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 January 31, 2010 ̈
                      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
                  88-1273503(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    ̈
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).
  ̈
Yes    ̈
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 ̈
                      Accelerated
      filer ̈Non-accelerated
      filer     ̈
      (Do not check if a smaller reporting company)
                      Smaller reporting companyx
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  ̈
Yes   x
No
  As of
March 6, 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 January 31, 2010 (unaudited) and October
      31, 2009 (audited)
                                        
                                        1Condensed
      Consolidated Statements of Operations and Comprehensive Income for the
      Three Months Ended January 31, 2010 and 2009 (unaudited)
                                        
                                        2Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended January
      31, 2010 and 2009 (unaudited)
                                        
                                        3Notes
      to the Condensed Consolidated Financial Statements
    (unaudited)
                                        
                                        4Item
      2.
                                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                        
                                        23Item
      3.
                                        Quantitative
      and Qualitative Disclosures About Market Risk
                                        
                                        27Item
      4T.
                                        Controls
      and Procedures
                                        
                                        27PART
      IIItem
      1.
                                        Legal
      Proceedings
                                        
                                        29Item
      1A.
                                        Risk
      Factors
                                        
                                        29Item
      2.
                                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                                        
                                        29Item
      3.
                                        Defaults
      Upon Senior Securities
                                        
                                        29Item
      4.
                                        Submission
      of Matters to a Vote of Securities Holders
                                        
                                        29Item
      5.
                                        Other
      Information
                                        
                                        29Item
      6.
                                        Exhibits
                                        
                                        29Signature
      Page
                                        
                                        30
  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 of our
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
evaluatingthe information
presented herein.
  iii
  PART
I
 
 Item
1.  Financial
Statements.
  RENHUANG
PHARMACEUTICALS, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
  Note
                      
                      January 31,
                        2010
                      
                      
                      October 31,
                        2009US$
                      
                      
                      US$(Unaudited)
                      
                      
                      (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      
                      
                      
                      17,704,449
                      
                      
                      
                      8,111,514Trade
      receivables, net
                      
                      7
                      
                      
                      20,961,210
                      
                      
                      
                      23,203,410Due
      from related parties
                      
                      11
                      
                      
                      -
                      
                      
                      
                      130,199Inventory,
      net
                      
                      9
                      
                      
                      3,315,097
                      
                      
                      
                      3,024,016Deposits
                      
                      11
                      
                      
                      1,467,000
                      
                      
                      
                      -Prepayments
                      
                      
                      
                      
                      -
                      
                      
                      
                      89,281Other
      receivables, net
                      
                      8
                      
                      
                      365,081
                      
                      
                      
                      102,613Total
      current assets
                      
                      
                      
                      
                      43,812,837
                      
                      
                      
                      34,661,033Property
      and equipment, net
                      
                      10
                      
                      
                      2,261,534
                      
                      
                      
                      2,352,163Deposits
                      
                      11
                      
                      
                      14,670,000
                      
                      
                      
                      16,137,000Total
      assets
                      
                      
                      
                      
                      60,744,371
                      
                      
                      
                      53,150,196LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilitiesCurrent
      liabilities:Accounts
      payable
                      
                      
                      
                      
                      490,611
                      
                      
                      
                      369,329Value
      added tax payable
                      
                      
                      
                      
                      757,612
                      
                      
                      
                      1,186,642Due
      to related parties
                      
                      11
                      
                      
                      408,931
                      
                      
                      
                      -Accrued
      employee benefits
                      
                      
                      
                      
                      1,241,271
                      
                      
                      
                      1,136,267Total
      current liabilities
                      
                      
                      
                      
                      2,898,425
                      
                      
                      
                      2,692,238Commitments
      and Contingencies
                      
                      16Shareholders’
      equityPreferred
      stock (no par value, 1,000,000 shares authorized; none issued and
      outstanding as of January 31, 2010 and October 31, 2009)
                      
                      13
                      
                      
                      -
                      
                      
                      
                      -Common
      stock ($0.001 par value, 100,000,000 shares
                        authorized;
      37,239,536 issued and
                        outstanding
      as of January 31, 2010 and October 31, 2009)
                      
                      13
                      
                      
                      37,240
                      
                      
                      
                      37,240Additional
      paid-in capital
                      
                      
                      
                      
                      7,598,869
                      
                      
                      
                      7,596,525Common
      stock warrants
                      
                      14
                      
                      
                      496,732
                      
                      
                      
                      496,732Reserves
                      
                      15
                      
                      
                      3,372,697
                      
                      
                      
                      3,372,697Accumulated
      other comprehensive income
                      
                      
                      
                      
                      3,370,174
                      
                      
                      
                      3,367,659Retained
      earnings
                      
                      
                      
                      
                      42,970,234
                      
                      
                      
                      35,587,105Total
      shareholders’ equity
                      
                      
                      
                      
                      57,845,946
                      
                      
                      
                      50,457,958Total
      liabilities and shareholders’ equity
                      
                      
                      
                      
                      60,744,371
                      
                      
                      
                      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
 
 For the three
                                  months ended January 31,Note
                                
                                2010
                                
                                
                                2009US$
                                
                                
                                US$(Unaudited)
                                
                                
                                (Unaudited)Sales,
      net
                                
                                
                                
                                
                                17,132,614
                                
                                
                                
                                13,769,997Cost
      of goods sold
                                
                                
                                
                                
                                7,652,638
                                
                                
                                
                                6,480,493Gross
      profit
                                
                                
                                
                                
                                9,479,976
                                
                                
                                
                                7,289,504Operating
      and administrative expenses:Sales
      and marketing
                                
                                
                                
                                
                                1,138,981
                                
                                
                                
                                298,090General
      and administrative
                                
                                
                                
                                
                                816,969
                                
                                
                                
                                622,033Research
      and development
                                
                                
                                
                                
                                152,364
                                
                                
                                
                                111,778Total
      operating expenses
                                
                                
                                
                                
                                2,108,314
                                
                                
                                
                                1,031,901Income
      from operations
                                
                                
                                
                                
                                7,371,662
                                
                                
                                
                                6,257,603Other
      income:Interest
      income
                                
                                
                                
                                
                                11,467
                                
                                
                                
                                9,128Income
      from operations before income tax expenses
                                
                                
                                
                                
                                7,383,129
                                
                                
                                
                                6,266,731Income
      tax expenses
                                
                                5
                                
                                
                                -
                                
                                
                                
                                -Net
      income
                                
                                
                                
                                
                                7,383,129
                                
                                
                                
                                6,266,731Other
      comprehensive income:Cumulative
      currency translation adjustments
                                
                                
                                
                                
                                2,515
                                
                                
                                
                                (65,103
                                )Total
      comprehensive income
                                
                                
                                
                                
                                7,385,644
                                
                                
                                
                                6,201,628Earnings
      per common stock- Basic
                                
                                
                                
                                
                                0.20
                                
                                
                                
                                0.18Earnings
      per common stock - Diluted
                                
                                
                                
                                
                                0.20
                                
                                
                                
                                0.18Weighted
      average common stock outstandingBasic
                                
                                
                                
                                
                                37,239,536
                                
                                
                                
                                35,096,680Diluted
                                
                                
                                
                                
                                37,293,393
                                
                                
                                
                                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 three months ended
                            January 31,2010
                          
                          
                          2009US$
                          
                          
                          US$(Unaudited)
                          
                          
                          (Unaudited)Cash
      flows from operating activities:Net
      income
                          
                          
                          7,383,129
                          
                          
                          
                          6,266,731Adjustments
      to reconcile net income to operating activities:Depreciation
      of property and equipment
                          
                          
                          90,599
                          
                          
                          
                          88,464Share
      compensation
                          
                          
                          2,344
                          
                          
                          
                          -Changes
      in assets and liabilities:Decrease
      (increase) in trade receivables
                          
                          
                          2,241,436
                          
                          
                          
                          (4,896,584
                          )Decrease
      (increase) in due from related parties
                          
                          
                          538,947
                          
                          
                          
                          (448,118
                          )(Increase)
      decrease in inventory, net
                          
                          
                          (290,982
                          )
                          
                          
                          95,701Decrease
      in prepayments
                          
                          
                          89,251
                          
                          
                          
                          33,659Increase
      in other receivables, net
                          
                          
                          (262,378
                          )
                          
                          
                          (162,464
                          )Increase
      in accounts payable
                          
                          
                          121,241
                          
                          
                          
                          86,569Decrease
      in value added tax payable
                          
                          
                          (428,884
                          )
                          
                          
                          (16,559
                          )Increase
      in accrued employee benefits
                          
                          
                          104,966
                          
                          
                          
                          112,914Net
      cash provided by operating activities
                          
                          
                          9,589,669
                          
                          
                          
                          1,160,313Cash
      flows from investing activities:Purchase
      of property and equipment
                          
                          
                          -
                          
                          
                          
                          (13,133
                          )Net
      cash used in investing activities
                          
                          
                          -
                          
                          
                          
                          (13,133
                          )Effect
      of exchange rate changes on cash
                          
                          
                          3,266
                          
                          
                          
                          (18,181
                          )Net
      increase in cash and cash equivalents
                          
                          
                          9,592,935
                          
                          
                          
                          1,128,999Cash
      and cash equivalents, beginning of year
                          
                          
                          8,111,514
                          
                          
                          
                          9,747,694Cash
      and cash equivalents, end of year
                          
                          
                          17,704,449
                          
                          
                          
                          10,876,693Supplemental
      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
 January
31, 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 January 31, 2010, the
results of their operations for the three months ended January 31, 2010 and
2009, and their cash flows for the three months ended January 31, 2010 and 2009.
The results of operations for the three months ended January 31, 2010 and 2009
are not necessarily indicative of the results to be expected for the entire
year.
 The
accompanying 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.
 4
  RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 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
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 January 31, 2010, this change did not have an impact
on the Company’s 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.
 
 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
January 31, 2010 and October 31, 2009 the exchange rate was RMB6.82 and RMB6.82,
respectively. Translation adjustment totaled $2,515 and $65,103 for the three
months ended January 31, 2010 and 2009, respectively.
  5
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 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 January 31, 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 months ended January 31,
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 months ended
January 31, 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
  6
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 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 months ended January 31, 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.
 
 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 January 31, 2010 and
October 31, 2009 the fair value of cash, trade receivable, other receivables,
accounts payable, and other payable approximated carrying value due to the short
maturity of the instruments.
 
 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 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. The
Company’s had no financial assets or liabilities carried at fair value on a
recurring basis at January 31, 2010.
  7
  RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 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
January 31, 2009, 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
January 31, 2010 and October 31, 2009, the Company has accrued $2,296,702 and
$3,020,898, respectively, for sales rebates.   For the three months
ended January 31, 2010 and 2009, the Company has deducted sales rebates in the
amount of $2,402,954 and $3,165,828, 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.
  8
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 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 $1,099,875 and $292,684 during the
three months ended January 31, 2010 and 2009, respectively.
 
 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 $2,344 and $0 in the three months ended January 31,
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.
  9
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 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.
 Generally,
years beginning after fiscal 2006, the Company is open to examination by PRC
taxing authorities.
 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 January 31, 2010 for U.S. or additional foreign
withholding taxes on approximately $42,970,234 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 January 31, 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.
  10
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 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 $7,385,644 and
$6,201,628 for the three months ended January 31, 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 increased overall equity by
$2,515 and decreased overall equity by $65,103 as of January 31, 2010
and January 31, 2009, respectively.
 
 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 represents the number of shares
that would be issued if all of the Company’s outstanding dilutive instruments
were converted into common stock.
  11
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 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 January 31, 2010 and October 31, 2009, there were no
financial instruments recorded as liability.
 
 3.
                  ACCOUNTING
      PRONOUNCEMENTS
 
 Accounting
Standards Update ("ASU") 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. 2009-15 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
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. The Company will
adopt this guidance in its first annual and interim reporting periods beginning
after November 15, 2009. The adoption of this guidance is not expected to have a
material impact on the Company’s financial statements.
  12
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 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. The Company will adopt this guidance in its first
annual and interim reporting periods beginning after November 15, 2009. The
adoption of this guidance is not expected to 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 $17,704,449 and $8,111,514, as of January 31, 2010 and October 31, 2009,
respectively.  No cash balances were restricted as at January 31, 2010 and
October 31, 2009.
 
 As of
January 31, 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 months ended January 31, 2010 and
2009.
  The
Company’s products are sold throughout the PRC. For three months ended January
31, 2010 and 2009, Siberian Ginseng (Acanthopanax) Series accounted for 47% and
55%, 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.
  13




RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 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 months ended January 31, 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 January 31,2010
                            
                            
                            2009US$
                            
                            
                            US$Tax
      savings
                            
                            
                            1,845,782
                            
                            
                            
                            1,566,683Benefit
      per share:Basic
                            
                            
                            0.05
                            
                            
                            
                            0.04Diluted
                            
                            
                            0.05
                            
                            
                            
                            0.04
 
 Had the
tax exemption not been in place for the three months ended January 31, 2010 and
2009, the Company estimates the following proforma financial statement
impact:
 
 Three months ended January 31,2010
                        
                        
                        2009US$
                        
                        
                        US$Net
      income before tax provision, as reported
                        
                        
                        7,383,129
                        
                        
                        
                        6,266,731Less
      Tax savings
                        
                        
                        (1,845,782
                        )
                        
                        
                        (1,566,683
                        )Proforma
      Net income
                        
                        
                        5,537,347
                        
                        
                        
                        4,700,048Proforma
      Net income per share:Basic
                        
                        
                        0.15
                        
                        
                        
                        0.13Diluted
                        
                        
                        0.15
                        
                        
                        
                        0.13
 14
  RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 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 January 31, 2010:Net
      income
                          
                          
                          7,383,129Basic
      EPS income available to common shareholders
                          
                          
                          7,383,129
                          
                          
                          
                          37,239,536
                          
                          
                          
                          0.20Effect
      of dilutive securities:Warrants
                          
                          
                          -
                          
                          
                          
                          53,857Diluted
      EPS income available to common shareholders
                          
                          
                          7,383,129
                          
                          
                          
                          37,293,393
                          
                          
                          
                          0.20For
      the three months ended January 31, 2009:Net
      income
                          
                          
                          6,266,731Basic
      EPS income available to common shareholders
                          
                          
                          6,266,731
                          
                          
                          
                          35,096,680
                          
                          
                          
                          0.18Effect
      of dilutive securities:Warrants
                          
                          
                          -
                          
                          
                          
                          -Diluted
      EPS income available to common shareholders
                          
                          
                          6,266,731
                          
                          
                          
                          35,096,680
                          
                          
                          
                          0.18
 
 For the
three months ended January 31, 2010, 50,000 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
January 31, 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 consolidated balance sheets as at January 31,
2010 and October 31, 2009 were as follows:
 
 2010
                        
                        
                        2009US$
                        
                        
                        US$Trade
      receivables
                        
                        
                        23,701,420
                        
                        
                        
                        26,667,816Less:
      Sales rebates
                        
                        
                        (2,296,702
                        )
                        
                        
                        (3,020,898
                        )Less:
      Allowance for doubtful accounts
                        
                        
                        (443,508
                        )
                        
                        
                        (443,508
                        )Trade
      receivables, net
                        
                        
                        20,961,210
                        
                        
                        
                        23,203,410
 15
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 8.
                  OTHER
      RECEIVABLES, NET
 
 The other
receivables amount included in the consolidated balance sheets as at January 31,
2010 and October 31, 2009 were as follows:
 
 2010
                        
                        
                        2009US$
                        
                        
                        US$Other
      receivables
                        
                        
                        725,448
                        
                        
                        
                        462,980Less:
      Allowance for doubtful accounts
                        
                        
                        (360,367
                        )
                        
                        
                        (360,367
                        )Other
      receivables, net
                        
                        
                        365,081
                        
                        
                        
                        102,613
 
 9.
                  INVENTORY,
      NET
 
 The
inventory amounts included in the consolidated balance sheets for as at January
31, 2010 and October 31, 2009 comprised of:
 
 2010
                          
                          
                          2009US$
                          
                          
                          US$Raw
      materials
                          
                          
                          2,246,613
                          
                          
                          
                          1,530,283Work-in-progress
                          
                          
                          678,287
                          
                          
                          
                          1,006,984Finished
      goods
                          
                          
                          454,430
                          
                          
                          
                          550,982Less:  Inventory
      reserves
                          
                          
                          (64,233
                          )
                          
                          
                          (64,233
                          )Inventory,
      net
                          
                          
                          3,315,097
                          
                          
                          
                          3,024,016
 
 10.
                  PROPERTY
      AND EQUIPMENT, NET
 
 Property
and equipment and related accumulated depreciation as of January 31, 2010 and
2009 were as follows:
 
 2010
                        
                        
                        2009US$
                        
                        
                        US$Machinery
      and equipment
                        
                        
                        3,435,421
                        
                        
                        
                        3,435,421Office
      equipment and furnishings
                        
                        
                        53,086
                        
                        
                        
                        53,086Motor
      vehicles
                        
                        
                        54,749
                        
                        
                        
                        54,7493,543,256
                        
                        
                        
                        3,543,256Less:
      Accumulated depreciation
                        
                        
                        (1,281,722
                        )
                        
                        
                        (1,191,093
                        )Net
      book value
                        
                        
                        2,261,534
                        
                        
                        
                        2,352,163
 
 Depreciation
expense for the three months ended January 31, 2010 and 2009 was $90,599 and
$88,464, respectively, of which $86,787 and $84,805 were included as a
component of cost of goods sold in the respective periods.  No assets were
pledged for borrowings as at January 31, 2010 and October 31,
2009.
  16
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 11.
                  RELATED PARTY
      TRANSACTIONS
 
 Due
from/to related parties included in the consolidated balance sheets as at
January 31, 2010 and October 31, 2009 comprised of:
 
 2010
                                
                                
                                2009US$
                                
                                
                                US$Due
      from related parties:Advances
      (1)
                                
                                
                                -
                                
                                
                                
                                130,199Deposits
      (2)
                                
                                
                                16,137,000
                                
                                
                                
                                16,137,000Total
                                
                                
                                16,137,000
                                
                                
                                
                                16,267,199
 
 2010
                                
                                
                                2009US$
                                
                                
                                US$Due
      to related parties:Advances
      (1)
                                
                                
                                408,931
                                
                                
                                
                                -Total
                                
                                
                                408,931
                                
                                
                                
                                -
  (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 period ended January 31, 2010, the Company received from Stock Co, a cash
payment of $539,130 resulting in a balance due to Stock Co of $408,931 as of
January 31, 2010.
 
 (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 $2,347,200.  Pursuant to
the Purchase Agreement, a payment of $1,467,000  was made to Stock Co,
in October 2009 and recorded as deposits on the consolidated balance sheet as at
January 31, 2010 and October 31, 2009.  Pursuant to the Purchase Agreement,
final payment of $880,200 is due by December 31, 2010, at which time title
for the assets will be transferred.  Accordingly the transaction is
considered incomplete as at January 31, 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 $23,472,000.  Pursuant to
the Purchase Agreement, a payment of $14,670,000 was made to Stock Co, in
October 2009 and recorded as deposits on the consolidated balance sheet as at
January 31, 2010 and October 31, 2009.  Pursuant to the Purchase Agreement,
final payment of $8,802,000 is due by December 31, 2011, at which time title for
the assets will be transferred.  Accordingly the transaction is considered
incomplete as at January 31, 2010.
  17
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 (3)
Related party transactions
 
 The
Company leases property and plant from Stock Co.  Rental expenses in
related to this lease, incurred and expensed to consolidated statements of
operations and comprehensive income during the three months ended January 31,
2010 and 2009 amounted to $153,735 and $153,600, respectively.
 
 During
the three months ended January 31, 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 consolidated statements of operations and comprehensive income for such
employee benefits amounted to approximately $104,963 and $112,914 for the three
months ended January 31, 2010 and 2009, respectively. The PRC government is
responsible for the medical benefits and ultimate pension liability to these
employees.
 
 13.
                  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.  At January
31, 2010 and October, 31, 2009, no preferred stock is outstanding.
 
 (2)  Common
Stock and Equity Transactions
 
 During
the three months ended January 31, 2010, the Company recorded $2,344 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.
 
 14.
                  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, 2009, the number of shares of common stock outstanding was 35,096,680
making 3,509,668 shares of common stock subject to the 2003
Plan.
  18
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 As of
January 31, 2010, there were no options or financial instruments outstanding
under the 2003 Plan.
 
 (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 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
$2,344 was recorded as compensation expense in the three months ended January
31, 2010.  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 Plan as of January 31, 2010 and movement during the
three months then ended are as follow:
 
 Options
                          
                          
                          Weighted
                            average
                            exercise price
                          
                          
                          Aggregate
                            intrinsic
                            value
                          
                          
                          Weighted
                            average
                            remaining
                            contractual
                            termUS$
                          
                          
                          US$Outstanding
      at November 1, 2009
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Granted
                          
                          
                          50,000
                          
                          
                          
                          1.00
                          
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Forfeited
      or expired
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Outstanding
      at January 31, 2010
                          
                          
                          50,000
                          
                          
                          
                          1.00
                          
                          
                          
                          9,000
                          
                          
                          
                          2.96
  A summary
of the status of the Company’s non-vested options as of January 31, 2010 and
movements during the three months then ended are as follow:
  19
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 Options
                          
                          
                          Weighted average
                            granted date fair
                            valueUS$Non-vested
      at November 1, 2009
                          
                          
                          -
                          
                          
                          
                          -Granted
                          
                          
                          50,000
                          
                          
                          
                          0.99Vested
                          
                          
                          -
                          
                          
                          
                          -Forfeited
      or expired
                          
                          
                          -
                          
                          
                          
                          -Non-vested
      at January 31, 2010
                          
                          
                          50,000
                          
                          
                          
                          0.99
 
 As of
January 31, 2010, there was $45,183 of unrecognized compensation cost related to
non-vested share-based compensation granted under the Plan.  The cost is
expected to be recognized over a period of 11 months.
 
 (3)  Warrants
 
 As of
January 31, 2010, the Company has 1,071,428 warrants outstanding at an average
exercise price of $0.875 per warrant for one share each of the Company’s common
stock. The warrants expire in 2012.
 
 Warrants
                        
                        
                        Average exercise
                          priceUS$Outstanding
      warrants at November 1, 2009
                        
                        
                        1,071,428
                        
                        
                        
                        0.88Warrants
      granted
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Expired/cancelled
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      warrants at January 31, 2010
                        
                        
                        1,071,428
                        
                        
                        
                        0.88
 
 Information
regarding the warrants outstanding at January 31, 2010 is summarized as
below:
 
 Warrants outstanding atJanuary 31, 2010Weighted
                          
                          
                          WeightedAverage
                          
                          
                          AverageRemaining
                          
                          
                          ExerciseExercise Prices
                          
                          Warrants
                          
                          
                          Contractual
                          
                          
                          PriceUS$
                          
                          Outstanding
                          
                          
                          Life (years)
                          
                          
                          US$0.88
                          
                          
                          1,071,428
                          
                          
                          
                          2.25
                          
                          
                          
                          0.88
 
 15.
                  STATUTORY
      RESERVES
 
 The
reserve funds as of January 31, 2009 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
  20
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 (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.
 
 16.
                  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.
 
 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 $10,493.
 
 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 $51,245.
  21
 
 RENHUANG
PHARMACEUTICALS, INC.
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January
31, 2010 and 2009
 
 As of
January 31, 2009, minimum lease payments are as follow:
 
 Total
                              
                              
                              Relatedparty
                              
                              
                              ThirdpartyUS$
                              
                              
                              US$
                              
                              
                              US$2010
                              
                              
                              185,214
                              
                              
                              
                              153,735
                              
                              
                              
                              31,4792011
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Thereafter
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -185,214
                              
                              
                              
                              153,735
                              
                              
                              
                              31,479
 
 During
the three months ended January 31, 2010 and 2009, the Group incurred rental
expenses in the amount of $185,514 and $220,757, respectively.
 
 (2)  Capital
commitments
 
 Capital
commitments for purchase of land use right, property and equipment and
production patents as of January 31, 2010 were approximately
$9,682,200.
  17.
                  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 January 31, 2010 to March 16, 2010, the
date which the Company’s consolidated financial statements have been issued and
were available to be issued, and has concluded the following events should be
reported during this period.  Subsequent events that may occur after March
16, 2010 have not been evaluated in the consolidated financial statements as of
January 31, 2010.
  22
 
 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.  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
                  Raw
      Material Supply and Prices.  The per unit costs of producing
      our products are subject to the supply and price volatility of raw
      materials, which are affected by various market factors such
      as  market demands, fluctuations in production and
      competition.
 
 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.
  23
 
 Results
of Operations
 
 The
following table sets forth certain information regarding our results of
operation.
 
 Three Months Ended January 312010
                      
                      
                      2009($
      in thousands)Statements
      of Operations DataSales,
      net
                      
                      
                      17,133
                      
                      
                      
                      13,770Cost
      of goods sold
                      
                      
                      7,653
                      
                      
                      
                      6,480Gross
      profit
                      
                      
                      9,480
                      
                      
                      
                      7,290Operating
      and administrative expensesSales
      and marketing
                      
                      
                      1,139
                      
                      
                      
                      298General
      and administrative
                      
                      
                      817
                      
                      
                      
                      622Research
      and development
                      
                      
                      152
                      
                      
                      
                      112Other
      income
                      
                      
                      11
                      
                      
                      
                      9Income
      from operation before income tax expenses
                      
                      
                      7,383
                      
                      
                      
                      6,267Income
      tax expenses
                      
                      
                      -
                      
                      
                      
                      -Net
      income
                      
                      
                      7,383
                      
                      
                      
                      6,267Other
      comprehensive income:Cumulative
      currency translation adjustments
                      
                      
                      3
                      
                      
                      
                      (65
                      )Total
      comprehensive income
                      
                      
                      7,386
                      
                      
                      
                      6,202
 
 Comparison
of Three Months Ended January 31, 2010 and 2009
 
 Total
Comprehensive Income
 Total
comprehensive income increased by approximately $1,184 thousand, or 19.1%, from
approximately $6,202 thousand in 2009 to approximately $7,386 thousand in
2010.  This increase was primarily attributable to an increase of
approximately $3,363 thousand, or 24.4%, in sales and an increase of $68
thousand, or 104.6% in cumulative currency translation adjustments, offsets in
part by an increase of $1,173 thousand, or 18.1% in cost of goods sold, an
increase of approximately $841 thousand, or 282.2%, in sales and marketing, an
increase of approximately $195 thousand, or 31.4% in general and administrative
expenses and an increase of approximately $40 thousand, or 35.7% in research and
development expenses.  Our gross profit margin increased from 52.9% in 2009
to 55.3% in 2010.
 
 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 $3,363 thousand, or 24.4%, from approximately $13,770 thousand in
2009 to approximately $17,133 thousand in 2010.  This increase in sales was
primarily attributable to increased demand and strong market acceptance of our
products as a result of our marketing efforts, in addition to price increases
for a number of our products.
 
 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
three months ended January 31, 2010 and 2009, respectively.  Sales rebates
are netted against total sales.
  24
 
 The
following table sets forth information regarding the sales of our principal
products before sales rebate during the three months ended January 31, 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
                        
                        
                        106
                        
                        
                        
                        9,161
                        
                        
                        
                        46.9
                        
                        
                        
                        141
                        
                        
                        
                        9,320
                        
                        
                        
                        55.0
                        
                        
                        
                        (35
                        )
                        
                        
                        (159
                        )
                        
                        
                        (1.7
                        )Tianma
      Series
                        
                        
                        24
                        
                        
                        
                        1,816
                        
                        
                        
                        9.3
                        
                        
                        
                        24
                        
                        
                        
                        1,784
                        
                        
                        
                        10.5
                        
                        
                        
                        0
                        
                        
                        
                        32
                        
                        
                        
                        1.8Compound
      Yangjiao Tablets
                        
                        
                        28
                        
                        
                        
                        2,423
                        
                        
                        
                        12.4
                        
                        
                        
                        29
                        
                        
                        
                        2,327
                        
                        
                        
                        13.8
                        
                        
                        
                        (1
                        )
                        
                        
                        96
                        
                        
                        
                        4.1Shark
      Vital Capsules
                        
                        
                        2
                        
                        
                        
                        1,084
                        
                        
                        
                        5.5
                        
                        
                        
                        5
                        
                        
                        
                        2,426
                        
                        
                        
                        14.3
                        
                        
                        
                        (3
                        )
                        
                        
                        (1,342
                        )
                        
                        
                        (55.3
                        )Shengmai
      Granules
                        
                        
                        29
                        
                        
                        
                        1,118
                        
                        
                        
                        5.7
                        
                        
                        
                        36
                        
                        
                        
                        1,078
                        
                        
                        
                        6.4
                        
                        
                        
                        (7
                        )
                        
                        
                        40
                        
                        
                        
                        3.7Banlangen
      Granules
                        
                        
                        21
                        
                        
                        
                        539
                        
                        
                        
                        2.8
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        21
                        
                        
                        
                        539
                        
                        
                        
                        100.0Compound
      Honeysuckle Granules
                        
                        
                        58
                        
                        
                        
                        3,395
                        
                        
                        
                        17.4
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        58
                        
                        
                        
                        3,395
                        
                        
                        
                        100.0Total
                        
                        
                        268
                        
                        
                        
                        19,536
                        
                        
                        
                        100.0
                        
                        
                        
                        235
                        
                        
                        
                        16,935
                        
                        
                        
                        100.0
                        
                        
                        
                        33
                        
                        
                        
                        (2,601
                        )
                        
                        
                        (15.4
                        )
 
 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 the H1N1 pandemic and the
winter season.   In 2010, we also experienced an increase in the
average sales price per pack of our products, as demonstrated in the table
below:
  2010
                        
                        
                        2009Sales
      revenues (in thousands)
                        
                        $
                        19,536
                        
                        
                        $
                        16,935Total
      sales quantity (pack in thousands)
                        
                        
                        268
                        
                        
                        
                        235Average
      selling prices/pack (in thousands)
                        
                        $
                        72.90
                        
                        
                        $
                        72.06
 
 The
increase in average sales price per pack, as reflected in the table, is
primarily attributable to the increase in the sales price of individual
products, namely Siberian Ginseng (Acanthopanax) Series and Shengmai Granules 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.
 
 Average Price Per PackProduct
                                  
                                  2010
                                  
                                  
                                  2009
                                  
                                  
                                  Percentage ChangeSiberian
      Ginseng (Acanthopanax) Series
                                  
                                  $
                                  86.31
                                  
                                  
                                  $
                                  66.19
                                  
                                  
                                  
                                  30.4Tianma
      Series
                                  
                                  
                                  75.21
                                  
                                  
                                  
                                  75.05
                                  
                                  
                                  
                                  0.2Compound
      Yangjiao Tablets
                                  
                                  
                                  85.60
                                  
                                  
                                  
                                  80.05
                                  
                                  
                                  
                                  6.9Shark
      Vital Capsules
                                  
                                  
                                  462.51
                                  
                                  
                                  
                                  461.54
                                  
                                  
                                  
                                  0.2Shengmai
      Granules
                                  
                                  
                                  39.04
                                  
                                  
                                  
                                  29.73
                                  
                                  
                                  
                                  31.3Banlangen
      Granules
                                  
                                  
                                  26.07
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  100.0Compound Honeysuckle
    Granules
                                  
                                  
                                  58.16
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  100.0Total
                                  
                                  $
                                  72.90
                                  
                                  
                                  $
                                  72.06
                                  
                                  
                                  
                                  1.2
 
 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 $1,173 thousand,
or 18.1%, from approximately $6,480 thousand in 2009 to approximately $7,653
thousand in 2010.  This increase was primarily attributable to increase in
products sold.
 
 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.
  25
 
 Operating
and Administrative Expenses
 Our total
operating expenses increased by approximately $1,076 thousand, or 104.3%, from
approximately $1,032 thousand in 2009 to approximately $2,108 thousand in 2010.
This increase was primarily attributable to an increase of approximately $841
thousand, or 282.2%, in sales and marketing expenses from approximately $298
thousand for 2009 to approximately $1,139 thousand for 2010, and an increase of
approximately $195 thousand, or 31.4% in general and administrative expenses,
from approximately $622 thousand for 2009 to approximately $817 thousand for
2010.  Increased operating and administrative expenses relate to our
efforts to expand our distribution network, market share, and awareness of
our premium quality products throughout China.
 
 Income
from Operations
 As a
result of the foregoing, our income from operations increased by approximately
$1,116 thousand, or 17.8%, from approximately $6,267 thousand in 2009 to
approximately $7,383 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 increased by approximately $68
thousand, or 104.6%, from approximately negative $65 thousand in 2009 to
approximately $3 thousand in 2010.
 
 Liquidity
and Capital Resources
 
 We had
retained earnings of approximately $42,970 thousand and $35,587 thousand as of
January 31, 2010 and October 31, 2009, respectively.  As of
January 31, 2010, we had cash and cash equivalents of approximately $17,704
thousand and total current assets of approximately $43,813 thousand.  As of
January 31, 2010, we had a working capital surplus of approximately $40,915
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:
  Three months ended January 31Net cash provided by (used in):
                        
                        2010
                        
                        
                        2009($ in thousands)Operating
      activities
                        
                        
                        9,590
                        
                        
                        
                        1,160Investing
      activities
                        
                        
                        -
                        
                        
                        
                        (13)Financing
      activities
                        
                        
                        -
                        
                        
                        
                        -
 
 Net
Cash Provided by Operating Activities
 Net cash
provided by operating activities increased approximately $8,430 thousand, from
net cash provided by operating activities of approximately $1,160 thousand in
2009 to net cash provided by operating activities of approximately $9,590
thousand in 2010.  This increase was primarily attributable to an increase
in net income from operations of approximately $1,116 thousand, a decrease in
the level of increase in trade receivables of approximately $7,138 thousand as a
result of tightened credit terms given to customers, a decrease in amounts due
from related parties of approximately $987 thousand.  This increase was
offset in part by increase in inventories of approximately $387 thousand, and a
decrease in value added tax payable of approximately $412
thousand.
  26
  Net
Cash Used in Investing Activities
 
 Approximately
$13 thousand was used to purchase property and equipment in 2009.   No
cash was provided by or used in investing activities in the three months ended
January 31, 2010.
 
 Outstanding
Long-Term Indebtedness
 
 None.
 
 Off-balance
Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements.
 
 Capital
commitments
 
 We have
capital commitments for purchase of land use right, property and equipment and
resource rights from a related party, Stock Co, of approximately
$9,682,200.  We expect to fund this commitment 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 $10,493.  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 $51,245.
 
 Payments due by periodObligations
                                  
                                  Total
                                  
                                  
                                  1 Year
                                  
                                  
                                  2 Year
                                  
                                  
                                  ThereafterOperating
      Lease Obligations – Total
                                  
                                  $
                                  185,214
                                  
                                  
                                  $
                                  185,214
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Operating
      Lease Obligations – Related party
                                  
                                  
                                  153,735
                                  
                                  
                                  
                                  153,735
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Operating
      Lease Obligations – Third party
                                  
                                  
                                  31,479
                                  
                                  
                                  
                                  31,479
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
 
 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
January 31, 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.
  27
 
 Changes
in Internal Controls Over Financial Reporting
 
 As
previously disclosed in our Form 10-K for the year ended October 31, 2009, as of
January 31, 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 January 31, 2010. 
Accordingly, management has concluded that we did not maintain effective
internal control over financial reporting as of January 31, 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, engaging
consultants, training our staff, implementing more rigorous policies and
procedures relating to period-end financial reporting, journal-entry approval,
supporting documentation, and account reconciliations which affect our internal
controls.  We expect to continue to implement additional financial and
management controls, reporting systems and procedures.  As a result of the
foregoing and until we have completed our process, there have been and will be
changes to our Internal Controls over financial reporting.
  28
  PART
II
 
 Item
1. Legal
Proceedings.
 
 As of
March 6, 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.
 
 None
 
 Item
3.  Defaults upon Senior
Securities.
 
 In the
three-month period ended January 31, 2010, and subsequent period through the
date hereof, we did not default upon any senior securities.
 
 Item
4.  Submission of Matters
to a Vote of Security Holders.
 
 In the
three-month period ended January 31, 2010, and subsequent period through the
date hereof, we did not submit any matters to a vote of our security
holders.
 
 Item
5.  Other
Information.
 
 None
 
 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)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.
  29
  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:
      March 16, 2010
                            RENHUANG
      PHARMACEUTICALS, INC.By:
                            /s/
      Li ShaomingLi
      Shaoming, Chief Executive Officer and President(Principal
      Executive Officer)Date:
      March 16, 2010
                            By:
                            /s/
      Yan Yi ChenYan
      Yi Chen, Chief Financial Officer(Principal
      Accounting and Financial
Officer)
  30