UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10-Q
 
 (Mark
One)
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended January 31, 2009
 
  ̈
              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: O-24512
 
 RENHUANG
PHARMACEUTICALS, INC.
 (Exact
name of registrant as specified in its charter)
 
 Nevada
              88-1273503(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)
 
 No.
281, Taiping Road, Taiping District,
 Harbin,
Heilongjiang Province, 150050, P. R. China
 (Address
of principal executive offices)
 
 Registrant's
telephone number, including area code 86-451-5762-0378
 
 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  ̈No x
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    
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  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                Smaller
      Reporting Company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈No x
 
 Applicable
only to corporate issuers:
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. As of March 10, 2008, there were
35,096,680 shares of common stock, par value $0.001, issued and outstanding.
  
  Renhuang
Pharmaceuticals, Inc.
 
 TABLE OF
CONTENTS
 
 PART
I
 
 ITEM
      1
                    FINANCIAL
      STATEMENTS
                    4ITEM
      2
                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                    21ITEM
      3
                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                    26ITEM
      4
                    CONTROLS
      AND PROCEDURES
                    26PART
      IIITEM
      1
                    LEGAL
      PROCEEDINGS
                    28ITEM
      1A
                    RISK
      FACTORS
                    28ITEM
      2
                    UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                    29ITEM
      3
                    DEFAULTS
      UPON SENIOR SECURITIES
                    29ITEM
      4
                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                    29ITEM
      5
                    OTHER
      INFORMATION
                    29ITEM
      6
                    EXHIBITS
                    29
  2
  PART
I - FINANCIAL INFORMATION
 
 This
Quarterly Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based
on management’s beliefs and assumptions, and on information currently available
to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company set forth under
the heading “Management's Discussion and Analysis of Financial Condition or Plan
of Operation.” Forward-looking statements also include statements in which words
such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,”
“consider” or similar expressions are used.
 
 Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and assumptions. The Company's future results and shareholder
values may differ materially from those expressed in these forward-looking
statements. Readers are cautioned not to put undue reliance on any
forward-looking statements.
  3
  ITEM 1Financial
Statements
 
 RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 ASSETS
 
 January31,
                              2009
                            
                            
                            October 31,
                              2008(Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
                            
                            $
                            10,876,693
                            
                            
                            $
                            9,747,693Accounts
      receivable, net
                            
                            
                            25,645,306
                            
                            
                            
                            20,844,478Inventories
                            
                            
                            2,525,065
                            
                            
                            
                            2,625,385Prepayments
      and other receivables, net
                            
                            
                            295,756
                            
                            
                            
                            167,338Due
      from related party
                            
                            
                            343,573TOTAL
      CURRENT ASSETS
                            
                            
                            39,686,393
                            
                            
                            
                            33,384,894PROPERTY,
      PLANT AND EQUIPMENT, NET
                            
                            
                            2,540,993
                            
                            
                            
                            2,620,949TOTAL
      ASSETS
                            
                            $
                            42,227,386
                            
                            
                            $
                            36,005,843
 
 The
accompanying notes are an integral part of the consolidated financial
statements
  4
  RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
  LIABILITIES AND
STOCKHOLDERS' EQUITY
  January 31,
                                                      2009
                                                    
                                                    
                                                    October 31,
                                                      2008(Unaudited)CURRENT
      LIABILITIESAccounts
      payable
                                                    
                                                    $
                                                    280,097
                                                    
                                                    
                                                    $
                                                    193,934Other
      payables
                                                    
                                                    
                                                    1,700,909
                                                    
                                                    
                                                    
                                                    1,607,489Due
      to related party
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    159,664TOTAL
      LIABILITIES
                                                    
                                                    
                                                    1,981,006
                                                    
                                                    
                                                    
                                                    1,961,087COMMITMENTSSTOCKHOLDERS'
      EQUITYPreferred
      stock - Authorized preferred shares 1,000,000, issued and outstanding
      number of shares: nil and at par value of nilCommon
      Stock - Authorized common shares 100,000,000, issued and outstanding
      number of shares 35,096,680 at par value of $0.001
                                                    
                                                    
                                                    35,097
                                                    
                                                    
                                                    
                                                    35,097Additional
      paid-in capital
                                                    
                                                    
                                                    6,595,400
                                                    
                                                    
                                                    
                                                    6,595,400Reserves
                                                    
                                                    
                                                    2,867,674
                                                    
                                                    
                                                    
                                                    2,867,674Retained
      earnings
                                                    
                                                    
                                                    27,511,998
                                                    
                                                    
                                                    
                                                    21,245,271Accumulated
      other comprehensive income
                                                    
                                                    
                                                    3,236,211
                                                    
                                                    
                                                    
                                                    3,301,314TOTAL
      STOCKHOLDERS' EQUITY
                                                    
                                                    
                                                    40,246,380
                                                    
                                                    
                                                    
                                                    34,044,756TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                    
                                                    $
                                                    42,227,386
                                                    
                                                    
                                                    $
                                                    36,005,843
 
 The
accompanying notes are an integral part of the consolidated financial
statements
  5
  RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (Unaudited)
 
 Three Months Ended January 31,2009
                                    
                                    
                                    2008SALES
                                    
                                    $
                                    13,769,997
                                    
                                    
                                    $
                                    10,458,856COST
      OF SALES
                                    
                                    
                                    (6,480,493
                                    )
                                    
                                    
                                    (4,797,732
                                    )GROSS
      PROFIT
                                    
                                    
                                    7,289,504
                                    
                                    
                                    
                                    5,661,124SELLING
      AND DISTRIBUTION EXPENSES
                                    
                                    
                                    (5,406
                                    )
                                    
                                    
                                    (69,344
                                    )ADVERTISING
      EXPENSE
                                    
                                    
                                    (292,684
                                    )
                                    
                                    
                                    (681,431
                                    )GENERAL
      AND ADMINISTRATIVE EXPENSES
                                    
                                    
                                    (618,374
                                    )
                                    
                                    
                                    (775,070
                                    )RESEARCH
      AND DEVELOPMENT
                                    
                                    
                                    (111,778
                                    )
                                    
                                    
                                    (341,894
                                    )(PROVISION
      FOR DOUBTFUL ACCOUNTS)/RECOVERY
                                    
                                    
                                    —
                                    
                                    
                                    
                                    41,432DEPRECIATION
                                    
                                    
                                    (3,659
                                    )
                                    
                                    
                                    (3,126
                                    )INCOME
      FROM OPERATIONS
                                    
                                    
                                    6,257,603
                                    
                                    
                                    
                                    3,831,691OTHER
      INCOME
                                    
                                    
                                    9,128
                                    
                                    
                                    
                                    13,973INCOME
      BEFORE INCOME TAXES
                                    
                                    
                                    6,266,731
                                    
                                    
                                    
                                    3,845,664INCOME
      TAXES
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —NET
      INCOME
                                    
                                    $
                                    6,266,731
                                    
                                    
                                    $
                                    3,845,664OTHER
      COMPREHENSIVE INCOMEFOREIGN
      CURRENCY TRANSLATION ADJUSTMENT
                                    
                                    
                                    (65,103
                                    )
                                    
                                    
                                    967,392COMPREHENSIVE
      INCOME
                                    
                                    $
                                    6,201,628
                                    
                                    
                                    $
                                    4,813,056BASIC
      AND DILUTED EARNINGS PER SHARE
                                    
                                    $
                                    0.18
                                    
                                    
                                    $
                                    0.11WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING –BASIC – AND
      DILUTED
                                    
                                    
                                    35,096,680
                                    
                                    
                                    
                                    35,096,680
 
 The
accompanying notes are an integral part of the consolidated financial
statements
  6
  RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Three Months Ended January 31,2009
                                
                                
                                2008(Unaudited)
                                
                                
                                (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                
                                $
                                6,266,731
                                
                                
                                $
                                3,845,664Adjustments
      to reconcile net income to net cash from operating activities
      :Depreciation
                                
                                
                                88,464
                                
                                
                                
                                80,240Provision
      for doubtful account
                                
                                
                                —
                                
                                
                                
                                (41,432
                                )Changes
      in operating assets and liabilities:Accounts
      receivable
                                
                                
                                (4,896,584
                                )
                                
                                
                                (4,434,966
                                )Inventories
                                
                                
                                95,701
                                
                                
                                
                                (911,844
                                )Prepayments
      and other receivables
                                
                                
                                (128,805
                                )
                                
                                
                                (203,934
                                )Accounts
      payable and accruals, net
                                
                                
                                86,569
                                
                                
                                
                                173,496Other
      payables
                                
                                
                                96,355
                                
                                
                                
                                52,393Due
      to related parties
                                
                                
                                (448,118
                                )
                                
                                
                                (8,992
                                )NET
      CASH - OPERATING ACTIVITIES
                                
                                
                                1,160,313
                                
                                
                                
                                (1,449,375
                                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property, plant and equipment
                                
                                
                                (13,133
                                )
                                
                                
                                (71,514
                                )NET
      CASH - INVESTING ACTIVITIES
                                
                                
                                (13,133
                                )
                                
                                
                                (71,514
                                )CASH
      FLOWS FROM FINANCING ACTIVITIES:
                                
                                
                                —
                                
                                
                                
                                —
 
 The
accompanying notes are an integral part of the consolidated financial
statements
  7
  RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CASH FLOWS (CONTINUED)
 
 Three Months Ended January 31,2009
                                  
                                  
                                  2008(Unaudited)
                                  
                                  
                                  (Unaudited)NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                  
                                  $
                                  1,147,180
                                  
                                  
                                  $
                                  (1,520,889
                                  )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
                                  
                                  
                                  (18,181
                                  )
                                  
                                  
                                  386,588Cash
      and cash equivalents, beginning of period
                                  
                                  
                                  9,747,694
                                  
                                  
                                  
                                  10,153,603Cash
      and cash equivalents, end of period
                                  
                                  $
                                  10,876,693
                                  
                                  
                                  $
                                  9,019,302SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      paid
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —Income
      taxes paid
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
 
 The
accompanying notes are an integral part of the consolidated financial
statements
  8
  RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
  1. REORGANIZATION
TRANSACTIONS
 
 1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
 Renhuang
Pharmaceuticals, Inc., (“Renhuang”) or the (“Company”) was incorporated in the
State of Nevada on August 18, 1988 and shares of the Company's Common Stock are
trading on the pink sheet under the symbol RHGP.  The Company owns
100% of Harbin Renhuang Pharmaceutical Company Limited (the “BVI”), a holding
company.  Substantially all of the Company’s operations are conducted
through BVI’s wholly-owned subsidiary Harbin Renhuang Pharmaceuticals Co., Ltd
(“Renhuang China” or the “Subsidiary”) which was incorporated in Harbin City in
the People’s Republic of China (the “PRC” or “China”) in 1996. The subsidiary is
principally engaged in production and sales of nutraceutical and
bio-pharmaceutical products including tablets, drinks and health food; the
Subsidiary’s sales network covers various provinces, cities, and counties
throughout China.
  Unless
otherwise provided in this current report, all references in this current report
to “we”, “us”, “our company”, “our”, or the “Company” refers to Renhuang
Pharmaceuticals, Inc. on a consolidated basis, including Renhuang China and the
BVI.
  2. BASIS OF
PRESENTATION
 
 The
accompanying consolidated financial statements of the Company are stated in
United States dollars and have been prepared in accordance with generally
accepted accounting principles in the United States of America and include the
financial statements of the Company and its majority-owned subsidiaries. All
significant intercompany transactions and balances are eliminated on
consolidation.
  The
accompanying unaudited consolidated financial statements as of January 31, 2009
and for the three months ended January 31, 2009 and 2008 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Regulation S-X applicable
to smaller reporting companies. In the opinion of management, these unaudited
consolidated interim financial statements include all adjustments considered
necessary to make the financial statements not misleading. The results of
operations for the three months ended January 31, 2009 are not necessarily
indicative of the results for the full fiscal year ending October 31, 2009. The
unaudited consolidated interim financial statements should be read in
conjunction with the Company’s audited consolidated financial statements and
notes thereto for the year ended October 31, 2008 as reported in Form
10-K.
  3. SUMMARY OF PRINCIPAL ACCOUNTING
POLICIES
 
 A. CASH AND CASH
EQUIVALENTS
 
 The
Company considers cash and cash equivalents to include cash on hand and demand
deposits with banks with an original maturity of three months or
less.
  9
  B. ACCOUNTS RECEIVABLE,
NET
 
 Accounts
receivable is recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. The Company issues invoices
at  month-end for the deliveries made during that monthly period. . An
account is considered past due after 180 days from the invoice date as at
January 31,2009 and October 31, 2008. The Company extended its standard credit
terms to 180 days during 2008 in order to increase its market share. The Company
recognizes an allowance for doubtful accounts to ensure accounts receivable are
not overstated due to uncollectibility and are maintained for all customers
based on a variety of factors, including the length of time the receivables are
past due, significant one-time events and historical experience. If
circumstances related to customers change, estimates of the recoverability of
receivables would be further adjusted. The allowance on the doubtful accounts
was $442,122 as at January 31, 2009 ($442,912 at October 31, 2008). The
Company does not accept returns or offer any post-sales marketing supporting to
customers.
 
 C. INVENTORIES
 
 Inventories
are stated at the lower of cost or net realizable value. Production cost is
allocated at FIFO and overhead cost is calculated on the weighted average
basis.  The cost includes all costs to acquire, transport and process
inventories to their present location and condition. The Company evaluates the
net realizable value of its inventories on a periodic basis and records a
provision for loss, if necessary, to reduce inventories to their net realizable
value. There were $64,033 and
$64,147 inventory reserve provisions recorded at January 31, 2009 and October
31, 2008, respectively.
 
 D. PROPERTY, PLANT AND
EQUIPMENT
 
 Property,
plant and equipment are carried at cost. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are
capitalized.
 
 When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included as
components of income in the year of disposition.
 
 The
Company records depreciation of its property, plant and equipment on a
straight-line basis over the estimated useful lives of the assets based on their
costs. The useful lives for property, plant and equipment are estimated as
follows:
 
 Machinary
      and equipment
                
                10
      yearsOffice
      equipment
                
                5
      to 10 yearsMotor
      vehicles
                
                5
      to 10 years
 
 E.
FAIR VALUE OF FINANCIAL INSTRUMENTS
  The
carrying amounts of certain financial instruments, including cash, accounts
receivable, other receivables, accounts payable, and other payables approximate
their fair values as of January 31, 2009 because of the relative short-term
maturity of these instruments.
  10


3.
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
 
 F. INCOME TAXES
 
 The
Company accounts for income tax under the provisions of Statements of Financial
Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the consolidated
financial statements. Deferred income taxes are provided using the liability
method. Under the liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial statement bases
of assets and liabilities. In addition, the Company is required to record all
deferred tax assets, including future tax benefits of capital losses carried
forward, and to record a “valuation allowance” for any deferred tax assets where
it is more likely than not that the asset will not be realized.
 
 In
accordance with the relevant income tax laws applicable to wholly foreign owned
enterprises operating in PRC, the profits of the Company are fully exempt from
income tax for two years (“tax holiday”), commencing from the first profit
making year of operations, followed by a 50% exemption for the immediate next
three years (“tax preferential period”), after which the profits of the Company
will be taxable at the full rate, currently 25% (See Note 12). On January 22,
2009, the local government extended the tax holiday for the Company to the end
of 2009.
 
 G. RELATED PARTIES
 
 Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence. Related parties may be individuals or corporate entities
(See Note 15).
 
 H. IMPAIRMENT OF LONG-TERM
ASSETS
 
 The
Company reviews long-lived assets for potential impairment based on a review of
projected undiscounted cash flows associated with these assets. Long-lived
assets are included in impairment evaluations when events and circumstances
exist that indicate the carrying amount of these assets may not be recoverable.
Measurement of impairment losses for long-lived assets that the Company expects
to hold and use is based on the estimated fair value of the assets. Therefore,
future changes in the Company’s strategy and other changes in its operations
could impact the projected future operating results that are inherent in
estimates of fair value, resulting in impairments in the future. Additionally,
other changes in the estimates and assumptions, including the discount rate and
expected long-term growth rate, which drive the valuation techniques employed to
estimate the fair value of long-lived assets could change and, therefore, impact
the assessments of impairment in the future.  As of January 31, 2009,
management expects its long-lived assets to be fully
recoverable.




11







I. FOREIGN CURRENCY
TRANSLATION





The
Company maintains its books and accounting records in its functional currency,
the Renminbi, (which is the PRC's currency).





In
translating the financial statements of the Company from its functional currency
into United States dollars (“USD”), its reporting currency, balance sheet
accounts are translated using the closing exchange rate in effect at the balance
sheet date and income and expense accounts are translated using an average
exchange rate prevailing during the reporting period. Adjustments resulting from
the transaction, if any, are included in accumulated other comprehensive income
in stockholders’ equity.





Foreign
currency transaction gains and losses, if any, are included in the determination
of net income for the period.





The
Renmimbi (“RMB”) is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or can be,
converted into USD at the rates used in translation. The exchange rate between
the RMB and the USD on January 31, 2009 and the average rate from October 31,
2008 to January 31, 2009 are:




Exchange
      rate
                        
                        Oct
      31,2008
                        
                        
                        Jan
      31, 2009Balance
      Sheets- period end RMB : USD exchange rate
                        
                        6.8258:1
                        
                        
                        6.8380:1Operating
      Statement: Period average RMB : USD exchange rate
                        
                        7.0467:1
                        
                        
                        6.8333:1




J. USE OF ESTIMATES





The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Significant estimates primarily related to the
realizable value of accounts receivable, inventories, and the useful lives of
plant and equipment. Actual results when ultimately realized could differ from
those estimates.





K. REVENUE
RECOGNITION





The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed and determinable, and
collectability is reasonably assured; this policy is in accordance with the
provisions of Staff Accounting Bulletin No. 104.  Renhuang generally
recognizes product sales when the product is shipped.


12




The
Company provides rebates to its sales agents (who act as wholesalers) as an
incentive plan. The rebate rate is set on a product-by-product basis. When
revenue is recognized, the rebate is accounted for as an offset to revenues in
accordance with EITF Issue No. 01-9, “Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor’s Products)”. On
average, the rebate rate was 19% and 17% of gross revenue in the three months
ended January 31, 2009 and 2008, respectively.





L.
CERTAIN RISKS AND CONCENTRATIONS




Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of trade accounts receivable. The Company
performs ongoing credit evaluations with respect to the financial condition of
its creditors, but does not require collateral. In order to determine the value
of the Company's accounts receivable, the Company records a provision for
doubtful accounts to cover probable credit losses. Management reviews and
adjusts this allowance periodically based on historical experience and its
evaluation of the collectability of outstanding accounts
receivable.





The
Company is subject to the consideration and risks of operating in the PRC. These
include risks associated with the political and economic environment, foreign
currency exchange and the legal system in the PRC.





M.
RESEARCH AND DEVELOPMENT




Research
and development (“R&D”) costs are expensed as incurred. Engineers and
technical staff are involved in the production of our products as well as
on-going research, with no segregation of the portion of their salaries relating
to research and development from the portion of their salaries relating to
production. The total salaries are included in cost of sales.  R&D
for the three months ended January 31, 2009 and 2008 are $111,778 and $341,894,
respectively.




N.
ADVERTISING




Advertising
costs consist primarily of promoting the Company and the Company’s products
through television and print advertisements in trade publications. Advertising
costs are expensed as incurred. They are separately disclosed in the
consolidated statements of income and comprehensive income.




O.
STOCK-BASED COMPENSATION




The
Company measures and records the cost of employee services received in exchange
for stock-based compensation at the grant date fair value of the
award.  This method is in accordance with SFAS No. 123 (revised
2004), “Share-Based Payment”.




P. CLASSIFICATION OF OPERATING COSTS AND
EXPENSES




The
Company records its operating costs and expenses using the following general
classifications:


13




Cost of Goods
Sold


Cost of
goods sold consists primarily of raw materials, direct labor and manufacturing
overhead. Manufacturing overhead includes an allocation of purchasing and
receiving costs, inspection fees, warehousing utilities, supplies, factory and
equipment repairs and maintenance, safety equipment and supplies, packing
materials, loading fees, and depreciation.




Selling
Expenses


Selling
expenses consist primarily of travel and entertainment, maintenance, payroll
(including taxes and benefits) for sales staff, telephone, utilities, insurance,
sales commissions and export fees.




General and Administrative
Expenses


General
and administrative expenses consist primarily of general office expenses, travel
and entertainment, transportation, administrative payroll, payroll taxes and
benefits, maintenance, telephone, utilities, printing, professional fees,
continuing education, licenses and fees.





Q. EARNINGS PER
SHARE





The
Company reports earnings per share in accordance with SFAS No. 128, “Earnings
per Share.” Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares available.
Diluted earnings per share is computed using the treasury stock method whereby
the denominator is increased by the net dilution on the exercise of the warrants
and other common stock equivalents if the additional common shares are
dilutive.  There were nil and 25,000 potentially dilutive securities
outstanding during the three month periods ended January 31, 2009 and 2008,
respectively.





R. COMPREHENSIVE
INCOME





The
Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated balances in
a full set of general-purpose financial statements. SFAS No. 130 defines
comprehensive income to include all changes in equity except those resulting
from investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities. In the three months ended
January 31, 2009, the only component of other comprehensive income is foreign
translation loss of $65,103 (gain $967,392 in the three months ended January 31,
2008), which is included within the accumulated other comprehensive income in
the balance sheet.


14


S. RECENT
PRONOUNCEMENTS





The
Company adopted SFAS No. 157 effective January 1, 2008, except for the
nonfinancial assets and liabilities that are subject to a one-year deferral
allowed by FASB Staff Position (FSP) SFAS 157-2 (“ FSP SFAS 157-2”). FSP SFAS
157-2 delays the effective date of SFAS No.157 until fiscal
years beginning after November 15, 2008 for nonfinancial assets and liabilities
that are not recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). The adoption of SFAS No.157 did not have
a material effect on our financial statements. The Company does not expect the
adoption of SFAS No.157 will have a
material effect on our financial statements beginning in year 2009 as it relates
to the items subject to the one-year deferral allowed by FSP SFAS
157-2.





In
February 2007, the FASB issued Statement No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No.159). This
statement permits companies to choose to measure many financial assets and
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The adoption of
SFAS No. 159, effective January 1, 2008, did not have a material impact on the
Company’s financial statements.





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141(R), “Business Combinations”(“SFAS 141(R)”).
SFAS 141(R) requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in an acquiree at the
acquisition date, measured at their fair values as of that date. Transaction
costs and restructuring costs are accounted for separately from the
business combination. This Statement also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to
recognize the identifiable assets and liabilities, as well as the noncontrolling
interest in the acquiree, at the full amounts of their fair values.
SFAS 141(R) is effective for the Company’s fiscal year beginning
January 1, 2009 on a prospective basis.


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51”(“SFAS 160”).
SFAS 160 requires entities to report noncontrolling (minority) interests of
consolidated subsidiaries as a component of shareholders’ equity on the balance
sheet; include all earnings of a consolidated subsidiary in consolidated results
of operations; and treat all transactions between an entity and the
noncontrolling interest as equity transactions between the parties.
SFAS 160 is effective for the Company’s fiscal year beginning
January 1, 2009, and adoption is prospective only; however, the
presentation and disclosure requirements must be applied retrospectively. The
Company does not consolidate any partially owned subsidiaries and therefore does
not expect the application of this standard to have a material impact on its
consolidated financial position, cash flows or results of
operations.


In March 2008, the FASB
issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging
Activitiesan
amendment of SFAS 133” ("SFAS 161"). This Statement will require enhanced
disclosures about derivative instruments and hedging activities to enable
investors to better understand their effects on an entity's financial position,
financial performance and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company does not expect the adoption of
SFAS 161 to have a material impact on its financial position, results of
operations or cash flows.




15




In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (FAS No.162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS No. 162 is effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles". The implementation of this standard will not
have a material impact on the Company's financial position and results of
operations.





4.
CASH AND CASH EQUIVALENTS





Cash and
cash equivalents as of January 31, 2009 and October 31, 2008 consist of the
following:





January
      31,
                                          2009
                                        
                                        October
      31,
                                          2008Cash
      on hand
                                        $
                                        
                                        7,708
                                        
                                        $
                                        
                                        20,880Cash
      in banks
                                        
                                        
                                        10,868,985
                                        
                                        
                                        
                                        9,726,813$
                                        
                                        10,876,693
                                        
                                        $
                                        
                                        9,747,693




The
Company maintains a bank account in the PRC which is not protected by FDIC
insurance or other insurance. As of January 31, 2009, the Company had
$10,868,985in uninsured
deposits with Chinese banks. Historically, the Company has not experienced any
losses in such accounts.





5. ACCOUNTS RECEIVABLE,
NET





The
Company's accounts receivable as of January 31, 2009 and October 31, 2008 are
summarized as follows:


January 31,2009
                      
                      
                      October 31,2008Accounts
      receivable
                      
                      $
                      26,087,428
                      
                      
                      $
                      21,287,390Less:
      Allowance for doubtful accounts
                      
                      
                      (442,122
                      )
                      
                      
                      (442,912
                      )Accounts
      receivable, net
                      
                      $
                      25,645,306
                      
                      
                      $
                      20,844,478





As of
January 31, 2009, there are three customers who accounted for $3,017,006,
$2,826,329 and $2,546,415 of accounts receivable, which are approximately 12%,
11% and 10% of the total balance, respectively.





These
same three major customers also have sales amounts over 10% of the total sales
for the three months ended January 31, 2009 and 2008 as follows:





2009
                      
                      
                      2008Customer
      A:
                      
                      $
                      1,454,267
                      
                      
                      
                      11
                      %
                      
                      $
                      1,220,295
                      
                      
                      
                      12
                      %Customer
      B
                      
                      $
                      1,325,374
                      
                      
                      
                      10
                      %
                      
                      $
                      1,208,579
                      
                      
                      
                      12
                      %Customer
      C:
                      
                      $
                      1,384,263
                      
                      
                      
                      10
                      %
                      
                      
                      –
                      
                      
                      
                      –




16





6.
PREPAYMENT AND OTHER RECEIVABLES, NET





Prepayments
and other receivables as of January 31, 2009 and October 31, 2008 consist of the
following:





January 31,
                          2009
                        
                        October 31,
                          2008Prepayment
      and other receivables
                        
                        $
                        654,996
                        
                        
                        $
                        527,220Less:
      allowance for doubtful accounts
                        
                        
                        (359,240
                        )
                        
                        
                        (359,882
                        )$
                        295,756
                        
                        
                        $
                        167,338





As of
January 31, 2009, the balance in prepayment and other receivables mainly
includes advances to employees and prepayment for purchase materials of $128,206
and $148,187, respectively.  As of October 31, 2008, the Company had
advances to employees of approximately $114,000.





7. INVENTORIES





The
Company's inventories as of January 31, 2009 and October 31, 2008 are summarized
as follows:


January 31,2009
                                      
                                      
                                      October 31,2008Raw
      materials
                                      
                                      $
                                      1,710,222
                                      
                                      
                                      $
                                      1,533,472Finished
      goods
                                      
                                      
                                      284,527
                                      
                                      
                                      
                                      249,103Work
      in progress
                                      
                                      
                                      594,349
                                      
                                      
                                      
                                      906,957Less:
      Valuation allowance
                                      
                                      
                                      (64,033
                                      )
                                      
                                      
                                      (64,147
                                      )$
                                      2,525,065
                                      
                                      
                                      $
                                      2,625,385





8.
PROPERTY, PLANT AND EQUIPMENT, NET


January 31,2009
                            
                            
                            October 31,
                              2008Cost:-Machinery
      and equipment
                            
                            $
                            3,357,254
                            
                            
                            $
                            3,350,762Office
      equipment and furnishings
                            
                            
                            50,951
                            
                            
                            
                            53,015Motor
      vehicles
                            
                            
                            52,920
                            
                            
                            
                            50,3883,461,125
                            
                            
                            
                            3,454,165Less: Accumulated
      depreciation
                            
                            
                            (920,132
                            )
                            
                            
                            (833,216
                            )Net
      book value
                            
                            $
                            2,540,993
                            
                            
                            $
                            2,620,949




17





For the
three months ended January 31, 2009, depreciation expenses relating to property,
plant and equipments were $88,464, consisting of $84,805 recorded as cost of
sales and $3,659 in general and administrative expenses. These expenses
were $80,240 for the three months ended January 31, 2008, consisting of
$77,114 recorded as cost of sales and $3,126 in general and administrative
expenses.





On March
3, 2007, the Company entered into an agreement to purchase certain assets and/or
the rights to use those assets from ZhangFa ShiYe Qingyang (“QingYang”) for
approximately $467,000.  The Company paid a deposit of approximately
$302,000 to QingYang and agreed to assume a bank loan of approximately $165,000
to secure the rights.  The assumed loan amount is included in other
liabilities as of January 31, 2009 and October 31, 2008.  The assets
acquired, which are comprised of property, equipment and inventory (the
Collateral”), are pledged against the bank loan.   Although
QingYang transferred operational control of the Collateral to the Company, the
Company was unable to obtain consent from the bank and local governmental
authorities to transfer legal title of the Collateral to Renhuang; as a result,
the Collateral is not recorded as an asset of Renhuang though the deposit was
initially recorded in the amount of $467,000.





After
paying the deposit, the Company began negotiating with the bank and local
authorities to settle all outstanding issues and secure full ownership of the
assets.  The Company was unable to finalize those negotiations prior
to October 31, 2007 and Management decided to record an impairment reserve
against the entire deposit amount at that date as the Company did not have legal
title to the Collateral and was unable to determine when or if it would gain
title.  That $467,000 impairment was recorded as a component of
general and administrative expenses during the fiscal year ended October 31,
2007. Though the QingYang facility (which constitutes the majority of the
Collateral) has not operated subsequent to the agreement it remains under the
control of Renhuang.  Management anticipates obtaining title to the
Collateral during 2009 upon the conclusion of negotiations with the bank and
local government authorities.





9. ACCOUNTS PAYABLE





Accounts
payable of $280,097 and $193,934 as of January 31, 2009 and October 31,
2008, respectively, consists of balances payable to supplies.





The
suppliers from whom the purchased amount is over 10% of the total purchase for
the three months ended January 31, 2009 and 2008 are listed as:





2009
                        
                        
                        2008Supplier
      A:
                        
                        $
                        1,254,870
                        
                        
                        
                        25
                        %
                        
                        $
                        1,082,404
                        
                        
                        
                        22
                        %Supplier
      B:
                        
                        $
                        598,879
                        
                        
                        
                        12
                        %
                        
                        $
                        543,633
                        
                        
                        
                        11
                        %




18


10. OTHER PAYABLES





The
balance as of January 31, 2009, mainly includes taxes payable of $675,822 and
social insurance payable of $745,122.





As of
October 31, 2008, the balance includes taxes payable of $693,607 and social
insurance payable of $645,110.





11. RESERVES





The
reserve funds as of January 31, 2009 and October 31, 2008 comprise the
following:





January 31,
                        2009
                      
                      
                      October 31,
                        2008Statutory
      surplus reserve fund
                      
                      $
                      2,585,297
                      
                      
                      $
                      2,585,297Public
      welfare fund
                      
                      282,377
                      
                      
                      282,377$
                      2,867,674
                      
                      
                      $
                      2,867,674





Pursuant
to the relevant laws and regulations of the PRC, the Company is required to
annually transfer 10% of its after tax profit as reported on financial
statements prepared under the accounting principles of the PRC to a statutory
surplus reserve fund until the balance reaches 50% of the registered share
capital.  This reserve can be used to make up any losses incurred or
to increase the share capital.  Except for reducing losses incurred,
any other application may not result in this reserve balance falling below 25%
of the registered capital.





Prior to
January 1, 2007, the Company was required each year to transfer 5% of its after
tax profit as reported on financial statements prepared under the accounting
principles of the PRC to the public welfare funds.  This reserve was
restricted to capital expenditure for employees’ collective welfare facilities
that are owned by the Company.  The public welfare funds are not
available for distribution to the stockholders (except in
liquidation).  Once capital expenditures for staff welfare facilities
have been made, an equivalent amount must be transferred from the public welfare
funds to the discretionary common reserve funds.  Due to a change in
PRC law, appropriation of profit to the public welfare funds is no longer
required.





The
Company reserves the statutory surplus at year end. As of January 31, 2009, the
estimated statutory surplus for the three months then ended was approximately
$626,673.





12.
INCOME TAXES





The
Company is subject to state and local income taxes within the PRC at the
applicable tax rate as reported in their PRC statutory financial statements in
accordance with the relevant income tax laws.





For the
year of 2008 and 2009, the Company was granted a tax holiday and is entitled to
full exemption from corporation income taxes through December
2009.


19


Had the
Company not been granted the tax holiday or been an eligible wholly foreign
owned company, the income tax provision at the general PRC income rate of 25%
starting from January 1, 2008 and 33% previously would have been approximately
$1.6 million and $1.2 million for the three months ended January 31, 2009 and
2008, respectively.




13.
COMMON STOCK




During
the three months ended January 31, 2009, no common stock was
issued.





14.
RELATED PARTY TRANSACTIONS




The
Company rents property from Harbin Renhuang Pharmaceutical Stock Co. Ltd. (“Old
Renhuang”), a Company owned by the Company’s major shareholder.  The
lease term is from May 1, 2008 to May 1, 2009, with a monthly rental payment of
approximately $51,200. The Company has due from related party of approximately
$696,000 including the construction fees paid on behalf of Old Renhuang of
approximately $248,000 and trade receivable of approximately $448,000. As of
January 31, 2009, the Company also has due to relate party of approximately
$408,000, which was the professional fee paid by Old Renhuang in 2007 for the
reverse merger. The Company offset the due from and due to related party,
therefore, the net balance was due from related party of approximately $288,000
at January 31, 2009.





As of
January 31, 2009, the net sales to Heilongjiang Renhuang Pharmaceutical Limited,
an Old Renhuang owned subsidiary, was approximately $375,000.




15. COMMITMENTS AND
CONTINGENCIES





A. CAPITAL AND LEASE
COMMITMENTS





The
Company entered into a lease for office space from May 1, 2007 to April 30,
2010, with average monthly rental payment $10,481. The Company also rents
factory space from a related party (See Note 14) with a monthly payment of
approximately $51,200.


The
minimum future payments for the rental leases as followings:





January 31, 2009Office
      space
                      
                      
                      Factory2010
                      
                      $
                      125,768
                      
                      
                      $
                      153,5542011
                      
                      
                      31,442
                      
                      
                      
                      –Thereafter
                      
                      
                      –
                      
                      
                      
                      –Total
                      
                      $
                      157,210
                      
                      
                      $
                      153,554





B. LEGAL PROCEEDINGS





The
Company is not currently involved in any litigation. There are no actions,
suits, proceedings, inquiries or investigations before or by any court, public
board, government agency, self-regulatory organization or body pending to the
knowledge of the executive officers of the Company.


20





16. EMPLOYEE
WELFARE PLAN




Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees. Pursuant to regulations promulgated
by the local authority in the PRC, the retirement pension insurance,
unemployment insurance, health insurance, injury insurance and pregnancy
insurance are established for employees during the term of their employment. For
the three months ended January 31, 2009, the level of contribution to these
funds was set at 22% of the average employee salary determined by the Social
Welfare Bureau. The Company included the payable amount of $101,232 as of
January 31, 2009 in other payables.




17. VULNERABILITY DUE TO CERTAIN
CONCENTRATIONS





The
Company faces a number of risks and challenges since its operations are in the
PRC. The Company's operations in the PRC are subject to special considerations
and significant risks not typically associated with companies in North America
and Western Europe. The Company's 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 laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





18.
SUBSEQUENT EVENT





On May
15, 2009, an agreement was reached between Renhuang and Allied Merit
International Investments, Inc. and Griffin Ventures Ltd. (the “Investors”). The
Investors will provide Renhuang with $1.5 million by July 31, 2009, in exchange
for an aggregate of 2,142,856 shares of the Company’s Common Stock and 1,071,428
Warrants with an exercise price of $0.875. The Company issued the 2,142,856
shares on May 20, 2009 and received the $1.5 million on August 7,
2009.





The
Company extended the lease with Old Renhuang on May 1, 2009. No modification was
made on the minimum payment table in Note 16 regarding the renewed
lease.





ITEM 2Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.





Overview





The
following discussion of the financial condition and results of the operation of
Renhuang Pharmaceuticals, Inc. include forward-looking statements involving risk
and uncertainties and should be read in conjunction with the financial
statements and notes included in this Quarterly Report on Form
10-Q.  Actual results may differ from the forward-looking statements
due to a variety of factors.


21





Results
of operations





For
the three months ended January 31, 2009 as compared to January 31,
2008





Revenues, Expenses and Net
Income




For
      the Three Months Ended January 31,2009
                        
                        
                        2008Revenue
                        
                        $
                        13,769,997
                        
                        
                        $
                        10,458,856Cost
      of Sales
                        
                        
                        (6,480,493
                        )
                        
                        
                        (4,797,732
                        )Selling
      and Distribution Expenses
                        
                        
                        (5,406
                        )
                        
                        
                        (69,344
                        )Advertising
      Expenses
                        
                        
                        (292,684
                        )
                        
                        
                        (681,431
                        )General
      and Administrative Expenses
                        
                        
                        (618,374
                        )
                        
                        
                        (775,070
                        )Research
      and Development
                        
                        
                        (111,778
                        )
                        
                        
                        (341,894Provision
      for Doubtful Account
                        
                        
                        —
                        
                        
                        
                        41,432Depreciation
      and Amortization
                        
                        
                        (3,659
                        )
                        
                        
                        (3,126
                        )Other
      Income (expense)
                        
                        
                        9,128
                        
                        
                        
                        13,973Net
      Income
                        
                        $
                        6,266,731
                        
                        
                        $
                        3,845,664





Revenues


Our
revenues for the three months ended January 31, 2009 were $13,769,997, which was
$3,311,141, or 32%, higher than $10,458,856 for the three months ended January
31, 2008.  The increase was primarily due to our marketing expansion.
During the three months ended January 31, 2009, we increased production of our
higher profit margin products in line with our overall strategy and decreased
production of our lower profit margin products. Our revenues for the three
months ended January 31, 2009 consisted primarily of sales of the following
products: Acanthopanax (Siberian Ginseng) products, Shark Power Health Care
products, and other Chinese traditional medical products.





Cost
of Sales


Our cost
of sales for the three months ended January 31, 2009 was $6,480,493, which was
$1,682,761, or 35%, higher than $4,797,732 for the quarter ended January 31,
2008. The increase in our cost of sales was primarily due to the increase of
revenue. The costs for the three months ended January 31, 2009 consisted
primarily of raw material, labor and production costs.





Selling
and Distribution Expenses





Our
selling and distribution expenses are those expenses related to the sales of our
products and the costs in distributing those products. For the three months
ended January 31, 2009, the expenses were $5,406, which was $63,938 or 92% lower
than $69,344 for the same period in 2008. This decrease was due to the reduction
of traveling expenses of approximately $43,000 with more efficient cost
management. The sales rebates of $3,165,828 and $2,576,838 for the three months
ended January 31, 2009 and 2008, respectively, were directly deducted from
revenue.


22


Advertising
Expenses


For the three months ended January 31,
2009, we had advertising expenses of $292,684. These advertising expenses were
primarily related to the advertising of Siberian Ginseng products. The
advertising expenses were $681,431 for the same period in 2008. This decrease
was due to a less aggressive advertising strategy.





General
and Administrative Expenses


Our
general and administrative expenses were $618,374 for the three months ended
January 31, 2009, which were primarily composed of $137,110 for payroll,
$220,757 for rental expenses, $95,635 for professional fees, $16,041 for
entertainment expenses, and $11,625 for travelling expenses. The expenses were
lower than the $775,070 for the three months ended January 31, 2008, which
were primarily composed of $49,161 for traveling expenses, $140,729 for payroll,
and $30,479 for office expenses.





Research
and Development


For
the three months ended January 31, 2009, we spent $111,778 on research and
development as compared to $341,894 for the same period in 2008. In the period
ended January 31, 2008, we engaged in more Siberian Ginseng related R&D
projects than for the period ended January 31, 2009.





Depreciation


We had
depreciation expenses of $3,659 for the three months ended January 31, 2009,
which were related to property, plant and equipment. The expenses were $3,126
for the same period in 2008. The expenses were comparable for the two
periods.





Liquidity
and Capital Resources





Our cash,
current assets, total assets, current liabilities, and total liabilities as of
January 31, 2009 are as follows:





January
      31,
                        2009Cash
      and Cash Equivalents
                      
                      $
                      10,876,693Total
      Current Assets
                      
                      $
                      39,686,393Total
      Assets
                      
                      $
                      42,227,386Total
      Current Liabilities
                      
                      $
                      1,981,006Total
      Liabilities
                      
                      $
                      1,981,006Working
      Capital
                      
                      $
                      37,705,387




23


Sources and Uses of
Cash





Operations


Net cash
generated from operating activities was $1,160,313 for the three months ended
January 31, 2009, compared to net cash used for operating activities of
$1,449,375 for the three months ended January 31, 2008. Our net cash generated
from operating activities for the current quarter was primarily $4,896,584 in
net accounts receivables, $128,805 in prepayment and other receivables, $96,355
in other payables, $95,701 in
inventories and $86,569 in total accounts payable and accruals. Cash generated
from operating activities declined as the Company extended credit terms for some
of our key accounts in order to obtain larger market share.





Investments


Net cash used in investing activities
was $13,133 for the quarter ended January 31, 2009. Our cash used in investing
activities was related to the acquisition of property, plant and
equipment.





Financing


There
were no financing activities during the quarter ended January 31,
2009.





Debt Instruments,
Guarantees, and Related Covenants





The
Company does not have any long term debt or significant short term debt, and has
not entered into any guarantee arrangements or other related
covenants.


24


Critical
Accounting Policies





The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. As such, in accordance with the use of
accounting principles generally accepted in the United States of America, our
actual realized results may differ from management’s initial estimates as
reported.. Our significant accounting policies include:





Property,
plant and equipments are carried at cost. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are capitalized. When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included as
components of income in the year of disposition. The Company records
depreciation of its property, plant and equipment on a straight-line basis over
the estimated useful lives of the assets based on their costs.





The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed and determinable, and
collectability is reasonably assured; this policy is in accordance with the
provisions of Staff Accounting Bulletin No. 104.  Renhuang generally
recognizes products sales when the product is shipped.




The
Company provides rebates to its sales agents (who act as wholesalers) as an
incentive plan. The rebate rate is set on a product-by-product basis. When
revenue is recognized, the rebate is accounted for as an offset to revenues in
accordance with EITF Issue No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor’s
Products).





Research
and development (“R&D”) costs are expensed as incurred. Engineers and
technical staff are involved in the production of our products as well as
on-going research, with no segregation of the portion of their salaries relating
to research and development from the portion of their salaries relating to
production. The total salaries are included in cost of sales.





Off-balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.


25


Contractual
Obligations





Payments
      due by periodObligations
                    
                    Total
                    
                    1
      Year
                    
                    2
      Years
                    
                    3Years
                    
                    4YearsOperating
      Lease Obligations – Total
                    
                    
                    310,764
                    
                    279,322
                    
                    
                    31,442
                    
                    -0-
                    
                    
                    -0-Operating
      Lease Obligations - Related Party
                    
                    
                    153,554
                    
                    153,554
                    
                    
                    -0-
                    
                    -0-
                    
                    
                    -0-Operating
      Lease Obligations - Third Party
                    
                    
                    157,210
                    
                    125,768
                    
                    
                    31,442
                    
                    -0-
                    
                    
                    -0-





As noted
above, we do lease office space from Old Renhuang, but we rent the space
pursuant to a one year lease and therefore, in accordance with GAAP, we have not
capitalized this expense.





ITEM
      3
            Quantitative
      and Qualitative Disclosures About Market
  Risk





Not
required.




ITEM
      4
            Controls and
      Procedures





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation, with the participation of our Chief Executive Officer
and Principal Accounting Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of January 31, 2009, to ensure that information required
to be disclosed by us in the reports filed or submitted by us under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commission’s rules and forms, including to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Principal Accounting
Officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, our Chief
Executive Officer and Principal Accounting Officer have concluded that as of
January 31, 2009, our disclosure controls and procedures were not effective at
the reasonable assurance level due to the material weaknesses described
below.





Evaluation
of Internal Control over Financial Reporting





As
required by Exchange Act Rules 13a-15(f) and 15d-15(f), our management has
carried out an evaluation, under the supervision of our Chief Executive Officer
and Principal Accounting Officer, of the effectiveness of the design and
operation of our internal control over financial reporting as of January 31,
2009.


26


Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control over financial reporting is
a process that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:





·
              Pertain to the maintenance of
      records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of assets of the
    Company,





·
              Provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles,
      and that receipts and expenditures are being made only in accordance with
      authorization of management and the board of directors of the Company,
      and




·
              Provide reasonable assurance
      regarding prevention (or timely detection) of unauthorized acquisition,
      use, or disposition of the Company's assets, which could have a material
      effect on Company consolidated financial
  statements.




Because
of certain inherent limitations, internal control over financial reporting may
not prevent or detect misstatements.





A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. Management has identified the following material
weakness that has caused management to conclude that, as of January 31,
2009, our internal control over financial reporting was not
effective:




·
              We
      were unable to meet our requirements to timely file our Annual Report on
      Form 10-K or our Quarterly Report on Form 10-Q for the three months ended
      January 31, 2009. Management evaluated the impact of our inability to
      timely file periodic reports with the Securities and Exchange Commission
      on our assessment of our disclosure controls and procedures and has
      concluded that the control deficiency that resulted in the inability to
      timely make these filings represented a material
  weakness.




·
              We
      were unable to properly review the U.S. GAAP adjustment procedures,
      disclosure reporting processes, and consolidated financial statements
      preparation processes.




·
              We
      were unable to effectively provide oversight of internal control over
      financial reporting because there was a lack of a proper reporting channel
      between the internal audit function and an audit
  committee.


27


Remediation
of Material Weaknesses





Management
recognizes the importance of these material weaknesses and is committed to
remediation and may institute a comprehensive remediation plan.  The
plan will include, but will not be limited to, hiring finance management,
resources and personnel with knowledge and experience in U.S. GAAP, and where
necessary, the plan will utilize the services of external consulting
professionals in the area of accounting advisory
services.  Furthermore, the plan will re-organize the internal audit
function and establish communication channels between the internal audit
function and an audit committee.





Management
intends to allocate resources to insure that reports are filed on a timely basis
in the future.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





ITEM
      1
            Legal
      Proceedings





We are
not a party to, or threatened by, any litigation or proceedings.





ITEM
      1A
            Risk
      Factors





Not
required for smaller reporting company.


28


ITEM
      2
            Unregistered
      Sales of Equity Securities and Use of
  Proceeds





There
have been no events that are required to be reported under this
Item.





ITEM
      3
            Defaults Upon
      Senior Securities





There
have been no events that are required to be reported under this
Item.





ITEM
      4
            Submission of
      Matters to a Vote of Security
Holders





There
have been no events that are required to be reported under this
Item.





ITEM
      5
            Other
      Information





There
have been no events that are required to be reported under this
Item.





29





ITEM
      6
            Exhibits





(a)
              Exhibits




3.1 (1)
                                          
                                          Restated
      Articles of Incorporation, as filed with the Nevada Secretary of State on
      April 21, 2003.3.2 (5)
                                          
                                          Amendment
      to Articles of Incorporation, as filed with the Nevada Secretary of State
      on July 28, 2006.3.3 (1)
                                          
                                          Second
      Restated Bylaws10.1 (2)
                                          
                                          Common
      Stock Purchase Agreement dated September 19, 2005.10.2 (2)
                                          
                                          Securities
      Purchase Agreement dated September 16, 2005.10.3 (3)
                                          
                                          Reorganization,
      Stock and Asset Purchase Agreement dated September 30,
    2005.10.4 (3)
                                          
                                          Stock
      Purchase Agreement dated September 30, 2005.10.5 (4)
                                          
                                          Securities
      Purchase Agreement dated September 16, 2005.10.6 (5)
                                          
                                          Loan
      Agreement with Heilongjiang Yuejintiande Building and Installation Project
      Co.,Ltd10.7
      (6)
                                          
                                          Acquisition
      Agreement between Harbin Renhuang Pharmaceutical Co., Ltd. and Zhongfa
      Industrial Group Yerui Pharmaceutical Co., Ltd., dated February 28,
      200721.1 (5)
                                          
                                          Subsidiaries
      of the
Registrant


30
  31.1
                        
                        Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
                        
                        Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
                        
                        Chief
      Executive Officer Certification Pursuant to 18 USC, Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                        
                        Chief
      Financial Officer Certification Pursuant to 18 USC, Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
  (1)
                          
                          Incorporated
      by reference to our Current Report on Form 8-K dated April 21, 2003, filed
      with the Commission on April 22, 2003.(2)
                          
                          Incorporated
      by reference from our Current Report on Form 8-K filed with the Commission
      on September 23, 2005.(3)
                          
                          Incorporated
      by reference from our Current Report on Form 8-K filed with the Commission
      on October 3, 2005.(4)
                          
                          Incorporated
      by reference from our Current Report on Form 8-K filed with the Commission
      on October 14, 2005.(5)
                          
                          Incorporated
      by reference from our First Amended Transition Report on Form 10-K/A filed
      with the Commission on February 22, 2007.(6)
                          
                          Incorporated
      by reference from our Quarterly Report on Form 10-Q for the period ended
      January 31, 2007, filed with the Commission on March 19,
  2007.
 31


SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Renhuang
      Pharmaceuticals, Inc.Dated:
      January 7, 2010
                
                /s/ Li ShaomingBy:
                Li
      ShaomingPresident
      andChief
      Executive OfficerDated:
      January 7, 2010
                
                /s/ Zuoliang WangBy:
                Zuoliang
      WangInterim
      Chief Financial Officer




32