stockholders: We incurred a net loss of $28,837 for the
six months ended June 30, 2010 as compared to a net loss of $6.7 million for the
six months ended June 30, 2009, a decrease of approximately $6.67 million. The
decrease in net loss was primarily due to the sharp decrease of $4.60 million in
selling expense and the decrease of $2.57 million in general and administrative
expense.
  19
 
 Liquidity
and Capital Resources
  General –
As of June 30, 2010, we had cash and cash equivalents of $ 1.34 million. We have
historically financed our business operations through bank loans, in addition to
equity offerings. In the first half part of 2010, the Company suffered the sharp
increase of raw material’s price. We incurred a net loss for the six months
ended June 30, 2010 of $37,105. The net loss was primarily due to the
recognition in the consolidated financial statements as of June 30, 2010 of the
payment expected to be made in connection with the settlement of the class
actions law suit.
 
 For the
six months ended June 30, 2010, we had net cash provided by operating activities
of $1.46 million, an increase of $ 0.48 million from $0.98 million for the six
months ended June 30, 2009. We believe that we would be able to obtain more cash
flows from operating activities accompanying the increasing sales
volume.
 
 Cash
flow
  Six months ended June 30,2010
                                    
                                    
                                    2009Unaudited
                                    
                                    
                                    Unaudited(in
      thousands)Net
      cash provided by operating activities
                                    
                                    $
                                    1,461
                                    
                                    
                                    $
                                    981Net
      cash used in investing activities
                                    
                                    
                                    (3,984
                                    )
                                    
                                    
                                    (309
                                    )Net
      cash (used in) provided by financing activities
                                    
                                    
                                    1,872
                                    
                                    
                                    
                                    (1,570
                                    )Cash
      and Cash Equivalents at End of Period
                                    
                                    $
                                    1,338
                                    
                                    
                                    $
                                    717
  Operating Activities: Net cash
provided by operating activities for the six months ended June 30, 2010 was
$1.46 million, as compared to net cash provided by operating activities of $0.98
million for the six months ended June 30, 2009. This result reflected the impact
of an increase of approximately $1.14 million in cash advance from
customers.
  Investing Activities: Net cash
used in investing activities was $3.98 million for the six months ended June 30,
2010, as compared to net cash used in the amount of $0.3 million for the six
months ended June 30, 2009. The increase in net cash used in investing
activities was primarily due to the significant increases in capital
expenditures, specifically, the construction of Shenghuo Plaza.
 
 After the
construction is completed and the Shenghuo Plaza is put into use, part of the
Shenghuo Plaza will be used to open a technology demonstration center of 12 Ways
Chinese Herbal Beauty Salon, where 12 ways cosmetics will be used and promoted
and our beauticians from all over the country will be trained in the center; the
remaining part of the Shenghuo Plaza will be opened for business as a business
hotel. Shenghuo Plaza is expected to completed and put into operation at the end
of this year. The final construction budget of Shenghuo Plaza is approximately
RMB 120 million. In May, 2010, we have entered into an agreement with Kunming
Tianzhiheng Hotel Management Co., Ltd (“Tianzhiheng”) to establish a company to
operate the business hotel. Tianzhiheng agreed to invest RMB25 million into the
construction of the hotel.
 
 Financing Activities: Net cash
provided by financing activities was approximately $1.87 million for the six
months ended June 30, 2010 compared to net cash used in the amount of $1.57
million for the six months ended June 30, 2009. The increase in cash provided
was primarily due to the increase of loans borrowed from banks.
  Working Capital
Deficiency
 
 Our
consolidated current liabilities exceeded our consolidated current assets by
$2.7 million as of June 30, 2010, and $6.9 million as of December 31,
2009.
  20
  As of
June 30, 2010, our net accounts and notes receivable (less allowance for
doubtful accounts of approximately $2.16 million) were approximately $12.96
million, an increase of approximately $0.86 million, from $12.1 million (net of
allowance for doubtful accounts of $2.05 million) as of December 31, 2009. In
order to maintain our existing market and customers and further to expand our
sales in the increasingly competitive business environment, theCompany
decided to allow some of our customers historically with good credit to extend
their credit terms, which led to the increase of the account
receivables.
  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.
  As of
June 30, 2010, our accounts payable were approximately $3.25 million, a decrease
of $1.49 million, from $4.74 million as of December 31, 2009. The decrease of
accounts payable is mainly attributed to the outstanding payment for
construction of Shenghuo plaza as of December 31, 2009 has been settled in the
current period.
  Our
payment cycle is considerably shorter than our receivable cycle, since we
typically pay our suppliers all or a portion of the purchase price in advance
and for some suppliers we must maintain a deposit for future orders. We require
our sales representatives to pay a certain percentage of the sales price as
deposit before we ship products to the customers. The deposit were approximately
$7.97 million as of June 30, 2010, increased $0.93 million, from approximately
$7.04 million as of December 31, 2009, primarily due to the increase of the
account receivables set forth above because we don’t return the deposits to our
sales representatives until they collect account receivables from our
customers.
 
 The other
payables and accrued expense decreased by $0.36 million, from $10.1 million as
of December 31, 2009 to $ 9.74 million as of June, 2010. The decrease of other
payables was mainly due to our strengthened controlling on the travel expense,
business entertainment expense .etc. The decrease of accrued expense balance was
primarily due to the decrease in legal counsel fees attributed to the SEC
investigation which started in February 2009 and concluded in September
2009.
  To the
extent that we cannot satisfy our cash needs, whether from operations or from a
financing source, our business may be impaired in that it may be difficult for
us to obtain products which could, in turn, impair our ability to generate
sales.
  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 August 16, 2010,
balance from ABC amounted to RMB 107 million (approximately $15.8 million) and
the remaining unused line of credit was RMB 3 million (approximately $0.4
million), 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 June 30, 2010,
short-term borrowings, amounting to RMB 11 million (approximately $1.62
million), were pledged by accounts receivable, amounting to RMB11 million
(approximately $1.62 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 28.8 million ($4.2 million)
factoring advance until May 4, 2011.
  21
 
 The
completion of Shenghuo Plaza is expected to generate more cash flows and
increase our ability to obtain additional financing from banks.
 
 Considering
the financial resources presently available, we are confident that we have
sufficient working capital for our present requirements and for at least the
next 12 months. This assumes, of which there can be no assurance, that the
remaining provinces in which we sell a significant amount of
Xuesaitong Soft Capsules will list such capsules in their respective 2010
Provincial Insurance catalogs. We will continue to make efforts to expand our
sales to get more cash flow.
  However,
we may require additional capital for acquisitions, for expanding business to
related fields, or for the operation of the subsidiaries and there is no
assurance that such funding will be available. Please see Note 6 –Borrowings in
the Condensed Consolidated Financial Statements.
  Off-Balance
Sheet Arrangements
  None.
  Foreign
Currency Risk
  Since all
of our operations are conducted in the PRC, we are subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and foreign currency exchange
rate fluctuations. Our operational results may be adversely affected by changes
in the political and social conditions in the PRC, and by changes in
governmental policies with respect to medical reforms and other laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things. Exchange rate
fluctuations may adversely affect the value, in U.S. dollar terms, of our net
assets and income derived from our operations in the PRC. In addition, all of
our revenue is denominated in the Chinese Yuan Renminbi (“RMB”), which must be
converted into other currencies before remittance out of the PRC. Both the
conversion of RMB into foreign currencies and the remittance of foreign
currencies abroad require approval of the PRC government. The effect of the
fluctuations of exchange rates is not considered to be material to our business
operations.
  Interest
Rate Risk
  We do not
have significant interest rate risk, as our debt obligations are primarily fixed
interest rates.
  ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
  Smaller
reporting companies are not required to provide the information required by this
Item.
  22
  ITEM 4T. CONTROLS AND
PROCEDURES
 
 Disclosure
controls and procedures
 
 Our
management, with the participation of our chief executive officer and chief
financial officer, Messrs. Gui Hua Lan and Mr. Chuanxiang Huang respectively,
evaluated the effectiveness of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports, such as this report, that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, Mr. Lan and Mr. Huang concluded that despite
improvements in areas of previously identified weakness in internal control over
financial reporting identified (described in Item 9A of our Annual Report on
Form 10-K for the year ended December 31, 2009), our disclosure controls and
procedures were not effective as of June 30, 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 June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 
 PART
II - OTHER INFORMATION
  ITEM 1. LEGAL PROCEEDINGS
 
 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 settlement
of RMB 360,000 has been paid on May 24, 2010.
 
 Class Action
Lawsuit –In 2008, putative class action lawsuits were asserted against
the Company and certain other parties in the United States District Court for
the Southern District of New York (the “Court”). On February 12, 2009, an
amended complaint was served on the Company by new lead counsel for the class,
consolidating the putative class actions and bearing the caption Beni Varghese,
Individually and on Behalf of All Other Similarly Situated v. China Shenghuo
Pharmaceutical Holdings, Inc., et al., Index No. 1:08 CIV. 7422. The defendants
include the Company, the Company’s controlling shareholders, Lan’s International
Medicine Investment Co., Limited, the Company’s chief executive officer, Gui Hua
Lan, the Company’s former chief financial officer, Qiong Hua Gao, and the
Company’s former independent registered public accounting firm, Hansen, Barnett
& Maxwell, P.C. (HB&M). Both the Company
and HB&M filed motions to dismiss the complaint, but those motions were
denied by the Court.  The substantive allegations of the amended
consolidated complaint have previously been summarized in disclosures by the
Company.
  On July
21, 2010, in a mediation conducted by Retired Judge Nicolas H. Politan, the
Company entered into an agreement in principle with counsel for plaintiffs in
this litigation and HB&M, in which the parties agreed to settle all claims
by the putative class members in exchange for payments of USD200,000 by the
Company and USD600,000 by HB&M’s professional liability
insurer.  The settlement, including its provisions regarding the
notification of class members and administration of any claims, will be entered
into in a written stipulation and agreement of settlement, to be executed by
counsel for the parties, and then must be submitted to the Court for
approval.  The settlement is expected to result in the dismissal of
the class action litigation.
  23
  The
Company believes the allegations in the amended consolidated complaint are
without merit, and, should the settlement not become final for any reason,
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.
  ITEM 1A. RISK FACTORS
  Except as
reflected in this Form 10-Q, there have been no material changes from the risk
factors previously disclosed in Item 1A of our Annual Report on Form 10-K for
the year ended December 31, 2009.
  ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
  None.
  ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
  None.
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
  None.
  ITEM 5. OTHER INFORMATION
  None.
  ITEM 6. EXHIBITS
 Exhibit
                  Number
                
                Description
      of Exhibit31.1
                
                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.
  24
 
 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)August
      16, 2010
                
                
                By:
                /s/ Gui Hua LanGui
      Hua LanChief
      Executive Officer and Chairman of theBoard
  25