UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-Q





(Mark
      One)





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





For
the quarterly period ended July 31, 2008





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





For the
transition period from _______________ to _______________.





Commission
file number: O-24512





RENHUANG
PHARMACEUTICALS, INC.


(Exact
name of registrant as specified in its charter)





Nevada
                (State
      or other jurisdiction of
                incorporation
      or organization)
              88-1273503
                (I.R.S.
      Employer
                Identification
      No.)





No.
      281, Taiping Road, Taiping District,
              Harbin,
      Heilongjiang Province, 150050, P. R. China
              (Address
      of principal executive offices)





Registrant’s
telephone number, including area code 86-451-5762-0378





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes o    
No o





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





Large
      accelerated filer  o
            Accelerated
      filer oNon-accelerated
      filer    o
            Smaller
      Reporting Company x





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





Applicable
only to corporate issuers:





As of
September 15, 2008, there were 35,096,680 shares of common stock, par value
$0.001, issued and outstanding.







Renhuang
Pharmaceuticals, Inc.





TABLE OF
CONTENTS




PART
      IITEM
      1
                                FINANCIAL
      STATEMENTS
                                4ITEM
      2
                                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS.
                                23ITEM
      3
                                QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                                30ITEM
      4
                                CONTROLS
      AND PROCEDURES
                                30PART
      IIITEM
      1
                                LEGAL
      PROCEEDINGS
                                32ITEM
      1A
                                RISK
      FACTORS
                                32ITEM
      2
                                UNREGISTERED SALES
      OF EQUITY SECURITIES AND USE OF PROCEEDS
                                32ITEM
      3
                                DEFAULTS
      UPON SENIOR SECURITIES
                                33ITEM
      4
                                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                33ITEM
      5
                                OTHER
      INFORMATION
                                33ITEM
      6
                                EXHIBITS
                                33




2


PART
I - FINANCIAL INFORMATION





This
Quarterly Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based
on management’s beliefs and assumptions, and on information currently available
to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company set forth under
the heading “Management’s Discussion and Analysis of Financial Condition or Plan
of Operation.” Forward-looking statements also include statements in which words
such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,”
“consider” or similar expressions are used.





Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and assumptions. The Company’s future results and shareholder
values may differ materially from those expressed in these forward-looking
statements. Readers are cautioned not to put undue reliance on any
forward-looking statements.




3




ITEM 1
              Financial
      Statements




RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





ASSETS




July 31,
                        2008
                      
                      
                      October31,2007(a)(Unaudited)
                      
                      
                      (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      13,218,937
                      
                      
                      
                      10,153,603Accounts
      receivable, net
                      
                      
                      13,969,786
                      
                      
                      
                      8,889,411Inventories
                      
                      
                      2,378,275
                      
                      
                      
                      969,672Prepayments
      and other receivables, net
                      
                      
                      303,050
                      
                      
                      
                      196,997TOTAL
      CURRENT ASSETS
                      
                      
                      29,870,048
                      
                      
                      
                      20,209,683PROPERTY,
      PLANT AND EQUIPMENT, NET
                      
                      
                      2,701,690
                      
                      
                      
                      2,606,285TOTAL
      ASSETS
                      
                      $
                      32,571,738
                      
                      
                      
                      22,815,968


(a)
Reference is made to the audited financial statements of the Company filed with
the SEC on Form 10-K in May 2008.





The
accompanying notes are in integral part of the consolidated financial
statements


4


RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS




LIABILITIES AND
STOCKHOLDERS' EQUITY





July 31,
                      2008
                    
                    
                    October 31,
                      2007(a)(Unaudited)
                    
                    
                    (Audited)CURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    277,125
                    
                    
                    $
                    155,600Due
      to related party
                    
                    
                    159,424
                    
                    
                    
                    157,376Other
      payables
                    
                    
                    1,220,007
                    
                    
                    
                    1,109,492TOTAL
      LIABILITIES
                    
                    
                    1,656,556
                    
                    
                    
                    1,422,468STOCKHOLDERS’
      EQUITYPreferred
      stock - Authorized preferred shares 1,000,000, issued and outstanding
      number of shares nil and at par value of nilCommon
      Stock - Authorized common shares 100,000,000, issued and outstanding
      number of shares 35,096,680 at par value of $0.001
                    
                    
                    35,097
                    
                    
                    
                    35,097Additional
      paid-in capital
                    
                    
                    6,627,099
                    
                    
                    
                    6,627,099Reserves
                    
                    
                    1,841,734
                    
                    
                    
                    1,841,734Retained
      earnings
                    
                    
                    19,197,333
                    
                    
                    
                    11,980,112Accumulated
      other comprehensive income
                    
                    
                    3,213,919
                    
                    
                    
                    909,458TOTAL
      STOCKHOLDERS’ EQUITY
                    
                    
                    30,915,182
                    
                    
                    
                    21,393,500TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
                    $
                    32,571,738
                    
                    
                    
                    22,815,968


(a)
Reference is made to the audited financial statements of the Company filed with
the SEC on Form 10-K in May 2008.





The
accompanying notes are in integral part of the consolidated financial
statements


5


RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF INCOME AND COMPREHENSIVE INCOME


(Unaudited)




Three Months Ended July
                        31,
                      
                      
                      Nine Months Ended July
                        31,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007SALES
                      
                      $
                      6,255,557
                      
                      
                      $
                      5,071,331
                      
                      
                      $
                      24,231,007
                      
                      
                      $
                      20,890,656COST
      OF SALES
                      
                      
                      (2,945,740
                      )
                      
                      
                      (2,491,963
                      )
                      
                      
                      (11,167,257
                      )
                      
                      
                      (10,184,980
                      )
      )GROSS
      PROFIT
                      
                      
                      3,309,817
                      
                      
                      
                      2,579,368
                      
                      
                      
                      13,063,750
                      
                      
                      
                      10,705,676SELLING
      AND DISTRIBUTION EXPENSES
                      
                      
                      (35,508
                      )
                      
                      
                      (12,178
                      )
                      
                      
                      (146,939
                      )
                      
                      
                      (134,624
                      )
      )ADVERTISING
      EXPENSE
                      
                      
                      (861,920
                      )
                      
                      
                      (7,588
                      )
                      
                      
                      (2,222,991
                      )
                      
                      
                      (180,269
                      )
      )GENERAL
      AND ADMINISTRATIVE EXPENSES
                      
                      
                      (632,219
                      )
                      
                      
                      (655,929
                      )
                      
                      
                      (1,956,253
                      )
                      
                      
                      (1,292,433
                      )
      )RESEARCH
      AND DEVELOPMENT
                      
                      
                      (943,942
                      )
                      
                      
                      —
                      
                      
                      
                      (1,614,957
                      )
                      
                      
                      —BAD
      DEBT RECOVERY/(EXPENSE)
                      
                      
                      588
                      
                      
                      
                      178,040
                      
                      
                      
                      42,753
                      
                      
                      
                      (443,082
                      )
      )DEPRECIATION
                      
                      
                      (3,799
                      )
                      
                      
                      (75,205
                      )
                      
                      
                      (10,330
                      )
                      
                      
                      (213,680
                      )
      )INCOME
      FROM OPERATIONS
                      
                      
                      833,017
                      
                      
                      
                      2,006,508
                      
                      
                      
                      7,155,033
                      
                      
                      
                      8,441,588OTHER
      INCOME
                      
                      
                      27,535
                      
                      
                      
                      7,219
                      
                      
                      
                      62,188
                      
                      
                      
                      17,285INCOME
      BEFORE INCOME TAXES
                      
                      
                      860,552
                      
                      
                      
                      2,013,727
                      
                      
                      
                      7,217,221
                      
                      
                      
                      8,458,873INCOME
      TAXES
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —NET
      INCOME
                      
                      $
                      860,552
                      
                      
                      
                      2,013,727
                      
                      
                      
                      7,217,221
                      
                      
                      
                      8,458,873OTHER
      COMPREHENSIVE INCOMEFOREIGN
      CURRENCY TRANSLATION ADJUSTMENT
                      
                      
                      637,421
                      
                      
                      
                      331,264
                      
                      
                      
                      2,304,462
                      
                      
                      
                      657,277COMPREHENSIVE
      INCOME
                      
                      $
                      1,497,973
                      
                      
                      $
                      2,344,991
                      
                      
                      $
                      9,521,683
                      
                      
                      $
                      9,116,150BASIC
      EARNINGS PER SHARE
                      
                      $
                      0.03
                      
                      
                      $
                      0.06
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.24DILUTED
      EARNING PER SHARE
                      
                      $
                      0.03
                      
                      
                      $
                      0.06
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.24WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING –BASIC
                      
                      
                      35,096,680
                      
                      
                      
                      35,058,920
                      
                      
                      
                      35,096,680
                      
                      
                      
                      35,019,976WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING –DILUTED
                      
                      
                      35,096,680
                      
                      
                      
                      35,058,930
                      
                      
                      
                      35,096,680
                      
                      
                      
                      35,019,982





The
accompanying notes are in integral part of the consolidated financial
statements


6


RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS


(Unaudited)





Nine
      Months Ended July 31,2008
                      
                      
                      2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      7,217,221
                      
                      
                      $
                      8,458,873Adjustments
      to reconcile net income to net cash from operating activities
      :Depreciation
                      
                      
                      251,401
                      
                      
                      
                      213,680Adjustments
      to the provision for bad debts
                      
                      
                      (42,753
                      )
                      
                      
                      443,082Fair
      Value of Warrants Issued for services
                      
                      
                      —
                      
                      
                      
                      31,699Fair
      Value of Shares Issued
                      
                      
                      —
                      
                      
                      
                      284,675Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (4,080,755
                      )
                      
                      
                      16,508Inventories
                      
                      
                      (1,266,636
                      )
                      
                      
                      (884,899
                      )Prepayment
      and other receivables, net
                      
                      (41,400
                      )
                      
                      
                      378,492Deferred
      expenses
                      
                      
                      —
                      
                      
                      
                      (4,535
                      )Accounts
      payable
                      
                      
                      102,771
                      
                      
                      
                      45,709Due
      to/from related party
                      
                      
                      (92,79
                      )
                      
                      
                      (419,910
                      )Other
      payable
                      
                      
                      5,928
                      
                      
                      
                      (201,813
                      )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
                      
                      
                      2,136,498
                      
                      
                      
                      8,361,561CASH
      FLOWS FROM INVESTING ACTIVITIES:Short
      – term loan
                      
                      
                      —
                      
                      
                      
                      (9,495,674
                      )Acquisition
      of property, plant and equipment
                      
                      
                      (107,451
                      )
                      
                      
                      (114,058
                      )Construction
      in progress
                      
                      
                      —
                      
                      
                      
                      (386,278
                      )NET
      CASH USED IN INVESTING ACTIVITIES
                      
                      $
                      (107,
      451
                      )
                      
                      $
                      (9,996,010
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:
                      
                      
                      —
                      
                      
                      
                      —





The
accompanying notes are in integral part of the consolidated financial
statements


7


RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS (CONTINUED)


(Unaudited)





Nine
      Months Ended July 31,2008
                    
                    
                    2007NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                    
                    $
                    2,029,047
                    
                    
                    $
                    (1,634,449
                    )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
                    
                    
                    1,036,287
                    
                    
                    
                    666,842Cash
      and cash equivalents, beginning of period
                    
                    
                    10,153,603
                    
                    
                    
                    1,021,267Cash
      and cash equivalents, end of period
                    
                    $
                    13,218,937
                    
                    
                    $
                    53,660SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      paid
                    
                    $
                    —
                    
                    
                    $
                    45,996Income
      taxes paid
                    
                    $
                    —
                    
                    
                    $
                    —Issuance
      of common shares for services
                    
                    $
                    —
                    
                    
                    $
                    97





The
accompanying notes are in integral part of the consolidated financial
statements


8


RENHUANG
PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS





1.
ORGANIZATION AND PRINCIPAL ACTIVITIES





Renhuang
Pharmaceuticals, Inc., (“Renhuang”) or the (“Company”) was incorporated in the
State of Nevada on August 18, 1988 and shares of the Company's Common Stock are
traded over-the counter on the Pink Sheets under the symbol RHGP.  The
Company owns 100% of Harbin Renhuang Pharmaceutical Company Limited (the “BVI”),
a holding company.  Substantially all of the Company’s operations are
conducted through BVI’s wholly-owned subsidiary Harbin Renhuang Pharmaceuticals
Co., Ltd (“Renhuang China” or the “Subsidiary”) which was incorporated in Harbin
City in the People’s Republic of China (the “PRC” or “China”) in 1996. The
subsidiary is principally engaged in production and sales of nutraceutical and
bio-pharmaceutical products including tablets, drinks and health food; the
Subsidiary’s sales network covers various provinces, cities, and counties
throughout China.




Unless
otherwise provided in this current report, all references in this current report
to “we”, “us”, “our company”, “our”, or the “Company” refer to Renhuang
Pharmaceuticals, Inc. on a consolidated basis, including Renhuang China and the
BVI.





2. BASIS OF
PRESENTATION





The
accompanying consolidated financial statements of the Company are stated in
United States dollars and have been prepared in accordance with accounting
principles generally accepted in the United States of America and include the
financial statements of the Company and its subsidiaries. All significant
intercompany transactions and balances are eliminated on
consolidation.





The
accompanying unaudited consolidated financial statements as of July 31, 2008 and
for the three and nine months ended July 31, 2008 and 2007 have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X
applicable to smaller reporting companies. In the opinion of management, these
unaudited consolidated interim financial statements include all adjustments
considered necessary to make the financial statements not misleading. The
results of operations for the nine months ended July 31, 2008 are not
necessarily indicative of the results for the full fiscal year ending October
31, 2008. The unaudited consolidated interim financial statements should be read
in conjunction with the Company’s audited consolidated financial statements
and notes thereto for the year ended October 31, 2007 as reported in Form
10-K.


9




The
presentation of certain prior period information has been modified to conform to
the current presentation.





3. SUMMARY OF PRINCIPAL ACCOUNTING
POLICIES





A. CASH AND CASH
EQUIVALENTS





The
Company considers cash and cash equivalents to include cash on hand and demand
deposits with banks with an original maturity of three months or
less.





B. ACCOUNTS RECEIVABLE,
NET





Accounts
receivable is recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. The Company issues invoice at the
month-end  for the deliveries made during that monthly period .An
account is considered past due after 90 days from the invoice date as at October
31, 2007. The Company extended its standard credit terms to 180 days during 2008
in order to increase its market share. The Company recognizes an allowance for
doubtful accounts to ensure accounts receivable are not overstated due to
uncollectibility and are established on a by-customers basis based upon a
variety of factors which include: the length of time the receivables are past
due, significant one-time events and historical experience. If circumstances
related to a customer changes, estimates of the recoverability of receivables
would be further adjusted.  The allowance on the doubtful accounts was
$146,926 as at July 31, 2008 ($134,295 in October 31, 2007). The Company does
not accept returns or offer any post-sales marketing support to
customers





C. INVENTORIES





Inventories
are stated at the lower of cost or net realizable value. Production cost is
allocated at FIFO and overhead cost is calculated on the weighted average
basis.  The cost includes all costs to acquire, transport and process
inventories to their present location and condition. The Company evaluates the
net realizable value of its inventories regularly, and records a provision for
loss, if necessary, to reduce inventories to their net realizable value. There
were $64,025 and $58,521 of inventory reserve provisions recorded at July 31,
2008 and October 31, 2007, respectively.




10


D. PROPERTY, PLANT AND
EQUIPMENT





Property,
plant and equipment are carried at cost. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are
capitalized.





When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included as
components of income at the time of disposition.





The
Company records depreciation of its property, plant and equipment on a
straight-line basis over the estimated useful lives of the assets based on their
costs. The useful lives for property, plant and equipment are estimated as
follows:





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





E.
FAIR VALUE OF FINANCIAL INSTRUMENTS




The
carrying amounts of certain financial instruments, including cash, accounts
receivable, other receivables, accounts payable, and other payables approximate
their fair values as of July 31, 2008 because of the relative short-term
maturity of these instruments.





3.
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (CONTINUED)





F. INCOME TAXES


The
Company accounts for income tax under the provisions of Statements of Financial
Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the consolidated
financial statements. Deferred income taxes are provided using the liability
method. Under the liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial statement bases
of assets and liabilities. In addition, the Company is required to record all
deferred tax assets, including future tax benefits of capital losses carried
forward, and to record a “valuation allowance” for any deferred tax assets where
it is more likely than not that the asset will not be realized.





In
accordance with the relevant income tax laws applicable to wholly foreign owned
enterprises operating in PRC, the profits of the Company are fully exempt from
income tax for two years (“tax holiday”), commencing from the first profit
making year of operations, followed by a 50% exemption for the immediate next
three years (“tax preferential period”), after which the profits of the Company
will be taxable at the full rate, currently 25% (See Note 12).




11


G. RELATED PARTIES





All
related party transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.  The aggregate of
balances due to and from related parties for all periods presented are
separately disclosed on the face of the balance sheet (See Note
15).





H. IMPAIRMENT OF LONG-TERM
ASSETS





The
Company assesses long-lived assets for potential impairment based on a review of
projected undiscounted cash flows associated with these assets. Long-lived
assets are subjected to impairment evaluations when events and circumstances
exist that indicate the carrying amount of these assets may not be recoverable.
This process is highly subjective and changes in the estimates and assumptions,
including the discount rate and expected long-term growth rate, which drive the
valuation techniques employed to estimate the fair value of long-lived assets
could change and, therefore, impact the assessments of impairment in the
future.  As of July 31, 2008, management expects its long-lived assets
to be fully recoverable.





I. FOREIGN CURRENCY
TRANSLATION





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





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





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




The
Renmibi (“RMB”) is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or can be,
converted into United States dollars (“USD”) at the rates used in translation.
The exchange rate between the RMB and the USD on July 31, 2008 and the average
rate from October 31, 2007 to July 31, 2008 are:





Exchange
      rate:
                  Jul.31,2008
                  Oct.31,2007Balance
      Sheets- Year end RMB:USD exchange rate
                  6.8388:1
                  7.4820:1Operating
      Statement: Average quarterly RMB:USD exchange rate
                  7,1129:1
                  7.6917:1




12





J. USE OF ESTIMATES





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





K. REVENUE
RECOGNITION


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





The
Company provides rebates to its sales agents (who act as wholesalers) as an
incentive plan. The rebate rate is set on a product-by-product basis. When
revenue is recognized, the rebate is accounted for as an offset to revenues in
accordance with EITF Issue No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor’s Products). On
average, the rebate rate was 17% and 18% of gross revenue in the nine months
ended July 2008 and 2007, respectively.





L.
CERTAIN RISKS AND CONCENTRATIONS




The
Company is subject to a significant concentration of credit risk with its trade
accounts receivable. The Company performs ongoing credit evaluations with
respect to the financial condition of its creditors, but does not require
collateral. The Company records a provision for doubtful accounts to cover
probable credit losses. Management reviews and adjusts this allowance
periodically based on historical experience and its evaluation of the
collectability of outstanding accounts receivable.





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





M.
RESEARCH AND DEVELOPMENT


Research
and development (“R&D”) costs are expensed as incurred. Engineers and
technical staff are involved in the production of our products as well as
on-going research, with no segregation of the portion of their salaries relating
to research and development from the portion of their salaries relating to
production. The total salaries are included in cost of sales.  R&D
for the nine months ended July 31, 2008 and 2007 are $1,614,957 and nil
respectively.




13


N.
ADVERTISING





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




O.
STOCK-BASED COMPENSATION




The
Company measures and records the cost of employee services received in exchange
for stock-based compensation at the grant date fair value of the
award.  This method is in accordance with SFAS No. 123 (revised
2004), “Share-Based Payment”.  ”.  Total stock based
compensation expense for the nine months ended July 31, 2008 and 2007 was
nil.





P. CLASSIFICATION OF OPERATING COSTS AND
EXPENSES





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




Cost of Goods
Sold


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




Selling
Expenses


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




General and Administrative
Expenses


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





Q. EARNINGS PER
SHARE





The
Company reports earnings per share in accordance with SFAS No. 128, “Earnings
per Share.” Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares available.
Diluted earnings per share is computed using the treasury stock method whereby
the denominator is increased by the net dilution on the exercise of the warrants
and other common stock equivalents if those additional common shares were
dilutive.  There were 25,000 potentially dilutive securities
outstanding during the nine months ended July 31, 2008 and 2007. The 25,000
warrants in both of the above periods were deemed to be anti-diluted due as the
market price of the shares was lower than the exercise price as of July 31, 2008
and July 31, 2007 respectively.




14


R.
COMPREHENSIVE INCOME





The
Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated balances in
a full set of general-purpose financial statements. SFAS No. 130 defines
comprehensive income to include all changes in equity except those resulting
from investments by owners and distributions to owners, including adjustments to
minimum pension liabilities, accumulated foreign currency translation, and
unrealized gains or losses on marketable securities. In the nine months ended
July 31, 2008, the only component of other comprehensive income is foreign
translation gain of $2,304,462 ($657,277 in the nine months ended July31, 2007),
which has been recorded as the accumulative other comprehensive income in the
balance sheet.





S. RECENT
PRONOUNCEMENTS





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





In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115 (" SFAS No. 159"). SFAS No.159
permits entities to choose to measure many financial instruments and certain
other items at fair values. SFAS No. 159 is effective for fiscal years after
November 15, 2007. The adoption of SFAS No. 159, effective January 1, 2008, did
not have a material impact on the Company’s financial statements.




In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”). SFAS
141R provides additional guidance on improving the relevance, representational
faithfulness, and comparability of the financial information that a reporting
entity provides in its financial reports about a business combination and its
effects. This Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
believes there will be no material impact on its financial statements upon
adoption of this standard.




15


In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51”(“SFAS 160”). SFAS 160
amends ARB No. 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This Statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15, 2008.
The Company believes there will be no material impact on its financial
statements upon adoption of this standard.





In March
2008, the FASB issued SFAS No. 161, which requires enhanced disclosures on
a company’s use of derivative instruments, its applicable accounting policies
related to derivatives and the effect of those derivatives on a company’s
financial position, results of operations and cash flows. This statement is
effective for fiscal years and interim periods beginning after November 15,
2008, with early adoption encouraged. Adoption of SFAS No.161 will have no
impact on our financial position, results of operations or cash
flows.





4.
CASH AND CASH EQUIVALENTS





Cash and
cash equivalents as of July 31, 2008 and October 31, 2007 consist of the
following:





July 31,
                      2008
                    
                    October 31,
                      2007Cash
      on hand
                    
                    $
                    15,347
                    
                    
                    $
                    28,657Cash
      in banks
                    
                    
                    13,203,590
                    
                    
                    
                    10,124,946$
                    13,218,937
                    
                    
                    $
                    10,153,603




The
Company maintains a bank account in the PRC which is not protected by FDIC
insurance or other insurance. As of July 31, 2008, the
Company had $13,203,590 in uninsured deposits with Chinese
banks.  Historically, the Company has not experienced any losses in
such accounts.





5. ACCOUNTS RECEIVABLE,
NET


The
Company's accounts receivable as of July 31, 2008 and October 31, 2007 are as
follows:




July 31, 2008
                        
                        
                        October 31, 2007Accounts
      receivable
                        
                        $
                        14,116,712
                        
                        
                        $
                        9,023,706Less:
      Allowance for doubtful accounts
                        
                        
                        (146,926
                        )
                        
                        
                        (134,295
                        )Accounts
      receivable, net
                        
                        $
                        13,969,786
                        
                        
                        $
                        8,889,411





As at
July 31, 2008, there were two customers which accounted for $1,880,006 and
$1,806,626 of accounts receivable which are approximately 13% and 13% of the total
balance, respectively.




16


These
same two major customers also have the sales amount over 10% of the total sales
for the nine months ended July 31, 2008 and 2007 are as follows:





2008
                
                
                2007Customer
      A:
                
                $
                2,738,198
                
                
                
                11
                %
                
                
                2,399,609
                
                
                
                11
                %Customer
      B:
                
                $
                2,644,290
                
                
                
                11
                %
                
                
                2,163,702
                
                
                
                10
                %





6.
PREPAYMENTS AND OTHER RECEIVABLES, NET





Prepayments
and other receivables as of July 31, 2008 and October 31, 2007 consist of the
following:





July 31,
                    2008
                  
                  
                  October 31,
                    2007Prepayments
      and other receivables
                  
                  $
                  662,249
                  
                  
                  $
                  565,960Less:
      allowance for doubtful accounts
                  
                  
                  (359,199
                  )
                  
                  
                  (368,963
                  )$
                  303,050
                  
                  
                  $
                  196,997





As of
July 30, 2008, the balance in prepayments and other receivables mainly includes
prepayment for advertising of approximately $7,000 and advances to employees of
approximately $ 277,000. As of October 31, 2007, the Company had advances to
employees of approximately of.$181,000.





7. INVENTORIES





The
Company's inventories as of July 31, 2008 and October 31, 2007 are summarized as
follows:





July 31, 2008
                
                
                October 31, 2007Raw
      materials
                
                $
                1,027,869
                
                
                $
                437,144Finished
      goods
                
                
                311,564
                
                
                
                64,445Work-in-process
                
                
                1,102,867
                
                
                
                526,604Less:
      allowance for obsolete
                
                
                (64,025
                )
                
                
                (58521
                )$
                2,378,275
                
                
                $
                969,672


17





The
finished goods included $139,184 and $0 consignment goods as at July 31, 2008
and October31,
2007.





8.
PROPERTY, PLANT AND EQUIPMENT, NET





July 31, 2008
                
                
                October 31, 2007Cost:-Machinery
      and equipment
                
                $
                3,344,392
                
                
                $
                2,959,892Office
      equipment and furnishings
                
                
                47,924
                
                
                
                38,649Motor
      vehicles
                
                
                52,914
                
                
                
                48,3643,445,230
                
                
                
                3,046,905Less:
      Accumulated depreciation:-
                
                
                (743,540
                )
                
                
                (440,620
                )Net
      book value
                
                $
                2,701,690
                
                
                $
                2,606,285





For the
nine months ended July 31, 2008, depreciation expenses relating to property,
plant and equipment were $251,401 consisting of $241,071 recorded as cost of
sales and $10,330 in general and administrative expenses. As of July 31, 2007,
the Company had depreciation expenses of $213,680 included in general and
administrative expenses.




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




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


18





9. ACCOUNTS PAYABLES





Accounts
payable $277,125 and $155,600 as of July 31, 2008 and October 31, 2007 consist
of balances payable to suppliers.




The
suppliers from whom the purchased amount is over 10% of the total purchase for
the nine months ended July 31, 2008 and 2007 are:





2008
                
                
                2007Supplier
      A:
                
                $
                2,410,238
                
                
                
                24
                %
                
                $
                2,133,912
                
                
                
                24
                %Supplier
      B:
                
                $
                1,178,853
                
                
                
                12
                %
                
                $
                1,090,493
                
                
                
                12
                %Supplier
      C:
                
                $
                971,699
                
                
                
                10
                %
                
                $
                898,574
                
                
                
                10
                %





10. OTHER PAYABLES





The
balance as of July 31, 2008, includes taxes payable of $606,913, and social
insurance payable of $555,205.





As of
October 31, 2007, the balance includes taxes payable of $590,022, and social
insurance payable of $302,562.





11. RESERVES





The
reserve funds as of July 31, 2008 and October 31, 2007 are comprised of the
following:


July 31, 2008
                
                
                October 31,
                  2007Statutory
      surplus reserve fund
                
                $
                1,559,357
                
                
                $
                1,559,357Public
      welfare fund
                
                $
                282,377
                
                
                
                282,377$
                1,841,734
                
                
                $
                1,841,734





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


19


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


The
Company reserves the statutory surplus at year ended. As of July 31, 2008, the
estimated statutory surplus for nine months ended was approximately
$721,700.





12.
INCOME TAXES





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





For the
year of 2007 and 2008, the Company was granted a tax holiday and is entitled to
full exemption from corporation income taxes through December 2008..Had the
company not been granted the tax holiday or been an eligible wholly foreign
owned company, the income tax provision at the general PRC income rate of 25%
starting from January 1, 2008 and 33% previously would have been approximately
2.0 million and $2.9 million  for the nine months ended July 31, 2008 and
2007 respectively.




13.
COMMON STOCK




During
the three and nine months ended July 31, 2008, no common stock was
issued.





14.
WARRANTS


The Company entered into a Director
appointment agreement with Mr. Moliteus dated April 16, 2007, pursuant to which
the Company issued Mr. Moliteus 15,000 warrants, which expire on April 16, 2010,
to purchase 15,000 shares of Renhuang’s common stock at $3.02 per share. On July
31, 2007, warrants to purchase 10,000 additional shares were issued to Mr.
Moliteus with an exercise price of $2.50.


Transactions
involving warrants are summarized as follows:


Number of
                  Shares
                
                
                Weighted
                  Average Price
                  Per ShareOutstanding
      at October 31, 2006
                
                
                —
                
                
                
                —Granted—
      April 16, 2007
                
                
                15,000
                
                
                $
                3.02—
      July 31, 2007
                
                
                10,000
                
                
                $
                2.50Exercised
                
                
                —
                
                
                
                —Cancelled
      or expired
                
                
                —
                
                
                
                —Outstanding
      at October 31, 2007
                
                
                25,000
                
                
                $
                2.81Granted
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —Outstanding
      at July 31, 2008
                
                
                25,000
                
                
                
                2.81


20





15.
RELATED PARTY TRANSACTIONS




The
Company rented property and plant from Harbin Renhuang Pharmaceutical Stock Co.
Ltd. (“Old Renhuang”), a Company owned by the Company’s major shareholder. The
lease term is from May 1, 2008 to May 1, 2009, with monthly rental payment of
approximately $48,710. The Company has an amount due from related party of
approximately $248,000 including the construction fees paid on behalf of Old
Renhuang and receivable from sales. The Company also has an amount due to a
related party of approximately $407,000 related to professional fees paid by Old
Renhuang in 2007 for the reverse merger. The Company offsets the due from and
due to related party balances, therefore the net balance was due to related
party of approximately $159,000.





16. COMMITMENTS AND
CONTINGENCIES





A. CAPITAL AND LEASE
COMMITMENTS





The
Company entered into a lease for office space from May 1, 2007 to April 30,
2010, with average monthly rental payment of $10,076. The Company also rented
factory from a related party (See Note 15) with monthly payment of
$48,710.





The
minimum future payments for the rental leases as followings:




July
      31, 2008Office
                  
                  
                  Factory2009
                  
                  $
                  125,753
                  
                  
                  $
                  460,6072010
                  
                  
                  94,315
                  
                  
                  
                  —Thereafter
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  220,068
                  
                  
                  $
                  460,607





B. LEGAL PROCEEDINGS





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




17.EMPLOYEE WELFARE
PLAN





Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees. Pursuant to regulations promulgated
by the local authority in the PRC, the retirement pension insurance,
unemployment insurance, health insurance, injury insurance and pregnancy
insurance are established for employees during the term of their employment. For
the nine months ended July 31, 2008, the level of contribution to these funds
was set at 22% of the average employee salary determined by the Social Welfare
Bureau. The Company incurred the payable amount of $215,548 as of July 31,
2008 in other payables.




21


18. VULNERABILITY DUE TO CERTAIN
CONCENTRATIONS





The
Company faces a number of risks and challenges since its operations are in the
PRC. The Company's operations in the PRC are subject to special considerations
and significant risks not typically associated with companies in North America
and Western Europe. The Company's results may be adversely affected by changes
in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





19.
SUBSEQUENT EVENT





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





The
warrants issued to Mr. Moliteus were cancelled during fiscal 2008.





On
January 22, 2009, the local government extended the tax holiday for the Company
to the end of 2009.





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


22





ITEM 2
            Managements Discussion and
      Analysis of Financial Condition and Results of
      Operations.





Overview





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





Results
of operations





Three
months ended July 31, 2008 as compared to Three months ended July 31,
2007





Revenues, Expenses and Net
Income





2008
                
                
                2007Revenue
                
                $
                6,255,557
                
                
                
                5,071,331Cost
      of Sales
                
                
                (2,945,740
                )
                
                
                (2,491,963
                )
      )Selling
      and Distribution Expenses
                
                
                (35,508
                )
                
                
                (12,178
                )
      )Advertising
      Expenses
                
                
                (861,920
                )
                
                
                (7,588
                )
      )General
      and Administration Expenses
                
                
                (632,219
                )
                
                
                (655,929
                )
      )Research
      and Development
                
                
                (943,942
                )
                
                
                —Provision
      for Doubtful Account
                
                
                588
                
                
                
                178,040
                )Depreciation
      and Amortization
                
                
                (3,799
                )
                
                
                (75,205
                )
      )Other
      income
                
                
                27,535
                
                
                
                7,219Net
      Income
                
                $
                860,552
                
                
                
                2,013,727


23





Revenues





For the
three months ended July 31, 2008, our revenues increased by $1,184,226 or 23% as
compared to $5,071,331 during the same period in 2007. Our revenues increase
mainly due to the significant sales growth of the products represented by
Acanthopanax (Siberian Ginseng) products, Shark Power Health Care products and
Tianma Headache Relief Pills.





Cost
of Sales


Our cost
of sales for the three months ended July 31, 2008 and 2007 were $2,945,740 and
$2,491,963 respectively, which were approximately 47% and 49% of revenue and
consisted primarily of raw material, labor and production costs. The decline of
the percentage of cost to revenue is due to the production and sales
acceleration of the high margin products represented by Acanthopanax Ointment
and Shark Power Health Care products.





Selling
and Distribution Expenses





Our
selling and distribution expenses were $35,508 and $12,178 for the three months
ended July 31, 2008 and 2007, respectively. The sales rebates of $1,461,133 and
$1,342,627 for the three months ended July 31, 2008 and 2007 were recorded as
reductions of revenue. The selling and distribution expenses are approximately
the same in the two periods.





Advertising
Expenses





For the
three months ended July 31, 2008 and 2007 our advertising expenses were $861,920
and $7,588 respectively. These advertising expenses were primarily related to
the advertising of Acanthopanax. These significant increases were due to our
more aggressive advertising strategy during this period of 2008 to increase name
recognition in Southern China. The Company was dedicated to build a leading
‘Renhuang brand’ associated with Siberian Ginseng products in the coming
years.





General
and Administrative Expenses





Our
general and administrative expenses were $632,219 and $655,929 for the three
months ended July 31, 2008, and 2007, respectively. Our general and
administrative expenses mainly included payroll, leasing expenses, professional
fees, entertainment, and travel expenses. The slight decrease is mainly due to
the reduction of the travel expenses and payroll.




24




Research
and Development





For the
three months ended July 31, 2008 and 2007, we spent $943,942 and $0, on research
and development, respectively. The increase is mainly due to our new R&D
projects during the current period, including Siberian Ginseng GAP base and
projects on improving the process of producing Siberian Ginseng
extracts.





Depreciation





Our
depreciation expenses were $3,799 and $75,205 for the three months ended July
31, 2008 and 2007, respectively. The decrease is mainly due to allocation of
depreciation expense related to production in cost of sales, but none in prior
period of 2007.





Nine
months ended July 31, 2008 as compared to Nine months ended July 31,
2007





Revenues, Expenses and Net
Income





2008
                  
                  
                  2007Revenue
                  
                  $
                  24,231,007
                  
                  
                  
                  20,890,656Cost
      of Sales
                  
                  
                  (11,167,257
                  )
                  
                  
                  (10,184,980
                  )Selling
      and Distribution Expenses
                  
                  
                  (146,939
                  )
                  
                  
                  (134,624
                  )Advertising
      Expenses
                  
                  
                  (2,222,991
                  )
                  
                  
                  (180,269
                  )General
      and Administration Expenses
                  
                  
                  (1,956,253
                  )
                  
                  
                  (1,292,433
                  )Research
      and Development
                  
                  
                  (1,614,957
                  )
                  
                  
                  —Provision
      for Doubtful Account
                  
                  
                  42,753
                  
                  
                  
                  (443,082
                  )Depreciation
      and Amortization
                  
                  
                  (10,330
                  )
                  
                  
                  (213,680
                  )Other
      income
                  
                  
                  62,188
                  
                  
                  
                  17,285Net
      Income
                  
                  $
                  7,217,221
                  
                  
                  
                  8,458,873


25





Revenues





For the
nine months ended July 31, 2008, our revenues increased by $3,340,351 or 16% as
compared to $20,890,656 during the same period in 2007. Our revenues increase
was due to the success of our marketing expansion. During the nine months ended
July 31, 2008, we increased production of our higher profit margin products in
line with our overall strategy and decreased production of our lower profit
margin products. Our revenues for the nine months ended July 31, 2008 consisted
primarily of sales of the following products: Acanthopanax products, Shark Power
Health Care products, and other Chinese traditional medical
products.





Cost
of Sales





Our cost
of sales for the nine months ended July 31, 2008 and 2007 were $11,167,257 and
$10,184,980 respectively, which were approximately 46% and 49% of revenue and
consisted primarily of raw material, labor and production costs. The decline of
the percentage of cost to revenue is due to the proportion of the high margin
products sales increase as represented by the Acanthopanax
ointment.





Selling
and Distribution Expenses





Our selling and distribution expenses
were only $146,939 and $134,624 for
the nine months ended July 31, 2008 and 2007, respectively. The sales rebates of
$5,888,152 and $5,410,498 for the nine months ended July 31, 2008 and 2007 were
recorded as reductions of revenue. The selling and distribution expenses are
approximately the same during the two periods.





Advertising
Expenses





For the
nine months ended July 31, 2008 and 2007 we had advertising expenses of
$2,222,991 and $180,269 respectively. These advertising expenses were primarily
related to the advertising of Acanthopanax. These significant increases were due
to our more aggressive advertising strategy during this period to increase name
recognition in Southern China. The Company isdedicated to build a leading
‘Renhuang brand’ associated with Acanthopanax products in the coming
years.


26





General
and Administrative Expenses





Our
general and administrative expenses were $1,956,253 and $1,292,433 for the nine
months ended July 31, 2008, and 2007, respectively. Our general and
administrative expenses mainly included payroll, leasing expenses, professional
fees, entertainment, and traveling expenses. The increase of the general and
administrative expenses is mainly due to the growth of traveling expenses and
payroll.





Research
and Development





For the
nine months ended July 31, 2008 and 2007, we spent $1,614,957 and $0 on research
and development, respectively. R&D have been expensed when incurred for
accounting. The increase is mainly due to the investments in Acanthopanax GAP
base and research work on Acanthopanax products.





Depreciation





We had
depreciation expenses of $10,330 and $213,680 for the nine months ended July 31,
2008 and 2007, respectively. The decrease is mainly due to allocation of
depreciation expense related to production in cost of sales, but none in prior
period.





Liquidity
and Capital Resources





Our cash, current assets, total assets,
current liabilities, and total liabilities as of July 31, 2008 were as
follows:





July 31, 2008Cash
      and Cash Equivalents
                  
                  $
                  13,218,937Total
      Current Assets
                  
                  
                  29,870,048Total
      Assets
                  
                  
                  35,571,738Total
      Current Liabilities
                  
                  
                  1,656,556Total
      Liabilities
                  
                  
                  1,656,556Working
      capital
                  
                  $
                  28,213,491


27


Sources and Uses of
Cash





Operations


Net cash
generated from operating activities was $2,136,498 for the nine months
ended July 31, 2008. Our net cash used in operating activities for the current
nine month period was primarily $4,080,755 in net accounts receivables,
$1,266,636 in inventories, $41,400 from reduction of other net receivables,
$102,771 in total accounts payable and accruals, and $5,928 in other
payables. Cash generated from operating activities declined dramatically as the
Company extended credit terms for some of our key accounts in order to obtain
more market share.





Investments


Net cash
used in investing activities was $ 107,451 for the nine months ended July 31,
2008. For the nine months ended July 31, 2008, our cash used in investing
activities was related to the acquisition of property, plant and
equipment.





Financing





There
were no financing activities during the periods ended July 31,
2008.




Debt Instruments,
Guarantees, and Related Covenants





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





Critical
Accounting Policies





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


28





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





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





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




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





Off-balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





Contractual
Obligations




Payments due by periodObligations
                
                Total
                
                
                1 Year
                
                
                1-2 Years
                
                
                2-3
                  Years
                
                
                3-5
                  YearsOperating
      Lease Obligations – Total
                
                $
                680,675
                
                
                $
                586,360
                
                
                $
                94,315
                
                
                $
                -0-
                
                
                
                -0-Operating
      Lease Obligations - Related Party
                
                
                460,607
                
                
                
                460,607
                
                
                
                -0-
                
                
                
                -0-
                
                
                
                -0-Operating
      Lease Obligations - Third Party
                
                $
                220,068
                
                
                $
                125,753
                
                
                $
                94,315
                
                
                
                -0-
                
                
                
                -0-




29


As noted
above, we lease office space from Old Renhuang pursuant to a year to year
lease.





ITEM 3
            Quantitative and Qualitative
      Disclosures About Market
Risk





Not
required.





ITEM 4
            Controls and
      Procedures





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation, with the participation of our Chief Executive Officer
and Principal Accounting Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of July 31, 2008, to ensure that information required to
be disclosed by us in the reports filed or submitted by us under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commission’s rules and forms, including to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Principal Accounting
Officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on that evaluation, our Chief
Executive Officer and Principal Accounting Officer have concluded that as of
July 31, 2008, our disclosure controls and procedures were not effective at the
reasonable assurance level due to the weaknesses described below.





Evaluation
of Internal Control over Financial Reporting





As required by Exchange Act Rules
13a-15(f) and 15d-15(f), our management has carried out an evaluation, under the
supervision of our Chief Executive Officer and Principal Accounting Officer, of
the effectiveness of the design and operation of our internal control over
financial reporting as of July 31, 2008.





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


30





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





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





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





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





A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5), such that a
misstatement of the annual or interim financial statements may not be prevented
or detected. Management has identified the following material weakness that has
caused management to conclude that, as of July 31, 2008, our internal control
over financial reporting was not effective:




·
            We
      were unable to meet our requirements to timely file our Annual Report on
      Form 10-K for the year ended October 31, 2008. Management evaluated the
      impact of our inability to timely file periodic reports with the
      Securities and Exchange Commission on our assessment of our disclosure
      controls and procedures and has concluded that the control deficiency that
      resulted in the inability to timely make these filings represented an
      internal control weakness.




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




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


31





Remediation
of Weaknesses





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





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





Changes
in Internal Control over Financial Reporting





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





PART
II - OTHER INFORMATION





ITEM 1
            Legal
      Proceedings





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




ITEM 1A
            Risk
    Factors





Not
required for smaller reporting company.





ITEM 2
            Unregistered Sales of Equity
      Securities and Use of
Proceeds





None.


32





ITEM 3
            Defaults Upon Senior
      Securities





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





ITEM 4
            Submission of Matters to a Vote
      of Security Holders





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





ITEM 5
            Other
      Information





None.





ITEM 6
            Exhibits





(a)
            Exhibits





3.1
      (1)
              
              Restated
      Articles of Incorporation, as filed with the Nevada Secretary of State on
      April 21, 2003.3.2
      (5)
              
              Amendment
      to Articles of Incorporation, as filed with the Nevada Secretary of State
      on July 28, 2006.3.3
      (1)
              
              Second
      Restated Bylaws10.1
      (2)
              
              Common
      Stock Purchase Agreement dated September 19,
  2005.


33





10.2
      (2)
              
              Securities
      Purchase Agreement dated September 16, 2005.10.3
      (3)
              
              Reorganization,
      Stock and Asset Purchase Agreement dated September 30,
    2005.10.4
      (3)
              
              Stock
      Purchase Agreement dated September 30, 2005.10.5
      (4)
              
              Securities
      Purchase Agreement dated September 16, 2005.10.6
      (5)
              
              Loan
      Agreement with Heilongjiang Yuejintiande Building and Installation Project
      Co.,Ltd10.7
      (6)
              
              Acquisition
      Agreement between Harbin Renhuang Pharmaceutical Co., Ltd. and Zhongfa
      Industrial Group Yerui Pharmaceutical Co., Ltd., dated February 28,
      200721.1
      (5)
              
              Subsidiaries
      of the Registrant31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
              
              Chief
      Executive Officer Certification Pursuant to 18 USC, Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
              
              Chief
      Financial Officer Certification Pursuant to 18 USC, Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


34





(1)
            Incorporated by reference to our
      Current Report on Form 8-K dated April 21, 2003, filed with the Commission
      on April 22, 2003.


(2)
            Incorporated by reference from
      our Current Report on Form 8-K filed with the Commission on September 23,
      2005.


(3)
            Incorporated by reference from
      our Current Report on Form 8-K filed with the Commission on October 3,
      2005.


(4)
            Incorporated by reference from
      our Current Report on Form 8-K filed with the Commission on October 14,
      2005.


(5)
            Incorporated by reference from
      our First Amended Transition Report on Form 10-K/A filed with the
      Commission on February 22,
2007.


(6)
            Incorporated by reference from
      our Quarterly Report on Form 10-Q for the period ended January 31, 2007,
      filed with the Commission on March 19,
  2007.


35


SIGNATURES





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





Renhuang
      Pharmaceuticals, Inc.Dated:
      January 12, 2010
            
            /s/ Li ShaomingBy:
            Li
      ShaomingPresident
      andChief
      Executive OfficerDated:
      January 12, 2010
            
            /s/ Zuoliang WangBy:
            Zuoliang
      WangInterim
      Chief Financial Officer


36