csph_10q.htm

0001354488-12-002964.txt : 20120530 0001354488-12-002964.hdr.sgml : 20120530 20120530145424 ACCESSION NUMBER: 0001354488-12-002964 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20120331 FILED AS OF DATE: 20120530 DATE AS OF CHANGE: 20120530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: China Shenghuo Pharmaceutical Holdings Inc CENTRAL INDEX KEY: 0001335106 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33537 FILM NUMBER: 12877165 BUSINESS ADDRESS: STREET 1: NO. 2, JING YOU ROAD STREET 2: KUNMING NATIONAL ECONOMY & CITY: TECHNOLOGY DEVELOPING DISTRICT STATE: F4 ZIP: 00000 BUSINESS PHONE: 0086-871-7282628 MAIL ADDRESS: STREET 1: NO. 2, JING YOU ROAD STREET 2: KUNMING NATIONAL ECONOMY & CITY: TECHNOLOGY DEVELOPING DISTRICT STATE: F4 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: SRKP 8 INC DATE OF NAME CHANGE: 20050803 10-Q 1 csph_10q.htm QUARTERLY REPORT csph_10q.htm

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

For the quarterly period ended March 31, 2012

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

For the transition period from ______________ to ______________

Commission file number 001-33537

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

0086-871-728-2628

(Registrant’s Telephone Number, Including Area Code)

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company þ

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

There were 19,679,400 shares outstanding of the issuer’s common stock, par value $.0001 per share, as of May 29, 2012.

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

		Page

PART I - FINANCIAL INFORMATION

ITEM 1.	CONDENSED FINANCIAL STATEMENTS		F-1

	Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011		F-1

	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 Three Months Ended March 31, 2012 and 2011 (Unaudited)		F-3

	Notes to Condensed Consolidated Financial Statements (Unaudited)		F-4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		3

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		13

ITEM 4T.	CONTROLS AND PROCEDURES		13

PART II - OTHER INFORMATION			14

ITEM 6.	EXHIBITS		14

SIGNATURES			15

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in USD)

	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

See notes to condensed 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)

	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

See notes to condensed consolidated financial statements.

F-2

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

	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		$	-

See notes to condensed 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 March 31, 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.

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, 2012 (“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 2011 Form 10-K.

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.

(c)	Accounts and notes receivable

Accounts receivable are recognized and carried at original sale amounts less an allowance for uncollectible accounts, as needed.

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.

F-5

(d)	Income taxes

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.

(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.

(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.

F-6

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 - 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)	Recently issued accounting standards affecting the Company

In the three months ended March 31, 2012, the FASB has not issued any Accounting Standards Update.

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. Performance is measured by various factors such as segment revenue and segment profit (loss).

(a)	Segment reporting for the three months ended March 31, 2012 (unaudited):

	Medicine			Hotel		Shi Lin			Others		Elimination			Total

Revenues from external customers	$	10,373,886		$	912,240	$	-		$	86,327	$	-		$	11,372,453
Inter segment revenue	$	15,341		$	-	$	-		$	-	$			$	15,341
Segment (loss) profit	$	(595,050	)	$	104,841	$	(88,129	)	$	31,226	$	(20,582	)	$	(567,694	)

F-7

(b)	Segment reporting for the three months ended March 31, 2011 (unaudited):

	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

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

NOTE 4 – INVENTORIES, NET

Inventories consisted of the following:

	March 31,		December 31,
	2012		2011
	(Unaudited)
Raw materials	$	719,133	$	808,009
Work-in-process		1,666,346		1,361,386
Finished goods		1,209,417		525,993
Total inventories	$	3,594,896	$	2,695,388

NOTE 5 – BORROWINGS

The Company’s borrowings are payable to banks, 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 March 31, 2012 and December 31, 2011:

	March 31		December 31
	2012		2011
	(Unaudited)
Current:
Short-term borrowings from banks and Reserve Center, collateralized	$	21,346,297	$	15,816,788
Current portion of long-term borrowings, collateralized		5,941,884		6,253,075
Borrowings from governmental financial bureau, uncollateralized		42,151		42,107
	$	27,330,333	$	22,111,970

F-8

(a)	The current portion of the long-term bank borrowings mature in April 2012 and was repaid in full subsequently.

(b)

As of March 31, 2012, the balance of borrowings from Agricultural Bank of China (the “ABC”) was approximately USD16,269,000, among which, borrowings amounting to approximately USD10,708,000 was collateralized by land use rights and buildings, while the others in an aggregate amount of approximately USD5,561,000 were guaranteed by the CSPH’s 94.95% shares in Shenghuo.

(c)	As of March 31, 2012, short-term borrowings of approximately USD1,271,000 from Fudian Bank was collateralized by the Shenghuo’s patent and was repaid in full subsequently.

(d)

As of July 29, 2011,the Company was granted of a one-year 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.

(e)

As of March 31, 2012, short-term borrowing of RMB5,000,000 (approximately USD794,000) from China Minsheng Bank Corporation 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.

(f)	As of March 31, 2012, short-term borrowings of RMB2,660,000 (approximately USD423,000) from China Merchant Bank was collateralized by the bank acceptance notes in the amount of approximately USD450,000.

(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

	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

As of March 31, 2012, the amount due from Dianjiao which is under common control with the Company was for business purpose, it was interest free and repaid on demand.

F-9

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

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 March 31, 2012 and 2011 include 46,000 warrants and 246,000 warrants, 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.

	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 8 – CONCENTRATIONS

For the three months ended March 31, 2012, the Company had concentrations of purchases raw materials from two vendors accounting for 67.2% of total 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 sales for the three months ended March 31,2012, as compared to one customer accounting for 16.7% of total sales for the three months ended March 31, 2011. As of March 31, 2012 and 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 March 31, 2012, as compared to approximately 86% for the three months ended March 31, 2011, respectively.

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 USD 4,738,000 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:

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

F-10

(b)	Capital Commitment

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.

NOTE 10– SUBSEQUENT EVENTS

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.

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.

F-11

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 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. 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 Securities and Exchange Commission, including those factors discussed under the captions “Risk Factors” and “Forward-Looking Statements” in our 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 89% and 86% of our sales for the three months ended March 31, 2012 and 2011 respectively.

Shenghuo Plaza and Zhonghuang Hotel

We expect to receive the Building Completion Examination Certificate and Property Ownership Certificate by late 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 RMB100 million (approximately $16 million) to finance the Xinglin International Health-Preserving Tourist Resort discussed below and to reduce current short term debt.

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, and the phase II exploratory and enhanced clinical trials were completed in 2010. In the third quarter of 2011, we held a seminar with related experts and drafted a preliminary clinical research protocol. We entered into an agreement with a clinical study company to run phase III clinical trials. We anticipate Phase III clinical trials will begin in July of 2012 and will be completed by the first half of 2014. Thereafter, we will submit the application for production approval. We expect to obtain production approval by the end of 2014. We expect to incur a cost of approximately RMB4.2 million (approximately $0.65 million) to run Phase III clinical trials from 2012 to 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. Now we are conducting additional pharmacodynamics experiment to observe Dencichine for Injection’s function on treating thrombocytopenia in patients undergoing chemotherapy. We will submit our application for clinical trials to State Food and Drug Administration (SFDA) after getting 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 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 incurred approximately RMB658,404 (approximately $101,939) in 2011 and expect to incur approximately RMB4 to 6 million (approximately $0.6 million to $0.9 million) from 2012 to 2014 in connection with 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 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.

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. On March 21, 2012, the Exchange notified the Company its decision to defer making a determination on whether the Company has regained compliance after the company files the Annual Report on the Form 10-K on March 30, 2012.

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.

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 Capsules is sold and “Shenhuo” - the brand under which most of our products are sold. "Lixuwang", the trademark of Xuesaitong Soft 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.

We believe it is in our-long-term best interest to grow our operations through the over-the-counter (“OTC”) market, which will produce higher profit margins. Besides Yunnan province where Xuesaitong has its presence many years ago, we started to expand Xuesaitong’s presence into the OTC market in selected areas outside Yunnan province around China since 2009. We developed several main OTC markets in 2011 in provinces such as Jiangsu, Fujian, Guangdong, Hunan, Liaoning, Shandong, Heilongjiang, Chongqing, Guangxi and Zhejiang. The performance of OTC market in Yunnan province is best among these provinces, with a gross sales of Xuesaitong Soft Capsules in the OTC market amounting to approximately $0.3 million for the three months ended March 31, 2012. As of March 31, 2012, in addition to the 2000 chain drugstores in Yunnan province, we have established sales relations with 12000 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.

We also 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.

Strategic Adjustment in Cosmetic

Since the marketing of 12 Ways cosmetics, the Company tried to expand its sales and have expanded the geographic region in which our 12 Ways products were sold from our native Yunnan province to a number of cities and provinces outside our local region. But due to the insufficient funding for marketing development, the sales of 12 Ways cosmetics grew slowly and the subsidiary of cosmetics has suffered a continuing loss. The loss adversely effected the holistic operation of the Company. Currently, the Company has a tight budget, in order to focus on our principal business – pharmaceutical with our limited capital, the Company has decided to make adjustment in Cosmetic in the fourth quarter of 2011. We will not fund the market development for 12 Ways cosmetics until we have enough capital.

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

Three Months Ended March 31, 2012 and 2011

The following table sets forth our statements of operations for the three months ended March 31, 2012 and 2011 in U.S. dollars (unaudited):

	Three months ended March 31,
	2012			2011			Change ($)			Variance (%)
	Unaudited			Unaudited
Sales	$	11,372,453		$	9,441,626			1,930,827			20.5	%
Cost of Sales		4,669,455			3,805,692			863,763			22.7	%
Gross Margin		6,702,998			5,635,934			1,067,064			18.9	%
Operating Expenses:
Selling expenses		5,168,179			4,076,430			1,091,749			26.8	%
General and administrative expenses		1,378,138			1,030,215			347,923			33.8	%
Research and development expenses		231,947			121,725			110,222			90.6	%

(Loss) Income from Operations		(75,266	)		407,564			(482,830	)		-118.5	%

Other Expenses		(492,428	)		(306,883	)		(185,545	)		60.5	%
(Loss) Income Before Income Tax Expenses		(567,694	)		100,681			(668,375	)		-663.9	%
Income taxes benefit (expense)		121,073			(14,980	)		136,053			-908.2	%
Net (Loss) Income		(446,621	)		85,701			(532,322	)		-621.1	%
Net loss attributable to non-controlling interests		(2,239	)		(13,672	)		11,433			-83.6	%
Net (Loss ) Income Attributable to Stockholders	$	(444,382	)		99,373			(543,755	)		-547.2	%
Basic and diluted (loss) earnings per share	$	(0.02	)		0.01			(0.03	)		-300.00	%
Weighted-average number of shares outstanding-basic and diluted		19,679,400			19,679,400			-			-

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.

Cost of sales: Our cost of sales for the three months ended March 31, 2012 was approximately $4.7 million, an increase of approximately $0.9 million or 22.7% from approximately $3.8 million for the three months ended March 31, 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.

Gross margin: Our gross profit for the three months ended March 31, 2012 was approximately $6.7 million as compared with approximately $5.6 million for the three months ended March 31, 2011, an increase of approximately $1.1 million, or 18.9%. Gross profit as a percentage of revenues was approximately 58.9% for the three months ended March 31, 2012, a decrease of 0.8% from 59.7% for the three months ended March 31, 2011. The slight decrease in gross profit percentage was primarily due to the increase of cost of raw materials as set forth above.

Selling expense: Selling expenses were approximately $5.2 million for the three months ended March 31, 2012, an increase of approximately $1.1 million, or 26.8%, from approximately $4.1 million for the three months ended March 31, 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 March 31, 2012, an increase of approximately $0.4 million, or 33.8%, from approximately $1 million for the three months ended March 31, 2011. The increase was primarily due to the increase of staff cost and legal and financial consulting service expenses.

Research 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.

Other expenses: Other expenses were $492,428 for the three months ended March 31, 2012, which consisted of interest expense and non-operating expense, offset by subsidy income, interest income and non-operating income, an increase of $185,545, or 60.5%, from an expense of $306,883 for the three months ended March 31, 2011. The increase was mainly due to an increase in interest expenses occurring and less subsidy income received as compared the same period in 2011.

Income tax benefit (expense): Income tax benefit was $121,073 for the three months ended March 31, 2012 as compared to income tax expense of $14,980 for the three months ended March 31, 2011. The tax benefit was mainly attributable to the medicine segment of the Company and the deferred tax assets benefit from accrued expenses.

Net income (loss): Net loss was $446,621 for the three months ended March 31, 2012 as compared to the net income of $85,701 for the three months ended March 31, 2011, as a result of the factors described above.

Liquidity and Capital Resources

General –As of March 31, 2012, we had cash and cash equivalents of approximately $6.7 million. In the three months ended March 31, 2012, the Company suffered a net loss of $446,621 due to the increase of raw materials’ price from 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 $24 million as of March 31, 2012, and approximately $23.2 million as of December 31, 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 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.

For the borrowings which matures in the next twelve months, we expect to settle them through a combination 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

	Three months ended March 31,
	2012				2011
	Unaudited				Unaudited
	In thousands
Net cash provided by operating activities		$	896,967		$	2,609,836
Net cash used in investing activities			(664,383	)		(2,290,810	)
Net cash provided by (used in) financing activities			5,184,230			(593,741	)
Cash and Cash Equivalents at End of Period		$	6,676,938		$	1,409,304

Operating Activities: Net cash provided by operating activities for the three months ended March 31, 2012 was approximately $0.9 million, as compared to net cash provided by operating activities of approximately $2.6 million for the three months ended March 31, 2011. The decrease in the net cash provided by operating activities was mainly due to the loss we suffered in 2012 period and the increase in the accounts receivable balance as at March 31, 2012.

Investing 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 $5.2 million for the three months ended March 31, 2012, as compared to net cash used in the amount of approximately $0.6 million for the three months ended March 31, 2011. The increase in cash 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 $24.0 million as of March 31, 2012 and approximately $23.2 million as of December 31, 2011.

As of March 31, 2012, our net accounts and notes receivable (less allowance for doubtful accounts of approximately $2.5 million) were approximately $19.7 million, an increase of approximately $1.6 million, from approximately $18.1 million (net of allowance for doubtful accounts of approximately $2.6 million) as of December 31, 2011 which is in line with the increase in sales.

As of March 31, 2012, our accounts payable were approximately $9 million, a decrease of approximately $0.4 million, from approximately $9.4 million as of December 31, 2011.

Our advance from customers increased from approximately $1.1 million as of December 31, 2011 to approximately $4 million in March 31, 2012. The increase of was mainly due to the prepayment in the amount of approximately $2.7 million by our largest customer Tianjin Zhongxing Medicine Co., Ltd. to us for Xuesaitong purchasing.

Our payment cycle is considerably shorter than our receivable cycle, since we typically pay our suppliers all or a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders. We require our sales representatives to pay a certain percentage of the sales price as deposit before we deliver the products to the customers. The deposits were approximately $6.1 million as of March 31, 2012 and as of December 31, 2011.

Other payables and accrued expense, mainly consisted of accrued commission payable to the sales representatives, increased by approximately $1.5 million, from approximately $11.8 million as of December 31, 2011 to approximately $13.3 million as of March 31, 2012 due to the net effect of payment and accrual for commission for the three months ended March 31, 2012.

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.

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 late 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.

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 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, 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, 2011), our disclosure controls and procedures were not effective as of March 31, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit Number		Description of Exhibit

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.

10.2		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

________

* 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.

SIGNATURES

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

	CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
		(Registrant)

May 30, 2012	By:	/s/ Feng Lan
		Feng Lan
		Chief Executive Officer and President
		(Principal Executive Officer)

EX-10.1 2 csph_ex101.htm BORROWING CONTRACT csph_ex101.htm

EXHIBIT 10.1

Borrowing Contract

Lender：Kunming Land and Mine reservation Center - Branch Center in Kunming National Economy and Technology Development Zone

Borrower: Kunming Shenghuo Pharmaceutical (Group) Co., Ltd.

In order to support Kunming Shenghuo Pharmaceutical (Group) Co., Ltd.(“Shenghuo”) to expand its production and repay its maturing loan, after two parties’ mutual discussion, the two parties enter into this contract according to related rules of The Contract Law of Peoples Republic of China and will comply with the terms of this contract together.

1.	On March 30, 2012, the Lender lends RMB35 million to the Borrower. The Borrower will use this fund to repay its mature loan.

2.	The term of this borrowing is from March 30, 2012 to April 29, 2012.

3.	The annual interest rate of this borrowing is 6.10% and will be charged quarterly. If the Borrower doesn’t repay this borrowing as scheduled, an additional daily interest rate of 0.04% will be charged as penalty.

In order to guarantee that the Lender can recover the borrowing as scheduled, the Borrower will use its multiple-use building and packing workshop which are valued at RMB 156,610,000 as collateral. If the Borrower can’t repay the principal and interest as scheduled, the Lender has right to deal with the collateral to recover its principal and interest.

5.	If the Borrower doesn’t use the borrowing according to the terms of this contract or has any illegal behavior, the Lender has right to recover the borrowing and terminate the contract in advance.

6.	The lender has right to examine and supervise the usage of the borrowing, and know the financial situation of the Borrower. The Borrower should introduce and provide true information to the Lender.

7.	This contract shall be executed in two original copies, each for both parties, which shall have equal force and effect.

This contract shall take effect since the date of signing this contract and have legal force. Matters not covered in this contract shall be subject to the rules of The Contract Law of Peoples Republic of China and other related rules. This contract shall expire after the principal and interest have been repaid off.

Borrower:

“KUNMING SHENG HUO PHARMACEUTICS (GROUP) CO., LTD.” (Seal)

Legal Representative: Feng Lan (Signature)

Handling personnel: Qionghua Gao (Signature)

Lender:

“Branch Center in Kunming National Economy and Technology Development Zone of Kunming Land and Mine Reservation Center” (Seal)

Principal: Jianyun Wang (Seal)

Handling personnel: Dejian Wang (Signature)

Date: March 30, 2012

Signed at: Branch Center in Kunming National Economy and Technology Development Zone of Kunming Land and Mine Reservation Center

EX-10.2 3 csph_ex102.htm LOAN CONTRACT csph_ex102.htm

EXHIBIT 10.2

AGRICULTURAL BANK OF CHINA

ABC[2012]1003-1

AGRICULTURAL BANK OF CHINA

Loan Contract

No. 53010120120001121

Loan Contract

Dear Client:

For your best interest, please read all provisions under this Contract carefully before executing it, especially those provisions in black, paying attention to your rights and obligations. Please feel free to contact the administering branch for any questions.

Table Contents

1.	Definitions
2.	Commitment by the Borrower
3.	Basic Provisions
	3.1.	Type of Loan
	3.2.	Purpose of Loan
	3.3.	Interest Rate, Penalty Interest and Compound Interest
	3.4.	Loan Withdrawal and Payment
	3.5.	Financial Index Monitoring
	3.6.	Account Supervision
	3.7.	Loan Repayment
	3.8.	Loan Note
	3.9.	Guaranty
	3.10.	Rights and Obligations
4.	Supplementary Provisions
5.	Legal Liability
6.	Other Matters

Borrower (Full Name): Kunming Sheng Huo Pharmaceutics (Group) Co., Ltd.

Place of Residence: No.2 Jing You Road, Kunming National Economy &Technology Developing District

Legal Representative: Guihua Lan

Lender (Full Name): Agricultural Bank of China Kunming Shuanglong Branch

Place of Residence: No. 51 Tangshuang Road, Kunming

Tel/Fax: +86-871-3113732

Legal Representative: Qian He

Pursuant to the relevant PRC laws and regulations, the two parties, following consultations, mutually agree to enter into this Contract (“Contract”) as follows.

1. Definitions

Unless otherwise provisioned, the terms included in this Contract will be defined as below:

1.1 Loan Term: includes the total term for all loans and single term for each loan. The total term indicates the period dated from the release of first loan to the pay off of all principals and interests as prescribed in the Contract; single term indicates the period from date of releasing of single loan out of separate withdrawals to paying off of such single loan.

1.2 Line of Credit: indicates the limited amount of principal provided by the Lender to the Borrower within the valid period of line of credit as prescribed in the Contract. The Borrower is permitted for the recycle use of loan within the valid period of line of credit and the permitted amount of loan. However, the total amount of applied loan and unpaid loan under this Contract should not exceed the line of credit. The unused line of credit will become invalid automatically upon the expiration of line of credit.

1.3 Electronic Self-service Channels: indicate the electronic channels of E-banking, Telephone banking or cash management channel be available for withdrawal provided by the Lender under the loan form of recycled self-service current capital.

1.4 Period: period is counted by date, month or year; where the last day of the period upon expiration falls on the public holiday or weekend, the date of period expiration will be extended to the first business day upon the end of public holiday or weekend.

1.5 LIBOR/HIBOR: indicates the interbank offered rate of London/Hong Kong announced by Reuters for the corresponding term two working days prior to the interest bearing date.

1.6 Laws and Regulations: including laws, administrative regulations, local code and regulation, judicial interpretation and rules with legal effect.

2. Commitments by the Borrower

2.1 Submit loan application by law: The Borrower represents an enterprise legal person which has been incorporated by law and registered upon the approval of authorities concerned, or other organization meets the state requirements of being a Borrower; it possesses good credit, no material rotten record; it clearly states the legal purpose of loan and resource of repayment; it conducts no activity violated laws and regulations.

2.2 Conduct no defect in the course of contract execution: The Borrower has performed all necessary procedures according to law or articles of incorporation, in order to execute this Contract or fulfill its obligations under this Contract; it is the Borrower’s legal representative or authorized agent who signs this Contract; the Borrower will actively handle produces of obtaining contract approval, contract registration or filing, or assist the Lender for this purpose; there is no other conditions making the Loan Contract defect in effective due to the Borrower.

2.3 To provide legal and effective guarantee: The Borrower assures that the Guarantor has performed all necessary procedures according to law or articles of incorporation in order to sign the Guaranty Contract or fulfill its obligations under the Guaranty Contract; The Guarantor has the right to set up guaranty by secured property; it is the authorized person who will sign the Guaranty Contract; The Borrower will urge the Guarantor to actively handle all procedures relating to Guaranty Contract approval, registration and filing, or assist the Lender for this purpose; it assures of no other conditions making the contract defect in effectiveness or causing material adverse changes.

2.4 To perform rights and obligations under the Contract with good faith: The Borrower will use the loan as per prescribed term, purpose and method, conducting no activity violated laws or regulations; it will actively assist concerned state authorities and the Lender in management of loan payment, management after loan releasing and related examinations; it will repay the loan at full amount and in a timely manner as required by the Contract, no escaping of debts by any method; it will obtain the Lender’s consent on significant events of outbound investment, substantial increase of debt financing and conducts of merger, dismantlement and share transfer; the Lender may choose to withdraw the loan ahead of schedule according to the Borrower’s condition of capital collection; the Borrower shall inform the Lender timely for material adverse event which could affect its ability of debt repayment; there is no other conditions of violating the obligations under this Contract.

2.5 The Borrower shall not conceal any happened or happening issues could affect its financial situation or ability of debt repayment from the Lender, which includes but limited to litigation, arbitration, other administrative proceeding or claim.

2.6 The information relates to the Borrower, Guarantor and Shareholder provided by the Borrower are authentic, full, precise, legal and effective.

3. Basic Provisions

3.1. Type of Loan: Ordinary Loan toward current capital

3.1.1 Currency and amount of loan (in Capital): RMB FOURTY MILLION YUAN

3.1.2 Term of loan: One year; Date of loan release: April 20, 2012

3.1.3 Amount and term for single loan: RMB40,000,000

3.2 Purpose of Loan: Purchase of raw materials

3.3 Interest Rate, Penalty Interest and Compound Interest

3.3.1 Loan Interest Rate

3.3.1.1 The interest rate of loans in RMB is determined as per Method 1 below:

(1) Fixed Interest Rate: the interest will float by 5% based on the benchmark RMB interest rate for the same term announced by the People’s Bank of China in accordance with the date of each withdrawal and the term for entire loan.

3.3.2 Method of Interest Calculation, Interest Settlement

3.3.2.1 The interest on the loan hereunder shall be settled on a monthly basis, with the date of settlement falling on the 20th day of each month. The Borrower shall pay up the interest on every interest settlement day. If the last repayment day of the loan principal is not an interest settlement day, the outstanding interest shall be paid up immediately together with the principal.

3.3.2.2 For the loan being subject to fixed interest rate, the interest will be calculated as per agreed interest rate. For the loan being subject to floating interest rate, the interest will be calculated as per the interest rate determined on each floating period; if the interest rate floats frequently within a single period of interest settlement, it may calculate the interest for each floating period at first, and then calculate them in total. If the loan is subject to other interest rate, the interest shall be calculated as agreed method.

3.3.2.3 Where the date of loan maturity comes to the public holiday or weekend, the normal date of repayment shall be extended to the first business day after the public holiday or weekend, and the interest will be collected as per agreed method of interest calculation during the extension period.

3.3.3 Penalty Interest

3.3.3.1 Where the Borrower fails to return the principal on specified period as prescribed in this Contract, the Lender will collect a penalty interest at the rate of floating by 30% based on the specified loan interest rate dated from the over due period against the matured loan, until the principal and interest been paid off.

3.3.3.2 Where the Borrower fails to use the loan as per the prescribed purpose, the Lender will collect a penalty interest at a rate of floating by 50% based on the specified loan interest rate dated from the default period against the wrong used loan, until the principal and interest been paid off.

3.3.3.3 For the loan both overdue and fails to be used according to the proposed purpose as agreed in the Contract, the calculation of penalty interest rate will be subject to the highest rate.

3.3.4 Compound Interest

Where the Borrower fails to pay interest on due, the Lender will collect monthly compound interest for this purpose dated from the failure of paying interest matured. For those interests unpaid prior to the maturity of loan, a compound interest will be collected according to the loan interest rate as agreed in the Contract; for those interests afterwards, a compound interest will be collected according to the penalty interest rate as agreed in the Contract; Where the loan usage constitutes a breach of contract or the interests were not paid during the over due period, a compound interest will be collected according to correspondent penalty interest rate as agreed in the Contract.

3.4 Loan Withdrawal and Payment

3.4.1 Conditions on Loan Withdrawal

3.4.1.1 The Borrower shall meet all the requirements as below for application of withdrawal:

1) The Borrower possesses the subject qualification for loan application；the correspondent decision making or authorization institutions have approved the resolution on loan application according to law and concerned authorities have issued the necessary approval;

2) Related procedures for guarantee have been done as per the requirement of the Lender, and the guarantee becomes legal and effective;

3) The loan usage meets the requirements of laws and regulations, and the provisions of the loan contract and business contract corresponding to the loan use.

4) The commitments made by the Borrower at the time of contract execution shall remain true and effective, no existing of significant or material adverse changes, no happening of other material adverse events which could affect the performance of this Contract;

5) Other agreement: The loan usage shall be in consistence with the proposed usage for applied loan.

3.4.1.2 Shall the Borrower fail to practice the above provision within 6 months after signing this Contract, the Lender shall have the right to terminate this Contract. If the Contract is terminated by the Lender, the Borrower may raise a dispute within 7 days which is dated from the Lender informing the Borrower by written, oral or other methods.

3.4.2 Method of Withdrawal

3.4.2.1 Ordinary Loan for Current Capital

3.4.2.1.1 The Borrower shall withdraw the loan according to its actual demand of loan using and the plan of withdrawal will be determined by the Borrower's actual loan requirement and the Lender's credit scale. Where the Borrower fails to go through the withdrawal procedures as prescribed by the plan of withdrawal, the Lender may cancel part of or the entire loan which has not been withdrawn, and the Lender could further re-determine whether to release the loan or not, as well as the conditions for loan withdrawal.

3.4.2.1.2 The Borrower shall withdraw the loan on agreed amount and at specified date. It is required to submit application to the Lender three days earlier for intention of adjusting the withdrawal plan and shall obtain the Lender’s consent.

3.4.3 Loan Payment

3.4.3.1 Entrusted Payment

3.4.3.1.1 Have explicit object of payment and the amount of single withdrawal exceeds RMB 5 million (including the foreign currencies at equivalent value).

3.4.3.1.2 If adopting the entrusted payment, the Borrower shall submit an application for withdrawal and the notice on entrusted payment to the Lender two days earlier, who is also required to provide related materials, such as business contract corresponding to the withdrawal, invoices and other certificates. Upon confirmation, the Lender will pay the loan directly to the Borrower’s trading partner through the Borrower’s account. Where the application for withdrawal is inconsistent with the provisions for withdrawal as prescribed in the Contract, or the application for entrusted payment is inconsistent with the Contract, existing incomplete or false trading information, the Lender may choose not to release or pay the loan; and the Lender shall not be liable for breaching of contract by the Borrower to its trading partners or other damages hereunder. The Lender shall not bear responsibility for the delay of or failure in loan release due to incorrect and incomplete payment information provided by the Borrower.

3.4.3.1.3 If the Borrower applies for payment suspension or abandon the payment entrustment, it shall submit the application in written prior to the payment by the Lender. Upon the Lender’s confirmation, the entrusted payment will be suspended and the correspondent loan could be collected back; however, the interest for correspondent loan shall be collected pursuant to the Contract during this period. Where the Borrower applies to resume the entrusted payment afterward, it shall handle the procedures according to provision 3.4.3.1.2.

3.4.3.1.4 No condition shall be attached to the entrusted payment。If there is condition attached to the Notice of Entrusted Payment, no obligation shall be created to the Lender hereof. Unless otherwise specified in written, the Borrower is not obligated to inform the Lender for issues of payment entrustment, suspension, abandonment and resuming.

3.4.3.1.5 If adopting the entrusted payment, the Lender will be entitled to restrict the Borrower’s relevant account in functions of payments and automatic withdrawals through off-counter channels such as internet banking, telephone banking, cash management channel and etc.

3.4.3.2 Independent Payment

Excluding conditions as agreed in provisions 3.4.3.1.1, the Borrower may choose independent payment according to the Contract when the loan has been issued to its account. The Borrower shall inform the Lender of the loan using progress, and further provide business contracts, invoices and other notes corresponding to the record of loan using in a timely manner as per its requirement. The Lender may confirm whether the loan has been used for specified purpose through account analysis, notes examination and field investigation.

3.4.3.3 Should the conditions of 1) degrading of credit status, 2) poor performance in main business， 3）abnormality in loan usage and 4) failing to use the loan on specified purpose happen to the Borrower, the Lender may choose to stop loan releasing and payment.

3.4.4 Return of Withdrawal

3.4.4.1 Where the loan been withdrawn exceeds the amount been actually paid for related transactions or the traded amount has been returned due to the failure in performing the entire business contract in correspondent to the loan under this Contract, or the business contract is terminated or becomes ineffective, though not contributed to the fault of Borrower, it shall return correspondent withdrawn loan back to the Lender.

3.4.4.2 Where the Borrower fails to spend the loan on specified purpose, the Lender is entitled to collect the loan back.

3.4.4.3 Before the loan was returned to the Lender as required by provisions 3.4.4.1 and 3.4.4.2, the interest shall be calculated and collected pursuant to provisions 3.3.1 and 3.3.2.

3.5 Financial Index Monitoring

N/A

3.6 Account Supervision

3.6.1 The Borrower’s account for capital collection is as below:

Account name: Kunming Sheng Huo Pharmaceutical (Group) Co., Ltd.

Account number: 219201040002355

3.6.2 The Lender is entitled to supervise the capital collection account by taking actions as below:

1) Request the Borrower providing the flow in and out conditions of the capital collection account from time to time.

3.7 Loan Repayment

3.7.1 Method of Loan Repayment

3.7.1.1 The Borrower shall deposit the matured principal and interest into the account for repayment designated by the Lender prior to the date of repayment one day prior to the date of repayment, and it shall irrevocably authorize the Lender to collect money from this account.

3.7.1.2 Shall the Borrower fail to pay the debt on due (including those debt been declared mature ahead of schedule) as prescribed by this Contract, the Lender shall have the right to collect money from other accounts which are opened by the Borrower in each institutions affiliated to the Agricultural Bank of China, until the debt been paid off.

3.7.1.3 If the Lender exercises its right of offset according to law or contract, the Borrower may raise a dispute within 7 days which is dated from the Lender informing the Borrower by written, oral or other methods.

3.7.2 Order of Repayment

3.7.2.1 Unless otherwise specified, the loan shall be repaid according to the order as below:

1) If there are several debts matured between the Lender and Borrower, and the amount of repayment is not sufficient to pay off the entire debts on due, it will be the Lender to decide the order of loan repayment and offset;

2) Where the Lender exercises its right of offsetting according to law or contract, it will be the Lender to decide the order of offsetting; When the Lender exercises its right of subrogation, it will be the Lender to decide the order of secondary debtor paying off the debts.

3.7.2.2 Where the Borrower’s balance is not sufficient to pay off the loan on due, the Lender can choose to treat the repayment as principal, interest, penalty interest, compound interest or expenditure on the realization of creditor’s right.

3.7.3 Repayment ahead of Schedule

3.7.3.1 The Borrower shall inform the Lender in written three days in advance for intention of repayment ahead of schedule and shall obtain its approval. The order of repayment please refer to the provision 3.7.2.

3.7.3.2 For loan repayment ahead of schedule, the interest will be collected by the method as below and the interest will end with the last payment of principal:

1)The interest will be collected according to the loan term and interest rate as agreed.

3.7.3.3 For the repayment ahead of schedule, the amount of principal being paid back shall be no less than RMB 10,000 or be integral multiples of RMB 10,000.

3.7.3.4 Where the Borrower only repays part of the loan in advance, it shall pay interest for remaining part of the loan.

3.7.4 Term Extension

Where the Borrower of ordinary current capital fails to repay the loan in specified date, it may apply for extension to the Lender. The application shall be submitted 15 days prior to the maturity date and an agreement on term extension will be executed upon the Lender’s consent.

3.8 Loan Note

3.8.1 The loan note constitutes a part of this Contract. All those information, including amount of loan, amount of loan withdrawal, amount of repayment, date of loan release and loan maturity, loan term, loan interest, loan usage shall be subject to the record of loan note when they are inconsistence with those information recorded or not yet recorded information.

3.8.2 Under the loan form of recycled self-service current capital, if the Borrower withdraws the loan through electronic self-service channel, all those information, including amount of loan, amount of loan withdrawal, amount of repayment, date of loan release and loan maturity, loan term, loan interest, loan usage shall be subject to the electric record.

3.9 Guaranty

3.9.1 The method of guaranty for the loan under this Contract is mortgage.

3.9.2 The guaranty contract will be executed among the Lender, Borrower and Guarantor separately.

3.10 Rights and Obligations

3.10.1 Lender’s Rights and Obligations

1) Withdraw the loan as agreed in this Contract;

2) Repay the principal and interest at full amount and in a timely manner;

3) Shall use the loan by law or by the purpose and method as prescribed in the contract, and may neither use the loan for fixed assets or equity investment nor manufacturing or business operation prohibited by the state;

4) Accept the supervision and examination by the Lender or its trustee over the Borrower’s financial activities and loan usage; Submit materials related to the loan usage, financial information or other information as required by the Lender;

5) The Borrower shall inform the Lender in written and obtain its consent to put following activities into practice; the Lender may also participate in activities as below:

i. Activities about contracting, leasing, shareholding reform, jointing operation, merging, separating, registered capital reducing, jointing venture, assert transferring, major outbound investment, bond issuing, large amount of financing, material associated transaction, applying for stopping operation for correction, applying for dissolving, applying for bankrupting, etc.

ii. Provide large amount of guarantee or mortgage, pledge with its major asset to third party, which may affect the Borrower’s ability of loan repaying;

iii. Other adverse conditions may cause significant change to the debt relationship under this Contract or affect the realization of creditor’s right;

6) The Borrower shall inform the Lender in written within 5 days upon the happening of following events:

i. The Borrower and its legal representative, person in charge or actual controller are involved in illegal activities;

ii. Stop production or operation, cancellation or forced cancellation of business license;

iii. Deterioration of financial status, material difficulty in production and operation or significant adverse dispute;

iv. Other issues may affect adversely the realization of creditor’s right.

7) The Borrower shall inform the Lender in written within 7 days upon the happening of following events:

i. Changes in affiliated relationships, major changes in management, major adjustments in organizational structure;

ii. Major changes in registered names, place of residence and scope of business or in franchised issues;

iii. Increase in registered capital, material amendment to the articles of incorporation;

iv. Changes in other issues which may affect the Borrower’s performance of debt;

8) The Borrower may not escape from debt by means of withdrawing funds, transferring assets or , may not participate in other activities that could damage the Lender’s benefit;

9) The Borrower shall be liable for expenditures on legal service, insurance, transportation, evaluation, registration, custody, identification or notarization related to this Contract or guarantee under this Contract;

10) Other rights and obligations as regulated by law or as agreed by both parties.

3.10.2 The Lender’s Rights and Obligations

1) Shall release the loan at full amount and in timely manner, provided that the delay of loan release is caused by the Borrower itself or other causes beyond the Borrower’s fault;

2) Be entitled to supervise or examine over the Borrower’s conditions on production and operation, financial status, supplies storage and loan usage, also to request providing with relevant documents and information;

3) If the following events happen: i) the loan security or debt performance may be affected, or ii) the Guarantor encounters production or operation halts, cancellation of business license, bankruptcy, revocation or major loss in operation which could cause losing part of or entire ability of guaranty; or iii) the value reduce, accidental damage or loss of collateral which could jeopardizes the realization of guaranty. The Lender may request the Borrower to improve its protection on creditor’s right and provide other effective guaranty; the Lender may also reduce or cancel the line of credit, stop releasing the loan, announcing that the loan under this Contract and other contracts matures ahead of schedule, therefore needs to be collected in advance.

4) Other rights and obligations as regulated by law or as agreed by both parties.

3.10.3 Other Obligations

3.10.3.1 Each party shall bear its confidential obligation for another party for trade secrets and other interest-related information during the course of contract execution and performance; Neither party shall disclose the above mentioned information to third party without obtaining consent from another party, unless otherwise specified by laws and regulations.

3.10.3.2 Upon the termination of rights and obligation under this Contract, each party is required to perform its duty of noticing and assisting as necessary as per the principle of good faith.

4. Supplementary Provisions

None.

5. Legal Liability

5.1 The following actions conducted by the Borrower shall constitute breach of contract:

1) Violate the obligations as prescribed in this Contract;

2) Fails in performing the promise as made in Provision 2 under this Contract;

3) Clearly express its willing by words or actions of neither paying off the debts on due nor debts unexpired;

4) The Lender announces that the Borrower’s act has constituted breach of Contract due to failure in performing or fulfilling the obligations as agreed in other contracts between the two parties;

5) Other conditions that the Borrower fails in performing or fulfilling the Contract.

5.2 The Lender may terminate this Contract or other contracts between the two parties if the following conditions happen:

1) The actions of the Borrower or its Guarantor have constituted breach of contract;

2) Significant adverse changes may happen to the Borrower’s or its Guarantor’s ability of repaying the loan；

3) The mortgage or pledge may have suffered from significant damage or value impairment;

4) Adjustment to state policies may have significant adverse effect to security of loan;

5) The Borrower conducts act of material breach of contract to other creditors.

6) Other conditions that could terminate the Contract by law or as per the agreement between the two parties.

If the Contract is terminated by the Lender, the Borrower may raise a dispute within 7 days which is dated from the Lender informing the Borrower by written, oral or other methods.

5.3 Should conditions mention in the Provisions 5.1 and 5.2 really happen, the Lender may take following remedy measures:

1) Request the Borrower or Guarantor to correct its act of breach or other acts of undermining the security of loan, putting other measures of debt guarantee into practice or proving other effective guarantee.

2) Should the Borrower fail in using, repaying the loan or paying interest as agreed in this Contract, the Lender may levy penalty interest and compound interest for this purpose, until the Borrower pays off the principal and interest;

3) Reduce or cancel the Borrower’s line of credit in loan borrowing, stop releasing the loan, collect the already released loan ahead of schedule, announcing that the loan under other loan contracts between the two parties has expired.

4) Exercise legal or prescribed right of offset to the Borrower;

5) Request the Borrower to bear liability of damage or other legal liabilities;

6) Take measure of asset protection or other legal measures accordingly;

7) May disclose the Borrower’s act of breach of contract;

8) Other remedies: none.

5.4 Where the Lender is forced to realize its creditor’s right through litigation or arbitration due to the Borrower’s breach of contract, it shall be liable for expenses on lawyer, business travel, enforcement, evaluation and other expenditures necessary to realize the creditor’s right.

5.5 On condition that the Borrower has performed its obligations under this Contract, if the Lender fails in releasing the loan in full amount at specified period, it shall be liable for all actual damages suffered by the Borrower.

6. Other Matters

6.1 Notice

All notices and communication under this Contract shall be delivered to the other party as per the mailing address, telex No. or other ways of contact recorded in this Contract, and one party shall inform the other party timely for changes in method of contact.

6.2 The Lender may charge from the Borrower according to the items and standards defined by laws and regulations, unless otherwise agreed by both parties. The Lender may not further notice the Borrower for taking adjustment in expense items and standards by laws and regulations, unless otherwise regulated by law or agreed by both parties.

The expense need to be paid to the third party for the performance of this Contract shall be born by both parties through negotiation. If fails, the expense shall be born by both parties according to laws and regulations or principle of justice.

6.3 The Lender or the Agricultural Bank of China may authorize or entrust other branches affiliated to it to perform the rights and obligations under this Contract or transfer the loan under this Contract to other branches for management, which is recognized by the Borrower. Therefore, the Lender will not take further consent from the Borrower for the practice of activities as above.

6.4 The Lender shall, at the request of relative laws or financial regulators, have the right to provide the information related to this Contract (including but not limited to the classification of loan, information on loan overdue, etc)or other information related to the Borrower to the credit reporting system of People's Bank of China or other legally established credit information database for searching or using by qualified institutions or individuals. The lender shall not bear any form of responsibility for any adverse infect or lost caused to the Borrower due to the third party's rely on or use of information as above mentioned.

6.5 During the valid period of this Contract, shall any issue of or change in any laws and regulations, state policies or regulatory rules cause the Lender failing in continuing to perform this Contract or part of provisions under this Contract, the Lender shall have the right to cancel the rest of loan remaining to be released to the Borrower and take other necessary measures according to relative regulations as above mentioned.

6.6 The failure of exercising any rights or part rights or the delay of exercising any rights by the Lender under this Contract shall not constitute waiving or changing of these or those rights, nor affecting his further exercising of these or those rights.

6.7 Settlement of Dispute

6.7.1 If there is any dispute in the process of implementing this contract, the two parties can negotiate to settle it, and also can settle it as per the method 1 below:

1. Lawsuit. The People’s Court in the Lender’s residence has the jurisdiction.

2. Arbitration. Submit the dispute to / （the name of the arbitration organization）and arbitrate it according to its arbitration rules.

6.7.2 During the lawsuit or the arbitration, the terms under this contract which have not been involved in the dispute still need to be executed.

6.8 Contract Effectiveness

6.8.1 This Contract shall come into force as of the date of execution and sealing by both parties.

6.8.2 Place of execution:Agricultural Bank of China Kunming Shuanglong Branch

6.8.3 Anything not covered in this Contract will be discussed separately by both parties.

6.8.4 This Contract shall be executed in four original copies, each for both parties, each for Guarantor, and each for Notary office, which shall have equal force and effect.

Declaration by the Borrower: The Lender has reminded us paying attention to relevant provisions (especially those provisions in black) hereof by law and, at our request, explained the provisions as necessary. We have read and understood the provisions here above.

Borrower (Seal & Signature):

“KUNMING SHENG HUO PHARMACEUTICS (GROUP) CO., LTD.” (Seal)

Legal Representative or Authorized Agent: Gui Hua Lan (Signature)

Lender (Seal & Signature):

“AGRICULTURAL BANK OF CHINA KUNMING SHUANGLONG BRANCH” (Seal)

Principal or Authorized Agent: Qian He (Signature)

Date of Execution: April 19, 2012

EX-10.3 4 csph_ex103.htm MORTGAGE CONTRACT csph_ex103.htm

EXHIBIT 10.3

Mortgage Contract

Contract No.: 53100220120012608

Dear customer,

In order to protect your rights and interests, please read all the terms （especially the terms in boldface）in this contract carefully and pay attention to your rights and obligations before you sign this contract. If you have any questions, please consult the bank.

Mortagee (full name): Agricultural Bank of China, Kunming Shuanglong Subbranch

Mortgagor: Kunming Shenghuo Pharmaceutical (Group) Co., Ltd.

This Mortgage Contract is entered into by and among the two parties in accordance with relevant Chinese laws and regulations for purpose of ensuring that Kunming Shenghuo Pharmaceutical (Group) Co., Ltd. will repay the loan under the Loan Contract (No. 53010120120001121) as above mentioned.

1. Type and Amount of the Creditor’s Principal Debt

The creditor’s principal debt guaranteed is the loan borrowed for current capital in the amount of RMB 2.15 million.

2. The Scope of Guaranty of Mortgage

The scope of this guaranty of mortgage includes the amount of creditor’s principal claim and the interest thereof, default fine, compensation for damage and all kinds of relevant expenses on for the mortgagee to realize the creditor’s claim and the mortgaged right.

3. Collateral

3.1 The mortgagor agrees to use the machinery equipments as collateral, which are on the attached List of Collateral of Non-Real Estate Property (No.: 53100220120012608), which constitutes an integral part of this Contract and has same legal force and effect as in the Contract; and

3.2 The provisional price of the above mentioned collateral is RMB30,761,550 while the terminal value will be determined by its actual disposing price.

4. Covenants of the Mortgagor

4.1 The Mortgagor has obtained authorization necessary to enter into this Contract pursuant to relevant regulations and procedures.

4.2 The full and undisputed ownership and disposition right of the collateral is entitled to the mortgagor.

4.3 The collateral is negotiable or transferable according to law.

4.4 The collaterals have not been confiscated, detained or supervised.

4.5 The mortgagor shall make a full and accurate disclosure to the extent that the money and collateral such as tax in default, construction mortgages have been mortgaged or rented.

4.6 The Mortgagor has obtained approval from co-owners of the right to be pledged under this Contract.

4.7 During the term of mortgage, the mortgagor shall inform the mortgagee in writing if any of following occurs:

4.7.1 The collaterals have been confiscated, detained, supervised or are subject to other enforcement actions.

4.7.2 The mortgagor’s capital or organizational structure has changed. The changes include but not limited to contract operation, leasing, shareholding system transformation, joint operation, merger, separation, partnership, asset transfer, and etc.

4.7.3 The business license of the mortgagor has been cancelled or revoked, or is ordered to shut down or close its business for other causes.

4.7.4 The mortgagor applies for bankruptcy, reorganization, reconciliation or is the subject of bankruptcy and reorganization applications.

4.8 Nothing exists that may prevent the mortgagee from exercising its right with respect to the collateral.

5. Effect of the Collateral

The effect of collateral is extended to the ancillary component, incidental right, subrogation of mortgage or other property and rights associated with the collateral according to laws and regulations.

6. Management and Utility of the Collateral

6.1 The collateral under this Contract shall be kept by the mortgagor; the mortgagor shall be liable for the management of utility of the collateral. And the mortgagee shall be entitled to supervise and review how the collateral was managed and used.

6.2 During the term of mortgage, the mortgagor may not grant or transfer, rent, remortgage the collateral or dispose it in other ways without the written approval of the mortgagee. Where the written approval is available, the proceeds from the collateral disposition shall firstly be used to liquidate the secured creditor’s principal claim and the escrow.

6.3 Where the collateral was damaged, lost, expropriated, or was owned by the third party resulted from the affiliation, mixture or process of the collateral, the mortgagor shall take active measures to prevent the loss from increasing, meanwhile shall notify the mortgagee in written. The mortgagee is entitled to obtain the indemnity at first priority. Where the performance term of the secured creditor’s claim has not elapsed, the mortgagee is entitled to liquidate the debt or to escrow in advance.

6.4 During the term of mortgage, where the value of collateral is decreased, the mortgagee is entitled to ask the mortgagor resuming original value of the collateral or offering a guaranty which is equivalent to the decreased value and needs to be recognized by the mortgagee.

7. Insurance of the Collateral

7.1 The mortgagor shall effect the insurance for the collateral at the request of the mortgagee and designate the mortgagee as the first beneficiary. The original insurance document shall be delivered to the mortgagee for storage.

7.2 The mortgagor shall be liable for the insurance premiums and pay it in full amount and on time. It also requires the mortgagor perform other obligations under the insurance contract (including the insurance document or other insurance certificate). During the term of mortgage, where the mortgagor didn’t pay the insurance premiums or effect (or renew) the insurance contract on time, the mortgagee is entitled to make advance payment of the insurance premiums or effect the insurance contract on behalf of the mortgagor, while the mortgagor shall be liable for those expenses. The mortgagor agrees that the mortgagee could collect the above mentioned expenses from its account opened at the mortgagee.

7.3 During the term of mortgage, the mortgagor may not unilaterally or negotiate with the insurer to change or terminate the insurance contract without the written approval of mortgagee; neither should he waive the right to insurance claims or the right to claim compensation against the third party.

7.4 During the term of mortgage, where an insurance incident incurred to the collateral, the mortgagor shall immediately inform the insurer and mortgagee, and shall be responsible to claim compensation. Where the mortgagee didn’t perform his obligation of notification or claiming compensation, causing the loss of the mortgagee, the mortgagor shall be liable for indemnity.

8. Registration of Mortgage

8.1 The mortgagor shall register this Mortgage Contract with relevant registration authorities within 5 days from the date of its execution; all of those certificates, mortgage registration document associated with the collateral shall be kept by the mortgagee.

8.2 During the term of mortgage, where the registration needs to be changed, the mortgagor shall be liable to do so.

8.3 During the term of mortgage, where the mortgaged right is transferred by the mortgagor according to this Contract; the mortgagor shall be in assistance with the mortgagee and transferee on the change of registration.

9. Transfer of Mortgaged Right

Where part of the creditor’s claim is transferred by the mortgagee, he is entitled not to transfer the corresponding mortgaged right.

10. Realization of Mortgaged Right

10.1 Under any of the following circumstances, the mortgagee has the right to exercise the mortgaged right:

10.1.1 The mortgagee is not paid at the maturity of the obligation under the principal contract.

10.1.2 The business licenses of the debtor or mortgagor has been cancelled or revoked, or he is ordered to close down or was terminated for other causes.

10.1.3 The People’s Court has accepted the bankruptcy application of the debtor or mortgagor or has made the determination of a settlement.

10.1.4 The debtor or mortgagor was dead or was declared lost or dead.

10.1.5 The collateral has been sealed up, distrained, supervised or has been taken other enforcement actions.

10.1.6 The collateral was damaged, lost or expropriated.

10.1.7 The mortgagor didn’t resume the value of the collateral or offer the corresponding guaranty at the request of mortgagee.

10.1.8 The mortgagor violated those obligations under this Contract.

10.1.9 Other circumstances that have material effect on the realization of mortgaged right.

10.2 Where there are both material guarantee (include the guarantee provided by debtor or third party) and credit guarantee for the claim guaranteed under this contract, the Mortagee shall be able to achieve claim via material guarantee, and also can request the guarantor to burden the obligation of credit guarantee. Where more than two material guarantors for the creditor’s claim under this Contract exist in the mean time (include the guarantee provided by debtor), the mortgagee is entitled to exercise the security right to any one of the collateral or both of them. If the mortgagee has chosen certain material guarantee or collateral to achieve its claim, it can also achieve part of or all claim via other guarantee or collateral meanwhile.

10.3 Where the mortgagor is the third person other than the debtor, meanwhile the debtor has offered material guarantee for the creditor’s claim under the principal contract, and the mortgagor has waived this security right, the mortgagor agrees to continue to offer a guaranty of mortgage for the creditor’s claim under the principal contract. “The security right” is the security right formed when the debtor offers material guarantee for the claim under the principal contract.

10.4 Where the Mortgagor offers guarantee by using the collateral under this contract for several debts, include but not limited, the debts under this contract, and the money converted from the sale or the auction of the collateral is not enough to pay off all the debt, the mortgagee is entitled to decide the ranking of all claims. If this collateral offers guarantee for the debt between other debtor and the mortgagee and the money converted from the sale or the auction of the collateral is not enough to pay off all the debt and there are not any appointed matters, the mortgagee is also entitled to decide the ranking of all claims.

11. Liability for Breach of Contract

11.1 After this Contract takes effect, where the mortgagee didn’t perform his obligations, resulting in the loss of mortgagor, the mortgagee shall be liable for the indemnity.

11.2 The mortgagor shall indemnify the mortgagee in case of committing any of the following acts:

11.2.1 Didn’t obtain legal and effect authorization which is necessary for the guaranty under this Contract.

11.2.2 Didn’t perform his obligation of making a full and accurate disclosure to the extent that there is a existence of tax in default, construction mortgage, co-ownership of the collateral and a dispute over the collateral, or the collateral was mortgaged or rented, or the collateral has been sealed up, distrained or supervised.

11.2.3 Didn’t register the Mortgage Contract according to the provisions herein.

11.2.4 Disposed the collateral without the written approval of the mortgagee.

11.2.5 Didn’t resume the value of the collateral or offer the corresponding guaranty at the request of the mortgagee.

11.2.6 Other activities that have violated the agreement under this Contract or affected the realization of mortgaged right.

12. Special provisions where there are changes in the mortgaged buildings, other attachments on the ground and the use right of the land for construction.

12.1 Where the collateral under this contract is building, other attachments on the ground or the use right of the land for construction and the collateral is expropriated, levied or demolished, the Mortgagor should inform the Mortgagee within 10 days after getting the information of demolition.

12.2 If the compensation for demolition is in the form of the exchange of right and the borrower has not repay the debt ahead of time, the Mortgagor should make collateral for the debt by using the building, other attachments on the ground or the use right of the land for construction gotten in the demolition exchange and sign relevant contract. The Mortgagor should also do collateral register procedures for the exchanged building, other attachments on the ground or the use right of the land for construction. Before the new collateral was registered, the Mortgagee has the right to request the Mortgagor to provide other guarantee.

12.3 If the Mortgagor gets compensation for demolition in the form of money, the Mortgagee has the priority to get the compensation; if the loan contract has not expired, the Mortgagee has the right to request the Mortgagor to deposit the compensation to the deposit account or pledge the certificate of the deposit to provide guarantee for the debt and sign relevant guarantee agreement.

12.4 If the Mortgagor violates the terms under this contract, it should pay % of the principal of the main debt as liquidated damages.

13. Liability for Expenses

The mortgagor shall be liable for incurred costs in the course of collateral appraisement, evaluation, storage, registration, notarization and escrow.

14. Objection Period of rescission right

Where the Mortgagee executes rescission right according to rules or terms under this contract, the objection period for the Mortgagor is seven working days as of the date on which the Mortgagee informs the Mortgagor by written or oral notice or notice in other forms.

15. Resolution of Disputes

Any dispute arising from this Contract shall be resolved by both parties through friendly discussion, or

15.1 Shall be resolved by litigation which falls within the jurisdiction of People’s Court in the mortgagee’s place of residence.

15.2 During the course of the litigation, this Contract shall be performed except for the part under dispute.

16. Other Matters

16.1 The mortgagor hereby acknowledged the receipt of the principal contract and have read and understood this contract secured by the mortgagor.

17. This Contract shall take effect from the date of its execution.

18. This Contract is made out in 4 copies and each one for the Mortgagee, the Mortgagor, the Administration for Industry and Commerce, Ministry of Commerce and the Public Notary Office. Each copy has same legal force and effect.

The mortgagee has notified the mortgagor to make a complete and accurate understanding for each provision under this Contract and have made explanations for corresponding provisions as per the requirement of the mortgagor. Both parties reached an agreement on this Contract.

The Mortgagor declare that: the mortgagee has pointed out relevant terms （especially the terms in boldface）and explained the concept, content and legal effect of relevant terms at the request of us. We know and understand all the terms above.

Mortgagee:

Agricultural Bank of China, Kunming Shuanglong Subbranch

Signature: Qian He

Mortgagor:

Kunming Shenghuo Pharmaceutical (Group) Co., Ltd.

Signature: Qionghua gao

Date: April 19, 2012

EX-10.4 5 csph_ex104.htm MORTGAGE CONTRACT csph_ex104.htm

EXHIBIT 10.4

Mortgage Contract

Contract No.: 53100220120012609

Dear customer,

Mortagee (full name): Agricultural Bank of China, Kunming Shuanglong Subbranch

Mortgagor: Kunming Shenghuo Pharmaceutical (Group) Co., Ltd.

1. Type and Amount of the Creditor’s Principal Debt

The creditor’s principal debt guaranteed is the loan borrowed for current capital in the amount of RMB37.85 million.

2. The Scope of Guaranty of Mortgage

3. Collateral

3.1 The mortgagor agrees to use the real property as collateral, which are on the attached List of Collateral of Real Estate (No.: 53100220120012609), which constitutes an integral part of this Contract and has same legal force and effect as in the Contract; and

3.2 The provisional price of the above mentioned collateral is RMB54,080,000 while the terminal value will be determined by its actual disposing price.

4. Covenants of the Mortgagor

4.1 The Mortgagor has obtained authorization necessary to enter into this Contract pursuant to relevant regulations and procedures.

4.2 The full and undisputed ownership and disposition right of the collateral is entitled to the mortgagor.

4.3 The collateral is negotiable or transferable according to law.

4.4 The collaterals have not been confiscated, detained or supervised.

4.5 The mortgagor shall make a full and accurate disclosure to the extent that the money and collateral such as tax in default, construction mortgages have been mortgaged or rented.

4.6 The Mortgagor has obtained approval from co-owners of the right to be pledged under this Contract.

4.7 During the term of mortgage, the mortgagor shall inform the mortgagee in writing if any of the following occurs: