UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

~~SECURITIES~~For ~~EXCHANGE~~the ~~ACT~~quarterly OFperiod ~~1934~~ended March 31, 2012

For the quarterly period ended September 30, 2011

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 001-33537

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		20-2903562
(State or Other Jurisdiction of Incorporation or Organization)		(IR.S. Employer Identification No.)

No. 2 , Jing You Road,
Kunming National Economy &
Technology Developing District
People’s Republic of China 650217		N/A
(Address of Principal Executive Offices)		(Zip Code)

0086-871-728-2628

(Registrant’s Telephone Number, Including Area Code)

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

Yes ¨ No ¨

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 xþ

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

~~Yes~~There ¨were No19,679,400 xshares outstanding of the issuer’s common stock, par value $.0001 per share, as of May 29, 2012.

There were 19,679,400 shares outstanding of the issuer’s common stock, par value $.0001 per share, as of November 14, 2011.

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

			Page	~~Page~~
PART I - FINANCIAL INFORMATION
ITEM 1.	CONDENSED FINANCIAL STATEMENTS	~~FINANCIAL STATEMENTS~~		F-1
		Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010		F-1
	Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011			F-1
		Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)		F-2
	Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)			F-2
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)		F-3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)			F-3
		Notes to Consolidated Financial Statements (Unaudited)		F-4~F-15
	Notes to Condensed Consolidated Financial Statements (Unaudited)			F-4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~		~~2~16~~3
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~		1613
ITEM 4T.	CONTROLS AND PROCEDURES	~~CONTROLS AND PROCEDURES~~		1613
PART II - OTHER INFORMATION				1714
ITEM 1.		LEGAL PROCEEDINGS		17
ITEM 6.	EXHIBITS			14
ITEM 1A.		RISK FACTORS		17
SIGNATURES				15
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		17
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES		17
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		17
ITEM 5.		OTHER INFORMATION		17
ITEM 6.		EXHIBITS		17
SIGNATURES				19

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in USD)

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2012			2011
	(unaudited)
Assets:
Current Assets:
Cash and cash equivalents	$	6,676,938		$	1,247,230
Restricted Cash		794,791			794,115
Accounts and notes receivable, net		19,693,400			18,076,050
Other receivables, net		4,076,263			4,084,102
Advances to suppliers, net		360,536			542,153
Inventories, net		3,594,896			2,695,388
Due from related parties		152,897			574,899
Current deferred tax assets		1,509,050			1,394,101
Other current assets		526,871			199,929
Total Current Assets		37,385,642			29,607,967

Property, plant and equipment, net		25,846,785			25,873,670
Intangible assets, net		1,452,976			1,473,074
Deposits for long-live assets		1,079,977			1,078,846
Non-current deferred tax assets		346,493			275,677
	$	66,111,873		$	58,309,234
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	8,960,710			9,395,483
Other payables and accrued expenses		13,298,492			11,819,179
Sales representative deposits		6,127,394			6,106,287
Due to related parties		18,434			18,414
Short-term borrowings		21,388,449			15,858,895
Advances from customers		3,952,315			1,090,668
Taxes payable and other current liabilities		1,671,803			2,255,322
Current portion of long-term borrowings		5,941,884			6,253,075
Total Current Liabilities		61,359,481			52,797,323
Commitments and Contingencies
Equity:
Common stock, $0.0001 par value, 100,000,000 shares authorized and 19,679,400 shares issued and outstanding		1,968			1,968
Additional paid-in capital		6,014,688			6,014,688
Appropriated retained earnings		147,023			147,023
Accumulated deficit		(6,235,141	)		(5,790,759	)
Accumulated other comprehensive income		1,748,239			1,743,393
Total stockholder's equity		1,676,777			2,116,313
Non-controlling interest		3,393,363			3,395,598
Due from non-controlling interest for hotel project		(317,748	)		-
Total non-controlling interest		3,075,615			3,395,598
Total Equity		4,752,392			5,511,911
Total liabilities and equity	$	66,111,873			58,309,234

~~(Amounts~~See innotes ~~USD)~~to condensed consolidated financial statements.

	September 30,			December 31,
	2011			2010
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	3,936,948		$	1,669,387
Restricted Cash		314,718			-
Accounts and notes receivable, net of allowance of 2,355,552 and 2,260,505 for 2011 and 2010, respectively		15,895,009			11,531,027
Other receivables, net of allowance of 3,292,772 and 3,159,623 for 2011 and 2010, respectively		4,271,421			4,111,315
Advances to suppliers		590,735			580,168
Inventories		2,102,299			2,599,351
Due from related parties		201,077			190,614
Current deferred tax assets		1,133,114			833,568
Other current assets		135,549			208,111
Total current assets		28,580,870			21,723,541
Property, plant and equipment, net		22,586,801			21,069,139
Other non-current assets		2,395,763			2,554,193
Total assets	$	53,563,434		$	45,346,873
Liabilities and equity:
Current liabilities:
Accounts payable	$	8,643,563		$	8,964,404
Other payables and accrued expenses		12,133,317			9,699,857
Sales representative deposits		5,532,182			4,936,429
Due to related parties		-			79,864
Short-term borrowings		16,864,031			5,289,178
Advances from customers		1,337,319			1,158,649
Taxes payable and other current liabilities		1,071,970			881,506
Current portion of long-term borrowings		6,199,940			6,039,833
Total current liabilities		51,782,322			37,049,720
Long-term borrowings		-			6,251,227
Total liabilities		51,782,322			43,300,947
Commitments and contingencies
Equity:
Common stock, $0.0001 par value, 100,000,000 shares authorized and 19,679,400 shares issued and outstanding		1,968			1,968
Additional paid-in capital		6,077,003			6,193,927
Appropriated retained earnings		147,023			147,023
Accumulated deficit		(6,243,196	)		(5,940,439	)
Accumulated other comprehensive income		1,677,434			1,638,109
Total stockholder's equity		1,660,232			2,040,588
Non-controlling interest		120,880			5,338
Total equity		1,781,112			2,045,926
Total Liabilities and equity	$	53,563,434		$	45,346,873

See notes to consolidated financial statements

F-1

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED) (Amounts in USD, except shares)

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three months ended March 31,
	2012			2011

Sales	$	11,372,453		$	9,441,626
Cost of Goods Sold		4,669,455			3,805,692
Gross Margin		6,702,998			5,635,934
Operating Expenses:
Selling expenses		5,168,179			4,076,430
General and administrative expenses		1,378,138			1,030,215
Research and development expense		231,947			121,725
		6,778,264			5,228,370
(Loss) Income from Operations		(75,266	)		407,564
Other Income (Expenses):

Subsidy income		8,244			7,598
Interest and other expense		(500,672	)		(314,481	)
		(492,428	)		(306,883	)
(Loss) Income Before Income Tax Expenses		(567,694	)		100,681
Income tax benefit (expense)		121,073			(14,980	)
Net (Loss) Income		(446,621	)		85,701
Net loss attributable to non-controlling interests		(2,239	)		(13,672	)
Net (Loss) Income Attributable to Stockholders	$	(444,382	)	$	99,373
Comprehensive (Loss) Income:
Net (Loss ) Income		(446,621	)		85,701
Foreign currency translation adjustment		4,850			19,794
Comprehensive (Loss) Income	$	(441,771	)	$	105,495
Less: Comprehensive loss attributable to non-controlling interests		(2,235	)		(16,830	)
Comprehensive (Loss) Income Attributable to Stockholders		(439,536	)		122,325
Basic and diluted (loss) earnings per share	$	(0.02	)	$	0.01
Weighted-average number of shares outstanding -basic and diluted		19,679,400			19,679,400

~~AND~~See ~~COMPREHENSIVE~~notes ~~INCOME~~to ~~(LOSS)~~condensed ~~(UNAUDITED)~~consolidated financial statements.

(Amounts in USD, except shares)

	Three Months Ended September 30,						Nine Months ended September 30,
	2011			2010			2011			2010
Sales	$	10,910,079		$	8,551,182		$	31,248,165		$	23,340,191
Cost of goods sold		3,936,610			2,996,674			11,749,518			7,561,650
Gross profit		6,973,469			5,554,508			19,498,647			15,778,541
Operating expenses:
Selling expenses		5,233,061			3,849,347			14,255,496			11,869,164
General and administrative expenses		1,366,711			894,301			3,638,386			2,493,749
Research and development expense		321,297			160,795			587,871			417,184
		6,921,069			4,904,443			18,481,753			14,780,097
Income from operations		52,400			650,065			1,016,894			998,444
Other income (expenses):
Subsidy income		1,011			492,451			155,753			654,013
Interest and other expense		(593,459	)		(193,908	)		(1,494,441	)		(718,323	)
		(592,448	)		298,543			(1,338,688	)		(64,310	)
(Loss) income before income tax		(540,048	)		948,608			(321,794	)		934,134
Income tax benefit (expense)		37,949			(118,370	)		10,786			(141,001	)
Net (loss) income		(502,099	)		830,238			(311,008	)		793,133
Net income (loss) attributable to non-controlling interests		4,355			42,581			(8,252	)		34,313
Net (loss) income attributable to stockholders	$	(506,454	)	$	787,657		$	(302,756	)	$	758,820
Comprehensive income (loss):
Net (loss) income		(502,099	)		830,238			(311,008	)		793,133
Foreign currency translation adjustment		(9,388	)		21,221			40,397			26,135
Comprehensive (loss) income:	$	(511,487	)	$	851,459		$	(270,611	)	$	819,268
Comprehensive gain (loss) attributable to non-controlling interests		8,711			42,617			(7,180	)		35,444
Comprehensive (loss) income attributable to stockholders	$	(520,198	)	$	808,842		$	(263,431	)	$	783,824
Basic and diluted (loss) earnings per share	$	(0.03	)	$	0.04		$	(0.02	)	$	0.04
Weighted average number of shares outstanding-basic and diluted		19,679,400			19,679,400			19,679,400			19,679,400

See notes to consolidated financial statements

F-2

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in USD)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three months ended March 31,
	2012			2011
Net Cash Provided by Operating Activities	$	896,967		$	2,609,836
Cash Flows from Investing Activities:
Purchase of long-lived assets		(664,383	)		(2,290,979	)
Proceeds from disposal of Property		-			169
Net Cash Used in Investing Activities		(664,383	)		(2,290,810	)

Cash Flows from Financing Activities:
Increase in restricted cash		(156	)		-
Proceeds from borrowings		8,513,809			3,292,326
Payments on borrowings		(3,329,423	)		(3,886,067	)
Net Cash Provided by (Used in) Financing Activities		5,184,230			(593,741	)

Effect of exchange rate changes on cash and cash equivalents		12,894			14,632
Net Increase (Decrease) in Cash and Cash Equivalents		5,429,708			(260,083	)
Cash and Cash Equivalents at Beginning of Period		1,247,230			1,669,387
Cash and Cash Equivalents at End of Period	$	6,676,938		$	1,409,304

Supplemental Information
Cash paid for interest	$	565,730		$	332,323
Cash paid for income taxes	$	61,161		$	-

~~(Amounts~~See innotes ~~USD)~~to condensed consolidated financial statements.

	Nine months ended September 30,
	2011			2010
Net cash provided by operating activities	$	2,275,642		$	2,239,891
Cash flows from investing activities:
Purchase of long-lived assets		(4,425,497	)		(5,607,809	)
Proceeds from disposal of property		171			308,229
Net cash used in investing activities		(4,425,326	)		(5,299,580	)
Cash flows from financing activities:
Proceeds from borrowings		22,083,616			24,640,172
Transfer to restricted cash		(314,718	)		-
Payments on borrowings		(17,444,806	)		(21,904,375	)
Net cash provided by financing activities		4,324,092			2,735,797
Effect of foreign currency fluctuation on cash and cash equivalents		93,153			40,775
Net increase (decrease) in cash and cash equivalents		2,267,561			(283,117	)
Cash and cash equivalents at beginning of period		1,669,387			1,986,540
Cash and cash equivalents at end of period	$	3,936,948		$	1,703,423
Supplemental information
Cash paid for interest	$	1,041,719		$	543,799
Cash paid for income taxes	$	71,077		$	130,489

See notes to consolidated financial statements

F-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, cosmetic products, and also engages in the hotel operating business 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

As of ~~September~~March 3031, ~~2011~~2012, the CSPH owns a 94.95% equity interest in Kunming Shenghuo Pharmaceuticals (Group) Co., Ltd. (“Shenghuo”). Shenghuo owns a 100% equity interest in Kunming Shenghuo Medicine Co., Ltd. (“Medicine”), Kunming Pharmaceutical Importation and Exportation Co., Ltd. (“Import/Export”) and Kunming Shenghuo Cosmetics Co., Ltd. (“Cosmetic”), respectively. 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. On November 15, 2010, Shenghuo formed Kunming Shenghuo Hotel Management Co., Ltd. (“Hotel”). According to the investment agreement with an independent third party, Shenghuo holds 80% equity interest in Hotel. Hotel was formed to run the hotel business. Except for CSPH, all other entities are formed in and operate within the PRC.

On April 30, 2009, Shenghuo formed Shi Lin Shenghuo Co., Ltd. (“Shi Lin”) as a wholly owned subsidiary. Shi Lin was formed for the purpose of purchasing or leasing land suitable for cultivating the medicinal herb Panax notoginseng for use in the production of the Company’s medicinal products. As of September 30, 2011, Shi Lin does not generate any revenue.

On November 15, 2010, Shenghuo formed Kunming Shenghuo Hotel Management Co., Ltd. (“Hotel”). According to the investment agreement with an independent third party, Shenghuo holds 80% equity interest in Hotel. Hotel was formed to run the hotel business.

Except for CSPH, all other entities are formed in and operate within the PRC.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)	Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements (“consolidated financial statements”) have been prepared in accordance with the accounting policies described in the Company’s Form 10-K filed on March 30, ~~2011~~2012 (“~~2010~~2011 Form 10-K”), and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s ~~2010~~2011 Form 10-K.

The 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 USD23,201,000 as of September 30, 2011 and USD15,326,000 as of December 31, 2010. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by seeking equity and/or debt financing by using Shenghuo Plaza and the two new office buildings as mortgage collateral after the Company has obtained the Property Ownership Certificate by the end of 2011 or early 2012. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. In the event we are not able to obtain funding, we will not be able to implement or may be required to delay all or part of our business plan, and our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be materially adversely affected. The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence.

F-4

The 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 USD 23,974,000 as of March 31, 2012 and USD23,189,000 as of December 31, 2011. These factors and the capital commitment described in note 9(b) raise substantial doubt about the Company’s ability to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by seeking equity and/or debt financing by using Shenghuo Plaza and the two new office buildings as mortgage collateral after the Company has obtained the Property Ownership Certificate by late 2012. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. In the event we are not able to obtain funding, we will not be able to implement or may be required to delay all or part of our business plan, and our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be materially adversely affected. The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence. In the opinion of the management of the Company (“Management”), all normal recurring adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. Interim results of operations are not necessarily indicative of the results of the full year.

(b)	Principle of consolidation

The 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. Non-controlling interests represents the ownership interests in the subsidiaries that are held by owners other than the parent and are part of the equity of the consolidated group. The non-controlling interests are reported in the 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 non-controlling interests. If losses attributable to the parent and the non-controlling interests in a subsidiary exceed their interests in the subsidiary’s equity, the excess, and any further losses attributable to the parent and the non-controlling interests, is attributed to those interests.

Non-controlling interests represents the ownership interests in the subsidiaries that are held by owners other than the parent and are part of the equity of the consolidated group. The non-controlling interests are reported in the 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 non-controlling interests. If losses attributable to the parent and the non-controlling interests in a subsidiary exceed their interests in the subsidiary’s equity, the excess, and any further losses attributable to the parent and the non-controlling interests, is attributed to those interests.

(c)	Accounts and notes receivable

Accounts receivable are recognized and carried at original sale amounts less an allowance for uncollectible accounts, as needed. Accounts receivable are reviewed periodically as to whether they are past due based on contractual terms and their carrying values have become impaired. An allowance for doubtful accounts is recorded in the period in which loss is determined to be probable based on an assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing economic conditions. Accounts receivable balances are written off after all collection efforts have been exhausted. Notes receivable represent bankers’ acceptances that have been arranged with third-party financial institutions by certain customers to settle their purchases from us. These bankers’ acceptances are non-interest bearing and are collectible within six months. Such sales and purchasing arrangements are consistent with industry practices in the PRC. There are no outstanding amounts from customers that individually represent greater than 10% of the total balance of accounts receivable for the periods presented. The Company entered into a factoring agreement with Bank of China (“BOC”), to transfer accounts receivable with full recourse. The Company is required to repurchase the transferred accounts receivable, if any controversy arises on the accounts receivable, at a price of proceeds received from BOC less settled accounts receivable plus interest and other necessary penalty or expense. The Company accounts for its transferred accounts receivable in accordance with Accounting Standard Codification (“ASC”) Topic 810, with the proceeds received from BOC being recognized as collateralized borrowings.

Notes receivable represent bankers’ acceptances that have been arranged with third-party financial institutions by certain customers to settle their purchases from us. These bankers’ acceptances are non-interest bearing and are collectible within six months. Such sales and purchasing arrangements are consistent with industry practices in the PRC.

There are no outstanding amounts from customers that individually represent greater than 10% of the total balance of accounts receivable for the periods presented.

The Company entered into a factoring agreement with Bank of China (“BOC”), to transfer accounts receivable with full recourse. The Company is required to repurchase the transferred accounts receivable, if any controversy arises on the accounts receivable, at a price of proceeds received from BOC less settled accounts receivable plus interest and other necessary penalty or expense. The Company accounts for its transferred accounts receivable in accordance with Accounting Standard Codification (“ASC”) Topic 810, with the proceeds received from BOC being recognized as collateralized borrowings.

(d) Income taxes

CSPH and its consolidated entities each files tax returns separately.

F-5

~~The~~(d) ~~Company~~Income follows 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.

CSPH and its consolidated entities each file tax returns separately. The Company follows 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 ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income tax in interim periods, and income tax disclosures. The CSPH is subject to income tax in the United States. Shenghuo is qualified to enjoy preferential tax rate under relevant PRC tax laws and regulations, with effective income tax rate of 10% in 2009, 11% in 2010 and 12% in 2011. No deferred United States income taxes are provided for since all accumulated profits will be permanently reinvested in the PRC. From 2012, Shenghuo will be subject to income tax at a rate of 15%. All other subsidiaries in the PRC were subject to income tax at a rate of 25% for the periods presented.

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

(e)	Revenue recognition

The Company recognizes revenue in accordance with ASC Topic 605. All of the following criteria must exist in order for the Company 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.

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.

(f)	Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment. The historical cost of acquiring an item of property, plant and equipment includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. If an item of property, plant and equipment requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the item is a part of the historical cost. This item is categorized as construction in progress and is not depreciated until substantially all the activities necessary to bring it to the condition and location necessary for its intended use are completed.

Depreciation of property, plant and equipment is calculated using the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets as follows:

Asset	Useful life (years)		Residual value %
Buildings		25 - 30		5	%
Machinery		3 - 20		0-5	%
Office equipment and furnishing		3 - 10		0-5	%
Vehicles		3 - 10		0-5	%

F-6

Depreciation of property, plant and equipment ~~attributable~~is tocalculated ~~manufacturing~~using ~~activities~~the isstraight-line ~~capitalized~~method as(after ~~part~~taking ofinto ~~inventories,~~account ~~and~~their ~~expensed~~respective toestimated ~~cost~~residual ofvalues) ~~goods~~over ~~sold~~the ~~when~~estimated ~~inventories~~useful ~~are~~lives ~~sold.~~of the assets as follows:

Expenditure for maintenance and repairs is expensed as incurred.

Asset	Useful life (years)		Residual value %
Buildings		25 - 40		5	%
Machinery		3 - 20		0-5	%
Office equipment and furnishing		3 - 10		0-5	%
Vehicles		3 - 10		0-5	%

Depreciation of property, plant and equipment attributable to manufacturing activities is capitalized as part of inventories, and expensed to cost of goods sold when inventories are sold. Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations.

(g)	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.

(h) ~~Recent~~Recently ~~Accounting~~issued ~~Pronouncements~~accounting standards affecting the Company

In the three months ~~period~~ ended ~~September~~March 3031, ~~2011~~2012, the FASB ~~issued~~has ~~ASU~~not ~~No.~~issued ~~2011-06~~any ~~through~~Accounting ~~ASU~~Standards NoUpdate. ~~2011-09, none of which are expected to have a material impact on the consolidated financial statements upon adoption.~~

NOTE 3 – SEGMENT REPORTING

The Company has four major reportable segments, Medicine, Cosmetic, Hotel and Shi Lin. The Company’s reportable segments are based primarily on different types of business and represent the primary mode used to assess allocation of resources and performance. ~~The~~Performance ~~Company~~is ~~evaluates~~measured ~~its~~by ~~business~~various ~~segments~~factors ~~primarily~~such onas ~~the basis of~~ segment ~~earnings,~~revenue ~~with~~and segment ~~earnings~~profit ~~defined as earnings before corporate expense, depreciation and amortization expense, interest, income taxes and certain other items~~(loss). ~~The Company has no material inter-segment sales.~~

(a) Segment reporting for the three months ended ~~September~~March 3031, ~~2011~~2012 (unaudited):

	Medicine			Hotel			Shi Lin			Others			~~Total~~Elimination			Total
Revenues from external customers	$	910,~~922~~373,~~640~~886		$	~~852~~912,~~601~~240		$	-		$	~~134~~86,~~838~~327		$	~~10,910,079~~-		$	11,372,453
Inter segment revenues		48,761			-			-			-			48,761
Inter segment revenue	$	15,341		$	-		$	-		$	-		$			$	15,341
Interest income		2,703			383			36			34			3,156
Segment (loss) profit	$	(595,050	)	$	104,841		$	(88,129	)	$	31,226		$	(20,582	)	$	(567,694	)
Interest expense		(544,223	)		(6,354	)		11			(114	)		(550,680	)
Net interest (expenses) income		(541,520	)		(5,971	)		47			(80	)		(547,524	)
Depreciation and amortization		232,626			125,745			2,685			5,172			366,228
Segment (loss) profit		(552,091	)		200,774			(83,702	)		(108,528	)		(543,547	)
Other significant noncash items:
Provision and allowance		13,479			-			-			(69,144	)		(55,665	)
Segment assets as of September 30, 2011	$	42,049,425		$	13,561,189		$	7,645,588		$	1,349,288		$	64,605,490

F-7

~~During~~(b) Segment reporting for the three months ended ~~September~~March 3031, 2011 ~~and 2010, the revenue from external customers in other segment was generated from the Cosmetic business.~~(unaudited):

Reconciliations of segment revenue, profit and loss and assets with consolidated amount are listed as follows:

	Medicine		Hotel			Shi Lin			Others		Elimination			Total

Revenues from external customers	$	8,841,946	$	413,996		$	-		$	185,684	$	-		$	9,441,626
Inter segment revenue	$	108,830	$	-		$	-		$	-	$	-		$	108,830
Segment (loss) profit	$	262,361	$	(109,379	)	$	(39,804	)	$	41,673	$	(54,170	)	$	100,681

	For the three months ended September 30, 2011
Revenues
Total revenues for reportable segments	$	10,958,840
Elimination of inter segment revenues		(48,761	)
Total consolidated revenues	$	10,910,079
Profit or loss
Total loss for reportable segments	$	(543,547	)
Other income		11,587
Other expense		(22,499	)
Subsidy income		1,011
Elimination of inter segment loss		13,400
Loss before income tax	$	(540,048	)

During the three months ended March 31, 2012 and 2011, the revenue from external customers in other segment was generated from the Cosmetic business.

~~F-8~~NOTE 4 – INVENTORIES, NET

(b) Segment reporting for the three months ended September 30, 2010 (unaudited):

	Medicine			Hotel		Shi Lin			Others			Total
Revenues from external customers	$	8,360,676		$	-	$	-		$	190,506		$	8,551,182
Intersegment revenues		62,042			-		-			-			62,042
Interest income		941			-		268			32			1,241
Interest expense		(214,747	)		-		-			(178	)		(214,925	)
Net interest (expenses) income		(213,806	)		-		268			(146	)		(213,684	)
Depreciation and amortization		191,119			-		558			5,219			196,896
Segment profit (loss)		500,926			-		(69,322	)		(34,658	)		396,946
Other significant noncash items:
Provision and allowance		-			-		-			-			-
Segment assets as of December 31, 2010	$	37,722,049		$	8,613,549	$	7,350,765		$	1,481,330		$	55,167,693

Reconciliations of segment revenue, profit and loss and assets with consolidated amount are listed as follows:

	For the three months ended September 30, 2010
Revenues
Total revenues for reportable segments	$	8,613,224
Elimination of inter segment revenues		(62,042	)
Total consolidated revenues	$	8,551,182
Profit or loss
Total profit for reportable segments	$	396,946
Other income		34,363
Other expense		(22,506	)
Subsidy income		492,451
Elimination of inter segment loss		47,354
Income before income tax	$	948,608

F-9

	Medicine			Hotel			Shi Lin			Others			Total
Revenues from external customers	$	28,807,709		$	1,920,318		$	-		$	520,138		$	31,248,165
Inter segment revenues		251,517			-			-			-			251,517
Interest income		5,448			911			104			121			6,584
Interest expense		(1,259,291	)		(12,997	)		-			(237	)		(1,272,525	)
Net interest (expenses) income		(1,253,843	)		(12,086	)		104			(116	)		(1,265,941	)
Depreciation and amortization		674,072			328,662			7,952			15,511			1,026,197
Segment (loss) profit		(49,691	)		51,375			(207,179	)		(83,685	)		(289,180	)
Other significant noncash items:
Provision and allowance		(22,033	)		-			-			(69,144	)		(91,177	)
Segment assets as of September 30, 2011	$	42,049,425		$	13,561,189		$	7,645,588		$	1,349,288		$	64,605,490

During the nine months ended September 30, 2011 and 2010, the revenue from external customers in other segment was generated from the Cosmetic business.

Reconciliations of segment revenue, profit and loss and assets with consolidated amount are listed as follows,

	For the nine months ended September 30, 2011
Revenues
Total revenues for reportable segments	$	31,499,682
Elimination of inter segment revenues		(251,517	)
Total consolidated revenues	$	31,248,165
Profit or loss
Total loss for reportable segments	$	(289,180	)
Other income		33,528
Other expense		(192,433	)
Subsidy income		155,753
Elimination of inter segment profit		(29,462	)
Loss before income tax	$	(321,794	)

F-10

(d) Segment reporting for the nine months ended September 30, 2010 (unaudited):

	Medicine			Hotel		Shi Lin			Others			Total
Revenues from external customers	$	22,693,704		$	-	$	-		$	646,487		$	23,340,191
Intersegment revenues		271,756			-		-			-			271,756
Interest income		6,086			-		359			194			6,639
Interest expense		(659,791	)		-		-			(570	)		(660,361	)
Net interest (expenses) income		(653,705	)		-		359			(376	)		(653,722	)
Depreciation and amortization		538,547			-		558			18,454			557,559
Segment profit (loss)		649,225			-		(89,580	)		(213,351	)		346,294
Other significant noncash items:
Provision and allowance		-			-		-			-			-
Segment assets as of December 31, 2010	$	37,722,049		$	8,613,549	$	7,350,765		$	1,481,330		$	55,167,693

Reconciliations of segment revenue, profit and loss and assets with consolidated amount are listed as follows:

	For the nine months ended September 30, 2010
Revenues
Total revenues for reportable segments	$	23,611,947
Elimination of inter segment revenues		(271,756	)
Total consolidated revenues	$	23,340,191
Profit or loss
Total profit for reportable segments	$	346,294
Other income		200,978
Other expense		(292,646	)
Subsidy income		654,013
Elimination of inter segment loss		25,495
Income before income tax	$	934,134

F-11

NOTE 4 – INVENTORIES

Inventories consisted of the following:

	September 30,		December 31,
	March 31,		December 31,
	2011		2010
	2012		2011
	(Unaudited)
Raw materials	$	~~839~~719,~~674~~133	$	~~807~~808,~~796~~009
Work-in-process		~~563~~1,~~453~~666,346		1,~~127~~361,~~918~~386
Finished goods		~~699~~1,~~172~~209,417		~~663~~525,~~637~~993
	$	2,102,299	$	2,599,351
Total inventories	$	3,594,896	$	2,695,388

NOTE 5 – BORROWINGS

The Company’s borrowings are payable to banks, ~~and~~ governmental financial bureaus and Kunming Land and Mine Reserve Center (the “Reserve Center”). The following summarizes the Company’s debt obligations and respective balances as of ~~September~~March 3031, ~~2011~~2012 and December 31, ~~2010~~2011:

	September 30,		December 31,
	March 31		December 31
	2011		2010
	2012		2011
	(Unaudited)
Current:
Short-term bank borrowings, collateralized	$	16,035,488	$	5,135,870
Short-term borrowings from banks and Reserve Center, collateralized	$	21,346,297	$	15,816,788
Short-term bank borrowings, uncollateralized		786,794		-
Current portion of long-term borrowings, collateralized		5,941,884		6,253,075
Current portion of long-term borrowings, collateralized		6,199,940		6,039,833
Borrowings from governmental financial bureau, uncollateralized		42,151		42,107
Borrowings from governmental financial bureau, uncollateralized		41,749		153,308
	$	27,330,333	$	22,111,970
		23,063,971		11,329,011
Non-current:
Long-term bank borrowings, collateralized		-		6,251,227
	$	23,063,971	$	17,580,238

(a) As of September 30, 2011, the balance of borrowings from Agricultural Bank of China (the “ABC”) was approximately USD16,428,000, among which, borrowings amounting to approximately USD10,921,000 was collateralized by land use rights and buildings, while the others in an aggregate amount of approximately USD5,508,000 were guaranteed by the CSPH’s 94.95% shares in Shenghuo.F-8

(ba) AsThe ofcurrent ~~September~~portion ~~30,~~of ~~2011,~~the ~~short~~long-term bank borrowings ofmature ~~approximately~~in ~~USD1,259,000~~April ~~from~~2012 ~~Fudian~~and ~~Bank~~ was ~~collateralized~~repaid byin ~~the~~full ~~Shenghuo’s patent~~subsequently.

(cb) As of ~~July~~March 2931, ~~2011~~2012, the ~~Company~~balance ~~was granted~~ of aborrowings ~~one-year~~from ~~line~~Agricultural Bank of ~~credit~~China by(the ~~BOC~~“ABC”) ~~with~~was aapproximately ~~maximum of RMB30~~USD16,~~000~~269,000, (among which, borrowings amounting to approximately ~~USD4~~USD10,~~720~~708,000) ~~factoring~~was ~~advance~~collateralized ~~between~~by ~~July~~land ~~29,~~use ~~2011~~rights and ~~July~~buildings, 28while the others in an aggregate amount of approximately USD5,561,000 ~~2012~~were guaranteed by the CSPH’s 94.95% shares in Shenghuo.

(c) As of ~~September~~March 3031, ~~2011~~2012, short-term borrowings of approximately ~~USD4~~USD1,~~548~~271,000, ~~were~~from ~~secured~~Fudian byBank ~~accounts~~was ~~receivable,~~collateralized ~~with~~by anthe ~~amount~~Shenghuo’s ofpatent ~~approximately~~and ~~USD5,685,000. The unused line of credit as of September 30, 2011~~ was ~~approximately~~repaid ~~USD172,000~~in ~~which~~full ~~required additional collaterals upon withdrawal~~subsequently.

F(d) As of July 29, 2011,the Company was granted of a one-12year line of credit by BOC with a maximum of RMB30,000,000 (approximately USD4,766,000) factoring advance between July 29, 2011 and July 28, 2012. As of March 31, 2012, short-term borrowings of approximately USD2,971,000, were secured by accounts receivable, with an amount of approximately USD3,729,000. The unused line of credit as of March 31, 2012 was approximately USD1,795,000 which required additional collaterals upon withdrawal.

(de) As of ~~September~~March 3031, ~~2011~~2012, short-term ~~borrowings~~borrowing of RMB5,000,000 (~~USD786~~approximately USD794,~~794~~000) from China Minsheng Bank Corporation ~~were~~ ~~unsecured~~was guaranteed by a maximum loan guarantee contract of RMB10,000,000, or approximately USD1,589,000. The unused line of credit as of March 31, 2012 was approximately USD795,000.

(ef) ~~The~~As ~~weighted~~of ~~average~~March ~~interest~~31, ~~rate~~2012, ~~for~~short-term ~~the~~ borrowings atof ~~September~~RMB2,660,000 30(approximately USD423,000) ~~2011~~from ~~and~~China ~~December~~Merchant ~~31,~~Bank ~~2010~~was ~~are~~collateralized asby ~~follows:~~the bank acceptance notes in the amount of approximately USD450,000.

	September 30,			December 31,
	2011			2010
	(Unaudited)
Current:
Short-term bank borrowings		7.44	%		5.33	%
Current portion of long-term borrowings		5.40	%		5.40	%
Borrowings from governmental financial bureau		-			-
Non-current:
Long-term bank borrowings		-			5.4	%

(g)

As of March 31, 2012, short-term borrowing of RMB35,000,000 (approximately USD5,561,000) from Reserve Center was collateralized by buildings. RMB25,000,000 (approximately USD3,972,000) of the borrowing was repaid subsequently and the Company has orally agreed with the Reserve Center on repaying the rest of the borrowing (RMB10,000,000, approximately USD1,589,000) on extended maturity date from April 29, 2012 until when they have adequate working capital. During the period that the loan is in default, the Company is required to pay an additional interest penalty at 0.04% per diem of the interest rate defined in the original loan agreement.

(h)	The weighted average interest rate for the borrowings at March 31, 2012 and December 31, 2011 are as follows:

	March 31			December 31
	2012			2011
	(Unaudited)
Current:
Short-term borrowings from banks and Reserve Center		7.20	%		6.91	%
Current portion of long-term borrowings		5.40	%		5.40	%
Borrowings from governmental financial bureau		0.00	%		0.00	%

NOTE 6 – RELATED PARTY TRANSACTIONS AND BALANCES

The Group entered into shares transfer agreements with Mr. Feng Lan in August 2011 for the 1% and 1% shares of Import/Export and Medicine he held respectively. The Group would pay RMB10,000 and RMB100,000 respectively for the 1% and 1% shares of Import/Export and Medicine respectively.

	March 31,		December 31,
	2012		2011
	(Unaudited)

Amounts due from related parties
Kunming Dianjiao Nutritional Supplements Co., Ltd. (“Dianjiao”)	$	152,897	$	574,899

Amounts due to related parties
Officers	$	18,434	$	18,414

~~The~~As ~~Group~~of ~~also~~March ~~entered~~31, ~~into~~2012, ~~shares~~the ~~transfer~~amount ~~agreements~~due ~~with~~from ~~Mr.~~Dianjiao ~~Lei~~which ~~Lan~~is inunder ~~June~~common ~~2011~~control ~~for~~with the ~~1.82%~~Company ~~shares~~was offor ~~Cosmetics.~~business ~~The~~purpose, ~~Group~~it ~~would~~was ~~pay~~interest ~~RMB100,000~~free ~~for~~and ~~the~~repaid ~~1.82%~~on ~~shares of Cosmetics~~demand.

~~Both transactions mentioned above were finished in the third quarter of 2011. After which the Group holds 100% shares of Import/Export, Medicine and Cosmetics.~~F-9

	September 30,		December 31,
	2011		2010
	(Unaudited)
Amounts due from related parties
Kunming Dianjiao Nutritional Supplements Co., Ltd. (“Dianjiao”)	$	201,077	$	190,614
Amounts due to related parties
Officers	$	-	$	79,864

NOTE 7 – BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

AsBasic earnings per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of ~~September~~common ~~30,~~shares ~~2010,~~outstanding for the ~~amount~~period. ~~due~~Diluted income or (loss) per share reflects the potential dilution from ~~Dianjiao~~the ~~which~~exercise isor ~~under~~conversion of other securities into common ~~control~~stock, ~~with~~but ~~the~~only ~~Company~~if ~~was~~dilutive. Potentially dilutive securities for ~~business~~the ~~purpose~~periods ended March 31, it2012 ~~was~~and ~~interest~~2011 ~~free~~include 46,000 warrants and ~~repaid~~246,000 onwarrants, ~~demand~~respectively. However, since the exercise price of the related common stock for these two periods exceeds the average market price and dilutive loss per share excludes all potential common shares if their effect is anti-dilutive, the warrants are considered as no dilutive effect in computation of earnings per share.

F-13

	Three Months Ended March 31,
	2012 (Unaudited)			2011 (Unaudited)
Net income(loss) attributable to stockholders	$	(444,382	)	$	99,373
Weighted-average number of shares outstanding -basic and diluted		19,679,400			19,679,400
Basic and diluted earnings (loss) per share	$	(0.02	)	$	0.01

NOTE 7 – BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Unaudited)

Basic earnings per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income or (loss) per share reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. Potentially dilutive securities for the periods ended September 30, 2011 and 2010 include 246,000 warrants. However, since the exercise price of the related common stock for these two periods exceeds the average market price and dilutive loss per share excludes all potential common shares if their effect is anti-dilutive, the warrants are considered as no dilutive effect in computation of earnings per share.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Net (loss) income attributable to stockholders	$	(506,454	)	$	787,657	$	(302,756	)	$	758,820
Weighted average number of shares outstanding - basic and diluted		19,679,400			19,679,400		19,679,400			19,679,400
Basic and diluted (loss) earnings per share		(0.03	)		0.04		(0.02	)		0.04

NOTE 8 – CONCENTRATIONS

For the three ~~and nine~~ months ended ~~September~~March 3031, ~~2011~~2012, the Company had concentrations of purchases raw materials from ~~three~~two vendors accounting for 7767.2% ~~and~~of 69total purchases, as compared to approximately 68.5% of total purchase for the three months ended March 31, 2011, respectively. Concentration of sales from three customer accounting for 45.5% of total ~~purchases~~sales for the three months ended March 31,2012, as compared to ~~approximately~~one ~~79%~~customer ~~and~~accounting 62for 16.7% of total ~~purchase~~sales for the three months ended March 31, 2011. As of March 31, 2012 and ~~nine~~December 31, 2011, the Company had no significant concentration on accounts receivable. Approximately 89% of the sales came from a single product, Xuesaitong Soft Capsules for the three months ended ~~September~~March 3031, ~~2010~~2012, as compared to approximately 86% for the three months ended March 31, 2011, respectively.

Concentration of sales from two customer accounting for 20% and 15% and 12% and 15% of total sales for the three and nine months ended September 30, 2011 respectively. No significant concentration on sales from single customer for the three and nine months ended September 30, 2010, respectively.

As of September 30, 2011 and December 31, 2010, the Company had no significant concentration on accounts receivable.

Approximately 89% and 86% of the sales came from a single product, Xuesaitong Soft Capsules for the three months and nine months ended September 30, 2011, as compared to approximately 91% and 89% for the three months and nine months ended September 30, 2010, respectively.

F-14

NOTE 9 – COMMITMENTS AND CONTINGENCIES

(a)	Operating lease commitment

On September 8, 2010, the Company signed an agreement with Management Commission of Kunming Shilin Taiwan Farmer Entrepreneur Centre (“Entrepreneur Centre”) to rent the land for planting suitable-for-cultivating medicinal herb for use in the production of the Company’s medicinal products and to construct a health preserving zone and travel service center. The total operating lease amounted to approximately ~~USD4~~USD 4,~~818~~738,000 with a lease term of 20 years. According to the lease agreement, the rental for the first five years should be paid annually, and the rental for the remaining 15 years should be fully prepaid in 2015. As of March 31, 2012, the operating lease commitment is summarized as below:

As of September 30, 2011, the operating lease commitment is summarized as below:

Year Ending December 31,	Amount
2012	$	335,581
2013		236,881
2014		236,881
2015		3,553,215
	$	4,362,558

Year Ending December 31,	Amount
October 1 to December 31, 2011	$	97,759
2012		234,622
2013		234,622
2014		234,622
2015		3,656,195
	$	4,457,820

F-10

(b)	Capital Commitment

As of ~~September~~March 3031, ~~2011~~2012, we have a capital commitment of ~~USD261~~USD5,~~675~~688,051 ~~related~~for to the ~~Shenghuo~~second ~~Plaza~~installment ~~project~~of purchasing land use right for Xinglin International Health-Preserving Tourist Resort. Such amount is expected to be paid ~~within~~upon ~~2011~~the requirement of the Management Committee of Kunming Shilin Taiwan Farmer Entrepreneur Centre.

AsNOTE of10– ~~September~~SUBSEQUENT 30, 2011, we have a capital commitment of USD5,161,137 for the second instalment of purchasing land use right for Xinglin International Health-Preserving Tourist Resort. Such amount is expected to be paid upon the requirement of the Management Committee of Kunming Shilin Taiwan Farmer Entrepreneur Centre.EVENTS

~~NOTE~~In April, 2012, we obtained a loan of RMB40 million (approximately $6 million) from Agricultural Bank of China for working capital. On April 17, 2012, the Company received a deficiency letter (the “Deficiency Letter”) from NYSE Amex LLC (the “NYSE Amex” or “Exchange”) stating that the Company has resolved the continued listing deficiency with respect to Section 1003(a)(i) of the NYSE Amex’s Company Guide (the “Company Guide”) referenced in NYSE Amex’s letter dated September 22, 2010. However, as a result of the Company sustaining losses which are so substantial in relation to its overall operations or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of NYSE Amex, as to whether such issuer will be able to continue operations and/or meet its obligations as they mature, the Company is no longer in compliance with Section 1003(a)(iv) of the Company Guide. The Deficiency Letter states that, in order to maintain its NYSE Amex listing, the Company must submit a plan of compliance by May 1, 2012, advising NYSE Amex how it intends to regain compliance with Section 1003(a)(iv) of the Company Guide by July 2, 2012. In view of, among other things, the belief of the Board of Directors that under the Company’s current circumstances, it is not reasonably practicable for the Company to establish and implement a plan of compliance that would satisfy NYSE Amex’s continued listing requirements, the substantial financial burden on the Company as a result of its status as a U.S. public company, the Company’s inability to raise capital in the United States and the minimal benefits derived from being a U.S. public company, the Board of Directors of the Company determined on April 19, 2012 that it is in the best interest of the Company to voluntarily delist the Company’s common stock from NYSE Amex and deregister its shares with U.S. Securities & Exchange Commission (the “SEC”). In connection therewith, the Company notified NYSE Amex on April 20, 2012 of the Company’s intention to file a Form 25 - Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act of 1934 (the “Form 25”), with the SEC on April 30, 2012. The Form 25 became effective on May 10, –2012. ~~SUBSEQUENT~~As ~~EVENTS~~s result of discussions between the Company's legal counsel and the SEC, the SEC has taken the position that the exemption that the Company had sought to rely upon under Section 15(d) of the Exchange Act to suspend its reporting obligations is unavailable to it at this time. As such, the Company at this time will not file a Form 15, and it will continue to be a reporting company under Section 15(d) of the Exchange Act until such time as it is allowed to suspend its reporting obligations, which the Company expects to be no later than the first quarter of 2013.

~~The Company did not have any significant subsequent events as of the issuance of the financial statements.~~F-11

F-15

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

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 Pharmaceutical Holdings, Inc. Throughout this document, references to “we,” “our,” the “Company” refer to China Shenghuo Pharmaceutical Holdings, Inc. and its subsidiaries. MD&A should be read in conjunction with our financial statements and the related notes, and the other financial information included in this report.

This filing contains forward-looking statements. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, our ability to repay certain bank loans due in ~~2011~~2012, general economic and business conditions; changes in foreign, political, social, and economic conditions; our expansion into the retail distribution of our cosmetic products; regulatory initiatives and compliance with governmental regulations; the ability to achieve further market penetration and additional customers; and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance of the actual results or developments. ~~Refer~~Additional factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in our filings with the ~~sections~~Securities ~~entitled~~and Exchange Commission, including those factors discussed under the captions “Risk Factors” and “~~Special Note Regarding~~ Forward-Looking Statements” ~~contained~~ in ~~this~~our ~~report~~most recent Annual Report on Form 10-K for the year ended December 31, 2011, as may be supplemented or amended from time to time, which we urge investors to consider.

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 the greyish-brown or greyish-yellow plant that only grows in a few geographic locations, among which is the Yunnan Province in southwest China, where we are located; this province accounts for 90% of the total global production. The main root of Panax notoginseng are cylindrical shaped and are 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 approximately 8689% and 8986% of our sales for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 and ~~2010~~2011 respectively.

We have expanded our real estate owned and deployed in our pharmaceutical operations by 107,231 square feet. This is a result of the construction of our 29,212 square feet new 7-storey office building for our executives and administrative staff. We also built a 78,020 square feet 7-storey adjacent building to be used as a training facility for sales and marketing team, 12 Ways team and our staff’s continuing education. These two new office buildings were built at a cost of approximately RMB 26 million (approximately $4 million) by using cash flow from our operations and are debt free. We rented out the 3rd floor and part of the 4th floor of the training facility building totaling an area of 15,931 square feet for a term of four years. The lease began in April 2011 with an annual rental of RMB532,800 ($83,841) for the first year and 5% increment for each year in the next three years.

Shenghuo Plaza and Zhonghuang Hotel

With the substantial completion of Shenghuo Plaza at the end of 2010, we entered into a new business - the hotel and hospitality business. Shenghuo Plaza consists of 17-storey totaling approximately 252,984 square feet. Two floors of Shenghuo Plaza are designed to be utilized as 12 Ways Chinese Herbal Beauty Demonstration Center. In the center, we will use 12 Ways cosmetics to demonstrate how to keep beautiful and healthy, provide a variety of services, including acupuncture, body massage, foot massage and train our professional beauticians. The Company believes this center will be helpful to promote 12 Ways’ brand recognition and the sales of 12 Ways cosmetics. In addition, 12 Ways beauty products will be prominently displayed in the lobby of the Shenghuo Plaza in order to expose them to tourists and business clienteles. The decoration of those floors hasn’t finished yet. The balance of Shenghuo Plaza is used as a business hotel - Zhonghuang Hotel, restaurant and banquet facilities and an entertainment venue. The hotel is designed as per 4-star hotel standards. The market focus of the hotel is tour groups, business people, business conferences, wedding banquet, business banquet, and ancillary services. The Company believes that Shenghuo Plaza is a sound investment that will generate cash flow to support the R&D and the pharmaceutical business of the Company. On November 15, 2010, we formed Shenghuo Hotel Management of which we hold 80% equity interest, while Tianzhiheng Hotel Management Co., Ltd. ("Tianzhiheng") holds 20% equity interest, to operate the hotel together. Tianzhiheng is a professional hotel management company with rich experiences in hotel operation. The Company believes the cooperation with Tianzhiheng can complement the Company's lack of experience in the hotel management business and help the Company to operate the hotel better. As of September 30, 2011, we incurred a cost of approximately RMB 83.2 million (approximately $13.1 million) to build Shenghuo Plaza. While we have not conducted any formal appraisal, we believe that Shenghuo Plaza can be valued at approximately RMB 250 million (approximately $39.3 million) based on the market price of comparable land and buildings. Shenghuo Plaza has begun trial operations since January 2011. Sixteen floors are now open to the public on a trial basis, as we completed the interior decoration and outfitting of 2 floors in the third quarter. The interior decoration and outfitting of the one remaining floor is expected to be completed in November 2011. The entire Shenghuo Plaza will be formally open to the public after we obtain our business license. In order to get the business license for Shenghuo Plaza, we must obtain the following certificates: (1) Certificate of Completion Acceptance and Environmental Protection, (2) Certificate of Inner Building Environment Examination, (3) Certificate of Fire Prevention Inspection, (4) Building Completion Examination Certificate and (5) Property Ownership Certificate. As of now, we have obtained the first three certificates mentioned above. We expect to receive the Building Completion Examination Certificate and Property Ownership Certificate by ~~the~~late ~~end of 2011 or early~~ 2012. Once the Building Completion Examination Certificate and Property Ownership Certificate are issued, we intend to apply for a business license for Zhonghuang Hotel and use Shenghuo Plaza and the two new office buildings as mortgage collateral for a new loan amounting to ~~RMB~~RMB100 ~~100~~ million (approximately $16 million) to finance the Xinglin International Health-Preserving Tourist Resort discussed below and to reduce current short term debt. We expect Shenghuo Plaza to generate approximately RMB 2.4 million (approximately $0.38 million) in annual net income commencing with the fiscal year of 2011. This cash flow will allow us to support our R&D development and otherwise advance our pharmaceutical operations. $0.9 million has been expended on Shenghuo Plaza and Zhonghuang Hotel during the nine months ended September 30, 2011 and since the construction has been substantially completed as of September 30, 2011, no significant further expenditure is expected.

Xinglin International Health-Preserving Tourist Resort

We are also expanding into the businesses of wellness tourism. On April 30, 2009, we formed Shilin Shenghuo Pharmaceutical Co., Ltd. (“Shilin Shenghuo”) as a wholly owned subsidiary for the purpose of purchasing or leasing land to build our own medicinal herb planting base. On September 8, 2010, we signed an agreement with Management Commission of Kunming Shilin Taiwan Farmer Entrepreneur Centre (“Entrepreneur Centre”) to lease a piece of land located near the Stone Forest which has been recognized as a world natural heritage. With an area of 437.9 acres (2,658 Mu), the land will be used to construct a Traditional Chinese Medicine (“TCM”)-based ecological wellness tourism destination that focuses on improving the health and extending the life expectancy of the elderly and introduce TCM culture - Xinglin International Health-Preserving Tourist Resort (the “Resort”). In the Resort, approximately 250.4 acres (1,520 Mu) are devoted to planting suitable-for-cultivating Sanchi and other medicinal herbs for use in the production of our medicinal products in 2011. The rest of the property will be used to build exhibition facilities which emphasize TCM culture, a temple, a TCM museum and apartments for elderly people.

In an effort to reduce costs of raw materials used in our medicinal products, we have grown the medicinal herb Banlangen and Danshen, which are used in the production of our Banlangen Tablets/Grains and Danshen Tablets, on 197.6 acres (1,200 Mu) and 16.5 acres (100 Mu), respectively. We expect to harvest them by the end of this year. We have also constructed greenhouses within the Resort in which the medicinal herb Sanqi are grown on 3.3 acres (20 Mu) beginning during the second quarter of 2011, which we expect to harvest in 2014.

The total operating lease amounted to approximately RMB 30.6 million (equals to approximately $4.8 million) with a lease term of 20 years. Our operating lease commitment is approximately $0.1 million for the rest of 2011, $0.23 million for each of 2012, 2013 and 2014, and approximately $3.7 million for 2015. The terms of the operating lease are set forth in the Lease Agreement on the Project of Construction of Shilin Shenghuo TCM Cultural Garden (the “Lease Agreement”), dated September 8, 2010 between Kunming Shenghuo Pharmaceutical (Group) Co., Ltd. (“Kunming Shenghuo”) and the Entrepreneur Centre and previously filed.

In January of 2011, we submitted the plan of programming and design of the Resort. It was approved by the Urban and Rural Planning Committee of Shilin County, which consists of, among others, the Secretary of Shilin County Party Committee, the head of Shilin County, deputy head of Shilin County, Construction Bureau, Land and Resource Bureau, Finance Bureau, Environment Protection Bureau of Shilin County and the Entrepreneur Centre et al., on March, 22, 2011. We anticipate that the whole Resort project will take 5 years to complete.

In October 2011, we paid RMB 1,797,700 ($282,884) to the Entrepreneur Centre as a further installment payment for the purchase of certain land use right for the Resort. With this payment and the first installment of RMB 5 million ($786,794) paid in 2010, the Company has paid 18% of the total purchase price of RMB 37,800,000 ($5,948,166) for the land use right. The remaining balance will be paid in future installments as determined by the Entrepreneur Centre. The terms of the land use right purchase is set forth in the Supplemental Agreement on the Project of Construction of Shilin Shenghuo TCM Cultural Garden (the “Supplemental Agreement”), dated September 8, 2010 between Kunming Shenghuo and the Entrepreneur Center and previously filed. Both the Lease Agreement and the Supplemental Agreement are subject to the fulfillment by Kunming Shenghuo of certain conditions including timely payment and construction and implementation of the Resort in accordance with the prescribed timeframe and standards.

New drug pipeline

● Wei Dingkang Soft Capsules - a type of traditional Chinese medicine designed to treat peptic ulcer disease by inhibiting bacterial growth, relieving stomach muscle spasms, and reducing inflammation of the intestinal lining. The product is designed to be effective for upset stomach, vomiting, pain and degradation of the stomach lining. The product has been approved by the State Food and Drug Administration (SFDA) for clinical testing. Phase II clinical trials were completed in December 2007, ~~after~~and ~~which~~ the phase II exploratory and enhanced clinical trials ~~have~~were ~~commenced and~~ completed in 2010. In the third quarter of 2011, we ~~have~~ held a seminar with related experts and drafted a preliminary clinical research protocol. We ~~have~~ entered into an agreement with a clinical study company to run phase III clinical trials. We anticipate Phase III clinical trials will begin atin ~~the~~July ~~beginning~~ of 2012 and will be completed by the first half of ~~2013~~2014. Thereafter, we will submit the application for production approval. We expect to obtain production approval by the end of ~~2013 or the beginning of~~ 2014. We expect to incur a cost of approximately ~~RMB 4~~RMB4.2 million (approximately $0.6665 million) to run Phase III clinical trials infrom 2012 ~~and~~to ~~2013~~2014.

● Dencichine for Injection - is designed to treat hemorrhage diseases, such as stop or reduce bleeding during/after operations. The pharmacology and toxicology studies are almost finished and the results demonstrate that Dencichine for Injection shows high effectiveness and high safety both in our internal animal models tests and the test conducted by Nanjing Evaluation and Research Center. SoNow ~~far,~~ we ~~have~~are ~~completed~~conducting ~~the~~additional ~~preparation~~pharmacodynamics ofexperiment ~~the~~to ~~materials~~observe ~~and~~Dencichine wefor ~~plan~~Injection’s tofunction on treating thrombocytopenia in patients undergoing chemotherapy. We will submit our application for clinical trials to State Food and Drug Administration (SFDA) inafter ~~November~~getting ~~2011~~the result of the pharmacodynamics experiment and now it’s difficult to anticipate how long time the pharmacodynamics experiment will take. Assuming required governmental approvals are obtained in a timely fashion, we anticipate that production and marketing of the product will begin in ~~2013~~2014. Dencichine for Injection is a drug requiring extensive testing by the national SFDA, including neurotoxicity testing, which may take a significant amount of time. In addition, clinical testing and audit processes are out of our control, so we must allow for additional time. We ~~expect~~incurred ~~to incur~~ approximately ~~RMB1~~RMB658,~~000,000~~404 (approximately $~~153~~101,~~905~~939) in 2011 and ~~approximately~~expect ~~RMB~~to 2incur approximately RMB4 to 36 million (approximately $0.36 million to $0.59 million) infrom 2012 ~~and~~to ~~2013~~2014 in connection with clinical trials.

4● Sh1002 - is designed to treat one of complications of diabetes mellitus: retinal vascular lesions. We submitted Investigational New Drug Application (IND) for Sh1002 to FDA in October 2010 and have been approved to start IND study after December 24, 2010. The application for clinical trials for Sh1002 in America has also been approved by FDA and the Phase I clinical trial started in the second quarter of 2011 and a group consisted of 18 patient cases accepted the Phase I clinical trial and no one has any adverse drug reactions. With the completion of the Phase I clinical trial in January 2012, we are now preparing for the Phase II clinical trials. We plan to continue conducting the Phase II clinical trials in America and then license our technology to a foreign pharmaceutical company, while retaining the China domestic marketing and the global manufacturing right of Sh1002. We incurred approximately $303,335 for Phase I clinical trials and the preparation for Phase II clinical trials in 2011. Approximately $1.5 million is expected to be expended for Phase II clinical trials.

Sh1002 - is designed to treat one of complications of diabetes mellitus: retinal vascular lesions. We submitted Investigational New Drug Application (IND) for Sh1002 to FDA in October 2010 and have been approved to start IND study after December 24, 2010. The application for clinical trials for Sh1002 in America has also been approved by FDA and the Phase I clinical trial has been started in the second quarter of 2011. So far, a group consisted of 18 patient cases accepted the Phase I clinical trial and no one has any adverse drug reactions. We plan to continue conducting the Phase I and Phase II clinical trials in America and then license our technology to a foreign pharmaceutical company, while retaining the China domestic marketing and the global manufacturing right of Sh1002. We expect to incur approximately $400,000 for Phase I clinical trials in 2011 of which approximately $283,690 has been expended as of September 30, 2011. Approximately $2 million is expected to be expended for Phase II clinical trials in 2012.

On September 22, 2010 the Company received notice from NYSE Amex LLC (the “NYSE Amex” or “Exchange”) Staff indicating that the Company is below certain of the Exchange’s continued listing standards due to the fact that its stockholder’s equity is less than $2,000,000, it has sustained losses from continuing operations, and it has net losses in two out its three most recent fiscal years, as set forth in Section 1003(a) (i) of the NYSE Amex Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange to demonstrate its ability to regain compliance with the continued listing standards by March 22, 2012. On October 29, 2010 and November 29, 2010, the Company presented its plan to and responded to supplemental questions from the Exchange.

On December 6, 2010 the Exchange notified the Company that it accepted the Company’s plan of compliance and granted the Company an extension until March 22, 2012 to regain compliance with the continued listing standards. ~~The~~On ~~Company~~March is21, ~~subject~~2012, tothe ~~periodic review by~~ Exchange ~~Staff~~notified ~~during~~ the ~~extension~~Company ~~period~~its ~~and~~decision isto indefer ~~the~~making ~~process~~a ofdetermination ~~responding~~on towhether ~~requests~~the ~~for~~Company ~~certain~~has ~~supplemental~~regained ~~information.~~compliance Asafter ofthe ~~September~~company ~~30,~~files ~~2011~~the ~~and~~Annual ~~December~~Report ~~31,~~on ~~2010,~~ the ~~stockholder’s~~Form ~~equity~~10-K ~~reached~~on ~~approximately~~March ~~$1.8~~30, ~~million and $2~~2012.~~0 million respectively.~~

On April 17, 2012, the Company received a deficiency letter (the “Deficiency Letter”) from the NYSE Amex stating that the Company has resolved the continued listing deficiency with respect to Section 1003(a)(i) of the NYSE Amex’s Company Guide (the “Company Guide”) referenced in NYSE Amex’s letter dated September 22, 2010. However, as a result of the Company sustaining losses which are so substantial in relation to its overall operations or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of NYSE Amex, as to whether such issuer will be able to continue operations and/or meet its obligations as they mature, the Company is no longer in compliance with Section 1003(a)(iv) of the Company Guide. The Deficiency Letter states that, in order to maintain its NYSE Amex listing, the Company must submit a plan of compliance by May 1, 2012, advising NYSE Amex how it intends to regain compliance with Section 1003(a)(iv) of the Company Guide by July 2, 2012.

In view of, among other things, the belief of the Board of Directors that under the Company’s current circumstances, it is not reasonably practicable for the Company to establish and implement a plan of compliance that would satisfy NYSE Amex’s continued listing requirements, the substantial financial burden on the Company as a result of its status as a U.S. public company, the Company’s inability to raise capital in the United States and the minimal benefits derived from being a U.S. public company, the Board of Directors of the Company determined on April 19, 2012 that it is in the best interest of the Company to voluntarily delist the Company’s common stock from NYSE Amex and deregister its shares with U.S. Securities & Exchange Commission (the “SEC”). In connection therewith, the Company notified NYSE Amex on April 20, 2012 of the Company’s intention to file a Form 25 - Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act of 1934 (the “Form 25”), with the SEC on April 30, 2012. The Form 25 became effective on May 10, 2012.

As s result of discussions between the Company's legal counsel and the SEC, the SEC has taken the position that the exemption that the Company had sought to rely upon under Section 15(d) of the Exchange Act to suspend its reporting obligations is unavailable to it at this time. As such, the Company at this time will not file a Form 15, and it will continue to be a reporting company under Section 15(d) of the Exchange Act until such time as it is allowed to suspend its reporting obligations, which the Company expects to be no later than the first quarter of 2013.

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. However, we intend to devote additional resources to research and development and to continue to evaluate and develop additional high-tech product candidates to expand our pipeline where we perceive an unmet need and commercial potential and 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 our main product “Xuesaitong” Soft ~~Capsule~~Capsules is sold and “Shenhuo” - the brand under which most of our products are sold. "Lixuwang", the trademark of Xuesaitong Soft ~~Capsule~~Capsules, was awarded the Chinese Well-Known Trademark Honor by the State Administration for Industry and Commerce of China in 2010. This prestigious award gives China Shenghuo green path in anti-counterfeit campaign and intellectual property protection. 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.

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” Soft Capsules is sold to hospitals through regional wholesale companies located in the various cities of China and because China has thousands of wholesale companies, we employ a large number of sales representatives to expand into new markets and gain new customers.

As of March 31, 2012, our medicine marketing team maintains sales offices in approximately 21 provinces throughout China. The sales network covers approximately 215 cities and is staffed by approximately 708 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.

~~Since~~We ~~2005,~~believe ~~our~~it ~~primary~~is ~~product, Xuesaitong Soft Capsules has been listed~~ in ~~Part~~our-long-term Bbest ofinterest ~~the~~to ~~State~~grow ~~Insurance Catalogue. Xuesaitong Soft Capsules represented approximately 86% of~~ our ~~sales~~operations ~~for~~through the ~~nine months ended September 30, 2011. In addition to~~ over-the-counter ~~State Insurance Catalogue, each of the 31 Chinese provinces establishes its own provincial insurance catalogue~~ (~~each, a~~ “~~PIC~~OTC”). Amarket, ~~drug~~which ~~listed on the PIC~~ will ~~result~~produce inhigher ~~the~~profit ~~patient purchasing such drug to receive the same 90% reimbursement as if such drug were listed on Part B of the State Insurance Catalogue~~margins. InBesides ~~November~~Yunnan ~~2009,~~province ~~the~~where ~~Ministry~~Xuesaitong ofhas ~~Labor~~its ~~and~~presence ~~Social~~many ~~Security~~years ~~in China announced the updated State Insurance Catalogue~~ago, ~~which~~we ~~took~~started ~~effect~~to onexpand ~~July 1, 2010.~~ Xuesaitong’s ~~Soft~~presence ~~Capsules,~~into ~~our~~the ~~primary~~OTC ~~product,~~market ~~was not included~~ in ~~Part~~selected Bareas ofoutside ~~the~~Yunnan ~~State~~province ~~Insurance~~around ~~Catalogue.~~China ~~Banlangen~~since ~~Tablets, Dansheng Tablets and Sulfadiazine Silver Ointment remain listed in the updated State Insurance Catalogue~~2009. We Indeveloped ~~order~~several tomain ~~mitigate~~OTC ~~the~~markets ~~negative impact the removal from the State Insurance Catalogue may have on the Company, we have applied for provincial listing~~ in 312011 ~~provinces. Xuesaitong Soft Capsules has been listed~~ in ~~the 2010 Provincial Insurance Catalogs of the following sixteen~~ provinces: ~~Tianjin,~~such as Jiangsu, ~~Hebei, Henan, Shanghai, Heilongjiang,~~ Fujian, ~~Anhui,~~ Guangdong, ~~Yunnan~~Hunan, ~~Beijing~~Liaoning, ~~Guangxi~~Shandong, ~~Inner Mongolia~~Heilongjiang, ~~Shaanxi~~Chongqing, ~~Gansu~~Guangxi and ~~Hunan~~Zhejiang. The ~~total~~performance ~~percentage~~ of ~~sales~~OTC ~~derived~~market ~~from~~in ~~Xuesaitong~~Yunnan ~~Soft~~province ~~Capsules~~is inbest among these provinces, ~~account~~with ~~for~~a ~~72%~~gross insales ~~2010~~of ~~and 75% for the nine months ended September 30, 2011.~~ Xuesaitong Soft Capsules ~~has~~in ~~been delisted from~~ the ~~2010~~OTC ~~Provincial~~market ~~Insurance~~amounting ~~Catalogs~~to ofapproximately ~~the~~$0.3 ~~following~~million 15 provinces: Zhejiang, Jiangxi, Jilin, Liaoning, Shangdong, Shanxi, Chongqing, Hubei, Sichuan, Xinjiang, Guizhou, Qinghai, Ningxia, Tibet and Hainan provinces and city where it generated a sales of 28% in 2010 and 25% for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012. ~~Xuesaitong~~As ~~Soft Capsules accounted for approximately 86%~~ of ~~the~~March ~~Company's~~31, ~~revenues~~2012, in ~~the~~addition ~~nine months period ended September 30, 2011. We expect~~ to ~~improve~~the ~~our~~2000 ~~sales~~chain ~~effort~~drugstores in ~~those~~Yunnan ~~sixteen provinces in which Xuesaitong has been listed on their PICs. The Company is in the process of developing a pipeline of proprietary formulations of other drug compounds. However~~province, ~~such~~we ~~formulations~~ have ~~not~~established ~~been~~sales ~~finalized~~relations orwith ~~submitted~~12000 tochain ~~State~~drugstores ~~Food~~in ~~and~~most ~~Drug~~provinces ~~Administration~~in ~~(“SFDA”) for review and approval~~China. ~~This~~The ~~process is time-consuming and capital intensive and there is no assurance that SFDA will accept the data presented by the~~ Company ~~without~~reimburses ~~requiring additional data and that, ultimately,~~ the ~~application~~sales ~~for~~representatives ~~drug~~their ~~approval~~accrued ~~will~~selling beexpenses ~~successful.~~when ~~Therefore,~~related inaccounts ~~the~~receivable ~~near~~are ~~term the Company is dependent on the sales of Xuesaitong Soft Capsules~~collected.

Further, the Department of Heath in China, which makes an independent assessment of the drugs available, publishes a “State Essential Drug List” as to what drugs are basic and prevalent and can satisfy the ordinary need for drugs to all the people. Patients purchasing medicines included in the “State Essential Drug List” are entitled to reimbursement of 90% of the costs of such medicines from the social medical fund in accordance with relevant regulations in China. In addition to the State Essential Drug List, each of the 31 Chinese provinces is entitled to add about 100 drugs to its own Provincial Essential Drug List. A drug listed on the provincial list will result in the patient purchasing such drug to receive the same 90% reimbursement. The Company’s Xuesaitong Soft Capsule was listed on the “State Essential Drug List” in 2000 and 2004 which was updated every four years. Xuesaitong Soft Capsule was not included in the State Essential Drug List updated in 2009 but has been listed in the Provincial Essential Drug List of the following four provinces and cities - Yunnan, Henan, Hunan and Tianjin.

The wholesale and retail prices of medicines that are included in the national and provincial insurance catalogs are subject to price controls administered by the Price Control Office under the National Development and Reform Commission, or the NDRC, or their provincial price control authorities. Since Xuesaitong Soft Capsules is no longer listed in the 2010 State Insurance Catalog and the 2010 Provincial Insurance Catalogs of Zhejiang, Jiangxi, Jilin, Liaoning, Shangdong, Shanxi, Chongqing, Hubei, Sichuan, Xinjiang, Guizhou, Qinghai, Ningxia, Tibet and Hainan provinces and cities, it is no longer subject to the state price control and provincial price controls in those fifteen provinces. However, since Xuesaitong Soft Capsules is still listed in the insurance catalogs of the rest of the sixteen provinces, its price is still subject to price control administered by the price control authorities in those provinces. Xuesaitong Soft Capsules is 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 largest customers are Tianjin Zhongxing Medicine Co., Ltd., Yunnan Pharmaceutical Co., Ltd., and Guangzhou Medicine, Co., Ltd., all of which accounted for 15%, 12% and 6% of our sales for the nine months ended September 30, 2011 respectively.

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

As of September 30, 2011, our medicine marketing team maintains sales offices in approximately 21 provinces throughout China. The sales network covers approximately 215 cities and is staffed by approximately 693 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 Xuesaitong Soft Capsules in the OTC market in Yunnan province amounted to RMB 9.3 million, resulting in a gross profit realized by the Company of approximately RMB 6.2 million during the nine months ended September 30, 2011. Based on these positive results, we will continue to expand our presence in the OTC market during the rest of 2011 in provinces such as Jiangsu, Fujian, Guangdong, Hunan, Liaoning, Shanghai, Shandong, Heilongjiang, Gansu, Beijing, Hebei and Hubei. Among them, Guangdong, Hunan and Liaoning are making greater contributions to the OTC market. As of September 30, 2011, in addition to the 2960 chain drugstores in Yunnan province, we have established sales relations with 4900 chain drugstores in most provinces in China. The Company reimburses the sales representatives their accrued selling expenses when related accounts receivable are collected.

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

~~Our~~We ~~business~~also ishope ~~capital~~to ~~intensive,~~stabilize ~~and~~the ~~these~~sales ~~research~~channel into hospitals and ~~development,~~widen ~~marketing,~~the reach of sales ~~network~~in ~~expansion~~urban and ~~cosmetic~~rural ~~product~~communities ~~expansion~~at ~~initiatives~~the same time. Large increases in medicine sales at an average lower price will ~~require~~ensure usthe togrowth ~~expend~~of ~~significant~~general ~~cash~~medicinal ~~resources~~sales over the next few years. Also, ~~which~~we ~~could~~are ~~adversely~~focusing ~~affect~~our efforts on developing better channels for selling our ~~profitability~~products to expand our revenue and ~~liquidity.~~to Wecounter dofierce ~~face~~market ~~certain~~competition. ~~challenges~~To ~~and~~that ~~risks~~extent, ~~including~~we ~~our~~began ~~relatively~~to ~~high~~build ~~debt~~relationships ~~ratio,~~with ~~which~~new ishigh-quality ~~one~~sales ofagents and terminate our ~~main~~relationships ~~risks.~~with Wesales ~~have~~agent ~~encountered~~with apoor ~~shortage~~historical ofperformances ~~working~~since ~~capital~~2009. ~~and~~We ~~are~~believe ~~exploring~~that ~~possible~~this ~~ways~~shift towill ~~address~~provide ~~our~~a ~~short~~sound ~~and~~foundation ~~long~~for ~~term~~our ~~cash~~operations ~~needs~~going forward.

WeStrategic ~~believe~~Adjustment ~~that among the most important economic or industry-wide factors relevant to our growth~~ in the short term is 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 have applied for the designation of Xuesaitong Soft Capsules as a medicine with “good quality worthy of high price,” which we received in February 2007. Currently, the Chinese government supports the medical system in urban and rural communities.Cosmetic

~~According~~Since tothe ~~data~~marketing ~~from~~of 12 Ways cosmetics, the ~~China~~Company ~~State~~tried ~~Statistical~~to ~~Bureau,~~expand its sales and have expanded the ~~total~~geographic ~~retail~~region ~~sales~~in ofwhich ~~Traditional~~our ~~Chinese~~12 ~~Medicine~~Ways ~~("TCM")~~products ~~and~~were ~~western~~sold ~~medicines~~from inour ~~China~~native ~~grew~~Yunnan ~~23.5%~~province onto a ~~year-over-year~~number ~~basis~~of incities ~~2010~~and provinces outside our local region. ~~This~~But ~~growth~~due ~~was~~to ~~driven~~the byinsufficient afunding ~~number~~for marketing development, the sales of ~~favorable~~12 ~~factors~~Ways ~~including~~cosmetics grew slowly and the ~~reform~~subsidiary of ~~the~~cosmetics ~~medical~~has ~~system~~suffered ina ~~China,~~continuing ~~improving~~loss. ~~standards~~The loss adversely effected the holistic operation of ~~living~~the ~~from~~Company. anCurrently, ~~increase~~the inCompany ~~disposable~~has ~~income~~a tight budget, anin ~~aging~~order ~~population~~to focus on our principal business – pharmaceutical with our limited capital, the ~~improving~~Company ~~access~~has ~~and~~decided ~~higher~~to ~~participation~~make adjustment in Cosmetic in the ~~State~~fourth ~~Basic~~quarter ~~Medical~~of ~~Insurance~~2011. ~~System,~~We ~~and~~will not fund the ~~increase~~market indevelopment ~~government~~for ~~spending~~12 onWays ~~public~~cosmetics ~~health~~until ~~care~~we have enough capital.

In January 21, 2009, the Chinese government announced a healthcare reform plan proposing the government spend upward of RMB850 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) to expand medical insurance coverage and increase participation rate, 2) set up a national basic drug system, 3) establishment of an extensive public health system, 4) increasing the efficiency and improve the quality of basic medical services, especially in the rural areas, and 5) reform state-owned hospitals.

TCM, including prescription and over-the-counter pharmaceuticals, have been widely used in China for many years and are 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 catalog. 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 fierce market competition. To that extent, we began to build relationships with new high-quality sales agents and terminate our relationships with sales agent with poor historical performances since 2009. We believe that this shift will provide a sound foundation for our operations going forward.

Our 12 WaysTM Chinese Traditional Medicine Beauty Salon Series (“12 Ways”) cosmetic products are sold in a number of cities and provinces outside our local region. We have opened a number of retail specialty counters to offer our cosmetic products at pharmacies throughout Eastern China, eventually expanding our retail presence across China. As of September 30, 2011, we have opened approximately 1100 retail specialty counters in more than 53 cities throughout China, including main cities such as Beijing, Shanghai, Nanjing, Hangzhou, Suzhou, Jinan, Weifang Shenzhen, Zhengzhou, Jiaozuo, Golmud, Zibo, Luzhou, Sanmenxia, Daqing, Lanzhou, Chongqing, Changchun, Jiujiang, Kunming and so on. In addition, we built a 12 Ways Chinese Herbal Beauty Demonstration Center by using two floors of Shenghuo Plaza, and the center has started trial operation since the middle of October. In the center, we use 12 Ways cosmetics to demonstrate how to keep beautiful and healthy, provide a variety of services, including acupuncture, body massage, foot massage and other services and train our professional beauticians. Management hopes that the opening of this center 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 get 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 been fluctuating, which will likely increase our cost of product sold. In addition, our expected increased expenses for research and development, marketing and sales may have an adverse effect on future profit levels and available cash resources.

Critical Accounting Policies and Estimates

Application of Critical Accounting Policies

We consider the policies discussed below as critical to understanding our Consolidated Financial Statements, as their application places the most significant demands on management’s judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. In instances where different estimates could have reasonably been used, we disclosed the impact of these different estimates on our operations. In certain instances, like revenue recognition, the accounting rules are prescriptive; therefore, it would not have been possible to reasonably use different estimates. Changes in assumptions and estimates are reflected in the period in which they occur. The impact of such changes could be material to our results of operations and financial condition in any quarterly or annual period.

Specific risks associated with these critical accounting policies are discussed throughout the MD&A, where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to Note 2 – Summary of significant accounting policies in the Consolidated Financial Statements.

Allowance for Doubtful Accounts and Credit Losses

Accounts receivable are reviewed periodically as to whether they are past due based on contractual terms and their carrying values have become impaired. An allowance for doubtful accounts is recorded in the period in which loss is determined to be probable based on an assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing economic conditions. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. We have considered all available information in our assessments of the adequacy of the provision for doubtful accounts and we do not expect there would be significant changes on conditions that would result in material effect on the allowance estimation. We will continue to assess our receivable portfolio in light of the current economic environment and its impact on our estimation of the adequacy of the allowance for doubtful accounts.

Income Taxes and Tax Valuation Allowances

We follow Statement of Accounting Standard Codification (“ASC”) Topic 740 “Accounting for Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies in making this assessment. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a significant portion of our deferred tax assets resulting in a substantial adverse impact on our operating results.

Results of Operations

~~(a)~~ Three Months Ended ~~September~~March 3031, ~~2011~~2012 and ~~2010~~2011

The following table sets forth our ~~results~~statements of operations for the three months ended ~~September~~March 3031, ~~2011~~2012 and ~~2010~~2011 in U.S. dollars (unaudited):

	Three months ended September 30,
	Three months ended March 31,
	2011			2010			Change ($)			Variance (%)
	2012			2011			Change ($)			Variance (%)
	Unaudited			Unaudited
Sales	$	1011,~~910~~372,~~079~~453		$	89,~~551~~441,~~182~~626			21,~~358~~930,~~897~~827			2820.5	%
Cost of goods sold		3,936,610			2,996,674			939,936			31	%
Cost of Sales		4,669,455			3,805,692			863,763			22.7	%
Gross profit		6,973,469			5,554,508			1,418,961			26	%
Gross Margin		6,702,998			5,635,934			1,067,064			18.9	%
Operating expenses:
Operating Expenses:
Selling expenses		5,~~233~~168,~~061~~179			34,~~849~~076,~~347~~430			1,~~383~~091,~~714~~749			3626.8	%
General and administrative expenses		1,~~366~~378,~~711~~138			~~894~~1,~~301~~030,215			~~472~~347,~~410~~923			5333.8	%
Research and development expenses		~~321~~231,~~297~~947			~~160~~121,~~795~~725			~~160~~110,~~502~~222			~~100~~90.6	%
		6,921,069			4,904,443			2,016,626			41	%
(Loss) Income from Operations		(75,266	)		407,564			(482,830	)		-118.5	%
Income from operations		52,400			650,065			(597,665	)		(92	)%
Other Expenses		(492,428	)		(306,883	)		(185,545	)		60.5	%
Other (expenses) income		(592,448	)		298,543			(890,991	)		(298	)%
(Loss) Income Before Income Tax Expenses		(567,694	)		100,681			(668,375	)		-663.9	%
(Loss) income before income tax expenses		(540,048	)		948,608			(1,488,656	)		(157	)%
Income taxes benefit (expense)		121,073			(14,980	)		136,053			-908.2	%
Income taxes benefit (expense)		37,949			(118,370	)		156,319			(132	)%
Net (Loss) Income		(446,621	)		85,701			(532,322	)		-621.1	%
Net (loss) income		(502,099	)		830,238			(1,332,337	)		(160	)%
Net loss attributable to non-controlling interests		(2,239	)		(13,672	)		11,433			-83.6	%
Net income attributable to non-controlling interests		4,355			42,581			(38,226	)		(90	)%
Net (Loss ) Income Attributable to Stockholders	$	(444,382	)		99,373			(543,755	)		-547.2	%
Net (loss) income attributable to stockholders	$	(506,454	)	$	787,657			(1,294,111	)		(164	)%
Basic and diluted (loss) earnings per share	$	(0.02	)		0.01			(0.03	)		-300.00	%
Basic and diluted (loss) earnings per share	$	(0.03	)	$	0.04			(0.07	)		(175	)%
Weighted-average number of shares outstanding-basic and diluted		19,679,400			19,679,400			-			-
Weighted average number of shares outstanding - basic and diluted		19,679,400			19,679,400			-			0	%

Sales: Sales for the three months ended March 31, 2012 was approximately $11.4 million, an increase of approximately $1.9 million, or 20.5%, from approximately $9.4 million for the three months ended March 31, 2011. The increase in sales was primarily due to the Company’s main product Xuesaitong’s sales increasing as the Company’s continuous efforts made. In addition, Hotel Segment contributed approximately $1 million in 2012 period, as compared with $0.4 million in the corresponding period of 2011.

~~Sales: Sales for the three months ended September 30, 2011 was approximately $10.9 million, an increase of approximately $2.3 million, or 28%, from approximately $~~8.6 million for the three months ended September 30, 2010. The increase in sales was primarily due to the Company’s main product Xuesaitong’s sales increasing in Tianjin City and Yunnan Province as Xuesaitong was listed on the PIC list of Tianjin City since the second half year in 2010 and the Company strengthened sales promotion in the provinces and cities where Xuesaitong was listed on their PIC lists, especially Yunnan Province and Tianjin City. The OTC market also contributed part of increase of revenue as the Company also strengthened the OTC market development in 2011.

Cost of ~~goods sold~~sales: Our cost of sales for the three months ended ~~September~~March 3031, ~~2011~~2012 was approximately $34.97 million, an increase of approximately $0.9 million or 3122.7% from approximately $3.08 million for the three months ended ~~September~~March 3031, ~~2010~~2011. The increase in cost of sales was in line with the increase in sales. In addition, the increase in cost of sales was also due to the increase of the sales volume and the purchase price of Sanqi which is the main raw material of our main product Xuesaitong. Although we have started to grow Sanqi within the Resort, we will not be able to harvest until 2014 because it has a three -year growth cycle. ~~In addition, the Zhonghuang Hotel began trial operation since January 2011 which has contributed approximately $0.5 million to the increase of cost of sales.~~

Gross ~~profit~~margin: Our gross profit for the three months ended ~~September~~March 3031, ~~2011~~2012 was approximately $76.07 million as compared with approximately $5.6 million for the three months ended ~~September~~March 3031, ~~2010~~2011, an increase of approximately $1.41 million, or 2618.9%. Gross profit as a percentage of revenues was approximately 6458.9% for the three months ended ~~September~~March 3031, ~~2011~~2012, a decrease of 10.8% from 6559.7% for the three months ended ~~September~~March 3031, ~~2010~~2011. The slight decrease in gross profit percentage was primarily due to the increase of cost of ~~sales~~raw materials as set forth above.

Selling expense: Selling expenses were approximately $5.2 million for the three months ended ~~September~~March 3031, ~~2011~~2012, an increase of approximately $1.41 million, or 3626.8%, from approximately $34.81 million for the three months ended ~~September~~March 3031, ~~2010~~2011. The primary reason for the increase in selling expenses was due to increase of sales commission to sales representative in line with the sales increment.

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 $1.4 million for the three months ended ~~September~~March 3031, ~~2011~~2012, an increase of approximately $0.54 million, or 5333.8%, from approximately $~~0.9~~1 million for the three months ended ~~September~~March 3031, ~~2010~~2011. The increase was primarily due to the increase of ~~the~~staff ~~management’s~~cost ~~traveling~~ and ~~conference~~legal ~~expenses~~and ~~for~~financial ~~expanding~~consulting ~~our~~service ~~sales channel~~expenses. ~~In addition, Zhonghuang Hotel began trial operation since January 2011 which has contributed $94,100 to the increase of general and administrative expense.~~

10Research and development expense: Research and development expense for the three months ended March 31, 2012 was $ 231,947, as compared to $121,725 for the three months ended March 31, 2011, an increase of $110,222. The increase was primarily due to the expenditures in 2012 period for outside experts for the Phase I clinical test of Sh1002 which amounted to $98,448.

~~Research~~Other ~~and development expense~~expenses: ~~Research~~Other ~~and~~expenses ~~development~~were ~~expense~~$492,428 for the three months ended ~~September~~March 3031, ~~2011~~2012, ~~was~~which ~~$321~~consisted of interest expense and non-operating expense,~~297,~~ asoffset ~~compared~~by tosubsidy ~~$160~~income,~~795~~ ~~for~~interest ~~the~~income ~~three~~and ~~months~~non-operating ~~ended~~income, ~~September~~an 30increase of $185,545, ~~2010~~or 60.5%, from an ~~increase~~expense of $~~160~~306,~~502~~883 for the three months ended March 31, 2011. The increase was ~~primarily~~mainly due to ~~the~~an ~~expenditures~~increase in ~~the~~interest ~~third~~expenses ~~quarter~~occurring ofand ~~2011~~less ~~for~~subsidy ~~outside~~income ~~experts~~received ~~for~~as compared the ~~Phase~~same Iperiod ~~clinical~~in ~~test of Sh1002 which amounted to $168,680~~2011.

~~Other~~Income ~~expenses~~tax benefit (expense): ~~Other~~Income ~~expenses~~tax ~~were~~benefit was $~~592~~121,~~448~~073 for the three months ended ~~September~~March 3031, ~~2011,~~2012 ~~which~~as ~~consisted~~compared ofto ~~interest~~income ~~expense~~tax ~~and non-operating~~ expense, ~~offset by subsidy income, interest income and non-operating income, a decrease~~ of $~~890~~14,~~991,~~980 ~~or 298%, from an income of $298,543~~ for the three months ended ~~September~~March 3031, ~~2010~~2011. The ~~decrease~~tax benefit was mainly ~~due~~attributable to anthe ~~increase~~medicine insegment ~~interest~~of ~~expenses~~the ~~occurring~~Company and ~~less~~the ~~subsidy~~deferred ~~income~~tax ~~received~~assets asbenefit ~~compared~~from ~~the~~accrued ~~same period in 2010~~expenses.

~~Income~~Net ~~tax~~income ~~benefit~~ (~~expense~~loss): ~~Income~~Net ~~tax~~loss ~~benefit~~ was $37446,~~949~~621 for the three months ended ~~September~~March 3031, ~~2011~~2012 as compared to ~~income~~the ~~tax~~net ~~expense~~income of $~~118~~85,~~370~~701 for the three months ended ~~September~~March 3031, ~~2010.~~2011, ~~The~~as ~~tax~~a ~~benefit~~result ~~was mainly attributable to the medicine segment~~ of the ~~Company~~factors ~~and~~described ~~the deferred tax assets benefit from accrued expenses and provisions for inventory~~above.

Net (loss) income attributable to shareholders: Net loss was $506,454 for the three months ended September 30, 2011 as compared to the net income of $787,657 for the three months ended September 30, 2010. The net loss was primarily due to the increase of the cost of raw material, expenses related to the trial operation of Shenghuo Plaza, research and development expense on the Phase I clinical test of Sh1002 in America, operating expenses, interest expense, and less government subsidy income ($1,011 as compared to $492,451 for the prior year period).9

(b) Nine Months Ended September 30, 2011 and 2010

The following table sets forth our results of operations for the nine months ended September 30, 2011 and 2010.

	Nine months ended September 30,
	2011			2010			Change ($)			Variance (%)
	Unaudited			Unaudited
Sales	$	31,248,165		$	23,340,191			7,907,974			34	%
Cost of goods sold		11,749,518			7,561,650			4,187,868			55	%
Gross profit		19,498,647			15,778,541			3,720,106			24	%
Operating expenses:
Selling expenses		14,255,496			11,869,164			2,386,332			20	%
General and administrative expenses		3,638,386			2,493,749			1,144,637			46	%
Research and development expenses		587,871			417,184			170,687			41	%
		18,481,753			14,780,097			3,701,656			25	%
Income from operations		1,016,894			998,444			18,450			2	%
Other expenses		(1,338,688	)		(64,310	)		(1,274,378	)		1982	%
(Loss) income before income tax expenses		(321,794	)		934,134			(1,255,928	)		(134	)%
Income taxes expense		10,786			(141,001	)		151,787			(108	)%
Net (loss) income		(311,008	)		793,133			(1,104,141	)		(139	)%
Net (loss) income attributable to non-controlling interests		(8,252	)		34,313			(42,565	)		(124	)%
Net (loss) income attributable to stockholders	$	(302,756	)	$	758,820			(1,061,576	)		(140	)%
Basic and diluted (loss) earnings per share	$	(0.02	)	$	0.04			(0.06	)		(150	)%
Weighted average number of shares outstanding - basic and diluted		19,679,400			19,679,400			-			0	%

Sales: Sales for the nine months ended September 30, 2011 was approximately $31.2 million, an increase of approximately $7.9 million, or 34 %, from approximately $23.3 million for the nine months ended September 30, 2010. The increase in sales was primarily due to the Company’s main product Xuesaitong’s sales increasing in Tianjin City, Jiangsu, Guangdong and Yunnan Province as Xuesaitong was listed on the PIC list of Tianjin City since the second half year in 2010 and the Company strengthened sales promotion in the provinces and cities where Xuesaitong was listed on their PIC lists, especially Yunnan Province and Tianjin City. The OTC market also contributed part of increase of revenue as the Company also strengthened the OTC market development in 2011.

Cost of goods sold: Our cost of sales for the nine months ended September 30, 2011 was approximately $11.7 million, an increase of approximately $4.2 million, or 55%, from approximately $7.5 million for the nine months ended September 30, 2010. The increase in cost of sales was due to the increase of the sales volume and the purchase price of Sanqi which is the main raw material of our main product Xuesaitong. Although we have started to grow Sanqi within the Resort, we will not be able to harvest until 2014 because it has a three year growth cycle. In addition, the Zhonghuang Hotel began trial operation since January 2011 which has contributed $1.5 million to the increase of cost of sales.

Gross profit: Our gross profit for the nine months ended September 30, 2011 was approximately $19.5 million as compared with approximately $15.8 million for the nine months ended September 30, 2010, an increase of approximately $3.7 million, or 24%. Gross profit as a percentage of sales was approximately 62% for the nine months ended September 30, 2011, a decrease of 6% from 68% for the nine months ended September 30, 2010. The decrease in gross profit percentage was primarily due to the increase of cost of sales set forth above.

Selling expense: Selling expenses were approximately $14.3 million for the nine months ended September 30, 2011, an increase of approximately $2.4 million, or 20%, from approximately $11.9 million for the nine months ended September 30, 2010. The primary reason for the increase in selling expenses was due to increase of sales commission to sales representative in line with the sales increment.

General and administrative expense: General and administrative expenses were approximately $3.6 million for the nine months ended September 30, 2011, an increase of approximately $1.1million, or 46%, from approximately $2.5 million for the nine months ended September 30, 2010. The increase was primarily due to the increase of the management’s traveling expenses and conference expenses for expanding our sales channel. In addition, Zhonghuang Hotel began trial operation since January 2011 which has contributed approximately $0.25 million to the increase of general and administrative expense.

Research and development expense: Research and development expense for the nine months ended September 30, 2011 was $587,871, as compared to $417,184 for the period ended September 30, 2010, an increase of $170,687 or 41%. The increase was primarily due to the expenditures in the third quarter of 2011 for outside experts for the Phase I clinical test of Sh1002 in America which amounted to $168,680.

Other expenses: Other expenses were approximately $1.3 million for the nine months ended September 30, 2011, which consisted of interest expense and non-operating expense, offset by subsidy income, interest income and non-operating income, an increase of approximately $1.3 million, or 1982%, from $64,310 for the nine months ended September 30, 2010. The increase was mainly due to less subsidy income from provincial government as compared the same period in 2010 and more interest expenses in the nine months period of 2011.

Income tax benefit (expense): Income tax benefit was $10,786 for the nine months ended September 30, 2011 as compared to income tax expense $141,001 for the nine months ended September 30, 2010. The tax benefit was mainly from medicine segment of the Company and the deferred tax assets benefit from accrued expenses and provisions for inventory.

Net income (loss) attributable to shareholders: Net loss was $302,756 for the nine months ended September 30, 2011 as compared to the net income of $758,820 for the nine months ended September 30, 2010. The net loss was primarily due to the increase of the cost of raw material, expenses related to the trial operation of Shenghuo Plaza, research and development expense on the Phase I clinical test of Sh1002 in America, operating expenses, interest expense, and less government subsidy income ($155,753 as compared to $654,013 for the prior year period).

Liquidity and Capital Resources

General - –As of ~~September~~March 3031, ~~2011~~2012, we had cash and cash equivalents of approximately $46.37 million. In the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012, the Company suffered a net loss of $~~302~~446,~~756~~621 due to the increase of raw materials’ price from ~~2010~~2012, the increase of selling expense, and general and administrative expense, research and development expense, interest expense and less subsidy income. Our consolidated current liabilities exceeded consolidated current assets by approximately $~~23.2~~24 million as of ~~September~~March 3031, ~~2011~~2012, and approximately $1523.32 million as of December 31, ~~2010~~2011. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by seeking equity and/or debt financing by using Shenghuo Plaza and the two new office buildings as mortgage collateral after the Company has obtained the Property Ownership Certificate by ~~the~~late ~~end of 2011 or early~~ 2012. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. In the event we are not able to obtain funding, we will not be able to implement or may be required to delay all or part of our business plan, and our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be materially adversely affected.

For the ~~nine~~borrowings ~~months~~which ~~ended~~matures ~~September~~in ~~30, 2011, we had net cash provided by operating activities of approximately $2.3 million, an increase of approximately $0.1 million from approximately $2.2 million for~~ the ~~nine~~next ~~months~~twelve ~~ended September 30~~months, ~~2010. We believe that~~ we ~~will~~expect ~~be able~~ to ~~obtain~~settle ~~more~~them ~~cash~~through ~~flows~~a ~~from~~combination ~~operating activities by strengthen control on working capital management.~~of:

●	cash flow from operating activities;

●	new borrowings and credit facilities to be obtained; and

●	revolving of existing borrowings.

For the three months ended March 31, 2012, we had net cash provided by operating activities of approximately $0.9 million, a decrease of approximately $1.7 million from approximately $2.6 million for the three months ended March 31, 2011. We believe that we will be able to obtain more cash flows from operating activities by strengthen control on working capital management.

Cash flow

		Nine months ended September 30,
	Three months ended March 31,
		2011			2010
	2012				2011
	Unaudited	~~Unaudited~~			Unaudited
	In thousands	~~In thousands~~
Net cash provided by operating activities		$	2896,~~275,642~~967		$	2,~~239~~609,~~891~~836
Net cash used in investing activities			(4664,~~425,326~~383	)		(52,~~299~~290,~~580~~810	)
Net cash provided by financing activities			4,324,092			2,735,797
Net cash provided by (used in) financing activities			5,184,230			(593,741	)
Cash and cash equivalents at end of period		$	3,936,948		$	1,703,423
Cash and Cash Equivalents at End of Period		$	6,676,938		$	1,409,304

Operating Activities: Net cash provided by operating activities for the nine months ended September 30, 2011 was approximately $2.3 million, as compared to net cash provided by operating activities of approximately $2.2 million for the nine months ended September 30, 2010. The operating activities remain stable between these two periods.10

~~Investing~~Operating Activities: Net cash ~~used~~provided inby ~~investing~~operating activities ~~was approximately $4.4 million~~ for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 was approximately $0.9 million, as compared to net cash ~~used~~provided inby ~~the~~operating ~~amount~~activities of approximately $52.36 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011. The decrease in the net cash ~~used~~provided inby ~~investing~~operating activities was ~~primarily~~mainly due to ~~decreases~~the loss we suffered in ~~capital~~2012 ~~expenditures,~~period ~~specifically,~~and the ~~construction~~increase ofin ~~Shenghuo~~the ~~Plaza~~accounts receivable balance as at March 31, 2012.

13Investing Activities: Net cash used in investing activities was approximately $0.7 million for the three months ended March 31, 2012, as compared to net cash used in the amount of approximately $2.3 million for the three months ended March 31, 2011. The decrease in net cash used in investing activities was primarily due to decreases in capital expenditures, specifically, the construction of Shenghuo Plaza.

Financing Activities: Net cash provided by financing activities was approximately $45.32 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012, as compared to net cash ~~provided~~used in the amount of approximately $20.76 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011. The increase in cash ~~used~~provided was primarily due to the increase of loans borrowed from banks and Reserve Center.

Working Capital Deficiency

Our consolidated current liabilities exceeded our consolidated current assets by approximately $2324.20 million as of ~~September~~March 3031, ~~2011~~2012 and approximately $1523.32 million as of December 31, ~~2010~~2011.

As of ~~September~~March 3031, ~~2011~~2012, our net accounts and notes receivable (less allowance for doubtful accounts of approximately $2.35 million) were approximately $1519.97 million, an increase of approximately $41.46 million, from approximately $1118.51 million (net of allowance for doubtful accounts of approximately $2.36 million) as of December 31, ~~2010~~2011 which is in line with the increase in sales.

~~Before~~As ~~2009, we made significant cash advances to our sales representatives to assist and encourage them to expand the marketing and sales~~ of ~~our~~March 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 travel31, ~~meals and other incidental expenses that arose in connection with their sales activities. Prior to September 2006~~2012, weour ~~did~~accounts ~~not~~payable ~~ask~~were ~~sales~~approximately ~~representatives~~$9 ~~to pay off advances immediately because the Chinese economy has grown quickly and because competition in the pharmaceutical industry is intense. Instead~~million, wea ~~encouraged~~decrease ~~sales representatives to expand their markets and gain more customers. However, beginning in September 2006, we began to more vigorously pursue collection~~ of ~~all~~approximately ~~sales representative advances~~$0.4 ~~Nonetheless~~million, ~~there~~from ~~are~~approximately 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$9.4 ~~Pursuant~~million toas ~~the policies adopted at the beginning~~ of ~~2009,~~December ~~instead of advancing sales representatives money to sustain or develop markets~~31, ~~we reimburse sales representatives their selling and marketing expenses when they present expense vouchers~~2011. Management considers this a better way to manage the potential for bad debts on the advances to sales representatives. We pay the accrued selling expenses only when we collect an account receivable for which a sales representative has presented his expense receipts. Because we offer a grace period of one to three months to our clients for remitting payments due, the accrued sales expenses may remain outstanding as long as it takes to collect the corresponding accounts receivable.

AsOur ofadvance ~~September~~from ~~30,~~customers ~~2011,~~increased ~~our~~from ~~accounts payable were~~ approximately $81.61 million, aas ~~decrease~~ of December 31, 2011 to approximately $0.4 million in March 31, ~~from~~2012. The increase of was mainly due to the prepayment in the amount of approximately $92.07 million asby ofour ~~December~~largest 31customer Tianjin Zhongxing Medicine Co., ~~2010~~Ltd. to us for Xuesaitong purchasing.

AsOur ofpayment ~~September~~cycle ~~30,~~is ~~2011~~considerably shorter than our receivable cycle, since we typically pay our ~~advance~~suppliers ~~from~~all ~~customers~~or ~~increased~~a ~~from~~portion ~~approximately~~of ~~$1.2~~the ~~million~~purchase price in ~~2010~~advance toand ~~approximately~~for ~~$1.3~~some ~~million~~suppliers inwe ~~2011.~~must ~~The~~maintain ~~increase~~a ofdeposit ~~was~~for ~~mainly~~future ~~due~~orders. We require our sales representatives to pay a certain percentage of the ~~prepayment~~sales inprice as deposit before we deliver the ~~amount~~products ofto ~~approximately~~the $0customers.6 ~~million~~The bydeposits ~~our~~were ~~largest~~approximately ~~customer~~$6.1 ~~Tianjin~~million ~~Zhongxing~~as ~~Medicine~~of ~~Co.~~March 31, ~~Ltd.~~2012 toand usas ~~for~~of ~~Xuesaitong~~December ~~purchasing~~31, 2011.

~~Our~~Other ~~payment~~payables ~~cycle~~and isaccrued ~~considerably shorter than our receivable cycle~~expense, ~~since~~mainly weconsisted ~~typically~~of ~~pay~~accrued ~~our~~commission ~~suppliers~~payable ~~all~~to ~~or a portion of~~ the ~~purchase~~sales ~~price~~representatives, inincreased ~~advance~~by ~~and~~approximately ~~for~~$1.5 ~~some~~million, ~~suppliers~~from weapproximately ~~must maintain a deposit for future orders~~$11.8 Wemillion ~~require~~as ~~our~~of ~~sales~~December ~~representatives~~31, 2011 to ~~pay~~approximately a$13.3 ~~certain~~million ~~percentage~~as of ~~the~~March ~~sales~~31, ~~price~~2012 asdue ~~deposit before we deliver the products~~ to the ~~customers.~~net ~~The~~effect ~~deposits were approximately $5.5 million as~~ of ~~September~~payment ~~30,~~and ~~2011~~accrual ~~and~~for ~~approximately~~commission ~~$4.9~~for ~~million~~the asthree ofmonths ~~December~~ended March 31, ~~2010~~2012.

Other payables and accrued expense, mainly consisted of accrued commission payable to the sales representatives, increased by approximately $2.4 million, from approximately $9.7 million as of December 31, 2010 to approximately $12.1 million as of September 30, 2011 due to the net effect of payment and accrual for commission for the nine months ended September 30, 2011.

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

1411

InThe ~~April~~completion ~~2011,~~of weShenghuo ~~signed~~Plaza aand ~~loan~~the ~~agreement~~two ~~with~~new ~~Fudian~~office ~~Bank~~buildings ~~and~~is ~~obtained~~expected ato ~~short-term~~generate ~~borrowing~~more ~~amounting~~cash flows and increase our ability to ~~RMB8~~obtain ~~million~~additional ~~(approximately~~financing $1from banks.2 ~~million)~~By ~~between~~using ~~April~~Shenghuo ~~22,~~Plaza ~~2011~~ and ~~April~~the ~~21,~~two ~~2012.~~new ~~This~~office ~~short-term~~buildings ~~borrowing~~as ~~was~~mortgage ~~collateralized~~collateral after the Company has obtained the Property Ownership Certificate by late 2012 and the ~~Shenghuo’s~~proceeds ~~patent~~to -be agenerated ~~Method~~from ofoperations, ~~Synthetic~~we ~~Preparation~~are ofconfident ~~Dencichine~~that we will have sufficient working capital for ~~Treatment~~at ofleast ~~Bleeding~~the ~~(No~~next 12 months. ~~ZL00109992~~We will continue to make efforts to expand our sales to get more cash flow.~~2).~~

In July, 2011, we entered into a factoring agreement with Bank of China (the “BOC”) to transfer our accounts receivable with full recourse and the proceeds received from BOC being recognized as collateralized borrowings. Under this renewed factoring agreement, BOC agrees to provide the Company a maximum of approximately RMB 30 million (equal to approximately $4.6 million) factoring advance until July 28, 2012.

In August, 2011, we signed a loan agreement with Agricultural Bank of China (the “ABC”) and obtained a short-term borrowing amounting to RMB 35 million (approximately $5.5 million) between August 26, 2011 and August 25, 2012. This short-term borrowing was collateralized by Shenghuo’s shares.

Further, in September, 2011, Medicine borrowed a short-term loan in the amount of RMB 5,000,000 ($786,794) from China Minsheng Bank Corporation. This loan was unsecured.

The completion of Shenghuo Plaza and the two new office buildings is expected to generate more cash flows and increase our ability to obtain additional financing from banks. By using Shenghuo Plaza and the two new office buildings as mortgage collateral after the Company has obtained the Property Ownership Certificate by the end of 2011 or early 2012 and the proceeds to be generated from operations, we are confident that we will have sufficient working capital for at least the next 12 months. 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 5 –Borrowings in the Consolidated Financial Statements.

Off- Balance Sheet Commitment and Arrangements

On September 8, 2010, the Company signed an agreement with Management Commission of Kunming Shilin Taiwan Farmer Entrepreneur Centre to lease land for planting suitable-for-cultivating medicinal herb for use in the production of the Company’s medicinal products and to construct a health preserving zone and travel service center. The total operating lease amounted to approximately $4.8 million with a lease term of 20 years. Up to approximately $4.5 million under this lease agreement would be paid in the coming 4 years.

The Company plans to pay the lease expense by using the cash flow from our operations and bank borrowings.

As of March 31, 2012, we have a capital commitment of USD5,688,051 for the second installment of purchasing land use right for Xinglin International Health-Preserving Tourist Resort. Such amount is expected to be paid upon the requirement of the Management Committee of Kunming Shilin Taiwan Farmer Entrepreneur Centre.

Except as aforementioned, the Company does not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financials partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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~~rate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure controls and procedures

Our management, with the participation of our chief executive officer and chief financial officer, ~~Messrs~~Mr. Feng Lan and Mr. Raymond Wang 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. Wang concluded that despite our hiring of a CFO who is familiar with U.S. GAAP in this April, more training offered to our staff in the accounting department and 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, ~~2010~~2011), our disclosure controls and procedures were not effective as of ~~September~~March 3031, ~~2011~~2012.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

1613

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On July 21, 2010, in a mediation conducted by Retired Judge Nicolas H. Politan, the Company entered into an agreement in principle with counsel for plaintiffs in this litigation and HB&M, in which the parties agreed to settle all claims by the putative class members in exchange for payments of USD200,000 by the Company and USD600,000 by HB&M’s professional liability insurer. The settlement must be approved by the Court to become effective and, on or about November 2, 2010, the plaintiffs filed a motion with the Court seeking such approval.

On March 18, 2011, The Court issued an Order and Judgement finally approving the Settlement of all claims and dismissing the complaint.

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, 2010.

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

10.1		English translation of Loan Contract, dated August 26, 2011 by and between Kunming Shenghuo Pharmaceutical (Group) Co., Ltd. and Agricultural Bank of China.
Exhibit Number		Description of Exhibit
10.2		English translation (revised) of the Lease Agreement on the Project of Construction of Shilin Shenghuo TCM Cultural Garden between Kunming Shenghuo Pharmaceutical (Group) Co.,Ltd and Management Commission of Kunming Shilin Taiwan Farmer Entrepreneur Centre, dated September 8, 2010.
10.1		English translation of Borrowing Contract, dated March 30, 2012 by and between Kunming Shenghuo Pharmaceutical (Group) Co., Ltd. and Kunming Land and Mine Reserve Center.
10.3		English translation (revised) of the Supplemental Agreement on the Project of Construction of Shilin Shenghuo TCM Cultural Garden between Kunming Shenghuo Pharmaceutical (Group) Co.,Ltd and Management Commission of Kunming Shilin Taiwan Farmer Entrepreneur Centre, dated September 8, 2010.
10.2		English translation of Loan Contract , dated April 19, 2012, by and between Kunming Shenghuo Pharmaceutical (Group) Co., Ltd. And Agricultural Bank of China.
10.3		English translation of Mortgage Contract (Machinery as Collateral), dated April 19, 2012, by and by and between Kunming Shenghuo Pharmaceutical (Group) Co., Ltd. And Agricultural Bank of China.
10.4		English translation of Mortgage Contract (Real Estate as Collateral), dated April 19, 2012, by and by and between Kunming Shenghuo Pharmaceutical (Group) Co., Ltd. And Agricultural Bank of China.
31.1		Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
31.2		Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
32.1		Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

17________

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.*

* Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

* 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.14

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)~~	(Registrant)
November 14, 2011
May 30, 2012	By:	/s/ Feng Lan
		By:	/s/ Feng Lan
		Feng Lan
			Feng Lan
		Chief Executive Officer and President
			Chief Executive Officer and President
		(Principal Executive Officer)

Filing Compare · China Shenghuo Pharmaceutical Holdings Inc