UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-Q





x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended April 30, 2010o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from                                                                to





Commission
File Number: 000-24512





RENHUANG
PHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)





Nevada
              84-1273503(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)No.
      218, Taiping
                Taiping
      District, Harbin, Heilongjiang Province, P.R. China 100016
                (Address
      of principal executive offices)





86-451-5762-0378


(Registrant’s
Telephone Number, Including Area Code)











Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


x
Yes   o No





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).


o Yes   o No







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




Large accelerated
      filer o
            Accelerated filer
      oNon-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).


o
Yes   x No




As of May
31, 2010, there were 37,239,536 shares of the registrant’s $0.001 par value
common stock issued and outstanding.





TABLE
OF CONTENTS





PART IItem
    1.
                                        Financial
      Statements
                                        1Condensed
      Consolidated Balance Sheets as of April 30, 2010 (unaudited) and October
      31, 2009
                                          (audited)Condensed
      Consolidated Statements of Operations and Comprehensive Income for the
      Three and Six
                                          Months
      Ended April 30, 2010 and 2009 (unaudited)Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended April 30,
      2010
                                          and
      2009 (unaudited)Notes
      to the Condensed Consolidated Financial Statements
    (unaudited)Item
    2.
                                        Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
                                        26Item
    3.
                                        Quantitative and Qualitative
      Disclosures About Market Risk
                                        34Item
    4T.
                                        Controls and
      Procedures
                                        34PART
IIItem
    1.
                                        Legal
      Proceedings
                                        35Item
    1A.
                                        RiskFactors
                                        35Item
    2.
                                        UnregisteredSales of Equity Securities and Use of
      Proceeds
                                        35Item
    3.
                                        Defaults Upon Senior
      Securities
                                        35Item
    4.
                                        [REMOVED AND
      RESERVED]
                                        35Item
    5.
                                        Other
      Information
                                        35Item
    6.
                                        Exhibits
                                        36Signature Page
                                        37





ii


In this Quarterly Report on Form 10-Q,
references to “dollars” and “$” are to United States dollars and, unless the
context otherwise requires, references to “we,” “us” and “our” refer to Renhuang
Pharmaceuticals, Inc.  and its consolidated
subsidiaries.





This Quarterly Report contains certain
forward-looking statements. When used in this Quarterly Report, statements which
are not historical in nature, including the words “anticipate,” “estimate,”
“should,” “expect,” “believe,” “intend,” “may,” “project,” “plan” or “continue,”
and similar expressions are intended to identify forward-looking statements.
They also include statements containing anticipated business developments, a
projection of revenues, earnings or losses, capital expenditures, dividends,
capital structure or other financial terms.




The forward-looking statements in this
Quarterly Report are based upon management’s beliefs, assumptions and
expectations of our future operations and economic performance, taking into
account the information currently available to them. These statements are not
statements of historical fact. Forward-looking statements involve risks and
uncertainties, some of which are not currently known to us that may
cause our actual results, performance or financial condition to be
materially different from the expectations of future results, performance or
financial condition we express or imply in any forward-looking statements. These
forward-looking statements are based on our current plans and expectations
and are subject to a number of uncertainties and risks that could significantly
affect current plans and expectations and our future financial condition and
results.




We undertake no
obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this filing might not occur. We qualify any
and all ofour forward-looking
statements entirely by these cautionary factors. As a consequence, current
plans, anticipated actions and future financial conditions and results may
differ from those expressed in any forward-looking statements made by or on our
behalf. You are cautioned
not to unduly rely on such forward-looking statements when evaluating the
information presented herein.




iii


PART I





Item 1.  Financial
Statements.




RENHUANG
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS




Note
                
                April 30,
                  2010
                
                
                October 31,
                  2009US$
                
                
                US$ASSETS
                
                
                (Unaudited)
                
                
                (Audited)Current
      assets:Cash
      and cash equivalents
                
                
                
                23,391,609
                
                
                
                8,111,514Trade
      receivables, net
                7
                
                
                14,900,545
                
                
                
                23,203,410Due
      from related parties
                11
                
                
                -
                
                
                
                130,199Inventory,
      net
                9
                
                
                2,934,928
                
                
                
                3,024,016Deposits
                11
                
                
                1,462,887
                
                
                
                -Prepayments
                
                
                
                -
                
                
                
                89,281Other
      receivables, net
                8
                
                
                164,566
                
                
                
                102,613Total
      current assets
                
                
                
                42,854,535
                
                
                
                34,661,033Property
      and equipment, net
                10
                
                
                2,164,720
                
                
                
                2,352,163Deposits
                11
                
                
                18,557,480
                
                
                
                16,137,000Total
      assets
                
                
                
                63,576,735
                
                
                
                53,150,196LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilitiesCurrent
      liabilities:Accounts
      payable
                
                
                
                279,063
                
                
                
                369,329Value
      added tax payable
                
                
                
                498,090
                
                
                
                1,186,642Accrued
      employee benefits
                
                
                
                1,339,371
                
                
                
                1,136,267Warrant
      liability
                
                
                
                342,770
                
                
                
                -Total
      current liabilities
                
                
                
                2,459,294
                
                
                
                2,692,238Commitments
      and Contingencies
                16Shareholders’
      equityPreferred
      stock (no par value, 1,000,000 shares authorized; none issued and
      outstanding as of April 30, 2010 and October 31, 2009)
                14
                
                
                -
                
                
                
                -Common
      stock ($0.001 par value, 100,000,000 shares
                  authorized;
      37,239,536 issued and
                  outstanding
      as of April 30, 2010 and October 31, 2009)
                14
                
                
                37,240
                
                
                
                37,240Additional
      paid-in capital
                
                
                
                7,613,119
                
                
                
                7,596,525Common
      stock warrants
                15
                
                
                496,732
                
                
                
                496,732Reserves
                16
                
                
                3,372,697
                
                
                
                3,372,697Accumulated
      other comprehensive income
                
                
                
                3,207,770
                
                
                
                3,367,659Retained
      earnings
                
                
                
                46,389,883
                
                
                
                35,587,105Total
      shareholders’ equity
                
                
                
                61,117,441
                
                
                
                50,457,958Total
      liabilities and shareholders’ equity
                
                
                
                63,576,735
                
                
                
                53,150,196





The
accompanying notes are an integral part of these financial
statements.




1


RENHUANG
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME




Three
      months ended
                                                                                                                        April
      30,
                                                                                                                      
                                                                                                                      
                                                                                                                      Six
      months ended
                                                                                                                          April
      30,Note
                                                                                                                      
                                                                                                                      
                                                                                                                      2010
                                                                                                                      
                                                                                                                      
                                                                                                                      2009
                                                                                                                      
                                                                                                                      
                                                                                                                      2010
                                                                                                                      
                                                                                                                      
                                                                                                                      2009US$
                                                                                                                      
                                                                                                                      
                                                                                                                      US$
                                                                                                                      
                                                                                                                      
                                                                                                                      US$
                                                                                                                      
                                                                                                                      
                                                                                                                      US$(Unaudited)
                                                                                                                      
                                                                                                                      
                                                                                                                      (Unaudited)
                                                                                                                      
                                                                                                                      
                                                                                                                      (Unaudited)
                                                                                                                      
                                                                                                                      
                                                                                                                      (Unaudited)Sales,
      net
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      12,092,506
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8,702,878
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      29,225,120
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      22,472,875Cost
      of goods sold
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (5,877,856
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (4,402,550
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (13,530,494
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (10,883,043
                                                                                                                      )Gross
      profit
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      6,214,650
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4,300,328
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      15,694,626
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      11,589,832Operating
      and administrative expenses:Sales
      and marketing
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,265,319
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,119,855
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,404,300
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,417,945General
      and administrative
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      974,825
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      597,740
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,791,794
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,219,773Research
      and development
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      570,557
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      494,202
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      722,921
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      605,980Total
      operating expenses
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,810,701
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,211,797
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      4,919,015
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3,243,698Income
      from operations
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3,403,949
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,088,531
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10,775,611
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8,346,134Other
      income:Interest
      income
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      15,699
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10,022
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      27,166
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      19,150Income
      from operations before income tax expenses
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3,419,648
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,098,553
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10,802,777
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8,365,284Income
      tax expenses
                                                                                                                      
                                                                                                                      5
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      -Net
      income
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3,419,648
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,098,553
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10,802,777
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8,365,284Other
      comprehensive income:Cumulative
      currency translation adjustments
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (162,404
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      79,271
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (159,889
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      14,168Total
      comprehensive income
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      3,257,244
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      2,177,824
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      10,642,888
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      8,379,452Earnings
      per common stock- Basic
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.09
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.06
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.29
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.24Earnings
      per common stock - Diluted
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.09
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.06
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.29
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      0.24Weighted
      average common stock outstandingBasic
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      37,239,536
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      35,096,680
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      37,239,536
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      35,096,680Diluted
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      37,917,140
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      35,096,680
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      37,724,214
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      35,096,680







The
accompanying notes are an integral part of these financial
statements.




2


RENHUANG
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





For
      the six months ended
                                  April
      30,2010
                                
                                
                                2009US$
                                
                                
                                US$(Unaudited)
                                
                                
                                (Unaudited)Cash
      flows from operating activities:Net
      income
                                
                                
                                10,802,777
                                
                                
                                
                                8,365,284Adjustments
      to reconcile net income to operating activities:Depreciation
      of property and equipment
                                
                                
                                181,076
                                
                                
                                
                                177,224Warrants
      issued for services
                                
                                
                                342,770
                                
                                
                                
                                -Share
      compensation
                                
                                
                                16,594
                                
                                
                                
                                -Changes
      in assets and liabilities:Decrease
      (increase) in trade receivables
                                
                                
                                8,238,225
                                
                                
                                
                                (4,458,764
                                )Decrease
      (increase) in due from related parties
                                
                                
                                129,841
                                
                                
                                
                                (448,118
                                )Decrease
      in inventory, net
                                
                                
                                80,613
                                
                                
                                
                                569,231Decrease
      in prepayments
                                
                                
                                89,036
                                
                                
                                
                                33,659(Increase)
      decrease in other receivables, net
                                
                                
                                (62,244)
                                
                                
                                
                                80,803Decrease
      in accounts payable
                                
                                
                                (89,235)
                                
                                
                                
                                (77,331)Decrease
      in value added tax payable
                                
                                
                                (685,259)
                                
                                
                                
                                (270,979
                                )Increase
      in accrued employee benefits
                                
                                
                                206,296
                                
                                
                                
                                216,565Net
      cash provided by operating activities
                                
                                
                                19,250,490
                                
                                
                                
                                4,187,574Cash
      flows from investing activities:Purchase
      of property and equipment
                                
                                
                                -
                                
                                
                                
                                (16,212
                                )Deposits
      for office properties
                                
                                
                                (3,928,614)
                                
                                
                                
                                -Net
      cash used in investing activities
                                
                                
                                (3,928,614)
                                
                                
                                
                                (16,212
                                )Effect
      of exchange rate changes on cash
                                
                                
                                (41,781)
                                
                                
                                
                                6,215Net
      increase in cash and cash equivalents
                                
                                
                                15,280,095
                                
                                
                                
                                4,177,577Cash
      and cash equivalents, beginning of year
                                
                                
                                8,111,514
                                
                                
                                
                                9,747,693Cash
      and cash equivalents, end of year
                                
                                
                                23,391,609
                                
                                
                                
                                13,925,270Supplemental
      disclosure of cash flow information:Cash
      paid during the year for income taxes
                                
                                
                                -
                                
                                
                                
                                -Interest
      paid during the year
                                
                                
                                -
                                
                                
                                
                                -







The
accompanying notes are an integral part of these financial
statements.




3


RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


1.  ORGANIZATION
AND NATURE OF OPERATION





The
accompanying consolidated financial statements include the financial statements
of Renhuang Pharmaceuticals, Inc. (“Renhuang”) and its
subsidiaries.  Renhuang and its subsidiaries are collectively referred
to as the “Company.”





Renhuang
was incorporated in the State of Nevada on August 18, 1988, originally under the
corporate name of Solutions, Incorporated.  It was inactive until
August 16, 1996, when it changed its corporate name to Suarro Communications,
Inc, and engaged in the business of providing internet based business
services.  This line of business was discontinued in 2006, and Renhuang
became a non-operating public company.  Renhuang underwent a number of
corporate name changes as follows:





June
      1997
            ComTech
      Consolidation Group, IncFebruary
      1999
            E-Net
      CorporationMay
      1999
            E-Net
      Financial CorporationJanuary
      2000
            E-Net.Com
      CorporationFebruary
      2000
            E-Net
      Financial.Com CorporationJanuary
      2002
            Anza
      Capital, Inc (“Anza”)June
      2006
            Renhuang
      Pharmaceuticals, Inc.





Effective
August 28, 2006, Renhuang completed the acquisition of 100% ownership of Harbin
Renhuang Pharmaceutical Company Limited, a company incorporated in the British
Virgin Islands.  As a result, Harbin Renhuang Pharmaceutical Company
Limited became a wholly owned subsidiary of Renhuang.





Harbin
Renhuang Pharmaceutical Company Limited owns 100% of the registered capital of
Harbin Renhuang Pharmaceutical Co. Ltd (“Renhuang China”).





The core
activities of subsidiaries included in the consolidated financial statements are
as follow:


·
            Harbin
      Renhuang Pharmaceutical Company Limited – Investment
    holding.·
            Renhuang
      China – Development, manufacturing and distribution of pharmaceutical
      products.





Renhuang
China’s principal country of operations is the People’s Republic of China (the
“PRC”) and maintains their accounting records in Renminbi (“RMB”). 
Substantially all of the Company’s assets and operation are located in the
PRC.





2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of presentation of financial statements





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and related notes.  The accompanying unaudited
condensed consolidated financial statements and related notes should be read in
conjunction with the audited consolidated financial statements of the Company
and notes thereto for the year ended October 31, 2009, which are included in the
Company’s Form 10-K for the year ended October 31, 2009, filed with the SEC on
January 29, 2010.





In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the balance sheets of
Renhuang Pharmaceuticals, Inc. and its subsidiaries as of April 30, 2010, the
results of their operations for the three and six months ended April 30, 2010
and 2009, and their cash flows for the six months ended April 30, 2010 and
2009.  The results of operations for the three and six months ended
April 30, 2010 and 2009 are not necessarily indicative of the results to be
expected for the entire year.





4
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


The
accompanying condensed consolidated financial statements are expressed in terms
of US dollars.




In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162.  This statement modifies the
Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only
two levels of GAAP, authoritative and nonauthoritative accounting literature.
Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also
known collectively as the “Codification,” is considered the single source of
authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC. 
Nonauthoritative guidance and literature would include, among other things, FASB
Concepts Statements, American Institute of Certified Public Accountants Issue
Papers and Technical Practice Aids and accounting textbooks. The Codification
was developed to organize GAAP pronouncements by topic so that users can more
easily access authoritative accounting guidance.  It is organized by topic,
subtopic, section, and paragraph, each of which is identified by a numerical
designation.  This statement applies beginning in third quarter
2009.  All accounting references have been updated, and therefore SFAS
references have been replaced with ASC references.





The
Company operates in one operating segment in accordance with accounting guidance
FASB ASC Topic 280, “Segment
Reporting.” Our CEO has been identified as the chief operating decision
maker as defined by FASB ASC Topic 280.





Principles
of consolidation





The
condensed consolidated financial statements include the financial statements of
Renhuang and its subsidiaries.





All
inter-company transactions and balances have been eliminated in
consolidation.





Effective
beginning second quarter 2009, the FASB Topic 810, “Consolidation Topic,” revised
the accounting treatment for noncontrolling minority interests of
partially-owned subsidiaries.  Noncontrolling minority interests
represent the portion of earnings that is not within the parent company’s
control. These amounts are now required to be reported as equity instead of as a
liability on the balance sheet.  In addition this statement requires net
income from noncontrolling minority interest to be shown separately on the
consolidated statements of operations and comprehensive income.  As
the Company has no noncontrolling interest at April 30, 2010, this change did
not have an impact on the Company’s condensed consolidated financial statements.




Use
of estimates





The
preparation of these consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affected the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods.





Significant
estimates and assumptions by management include, among others, uncollectible
accounts receivable, slow moving, obsolete and/or damaged inventory, property
and equipment, reserve for employee benefit obligations, stock warrant
valuation, and other uncertainties. Actual results may differ from these
estimates.  The current economic environment has increased the degree
of uncertainty inherent in these estimates and assumptions.





5
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


Foreign
currency translation





The
Company’s principal country of operations is the PRC. The financial position and
results of operations of the subsidiaries are determined using the local
currency (“Renminbi” or “RMB”) as the functional currency.





Translation
of amounts from RMB into US dollars for reporting purposes is performed by
translating the results of operations denominated in foreign currency at the
weighted average rate of exchange during the reporting period. Assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated at the market rate of exchange ruling at that date. The registered
equity capital denominated in the functional currency is translated at the
historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements into the
reporting currency (US dollars) are reported as a component of accumulated other
comprehensive income in shareholders’ equity.





As of
April 30, 2010 and October 31, 2009 the exchange rate was RMB6.84 and RMB6.82,
respectively. Translation adjustment totaled ($162,404) and $79,271 for the
three months ended April 30, 2010 and 2009, respectively, and ($159,889) and
$14,168 for the six months ended April 30, 2010 and 2009.





Cash
and cash equivalents





Cash and
cash equivalents represent cash on hand and demand deposits placed with banks or
other financial institutions, which have original maturities less than three
months.  There are no restriction to cash at April 30, 2010 and
October 31, 2009.   Substantially all of the Company’s cash is held in
bank accounts in the PRC and is not protected by the Federal Deposit Insurance
Corporation (“FDIC”) insurance or any other similar insurance.  Given
the current economic environment and risks in the banking industry, there is a
risk that deposits may not be readily available.





Trade
receivables, net





Trade
receivables are recorded at the invoiced amount and do not bear interest. Trade
receivable payment terms vary and amounts due from customers are stated in the
financial statements net of an allowance for doubtful accounts and sales
rebates. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its trade receivables.  Trade receivables
outstanding longer than the payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time the trade receivable is past due, the Company’s previous loss
history, the counter party’s current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a whole.
The Company writes off receivables when they are deemed uncollectible, and
payments subsequently received on such trade receivables are credited to the
allowance for doubtful accounts.  There were no write offs for the three
and six months ended April 30, 2010 and 2009.  The Company does not
have any off-balance sheet credit exposure related to its
customers.




Inventory,
net





Inventory
consists of raw materials, work-in-progress and finished goods and is valued at
the lower of cost or market value. The value of inventory is determined using
the weighted average cost method and includes any related production overhead
costs incurred in bringing the inventory to their present location and
condition. Overhead costs included in finished goods include, direct labor cost
and other costs directly applicable to the manufacturing process.





The
Company estimates an inventory allowance for excessive, slow moving and obsolete
inventories as well as inventory whose carrying value is in excess of net
realizable value.  Inventory amounts are reported net of such
allowances.  There were no inventory write offs for the three and six
months ended April 30, 2010 and 2009.





6


RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


April
30, 2010 and 2009






Property
and equipment, net





Property
and equipment are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the results of
operations for the respective period.





Depreciation
is provided over the estimated useful lives of the related assets using the
straight-line method.  The estimated useful lives for significant
property, plant and equipment categories are as follows:





Machinery
      and equipment
              10
      yearsOffice
      equipment and furnishings
              5-10
      yearsMotor
      vehicles
              5-10
      years




Long-lived assets





The
Company’s long-lived assets and other assets (consisting of property and
equipment) are reviewed for impairment in accordance with the guidance of the
FASB Topic ASC 360, “Property,
Plant, and Equipment,” and FASB ASC Topic 205 “Presentation of Financial
Statements.”  The Company tests for impairment losses on
long-lived assets used in operations whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Recoverability of an asset to be held and used is measured by a comparison of
the carrying amount of an asset to the future undiscounted cash flows expected
to be generated by the asset. If such asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value. Impairment evaluations involve
management’s estimates on asset useful lives and future cash
flows.  Actual useful lives and cash flows could be different from
those estimated by management which could have a material effect on our
reporting results and financial positions.  Fair value is determined
through various valuation techniques including discounted cash flow models,
quoted market values and third-party independent appraisals, as considered
necessary. Through the three and six months ended April 30, 2010 and 2009, the
Company had not experienced impairment losses on its long-lived assets. However,
there can be no assurances that demand for the Company’s products or services
will continue, which could result in an impairment of long-lived assets in the
future.





Warrant
liability





On March
25, 2010, the Company issued warrants (the “Warrants”) for 160,000 common shares
to a service provider that have an exercise price of $2.00 per share and a
contractual life of 3 years.  The terms of the Warrant agreement
include the following factors that in accordance with FASB Topic ASC 815,
requires that the Warrants be classified at their fair value to liabilities each
reporting period.





·
            The
      holder of the Warrants (the “Holder”) is entitled to the benefits of Rule
      144 promulgated under the Securities Act of 1933, as amended and any other
      rule or regulation of the SEC that may at any time permit the Holder to
      sell securities of the Company to the public without
      registration.  Non compliance with such rules and regulations
      could result in the Company having to settle the Warrant obligation in
      cash.





·
            The
      exercise price and number of shares issuable upon exercise of the Warrants
      (the “Warrant Shares”) are subject to adjustment for standard dilutive
      events, including the issuance of common stock, or securities convertible
      into or exercisable for shares of common stock, that will adversely affect
      the Holder’s rights under the Warrants.  There were no dilutive
      events in the three and six months ended April 31, 2010, which would have
      resulted in an adjustment to the exercise price or number of Warrant
      Shares.





7
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


At April
31, 2010, the fair value of the Company’s warrants liability was
$342,770.  The Company used the Black-Scholes valuation model to
estimate the fair value of the Warrants.  The valuation was based on
the assumptions noted in the following table.








Expected volatility
                
                
                205.3
                %Expected dividends
                
                
                0
                %Expected term (in years)
                3 yearsRisk-free rate
                
                
                1.69
                %





Fair
value of financial instruments





The
Company applies the provisions of accounting guidance, FASB Topic ASC 825 that
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value, and defines fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties.  As of April 30, 2010
and October 31, 2009 the carrying value of cash, trade receivables, other
receivables, accounts payable, and warrant liability approximated their fair
value.





Fair
value measurements





Effective
April 1, 2009, the FASB ASC Topic 825, “Financial Instruments,”
requires disclosures about fair value of financial instruments in quarterly
reports as well as in annual reports.




The FASB
ASC Topic 820, “Fair Value
Measurements and Disclosures,” clarifies the definition of fair value for
financial reporting, establishes a framework for measuring fair value and
requires additional disclosures about the use of fair value
measurements.





Various
inputs are considered when determining the fair value of the Company’s financial
instruments. The inputs or methodologies used for valuing securities are
not necessarily an indication of the risk associated with investing in these
securities.  These inputs are summarized in the three broad levels
listed below.





·
            Level
      1 – observable market inputs that are unadjusted quoted prices for
      identical assets or liabilities in active
  markets.





·
            Level
      2 – other significant observable inputs (including quoted prices for
      similar securities, interest rates, credit risk,
  etc...).





·
            Level
      3 – significant unobservable inputs (including the Company’s own
      assumptions in determining the fair value of financial
      instruments).





The
Company’s adoption of FASB ASC Topic 825 did not have a material impact on the
Company’s condensed consolidated financial statements.





The
carrying value of financial assets and liabilities recorded at fair value is
measured on a recurring or nonrecurring basis. Financial assets and liabilities
measured on a non-recurring basis are those that are adjusted to fair value when
a significant event occurs. The Company had no financial assets or liabilities
carried and measured on a nonrecurring basis during the reporting periods.
Financial assets and liabilities measured on a recurring basis are those that
are adjusted to fair value each time a financial statement is
prepared.




8
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


The
availability of inputs observable in the market varies from instrument to
instrument and depends on a variety of factors including the type of instrument,
whether the instrument is actively traded, and other characteristics particular
to the transaction. For many financial instruments, pricing inputs are readily
observable in the market, the valuation methodology used is widely accepted by
market participants, and the valuation does not require significant management
discretion. For other financial instruments, pricing inputs are less observable
in the market and may require management judgment.





Revenue
recognition





Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” which
states that revenue should be recognized when the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) the service has been
rendered; (3) the selling price is fixed or determinable; and (4) collection of
the resulting receivable is reasonably assured.





Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable.





As of
April 30, 2010, the Company has no sales or contracts that included multiple
deliverables that would fall under the scope of FASB Topic ASC 605, “ Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging Issues Task
Force.”





The
Company provided annual sales rebates to its distributors based upon sales
volumes.  Sales rebates are recorded as a current liability at the
time of the sale based upon the Company’s estimates of whether each customer
would be entitled to rebates for the period.  At quarter end, the accrued
rebate amount is adjusted to the actual amount earned and reclassified to
trade receivables in accordance with legal right of offset.  Sales rebates
were deducted from sales in the accompanying consolidated statements of
operations and comprehensive income.





As of
April 30, 2010 and October 31, 2009, the Company has accrued $1,406,774 and
$3,020,898, respectively, for sales rebates.   For the three
months ended April 30, 2010 and 2009, the Company has deducted sales rebates in
the amount of $1,506,022 and $2,024,221, respectively, from sales.  For the
six months ended April 30, 2010 and 2009, the Company has deducted sales rebates
in the amount of $3,908,976 and $5,190,049, respectively, from sales. 
Sales rebates are calculated based on terms specified in contracts with
individual distributors.





Sales
returns and allowances





The
Company does not allow return of products except for products that were damaged
during shipment. The total amount of returned product is less than 0.05% of
total sales. The cost of damaged products is netted against sales and cost of
goods sold, respectively.





Cost
of goods sold





Cost of
goods sold primarily consists of direct and indirect manufacturing costs,
including production overhead costs, shipping and handling costs for the
products sold.





Sales
and marketing





Sales and
marketing costs consist primarily of advertising and market promotion expenses,
and other overhead expenses incurred by the Company’s sales and marketing
personnel. Advertising expenses amounted to $1,228,891 and $1,097,567 during the
three months ended April 30, 2010 and 2009, respectively and $2,328,766 and
$1,390,251 during the six months ended April 30, 2010 and 2009,
respectively.





9
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


Advertising
costs are expensed as incurred.





Research
and development





Research
and development (“R&D”) costs are expensed as incurred.





Employee
benefit costs





According
to the PRC regulations on pension, a company contributes to a defined
contribution retirement plan organized by municipal government in the province
in which the Renhuang China was registered and all qualified employees are
eligible to participate in the plan. Contributions to the plan are calculated at
20% of the employees’ salaries above a fixed threshold amount, employees
contribute 4% and the Renhuang China contributes the balance of
16%.





Share-based
compensation




For
purposes of determining the variables used in the calculation of stock
compensation expense under the provisions of FASB ASC Topic 505, “Equity” and FASB ASC Topic
718, “Compensation — Stock
Compensation,” we perform an analysis of current market data and
historical Company data to calculate an estimate of implied volatility, the
expected term of the option and the expected forfeiture rate. With the exception
of the expected forfeiture rate, which is not an input, we use these estimates
as variables in the Black-Scholes option pricing model. Depending upon the
number of stock options granted, any fluctuations in these calculations could
have a material effect on the results presented in our condensed consolidated
statement of income and other comprehensive income. In addition, any differences
between estimated forfeitures and actual forfeitures could also have a material
impact on our financial statements.




Share-based
compensation amounted to $14,250 and $0 in the three months ended April 30, 2010
and 2009, respectively and $16,594 and $0 in the six months ended April 30, 2010
and 2009, respectively.





Taxation





Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.





The
Company accounts for income tax under the provisions of FASB ASC Topic 740,
“Income Taxes,” which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of the events that have been included in the financial
statements or tax returns. Deferred income taxes are recognized for all
significant temporary differences between tax and financial statements bases of
assets and liabilities. Valuation allowances are established against net
deferred tax assets when it is more likely than not that some portion or all of
the deferred tax asset will not be realized.





The
Company does not have any long-term deferred tax assets or liabilities in China
that will exist once the tax holiday expires. The Company does not have any
significant deferred tax asset or liabilities that relate to tax jurisdictions
not covered by the tax holiday.





The
Company does not accrue United States income tax on unremitted earnings from
foreign operations, as it is the Company’s intention to invest these earnings in
the foreign operations indefinitely.





10
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


Generally,
years beginning after fiscal 2006, the Company is open to examination by PRC
taxing authorities.  In the United States, we are open to examination
from 2006 onward.





Enterprise
income tax





On March
16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income
Tax Law (“New EIT Law”) which became effective on January 1,
2008.  Pursuant to the New EIT Law, a unified enterprise income tax
rate of 25 percent and unified tax deduction standards will be applied
consistently to both domestic-invested enterprises and foreign-invested
enterprises.  However, the New EIT Law repealed most of the existing
preferential tax rates and tax holidays.  A five-year transition
period is allowed for enterprises that obtained preferential tax treatment under
the prior tax regime.  Under the prior tax regime, foreign-invested
enterprises were generally subject to a 30 percent federal tax rate plus a 3
percent local tax rate for a total tax rate of 33 percent.





Renhuang
China secured preferential tax treatment in the jurisdiction where it conducts
its manufacturing activity, where it was granted tax holiday from the local
government, for being a new and high-technology enterprise.





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets, including tax loss and credit carryforwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and noncurrent
based on their characteristics. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.





A
provision has not been made at April 30, 2010 for U.S. or additional foreign
withholding taxes on approximately $46,389,883 of undistributed earnings of
foreign subsidiaries because it is the present intention of management to
reinvest the undistributed earnings indefinitely in foreign operations.
Generally, such earnings become subject to U.S. tax upon the remittance of
dividends and under certain other circumstances. It is not practicable to
estimate the amount of deferred tax liability on such undistributed
earnings.





The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the State.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current State officials.





Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of April 30, 2010, is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
October 31, 2009, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.





Value
added tax





The
Provisional Regulations of The People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations of
the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.





11
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


Value
added tax payable in The People’s Republic of China is charged on an aggregated
basis at a rate of 13% or 17% (depending on the type of goods involved) on the
full price collected for the goods sold or, in the case of taxable services
provided, at a rate of 17% on the charges for the taxable services provided, but
excluding, in respect of both goods and services, any amount paid in respect of
value added tax included in the price or charges, and less any deductible value
added tax already paid by the taxpayer on purchases of goods and services in the
same financial year.





Comprehensive
Income





Total
comprehensive income is defined as all changes in shareholders’ equity during a
period, other than those resulting from investments by and distributions to
shareholders (i.e., issuance of equity securities and dividends). 
Generally, for the Company, total comprehensive income equals net income plus or
minus adjustments for currency translation.  Total comprehensive income
represents the activity for a period net of related tax and was $3,257,244 and
$2,177,824 for the three months ended April 30, 2010 and 2009, respectively and
$10,642,888 and $8,379,452 for the six months ended April 30, 2010 and 2009,
respectively.





While
total comprehensive income is the activity in a period and is largely driven by
net earnings in that period, accumulated other comprehensive income or loss
(“AOCI”) represents the cumulative balance of other comprehensive income as of
the balance sheet date.  For the Company, AOCI is primarily the cumulative
balance related to the currency adjustments and decreased overall equity by
$159,889 as of April 30, 2010 and increased overall equity by $14,168 as of
April 30, 2009.





Earnings
per share





Basic net
earnings per common stock is computed by dividing net earnings applicable to
common shareholders by the weighted-average number of common stock outstanding
during the period. Diluted net earnings per common stock is determined using the
weighted-average number of common stock outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, using the treasury stock
method, consisting of shares that might be issued upon exercise of common stock
warrants. In periods where losses are reported, the weighted-average number of
common stock outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive.





Basic
earnings per share is based on the weighted-average number of shares of common
stock outstanding.  Earnings per share, assuming dilution, is based on
the weighted-average number of shares of common stock outstanding adjusted for
the effects of common stock that may be issued as a result of the following
types of potentially dilutive instruments:




–
            warrants,





–
            employee
      stock options, and





–
            other
      equity awards, which include long-term incentive
  awards.





The FASB
Topic ASC 260, “Earnings per
Share,” requires the Company to include additional shares in the
computation of earnings per share, assuming dilution.  The additional
shares included in diluted earnings per share represent the number of shares
that would be issued if all of the Company’s outstanding dilutive instruments
were converted into common stock.




12


RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009





Diluted
earnings per share are based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.




Warrants





The
Company evaluates its warrants on an ongoing basis considering the accounting
guidance of FASB Topic ASC 825, which establishes standards for issuers of
financial instruments with characteristics of both liabilities and equity
related to the classification and measurement of those instruments. The warrants
are evaluated considering the accounting guidance of FASB Topic ASC 815, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.





Freestanding
financial instruments with characteristics of both liabilities and
equity





In
accordance with accounting guidance FASB Topic ASC 825, the Company accounts for
financial instruments as a liability if it embodies an obligation to repurchase
the issuer’s equity shares, or is indexed to such an obligation, and that
requires or may require the issuer to settle the obligation by transferring
assets. Freestanding financial instruments are financial instruments that are
entered into separately and apart from any of the entity’s other financial
instruments or equity transactions, or that is entered into in conjunction with
some other transaction and is legally detachable and separately exercisable. The
liability recorded is the per share price to be paid and is offset to
equity.  As of April 30, 2010 and October 31, 2009, there were no financial
instruments recorded as liability.





3.  ACCOUNTING
PRONOUNCEMENTS





Accounting
Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends
Subsequent Events Recognition and Disclosures, ASU No. 2009-16 (ASC Topic 860),
which amends Accounting for Transfer of Financial Assets, ASU No. 2009-05 (ASC
Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU
No. 2009-08, Earnings per Share, ASU No. 2009-12 (ASC Topic 820), Investments in
Certain Entities That Calculate Net Asset Value per Share, and various other
ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the Company, or
their effect on the financial statements would not have been
significant.




In April
2010, the FASB issued Accounting Standards Update, 2010-17, Revenue
Recognition—Milestone Method (Topic 605): “Milestone Method of Revenue
Recognition—a consensus of the FASB Emerging Issues Task
Force.”  This is an update regarding the milestone method of
revenue recognition. The scope of this update is limited to arrangements that
include milestones relating to research or development deliverables. The update
specifies criteria that must be met for a vendor to recognize consideration that
is contingent upon achievement of a substantive milestone in its entirety in the
period in which the milestone is achieved. The criteria apply to milestones in
arrangements within the scope of this update regardless of whether the
arrangement is determined to have single or multiple deliverables or units of
accounting. The update will be effective for fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. Early application is
permitted. Companies can apply this guidance prospectively to milestones
achieved after adoption. However, retrospective application to all prior periods
is also permitted. This update is not expected to have a material impact on the
Company’s financial statements.





In March
2010, the FASB issued Accounting Standards Update, 2010-13, Compensation—Stock
Compensation (Topic 718): “Effect of Denominating the Exercise
Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades—a consensus of the FASB Emerging Issues Task
Force.”  This is an update regarding the effect of
denominating the exercise price of a share-based payment awards in the currency
of the market in which the underlying equity securities trades and that currency
is different from (1) entity’s functional currency, (2) functional currency of
the foreign operation for which the employee provides services, and (3) payroll
currency of the employee. The update clarifies that an employee share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades should be
considered an equity award assuming all other criteria for equity classification
are met. The update will be effective for interim and annual periods beginning
on or after December 15, 2010, and will be applied prospectively. Affected
entities will be required to record a cumulative catch-up adjustment for all
awards outstanding as of the beginning of the annual period in which the
guidance is adopted. This update is not expected to have a material impact on
the Company’s financial statements.





13
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


In March,
2010, the FASB issued Accounting Standards Update, 2010-11, Derivatives and
Hedging (Topic 815): “Scope
Exception Related to Embedded Credit Derivatives.”  This update
clarifies the type of embedded credit derivative that is exempt from embedded
derivative bifurcation requirements. Specifically, only one form of embedded
credit derivative qualifies for the exemption – one that is related only to the
subordination of one financial instrument to another. As a result, entities that
have contracts containing an embedded credit derivative feature in a form other
than such subordination may need to separately account for the embedded credit
derivative feature. This update also has transition provisions, which permit
entities to make a special one-time election to apply the fair value option to
any investment in a beneficial interest in securitized financial assets,
regardless of whether such investments contain embedded derivative features.
This update is effective on the first day of the first fiscal quarter beginning
after June 15, 2010. Early adoption is permitted at the beginning of any fiscal
quarter beginning after March 5, 2010. This update is not expected to have a
material impact on the Company’s financial statements





In
January 2010, the FASB issued Accounting Standards Update, 2010-06, Fair
Value Measurements and Disclosures (Topic 820): “Improving Disclosures about Fair
Value Measurements.”  This update provides guidance to improve
disclosures about fair value measurements. This guidance amends previous
guidance on fair value measurements to add new requirements for disclosures
about transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurement on
a gross basis rather than on a net basis as currently required. This update also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value. This guidance
is effective for annual and interim periods beginning after December 15,
2009, except for the requirement to provide the Level 3 activities of purchases,
sales, issuances, and settlements on a gross basis, which will be effective for
annual and interim periods beginning after December 15, 2010. Early
application is permitted and, in the period of initial adoption, entities are
not required to provide the amended disclosures for any previous periods
presented for comparative purposes. The adoption of this update did not have a
significant impact on the Company’s financial statements.





In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): “ Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging Issues Task Force.” This
update provides application guidance on whether multiple deliverables exist, how
the deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a deliverable. The selling
price used for each deliverable will be based on vendor-specific objective
evidence, if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither vendor-specific
or third-party evidence is available. The Company will be required to apply this
guidance prospectively for revenue arrangements entered into or materially
modified after January 1, 2011; however, earlier application is permitted. The
Company has not determined the impact that this update may have on its financial
statements.





In June
2009, the FASB issued guidance related to accounting for transfers of financial
assets. This guidance improves the information that a reporting entity provides
in its financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a
continuing interest in transferred financial assets. In addition, this guidance
amends various ASC concepts with respect to accounting for transfers and
servicing of financial assets and extinguishments of liabilities, including
removing the concept of qualified special purpose entities.  This guidance must be
applied to transfers occurring on or after the effective date. On February 1,
2010, the Company adopted this guidance.  The adoption of this
guidance did not have a material impact on the Company’s financial
statements.





14
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


In June
2009, the FASB issued guidance which amends certain ASC concepts related to
consolidation of variable interest entities. Among other accounting and
disclosure requirements, this guidance replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. On February 1, 2010, the Company adopted this
guidance.  The adoption of this guidance did not have a material
impact on the Company’s financial statements.




4. CONCENTRATIONS OF BUSINESS AND CREDIT
RISK





The
Company conducts all of its primary trade in the PRC.  There can be no
assurance that the Company will be able to successfully conduct its trade, and
failure to do so would have a material adverse effect on the Company’s financial
position, results of operations and cash flows. Also, the success of the
Company’s operations is subject to numerous contingencies, some of which are
beyond management’s control. These contingencies include general economic
conditions, price of raw material, competition, governmental and political
conditions, and changes in regulations. Because the Company is dependent on
foreign trade in the PRC, the Company is subject to various additional
political, economic and other uncertainties. Among other risks, the Company’s
operations will be subject to risk of restrictions on transfer of funds,
domestic and international customs, changing taxation policies, foreign exchange
restrictions, and political and governmental regulations.





(1)
Cash and cash equivalents





The
Company maintains certain bank accounts in the PRC which are not protected by
FDIC insurance or other insurance.  Cash balance held in PRC bank
accounts to $23,391,609 and $8,111,514, as of April 30, 2010 and October 31,
2009, respectively.  No cash balances were restricted as at April 30,
2010 and October 31, 2009.





As of
April 30, 2010 and October 31, 2009, substantially all of the Company’s cash and
cash equivalents were held by major financial institutions located in the PRC
which management believes are of high credit quality.





(2)
Sales and trade receivables





The
Company provides credit in the normal course of business and substantially all
customers are located in the PRC.  The Company performs ongoing
credit evaluations of its customers and maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific customers,
historical trends, and other information.  Three individual customers
accounted for 10%-12% of net revenues during the three and six months ended
April 30, 2010 and 2009.




The
Company’s products are sold throughout the PRC. For three months ended April 30,
2010 and 2009, Siberian Ginseng (Acanthopanax) Series accounted for 41% and 53%,
respectively, of total sales.  For six months ended April 30, 2010 and
2009, Siberian Ginseng (Acanthopanax) Series accounted for 44% and 54%,
respectively, of total sales.





(3)
Foreign currency





The
Company operates in China, which may give rise to significant foreign currency
risks from fluctuations and the degree of volatility of foreign exchange rates
between U.S. dollars and the Chinese currency RMB.





15


RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009





(4)
Dividends





Payments
of dividends may be subject to some restrictions due to the fact that the
operating activities are conducted in a subsidiary residing in the
PRC.





(5)
Price control





The
retail prices of certain pharmaceuticals sold in China, primarily those included
in the national and provincial Medical Insurance Catalogs are subject to price
controls in the form of fixed prices or price ceilings. As such, the retail
prices for certain of the Company’s pharmaceutical products can be adjusted
downward or upward from time to time. Price controls did not have a material
impact on the Company’s operation in the three and six months ended April 30,
2010 and 2009.





(6)
Cost of goods sold





Cost of
goods sold is subject to price fluctuations due to various factors beyond the
Company’s control, including, among other pertinent factors, inflation and
changes in governmental regulations and programs.  The Company expects
cost of goods sold will continue to fluctuate and be affected by inflation in
the future.  The Company’s raw materials are purchased from various
independent suppliers, and do not rely on any one supplier.







5.           INCOME
TAXES





Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.  If
the Company did not have tax holiday, the effects of the tax per share were as
follows:


Three
      months ended
                                                          April
      30,
                                                        
                                                        Six
      months ended
                                                          April
      30,2010
                                                        2009
                                                        
                                                        2010
                                                        2009US$
                                                        US$
                                                        
                                                        US$
                                                        US$Tax
      savings
                                                        854,912
                                                        524,638
                                                        
                                                        2,700,694
                                                        2,091,321Benefit
      per share:Basic
                                                        0.02
                                                        0.01
                                                        
                                                        0.07
                                                        0.06Diluted
                                                        0.02
                                                        0.01
                                                        
                                                        0.07
                                                        0.06





Had the
tax exemption not been in place for the three and six months ended April 30,
2010 and 2009, the Company estimates the following proforma financial statement
impact:





Three
      months ended
                                              April
      30,
                                            
                                            Six
      months ended
                                              April
      30,2010
                                            2009
                                            
                                            2010
                                            2009US$
                                            US$
                                            
                                            US$
                                            US$Net
      income before tax provision, as reported
                                            3,419,648
                                            2,098,553
                                            
                                            10,802,777
                                            8,365,284Less
      Tax savings
                                            (854,912)
                                            (524,638)
                                            
                                            (2,700,694)
                                            ( 2,091,321)Proforma
      Net income
                                            2,564,736
                                            1,573,915
                                            
                                            8,102,083
                                            6,273,963Proforma
      Net income per share:Basic
                                            0.07
                                            0.04
                                            
                                            0.22
                                            0.18Diluted
                                            0.07
                                            0.04
                                            
                                            0.21
                                            0.18





16
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


6.           EARNINGS
PER SHARE





When
calculating diluted earnings per share for common stock equivalents, the
Earnings Per Share Topic, ASC 260, requires the Company to include the potential
shares that would be outstanding if all outstanding stock options or warrants
were exercised.   This is offset by shares the Company could
repurchase using the proceeds from these hypothetical exercises to obtain the
common stock equivalent.





The
following reconciles the components of the EPS computation:





Income
                                  
                                  
                                  Shares
                                  
                                  
                                  Per Share(Numerator)
                                  
                                  
                                  (Denominator)
                                  
                                  
                                  AmountUS$
                                  
                                  
                                  
                                  
                                  
                                  US$For
      the three months ended April 30, 2010:Net
      income
                                  
                                  3,419,648Basic
      EPS income available to common shareholders
                                  
                                  
                                  3,419,648
                                  
                                  
                                  
                                  37,239,536
                                  
                                  
                                  
                                  0.09Effect
      of dilutive securities:Share
      options
                                  
                                  
                                  
                                  
                                  
                                  
                                  27,235Warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  650,369Diluted
      EPS income available to common shareholders
                                  
                                  
                                  3,419,648
                                  
                                  
                                  
                                  37,917,140
                                  
                                  
                                  
                                  0.09For
      the three months ended April 30, 2009:Net
      income
                                  
                                  
                                  2,098,553Basic
      EPS income available to common shareholders
                                  
                                  
                                  2,098,553
                                  
                                  
                                  
                                  35,096,680
                                  
                                  
                                  
                                  0.06Effect
      of dilutive securities:Share
      options
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Diluted
      EPS income available to common shareholders
                                  
                                  
                                  2,098,553
                                  
                                  
                                  
                                  35,096,680
                                  
                                  
                                  
                                  0.06





For the
three months ended April 30, 2010, 70,000 share options were excluded from the
calculation of diluted earnings per share because the exercise price exceeded
the average price of the Company’s common stock.





For the
three months ended April 30, 2009, there were no securities or other contracts
to issue common stock that need to be considered in the diluted earnings per
share calculation.





Income
                                  
                                  
                                  Shares
                                  
                                  
                                  Per Share(Numerator)
                                  
                                  
                                  (Denominator)
                                  
                                  
                                  AmountUS$
                                  
                                  
                                  
                                  
                                  
                                  US$For
      the six months ended April 30, 2010:Net
      income
                                  
                                  10,802,777Basic
      EPS income available to common shareholders
                                  
                                  
                                  10,802,777
                                  
                                  
                                  
                                  37,239,536
                                  
                                  
                                  
                                  0.29Effect
      of dilutive securities:Share
      options
                                  
                                  
                                  
                                  
                                  
                                  
                                  10,721Warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  473,957Diluted
      EPS income available to common shareholders
                                  
                                  
                                  10,802,777
                                  
                                  
                                  
                                  37,724,214
                                  
                                  
                                  
                                  0.29For
      the six months ended April 30, 2009:Net
      income
                                  
                                  
                                  8,365,284Basic
      EPS income available to common shareholders
                                  
                                  
                                  8,365,284
                                  
                                  
                                  
                                  35,096,680
                                  
                                  
                                  
                                  0.24Effect
      of dilutive securities:Share
      options
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Warrants
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Diluted
      EPS income available to common shareholders
                                  
                                  
                                  8,365,284
                                  
                                  
                                  
                                  35,096,680
                                  
                                  
                                  
                                  0.24





17
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


For the
six months ended April 30, 2010, 70,000 share options and 160,000 warrants were
excluded from the calculation of diluted earnings per share because the exercise
price exceeded the average price of the Company’s common stock.





For the
six months ended April 30, 2009, there were no securities or other contracts to
issue common stock that need to be considered in the diluted earnings per share
calculation.





7.           TRADE
RECEIVABLES, NET





The trade
receivables amount included in the condensed consolidated balance sheets as at
April 30, 2010 and October 31, 2009 were as follows:





2010
                        
                        
                        2009US$
                        
                        
                        US$Trade
      receivables
                        
                        
                        16,749,583
                        
                        
                        
                        26,667,816Less:
      Sales rebates
                        
                        
                        (1,406,774
                        )
                        
                        
                        (3,020,898
                        )Less:
      Allowance for doubtful accounts
                        
                        
                        (442,264
                        )
                        
                        
                        (443,508
                        )Trade
      receivables, net
                        
                        
                        14,900,545
                        
                        
                        
                        23,203,410





8.           OTHER
RECEIVABLES, NET





The other
receivables amount included in the condensed consolidated balance sheets as at
April 30, 2010 and October 31, 2009 were as follows:





2010
                      
                      
                      2009US$
                      
                      
                      US$Other
      receivables
                      
                      
                      523,922
                      
                      
                      
                      462,980Less:
      Allowance for doubtful accounts
                      
                      
                      (359,356
                      )
                      
                      
                      (360,367
                      )Other
      receivables, net
                      
                      
                      164,566
                      
                      
                      
                      102,613





9.           INVENTORY,
NET





The
inventory amounts included in the condensed consolidated balance sheets for as
at April 30, 2010 and October 31, 2009 comprised of:





2010
                      
                      
                      2009US$
                      
                      
                      US$Raw
      materials
                      
                      
                      1,553,130
                      
                      
                      
                      1,530,283Work-in-progress
                      
                      
                      901,611
                      
                      
                      
                      1,006,984Finished
      goods
                      
                      
                      544,241
                      
                      
                      
                      550,982Less:  Inventory
      reserves
                      
                      
                      (64,054
                      )
                      
                      
                      (64,233
                      )Inventory,
      net
                      
                      
                      2,934,928
                      
                      
                      
                      3,024,016





18
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


10.           PROPERTY
AND EQUIPMENT, NET





Property
and equipment and related accumulated depreciation as of April 30, 2010 and
October 31, 2009 were as follows:





2010
                        
                        
                        2009US$
                        
                        
                        US$Machinery
      and equipment
                        
                        
                        3,425,788
                        
                        
                        
                        3,435,421Office
      equipment and furnishings
                        
                        
                        54,595
                        
                        
                        
                        53,086Motor
      vehicles
                        
                        
                        52,937
                        
                        
                        
                        54,7493,533,320
                        
                        
                        
                        3,543,256Less:
      Accumulated depreciation
                        
                        
                        (1,368,600
                        )
                        
                        
                        (1,191,093
                        )Net
      book value
                        
                        
                        2,164,720
                        
                        
                        
                        2,352,163





Depreciation
expense for the three months ended April 30, 2010 and 2009 was $90,477 and
$88,760, respectively, of which $86,578 and $85,039 were included as a
component of cost of goods sold in the respective
periods.





Depreciation
expense for the six months ended April 30, 2010 and 2009 was $181,076 and
$177,224, respectively, of which $173,365 and $169,844 were included as a
component of cost of goods sold in the respective
periods.





No assets
were pledged for borrowings as at April 30, 2010 and October 31,
2009.





11.
            RELATED
      PARTY TRANSACTIONS





Due from
related parties included in the condensed consolidated balance sheets as at
April 30, 2010 and October 31, 2009 comprised of:





2010
                        
                        
                        2009US$
                        
                        
                        US$Due
      from related parties:Advances
      (1)
                        
                        
                        -
                        
                        
                        
                        130,199Deposits
      (2)
                        
                        
                        20,020,367
                        
                        
                        
                        16,137,000Total
                        
                        
                        20,020,367
                        
                        
                        
                        16,267,199





(1)
Advances





Mr. Li
Shaoming, our chairman, chief executive officer and president, is also chairman
and a 50% shareholder of Harbin Renhuang Pharmaceutical Stock Co. Ltd (“Stock
Co”).





As of
October 31, 2009, the Company has a net amount due from Stock Co, of
$130,199.  This amount consists of $539,130 of repair and maintenance
work performed on property and plant leased from Stock Co and paid for on Stock
Co’s behalf.  This is offset by $408,931 of professional fees in
connection with the acquisition of Harbin Renhuang Pharmaceutical Company
Limited in 2006, paid for by Stock Co on the Company’s behalf.  During
the quarter ended January 31, 2010, the Company received from Stock Co, a cash
payment of $539,130 resulting in a balance of $408,931 due to Stock Co, which
was settled in the quarter ended April 30, 2010.





19
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


(2)
Deposits





On
September 1, 2009, the Company through its wholly own subsidiary, Renhuang
China, entered into a Purchase Agreement with Stock Co, to acquire two
production patents, for a total consideration of $2,340,619.  Pursuant
to the Purchase Agreement, a payment of $1,467,000 was made to Stock Co, in
October 2009 and $1,462,887 and $1,467,000 was recorded as deposits on the
condensed consolidated balance sheet as at April 30, 2010 and October 31, 2009,
respectively.  Pursuant to the Purchase Agreement, final payment of
$877,732 is due by December 31, 2010, at which time title for the assets
will be transferred.  Accordingly the transaction is considered
incomplete as at April 30, 2010.





On
October 12, 2009, the Company through its wholly own subsidiary, Renhuang China,
entered into a Purchase Agreement with Stock Co, to acquire the land use right,
property and plant, for a total consideration of
$23,406,185.  Pursuant to the Purchase Agreement, a payment of
$14,670,000 was made to Stock Co, in October 2009 and $14,628,866 and
$14,670,000 was recorded as deposits on the condensed consolidated balance sheet
as at April 30, 2010 and October 31, 2009, respectively.  Pursuant to
the Purchase Agreement, final payment of $8,777,319 is due by December 31, 2011,
at which time title for the assets will be transferred.  Accordingly
the transaction is considered incomplete as at April 30, 2010.





On April
10, 2010, the Company through its wholly own subsidiary, Renhuang China, entered
into a Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai
Company, to acquire two office floors for a total consideration of
$5,612,306.  Pursuant to the Purchase Agreement, a payment of
$3,928,614 was made in April 2010 and recorded as deposits on the condensed
consolidated balance sheet.  Pursuant to the Purchase Agreement, final
payment of $1,683,692 is due by December 20, 2012, at which time title for the
assets will be transferred.  Accordingly the transaction is considered
incomplete as at April 30, 2010.





(3)
Related party transactions





The
Company leases property and plant from Stock Co.  Rental expenses
related to this lease, incurred and expensed to condensed consolidated
statements of operations and comprehensive income during the three months ended
April 30, 2010 and 2009 amounted to $153,612 and $153,600, respectively, during
the six months ended April 30, 2010 and 2009 amounted to $307,224 and $307,200,
respectively.





During
the three and six months ended April 30, 2010 and 2009, the Company sold goods
in the amount of $0 and $375,000, respectively, to Heilongjiang Renhuang
Pharmaceutical Limited, a company where Mr. Li Shaoming is a major
shareholder.





12.           EMPLOYEE
BENEFITS





The
full-time employees of the Company’s subsidiary that is incorporated in the PRC
are entitled to staff welfare benefits, including medical care, welfare
subsidies, unemployment insurance and pension benefits. The PRC companies are
required to accrue for these benefits based on certain percentages of the
employees’ salaries in accordance with the relevant regulations, and to make
contributions to the state-sponsored pension and medical plans out of the
amounts accrued for medical and pension benefits. The total amounts expensed to
the condensed consolidated statements of operations and comprehensive income for
such employee benefits amounted to approximately $99,593 and $103,632 for the
three months ended April 30, 2010 and 2009, respectively and $204,556 and
$216,546 for the six months ended April 30, 2010 and 2009, respectively. The PRC
government is responsible for the medical benefits and ultimate pension
liability to these employees.





20
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


13.          ASSETS
AND LIABILITIES MEASURED AT FAIR VALUE





At April
30, 2010, the Company had no assets measured at fair value and the following
liabilities measured at fair value:








Fair
      value measurementQuoted
      prices in active markets of identical assets
                                            (Level
      1)
                                          
                                          
                                          
                                          Significant
      other observable inputs
                                            (Level
      2)
                                          
                                          
                                          
                                          Significant
      unobservable inputs
                                            (Level
      3)US$
                                          
                                          
                                          
                                          US$
                                          
                                          
                                          
                                          US$Warrants
      liability
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          342,770





At
October 31, 2009, the Company had no assets and liabilities measured at fair
value.








14.           PREFERRED
STOCK, COMMON STOCK AND EQUITY TRANSACTIONS





(1)  Preferred
Stock





The
Company’s articles of incorporation provide that our board of directors will be
authorized to issue from time to time, without further stockholder approval, up
to 1,000,000 additional shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series, including the dividend
rights, dividend rates, conversion rights, voting rights, rights of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
any series. Such shares of preferred stock could have preferences over our
common stock with respect to dividends and liquidation rights.  As at April
30, 2010 and October 31, 2009, there is no preferred stock
outstanding.





(2)  Common
Stock and Equity Transactions





During
the three and six months ended April 30, 2010, the Company recorded $11,589 and
$13,933, respectively, of share-based compensation expense in connection with an
option to purchase 50,000 shares valued at $47,527 granted to an employee on
January 13, 2010.





During
the three and six months ended April 30, 2010, the Company recorded $2,661 of
share-based compensation expense in connection with an option to purchase 70,000
shares valued at $171,397 granted to an independent director on April 13,
2010.





15.           OPTION
PLAN AND WARRANTS





(1)  2003
Omnibus Plan




On
February 28, 2003, our board of directors approved the Renhuang Pharmaceuticals,
Inc. 2003 Omnibus Securities Plan (the “2003 Plan”), which was approved by our
shareholders on April 11, 2003. The 2003 Plan offers selected employees,
directors, and consultants an opportunity to acquire our common stock, and
serves to encourage such persons to remain employed by us and to attract new
employees. The 2003 Plan allows for the award of stock and options, up to 25,000
(after giving effect to the 1-for-30 reverse stock split in 2006) shares of our
common stock. On May 1, of each year, the number of shares in the 2003
Securities Plan is automatically adjusted to an amount equal to ten percent of
our outstanding stock on April 30, of the immediately preceding year. As of
April 30, 2010, the number of shares of common stock outstanding was 37,239,536
making 3,723,954 shares of common stock subject to the 2003 Plan.





21
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


On April
13, 2010, an option to purchase 70,000 shares was granted under the 2003 Plan to
an independent director that vests on a quarterly basis from the date of
grant, conditioned upon continued service on such quarterly dates, and have a
contractual life of 3 years.  The fair value of the option award is
estimated on the date of grant using the Black-Scholes option valuation model to
be $171,397, of which $2,661 was recorded as compensation expense in the three
and six months ended April 30, 2010.  The valuation was based on the
assumptions noted in the following table.





Expected volatility
                
                
                227.9
                %Expected dividends
                
                
                0
                %Expected term (in years)
                3 yearsRisk-free rate
                
                
                1.65
                %





The
risk-free interest rate is based on the U.S. Treasury yield curve in effect for
the expected term of the option at the time of grant.  The dividend
yield on our common stock is assumed to be zero since we do not pay dividends
and have no current plans to pay them in the future.  The market price
volatility of our common stock was based on historical volatility since April
13, 2009.  Our methodology is consistent with prior period volatility
assumptions.  The expected life of the options is based upon our
anticipated expectations of exercise behavior since no options have been
exercised in the past to provide relevant historical data.





(2)  2007
Non-Qualified Company Stock Grant and Option Plan





On March
19, 2007, our board of directors approved the 2007 Non-Qualified Company Stock
Grant and Option Plan (the “2007 Plan”).   The 2007 Plan is
intended to serve as an incentive to and to encourage stock ownership by
our  directors, officers, and employees, and certain persons rendering
service to us, so that such persons may acquire or increase their proprietary
interest in our success, and to encourage them to remain in our
service.  Under the 2007, up to 200,000 shares of our common stock may
be subject to options.





On
January 13, 2010, an option to purchase 50,000 shares was granted under the 2007
Plan to an employee that vests on the 12-month anniversary of the date of grant,
conditioned upon continued employment on such date, and have a contractual life
of 3 years.  The fair value of the option award is estimated on the
date of grant using the Black-Scholes option valuation model to be $47,527, of
which $11,589 and $13,933 was recorded as compensation expense in the three and
six months ended April 30, 2010, respectively.  The valuation was
based on the assumptions noted in the following table.





Expected volatility
                
                
                236.5
                %Expected dividends
                
                
                0
                %Expected term (in years)
                3 yearsRisk-free rate
                
                
                1.5
                %





The
risk-free interest rate is based on the U.S. Treasury yield curve in effect for
the expected term of the option at the time of grant.  The dividend
yield on our common stock is assumed to be zero since we do not pay dividends
and have no current plans to pay them in the future.  The market price
volatility of our common stock was based on historical volatility since January
13, 2009.  Our methodology is consistent with prior period volatility
assumptions.  The expected life of the options is based upon our
anticipated expectations of exercise behavior since no options have been
exercised in the past to provide relevant historical data.








A summary
of option activity under the Company’s option  plan as of April 30,
2010 and movement during the six months then ended are as follow:





22
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


Options
                                      
                                      
                                      Weighted
                                        average
                                        exercise price
                                      
                                      
                                      Aggregate
                                        intrinsic
                                        value
                                      
                                      Weighted
                                        average
                                        remaining
                                        contractual
                                        termUS$
                                      
                                      
                                      US$Outstanding
      at November 1, 2009
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      -Granted
                                      
                                      
                                      120,000
                                      
                                      
                                      
                                      1.92
                                      
                                      
                                      
                                      -
                                      
                                      -Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      -Forfeited
      or expired
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      -Outstanding
      at April 30, 2010
                                      
                                      
                                      120,000
                                      
                                      
                                      
                                      1.92
                                      
                                      
                                      
                                      94,100
                                      
                                      2.85




A summary
of the status of the Company’s non-vested options as of April 30, 2010 and
movements during the six months then ended are as follow:








Options
                                
                                Weighted average
                                  granted date fair
                                  valueUS$Non-vested
      at November 1, 2009
                                
                                
                                -
                                
                                -Granted
                                
                                
                                120,000
                                
                                1.91Vested
                                
                                
                                -
                                
                                -Forfeited
      or expired
                                
                                
                                -
                                
                                -Non-vested
      at April 30, 2010
                                
                                
                                120,000
                                
                                1.91





As of
April 30, 2010, there was $202,330 of unrecognized compensation cost related to
non-vested share-based compensation granted under the Company’s option
plan.  The cost is expected to be recognized over a period of 2.96
years.





(3)  Warrants





As of
April 30, 2010, the Company has 1,231,428 warrants outstanding at an average
exercise price of $1.25 per warrant for one share each of the Company’s common
stock. The warrants expire in 2012 and 2013.





Warrants
                      
                      
                      Average
      exercise
                        priceUS$Outstanding
      warrants at November 1, 2009
                      
                      
                      1,071,428
                      
                      
                      
                      0.88Warrants
      granted
                      
                      
                      160,000
                      
                      
                      
                      2.00Exercised
                      
                      
                      -
                      
                      
                      
                      -Expired/cancelled
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      warrants at April 30, 2010
                      
                      
                      1,231,428
                      
                      
                      
                      1.25





Information
regarding the warrants outstanding at April 30, 2010 is summarized as
below:





23
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


Warrants outstanding atApril 30, 2010Weighted
                              
                              WeightedAverage
                              
                              AverageRemaining
                              
                              ExerciseExercise Prices
                              
                              Warrants
                              
                              Contractual
                              
                              PriceUS$
                              
                              Outstanding
                              
                              Life (years)
                              
                              US$0.88
                              
                              1,071,4282.00
                              
                              160,0001,231,428
                              
                              2.16
                              
                              1.02








16.           STATUTORY
RESERVES





The
reserve funds as of April 30, 2010 and October 31, 2009 were comprised of the
following:




2010
              
              
              2009US$
              
              
              US$Statutory
      surplus reserve
              
              
              3,090,320
              
              
              
              3,090,320Public
      welfare fund
              
              
              282,377
              
              
              
              282,377Total
              
              
              3,372,697
              
              
              
              3,372,697


(1) Statutory
reserves





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.





(2)
Public welfare funds





Prior to
January 1, 2007, the Company was required each year to transfer 5% of its after
tax profit as reported on consolidated 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.           COMMITMENTS
AND CONTINGENCIES





The
Company has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business, generally for quantities required
for the Company’s business and at prevailing market prices. No material annual
loss is expected from these commitments and there are no minimum purchase
commitments.





The
Company and its subsidiaries are self-insured, and they do not carry any
property insurance, general liability insurance, or any other insurance that
covers the risks of their business operations. As a result any material loss or
damage to its properties or other assets, or personal injuries arising from its
business operations would have a material adverse effect on the Company’s
financial condition and operations.





24
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April
30, 2010 and 2009


The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management, the
individual regulatory and legal matters in which it might involve in the future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations, or cash flows.





(1)  Operating
lease arrangements





The
Company leases office premise from a third party, Heilongjiang Jiusanyouzhi Co.,
Ltd.  The lease is from May 1, 2007 to April 30, 2010, with monthly
rental payment of $10,484.





The
Company also leases property and plant from a related party, Harbin Renhuang
Pharmaceutical Stock Co. Ltd.  The lease is from April 30, 2009 to May
1, 2010, with monthly rental payment of $51,204.





As of
April 30, 2010, there is no minimum lease payment in future years.





During
the three months ended April 30, 2010 and 2009, the Company incurred rental
expenses in the amount of $180,676 and $153,659, respectively.





During
the six months ended April 30, 2010 and 2009, the Company incurred rental
expenses in the amount of $366,189 and $374,416, respectively.





(2)  Capital
commitments





As of
April 30, 2010, the Company has capital commitments for purchase of land use
right, property and equipment, office floors and production patents of
approximately $11,338,743.




18.           SUBSEQUENT
EVENT





In May
2009, the FASB issued accounting guidance now codified as FASB ASC Topic 855,
“Subsequent Events,”
which establishes general standards of accounting for, and disclosures of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued.  FASB ASC Topic 855 is
effective for interim or fiscal periods ending after June 15, 2009.





Management
has evaluated subsequent events from April 30, 2010 to June 7, 2010, the date
which the Company’s condensed consolidated financial statements have been issued
and were available to be issued, and has concluded no events need to be reported
during this period.  Subsequent events that may occur after June 7,
2010 have not been evaluated in the condensed consolidated financial statements
as of April 30, 2010.





25


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





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and related notes appearing elsewhere in this Quarterly
Report.  In addition to historical financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs.  Our actual results could differ materially
from those discussed in the forward-looking statements.  Factors that
could cause or contribute to these differences include those discussed below and
elsewhere in this Quarterly Report. See also Risk Factors contained in our Form
10-K for the year ended October 31, 2009.





Overview





We are a
high-tech enterprise engaged in the development, manufacturing, and distribution
of botanical products, bio-pharmaceutical products, and traditional Chinese
medicines, or TCM, in the People’s Republic of China. We have three GMP
certified production facilities, Ah City natural and biopharmaceutical plant,
Dongfanghong pharmaceutical plant and Qingyang natural extraction plant, capable
of producing 18 dosage forms and over 200 different products. Our products
include but are not limited to botanical anti-depression and nerve-regulation
products, biopharmaceutical products, and botanical antibiotic and traditional
OTC Chinese medicines.  Botanical anti-depression and nerve-regulation
products account for over 50% of our revenues and we intend to strengthen our
developments in this area.  We have a distribution network of over
3,000 distributors and over 70 sales centers across 24 provinces in
China.





Factors
Affecting our Results of Operations





Our
operating results are primarily affected by the following factors:




Ÿ
            Pharmaceutical
      Industry Growth.We believe the market for
      pharmaceutical products in China is growing rapidly driven by China’s
      economic growth, increased pharmaceutical expenditure, an aging
      population, increased lifestyle-related diseases, government support of
      the pharmaceutical industry, as well as the increased availability of
      funding for medical insurance in China.   In particular, in
      January 2009, the PRC’s State Council passed a far-reaching medical reform
      plan (“Health Reform”) to help provide universal primary medical insurance
      coverage and increased access to medical facilities to a greater majority
      of its citizens.  We expect these factors to continue to drive
      industry growth.




Ÿ
            Production
      Capacity.We
      believe much of the pharmaceutical market in China is still underserved,
      particularly with respect to treatment of depression, melancholy and nerve
      regulation.  In 2009 the demand for our products that treat
      depression, melancholy and regulate nerves, increased and we were able to
      increase our production of such products to capture much of this
      growth.  We believe our facilities with the ability to
      manufacture 18 dosage forms and over 200 products will allow us to capture
      future market growth and increase our revenue and market share
      accordingly.




Ÿ
            Perceptions
      of Product Quality. We believe that rising health concerns in China
      have contributed to a greater demand for health-care products with
      perceived health benefits.  We believe many consumers in China
      tend to prefer natural health care products with, we believe, limited side
      effects.  Accordingly, we believe our reputation for quality and
      leadership position in a number of our products allow our products to
      command a higher average selling price and generate higher gross margins
      than our competitors.




Ÿ
            Seasonality.Our product
      sales remain seasonal, with greater demand in colder
    months.Ÿ
            Expenses
      Associated with Research and Development.In order to enhance
      our existing products and develop new products for the market, we have
      devoted significant resources to R&D.





Ÿ
            Expenses
      Associated with Sales and Marketing.In order to promote
      our product brand and gain greater market awareness, we have devoted
      significant resources to sales and marketing, in particular advertising
      activities.




26


Results of
Operations





Three-Month
Period Ended April 30, 2010 Compared to Three-Month Period Ended April 30,
2009





The
following table sets forth certain information regarding our results of
operation.





Three
      Months Ended April 302010
                    
                    
                    2009($
      in thousands)Statements
      of Operations DataSales,
      net
                    
                    
                    12,093
                    
                    
                    
                    8,703Cost
      of goods sold
                    
                    
                    5,878
                    
                    
                    
                    4,403Gross
      profit
                    
                    
                    6,215
                    
                    
                    
                    4,300Operating
      and administrative expensesSales
      and marketing
                    
                    
                    1,265
                    
                    
                    
                    1,120General
      and administrative
                    
                    
                    975
                    
                    
                    
                    598Research
      and development
                    
                    
                    571
                    
                    
                    
                    494Other
      income
                    
                    
                    15
                    
                    
                    
                    10Income
      from operation before income tax expenses
                    
                    
                    3,419
                    
                    
                    
                    2,098Income
      tax expenses
                    
                    
                    -
                    
                    
                    
                    -Net
      income
                    
                    
                    3,419
                    
                    
                    
                    2,098Other
      comprehensive income:Cumulative
      currency translation adjustments
                    
                    
                    (162
                    )
                    
                    
                    79Total
      comprehensive income
                    
                    
                    3,257
                    
                    
                    
                    2,177








Total
Comprehensive Income


Total
comprehensive income increased by approximately $1,080 thousand, or 49.6%, from
approximately $2,177 thousand in 2009 to approximately $3,257 thousand in
2010.  This increase was mainly attributable to the increased
sale of our Botanical antibiotic products, Banlangen Granules and Compound
Honeysuckle Granules that were introduced to the market in the last quarter of
2009 and an increase in average selling prices across our products. Our gross
profit margin increased from 49.4% in 2009 to 51.4% in 2010, as a result of
reduced sales rebates and price increases of a number of our
products.





Sales


Our sales
consist primarily of revenues generated from sales of Botanical anti-depression
and nerve-regulation products, Biopharmaceutical products and Botanical
antibiotics and traditional OTC Chinese medicines.  Sales increased by
approximately $3,390 thousand, or 39.0%, from approximately $8,703 thousand in
2009 to approximately $12,093 thousand in 2010.  This increase in
sales was primarily attributable to strong demands for our Botanical antibiotic
products, Banlangen Granules and Compound Honeysuckle Granules that were
introduced to the market in the last quarter of 2009, in addition to an increase
in average selling prices across our products.





We
provide incentive sales rebates to our sales agents.  The rebate rate,
which is determined on a product basis, averaged 11% and 19% of sales for the
three months ended April 30, 2010 and 2009, respectively.  Sales
rebates are netted against total sales.





The
following table sets forth information regarding the sales of our principal
products before sales rebate during the three months ended April 30, 2010 and
2009:





27





2010
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2010
      over 2009Product
      name
                                                    
                                                    Quantity
                                                      (Pack’000)
                                                    
                                                    
                                                    Amount
                                                      ($’000)
                                                    
                                                    
                                                    %
      of Sales
                                                    
                                                    
                                                    Quantity
                                                      (Pack’000)
                                                    
                                                    
                                                    Amount
                                                      ($’000)
                                                    
                                                    
                                                    %
      of Sales
                                                    
                                                    
                                                    Quantity
                                                      (Pack’000)
                                                    
                                                    
                                                    Amount
                                                      ($’000)
                                                    
                                                    
                                                    %
      of SalesSiberian
      Ginseng (Acanthopanax) Series
                                                    
                                                    
                                                    76
                                                    
                                                    
                                                    
                                                    5,538
                                                    
                                                    
                                                    
                                                    40.7
                                                    
                                                    
                                                    
                                                    88
                                                    
                                                    
                                                    
                                                    5,635
                                                    
                                                    
                                                    
                                                    52.5
                                                    
                                                    
                                                    
                                                    (12
                                                    )
                                                    
                                                    
                                                    (97
                                                    )
                                                    
                                                    
                                                    (1.7
                                                    )Tianma
      Series
                                                    
                                                    
                                                    13
                                                    
                                                    
                                                    
                                                    977
                                                    
                                                    
                                                    
                                                    7.2
                                                    
                                                    
                                                    
                                                    13
                                                    
                                                    
                                                    
                                                    974
                                                    
                                                    
                                                    
                                                    9.1
                                                    
                                                    
                                                    
                                                    0
                                                    
                                                    
                                                    
                                                    3
                                                    
                                                    
                                                    
                                                    0.3Compound
      Yangjiao Tablets
                                                    
                                                    
                                                    18
                                                    
                                                    
                                                    
                                                    1,758
                                                    
                                                    
                                                    
                                                    12.9
                                                    
                                                    
                                                    
                                                    19
                                                    
                                                    
                                                    
                                                    1,529
                                                    
                                                    
                                                    
                                                    14.3
                                                    
                                                    
                                                    
                                                    (1
                                                    )
                                                    
                                                    
                                                    229
                                                    
                                                    
                                                    
                                                    15.0Shark
      Vital Capsules
                                                    
                                                    
                                                    1
                                                    
                                                    
                                                    
                                                    655
                                                    
                                                    
                                                    
                                                    4.8
                                                    
                                                    
                                                    
                                                    4
                                                    
                                                    
                                                    
                                                    1,634
                                                    
                                                    
                                                    
                                                    15.2
                                                    
                                                    
                                                    
                                                    (3
                                                    )
                                                    
                                                    
                                                    (979
                                                    )
                                                    
                                                    
                                                    (59.9
                                                    )Shengmai
      Granules
                                                    
                                                    
                                                    23
                                                    
                                                    
                                                    
                                                    979
                                                    
                                                    
                                                    
                                                    7.2
                                                    
                                                    
                                                    
                                                    25
                                                    
                                                    
                                                    
                                                    953
                                                    
                                                    
                                                    
                                                    8.9
                                                    
                                                    
                                                    
                                                    (2
                                                    )
                                                    
                                                    
                                                    26
                                                    
                                                    
                                                    
                                                    2.7Banlangen
      Granules
                                                    
                                                    
                                                    15
                                                    
                                                    
                                                    
                                                    402
                                                    
                                                    
                                                    
                                                    3.0
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    15
                                                    
                                                    
                                                    
                                                    402
                                                    
                                                    
                                                    
                                                    100.0Compound
      Honeysuckle Granules
                                                    
                                                    
                                                    55
                                                    
                                                    
                                                    
                                                    3,289
                                                    
                                                    
                                                    
                                                    24.2
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    55
                                                    
                                                    
                                                    
                                                    3,289
                                                    
                                                    
                                                    
                                                    100.0Total
                                                    
                                                    
                                                    201
                                                    
                                                    
                                                    
                                                    13,598
                                                    
                                                    
                                                    
                                                    100.0
                                                    
                                                    
                                                    
                                                    149
                                                    
                                                    
                                                    
                                                    10,725
                                                    
                                                    
                                                    
                                                    100.0
                                                    
                                                    
                                                    
                                                    52
                                                    
                                                    
                                                    
                                                    2,873
                                                    
                                                    
                                                    
                                                    26.8





We
experienced a slight decrease in the demand of a number of our products mainly
from reduced order volumes as the effect of the Health Reform filters through
the chain drug stores.  The chain drug stores reacting to the
potential competition that the Heath Reform may bring are being cautious and
maintaining lower than usual stock levels.  As the PRC government
moves forward with the Health Reform, hospitals, health clinics and institutions
will be established in villages, remote regions and under-developed cities,
creating additional channels for the rural population to purchase drugs aside
from the chain drug stores.  We expect the Health Reform, when fully
in place, will greatly improve the rural population’s access to healthcare, and
therefore increase the demand for our products.  We have established
Medical Reform Sales Department as a dedicated resource focused on capturing
this tremendous growth opportunity.





In the
last quarter of 2009, we introduced two new products to the market, Banlangen
Granules and Compound Honeysuckle Granules, both of which have well accepted
anti-viral qualities, and were in great demand during and post the H1N1 pandemic
and the winter season.





In 2010,
we experienced a decrease in the average sales price per pack of our products,
as demonstrated in the table below:




2010
                      
                      
                      2009Sales
      revenues (in thousands)
                      
                      $
                      13,598
                      
                      
                      $
                      10,725Total
      sales quantity (pack in thousands)
                      
                      
                      201
                      
                      
                      
                      149Average
      selling prices/pack (in thousands)
                      
                      $
                      67.65
                      
                      
                      $
                      71.98





The
decrease in average sales price per pack, as reflected in the table, is
primarily attributable to a change in sale mix, with more products with lower
average price per pack sold, namely Banlangen Granules and Compound Honeysuckle
Granules.  Overall, the average price of individual products sold in
both 2010 and 2009 increased as demonstrated in the following table, which
reflects the average sales price per pack by product for 2010 and 2009 and the
percentage change in the sales price per pack.





28


Average
      Price Per PackProduct
                                  
                                  2010
                                  
                                  
                                  2009
                                  
                                  
                                  Percentage
      ChangeSiberian
      Ginseng (Acanthopanax) Series
                                  
                                  $
                                  72.66
                                  
                                  
                                  $
                                  63.78
                                  
                                  
                                  
                                  13.9Tianma
      Series
                                  
                                  
                                  76.34
                                  
                                  
                                  
                                  75.03
                                  
                                  
                                  
                                  1.7Compound
      Yangjiao Tablets
                                  
                                  
                                  100.03
                                  
                                  
                                  
                                  80.04
                                  
                                  
                                  
                                  25.0Shark
      Vital Capsules
                                  
                                  
                                  461.40
                                  
                                  
                                  
                                  461.46
                                  
                                  
                                  
                                  0.0Shengmai
      Granules
                                  
                                  
                                  42.01
                                  
                                  
                                  
                                  37.52
                                  
                                  
                                  
                                  12.0Banlangen
      Granules
                                  
                                  
                                  26.01
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  100.0Compound
      Honeysuckle Granules
                                  
                                  
                                  60.02
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  100.0Total
                                  
                                  $
                                  67.65
                                  
                                  
                                  $
                                  71.98
                                  
                                  
                                  
                                  (6.0
                                  )





In
addition to increasing the price of Shengmai Granules, we recently introduced
new dosage forms to our existing Botanical anti-depression and nerve-regulation
product category, which contain less sugar content and are suitable for diabetic
patient consumption.  We were able to demand a higher price for these
new dosage forms, namely in our Siberian Ginseng (Acanthopanax) Series and
Compound Yangjiao Tablets.  We plan to launch our latest products,
Badger Oil, a natural medicine for the treatment of burns with no known toxic
side effects or allergic reactions, and Qing Re Jie Du Oral Liquid, a
traditional Chinese Medicine for the treatment of influenza (commonly known as
the “flu”) and upper respiratory infections in the later half of the
year.  Based on market research, we anticipate positive market
acceptance to these new products.





Cost
of Goods Sold


Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs, and shipping and handling costs for the
products sold.  Cost of goods sold increased approximately $1,475
thousand, or 33.5%, from approximately $4,403 thousand in 2009 to approximately
$5,878 thousand in 2010.  This increase was primarily attributable to
increased products sold and increased raw material prices, namely sugar, which
had a price increase in March 2010 of approximately 32%.





Although
we anticipate that the cost of goods will increase due to inflationary price
increases, we do not believe that such increases will be material for fiscal
year 2010.  We anticipate that beyond 2010, our price for raw
materials and other production costs will continue to increase due to inflation.
If our costs of goods increase, this may have a negative effect on our net
income because, due to market conditions and competitive conditions, we may not
be able to increase the price for our products in proportion to the increase of
our costs of goods sold.





Operating
and Administrative Expenses


Our total
operating expenses increased by approximately $599 thousand, or 27.1%, from
approximately $2,212 thousand in 2009 to approximately $2,811 thousand in 2010.
This increase was primarily attributable to an increase of approximately $145
thousand, or 12.9%, in sales and marketing expenses from approximately $1,120
thousand for 2009 to approximately $1,265 thousand for 2010, as we continued to
invest in our distribution network and increase TV advertising to increase
product market share and create greater consumer awareness of our premium
quality products.  This increase was also attributable to an increase
of approximately $377 thousand, or 63.0% in general and administrative expenses
from approximately $598 thousand for 2009 to approximately $975 thousand for
2010, mainly as a result of recording approximately $343 thousand of expenses
associated with warrants issued for services, and an increase of research and
development expenses of approximately $77 thousand, or 15.6% from approximately
$494 thousand for 2009 to approximately $571 thousand for 2010.  We
expect research and development expenses to continue to increase in the coming
quarters as our pipeline projects advance and our pipeline size
grows.





29


Income
from Operations


As a
result of the foregoing, our income from operations increased by approximately
$1,321 thousand, or 63.0%, from approximately $2,098 thousand in 2009 to
approximately $3,419 thousand in 2010.





Income
Tax Expenses


We are
subject to U.S. federal and state income taxes.  Our subsidiary
registered in the PRC is subject to enterprise income taxes.  For the
fiscal year of 2010 and 2009, our PRC subsidiary was granted a tax holiday and
is entitled to full exemption from enterprise income taxes of 25%.





Cumulative
Currency Translation Adjustments


Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar.  All
translation adjustments resulting from the translation of our financial
statements into U.S. dollars are reported as cumulative currency translation
adjustments.  Our cumulative currency translation adjustments
decreased by approximately $241 thousand, or 305.1%, from approximately $79
thousand in 2009 to approximately negative $162 thousand in 2010.





Six-Month
Period Ended April 30, 2010 Compared to Six-Month Period Ended April 30,
2009





The
following table sets forth certain information regarding our results of
operation.





Six
      Months Ended April 302010
                    
                    
                    2009($
      in thousands)Statements
      of Operations DataSales,
      net
                    
                    
                    29,225
                    
                    
                    
                    22,473Cost
      of goods sold
                    
                    
                    13,530
                    
                    
                    
                    10,883Gross
      profit
                    
                    
                    15,695
                    
                    
                    
                    11,590Operating
      and administrative expensesSales
      and marketing
                    
                    
                    2,404
                    
                    
                    
                    1,418General
      and administrative
                    
                    
                    1,792
                    
                    
                    
                    1,220Research
      and development
                    
                    
                    723
                    
                    
                    
                    606Other
      income
                    
                    
                    27
                    
                    
                    
                    19Income
      from operation before income tax expenses
                    
                    
                    10,803
                    
                    
                    
                    8,365Income
      tax expenses
                    
                    
                    -
                    
                    
                    
                    -Net
      income
                    
                    
                    10,803
                    
                    
                    
                    8,365Other
      comprehensive income:Cumulative
      currency translation adjustments
                    
                    
                    (160
                    )
                    
                    
                    14Total
      comprehensive income
                    
                    
                    10,643
                    
                    
                    
                    8,379








Total
Comprehensive Income


Total
comprehensive income increased by approximately $2,264 thousand, or 27.0%, from
approximately $8,379 thousand in 2009 to approximately $10,643 thousand in
2010.  This increase was mainly attributable to the increased
sales of our Botanical antibiotic products, Banlangen Granules and Compound
Honeysuckle Granules that were introduced to the market in the last quarter of
2009 and an increase in average selling prices across our
products.  Our gross profit margin increased from 51.6% in 2009 to
53.7% in 2010, as a result of reduced sales rebates and prices increases of a
number of our products.





Sales


Our sales
consist primarily of revenues generated from sales of Botanical anti-depression
and nerve-regulation products, Biopharmaceutical products and Botanical
antibiotics and traditional OTC Chinese medicines.  Sales increased by
approximately $6,752 thousand, or 30.0%, from approximately $22,473 thousand in
2009 to approximately $29,225 thousand in 2010.  This increase in
sales was primarily attributable to strong demands for our Botanical antibiotic
products, Banlangen Granules and Compound Honeysuckle Granules that were
introduced to the market in the last quarter of 2009, in addition to an increase
in average selling prices across our products.





30


We
provide incentive sales rebates to our sales agents.  The rebate rate,
which is determined on a product basis, averaged 12% and 19% of sales for the
six months ended April 30, 2010 and 2009, respectively.  Sales rebates
are netted against total sales.





The
following table sets forth information regarding the sales of our principal
products before sales rebate during the six months ended April 30, 2010 and
2009:








2010
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2010
      over 2009Product
      name
                                                    
                                                    Quantity
                                                      (Pack’000)
                                                    
                                                    
                                                    Amount
                                                      ($’000)
                                                    
                                                    
                                                    %
      of Sales
                                                    
                                                    
                                                    Quantity
                                                      (Pack’000)
                                                    
                                                    
                                                    Amount
                                                      ($’000)
                                                    
                                                    
                                                    %
      of Sales
                                                    
                                                    
                                                    Quantity
                                                      (Pack’000)
                                                    
                                                    
                                                    Amount
                                                      ($’000)
                                                    
                                                    
                                                    %
      of SalesSiberian
      Ginseng (Acanthopanax) Series
                                                    
                                                    
                                                    182
                                                    
                                                    
                                                    
                                                    14,699
                                                    
                                                    
                                                    
                                                    44.4
                                                    
                                                    
                                                    
                                                    229
                                                    
                                                    
                                                    
                                                    14,956
                                                    
                                                    
                                                    
                                                    54.1
                                                    
                                                    
                                                    
                                                    (47
                                                    )
                                                    
                                                    
                                                    (257
                                                    )
                                                    
                                                    
                                                    (1.7
                                                    )Tianma
      Series
                                                    
                                                    
                                                    37
                                                    
                                                    
                                                    
                                                    2,793
                                                    
                                                    
                                                    
                                                    8.4
                                                    
                                                    
                                                    
                                                    37
                                                    
                                                    
                                                    
                                                    2,759
                                                    
                                                    
                                                    
                                                    10.0
                                                    
                                                    
                                                    
                                                    0
                                                    
                                                    
                                                    
                                                    34
                                                    
                                                    
                                                    
                                                    1.2Compound
      Yangjiao Tablets
                                                    
                                                    
                                                    46
                                                    
                                                    
                                                    
                                                    4,180
                                                    
                                                    
                                                    
                                                    12.6
                                                    
                                                    
                                                    
                                                    48
                                                    
                                                    
                                                    
                                                    3,857
                                                    
                                                    
                                                    
                                                    13.9
                                                    
                                                    
                                                    
                                                    (2
                                                    )
                                                    
                                                    
                                                    323
                                                    
                                                    
                                                    
                                                    8.4Shark
      Vital Capsules
                                                    
                                                    
                                                    4
                                                    
                                                    
                                                    
                                                    1,739
                                                    
                                                    
                                                    
                                                    5.3
                                                    
                                                    
                                                    
                                                    9
                                                    
                                                    
                                                    
                                                    4,061
                                                    
                                                    
                                                    
                                                    14.7
                                                    
                                                    
                                                    
                                                    (5
                                                    )
                                                    
                                                    
                                                    (2,322
                                                    )
                                                    
                                                    
                                                    (57.2
                                                    )Shengmai
      Granules
                                                    
                                                    
                                                    52
                                                    
                                                    
                                                    
                                                    2,097
                                                    
                                                    
                                                    
                                                    6.3
                                                    
                                                    
                                                    
                                                    62
                                                    
                                                    
                                                    
                                                    2,031
                                                    
                                                    
                                                    
                                                    7.3
                                                    
                                                    
                                                    
                                                    (10
                                                    )
                                                    
                                                    
                                                    66
                                                    
                                                    
                                                    
                                                    3.2Banlangen
      Granules
                                                    
                                                    
                                                    36
                                                    
                                                    
                                                    
                                                    941
                                                    
                                                    
                                                    
                                                    2.8
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    36
                                                    
                                                    
                                                    
                                                    941
                                                    
                                                    
                                                    
                                                    100.0Compound
      Honeysuckle Granules
                                                    
                                                    
                                                    113
                                                    
                                                    
                                                    
                                                    6,685
                                                    
                                                    
                                                    
                                                    20.2
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    113
                                                    
                                                    
                                                    
                                                    6,685
                                                    
                                                    
                                                    
                                                    100.0Total
                                                    
                                                    
                                                    470
                                                    
                                                    
                                                    
                                                    33,134
                                                    
                                                    
                                                    
                                                    100.0
                                                    
                                                    
                                                    
                                                    385
                                                    
                                                    
                                                    
                                                    27,664
                                                    
                                                    
                                                    
                                                    100.0
                                                    
                                                    
                                                    
                                                    85
                                                    
                                                    
                                                    
                                                    5,470
                                                    
                                                    
                                                    
                                                    19.8





In the
first quarter of 2010, we increased the price of a number of our products
namely, Siberian Ginseng (Acanthoopanax) Series and Shengmai Granules, which has
led to a temporary softening in demand for these products as a result of the
price increases.  Although sales declined slightly in these product
categories in the first quarter, we show volume rebounded in the second quarter,
however, this was offset by a slight decrease in the demand of a number of our
products mainly from reduced order volumes as the effect of the Health Reform
filters through the chain drug stores.  The chain drug stores reacting
to the potential competition that the Heath Reform may bring are being cautious
and maintaining lower than usual stock levels.  As the PRC government
moves forward with the Health Reform, hospitals, health clinics and institutions
will be established in villages, remote regions and under-developed cities,
creating additional channels for the rural population to purchase drugs aside
from the chain drug stores.  We expect the Health Reform, when fully
in place, will greatly improve the rural population’s access to healthcare, and
therefore increase the demand for our products.  We have established
Medical Reform Sales Department as a dedicated resource focused on capturing
this tremendous growth opportunity.





In the
last quarter of 2009, we introduced two new products to the market, Banlangen
Granules and Compound Honeysuckle Granules, both of which have well accepted
anti-viral qualities, and were in great demand during and post the H1N1 pandemic
and the winter season.





In 2010,
we experienced a decrease in the average sales price per pack of our products,
as demonstrated in the table below:




2010
                      
                      
                      2009Sales
      revenues (in thousands)
                      
                      $
                      33,134
                      
                      
                      $
                      27,664Total
      sales quantity (pack in thousands)
                      
                      
                      470
                      
                      
                      
                      385Average
      selling prices/pack (in thousands)
                      
                      $
                      70.50
                      
                      
                      $
                      71.85





The
decrease in average sales price per pack, as reflected in the table, is
primarily attributable to a change in sale mix, with more products with lower
average price per pack sold, namely Banlangen Granules and Compound Honeysuckle
Granules.  Overall, the average price of individual products sold in
both 2010 and 2009 increased as demonstrated in the following table, which
reflects the average sales price per pack by product for 2010 and 2009 and the
percentage change in the sales price per pack.





31


Average
      Price Per PackProduct
                              
                              2010
                              
                              
                              2009
                              
                              
                              Percentage
      ChangeSiberian
      Ginseng (Acanthopanax) Series
                              
                              $
                              80.61
                              
                              
                              $
                              65.26
                              
                              
                              
                              23.5Tianma
      Series
                              
                              
                              75.60
                              
                              
                              
                              75.05
                              
                              
                              
                              0.7Compound
      Yangjiao Tablets
                              
                              
                              91.13
                              
                              
                              
                              80.05
                              
                              
                              
                              13.8Shark
      Vital Capsules
                              
                              
                              462.09
                              
                              
                              
                              461.54
                              
                              
                              
                              0.1Shengmai
      Granules
                              
                              
                              40.37
                              
                              
                              
                              32.94
                              
                              
                              
                              22.6Banlangen
      Granules
                              
                              
                              26.04
                              
                              
                              
                              -
                              
                              
                              
                              100.0Compound
      Honeysuckle Granules
                              
                              
                              59.06
                              
                              
                              
                              -
                              
                              
                              
                              100.0Total
                              
                              $
                              70.50
                              
                              
                              $
                              71.85
                              
                              
                              
                              (2.0
                              )





In
addition to increasing the price of a number of our products in the first
quarter of 2010, namely Siberian Ginseng (Acanthoopanax) Series and Shengmai
Granules, we recently introduced new dosage forms to our existing Botanical
anti-depression and nerve-regulation product category, which contain less sugar
content and are suitable for diabetic patient consumption.  We were
able to demand a higher price for these new dosage forms, namely in our Siberian
Ginseng (Acanthopanax) Series and Compound Yangjiao Tablets.  We plan
to launch our latest products, Badger Oil, a natural medicine for the treatment
of burns with no known toxic side effects or allergic reactions, and Qing Re Jie
Du Oral Liquid, a traditional Chinese Medicine for the treatment of influenza
(commonly known as the “flu”) and upper respiratory infections in later half of
the year.  Based on market research, we anticipate positive market
acceptance to these new products.





Cost
of Goods Sold


Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs, and shipping and handling costs for the
products sold.  Cost of goods sold increased approximately $2,647
thousand, or 24.3%, from approximately $10,883 thousand in 2009 to approximately
$13,530 thousand in 2010.  This increase was primarily attributable to
increased products sold and increase in raw material prices, namely sugar, which
had a price increase in March 2010 of approximately 32%.





Although
we anticipate that the cost of goods will increase due to inflationary price
increases, we do not believe that such increases will be material for fiscal
year 2010.  We anticipate that beyond 2010, our price for raw
materials and other production costs will continue to increase due to inflation.
If our costs of goods increase, this may have a negative effect on our net
income because, due to market conditions and competitive conditions, we may not
be able to increase the price for our products in proportion to the increase of
our costs of goods sold.





Operating
and Administrative Expenses


Our total
operating expenses increased by approximately $1,675 thousand, or 51.6%, from
approximately $3,244 thousand in 2009 to approximately $4,919 thousand in 2010.
This increase was primarily attributable to an increase of approximately $986
thousand, or 69.5%, in sales and marketing expenses from approximately $1,418
thousand for 2009 to approximately $2,404 thousand for 2010, as we continued to
invest in our distribution network and increase TV advertising to increase
product market share and create greater consumer awareness of our premium
quality products.  This increase was also attributable to an increase
of approximately $572 thousand, or 46.9% in general and administrative expenses
from approximately $1,220 thousand for 2009 to approximately $1,792 thousand for
2010, mainly as a result of recording approximately $343 thousand of expenses
associated with warrants issued for services, and an increase of approximately
$117 thousand, or 19.3% in research and development expenses from approximately
$606 thousand for 2009 to approximately $723 thousand for 2010.  We
expect research and development expenses to continue to increase in the coming
quarters as our pipeline projects advance and our pipeline size
grows.





Income
from Operations


As a
result of the foregoing, our income from operations increased by approximately
$2,438 thousand, or 29.1%, from approximately $8,365 thousand in 2009 to
approximately $10,803 thousand in 2010.





32


Income
Tax Expenses


We are
subject to U.S. federal and state income taxes.  Our subsidiary
registered in the PRC is subject to enterprise income taxes.  For the
fiscal year of 2010 and 2009, our PRC subsidiary was granted a tax holiday and
is entitled to full exemption from enterprise income taxes of 25%.





Cumulative
Currency Translation Adjustments


Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar.  All
translation adjustments resulting from the translation of our financial
statements into U.S. dollars are reported as cumulative currency translation
adjustments.  Our cumulative currency translation adjustments
decreased by approximately $174 thousand, or 1,242.9%, from approximately $14
thousand in 2009 to approximately negative $160 thousand in 2010.





Liquidity
and Capital Resources





We had
retained earnings of approximately $46,390 thousand and $35,587 thousand as of
April 30, 2010 and October 31, 2009, respectively.  As of
April 30, 2010, we had cash and cash equivalents of approximately $23,392
thousand and total current assets of approximately $42,855
thousand.  As of April 30, 2010, we had a working capital surplus of
approximately $40,395 thousand.   We believe our cash and cash
equivalents are adequate to satisfy our working capital needs and sustain our
ongoing operations for the next twelve months.





Our
summary cash flow information is as follows:




Six
      months ended April 30Net
      cash provided by (used in):
                    
                    2010
                    
                    
                    2009($
      in thousands)Operating
      activities
                    
                    
                    19,250
                    
                    
                    
                    4,188Investing
      activities
                    
                    
                    (3,929)
                    
                    
                    
                    (16)Financing
      activities
                    
                    
                    -
                    
                    
                    
                    -





Net
Cash Provided by Operating Activities


Net cash
provided by operating activities increased approximately $15,062 thousand, from
net cash provided by operating activities of approximately $4,188 thousand in
2009 to net cash provided by operating activities of approximately $19,250
thousand in 2010.  This increase was primarily attributable to an
increase in net income from operations of approximately $2,437 thousand, and a
reduction in trade receivables of approximately $12,697 thousand, as average
days sales outstanding fell to 118 days in 2010 from 186 days in 2009, which
included a period of sales term incentives.  We have recently
tightened our credit terms with our customers to be within 100 days and will
continue to increase our collection efforts to reduce our days sales
outstanding.  This increase in net cash provided by operating
activities was also attributable to a reduction in amounts due from related
parties by approximately $578 thousand, and a decrease in inventory level by
approximately $488 thousand.  Furthermore, this increase in net cash
provided by operating activities was offset in part by a decrease in value added
tax payable of approximately $414 thousand.





Net
Cash Used in Investing Activities


Net cash
used in investing activities increased approximately $3,913 thousand, from
approximately $16 in 2009 to approximately $3,929 thousand in
2010.  This increase was primarily attributable to approximately
$3,929 thousand of payments made to purchase office floors from a third party
during the period ending April 30, 2010.





Outstanding
Long-Term Indebtedness





None.





Off-balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





33


Capital
commitments





We have
capital commitments for purchase of land use right, property and equipment and
production patents from a related party, Stock Co, of approximately $9,655,051.
In addition, on April 10, 2010, the Company, through its wholly own subsidiary,
Harbin Renhuang Pharmaceutical Co. Ltd, entered into a Property Sale and
Purchase Contract (“Purchase Agreement”) with Hongxiangmingyuan of Heilongjiang
Yongtai Company, to acquire two office floors in a building located in the
Nangang District, Harbin, PRC, for total consideration of
$5,612,306.  Pursuant to the Purchase Agreement, a payment of
$3,928,614 was made in April 2010, and the final payment of approximately
$1,683,692 is due by December 20, 2012, at which time title to the property will
be transferred to the Company.  We expect to fund these commitments
with cash provided from operations.





Contractual
Obligations





We lease
office premises from a third party, Heilongjiang JiuSanYouZhi Co.,
Ltd.  The lease is from May 1, 2007 to April 30, 2010, with an average
monthly rental payment of $10,484.  We also lease property and a plant
from a related party, Stock Co.  The lease is from April 30, 2009 to
May 1, 2010, with an average monthly rental payment of $51,204.





Item 3. Quantitative and Qualitative
Disclosures about Market Risk.





Because
we are a smaller reporting company, this Item 3 is not applicable.





Item 4T. Controls
and Procedures.





Evaluation
of Disclosure Controls and Procedures





As of
April 30, 2010, we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures, as such term is defined under Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended.  We did not timely file our quarterly reports on Form 10-Q
for the quarters ended January 31, April 30, and July 31, 2008 which were filed
in January 2010.  In addition, we did not timely file a Form 8-K, Item
4. Non-Reliance on Previously Issued Financial Statement or a Related Audit
Report or Completed Interim Review.  Accordingly, based upon that
evaluation, the chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were not effective to
ensure that information required to be disclosed in our periodic reports filed
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified by the Securities and Exchange Commission’s rules and
regulations.





Changes
in Internal Controls Over Financial Reporting





As
previously disclosed in our Form 10-K for the year ended October 31, 2009, as of
April 30, 2010, we have not yet completed documentation of controls placed in
operation to adequately address our financial reporting
risks.  Accordingly, we have not yet had the opportunity to assess the
effectiveness of our procedures to determine whether our internal control over
financial reporting is effective.   Further, as discussed above,
in light of our failure to timely file our periodic reports, we did not believe
that our disclosure controls and procedures were effective at April 30,
2010.  Accordingly, management has concluded that we did not maintain
effective internal control over financial reporting as of April 30,
2010.





As a
result of the above, since the third quarter of our 2009 fiscal year, we have
begun the implementation of remedial measures including hiring of a new chief
financial officer in January 2010, adding additional staff, appointing three
independent Directors to our Board of Directors, engaging consultants to advise
management on the preparation of Sarbanes-Oxley Section 404 compliance with
internal controls over financial reporting for fiscal year 2010, providing
relevant training to our staff, implementing more rigorous policies and
procedures relating to period-end financial reporting and other key processes,
strengthening key controls such as journal-entry approval, reconciliation
procedures and maintaining relevant supporting documentation. We expect to
continue to implement additional financial and management controls and
procedures going forward.  As a result of these measures and until we
have completed the remediation process, there has been and will be changes and
further improvement to our internal controls over financial
reporting.





34


PART II





Item 1. Legal
Proceedings.





As of May
31, 2010, we are not a party to, or threatened by, any legal
proceedings.




Item 1A. Risk
Factors.





Because
we are a smaller reporting company, this Item 1A is not applicable.





Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.





On March
25, 2010, the Company issued to its investor relations consultant a warrant
representing the right to purchase one hundred and sixty thousand (160,000)
fully-paid and non-assessable shares of Company common stock (the “Warrant”) at
an exercise price of $2.00 per share (the “Exercise Price”), subject to
adjustment, and exercisable for a period of three (3) years from the issuance
date of the Warrant.  The Warrant was issued without registration
under the Securities Act of 1933, as amended, in reliance upon the exemption
afforded by Section 4(2) thereunder.





Item 3.  Defaults upon Senior
Securities.





In the
six-month period ended April 30, 2010, and subsequent period through the date
hereof, we did not default upon any senior securities.





Item 4. [REMOVED
AND RESERVED].





Item 5.  Other
Information.





Compensation
to Outside Directors





The
Company previously announced the appointment of our outside directors Messrs.
Xiaoheng Shao, Changxiong Sun, and Bingchun Wu.  Messrs. Sun and
Wu will be members of our Audit Committee and for their services, they will
each receive RMB3,000 ($439) per month for Board meeting
attendance and will be reimbursed for their expenses incurred in performing
their duties.  In addition, Mr. Shao, the Chair of our Audit
Committee, will receive $3,000 per month for Board meeting attendance and will
be reimbursed for his expenses incurred in performing his duties as an outside
director. Further, Mr. Shao will receive an option for 70,000 shares of Company
common stock pursuant to the Company’s 2003 Omnibus Securities Plan that will
vest quarterly from the date of grant, conditioned upon continued service
on such quarterly dates, such options having a contractual life of 3
years.





35


Item 6.  Exhibits.





Exhibit
                  No.
                
                Description3.1
                
                Restated
      Articles of Incorporation(1)3.2
                
                Second
      Restated Bylaws(1)3.3
                
                Certificate
      of Amendment to Articles of Incorporation(2)10.1
                
                Renhuang
      Pharmaceuticals, Inc. 2007 Non-Qualified Company Stock Grant and Option
      Plan(3)10.2
                
                2003
      Omnibus Securities Plan(4)10.3
                
                Employment
      Agreement with Yan Yi Chen(5)10.4
                
                English
      translation of Purchase Agreement for Patents dated September 1, 2009(5)10.5
                
                English
      translation of Purchase Agreement for Ah City Natural and
      Biopharmaceutical Plant dated October 12, 2009(5)10.6
                
                English
      translation of Purchase Agreement with Hongxiangmingyuan of Heilongjiang
      Yongtai Company dated April 10, 2010*10.7
                
                Independent
      Director Agreement with Mr. Xiaoheng (Sean) Shao, dated April 13,
      2010*10.8
                
                Independent
      Director Agreement with Mr. Bingchun Wu, dated April 19,
    2010*10.9
                
                Independent
      Director Agreement with Mr. Changxiong Sun, dated April 19,
      2010*21.1
                
                Subsidiaries
      of the registrant(2)31.1
                
                Certification
      of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*31.2
                
                Certification
      of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*32.1
                
                Certification
      of Principal Executive and Financial Officers pursuant to 18 U.S.C.
      § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002*





*
            Filed
      herewith.(1)
            Incorporated
      by reference from Form 8-K filed with the SEC on April 22,
      2003.(2)
            Incorporated
      by reference from Form 10-K filed with the SEC on February 13,
      2007.(3)
            Incorporated
      by reference from Form 8-K filed with the SEC on May 2,
    2007.(4)
            Incorporated
      by reference from Form 8-K filed with the SEC on April 22,
      2003.(5)
            Incorporated
      by reference from Form 10-K filed with the SEC on January 29,
      2010.





36


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on our behalf by
the undersigned, thereunto duly authorized.




Date:
      June 7, 2010
              RENHUANG
      PHARMACEUTICALS, INC.By:
              /s/ Li
      ShaomingLi
      Shaoming, Chief Executive Officer and President(Principal
      Executive Officer)
 Date:
      June 7, 2010
                By:
                /s/ Yan
      Yi ChenYan
      Yi Chen, Chief Financial Officer(Principal
      Accounting and Financial Officer)





37