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 July 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
              (State
      or other jurisdiction of
              incorporation
      or organization)
            88-1273503
              (I.R.S.
      Employer
              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 oNo
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  ̈No
x





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
              (Do
      not check if a smaller
              reporting
      company)
            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 oNo x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. As of September 21, 2009, there were
37,239,536 shares of common stock, par value $0.001, issued and
outstanding.








Renhuang
Pharmaceuticals, Inc.





TABLE OF
CONTENTS




PART
      IITEM
      1
                        FINANCIAL
      STATEMENTS
                        
                        
                        4ITEM
      2
                        MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
      AND RESULTS OF OPERATIONS.
                        
                        
                        20ITEM
      3
                        QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUTMARKET
      RISK
                        
                        
                        27ITEM
      4
                        CONTROLS
      AND PROCEDURES
                        
                        
                        27PART
      IIITEM
      1
                        LEGAL
      PROCEEDINGS
                        
                        
                        29ITEM
      1A
                        RISK
      FACTORS
                        
                        
                        29ITEM
      2
                        UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OFPROCEEDS
                        
                        
                        29ITEM
      3
                        DEFAULTS
      UPON SENIOR SECURITIES
                        
                        
                        30ITEM
      4
                        SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                        
                        
                        30ITEM
      5
                        OTHER
      INFORMATION
                        
                        
                        30ITEM
      6
                        EXHIBITS
                        
                        
                        30




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 1
            Financial
      Statements




RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 ASSETS
 
 July 31,
                            2009
                          
                          
                          October31,
                            2008(a)(Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          12,767,747
                          
                          
                          $
                          9,747,693Accounts
      receivable, net
                          
                          
                          26,664,480
                          
                          
                          
                          22,588,580Inventories
                          
                          
                          2,575,493
                          
                          
                          
                          2,625,385Prepayments
      and other receivables, net
                          
                          
                          89,086
                          
                          
                          
                          167,338Due
      from related party
                          
                          
                          288,156
                          
                          
                          
                          —TOTAL
      CURRENT ASSETS
                          
                          
                          42,384,962
                          
                          
                          
                          35,128,995PROPERTY,
      PLANT AND EQUIPMENT, NET
                          
                          
                          2,365,024
                          
                          
                          
                          2,620,949TOTAL
      ASSETS
                          
                          $
                          44,749,986
                          
                          
                          $
                          37,749,944
    The accompanying notes are in integral part of the
consolidated financial statements
  4
 
 RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 LIABILITIES AND
STOCKHOLDERS' EQUITY
 
 July 31,
                                2009
                              
                              
                              October 31,
                                2008 (a)(Unaudited)CURRENT
      LIABILITIESAccounts
      payable
                              
                              $
                              100,167
                              
                              
                              $
                              193,934Other
      payables
                              
                              
                              1,644,648
                              
                              
                              
                              1,767,153TOTAL
      CURRENT LIABILITIES
                              
                              
                              1,744,815
                              
                              
                              
                              1,961,087TOTAL
      LIABILITIES
                              
                              
                              1,744,815
                              
                              
                              
                              1,961,087STOCKHOLDERS’
      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 37,239,536 (35,096,680 in 2008) at par value of
      0.001
                              
                              
                              37,240
                              
                              
                              
                              35,097Additional
      paid-in capital
                              
                              
                              8,093,257
                              
                              
                              
                              6,595,400Reserves
                              
                              
                              2,867,674
                              
                              
                              
                              3,036,617Retained
      earnings
                              
                              
                              30,285,254
                              
                              
                              
                              22,765,757Accumulated
      other comprehensive income
                              
                              
                              3,221,746
                              
                              
                              
                              3,355,986Subscription
      receivable
                              
                              
                              (1,500,000
                              )
                              
                              
                              —TOTAL
      STOCKHOLDERS’ EQUITY
                              
                              
                              43,005,171
                              
                              
                              
                              35,788,857TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                              
                              $
                              44,749,986
                              
                              
                              $
                              37,749,944
  (a) Reference is made to the audited financial
statements of the Company filed with the SEC on Form 10-K on September 9, 2009.
 
 The accompanying notes are in integral part of the
consolidated financial statements
  5
 
 RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (Unaudited)
 
 Three Months Ended July
      31,
                                  
                                  
                                  Nine Months Ended July
      31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008SALES
                                  
                                  $
                                  6,442,197
                                  
                                  
                                  $
                                  6,255,557
                                  
                                  
                                  $
                                  28,915,072
                                  
                                  
                                  $
                                  24,231,007COST
      OF SALES
                                  
                                  
                                  (2,942,649
                                  )
                                  
                                  
                                  (2,945,740
                                  )
                                  
                                  
                                  (13,825,692
                                  )
                                  
                                  
                                  (11,167,257
                                  )GROSS
      PROFIT
                                  
                                  
                                  3,499,548
                                  
                                  
                                  
                                  3,309,817
                                  
                                  
                                  
                                  15,089,380
                                  
                                  
                                  
                                  13,063,750SELLING
      AND DISTRIBUTION EXPENSES
                                  
                                  
                                  (20,001
                                  )
                                  
                                  
                                  (35,508
                                  )
                                  
                                  
                                  (47,695
                                  )
                                  
                                  
                                  (146,939
                                  )ADVERTISING
      EXPENSE
                                  
                                  
                                  (1,085,756
                                  )
                                  
                                  
                                  (861,920
                                  )
                                  
                                  
                                  (2,476,007
                                  )
                                  
                                  
                                  (2,222,991
                                  )GENERAL
      AND ADMINISTRATIVE EXPENSES
                                  
                                  
                                  (499,949
                                  )
                                  
                                  
                                  (632,219
                                  )
                                  
                                  
                                  (1,712,342
                                  )
                                  
                                  
                                  (1,956,253
                                  )RESEARCH
      AND DEVELOPMENT
                                  
                                  
                                  (1,227,411
                                  )
                                  
                                  
                                  (943,942
                                  )
                                  
                                  
                                  (1,833,391
                                  )
                                  
                                  
                                  (1,614,957
                                  )PROVISION
      FOR DOUBTFUL ACCOUNTS
                                  
                                  
                                  —
                                  
                                  
                                  
                                  588
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  42,753DEPRECIATION
                                  
                                  
                                  (3,783
                                  )
                                  
                                  
                                  (3,799
                                  )
                                  
                                  
                                  (11,163
                                  )
                                  
                                  
                                  (10,330
                                  )INCOME
      FROM OPERATIONS
                                  
                                  
                                  662,648
                                  
                                  
                                  
                                  833,017
                                  
                                  
                                  
                                  9,008,782
                                  
                                  
                                  
                                  7,155,033OTHER
      INCOME
                                  
                                  
                                  12,054
                                  
                                  
                                  
                                  27,535
                                  
                                  
                                  
                                  31,204
                                  
                                  
                                  
                                  62,188INCOME
      BEFORE INCOME TAXES
                                  
                                  
                                  674,702
                                  
                                  
                                  
                                  860,552
                                  
                                  
                                  
                                  9,039,986
                                  
                                  
                                  
                                  7,217,221INCOME
      TAXES
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —NET
      INCOME
                                  
                                  $
                                  674,702
                                  
                                  
                                  
                                  860,552
                                  
                                  
                                  
                                  9,039,986
                                  
                                  
                                  
                                  7,217,221OTHER
      COMPREHENSIVE INCOMEFOREIGN
      CURRENCY TRANSLATION ADJUSTMENT
                                  
                                  
                                  (93,739
                                  )
                                  
                                  
                                  637,421
                                  
                                  
                                  
                                  (79,568
                                  )
                                  
                                  
                                  2,304,462COMPREHENSIVE
      INCOME
                                  
                                  $
                                  580,963
                                  
                                  
                                  $
                                  1,497,973
                                  
                                  
                                  $
                                  8,960,418
                                  
                                  
                                  $
                                  9,521,683BASIC
      AND DILUTED  EARNINGS PER SHARE
                                  
                                  $
                                  0.02
                                  
                                  
                                  $
                                  0.03
                                  
                                  
                                  $
                                  0.25
                                  
                                  
                                  $
                                  0.20BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES
      OUTSTANDING
                                  
                                  
                                  36,796,990
                                  
                                  
                                  
                                  35,096,680
                                  
                                  
                                  
                                  35,669,678
                                  
                                  
                                  
                                  35,096,680
  The accompanying
notes are in integral part of the consolidated financial
statements
  6
 
 RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Nine
      Months Ended July 31,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      9,039,986
                      
                      
                      $
                      7,217,221Adjustments
      to reconcile net income to net cash from operating activities
      :Depreciation
                      
                      
                      265,559
                      
                      
                      
                      251,401Provision
      for bad debts/(recovery)
                      
                      
                      —
                      
                      
                      
                      (42,753
                      )Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (5,868,520
                      )
                      
                      
                      (2,407,050
                      )Inventories
                      
                      
                      43,425
                      
                      
                      
                      (1,266,636
                      )Prepayments
      and other receivables
                      
                      
                      77,805
                      
                      
                      
                      227,273Due
      from related party
                      
                      
                      (321,010
                      )
                      
                      
                      —Accounts
      payable and accruals
                      
                      
                      (93,249
                      )
                      
                      
                      102,771Due
      to related party
                      
                      
                      —
                      
                      
                      
                      360,273Other
      payables
                      
                      
                      (85,208
                      )
                      
                      
                      (2,306,002
                      )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                      
                      
                      3,058,788
                      
                      
                      
                      2,136,498CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property, plant and equipment
                      
                      
                      (16,183
                      )
                      
                      
                      (107,451
                      )NET
      CASH USED IN INVESTING ACTIVITIES
                      
                      $
                      (16,183
                      )
                      
                      $
                      (107,451
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:
                      
                      
                      —
                      
                      
                      
                      —
  The accompanying notes are in integral part of the
consolidated financial statements
  7
 
 RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CASH FLOWS (CONTINUED)
 (Unaudited)
 
 Nine
      Months Ended July 31,2009
                  
                  
                  2008NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                  
                  $
                  3,042,605
                  
                  
                  $
                  2,029,047EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
                  
                  
                  (22,551
                  )
                  
                  
                  1,036,287Cash
      and cash equivalents, beginning of period
                  
                  
                  9,747,693
                  
                  
                  
                  10,153,603Cash
      and cash equivalents, end of period
                  
                  $
                  12,767,747
                  
                  
                  $
                  13,218,937SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      paid
                  
                  
                  —
                  
                  
                  
                  —Income
      taxes paid
                  
                  
                  —
                  
                  
                  
                  —
  The accompanying notes are in integral part of the
consolidated financial statements
  8
 
 RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
 
 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 (“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. and subsidiaries.
  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 subsidiaries. All significant
intercompany transactions and balances are eliminated on
consolidation.
  The
accompanying unaudited consolidated financial statements as of July 31, 2009 and
for the three and nine months ended July 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 nine months ended July 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 are 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 90 days from the invoice date. 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 for
doubtful accounts was $441,824 as at July 31, 2009 ($442,912 in 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 regular basis and records a
provision for loss, if necessary, to reduce inventories to their net realizable
value. There were $63,990 and
$64,147 of inventory reserve provisions recorded as of July 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:
 
 Machinery
      and equipment
                
                10
      yearsOffice
      equipment and furnishings
                
                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 July 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 14).
 
 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 July 31, 2009,
management expects its long-lived assets to be fully recoverable.
 
 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 its reporting currency in United States dollars, 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
translations 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 United States dollars (“USD”) at the rates used in
translation. The exchange rate between the RMB and the USD on July 31, 2009 and
the average rate from October 31, 2008 to July 31, 2009 were:
 
 July
      31,2009
                          
                          
                          October
      31, 2008Balance
      Sheets- period end RMB : USD exchange rate
                          
                          6.8426:1
                          
                          
                          6.8258:1Operating
      Statement: Average quarterly RMB : USD exchange rate
                          
                          6.8457:1
                          
                          
                          7.0467:1
 
 11
  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.
 
 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 18% and 20% of gross revenue for the nine months
ended July 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
costs for the nine months ended July 31, 2009 and 2008 were $1,833,391 and
$1,614,957, respectively.
  12
  N.
ADVERTISING
 
 Advertising
costs consist primarily of promoting the Company and the Company’s products
through television and printed 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:
 
 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 and amortization.
 
 Selling
Expenses
 Selling
expenses consists primarily of travel and entertainment, maintenance, payroll
(including taxes and benefits) for sales staff, telephone and utilities,
insurance, sales commissions and export fees.
 
 General and Administrative
Expenses
 General
and administrative expenses consists 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 are 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 if the additional common shares were
dilutive.  There were 1,071,428 and 25,000 potentially dilutive
securities outstanding during the nine months ended July 31, 2009 and 2008,
respectively. The 1,071,428 and 25,000 warrants were deemed to be anti-diluted
due as the market prices of the shares were lower than the exercise price as of
July 31, 2009 and 2008.
 
 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 nine months ended
July 31, 2009, the only component of other comprehensive income is foreign
translation loss of $79,568 (gain of $2,304,462 in the nine months ended July 31, 2008),
which has been recorded as  accumulative other comprehensive income in
the balance sheet.
 
 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.
  13
  In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115” (" SFAS No. 159"). SFAS No.
159 permits entities to choose to measure many financial instruments and certain
other items at fair values. SFAS No. 159 is effective for fiscal years after
November 15, 2007. The Company is currently evaluating the impact of adopting
SFAS No. 159 on our financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, which requires enhanced disclosures on
a company’s use of derivative instruments, its applicable accounting policies
related to derivatives and the effect of those derivatives on a company’s
financial position, results of operations and cash flows. This statement is
effective for fiscal years and interim periods beginning after November 15,
2008, with early adoption encouraged. Adoption of SFAS No.161 will have no
impact on our financial position, results of operations or cash
flows.
  4.
CASH AND CASH EQUIVALENTS
 
 Cash and
cash equivalents as of July 31, 2009 and October 31, 2008 consisted of the
following:
 
 July
      31,
                            2009
                          
                          October
      31,
                            2008Cash
      on hand
                          
                          $
                          6,514
                          
                          
                          $
                          20,880Cash
      in banks
                          
                          
                          12,761,233
                          
                          
                          
                          9,726,813$
                          12,767,747
                          
                          
                          $
                          9,747,693
 
 
 The
Company maintains one bank account in the PRC which is not protected by FDIC
insurance or other insurance. As of July 31, 2009, the
Company had $12,761,233 in
uninsured deposits with this Chinese bank. Historically, the Company has not
experienced any losses in such account.
 
 5. ACCOUNTS RECEIVABLE,
NET
 The
Company's accounts receivable as of July 31, 2009 and October 31, 2008 are
summarized as follows:
  July
      31, 2009
                        
                        
                        October 31, 2008Accounts
      receivable
                        
                        $
                        27,106,304
                        
                        
                        $
                        23,031,492Less:
      Allowance for doubtful accounts
                        
                        
                        (441,824
                        )
                        
                        
                        (442,912
                        )Accounts
      receivable, net
                        
                        $
                        26,664,480
                        
                        
                        $
                        22,588,580
 
 As at
July 31, 2009, there were two customers who accounted for $2,872,048 and
$3,035,705 of accounts receivable, which were approximately 11% and 11% of the
total balance, respectively.
  14





Three
major customers have sales amounts over 10% of total sales for the nine months
ended July 31, 2009 and 2008 as follows:





2009
                
                
                2008Customer
      A:
                
                $
                3,000,769
                
                
                
                10
                %
                
                
                2,644,290
                
                
                
                11
                %Customer
      B:
                
                $
                3,044,859
                
                
                
                11
                %
                
                
                2,738,198
                
                
                
                11
                %Customer
      C:
                
                $
                2,897,808
                
                
                
                10
                %





6.
PREPAYEMENTS AND OTHER RECEIVABLES, NET





Prepayments
and other receivables as of July 31, 2009 and October 31, 2008 consisted of the
following:





July 31,
                                                                2009
                                                              
                                                              
                                                              October 31,
                                                                2008Prepayments
      and other receivables
                                                              
                                                              $
                                                              448,085
                                                              
                                                              
                                                              $
                                                              527,220Less:
      allowance for doubtful accounts
                                                              
                                                              
                                                              (358,999
                                                              )
                                                              
                                                              
                                                              (359,882
                                                              )$
                                                              89,086
                                                              
                                                              
                                                              $
                                                              167,338





As of
July 31, 2009, the balance in prepayments and other receivables mainly includes
advance to employees of approximately $78,000. As of October 31, 2008, the Company had
approximately $14,650 for advertising expenses, and advance to employees of
approximately $114,000




7. INVENTORIES





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





July 31, 2009
                              
                              
                              October 31, 2008Raw
      materials
                              
                              $
                              1,162,965
                              
                              
                              $
                              1,533,472Work-in-Process
                              
                              
                              1,288,998
                              
                              
                              
                              906,957Finished
      goods
                              
                              
                              187,520
                              
                              
                              
                              249,103Less:
      Valuation allowance
                              
                              
                              (63,990
                              )
                              
                              
                              (64,147
                              )$
                              2,575,493
                              
                              
                              $
                              2,625,385





The
finished goods included $0 and $139,449 of consignment goods as at July 31, 2009
and October31, 2008,
respectively.


15





8.
PROPERTY, PLANT AND EQUIPMENT, NET





July 31, 2009
                  
                  
                  October 31, 2008Cost:-Machinery
      and equipment
                  
                  $
                  3,356,673
                  
                  
                  $
                  3,350,762Office
      equipment and furnishings
                  
                  
                  52,318
                  
                  
                  
                  53,015Motor
      vehicles
                  
                  
                  52,883
                  
                  
                  
                  50,3883,461,874
                  
                  
                  
                  3,454,165Less:
      Accumulated depreciation:
                  
                  
                  1,096,850
                  
                  
                  
                  833,216Net
      book value
                  
                  $
                  2,365,024
                  
                  
                  $
                  2,620,949





For the
nine months ended July 31, 2009, depreciation expenses relating to property,
plant and equipment were $265,559, consisting of $254,396 recorded as cost of
sales and $11,163 in general and administrative expenses and $251,401 for the
year ended July 31, 2008, consisting of $241,071 recorded as cost of sales and
$10,330 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
$300,200 to QingYang and agreed to assume a bank loan of approximately $165,000
to secure these assets.  The assumed loan amount is included in other
liabilities as of January 31, 2008 and October 31, 2007.  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.


16


9. ACCOUNTS PAYABLES





Accounts
payable of $100,167 and $193,934 as of July 31, 2009 and October 31, 2008,
respectively, consisted of balances payable to suppliers.




The
suppliers from whom the purchased amount is over 10% of the total purchase for
the nine months ended July 31, 2009 and July 31, 2008 were listed as
follows:





2009
                
                
                2008Supplier
      A:
                
                $
                2,748,426
                
                
                
                26
                %
                
                $
                2,410,238
                
                
                
                24
                %Supplier
      B:
                
                $
                1,291,031
                
                
                
                12
                %
                
                $
                1,178,853
                
                
                
                12
                %Supplier
      C:
                
                
                
                
                
                
                
                
                
                $
                971,699
                
                
                
                10
                %





10. OTHER PAYABLES





The
balance as of July 31, 2009, mainly includes taxes payable of $423,542, and
social insurance payable of $925,137.





As of
October 31, 2008, the balance includes taxes payable of $693,607 and social
insurance payable of $643,526.




11. RESERVES





The
reserve funds as of July 31, 2009 and October 31, 2008 were comprised of the
following:





July 31,
                    2009
                  
                  
                  October 31,
                    2008Statutory
      surplus reserve fund
                  
                  $
                  2,585,297
                  
                  
                  $
                  2,754,240Public
      welfare fund
                  
                  
                  282,377
                  
                  
                  
                  282,377$
                  2,867,674
                  
                  
                  $
                  3,036,617





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 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.


17





The
Company reserves the statutory surplus at year ended. As of July 31, 2009, the
estimated statutory surplus for nine months ended was approximately
$900,000.





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
years of 2008 and 2009, the Company was granted a tax holiday and is entitled to
full exemption from corporation income taxes through December 2009. 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 would have been approximately US$2,260,000 and
US$1,804,000 for the nine months ended July 31, 2009 and 2008
respectively.





13.
COMMON STOCK AND WARRANTS




During
the nine months ended July 31, 2009, 2,142,856 shares of the Company’s common
stock and 1,071,428 warrants with an exercise price of $0.875 were issued to
Allied Merit International Investments Inc and Griffin Ventures Ltd. (the
“Investors”) in exchange for $1.5 million cash.  The Company issued
2,142,856 shares on May 20, 2009 and received $1.5 million on August 7, 2009.
Since the $1.5 million cash was received in the subsequent period, it was
recorded as subscription receivable as of July 31, 2009.





14.
RELATED PARTY TRANSACTIONS




The
Company rented property and plant 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, 2009 to May 1, 2010, with
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 and receivable from sales. The Company also has due to
relate party of approximately $408,000 regarding 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.





The
Company sold goods in an amount of $374,301 to Heilongjiang Renhuang
Pharmaceutical Limited, a company owned by Old Renhuang.


18





15. COMMITMENTS AND
CONTINGENCIES





A. CAPITAL AND LEASE
COMMITMENTS





The
Company entered into a lease to rent office space from May 1, 2007 to April 30,
2010, with average monthly rental payment of approximately $10,500. The Company
also rented factory space from a related party (See Note 14) with a monthly
payment of approximately $51,200.





The
minimum payments for the rental leases are as follows:





Office
      space
                          
                          
                          Factory2010
                          
                          $
                          94,263
                          
                          
                          $
                          460,3512011
                          
                          
                          
                          
                          
                          
                          -Thereafter
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          94,263
                          
                          
                          $
                          460,351





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.





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 nine months ended July 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 incurred the payable amount of $281,482 as of July
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.


19


ITEM 2
            Managements 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. includes the 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.





Results
of operations





Three
months ended July 31, 2009 as compared to Three months ended July 31,
2008





Revenues, Expenses and Net
Income





2009
                  
                  
                  2008Revenue
                  
                  $
                  6,442,197
                  
                  
                  
                  6,255,557Cost
      of Sales
                  
                  
                  (2,942,649
                  )
                  
                  
                  (2,945,740
                  )Selling
      and Distribution Expenses
                  
                  
                  (20,001
                  )
                  
                  
                  (35,508
                  )Advertising
      Expenses
                  
                  
                  (1,085,756
                  )
                  
                  
                  (861,920
                  )General
      and Administration Expenses
                  
                  
                  (499,949
                  )
                  
                  
                  (632,219
                  )Research
      and Development
                  
                  
                  (1,227,411
                  )
                  
                  
                  (943,942
                  )Provision
      for Doubtful Account
                  
                  
                  —
                  
                  
                  
                  588Depreciation
      and Amortization
                  
                  
                  (3,783
                  )
                  
                  
                  (3,799
                  )Other
      income
                  
                  
                  12,054
                  
                  
                  
                  27,535Net
      Income
                  
                  $
                  674,702
                  
                  
                  
                  860,552




20





Revenues





For the
three months ended July 31, 2009, our revenues were $6,442,197, and increased by
$186,640, or 3%, as compared to the same period in 2008. Our revenue increase
was primarily attributable to the increase in advertising activities in
promoting Acanthopnanax (Siberian Gnseng) products.




Cost
of Sales




Our cost
of sales for the three months ended July 31, 2009 and 2008 were $2,942,649 and
$2,945,740, respectively, which were approximately 46% and 47% of revenue and
consisted primarily of raw materials, labor and production costs. The cost of
sales was comparable for both periods.




Selling
and Distribution Expenses





Our
selling and distribution expenses were $20,001 and $35,508 for the three months
ended July 31, 2009 and 2008, respectively. The sales rebates of $1,361,965 and
$1,399,453 for the three months ended July 31, 2009 and 2008 were directly
deducted from revenues (See Note 3). The
expenses decrease is mainly attributable to the decline of the travel expenses
and entertainment expenses. The Company selectively participated in several
influential nationwide sales conferences in this period and had won positive
marketing effects and results.




Advertising
Expenses





For the
three months ended July 31, 2009 and 2008, our advertising expenses were
$1,085,756 and $861,920, respectively. These advertising expenses were primarily
related to the advertising of Acanthopanax products. We started a more
aggressive advertising campaign from the begaining of 2008 to increase our brand
recognition in Southern China. The Company intends to build
up a leading ‘Renhuang brand’ associated with Acanthopanax products in the
coming years.


21





General
and Administrative Expenses





Our
general and administrative expenses were $499,949 and $632,219 for the three
months ended July 31, 2009, and 2008, respectively. Our general and
administrative expenses mainly include payroll, leasing expenses, professional
fees, entertainment, and travelling expenses. The decrease is mainly due to the
decline of payroll and travel expenses in the period as we launched a cost
savings plan in consideration of the spreading financial crisis.





Research
and Development





For the
three months ended July 31, 2009 and 2008, our research and development expenses
were $1,227,411 and $943,942, respectively.  The increase is mainly
due to the consistent research and development expenses on the Acanthopanax GAP
(Good Agricultural
Practice) base and research work on Acanthopanax effective parts. We are
drafting a plan on Acanthopanax GAP base construction
and the investments on the base are expected to increase steadily through
these years.




Depreciation





We had
depreciation expenses of $3,783 and $3,799 for the three months ended July 31,
2009 and 2008, respectively (See Note 8).  The expenses were
comparable for both periods.


22





Nine
months ended July 31, 2009 as compared to Nine months ended July 31,
2008





Revenues, Expenses and Net
Income





2009
                  
                  
                  2008Revenue
                  
                  $
                  28,915,072
                  
                  
                  
                  24,231,007Cost
      of Sale
                  
                  
                  (13,825,692
                  )
                  
                  
                  (11,167,257
                  )Selling
      and Distribution Expenses
                  
                  
                  (47,695
                  )
                  
                  
                  (146,939
                  )Advertising
      Expenses
                  
                  
                  (2,476,007
                  )
                  
                  
                  (2,222,991
                  )General
      and Administration Expenses
                  
                  
                  (1,712,342
                  )
                  
                  
                  (1,956,253
                  )Research
      and Development
                  
                  
                  (1,833,391
                  )
                  
                  
                  (1,614,957
                  )Provision
      for Doubtful Account
                  
                  
                  —
                  
                  
                  
                  42,753Depreciation
      and Amortization
                  
                  
                  (11,163
                  )
                  
                  
                  (10,330
                  )Other
      income
                  
                  
                  31,204
                  
                  
                  
                  62,188Net
      Income
                  
                  $
                  9,039,986
                  
                  
                  
                  7,217,221





Revenues





For the
nine months ended July 31, 2009, our revenues were $28,915,072, and increased by
$4,684,065, or 19%, as compared to the same period in 2008. Our revenues
increase is primarily attributable to the increase in advertising activities in
promoting the Acanthopnanax products.





Cost
of Sales





Our cost
of sales for the nine months ended July 31, 2009 and 2008 were $13,825,692 and
$11,167,257, respectively, which were approximately 48% and 46% of revenue and
consisted primarily of raw materials, labor and production costs. The increase
in the percentage of cost to revenue was due to the increase in the price of raw
materials and salaries.





Selling
and Distribution Expenses





Our
selling and distribution expenses were $47,695 and $146,939 for the nine months
ended July 31, 2009 and 2008, respectively. The sales rebates of $1,355,648 and
$1,461,133 for the nine months ended July 31, 2009 and 2008 were directly
deducted from revenue (See Note 3). The expenses decrease is
mainly attributable to the decline in travel expenses and
entertainment expenses. To control the cost the Company selectively
participated in several influential nationwide sales conferences in this period
and had won positive marketing effects and results. Therefore sales increased,
but selling and distribution expenses decreased.




Advertising
Expenses





For the
nine months ended July 31, 2009 and 2008, our advertising expenses were
$2,476,007 and $2,222,991, respectively. These advertising expenses were
primarily for the advertising of Acanthopanax produts. We started a more
aggressive advertising campaign from the beginning of  2008 to
increase our brand recognition in Southern China. The Company intends to build
up a leading ‘Renhuang brand’ associated with Acanthopanax products in the
coming years.





General
and Administrative Expenses





Our
general and administrative expenses were $1,712,342 and $1,956,253 for the nine
months ended July 31, 2009, and 2008, respectively. Our general and
administrative expenses mainly included payroll, leasing expenses, professional
fees, entertainment, and travelling expenses. The decrease is mainly due to the
decline of payroll and travel expenses in the period as we launched cost savings
plan in consideration of the spreading financial crisis.


23





Research
and Development





For the
nine months ended July 31, 2009 and 2008, our research and development expenses
were $1,833,391 and $1,614,957, respectively. The increase is mainly due to the
consistent research and development expenses on the Acanthopanax GAP (Good Agricultural
Practice) base and research work on Acanthopanax effective parts. We are
drafting a plan on Acanthopanax GAP base construction
and the investments on the base are expected to increase steadily in the
near future.





Depreciation





We had
depreciation expenses of $11,163 and $10,330 for the nine months ended July 31,
2009 and 2008, respectively (see Note 8).  The expenses were
comparable for both periods.





Liquidity
and Capital Resources





Our cash,
current assets, total assets, current liabilities, and total liabilities as of
July 31, 2009 were as follows:





July 31, 2009Cash
      and Cash Equivalents
                  
                  $
                  12,767,747Total
      Current Assets
                  
                  
                  42,384,962Total
      Assets
                  
                  
                  44,749,986Total
      Current Liabilities
                  
                  
                  1,744,815Total
      Liabilities
                  
                  
                  1,744,815Working
      capital
                  
                  $
                  40,640,147




24





Sources and Uses of
Cash





Operations




Net cash
generated from operating activities was $3,058,788 for the nine months
ended July 31, 2009. Our net cash generated from operating activities for the
current nine month period was primarily $5,868,520 in net accounts
receivables, $43,425 in inventories, $77,805 from reduction of prepayments and
other net receivables, $93,249 in total accounts payable and accruals,
$321,010 in due to/from related party, and $85,208 in other payables. Cash
generated from operating activities increase dramatically compared to the same
period in 2008 as we optimized the structure of accounts
receivable and accounts payable in order to obtain larger market
share.





Investments




Net cash
used in investing activities was $ 16,183 for the nine months ended July 31,
2009. For the nine months ended July 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 quarters ended July 31, 2009 and 2008.
The company intends to raise capital through private offerings in the next
twelve months.





Debt Instruments,
Guarantees, and Related Covenants





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





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 estimates include:


25





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
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed and determinable, and
collectibility 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.





Contractual
Obligations




Payments due by periodObligations
                    
                    Total
                    
                    
                    1 Year
                    
                    
                    1-2 Years
                    
                    
                    2-3 Years
                    
                    
                    3-5 YearsOperating
      Lease Obligations – Total
                    
                    $
                    554,614
                    
                    
                    $
                    554,614
                    
                    
                    $
                    -0-
                    
                    
                    $
                    -0-
                    
                    
                    
                    -0-Operating
      Lease Obligations – Related Party
                    
                    
                    460,351
                    
                    
                    
                    460,351
                    
                    
                    
                    -0-
                    
                    
                    
                    -0-
                    
                    
                    
                    -0-Operating
      Lease Obligations - Third Party
                    
                    $
                    94,315
                    
                    
                    $
                    94,315
                    
                    
                    $
                    -0-
                    
                    
                    
                    -0-
                    
                    
                    
                    -0-


26





As noted
above, we lease office space from Old Renhuang, but we rent the space pursuant
to a lease renewable annually.





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 July 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 July 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 July 31, 2009.





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:




27





·
            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 July 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 for the year ended October 31, 2008. 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.




Remediation
of Material Weaknesses




Management
recognizes the importance of this material weakness and is committed to
remediation and will institute a comprehensive remediation plan.  The
plan will include but 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.


28





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.




ITEM 2
            Unregistered Sales of Equity
      Securities and Use of
Proceeds




On May
15, 2009, we have sold an aggregate of 2,142,856 shares of common stock at a
purchase price of $0.70 per share and warrants exercisable until May 14, 2012 to
acquire an aggregate of 1,071,428 shares of common stock (subject to customary
adjustments) at an exercise price of $0.875 per share, to Allied Merit
International Inc. and Griffin Ventures Ltd. for the amount of $1.5 million made
to us on January 29, 2008. The securities were issued under the exemption of
Regulation D and Regulation S under the Securities Act of 1933, as amended
(“1933 Act”). Griffin Ventures Ltd. represented itself as an accredited investor
as that term is defined in Regulation D under the 1933 Act.  Allied
Merit International Inc. represented itself as a non U.S. person as that term is
defined in Rule 902 and thus claimed the exemption of Regulation S under the
1933 Act.




29





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.





ITEM 6
            Exhibits




(a)
            Exhibits





10.1
            Loan
      Conversion Agreement among the Company, Allied Merit International Inc.
      and Griffin Ventures Ltd. dated May 15,
2009





31.1
            Rule 13a-14(a)/15d-14(a)
      Certification of Chief Executive
Officer





31.2
            Rule 13a-14(a)/15d-14(a)
      Certification of Chief Financial
Officer





32.1
            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.




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:
      September 21, 2009
                      
                      /s/
      Li ShaomingBy:
                      Li
      ShaomingPresident
      andChief
      Executive OfficerDated:
      September 21, 2009
                      
                      /s/
      Zuoliang WangBy:
                      Zuoliang
      WangInterim
      Chief Financial
Officer




30