UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





x
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended October 31, 2009 ̈
              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)





86-451-5762-03787


(Registrant’s
Telephone Number, Including Area Code)





Securities
registered under Section 12(b) of the Act:


None





Securities
registered under Section 12(g) of the Act:





Common
Stock, par value $0.001


(Title
of class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  ̈
Yes   x
No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.  ̈
Yes   xNo





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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈





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 company x





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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of April 30, 2009 was approximately
$3,449,336 based upon the closing price as quoted on the Pink Sheet OTC. Shares
of common stock held by each officer and director and by each person who is
known to own 10% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates of the Company. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.




As of
January 21, 2010, there were 37,239,536 shares of the registrant’s $0.001 par
value common stock issued and outstanding.


No
documents are incorporated into the text by reference.










TABLE
OF CONTENTS




PART
      IItem
      1.
                  
                  Business
                  
                  1Item
      1A.
                  
                  Risk
      Factors
                  
                  12Item
      1B.
                  
                  Unresolved
      Staff Comments
                  
                  21Item
      2.
                  
                  Properties
                  
                  22Item
      3.
                  
                  Legal
      Proceedings
                  
                  22Item
      4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  
                  22PART
      IIItem
      5.
                  
                  Market
      for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
      Repurchases of Equity Securities
                  
                  23Item
      6.
                  
                  Selected
      Financial Data
                  
                  24Item
      7.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  
                  24Item
      7A.
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  30Item
      8.
                  
                  Financial
      Statements and Supplementary Data
                  
                  30Item
      9.
                  
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  
                  31Item
      9A(T).
                  
                  Controls
      and Procedures
                  
                  32Item
      9B
                  
                  Other
      Information
                  
                  33PART
      IIIItem
      10.
                  
                  Directors,
      Executive Officers and Corporate Governance
                  
                  34Item
      11.
                  
                  Executive
      Compensation
                  
                  36Item
      12.
                  
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  
                  38Item
      13.
                  
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  
                  39Item
      14.
                  
                  Principal
      Accountant Fees and Services
                  
                  40PART
      IVItem
      15.
                  
                  Exhibits
      and Financial Statement Schedules
                  
                  41





ii


In this Annual Report on Form 10-K,
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. Inc. and its consolidated subsidiaries.





This Annual Report contains certain
forward-looking statements. When used in this Annual 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
Annual 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 updateor 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 ourbehalf. You are
cautioned not to unduly rely on such forward-looking statements when evaluating
the information presented herein.


iii


PART
I





Item
1.  Business.




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 (“PRC” or “China”). We have
three “Good Manufacturing Practice” or 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 over-the-counter (“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.





Corporate
History and Structure





We were
incorporated in the State of Nevada on August 18, 1988, originally under the
corporate name of Solutions, Incorporated.  We were inactive until
August 16, 1996, when we changed our corporate name to Suarro Communications,
Inc, and engaged in the business of providing internet based business
services.   In 2006 we discontinued our business operation at the
time and became a non-operating public company.





On August
28, 2006, we entered into a Share Exchange Agreement (the “Agreement”) with
Harbin Renhuang Pharmaceutical Company Limited or Renhuang BVI, a company
incorporated in the British Virgin Islands.  Pursuant to the Agreement
we acquired all of the outstanding capital stock of Renhuang BVI, and indirect
ownership of Renhuang BVI’s wholly owned subsidiary, Harbin Renhuang
Pharmaceutical Co. Ltd or Renhuang China, which operates a pharmaceutical
development, manufacturing and distribution business through various research
and manufacturing facilities in the PRC.





Since
our inception, we have had the following name changes:





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





Substantially
all of our assets and operations are located in the PRC.





Our
Products





Our
products mainly fall into the following three categories: botanical
anti-depression & nerve-regulation products, biopharmaceutical products,
botanical antibiotics and traditional OTC Chinese medicines. The table below is
an illustration of our products and their main functions:


1





Product
      Category
                                
                                Product
                                
                                Main
      FunctionsBotanical
      anti-depression and nerve-regulation products
                                
                                Siberian
      Ginseng (Acanthopanax) Series:
                                  Siberian
      Ginseng (Acanthopanax) Tablets
                                  Siberian
      Ginseng (Acanthopanax) Syrup
                                  Siberian
      Ginseng (Acanthopanax) Extract(200g)
                                  Siberian
      Ginseng (Acanthopanax) Extract(338g)
                                
                                Antidepressant properties:Regulation of nervous excitation and inhibition; calm and inhibit
      spontaneous activities; improve sleep and anticonvulsant
      properties
                                  
                                  Improve blood
      properties: Improve blood flow, blood lipid profile and blood
      viscosity; prevent and improve cerebral thrombosis, hyperlipidemia,
      hypotension (low blood pressure), coronary heart disease, diabetes,
      leukopenia, and gonadotrophic dilation of blood vesselsTianma
      Series:
                                  Tianma
      Pills (sugar coated, 48 tablets)
                                  Tianma
      Pills (sugar coated, 100 tablets)
                                
                                Dispel
      coldness; relieve pain and headache caused by blood supply shortage and
      blood stasisCompound
      Yangjiao Tablets (sugar coated, 50 tablets)
                                
                                Relieve
      pain from migraines, vascular headaches, tension headaches and nervous
      headachesBiopharmaceutical
      products
                                
                                Shark
      Vital Capsules
                                
                                Improve
      the cerebral and cardiovascular oxygen supply; resist radiation; increase
      white blood cells; and prevent cancerBotanical
      antibiotics and traditional OTC Chinese medicines
                                
                                Banlangen
      Granules
                                
                                Antiviral
      (anti-influenza) and broad-spectrum antibioticCompound
      Honeysuckle Granules
                                
                                Antiviral;
      antibacterial; and anti-inflammatoryShengmai
      Granules
                                
                                Regulate
      blood flow; strengthen heart beat; and improve the immune system and blood
      quality





The
following table reflects the approximate sales, before sales rebates, of our
three product categories during the fiscal years ended October 31, 2009 and
2008:




2009
                                    
                                    
                                    2008
                                    
                                    
                                    Change (2009 – 2008)Product Category
                                    
                                    Quantity
                                      (Pack’000)
                                    
                                    
                                    Amount
                                      ($’000)
                                    
                                    
                                    % of
                                      Sales
                                    
                                    
                                    Quantity
                                      (Pack’000)
                                    
                                    
                                    Amount
                                      ($’000)
                                    
                                    
                                    % of
                                      Sales
                                    
                                    
                                    Quantity
                                      (Pack’000)
                                    
                                    
                                    Amount
                                      ($’000)
                                    
                                    
                                    % of
                                      SalesBotanical
      anti-depression and nerve-regulation products
                                    
                                    
                                    567
                                    
                                    
                                    
                                    40,748
                                    
                                    
                                    
                                    78.0
                                    
                                    
                                    
                                    485
                                    
                                    
                                    
                                    32,468
                                    
                                    
                                    
                                    76.0
                                    
                                    
                                    
                                    82
                                    
                                    
                                    
                                    8,280
                                    
                                    
                                    
                                    25.5Biopharmaceutical
      products
                                    
                                    
                                    13
                                    
                                    
                                    
                                    5,803
                                    
                                    
                                    
                                    11.1
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    7,249
                                    
                                    
                                    
                                    17.0
                                    
                                    
                                    
                                    (3
                                    )
                                    
                                    
                                    (1,446
                                    )
                                    
                                    
                                    (19.9
                                    )Botanical
      antibiotics and traditional OTC Chinese medicines
                                    
                                    
                                    147
                                    
                                    
                                    
                                    5,709
                                    
                                    
                                    
                                    10.9
                                    
                                    
                                    
                                    114
                                    
                                    
                                    
                                    2,987
                                    
                                    
                                    
                                    7.0
                                    
                                    
                                    
                                    33
                                    
                                    
                                    
                                    2,722
                                    
                                    
                                    
                                    91.1Total
                                    
                                    
                                    727
                                    
                                    
                                    
                                    52,260
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    615
                                    
                                    
                                    
                                    42,704
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    112
                                    
                                    
                                    
                                    9,556
                                    
                                    
                                    
                                    22.4




2





Botanical
anti-depression and nerve-regulation products





Botanical
anti-depression and nerve-regulation products contributed approximately $40,748
thousand to our revenue in 2009 ($32,468 thousand in 2008) and accounted for
approximately 78.0% of total product sales in 2009 (76.0% in 2008).





Siberian
Ginseng (Acanthopanax):





Acanthopanax,
which is known in the United States as Siberian Ginseng, has been used for
centuries in China.  According to Chinese Pharmacopoeia, it has
numerous medical efficacies including, improving kidney and spleen function;
tranquilizing the mind (anxiolytic effect), improving appetite; decreasing pain
(analgesic effect); and improving sleep quality.  In addition, further
pharmacologic studies and clinic trials conducted over the medical efficacies of
Siberian Ginseng (Acanthopanax) have shown additional benefits,
including:





·
            Antidepressant





Regulating the nervous system:Siberian Ginseng (Acanthopanax) not only improves the excitation process
of the central nervous system but also the inhibition process, making it more
efficient. It also helps to balance the two processes to improve human
intellectual and physical functions. (Source: "Chinese Medicine Information" -
Microbiology Teaching and Research Section of Suzhou Medical
College)





Treating neurasthenia:
Siberian Ginseng (Acanthopanax) can significantly reduce the symptoms of
neurasthenia; improves insomnia, restless sleep, heart palpitations,
forgetfulness, and fatigue. (Source: “Chinese patent medicine studies”
Acanthopanax research situation at home and abroad - Traditional Chinese
Medicine Research Section of Heilongjiang Institute of Chinese
Medicine)





Treating insomnia: Siberian
Ginseng (Acanthopanax) has been proven to be effective in treating hypochondria
and depression caused by insomnia and nerve dysfunction by an increasing number
of scientific research departments and national institutions. There is a natural
link between insomnia and depression. “Junk sleep” will lead to restlessness,
low spirits and decreased work quality. Although hypochondria and depression can
be attributed to external stimulus, stress and other factors, they are mainly
attributed to nerve dysfunction and are classified as a psychiatric illness.
(Source: “Insomnia and depression treatment website”
http://www.shimianyiyu.net)




·
            Threat
      cerebrovascular and cardiovascular disease. Siberian Ginseng
      (Acanthopanax) has positive effects on coronary heart disease, angina,
      high blood pressure and blood pressure regulation.(Source: “China
      Acanthopanax Web”
http://bjcp.xsjk.net)




·
            Anti-fatigue.Total
      Glucosides of Siberian Ginseng (Acanthopanax) has powerful anti fatigue
      effects that are more effective than Ginseng. (Source: “China
      Acanthopanax Web”
http://bjcp.xsjk.net)





·
            Antioxidant. Siberian
      Ginseng (Acanthopanax) helps to delay the aging process. (Source: “China
      Acanthopanax Web”
http://bjcp.xsjk.net)




·
            Strengthening
      the body: Total Glucosides of Siberian Ginseng (Acanthopanax)
      promotes fat, sugar and protein metabolism, and regeneration of
      hepatic (liver) cells; it improves protein and nucleic acid synthesis and
      strengthens physical performance. (Source: “China Acanthopanax Web”
      http://bjcp.xsjk.net)




3


Tianma
Pills and Compound Yangjiao Tablets:





Tianma
Pills and Compound Yangjiao Tablets are botanic drugs used to treat headaches
and regulate nerves.  Their known benefits and low side-effects
have led to them being the top sellers among medication with similar properties
in China.





Biopharmaceutical
products





Biopharmaceutical
products contributed approximately $5,803 thousand to our revenue in 2009
($7,249 thousand in 2008) and accounted for approximately 11.1% of total product
sales in 2009 (17.0% in 2008).





Shark
vital capsule is the only products currently in this category. It is a marine
biology medicine containing squalene, an extract from shark liver, which is
known to have the following effects:   Improve kidney and liver
function, reduce cholesterol levels, alleviate occurrence of heart disease,
increase leukocyte in blood, relieve fatigue and strengthen the overall immune
system.





We plan
to introduce Badger oil, a new biopharmaceutical product, which, according to
the Chinese Pharmacopoeia, treats burns and scalds, to the market in
2010.





Botanical
antibiotics and traditional OTC Chinese medicine




Botanical
antibiotics and traditional OTC Chinese medicines contributed approximately
$5,709 thousand to our revenue in 2009 ($2,987 thousand in 2008) and accounted
for approximately 10.9% of total product sales in 2009 (7.0% in
2008).





In our
last quarter of 2009, we introduced Banlangen Granules and Compound Honeysuckle
Granules to the market.  As these two products have been widely
recognized for their effects in prevention and treatment of common cold and flu,
we anticipate that  their sales will increase significantly during the
influenza epidemic.





Raw
materials and Suppliers





The raw
material of Siberian Ginseng (Acanthopanax) based products are effective
ingredients extracted from the Siberian Ginseng (Acanthopanax)
plant.  In China, about 94% of the wild Siberian Ginseng
(Acanthopanax) resources grow in the Heilongjiang Province (Source: Heilongjiang
Dongbei net).  Through our arrangement with Dongfanghong Forrestry
Bureau, we have the exclusive rights to the wild Siberian Ginseng (Acanthopanax)
in Dongfanghong, which represents approximately 70% of the wild Siberian Ginseng
(Acanthopanax) resources in China.  Additionally, since 2006, we have
been developing our own Siberian Ginseng (Acanthopanax) cultivation base in
Dongfanghong, Heilongjiang, China.





Other raw
materials and packaging materials are purchased from various independent
suppliers, and do not rely on any one supplier.  To ensure consistent
quality, we have established long-term relationships with many of our suppliers,
ensuring that we have at least ten different suppliers for each type of raw
materials.  We chose our suppliers based on criteria such as quality,
reputation, price, delivery capacity and GMP certification. In addition, we
conduct stringent inspections on each batch of raw material supplied, and
perform periodic review of supplier qualifications.





Manufacturing
and production facilities





We have
three production facilities:  Ah City natural and biopharmaceutical
plant, Dongfanghong pharmaceutical plant and Qingyang natural extraction
plant.  The facilities, with a total usable area of over 160 thousand
square meters, are capable of producing more than 200 kinds of pharmaceuticals,
health food, and functional food in 18 dosage forms, including tablets, capsules
(hard and soft), granules, oral liquid, frozen powder injection, powder
injection, liquid injection, dropping pills, and ointments.  We also
have β-lactams and
plant extraction lines and automatic packaging lines.


4





Our
production is in strict compliance with "Good Manufacturing Practice”, or GMP,
"Health Food Good Manufacturing Practice" and "Sterile Product Quality Control
Norms". We have state of the art automated equipments, precise testing
instruments, efficient air conditioning, cleaning systems and modern logistic
center for storage and distribution of products.





Quality
Assurance





We are
committed to delivering high-quality pharmaceutical products, and have set in
place comprehensive testing and quality control measures.   We
have a quality control team that carrying out quality control procedures in
compliance with internal policies, GMP standards and State Food and Drug
Administration, or SFDA, regulations.  There are quality checks at
every stage of production including testing the quality of raw materials,
throughout our manufacturing process and finished products against various
criteria such as ingredient composition, weight, physical appearance, and
sanitary conditions of the production line.  We also have a
pre-arranged emergency plan in the case of adverse effects such as accident
treatment process.





Our
production facilities comply with pharmaceutical GMP standards.  We
employ automated processes and scientific parameters throughout the
manufacturing process that are designed to ensure that all our products meet our
quality requirements.  We believe that our rigorous testing and
inspection procedures have been critical in ensuring that our products are
quality products.





Marketing
and Product Distribution





We sell
substantially all of our products in  the PRC. We have a complex
distribution network consisting of over 3,000 distributors and over 70 sales
centers across 24 provinces in China. Our products are mainly sold by our
distributors to pharmacies, medicine wholesale centers, hospitals and other
medical agencies. No single distributor equaled or exceeded 10% of our sales
during the fiscal year ended October 31, 2009 and 2008.





Based on
our product nature, distribution channel and market practices, we currently
mange our sales and distribution network through four departments:





·
            General
      Business Department.This department is mainly responsible for
      distribution of botanical anti-depression and nerve-regulation products.
      These products are distributed to provincial distributors, who further
      distribute the products to local distributors. The local distributors
      through various sales channels, including hospitals and media marketing
      methods, will market the products to end
  consumers.





·
            Brand
      Business Department. This department is mainly responsible for
      distribution of biopharmaceutical products. These products are distributed
      to provincial distributors, who further distribute the products to
      regional drugstores. The provincial distributors usually employ their own
      sales forces to promote the products and launch promotion campaigns with
      our support in marketing the products to end
  consumers.





·
            OTC
      Business Department. This department is mainly responsible for
      distribution of botanical antibiotics and traditional OTC Chinese
      medicines. These products are distributed to provincial distributors, who
      further distribute the products to regional drugstores. The provincial
      distributors usually employ their own sales forces and launch their own
      promotion campaigns in marketing the products to end
      consumers.





·
            Allocation Business
      Department. This department is responsible for bulk distribution of
      commonly used products. These products are distributed to medical trading
      centers and major market agents, who further distribute the products to
      nationwide drugstores and township
clinics.


5


Research
and Development





We are
committed to developing new products and improving our current
products.  During the fiscal year ended October 31, 2009 and 2008, we
spent approximately $2,529 thousand and $2,125 thousand, respectively, on
research and development.





Aligned
with our line of business, our  research and development (“R& D”)
are focused on the following:





·
            Development
      of single-plant anti-depression & nerve regulation
      products;





·
            Development
      of biopharmaceutical products; and





·
            Development
      of OTC product upgrades.





To become
an innovative enterprise, we continuously employ young talent to strengthen our
research team.  Currently we have established an open and innovative
R&D  environment consisting of Proprietary R&D Centers,
Cooperation R&D Centers and Post-doctoral Workstations.





·
            Proprietary
      R&D Centers. These centers are responsible for initial research
      of potential products and development of existing product upgrades. We
      have comprehensive research and development facilities, including
      innovative medicine division, standard extractions division, healthcare
      division, comprehensive division, planning & registration division and
      mid-phrase test division. In addition, our labs have received government
      and industry recognitions, namely: “Key Lab on TCM Extractions’” from the
      Science and Technology Bureau of Heilongjiang Province and “Innovative
      Medicine Lab” from the Industry Information Committee of
      Harbin.





·
            Cooperation
      R&D Centers. These centers have established committees
      consisting of well-know medical professionals in China, who specialize in
      biopharmaceutical and botanical medicines. The committee guides and
      advises the execution and direction of R&D projects, as well as
      evaluates research findings. The Cooperation Centers also work closely
      with the academic agencies including Institute of Biophysics and
      Ecological Centre of the Environment in the Chinese Academy of Science;
      Medical Research Institute of National Navy; Chinese Biochemical Medicine
      Research Center; Second Army Medical University; China Medicine
      University; Beijing University of Traditional Chinese Medicine;
      Heilongjiang Province Chinese Medicine University; Northeast Forestry
      University and Harbin Medical
University.





·
            Post-doctoral
      Workstations. The workstations allow post-doctoral studies on
      projects that are considered to be valuable to our
      development.





R
& D Strategy





Our
strategy  is to be the first brand and industry leader in single-plant
drugs for the treatment of depression and nerve-regulation, mainly through
development of products from Siberian Ginseng (Acanthopanax) and Schisandra. Our
goal is consistent with the following trends:





·
            Development
      of single-plant medicines is one of the three main developments in the
      pharmaceutical industry; and





·
            Antidepressants
      are one of the best selling drugs in the
world.





To
implement this strategy, we have established a cultivation base and are focusing
our effects to set the industry standard for Siberian Ginseng (Acanthopanax) and
Schisandra products.   This cultivation project has received
significant support from various government departments, including the Ministry
of Science and Technology, Development and Reform Commission.




6


R&D
Achievements





We have
received the following recognition for our research and
development:





2009
                      
                      The
      Siberian Ginseng (Acanthopanax) Polysaccharides products were awarded
      “Key Products in Heilongjiang Province” by Heilongjiang Science and
      Technology OfficeThe
      “Pollution-Free and Environment-Friendly Extraction Process for Total
      Alkaloids of Sophora Flavescens and Colorless Sterile Injection against
      Hepatitis B” project was listed as a Major Intellectual Property
      Rights Project by Harbin Intellectual Property Bureau.The “Industrialization of
      Siberian Ginseng (Acanthopanax) Extraction: Total Glucosides, Total
      Flavonoids and Polysaccharides” project was listed a special
      high-tech project by Heilongjiang Development and Reform
      Commission.The
      “Siberian Ginseng (Acanthopanax) Oral liquid” project was listed as a new
      industrialization special project by Harbin Development and Reform
      Commission2008
                      
                      The
      “Research on New Siberian Ginseng (Acanthopanax) Anti-depression
      Drugs” project was listed as a Harbin technological innovation
      talents project by Harbin Science and Technology Bureau2007
                      
                      The
      “Secondary Development and Industrialization of Genuine Medical Materials
      Siberian Ginseng (Acanthopanax) Series Products” project was listed
      as a major provincial-level pre-project by Heilongjiang Development and
      Reform
Commission





Current
R & D Projects





·
            Siberian
      Ginseng (Acanthopanax) Development Project.We have
      been successful in separating effective components of
      Siberian Ginseng (Acanthopanax), namely total glucosides, total flavonoids
      and syringin, in particular, syringin has significant effects in the
      treatment of depression and nerve regulation. We have created a sample of
      syringin freeze-dried Acanthopanax powder spasmolytic that is currently
      undergoing pilot test. If successful, this achievement represents great
      pioneering work in the field of Chinese medicine, and will enhance our
      competitive edge in this area.





·
            Schisandra
      Integrated Development Project. Schisandrais
      a wild plant with high medical and health values. Modern studies have
      shown that Schisandra contains lignin, which has strong effects in
      treating insomnia. At present, we have successfully completed research on
      the method of measuring total content of lignin in Schisandra and setting
      its quality standards. These achievements lay the foundation for advanced
      development of Schisandra products.





·
            Total
      Alkaloids of Sophora Flavescens Development Project. As a new drug
      against Hepatitis B, total alkaloids of Sophora flavescens can be used to
      replace α- interferon,
      matrine and oxymatrine
injections.





Intellectual
Property





We rely
on intellectual property such as trade secrets and technical innovations, to
protect and build our competitive position.


7





Patents





We are in
the process of purchasing two patents: Injection Preparation Method against
Hepatitis B (Patent No.: ZL200410043718.5) and Total Alkaloids of Sophora
Flavescens Extraction Method (Patent No.: ZL200410043717.0).





Trademarks





We have
received from Harbin Renhuang Pharmaceutical Stock Co., Ltd (“Stock Co.”) a
perpetual, royalty-free and non-exclusive license and right to use the word
“RENHUANG” in our tradename and as a trademark in connection with the sale of
our products.  Stock Co. is a company of which Mr. Li Shaoming, our
chairman, chief executive officer and president, serves as chairman and is a 50%
shareholder.





Growth
Strategy





We
believe that the rapid growth of Chinese economy, substantial increase in drug
spending, aging of the population, increase in diseases related to life style,
government support in the pharmaceutical market and gradual application of
the health insurance fund, China's pharmaceutical market will have significant
potentials.  In particular, we believe the demand for our products in
China will increase significantly, based on following:





Global
market condition of depression and melancholy





Depression
has been recognized as a common mental illness. According to World Health
Organization (WHO) officials, 5% of the world population is suffering from
depression. In 2002, the WHO identified depression as the world’s fourth largest
disease and estimated that depression would be the second largest disease by
2020. What was unexpected was that depression has become the world’s second
largest disease (second only to cardio-cerebral vascular disease) after
only 6-7 years.





According
to official statistics, about 80 million Chinese were suffering from depression
at the end of 2008. But it is estimated that the actual number of depression
patients (including mild depression patients) has reached more than 200 million.
In the past several decades, Chinese diagnostic techniques and treating
solutions of depression lagged behind western countries. Chinese people do
not have adequate knowledge of this disease. At present, only about 10% of
depression patients are getting medical care, far lagging behind world treatment
rate. (Source: Analysis and Prospect of China’s Anti-depressant Market in
2009, edited by HDCMR.com, http://www.hdcmr.com/ Source:Medicine Economic News,
dated October 30, 2009).





Currently
the eight best-selling anti-depressants in the world are: fluoxetine,
paroxetine, sertraline, fluvoxamine, venlafaxine, mirtazapine, duloxetine and
amitriptyline. Combined, they have 80% market share in the global
anti-depression market. However, they are relatively high priced and have
numerous adverse side effects.  Siberian Ginseng (Acanthopanax)
products, which are botanical medication used to treat depression and
nerve-regulation, have minor side effects and are moderate
priced.  Therefore we believe they have significant market
potentials.





Medical
Reform in China





The
Chinese government has promised that Renminbi 850 billion will be invested into
the national health insurance system by 2011. This plan has been approved
by the State Council. The implementation of this plan will give more than 90% of
China's population basic health insurance policies, providing better public
health and medical services.





On April
6, 2009, the State Council Officially promulgated Opinions of the CPC Central
Committee and the State Council on Deepening the Health Care System
Reform (final version). "The Opinions" first proposed that basic medical
and health institutions will be available to all the people as public products.
By 2011, all urban and rural residents will have been covered by this
system.  The reform includes:


8





·
            Accelerate
      the building of basic medical insurance system.
      The basic medical insurances for urban workers, urban residents and the
      new type of rural cooperative medical care system for rural residents will
      cover over 90% of those eligible within three
  years.





·
            Establish
      national essential medicines system.All essential
      medicines will be listed in the reimbursement catalog of essential
      medicine for health insurance. To ensure essential medicine quality, the
      government will select a number of preferred manufacturers to be the
      essential medicine suppliers. The selection criteria will include but are
      not limited to quality, reputation, capacity, qualification, and
      price.





·
            Perfecting
      the system of health care services at grass-roots levels.The
      construction of hospitals in counties (including Chinese medicine
      hospitals), central health clinics in towns and townships, health care
      clinics in villages in remote regions and community-level medical and
      health institutions in underdeveloped cities will be enhanced and
      improved.





·
            Promote the
      gradual equalization of basic public health services.Increase in public
      health services and improve the funding criteria which will bring broader
      acceptance of Chinese medicine.





·
            Promote the
      reform of public hospitals.Hospital management system, operation
      and supervision mechanisms will be reformed to improve service quality of
      medical institutions.




We
believe that many of our products will be listed in the reimbursement catalog of
essential medicine for health insurance. In addition, we anticipate that we
will be successful in becoming one of China’s essential medicine suppliers as
the PRC government moves forward with its reforms in 2010.





Our
growth strategy involves maximizing the opportunities that above developments
bring and capturing as much of the market share as possible in the
process.  To implement this strategy we plan to:




·
            Strengthen
      the dominant position ofSiberianGinseng(Acanthopanax). Siberian
      Ginseng (Acanthopanax) products have been widely recognized for their
      benefit in the treatment of depression and nerve-regulation. We hope to
      strengthen our current market share of Siberian Ginseng (Acanthopanax)
      products by focusing in related R&D and launching new products into
      market. In addition, we plan to enhance sales and marketing effects to
      promote the application of Siberian Ginseng (Acanthopanax) products as
      alternatives to chemical medicines used to treat depression and
      nerve-regulation.





·
            ExpandourSiberianGinseng
      (Acanthopanax)cultivating bases and adoptscientificmanagement, gradually
      improving quality standards ofSiberianGinseng
      (Acanthopanax).This
      would enable us to be the standards-maker of Siberian Ginseng
      (Acanthopanax) and provide us with a competitive edge over our
      competitors.





·
            Reducedistribution
      costs through use of direct sales system:We
      intend to gradually switch the sales method of our key products from the
      current agency system to a direct sales system. We believe that
      moving to a direct sales system will reduce distribution cost and
      increase our profit margins. In addition, it is expected that once
      certain drugs become essential government procurement drugs, the sales of
      these drugs will also be part of our direct sales
  system.





Competition





We face
competition from pharmaceutical manufacturers producing the same type of
pharmaceuticals.  Our competitors vary by product
categories:





Botanical
anti-depression and nerve-regulation products





As a
result of controlling significant wild Siberian Ginseng (Acanthopanax)
resources, and our achievements on Siberian Ginseng (Acanthopanax) research, we
have become the main manufacturer of these products, with over than 50% market
share. Our major competitors are Heilongjiang Gerun Pharmaceutical Co., Ltd. and
Harbin Shengyuan Biological Engineering Co., Ltd. We intend to further
develop this market and strengthen our leadership position.


9





Biopharmaceutical
products





We are
the main Shark Vital Capules manufacturer in China, with a market share of 67%.
Our major competitors are Beijing Saishali Biotechnology Research Center and
Shantou Xianle Pharmaceuticals Co., Ltd.





We have a
number of competitive advantages over our competitors, primarily:





·
            Lower
      production costs: We purchase our raw materials directly from
      Australia at prices which we believe are lower than competitors, who
      mostly purchase from coastal areas in China;
and





·
            Solid
      customer bases: We have accumulated a large and firm hospital
      customer and sales base as a result of our early entry into this
      biopharmaceutical market and having our products recognized for their
      excellent quality, mainly as a result of past clinical
    trials.




Botanical
Antibiotics and traditional OTC Chinese medicines





Our
Banlangen Granules have a market share of 13%.  Our major competitors
are Guangzhou Baiyunshan Hutchison Whampoa Chinese Medicine Co., Ltd. and
Guangzhou Xiangxue Bio-Medical Engineering Co., Ltd.





Our
Compound Honeysuckle Granules have a market share of 13%. Our major competitors
are Hebei Guojin Pharmaceutical Co., Ltd. and Shiyitang Pharmaceutical Factory
of Harbin Pharmaceutical Group.





Our
Shengmai Granules have a market share of 37%. Our major competitors are Hebei
Meibao Pharmaceutical Co., Ltd. and Guangxi Nanjing Weiwei Pharmacy Co.
Ltd.





We are
aware that the main competitive factors in selling products are quality, price
and product awareness. We believe that we have corresponding advantages in all
of these factors.




Government
Regulation





We are
regulated under national, provincial and local laws in China. The following
information summarizes aspects of those regulations that apply to us and is
qualified in its entirety by reference to all particular statutory or regulatory
provisions.





Regulations
at the national, provincial and local levels in China are subject to change. To
date, compliance with governmental regulations has not had a material impact on
our earnings or competitive position, but, because of the evolving nature of
such regulations, we are unable to predict the impact such regulation may have
in the foreseeable future.





Our
products are subject to regulatory controls governing pharmaceutical products.
As a developer, manufacturer and distributor of pharmaceuticals, we are subject
to regulation and oversight by different levels of the food and drug
administration in China, in particular, the PRC State Food and Drug
Administration, or SFDA. The “Law of the PRC on the Administration of
Pharmaceuticals,” as amended on February 28, 2001, provides the basic legal
framework for the administration of the production and sale of pharmaceuticals
in China and covers the manufacturing, distributing, packaging, pricing and
advertising of pharmaceutical products in China. Its implementation regulations
set out detailed implementation rules with respect to the administration of
pharmaceuticals in China.


10





Pharmaceutical
Manufacturer





As a
manufacturer of pharmaceutical products and raw materials, we are subject to
continuing regulation by the SFDA. We have obtained “Good Manufacturing
Practice” (GMP) certifications from SFDA to produce pharmaceutical products and
raw materials in China for all of our manufacturing facilities.  The
GMP certification criteria include institution and staff qualifications,
production premises and facilities, equipment, raw materials, hygiene
conditions, production management, quality controls, product distributions,
maintenance of sales records and manner of handling customer complaints and
adverse reaction reports. In addition, we have obtained pharmaceutical
manufacturing permits from the provincial food and drug
administration.





Approval
and Registration of Pharmaceutical Products





All our
products have received medicine registration approval from SFDA, which approves
their manufacturing with a national standard.





Price
Controls





The
retail prices of certain pharmaceuticals sold in China, primarily those included
in the national and provincial Medical Insurance Catalogs and those
pharmaceuticals whose production or trading are deemed to constitute monopolies,
are subject to price controls in the form of fixed prices or price ceilings. The
retail prices of medicines that are subject to price controls are administered
by the Price Control Office of the National Development and Reform Commission,
or the NDRC, and provincial and regional price control
authorities.  Price controls did not have a material impact on our
product pricing.





Reimbursement
Under the National Medical Insurance Program





According
to the PRC National Bureau of Statistics, as of December 31, 2008, over 317
million people in China were enrolled in the National Medical Insurance Program.
Most program participants are urban residents who are currently employed or
retired. Participants of the National Medical Insurance Program are eligible for
full or partial reimbursement of the cost of medicines included in the national
Medical Insurance Catalog.  Currently, around 74% of our products are
on the Medical Insurance Catalog.





Environmental
Matters





Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities. Our operating facilities have received
certifications from the relevant PRC government agencies in charge of
environmental protection indicating that the operations are in compliance with
the relevant PRC environmental laws and regulations. We are not currently
subject to any pending actions alleging any violations of applicable PRC
environmental laws.





Employees





As of
October 31, 2009, we have approximately 600 full-time employees; over 85% of
whom are graduates from technical colleges, universities or higher schools,
including bachelor, master, doctoral and post-doctoral
qualifications.   We have around 50 people in management
positions, around 35 people in research and development, around 480 people in
the production, storage and distribution, and around 35 people in the marketing
and sales (excluding our 3,000 distributors in over 70 sales centers across 24
provinces in China).





Financial
Information about Segments and Geographic Areas





We
operate and manage our business as a single segment.  As we primarily
generate our revenue from customers in the PRC, no geographical segments are
presented.





Corporate
Information




Our principal executive office is
located at No. 218, Taiping, Taiping District, Harbin, Heilongjiang Province,
P.R. China 15050. Our telephone number at that address is 86-451-5762-0378. Our
website address is www.renhuang.com. The information on our website is not a
part of this Annual Report.


11


Item
1A.  Risk
Factors.




Investment in our common stock
involves risk.  You should carefully consider the risks we describe below
before deciding to invest.  The market price of our common stock could
decline due to any of these risks, in which case you could lose all or part of
your investment.  In assessing these risks, you should also refer to the other
information included in this Annual Report, including our consolidated financial
statements and the accompanying notes.  You should pay particular attention to
the fact that we are a holding company with substantial operations in China and
are subject to legal and regulatory environments that in many respects
differ from that of the United States.  Our business, financial condition or
results of operations could be affected materially and adversely by any of
the risks discussed below and any others not foreseen.  This discussion
contains forward-looking statements.





Risks
Related to our Business





Our
products may not achieve or maintain widespread market acceptance.





Success
of our products is highly dependent on market acceptance.  We believe
that market acceptance of our products will depend on many factors,
including:





·
            the
      perceived advantages of our products over competing products and the
      availability and success of competing
products;





·
            the
      effectiveness of our sales and marketing
  efforts;





·
            our
      product pricing and cost
effectiveness;





·
            the
      safety and efficacy of our products and the prevalence and severity of
      adverse side effects, if any; and





·
            publicity
      concerning our products, product candidates or competing
      products.





If our
products fail to achieve or maintain market acceptance, or if new products are
introduced by others that are more favorably received than our products, are
more cost effective or otherwise render our products obsolete, we may experience
a decline in the demand for our products. If we are unable to market and sell
our products successfully, our business, financial condition, results of
operation and future growth would be adversely affected.





Our
future research and development projects may not be successful.





The
successful development of pharmaceutical products can be affected by many
factors. Products that appear to be promising at their early phases of research
and development may fail to be commercialized for various reasons, including the
failure to obtain the necessary regulatory approvals. In addition, the research
and development cycle for new products for which we may obtain an approval
certificate is long.





There is
no assurance that our future research and development projects will be
successful or completed within the anticipated time frame or budget or that we
will receive the necessary approvals from relevant authorities for the
production of these newly developed products, or that these newly developed
products will achieve commercial success. Even if such products can be
successfully commercialized, they may not achieve the level of market acceptance
that we expect.





We
have limited insurance coverage and may incur losses resulting from product
liability claims or business interruptions.





The
nature of our business exposes us to the risk of product liability claims that
is inherent in the research and development, manufacturing and marketing of
pharmaceutical products.  These risks are greater for our products
that receive regulatory approval for commercial sale. Even if a product were
approved for commercial use by an appropriate governmental agency, there can be
no assurance that users will not claim effects other than those intended
resulted from the use of our products. While to date no material claim for
personal injury resulting from allegedly defective products has been brought
against us, a substantial claim or a substantial number of claims, if
successful, could have a material adverse impact on our business, financial
condition and results of operations.


12





We
face substantial competition in connection with the marketing and sale of our
products.





Our
products compete with products with similar medical efficacy in similar market
areas. Most of our competitors are well established, have greater financial,
marketing, personnel and other resources, have been in business for longer
periods of time than us, and have products that have gained wide customer
acceptance in the marketplace. The pharmaceutical industry is also characterized
by the frequent introduction of new products. We may be unable to compete
successfully or our competitors may develop products which have greater medical
efficacy or gain wider market acceptance than ours.





Our
chairman and chief executive officer currently owns approximately 48% of our
common stock and has the ability to prevent certain types of corporate actions,
to the detriment of other stockholders.





Mr. Li
Shaoming (our chairman and chief executive officer) owns 17,850,000 shares of
our common stock, which represents approximately 48% of our outstanding shares
of common stock. Mr. Li is able to exercise significant influence over all
matters requiring stockholder approval, including the election of a majority of
the directors and determination of significant corporate actions. This
concentration of ownership could also have the effect of delaying or preventing
a change in control that could otherwise be beneficial to our
stockholders.





We
have entered into and will continue to enter into transactions with related
parties.





During
the normal course of business, we have sold goods to Heilongjiang Renhuang
Pharmaceutical Limited.  In addition, we leased property and a plant
from, and entered into purchase agreements to acquire land use rights, property
and plant and two production patents from Harbin Renhuang Pharmaceutical Stock
Co., Ltd (“Stock Co.”). Our major
shareholder and sole director, Mr. Li Shaoming, is a major shareholder of
Heilongjiang Renhuang Pharmaceutical Limited and a 50% shareholder of Stock
Co.  Although we believe that our transactions with Heilongjiang
Renhuang Pharmaceutical Limited and Stock Co., are, on the whole, no more
favorable, and no less favorable, than those available from unaffiliated third
parties, we currently do not have any independent directors to approve such
transactions.  We anticipate that we will continue to enter into
transactions with Heilongjiang Renhuang Pharmaceutical Limited and Stock Co. in
the future.





We
may not be able to manage our expansion of operations effectively.





We
anticipate significant continued expansion of our business to address growth in
demand for our products, as well as to capture new market opportunities. To
manage the potential growth of our operations, we will be required to improve
our operational and financial systems, procedures and controls, increase
manufacturing capacity and output, and expand, train and manage our growing
employee base. Furthermore, we need to maintain and expand our relationships
with our customers, suppliers and other third parties.  In addition,
the success of our growth strategy depends on a number of internal and external
factors, such as the expected growth of the pharmaceutical market in China and
the competition from other pharmaceutical companies. If we are unable to manage
our growth effectively, we may not be able to take advantage of market
opportunities, execute our business strategies or respond to competitive
pressures.





Our
future liquidity needs are uncertain and we may need to raise additional funds
in the future.





We may,
from time to time, need to raise funds as part of our business operations, such
as to devote financial resources to research and development of projects that we
believe to have significant commercialization potential, acquisition or
construction of manufacturing facilities.  We cannot assure you that
our revenues will be sufficient to meet our operational needs and capital
requirements. If we need to obtain external financing, we cannot assure you that
financing will be available in amounts or on terms acceptable to us, if at all.
Our future liquidity needs and other business reasons could require us to sell
additional equity or debt securities or obtain a credit facility. The sale of
additional equity or equity-linked securities could result in additional
dilution to our shareholders. The incurrence of additional indebtedness would
result in increased debt service obligations and could result in operating and
financing covenants that would restrict our operations.


13


The
retail prices of certain of our products are subject to control, including
periodic downward adjustment, by PRC government authorities.





Certain
of our pharmaceutical products, primarily those included in the national and
provincial Medical Insurance Catalogs, are subject to price controls in the form
of fixed retail prices or retail price ceilings. As such, the retail prices for
certain of our pharmaceutical products can be adjusted downward or upward from
time to time.  If the retail prices our products are reduced by the
government, our business or results of operations may be adversely
affected.





Our
results of operations may be affected by fluctuations in availability and price
of raw materials.





The raw
materials we use are subject to price fluctuations due to various factors beyond
our control, including, among other pertinent factors:





·
            increasing
      market demand;





·
            inflation;





·
            severe
      climatic and environmental
conditions;





·
            seasonal
      factors, and





·
            changes
      in governmental regulations and
programs.





We also
expect that our raw material prices will continue to fluctuate and be affected
by inflation in the future. Changes to our raw materials prices may result in
increases in production and packaging costs, and we may be unable to raise the
prices of our products to offset the increase costs in the short-term or at all.
As a result, our results of operations may be materially and adversely
affected.





Extensive
regulation of the pharmaceutical manufacturers industry in China could increase
our expenses resulting in reduced profits





We are
subject to extensive regulation by various governmental authorities in
jurisdictions in which our products are manufactured or sold, regarding the
processing, packaging, storage, distribution and labeling of our
products.  Our processing facilities and products are subject to
periodic inspection by national, provincial and local authorities. We believe
that we are currently in substantial compliance with all material governmental
laws and regulations and maintain all permits and licenses relating to our
operations.





Clinical
trials are very expensive, time-consuming and difficult to design and
implement.





Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time consuming. and failure can occur at any stage of the
trials, and we could encounter problems that cause us to abandon or repeat
clinical trials. The commencement and completion of clinical trials may be
delayed by several factors, including:





·           unforeseen
safety issues;





·           determination
of dosing issues;





·           lack
of effectiveness during clinical trials;





·           slower
than expected rates of patient recruitment;


14





·           inability
to monitor patients adequately during or after treatment; and





·           inability
or unwillingness of medical investigators to follow our clinical
protocols.





In
addition, we (or SFDA), may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
regulatory bodies find deficiencies in our investigational new drug, submissions
or the conduct of these trials. Therefore, we cannot predict with any certainty
the schedule for future clinical trials.





The
results of our clinical trials may not support our product candidate
claims.





Even if
our clinical trials are completed as planned, we cannot be certain that their
results will support our product candidate claims. Success in pre-clinical
testing and early clinical trials does not ensure that later clinical trials
will be successful, and we cannot be sure that the results of later clinical
trials will replicate the results of prior clinical trials and pre-clinical
testing. The clinical trial process may fail to demonstrate that our product
candidates are safe for humans and effective for indicated uses. This failure
would cause us to abandon a product candidate and may delay development of other
product candidates.





Physicians,
patients and other end consumer may abandon existing or choose not to accept and
use our new drugs.





Physicians
and patients may not accept and use our products. Acceptance and use of our
product will depend upon a number of factors including:





·
            perceptions
      by members of the health care community, including physicians, about the
      safety and effectiveness of our
products;





·
            cost-effectiveness
      of our product relative to competing products;
  and





·
            effectiveness
      of marketing and distribution efforts by us and distributors, if
      any.





Because
we expect sales of our current and future products to generate substantially all
of our product revenues for the foreseeable future, the failure to find market
acceptance would materially harm our business and results of
operations.





Our
drug-development program depends upon third-party research scientists who are
not subject to our control.





We depend
upon independent investigators and collaborators, such as universities and
medical institutions, to conduct our pre-clinical and clinical trials under
agreements with us. These collaborators are not our employees and we cannot
control the amount or timing of resources that they devote to our programs.
These investigators may not assign as great a priority to our programs or pursue
them as diligently as we would if we were undertaking such programs ourselves.
If outside collaborators fail to devote sufficient time and resources to our
drug-development programs, or if their performance is substandard, the approval
of our applications, if any, and our introduction of new drugs, if any, will be
delayed. These collaborators may also have relationships with other commercial
entities, some of which may compete with us. If our collaborators assist our
competitors at our expense, our competitive position and business could be
materially and adversely affected.





If
we cannot compete successfully for market share against other similar product
oriented companies, we may not achieve sufficient product revenues and our
business will suffer.





The
market for our product candidates is characterized by intense competition and
rapid technological advances. We will compete with a number of existing and
future drugs and therapies developed, manufactured and marketed by others.
Existing or future competing products may provide greater therapeutic
convenience or clinical or other benefits for a specific indication than our
products, or may offer comparable performance at a lower cost. If our products
fail to capture and maintain market share, we may not achieve sufficient product
revenues and our business will suffer.


15





We will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have either alone or together with
their collaborative partners, operate larger research and development programs
or have substantially greater financial resources than we do, as well as
significantly greater experience in:





·           developing
drugs;





·           undertaking
pre-clinical testing and human clinical trials;





·           obtaining
regulatory approvals of drugs;





·           formulating
and manufacturing drugs; and





·           launching,
marketing and selling drugs.





Developments
by competitors may render our products or technologies obsolete or
non-competitive.





The
biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. A large number of
companies are pursuing the development of pharmaceuticals that target the same
diseases and conditions that we are targeting. We face competition from
pharmaceutical and biotechnology companies in China and other countries. In
addition, companies pursuing different but related fields represent substantial
competition. Many of these organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, longer drug development history in obtaining regulatory approvals
and greater manufacturing and marketing capabilities than we do. These
organizations also compete with us to attract qualified personnel and parties
for acquisitions, joint ventures or other collaborations.





We
do not have patent protection and is subject to substantial
competition.





We are
currently in the process of purchasing two patented production techniques, but
we currently have no patent protection for any of our products. Many
pharmaceutical companies compete in the same market segment with similar
products or products having comparable medicinal applications or therapeutic
effects which may be used as direct substitutes for our products.  As
a result of the lack of patent protection, competitors with potential
substitutes could launch similar products in the market with their prices
analogous to or lower than those manufactured and sold by
us.  Further, the lack of patent protection could also attract an even
greater number of competitors who believe they can develop products that are
substantially similar to ours at a lower cost.





If
we fail to obtain or maintain applicable regulatory clearances or approvals for
our products, or if such clearances or approvals are delayed, we will be unable
to distribute our products in a timely manner, or at all, which could
significantly disrupt our business and materially and adversely affect our sales
and profitability.





The sale
and marketing of our products are subject to regulation in the PRC and in most
other countries where we intend to conduct business. For a significant portion
of our products, we need to obtain and renew licenses and registrations with the
PRC State Food and Drug Administration, or SFDA, and its equivalent in other
markets. The processes for obtaining regulatory clearances or approvals can be
lengthy and expensive, and the results are unpredictable. If we are unable to
obtain clearances or approvals needed to market existing or new products, or
obtain such clearances or approvals in a timely fashion, our business would be
significantly disrupted, and our sales and profitability could be materially and
adversely affected.





In
particular, as we enter foreign markets, we lack the experience and familiarity
with both the regulators and the regulatory systems, which could make the
process more difficult, more costly, more time consuming and less likely to
succeed.


16





If
we are unable to effectively and efficiently improve and maintain our controls
and procedures, there could be a material adverse effect on our operations or
financial results.





As a
public company, we are subject to the reporting requirements of the Securities
Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These requirements may
place a strain on our systems and resources, especially as we grow into other
markets. The Securities Exchange Act requires, among other things, that we file
annual, quarterly and current reports with respect to our business and financial
condition. The Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and internal control over financial
reporting. We are currently reviewing and further documenting our internal
control procedures. We expect to devote significant resources to maintain and
improve the effectiveness of our disclosure controls and procedures and internal
control over financial reporting.





Effective
internal controls are necessary for us to provide reliable financial reports. If
we cannot provide reliable financial reports, our business and operating results
could be harmed. We have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement. For example, we determined
that our controls and procedures needed to be improved to ensure that the
information required to be disclosed by us in the reports that we file and
furnish under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and regulations. The material weakness we have found
include the failure to complete documentation of controls placed in operation to
adequately address our financial reporting risks.  In addition, we
have failed to timely file our periodic reports.





Compliance
with rules and regulations concerning corporate governance may be costly, which
could harm our business.





We will
continue to incur significant legal, accounting and other expenses to comply
with regulatory requirements. The Sarbanes-Oxley Act of 2002, together with
rules implemented by the Securities and Exchange Commission has required and
will require us to make changes in our corporate governance, public disclosure
and compliance practices. In addition, we have incurred significant costs and
will continue to incur costs in connection with ensuring that we are in
compliance with rules promulgated by the Securities and Exchange Commission
regarding internal controls over financial reporting pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002. Compliance with these rules and regulations has
increased our legal and financial compliance costs, which have had, and may
continue to have, an adverse effect on our profitability.





We
have a limited operating history and limited historical financial information
upon which you may evaluate our performance.





We began
our operations in 2006 and continue to face risks in a growth industry. We may
not successfully address these risks and uncertainties or successfully implement
our operating strategies. If we fail to do so, it could materially harm our
business to the point of having to cease operations and could impair the value
of our common stock to the point investors may lose their entire investment.
Even if we accomplish these objectives, we may not generate positive cash flows
or the profits we anticipate in the future.





We rely on key executive officers and
their knowledge of our business and technical expertise would be difficult to
replace.





Our
success is dependent, to a large extent, on our ability to retain the services
of our executive management, who have contributed to our growth and expansion to
date. Our chairman, Mr. Li Shaoming, has been, and will continue to be,
instrumental to our success. Accordingly, the loss of his services, without
suitable replacements, will have an adverse effect on our business generally,
operating results and future prospects.





In
addition, the loss of the technical knowledge and management and industry
expertise of any of our key personnel could result in delays in product
development, loss of customers and sales and diversion of management resources,
which could adversely affect our operating results.


17





Our
holding company structure may hinder the payment of dividends.




Renhuang
has no direct business operations, other than its ownership of our subsidiaries.
While we have no current intention of paying dividends, should we decide in the
future to do so, as a holding company, our ability to pay dividends and meet
other obligations depends upon the receipt of dividends or other payments from
our operating subsidiaries and other holdings and investments. In addition, our
operating subsidiaries, from time to time, may be subject to restrictions on
their ability to make distributions to us due to restrictive covenants in
agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions applicable to our
subsidiaries. If future dividends are paid in Renminbi, fluctuations in the
exchange rate for the conversion of Renminbi into U.S. dollars may reduce the
amount received by U.S. stockholders upon conversion of the dividend payment
into U.S. dollars.





Risks
Related to Doing Business in China





Our
manufacturing plants are located in China and our pharmaceutical and medical
products production, sale and distribution are subject to Chinese
regulation.





Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some changes that could have
this effect are: (i) level of government involvement in the economy; (ii)
control of foreign exchange; (iii) methods of allocating resources; (iv) balance
of payment positions; (v) international trade restrictions; and (vi)
international conflict. Additionally, as a manufacturer of pharmaceutical and
medical products located in China, we are a state-licensed company and facility
and subject to Chinese regulations and laws. The Chinese government has been
active in regulating the pharmaceutical industry. If we were to lose our
state-licensed status we would no longer be able to manufacture pharmaceuticals
in China, which is our sole operation.





We
depend upon governmental laws and regulations that may be changed in ways that
will harm our business.





Our
business and products are subject to government regulations mandating the
manufacturing of pharmaceuticals in China and other countries. Changes in the
laws or regulations in China, or other countries we sell into, that govern or
apply to our operations could have a materially adverse effect on our business.
For example, the law could change so as to prohibit the use of certain
pharmaceuticals. If one of our pharmaceuticals or medical products are
prohibited, this change would reduce our productivity of that
product.





The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.





China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be
harmed by changes in its laws and regulations, including those relating to
taxation, import and export tariffs, pharmaceutical regulations, and other
matters. We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements. However, the central or local
governments of these jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations.





Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.


18


The
Chinese legal system may have inherent uncertainties that could materially and
adversely impact our ability to enforce the agreements governing our
operations.





We are
subject to oversight at the provincial and local levels of government. Our
operations and prospects would be materially and adversely affected by the
failure of the local government to honor our agreements or an adverse change in
the laws governing them. In the event of a dispute, enforcement of these
agreements could be difficult in China. China tends to issue legislation, which
is followed by implementing regulations, interpretations and guidelines that can
render immediate compliance difficult. Similarly, on occasion, conflicts arise
between national legislation and implementation by the provinces that take time
to reconcile. These factors can present difficulties in our ability to achieve
compliance. Unlike the United States, China has a civil law system based on
written statutes in which judicial decisions have limited precedential value.
The Chinese government has enacted laws and regulations to deal with economic
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, our experience in interpreting and
enforcing our rights under these laws and regulations is limited, and our future
ability to enforce commercial claims or to resolve commercial disputes in China
is therefore unpredictable. These matters may be subject to the exercise of
considerable discretion by agencies of the Chinese government, and forces and
factors unrelated to the legal merits of a particular matter or dispute may
influence their determination.





It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.





Substantially
all of our assets will be located outside of the United States and most of our
officers and directors will reside outside of the United States. As a result, it
may not be possible for United States investors to enforce their legal rights,
to effect service of process upon our directors or officers or to enforce
judgments of United States courts predicated upon civil liabilities and criminal
penalties of our directors and officers under Federal securities laws of the
United States. Moreover, we have been advised that the PRC does not have
treaties providing for the reciprocal recognition and enforcement of judgments
of courts with the United States. Further, it is unclear if extradition treaties
now in effect between the United States and the PRC would permit effective
enforcement of criminal penalties of the Federal securities laws of the United
States.





National,
provincial and local governments have established many regulations governing our
business operations.





We are
also subject to numerous national, provincial and local governmental
regulations, including environmental, labor, waste management, health and safety
matters and product specifications and regulatory approvals from healthcare
agencies. We are subject to laws and regulations governing our relationship with
our employees including: wage requirements, limitations on hours worked, working
and safety conditions, citizenship requirements, work permits and travel
restrictions. These local labor laws and regulations may require substantial
resources for compliance. We are subject to significant government regulation
with regard to property ownership and use in connection with our facilities in
the PRC, import restrictions, currency restrictions and restrictions on the
volume of domestic sales and other areas of regulation. These regulations can
limit our ability to react to market pressures in a timely or effective way,
thus causing us to lose business or miss opportunities to expand our
business.





The
PRC currency is not a freely convertible currency and fluctuations in the
exchange rate between the PRC currency and the U.S. dollar could adversely
affect our operating results.





The PRC
currency, the “Renminbi” or “RMB,” is not a freely convertible currency. We rely
on the PRC government’s foreign currency conversion policies, which may change
at any time, in regard to our currency exchange needs. This substantial
regulation by the PRC government of foreign currency exchange may restrict our
business operations and a change in any of these government policies could
negatively impact our operations, which could result in a loss of
profits.




The
functional currency of our operations in China is the Renminbi. However, results
of our operations are translated at average exchange rates into U.S. dollars for
purposes of reporting results. As a result, fluctuations in exchange rates may
adversely affect our expenses and results of operations as well as the value of
our assets and liabilities. Fluctuations may adversely affect the comparability
of period-to-period results. We do not currently use hedging techniques, and any
hedging techniques which we may use in the future, may not be able to eliminate
and may exacerbate the effects of currency fluctuations. Thus, exchange rate
fluctuations could cause our profits, and therefore our stock prices, to
decline.


19





We
are subject to various tax regimes, which may adversely affect our
profitability and tax liabilities in the future.





Renhuang
is incorporated in the U.S. and has subsidiaries and other operations in the PRC
and the British Virgin Islands. We will be subject to the tax regimes of these
countries. Although virtually all of Renhuang’s profits will be earned outside
of the U.S., under U.S. tax laws Renhuang’s earnings generally will be subject
to U.S. taxation, because U.S. companies are generally taxed on their world-wide
income. This may be true even if Renhuang does not repatriate any of its foreign
earnings to the U.S. For certain types of income (generally, income from an
active trade or business), U.S. companies are not required to pay tax on that
income until they repatriate those earnings to the U.S. (such as for use in
paying dividends or repurchasing shares). As a result, repatriation of earnings
would trigger more immediate tax obligations. As a result of the imposition of
U.S. taxes, Renhuang’s after-tax profits could decrease and could be below the
level that would have been obtained if Renhuang were incorporated outside the
U.S. The amount of taxes payable in the U.S. generally depends on the
profitability of our various operations and the application of available tax
credits and tax treaties. We are not currently receiving the benefit of any U.S.
tax credit, and we are not currently conducting a material amount of business in
a country with an advantageous tax treaty. Since the effect of tax credits and
tax treaties depends on the profitability of operations in various
jurisdictions, the amount of our tax will vary over time as we change the
geographic scope of our activities. However, for the near term we expect that
our total tax rate will be significantly influenced by the taxes we pay in
China, so that our total tax obligation might decrease as a result of favorable
tax treatment in China even though we were subject to additional U.S. taxes. In
the future, Renhuang may pay significantly higher taxes than we have paid
historically. In addition, any change in tax laws and regulations or the
interpretation or application thereof, either internally in one of those
jurisdictions or as between those jurisdictions, may adversely affect Renhuang’s
profitability and tax liabilities in the future.





Because
Chinese law will govern almost all of our material agreements, we may not be
able to enforce our legal rights internationally, which could result in a
significant loss of business, business opportunities, or capital.





Chinese
law will govern almost all of our material agreements. We cannot assure you that
we will be able to enforce any of our material agreements or that remedies will
be available outside of the PRC. The system of laws and the enforcement of
existing laws in the PRC may not be as certain in implementation and
interpretation as in the United States. The Chinese judiciary is relatively
inexperienced in enforcing corporate and commercial law, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. The
inability to enforce or obtain a remedy under any of our future agreements could
result in a significant loss of business, business opportunities or
capital.





Risks
Related to our Securities





The
market price of our shares is subject to significant price and volume
fluctuations.





The price
of our common shares may be subject to wide fluctuations due to variations in
our operating results, news announcements, our limited trading volume, general
market trends both domestically and internationally, currency movements, sales
of common shares by our officers, directors and our principal stockholders, and
sales of common shares by existing investors. Certain events, such as the
issuance of common shares upon the exercise of our outstanding stock options,
could also materially and adversely affect the prevailing market price of our
common shares. Further, the stock markets in general have recently experienced
extreme price and volume fluctuations that have affected the market prices of
equity securities of many companies and that have been unrelated or
disproportionate to the operating performance of such companies. In addition, a
change in sentiment by U.S. investors for China-based companies could have a
negative impact on the stock price. These fluctuations may materially and
adversely affect the market price of our common shares and the ability to resell
shares at or above the price paid, or at any price.


20





Our
Articles of Incorporation authorize our board of directors to issue new series
of preferred stock that may have the effect of delaying or preventing a change
of control, which could adversely affect the value of your shares.





Our
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. We may issue
additional preferred stock in ways which may delay, defer or prevent a change of
control of our company without further action by our stockholders. Such shares
of preferred stock may be issued with voting rights that may adversely affect
the voting power of the holders of our common stock by increasing the number of
outstanding shares having voting rights, and by the creation of class or series
voting rights.





Our
common stock has been thinly traded and we cannot predict the extent to which a
trading market will develop.





Our
common stock is quoted on the Pink Sheet OTC, or the Pink Sheets, an electronic
quotation service for securities traded OTC.  Our common stock is
thinly traded compared to larger, more widely known companies.  Thinly
traded common stock can be more volatile than common stock trading in an active
public market.  We cannot predict the extent to which an active public
market for our common stock will develop or be sustained.





We
do not expect to pay dividends.





We expect
to apply our future earnings, if any, toward the further expansion and
development of our business. The likelihood of us paying dividends is further
reduced by the fact that, in order to pay dividends, we would need to repatriate
profits earned outside of the U.S., and in doing so those profits generally
would become subject to U.S. taxation. Thus, the liquidity of your investment is
dependent upon your ability to sell your shares at an acceptable price, rather
than receiving an income stream from your investment. The price of our stock may
decline and fluctuations in market price coupled with limited trading volume in
our shares may limit your ability to realize any value from your investment,
including recovering the initial purchase price.




“Penny Stock” rules may make buying
or selling our common stock difficult, and severely limit its market and
liquidity.







Trading
in our common stock is subject to certain regulations adopted by the SEC,
commonly known as the “penny stock” rules. Our common shares qualify as “penny
stocks” and are covered by Section 15(g) of the Securities Exchange Act of 1934,
which imposes additional sales practice requirements on broker-dealers who sell
such common shares in the aftermarket. “Penny stock” rules govern how
broker-dealers can deal with their clients and with “penny stocks”. For sales of
our common stock, the broker-dealer must make a special suitability
determination and receive from you a written agreement prior to making a sale of
stock to you. The additional burdens imposed upon broker-dealers by the “penny
stock” rules may discourage broker-dealers from effecting transactions in our
common stock, which could severely affect its market price and liquidity. This
could prevent you from reselling your shares and could cause the price of the
shares to decline.




Item
1B.Unresolved
Staff Comments.





Because
we are not an accelerated filer, a large accelerated filer or a well-known
seasoned issuer, this Item 1B is not applicable.




21


Item
2.  Properties.





We lease
our principal executive offices located at No. 281 Taiping Road, Taiping
District, Harbin, Heilongjiang Province, 150050, China, our Ah City Natural and
Biopharmaceutical plant and our Dongfanghong Pharmaceutical plant from Stock
Co., a company 50% owned by Mr. Li Shaoming, our chairman, chief executive
officer and president. The lease is a total of 105,416 square foot office space,
with approximately 15,000 square feet used for executive offices and
approximately 90,000 square feet used for production and inventory. The lease is
year-to-year lease, with a monthly rent of $51,345.
 
 On
October 12, 2009, we entered into a purchase agreement with Stock Co. to acquire
the land use right, property and plant located at our Ah City Natural and
Biopharmaceutical 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 with a final payment of $8,802,000 due by December 31, 2011, at
which time title for the assets will be transferred.




We lease
a 970 square foot office space in Harbin, Heilongjiang Province from a third
party with a current monthly rent of $10,514. This lease is from May 1, 2007 to
April 30, 2011.





We own
our Qingyangnatural Extraction plant.





Upon
expiration of our current leases, we believe that we will be able to either
renew our existing leases or arrange new leases in nearby locations on
acceptable terms. We believe that these properties are adequately covered by
insurance.





We
believe that our facilities are suitable for our current
operations.  As part of our growth strategy, we plan to expand our
production capacity at our current facilities and to acquire and construct new
facilities in the future.




Item
3.  Legal
Proceedings.





From time
to time, we may be involved in litigation relating to claims arising out of its
operations in the normal course of business. Any of these claims could subject
us to costly litigation and, while we generally believe that we have adequate
insurance to cover many different types of liabilities, our insurance carriers
may deny coverage or our policy limits may be inadequate to fully satisfy any
damage awards or settlements. If this were to happen, the payment of any such
awards could have a material adverse effect on our results of operations and
financial position. Additionally, any such claims, whether or not successful,
could damage our reputation and business. As of January 21, 2010, we are not a
party to, or threatened by, any legal proceedings, the adverse outcome of which,
in management’s opinion, individually or in the aggregate, would have a material
adverse effect on our results of operations or financial position.




Item
4.Submission of
Matters to a Vote of Security Holders.





During
the last quarter of the fiscal year ended October 31, 2009, no matters were
submitted to a vote of our security holders, through the solicitation of
proxies.


22


PART
II
 
 Item
5.  Market for the Registrant’s Common Stock, Related Stockholder
Matters and Issuer Repurchases of Equity Securities
 
 Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 
 Our
common stock is quoted on the Pink Sheet OTC Markets, under the symbol
“RHGP.”  Prior to being quoted on the Pink Sheets OTC Markets, our
common stock was quoted on the OTC Bulletin Board.  At January 21,
2010 there were 37,239,536 shares of common stock issued and outstanding that
were held by approximately 80 stockholders of record.  The table below
lists the high and low closing prices per share of our common stock for each
quarterly period during the past two fiscal years as quoted on the Pink Sheet
OTC Market or OTC Bulletin Board.  The following prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
 
 High
                  
                  
                  LowYear
      Ended October 31, 2008:1st
      Quarter
                  
                  $
                  2.66
                  
                  
                  $
                  1.212nd
      Quarter
                  
                  $
                  1.79
                  
                  
                  $
                  0.653rd
      Quarter
                  
                  $
                  2.14
                  
                  
                  $
                  0.804th
      Quarter
                  
                  $
                  1.05
                  
                  
                  $
                  0.20Year
      Ended October 31, 2009:1st
      Quarter
                  
                  $
                  0.65
                  
                  
                  $
                  0.162nd
      Quarter
                  
                  $
                  0.51
                  
                  
                  $
                  0.163rd
      Quarter
                  
                  $
                  0.69
                  
                  
                  $
                  0.204th
      Quarter
                  
                  $
                  1.69
                  
                  
                  $
                  0.50
 
 Dividend
Policy
 
 We have
not declared or paid any dividends on our common stock and presently do not
expect to declare or pay any such dividends in the foreseeable
future.  Payment of dividends to our shareholders would require
payment of dividends by our PRC subsidiaries to us.  This, in turn,
would require a conversion of Renminbi into US dollars and repatriation of funds
to the US.  Under current PRC law, the conversion of Renminbi into
foreign currency generally requires government consent.   Further,
government authorities may impose restrictions that could have a negative impact
in the future on the conversion process or on our cash needs, which, in turn,
affects our ability to pay cash dividends to our
shareholders.  Although our subsidiary’s classification is WFOE under
PRC law permits them to declare dividends and repatriate their funds to us in
the United States, any change in this status or the regulations permitting such
repatriation could prevent them from doing so.  Any inability to
repatriate funds to us would in turn prevent payments of dividends to our
shareholders.
 
 Recent
Sales of Unregistered Securities
 
 On May
15, 2009, we sold an aggregate 2,142,856 shares of common stock at a purchase
price of $0.70 per share and three year warrants to acquire an aggregate of
1,071,428 shares of common stock at an exercise price of $0.875 per share to
Allied Merit International Inc. and Griffin Ventures Ltd. for $1.5 million which
was received on August 7, 2009.  The securities were issued under
exemptions from registration pursuant to Regulation D and Regulation S under the
Securities Act of 1933, as amended (“1933 Act”). Griffin Ventures Ltd.
represented it was an accredited investor as that term is defined in Regulation
D under the 1933 Act.  Allied Merit International Inc. represented it
was a non U.S. person as that term is defined in Rule 902 of Regulation S under
the 1933 Act.  No underwriter or placement was engaged in connection
with the above issuance and no commissions were paid.
  23
  Item
6. Selected Financial Data
 
 Because
we are a smaller reporting company, this Item 6. is not applicable.
 
 Item
7. 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 Annual
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 Annual Report, particularly in “Item 1A. Risk
Factors.”
 
 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 enhance our
      existing products and develop new products for the market, we have devoted
      significant resources to
R&D.
  24
  Results
of Operations
 
 The
following table sets forth certain information regarding our results of
operation.
 
 Years Ended October 312009
                  
                  
                  2008($ in thousands)Statements
      of Operations DataSales,
      net
                  
                  
                  43,411
                  
                  
                  
                  34,475Cost
      of goods sold
                  
                  
                  20,311
                  
                  
                  
                  15,981Gross
      profit
                  
                  
                  23,100
                  
                  
                  
                  18,494Operating
      and administrative expensesSales
      and marketing
                  
                  
                  3,650
                  
                  
                  
                  3,318General
      and administrative
                  
                  
                  2,117
                  
                  
                  
                  2,878Research
      and development
                  
                  
                  2,529
                  
                  
                  
                  2,125Other
      income
                  
                  
                  43
                  
                  
                  
                  118Income
      from operation before income tax expenses
                  
                  
                  14,847
                  
                  
                  
                  10,291Income
      tax expenses
                  
                  
                  -
                  
                  
                  
                  -Net
      income
                  
                  
                  14,847
                  
                  
                  
                  10,291Other
      comprehensive income:Cumulative
      currency translation adjustments
                  
                  
                  66
                  
                  
                  
                  2,392Total
      comprehensive income
                  
                  
                  14,913
                  
                  
                  
                  12,683
 
 Comparison
of Years Ended October 31, 2009 and 2008
 
 Total
Comprehensive Income
 Total
comprehensive income increased by approximately $2,230 thousand, or 17.6%, from
approximately $12,683 thousand in 2008 to approximately $14,913 thousand in
2009.  This increase was primarily attributable to an increase of
approximately $8,936 thousand, or 25.9%, in sales, and a decrease of
approximately $761 thousand, or 26.4% in general and administrative expenses
offset in part by an increase of approximately $4,330 thousand, or 27.1%, in
cost of goods sold and an increase of approximately $332 thousand, or 10.0%, in
sales and marketing expenses, an increase of approximately $404 thousand, or
19.0%, in research and development expenses, and a decrease of $2,326 thousand,
or 97.2% in cumulative currency translation adjustments.  Our gross
profit margin decreased from 53.6% in 2008 to 53.2% in 2009.
 
 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 $8,936 thousand, or 25.9%, from approximately $34,475 thousand in
2008 to approximately $43,411 thousand in 2009.  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 increase 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 17% and 19% of sales for the
year ended October 31, 2009 and 2008, respectively.  Sales rebates are
netted against total sales.
 
 The
following table sets forth information regarding the sales of our principal
products before sales rebate during the fiscal years ended October 31, 2009 and
2008:
  25
 
 2009
                                    
                                    2008
                                    
                                    2009 over 2008Product 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
                                    
                                    
                                    408
                                    
                                    
                                    
                                    28,340
                                    
                                    
                                    
                                    54.3
                                    
                                    
                                    
                                    353
                                    
                                    
                                    
                                    22,504
                                    
                                    
                                    
                                    52.7
                                    
                                    
                                    
                                    55
                                    
                                    
                                    
                                    5,836
                                    
                                    
                                    25.9Tianma
      Series
                                    
                                    
                                    68
                                    
                                    
                                    
                                    5,127
                                    
                                    
                                    
                                    9.8
                                    
                                    
                                    
                                    53
                                    
                                    
                                    
                                    3,863
                                    
                                    
                                    
                                    9.0
                                    
                                    
                                    
                                    15
                                    
                                    
                                    
                                    1,264
                                    
                                    
                                    32.7Compound
      Yangjiao Tablets
                                    
                                    
                                    91
                                    
                                    
                                    
                                    7,281
                                    
                                    
                                    
                                    13.9
                                    
                                    
                                    
                                    79
                                    
                                    
                                    
                                    6,101
                                    
                                    
                                    
                                    14.3
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    1,180
                                    
                                    
                                    19.3Shark
      Vital Capsules
                                    
                                    
                                    13
                                    
                                    
                                    
                                    5,803
                                    
                                    
                                    
                                    11.1
                                    
                                    
                                    
                                    16
                                    
                                    
                                    
                                    7,249
                                    
                                    
                                    
                                    17.0
                                    
                                    
                                    
                                    (3)
                                    
                                    
                                    
                                    (1,446)
                                    
                                    
                                    (19.9)Shengmai
      Granules
                                    
                                    
                                    104
                                    
                                    
                                    
                                    3,621
                                    
                                    
                                    
                                    6.9
                                    
                                    
                                    
                                    114
                                    
                                    
                                    
                                    2,987
                                    
                                    
                                    
                                    7.0
                                    
                                    
                                    
                                    (10)
                                    
                                    
                                    
                                    634
                                    
                                    
                                    21.2Banlangen
      Granules
                                    
                                    
                                    12
                                    
                                    
                                    
                                    306
                                    
                                    
                                    
                                    0.6
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    306
                                    
                                    
                                    100.0Compound
      Honeysuckle Granules
                                    
                                    
                                    31
                                    
                                    
                                    
                                    1,782
                                    
                                    
                                    
                                    3.4
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    31
                                    
                                    
                                    
                                    1,782
                                    
                                    
                                    100.0Total
                                    
                                    
                                    727
                                    
                                    
                                    
                                    52,260
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    615
                                    
                                    
                                    
                                    42,704
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    112
                                    
                                    
                                    
                                    9,556
                                    
                                    
                                    22.4
 
 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.   In 2009, we also experienced an increase in the
average sales price per pack of our products, as demonstrated in the table
below:
  2009
                                    
                                    
                                    2008Sales
      revenues (in thousands)
                                    
                                    $
                                    52,260
                                    
                                    
                                    $
                                    42,704Total
      sales quantity (pack in thousands)
                                    
                                    
                                    727
                                    
                                    
                                    
                                    615Average
      selling prices/pack (in thousands)
                                    
                                    $
                                    71.88
                                    
                                    
                                    $
                                    69.44
 
 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 2009 and 2008 and the percentage change in the sales price
per pack.
 
 Average Price Per PackProduct
                                  
                                  2009
                                  
                                  
                                  2008
                                  
                                  PercentageChangeSiberian
      Ginseng (Acanthopanax) Series
                                  
                                  $
                                  69.29
                                  
                                  
                                  $
                                  63.75
                                  
                                  8.7Tianma
      Series
                                  
                                  
                                  75.16
                                  
                                  
                                  
                                  72.77
                                  
                                  3.3Compound
      Yangjiao Tablets
                                  
                                  
                                  80.18
                                  
                                  
                                  
                                  77.63
                                  
                                  3.3Shark
      Vital Capsules
                                  
                                  
                                  462.26
                                  
                                  
                                  
                                  447.56
                                  
                                  3.3Shengmai
      Granules
                                  
                                  
                                  34.86
                                  
                                  
                                  
                                  26.20
                                  
                                  33.1Banlangen
      Granules
                                  
                                  
                                  26.06
                                  
                                  
                                  
                                  -
                                  
                                  100.0Compound
      Honeysuckle Granules
                                  
                                  
                                  57.12
                                  
                                  
                                  
                                  -
                                  
                                  100.0Total
                                  
                                  $
                                  71.88
                                  
                                  
                                  $
                                  69.44
                                  
                                  3.5
 
 We expect
the demand for our products will continue to increase as a result of gaining
greater market acceptance, in particular the benefits of our Siberian Ginseng
(Acanthopanax) Series in treating depression and
nerve-regulation.  Further, we believe many of our products will be
listed in the reimbursement catalog of essential medicine for health insurance.
In addition, we anticipate that we will be successful in becoming one of China’s
essential medicine suppliers as the PRC government moves forward with its Health
Reforms in 2010.
 
 Cost
of Goods Sold
 Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs shipping and handling costs for the products
sold.  Cost of goods sold increased approximately $4,330 thousand, or
27.1%, from approximately $15,981 thousand in 2008 to approximately $20,311
thousand in 2009.  This increase was primarily attributable to
increase in products sold and increases in certain raw material prices such as
sugar.
 
 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 our costs of good sold.
  26
  Operating
and Administrative Expenses
 Our total
operating expenses consist primarily of sales and marketing expenses, general
and administrative expenses and research and development
expenses.  Our total operating expenses decreased by approximately $25
thousand, or 0.3%, from approximately $8,321 thousand in 2008 to approximately
$8,296 thousand in 2009.
 
 Sales and
Marketing.  Our sales and marketing expenses consist primarily
of advertising and market promotion expenses, and other overhead expenses
incurred by the Company’s sales and marketing
personnel.    Sales and marketing expenses increased
approximately $332 thousand, or 10.0%, from approximately $3,318 thousand for
2008 to approximately $3,650 thousand for 2009.  This increase was
primarily attributable to an increase of approximately $436 thousand, or 13.8%,
in advertising expenses.  Sales and marketing expenses are likely to
increase as we continue expanding our distribution network throughout China and
seek to increase our market share and awareness of our products.
 
 General and Administrative.
Our general and administrative expenses consist primarily of salary, travel,
entertainment expenses, benefits, share-based compensation, and professional
service fees.  General and administrative expenses decreased by
approximately $761 thousand, or 26.4%, from approximately $2,878 thousand for
2008 to approximately $2,117 thousand for 2009.  This decrease was
primarily attributable to decrease of approximately $243 thousand, or 100.0%, in
allowance for receivables since there was no additional allowance in
2009.  General and administrative expenses are likely to increase as
we continue to expand our production, sourcing capacity, and distribution
capacity throughout China.
 
 Research and Development. Our
research and development expenses consist primarily of salary, equipment rental
expenses, and Siberian Ginseng (Acanthopanax) cultivation related
expenses.  Research and development expenses increased approximately
$404 thousand, or 19.0%, from approximately $2,125 thousand for 2008 to
approximately $2,529 thousand for 2009.  This increase was primarily
attributable to development of Siberian Ginseng (Acanthopanax) cultivation and
extraction of effective components of the Siberian Ginseng (Acanthopanax) plant,
and development of other products.  Research and development expenses
are likely to increase as we continue to devote our resources to development of
new products and enhancement of our existing products.
 
 Income
from Operations
 As a
result of the foregoing, our income from operations increased by approximately
$4,556 thousand, or 44.3%, from approximately $10,291 thousand in 2008 to
approximately $14,847 thousand in 2009.
 
 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
years of 2009 and 2008, our PRC subsidiary was granted a tax holiday and is
entitled to full exemption from enterprise income taxes of 25%.
 
 Cumulative
Currency Translation Adjustments
 Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar.  All
translation adjustments resulting from the translation of our financial
statements into U.S. dollars are reported as cumulative currency translation
adjustments.  Our cumulative currency translation adjustments
decreased by approximately $2,326 thousand, or 97.2%, from approximately $2,392
thousand in 2008 to approximately $66 thousand in 2009.
 
 Liquidity
and Capital Resources
 
 We had
retained earnings of approximately $35,587 thousand and $21,245 thousand as of
October 31, 2009 and 2008, respectively.  As of October 31, 2009,
we had cash and cash equivalents of approximately $8,112 thousand and total
current assets of approximately $34,661 thousand.  As of October 31,
2009, we had a working capital surplus of approximately $31,969
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.
  27
  Our
summary cash flow information is as follows:
  Year ended October 31Net cash provided by (used in):
                          
                          2009
                          
                          
                          2008($ in thousands)Operating
      activities
                          
                          
                          13,068
                          
                          
                          
                          (1,228)Investing
      activities
                          
                          
                          (16,221)
                          
                          
                          
                          (111)Financing
      activities
                          
                          
                          1,500
                          
                          
                          
                          -
 
 Net
Cash Provided by (Used in) Operating Activities
 Net cash
provided by (used in) operating activities increased approximately $14,296
thousand, from net cash used in operating activities of approximately $1,228
thousand in 2008 to net cash provided by operating activities of approximately
$13,068 thousand in 2009.  This increase was primarily attributable to
an increase in net income from operations of approximately $4,556 thousand, a
decrease in the level of increase in trade receivables of approximately $9,103
thousand as a result of tightened credit terms given to customers, a decrease in
the level of increase in inventories of approximately $1,119 thousand, and
an increase in value added tax payable of approximately $477
thousand.  This increase was offset in part by an increase in amounts
due from related parties of approximately $547 thousand.
 
 Net
Cash Used in Investing Activities
 Net cash
used in investing activities increased approximately $16,110 thousand, from
approximately $111 thousand in 2008 to approximately $16,221 thousand in
2009.  This increase was primarily attributable to approximately
$14,670 thousand of payments made to purchase the land use right and properties
of one of our production facilities from a related party, Stock Co, and
approximately $1,467 thousand of payments made to purchase two production
patents from Stock Co.
 
 Net
Cash Provided by Financing Activities
 Net cash
provided by financing activities increased approximately $1,500 thousand, from
$0 thousand in 2008 to approximately $1,500 thousand in 2009.  This
increase was attributable to consideration received from Allied Merit
International Investments, Inc. and Griffin Ventures Ltd for an aggregate of
2,142,856 shares of the Company’s common stock and 1,071,428 warrants with an
exercise price of $0.875 per share.
 
 Outstanding
Long-Term Indebtedness
 
 None
 
 Expansion
Strategy
 
 We
believe the market for pharmaceutical products in China is growing
rapidly.  Our growth strategy involves capturing as much of this
market as possible during this rapid growth phase.  To implement this
strategy we plan to strengthen our dominant position in the Siberian Ginseng
(Acanthopanax) market, expand our Siberian Ginseng (Acanthopanax) cultivating
bases and improving the quality standards of Siberian Ginseng (Acanthopanax),
and extend our distribution network through internal distribution channels
reforms.  Our expansion strategy will require the continued retention
and investment of our earnings from operations and, we believe, additional
funding from private debt and equity financing.  In general, the
commitment of funds to research and development, or acquisition or construction
of plant and equipment tends to impair liquidity.  However, we believe
that because of the upward trend in our revenues in recent years, even if this
trend levels off, our income from continuing operations coupled with such
additional financing, if required, should provide sufficient liquidity to meet
our expansion needs.
 
 Off-balance
Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements.
  28
  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
operation.
 
 Contractual
Obligations
 
 We lease
office premise from a third party, Heilongjiang JiuSanYouZhi Co.,
Ltd.  The lease is from May 1, 2007 to April 30, 2010, with average
monthly rental payment of $10,514.  We also lease property and plant
from a related party, Stock Co.  The lease is from April 30, 2009 to
May 1, 2010, with average monthly rental payment of $51,345.
 
 Payments due by periodObligations
                    
                    Total
                    
                    
                    1 Year
                    
                    
                    2 Year
                    
                    
                    ThereafterOperating
      Lease Obligations – Total
                    
                    $
                    371,154
                    
                    
                    $
                    371,154
                    
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      Lease Obligations – Related party
                    
                    
                    308,070
                    
                    
                    
                    308,070
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      Lease Obligations – Third party
                    
                    
                    63,084
                    
                    
                    
                    63,084
                    
                    
                    
                    -
                    
                    
                    
                    -
  Critical
Accounting Policies
 
 The
consolidated financial statements include the financial statements of us and our
subsidiaries.  All transactions and balances among us and our
subsidiaries have been eliminated upon consolidation.
 
 Accounting
Judgments and Estimates
 
 Certain
amounts included in or affecting our consolidated financial statements and
related disclosures must be estimated, requiring us to make certain assumptions
with respect to values or conditions that cannot be known with certainty at the
time the financial statements are prepared. These estimates and assumptions
affect the amounts we report for assets and liabilities and our disclosure of
contingent assets and liabilities at the date of our financial statements. We
routinely evaluate these estimates, utilizing historical experience, consulting
with experts and other methods we consider reasonable in the particular
circumstances. Nevertheless, actual results may differ significantly from our
estimates. Any effects on our business, financial position or results of
operations resulting from revisions to these estimates are recorded in the
period in which the facts that give rise to the revision become
known.
 
 We
believe that certain accounting policies are of more significance in our
consolidated financial statement preparation process than others, which policies
are discussed below. See also Note 2 to the consolidated financial
statements for a summary of our principal accounting policies.
 
 Estimates of allowances for bad
debts – We must periodically review our trade and other receivables to
determine if all are collectible or whether an allowance is required for
possible uncollectible balances.
 
 Estimate of the useful lives of
property and equipment– We must estimate the useful lives and proper
salvage values of our property and equipment. We must also review property and
equipment for possible impairment.
 
 Inventory – We must determine
whether we have any obsolete or impaired inventory.
 
 Revenue recognition – Revenue
from the sale of goods is recognized on the transfer of risks and rewards of
ownership, which generally coincides with the time when the goods are shipped to
customers and the title has passed.
 
 Please
refer to the notes to the financial statements included elsewhere in this filing
for a more complete listing of all of our critical accounting
policies.
  29
  New
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 Company has not determined the impact that
this guidance may have on its financial statements.
 
 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
Company has not determined the impact that this guidance may have on its
financial statements.
  Item
7A. Quantitative and Qualitative Disclosures About Market Risk
 
 Because
we are a smaller reporting company, this Item 7A is not applicable.
 
 Item
8. Financial Statements and Supplementary Data
 
 Financial
Statements
 
 Please
see the accompanying Financial Statements attached hereto beginning on page
F-1.
  30
 
 Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
 
 (a)  On
January 9, 2009, we dismissed Schwartz Levitsky Feldman, LLP (“Schwartz”) as our
principal independent accountant.  Schwartz issued an Independent
Auditor’s Report for the fiscal year ended October 31, 2007 and the six months
ended October 31, 2006.  Schwartz also reviewed the interim financial
statements of the Company’s indirect wholly-owned subsidiary, Harbin Renhuang
Pharmaceutical Stock Co., Ltd, a company incorporated in the People’s Republic
of China, for the six months ended April 30, 2006.
  During
the fiscal year ended October 31, 2007 and six months ended October 31, 2006,
and through January 9, 2009, (i) there were no disagreements between us and
Schwartz on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Schwartz would have caused Schwartz to make reference to the
matter in its reports on our financial statements, and (ii) Schwartz’s reports
on our financial statements did not contain an adverse opinion or disclaimer of
opinion, nor were they modified as to audit scope or accounting principles.
During the fiscal year ended October 31, 2007 and six months ended October 31,
2006 and through January 9, 2009, there were no reportable events as that term
is described in Item 304(a)(1)(iv) of Regulation S-K.
 
 On
January 9, 2009, the Board of Directors appointed MSPC, Certified Public
Accountants and Advisors A Professional Corporation (“MSPC”) as the principal
independent accountant.  Our Board of Directors participated in and
approved the decision to change principal independent accountant.
 
 (b)  On
January 13, 2010, we dismissed MSPC as our independent registered public
accounting firm.
 
 For
fiscal year ended October 31, 2008, MSPC issued an audit report on our
consolidated balance sheet as of October 31, 2008, and the related consolidated
statements of income and comprehensive income, shareholders’ equity, and cash
flows for the year then ended.  The report of MSPC on the foregoing
financial statements did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to any uncertainty, audit scope
or accounting principles.
  31
  During
the fiscal year ended October 31, 2008 and through January 13, 2010, (i) there
were no disagreements between us and MSPC on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreement(s), if not resolved to the satisfaction of MSPC would have
caused MSPC to make reference to the subject matter of disagreement in
connection with its reports on the Company’s financial statements, and (ii)
there were no reportable events as that term is described in Item 304(a)(1)(iv)
of Regulation S-K.
 
 On
January 13, 2010, we engaged Windes & McClaughry Accountancy Corporation
(“W&M”) as our new independent registered public accounting firm. Our Board
of Directors recommended, authorized, and approved the decision to dismiss MSPC
as our independent registered public accounting firm and to engage W&M to
serve as our independent registered public accounting firm.
 
 Item
9A(T). Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of
October 31, 2009, 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.  Lastly we restated
fiscal 2008 financial statements related to the misstatement of sales rebates.
Accordingly, based upon that evaluation, the chief executive officer and chief
financial officer have concluded material
weakness existed and 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.
 
 Management’s
Report on Internal Control Over Financial Reporting
 
 Management,
under the supervision of our chief executive officer and chief financial
officer, is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act)
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States, or GAAP.  Internal control over financial reporting
includes those policies and procedures that (a) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets, (b) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, (c) provide reasonable assurance that
receipts and expenditures are being made only in accordance with appropriate
authorization of management and the board of directors, and (d) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on
the financial statements.  A “material weakness” is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
registrant’s annual or interim financial statements will not be prevented or
detected on a timely basis by the company’s internal controls.  A
“significant deficiency” is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of the registrant’s financial reporting.  A “deficiency” in
internal control over financial reporting exists when the design or operation of
a control does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect misstatements on a
timely basis.
 
 During
our review of our financial statements and results for the year ended October
31, 2009, our management, under the supervision and with the participation of
our chief executive officer and chief financial officer, assessed the
effectiveness of our internal control over financial
reporting.
  32
  As of
October 31, 2009, 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 October 31,
2009.  We believe that the foregoing are material weaknesses and,
accordingly, management has concluded that we did not maintain effective
internal control over financial reporting as of October 31, 2009.
 
 This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
SEC that permit us to provide only management’s report in this Annual
Report.
 
 Remediation
Plan
 
 We are
devoting significant resources to remediating, improving and documenting our
disclosure controls and procedures and internal controls and procedures,
including hiring a new chief financial officer with US GAAP and SEC reporting
experience, additional accounting, and finance staff, and consultants to assist
with these functions, and implementing additional financial and management
controls, reporting systems and procedures.  These measures may not
ensure the adequacy of our internal controls over our financial processes and
reporting in the future.
 
 Changes
in Internal Controls
 
 Since the
third quarter of our 2009 fiscal year, we have begun the implementation of some
of the remedial measures described above, including hiring of a new chief
financial officer, 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.  We expect to continue to implement
additional financial and management controls, reporting systems and
procedures.
 
 Item
9B. Other Information
 
 Not
applicable.
  33
  PART
III
 
 Item
10.  Directors, Executive Officers and Corporate
Governance
 
 Directors,
Executive Officers and Significant Employees
 
 The
following table as of January 21, 2010, sets forth the name and age of each
member of our board of directors and/or executive officers, the positions and
offices held by each of them with us, and the period during which they has
served as one of our directors and/or executive officers.  Directors
serve until the election and qualification of their
successors.   There was no arrangement or understanding between
any executive officer or director and any other person pursuant to which any
person was elected as an executive officer or director.  There are no
family relationships between any of our directors, executive officers, director
nominees or significant employees.
 
 Name
                        
                        Age
                        
                        Position
                        
                        SinceLi
      Shaoming
                        
                        47
                        
                        Chairman
      of the board of directors, Chief Executive Officer,
      and  President
                        
                        2006Yan
      Yi Chen
                        
                        31
                        
                        Chief
      Financial Officer
                        
                        2010He
      Jiang
                        
                        38
                        
                        Secretary
                        
                        2006
 
 Li
Shaoming has served as the chairman of the board of directors, chief
executive officer and president since founding Harbin Renhuang Pharmaceutical
Co. Ltd. in 2006. Mr. Li has more than 20 years experience from the
pharmaceutical and finance industry. Mr. Li has been the chairman and chief
executive officer of Harbin Renhuang Pharmaceutical Stock Co. Ltd since 1996.
From 1984 to 1996, Mr. Li served as vice chairman of Shenzhen Health
Pharmaceutical Co. Ltd, a company dedicated to drug research, production, and
sales. Mr. Li is a professor at Harbin Business University and Northeastern
Agriculture University. Mr. Li also served as vice chairman of Heilongjiang
Provincial Chinese Traditional Medicine Association and Heilongjiang Provincial
Medicine Association. Mr. Li Shaoming graduated from Central University of
Finance and Economics in Beijing, China with a bachelor degree in
finance.
 
 Yan Yi Chenhas been our chief financial officer since January 13, 2010, replacing
Mr. Wang ZuoLiang, who resigned as interim chief financial officer in January
2010.  Ms. Chen has more than 9 years experience in accounting and
auditing.  From 2008 to 2009, Ms. Chen served as a financial
consultant, specializing in US GAAP and SEC reporting, of Resources Global
Professionals.  From 2006 to 2008, Ms. Chen served as an audit manager
of PricewaterhouseCoopers Zhong Tian CPAs Limited Company.  Ms. Chen
graduated from Victory University of Wellington in 2001 with a bachelor degree
in Commerce and Administration, majoring in Commercial law and Accounting, and a
Bachelor degree in Science, majoring in Computer science.  Ms. Chen is
also a member of the New Zealand Institute of Chartered
Accountants.
 
 He Jiang
was hired as our as special assistant to the president in 2004 and has served as
secretary since 2006. In this role he is in charge of asset management, risk and
crisis management, and internal audit. From 2001 to 2004, prior to joining our
company, he was the vice general manager of Heilongjiang Tiansheng High Tech Co.
Ltd. In this position Mr. Jiang was primarily responsible for managing projects,
such as, but not limited to, Clean Coal Projects. He received his Masters degree
in Industrial Economics in July, 2004, and his Bachelor degree in Management
from Jilin University in 1992.
 
 Board
and Board Committees
 
 Our Board
consists of one member, Mr. Li.  Previously, during 2009, the Board
consisted of two directors consisting of Mr. Li and Mr. Andy Wu.  Mr.
Wu resigned on December 22, 2008.  The Board intends to seek
additional qualified directors.
 
 Our board
of directors has established the following committees:  the Audit
Committee and the Compensation Committee.  Although the Audit
Committee and Compensation Committee  intend to adopt written charters
upon the appoint of other directors, at this time, due to our size and the fact
that we have only one director,  our Audit Committee and Compensation
Committee do not operate under a written charter .  Mr. Li is the sole
director and member of the Audit Committee and the Compensation
Committee
  34
  Audit
Committee Financial Expert
 
 We do not
have a director on our Audit Committee who meets the definition of an “audit
committee financial expert” within the meaning of Item 407(d)(5) of Regulation
S-K.
 
 Governance
Committee and Nominations to the board of directors
 
 We
do not have a separate governance or nominating committee.  Security
holders may make written recommendation of  potential nominees by
contacting our board of directors.
 
 Code
of Ethics
 
 Due
to the limited size of the Board and limited administrative staff, at this
time, we have not yet adopted a written Code of
Ethics.    We intend to adopt one in the
future.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities, to file with the Securities and Exchange Commission
(hereinafter referred to as the “Commission”) initial statements of beneficial
ownership, reports of changes in ownership and Annual Reports concerning their
ownership, of Common Stock and other of our equity securities on Forms 3, 4, and
5, respectively. Executive officers, directors and greater than 10% shareholders
are required by Commission regulations to furnish us with copies of all Section
16(a) reports they file.
 
 To our
knowledge based solely on information publicly available, during the fiscal year
ended October 31, 2009, our director and executive officer complied with Section
16(a) filing requirements except for Mr. Andy Wu who resigned on December 22,
2008 and never complied with such  filing
requirement.
  35
  Item
11. Executive Compensation
 
 Our
Compensation Committee, which currently consists of Mr. Li, assists our board of
directors in reviewing and approving the compensation structure of our directors
and executive officers, including all forms of compensation to be provided to
our directors and executive officers.  With the responsibility of
establishing, implementing and monitoring our executive compensation program
philosophy and practices, our Compensation Committee seeks to ensure that the
total compensation paid to our directors and executive officers is fair and
competitive.
 
 The
following table sets forth information regarding all forms of compensation
received by our Principal Executive Officer, Principal Financial Officer and one
other executive officers who served in these capacities during the fiscal year
ended October 31, 2009 (no executive officer’s salary and bonus exceeded
$100,000 in any of the applicable years):
 
 Summary
Compensation Table
 
 Name and Principal
                                          Position
                                        
                                        Year
                                        
                                        Salary
                                        
                                        
                                        Bonus
                                        
                                        
                                        Stock
                                          Awards
                                        
                                        
                                        Option
                                          Awards
                                        
                                        
                                        All Other
                                          Compensation
                                        
                                        
                                        TotalLi
      Shaoming, Chairman of Boar d of Director, Chief Executive Officer, and
      President
                                        
                                        2009
                                        
                                        $
                                        31,250
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        (1)
                                        
                                        $
                                        31,2502008
                                        
                                        $
                                        31,250
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        (1)
                                        
                                        $
                                        31,250Wang
      Zuo-Liang*, Interim Chief Financial Officer
                                        
                                        2009
                                        
                                        $
                                        4,500
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        4,5002008
                                        
                                        $
                                        4,500
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        4,500He
      Jiang, Secretary
                                        
                                        2009
                                        
                                        $
                                        4,500
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0
                                        -
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        4,5002008
                                        
                                        $
                                        4,500
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        -0-
                                        
                                        
                                        $
                                        4,500
 *Mr. Wang
resigned as interim chief financial officer on January 13, 2010.
 
 Employment
Agreements
 
 On
January 13, 2010, we entered into an employment agreement with Ms. Chen, who
became our chief financial officer on that date.  The agreement has a
three-year term and provides that Ms. Chen will receive a base salary of
approximately $58,700, and will be entitled to receive an option
grant under the 2007 Non-Qualified Company Stock Grant and Option
Plan to purchase 50,000 shares of our common stock, at an exercise price of
$1.00 per share, on the commencement date and on the first and second
anniversary thereafter (for a total of 150,000 shares). The options will be
subject to a one year vesting starting from each grant date. Ms. Chen is also
eligible to receive discretionary bonuses at times and in amounts determined by
our Compensation Committee and certain other benefits available to executive
officers.
 
 We have
no other employment agreements with our executive officers.  Our
chairman, chief executive officer and president, Mr. Li receives $31,250 in
annual salary and is reimbursed for out of pocket expenses. Our secretary, Mr.
Jiang receives $4,500 in annual salary and is reimbursed for out of pocket
expenses.
 
 Benefit
Plans
 
 We do not
have any profit sharing plan or similar plans for the benefit of our officers,
directors or employees. However, we may establish such plans in the
future.  Certain employees of our subsidiary, including Li Shaoming,
our chairman, chief executive officer, and president, have pension and
healthcare benefits through plans offered by such subsidiary, as required by
local Chinese laws.
  36
  2007
Non-Qualified Company Stock Grant and Option Plan and 2003 Omnibus Securities
Plan
 
 On March
19, 2007, our board of directors approved the2007 Non-Qualified
Company Stock Grant and Option Plan (the “2007 Plan”).   The 2007
Plan is intended to serve as an incentive 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
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
 
 As of
October 31, 2009, there were no options or other financial instruments
outstanding under either the 2007 Plan or 2003 Plan.
 
 Board
Compensation
 
 There is
currently no agreement with Mr. Li, our sole director, for
compensation.  Mr. Li is entitled to reimbursement for his travel
expenses.  We do not pay additional amounts for committee
participation or special assignments of the board of directors.For the fiscal year
ended October 31, 2009, no directors received any compensation for their
services as members of the board of directors.
 
 Severance
and Change of Control Agreement
 
 As of
October 31, 2009, we had no agreements or arrangements providing for payments to
a named executive officer in connection with any termination.
 
 Outstanding
Equity Awards at Fiscal Year End
 
 As of
October 31, 2009, none of our named executive officers held any stock
options.
 
 Restricted
Stock Agreements
  We have
not entered into any restricted stock agreements with any of our executive
employees or directors.
  37
  Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
 
 The
following table sets forth, as of January 21, 2010, information concerning the
beneficial ownership of shares of our common stock held by our directors, our
named executive officers, our directors and executive officers as a group, and
each person known by us to be a beneficial owner of 5% or more of our
outstanding common stock.
 
 Beneficial
ownership is determined according to the rules of the SEC.  Beneficial
ownership means that a person has or shares voting or investment power of a
security and includes any securities that person has the right to acquire within
60 days after the measurement date, such as pursuant to options, warrants or
convertible notes.  Except as otherwise indicated, we believe that
each of the beneficial owners of our common stock listed below, based on
information each of them has given to us, has sole investment and voting power
with respect to such beneficial owner’s shares, except where community property
or similar laws may apply.  For purposes of the column for shares
underlying convertible securities, in accordance with rules of the SEC, shares
of our common stock underlying securities that a person has the right to acquire
within 60 days of January 21, 2010 are deemed to be beneficially owned by such
person for the purpose of computing the percentage ownership of that person, but
we do not treat them as outstanding for the purpose of computing the ownership
percentage of any other person.
 
 Common Stock Beneficially OwnedName and Address of BeneficialOwner
                            
                            Total Outstanding
                            
                            
                            Shares Underlying
                              Convertible Securities(1)
                            
                            
                            Total
                            
                            
                            Percent (2)Directors
      and Named Executive OfficersLi
      Shaoming (3)
                            
                            
                            17,850,000(4
                            )
                            
                            
                            0
                            
                            
                            
                            17,850,000
                            
                            
                            
                            47.93
                            %He
      Jiang
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            %Yan
      Yi Chen
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            
                            
                            
                            0
                            %Directors
      and executive officers as a group(3
      persons)
                            
                            
                            17,850,000(4
                            )
                            
                            
                            0
                            
                            
                            
                            17,850,000
                            
                            
                            
                            47.93
                            %5%
      Beneficial OwnersPi
      Dianjun – Total Prosperity Company Ltd (5)
                            
                            
                            3,159,450
                            
                            
                            
                            0
                            
                            
                            
                            3,159,450
                            
                            
                            
                            8.48
                            %Tuya
      Wulan – New BVI Co. (6)
                            
                            
                            2,975,000
                            
                            
                            
                            0
                            
                            
                            
                            2,975,000
                            
                            
                            
                            7.99
                            %Cheung
      Yunman – China Wealth Sources Co. (7)
                            
                            
                            4,278,000
                            
                            
                            
                            0
                            
                            
                            
                            4,278,000
                            
                            
                            
                            11.49
                            %
 
 (1)
              Includes
      shares of our common stock issuable upon exercise of options or upon
      conversion of warrants or convertible notes within 60
  days.
 (2)
              Based
      on 37,239,536 shares of our common stock outstanding as of January 22,
      2010.
 (3)
              The
      address for this beneficial owner is No. 281, Taiping Road, Taiping
      District, Harbin, Heilongjiang Province, China
  150050.
 
 (4)
              Includes
      17,850,000 shares of Common Stock owned by Celebrate Fortune Company
      Limited, an entity controlled by Mr. Li
  Shaoming.
 (5)
              Includes
      3,159,450 shares of Common Stock owned by Total Prosperity Company Ltd, an
      entity controlled by Mr. Pi
Dianjun.
 (6)
              Includes
      2,975,000 shares of Common Stock owned by New BVI Co., an entity
      controlled by Mr. Tuya Wulan.
 (7)
              Includes
      4,278,000 shares of Common Stock owned by New China Wealth Sources Co., an
      entity controlled by Mr. Cheung
Yunman.
 
 The
following table provides aggregate information as of October 31, 2009 with
respect to all compensation plans (including individual compensation
arrangements) under which equity securities are authorized for
issuance.  As of October 31, 2009, no shares of our common stock have
been reserved for issuance under either the 2003 Omnibus Securities Plan nor
2007 Non-Qualified Company Stock Grant and Option Plan.
  38
 
 A
                          
                          
                          B
                          
                          
                          CPlan Category
                          
                          Number of securities to be
                            issued upon exercise of
                            outstanding options, and
                            warrants
                          
                          
                          Weighted-average exercise
                            price of outstanding
                            options, and warrants
                          
                          
                          Number of securities
                            remaining available for
                            future issuance under
                            equity compensation plans
                            (excluding securities
                            reflected in column A)Equity
      compensation plans approved by security holders
                          
                          
                          0
                          
                          
                          $
                          0.00
                          
                          
                          
                          3,509,678Equity
      compensation plans not approved by security holders
                          
                          
                          0
                          
                          
                          $
                          0.00
                          
                          
                          
                          200,000Total
                          
                          
                          0
                          
                          
                          $
                          0.00
                          
                          
                          
                          3,709,678
 
 Item
13. Certain Relationships and Related Transactions, and Director
Independence
 
 Transactions
with Related Persons
 
 Li
Shaoming our chairman, chief executive officer and president, is also chairman
and a 50% shareholder of Stock Co.  We lease property and a plant from
Stock Co.  Our rental expenses for this lease during the years ended
October 31, 2009 and 2008 amounted to $615,594 and $596,024,
respectively.
 
 During
the years ended October 31, 2009 and 2008, we sold goods in the amount of
$430,889 and $0, respectively, to Heilongjiang Renhuang Pharmaceutical Limited,
a company in which Mr. Li is a major shareholder.
 
 On
October 12, 2009, we through our  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.  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 October 31, 2009.
 
 On
September 1, 2009, we through our wholly-owned 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.  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 October
31, 2009.
 
 As of
October 31, 2009, we had a net amount due from Stock Co. of
$130,199.  The net 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 Renhuang China in 2006, paid for by Stock Co.
on our behalf.  As of October 31, 2008, we had a net amount due to
Stock Co, of $159,664.  This amount consists of $248,762 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 $408,426 of professional
fees in connection with the acquisition of Renhuang China in 2006, paid for by
Stock Co. on the Company’s behalf.
 
 Review,
Approval or Ratification of Transactions with Related Persons
 
 Although
we have not adopted formal procedures for the review, approval or ratification
of transactions with related persons, we adhere to a general policy that such
transactions should only be entered into if they are on terms that, on the
whole, are no more favorable, or no less favorable, than those available from
unaffiliated third parties and their approval is in accordance with applicable
law.  Such transactions require the approval of our board of
directors.  The above related party transactions were approved by our
board of directors.
  39
  Director
Independence
 
 We do not
have any independent directors as the term is defined under the NASDAQ
rules.
 
 Item
14. Principal Accountant Fees and Services
 
 As
previously disclosed, on January 13, 2010, we dismissed MSPC as our independent
registered public accounting firm and engaged Windes & McClaughry
Accountancy Corporation (“W&M”) as our new independent registered public
accounting firm for fiscal year ended October 31, 2009. Our board of directors
recommended, authorized, and approved the decision to dismiss MSPC as our
independent registered public accounting firm and to engage W&M to serve as
our independent registered public accounting firm.
 
 Audit
Fees
 
 During
the year ended October 31, 2009, MSPC’s and W&M’s fees were approximately
$60,000 and $67,500, respectively.  During the year ended October 31,
2008, MSPC’s and  W&M’s fees were approximately $200,000 and $0,
respectively  The fees were for professional services for the audit of
our financial statements and review of financial statements included in our
Forms 10-K and 10-Q’s, as applicable.
 
 Audit-Related
Fees
 
 During
the years ended October 31, 2009 and 2008, there were no fees relating to the
performance of any other  audit or review of our financial statements
by either MSPC or W&M.
 
 Tax
Fees
 
 During
the years ended October 31, 2009 and 2008, there were no fees relating to
professional tax services by either MSPC or W&M.
 
 All
Other Fees
 
 During
the years ended October 31, 2009 and 2008, there were no other fees relating to
services provided by MSPC or W&M.
 
 All
services and fees described above for the years ended October 31, 2009 and 2008
were approved by either the entire board of directors or the Audit Committee.
The Audit Committee’s pre-approval policies and procedures were detailed as to
the particular service and the audit committee was informed of each service and
such policies and procedures did not include the delegation of the audit
committee’s responsibilities.
 
 The
above-mentioned fees are set forth as follows in tabular form:
 
 2009
                      
                      
                      2008Total
      Audit Fees
                      
                      $
                      127,500
                      
                      
                      $
                      200,000Total
      Audit Related Fees
                      
                      $
                      -0-
                      
                      
                      $
                      -0-Total
      Tax Fees
                      
                      $
                      -0-
                      
                      
                      $
                      -0-Total
      of All Other Fees
                      
                      
                      -0-
                      
                      
                      
                      -0-
  40
  PART
IV
 
 Item
15. Exhibits and Financial Statement Schedules
 
 Financial
Statements
 
 The
following documents are filed as part of this Annual Report:
 
 (a)
              Financial
      Statements:
 PageReport
      of Windes & McClaughry Accountancy Corporation
                  F-2Report
      of MSPC Certified Public Accountants and Advisors, A Professional
      Corporation
                  F-3Consolidated
      Balance Sheets at October 31, 2009 and 2008
                  F-4Consolidated
      Statements of Operations for the Years Ended October 31, 2009 and
      2008
                  F-5Consolidated
      Statements of Changes in Stockholders’ Equity and Accumulated Other
      Comprehensive Income for the Years Ended October 31, 2009 and
      2008
                  F-6Consolidated
      Statements of Cash Flows for the Years Ended October 31, 2009 and
      2008
                  F-7Notes
      to Consolidated Financial Statements
                  F-8-F-23
 
 Exhibits
 The
following exhibits are filed as a part of this Annual Report.
  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*10.4
                      
                      English
      translation of Purchase Agreement for Patents dated September 1,
      2009*10.5
                      
                      English
      translation of Purchase Agreement for Ah City Natural and
      Biopharmaceutical Plant dated October 12, 2009*21.1
                      
                      Subsidiaries
      of the registrant(2)23.1
                      
                      Consent
      of MSPC*23.2
                      
                      Consent
      Of Windes & McClaughry Accountancy Corporation*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.
  41
  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:
      January 29, 2010
                          RENHUANG
      PHARMACEUTICALS, INC.By:
                          /s/ Li ShaomingLi
      Shaoming, Chief Executive Officer and President(Principal
      Executive Officer)Date:
      January 29, 2010
                          By:
                          /s/ Yan Yi ChenYan
      Yi Chen, Chief Financial Officer(Principal
      Accounting and Financial
Officer)
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following person on behalf of the registrant and in the
capacity and on the date indicated.
 
 Signature(s)
                
                Title(s)
                
                Date/s/
      Li Shaoming
                
                ChairmanLi
      Shaoming
                
                
                
                January
      29, 2010
  42





RENHUANG
PHARMACEUTICALS, INC.


CONSOLIDATED
BALANCE SHEETS




October
31, 2009





TABLE
OF CONTENTS




Report
      of Independent Registered Public Accounting Firm
                    F2Report
      of Independent Registered Public Accounting Firm
                    F3Consolidated
      Balance Sheets
                    F4Consolidated
      Statements of Operations and Comprehensive Income
                    F5Consolidated
      Statements of Changes in Shareholders’ Equity
                    F6Consolidated
      Statements of Cash Flows
                    F7Footnotes
      to Consolidated Financial Statements
                    F8-F23




F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and
 Stockholders
of Renhuang Pharmaceuticals, Inc.
 
 We have
audited the accompanying consolidated balance sheet of Renhuang Pharmaceuticals,
Inc. as of October 31, 2009, and the related consolidated statements of
operations and comprehensive income, shareholders’ equity and cash flows for the
year ended October 31, 2009. Renhuang Pharmaceuticals, Inc.’s management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Renhuang Pharmaceuticals
Inc. as of October 31, 2009, and the results of their operations and their cash
flows for the year ended October 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
  /s/
Windes & McClaughry
 Windes
& McClaughry Accountancy Corporation
  Long
Beach, California
 January
29, 2010




F-2





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of
 Renhuang
Pharmaceuticals, Inc.
 
 We have
audited the accompanying consolidated balance sheet of Renhuang Pharmaceuticals,
Inc. (the "Company"), as of October 31, 2008, and the related consolidated
statements of income and comprehensive income, changes in shareholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
October 31, 2008, and the results of their operations and cash flows for
the year then ended, in conformity with U.S. generally accepted accounting
principles.
 
 /s/
MSPC
 Certified
Public Accountants and Advisors
 A
Professional Corporation
 
 New York,
New York
 August 28,
2009, except as to the restatement discussed in Note 19 to the
consolidated financial statements for which the date is November 25,
2009


F-3





RENHUANG
PHARMACEUTICALS, INC.


CONSOLIDATED
BALANCE SHEETS




Note
                
                
                October 31,
                  2009
                
                
                October 31,
                  2008US$
                
                
                US$ASSETS
                
                
                
                
                
                
                
                RestatedCurrent
      assets:Cash
      and cash equivalents
                
                
                
                
                
                8,111,514
                
                
                
                9,747,693Trade
      receivables, net
                
                7
                
                
                
                23,203,410
                
                
                
                20,844,479Due
      from related parties
                
                11
                
                
                
                130,199
                
                
                
                -Inventory,
      net
                
                9
                
                
                
                3,024,016
                
                
                
                2,625,385Prepayments
                
                
                
                
                
                89,281
                
                
                
                33,695Other
      receivables, net
                
                8
                
                
                
                102,613
                
                
                
                133,642Total
      current assets
                
                
                
                
                
                34,661,033
                
                
                
                33,384,894Property
      and equipment, net
                
                10
                
                
                
                2,352,163
                
                
                
                2,620,949Deposits
                
                11
                
                
                
                16,137,000
                
                
                
                -Total
      assets
                
                
                
                
                
                53,150,196
                
                
                
                36,005,843LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilitiesCurrent
      liabilities:Accounts
      payable
                
                
                
                
                
                369,329
                
                
                
                193,934Value
      added tax payable
                
                
                
                
                
                1,186,642
                
                
                
                693,607Due
      to related parties
                
                11
                
                
                
                -
                
                
                
                159,664Accrued
      employee benefits
                
                
                
                
                
                1,136,267
                
                
                
                720,498Other
      payable
                
                
                
                
                
                -
                
                
                
                193,384Total
      current liabilities
                
                
                
                
                
                2,692,238
                
                
                
                1,961,087Commitments
      and Contingencies
                
                16Shareholders’
      equityPreferred
      stock (no par value, 1,000,000 shares authorized; none issued and
      outstanding as of October 31, 2009 and 2008)
                
                13
                
                
                
                -
                
                
                
                -Common
      stock ($0.001 par value, 100,000,000 shares
                  authorized;
      37,239,536 and 35,096,680 issued and
                  outstanding
      as of October 31, 2009 and 2008, respectively)
                
                13
                
                
                
                37,240
                
                
                
                35,097Additional
      paid-in capital
                
                
                
                
                
                7,596,525
                
                
                
                6,595,400Common
      stock warrants
                
                14
                
                
                
                496,732
                
                
                
                -Reserves
                
                15
                
                
                
                3,372,697
                
                
                
                2,867,674Accumulated
      other comprehensive income
                
                
                
                
                
                3,367,659
                
                
                
                3,301,314Retained
      earnings
                
                
                
                
                
                35,587,105
                
                
                
                21,245,271Total
      shareholders’ equity
                
                
                
                
                
                50,457,958
                
                
                
                34,044,756Total
      liabilities and shareholders’ equity
                
                
                
                
                
                53,150,196
                
                
                
                36,005,843





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





F-4





RENHUANG
PHARMACEUTICALS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


For the year ended October 31,Note
                      
                      
                      2009
                      
                      
                      2008US$
                      
                      
                      US$RestatedSales,
      net
                      
                      
                      
                      
                      
                      43,411,562
                      
                      
                      
                      34,474,490Cost
      of goods sold
                      
                      
                      
                      
                      
                      20,311,410
                      
                      
                      
                      15,980,638Gross
      profit
                      
                      
                      
                      
                      
                      23,100,152
                      
                      
                      
                      18,493,852Operating
      and administrative expenses:Sales
      and distribution
                      
                      
                      
                      
                      
                      3,649,820
                      
                      
                      
                      3,318,418General
      and administrative
                      
                      
                      
                      
                      
                      2,117,114
                      
                      
                      
                      2,877,516Research
      and development
                      
                      
                      
                      
                      
                      2,529,085
                      
                      
                      
                      2,124,511Total
      operating expenses
                      
                      
                      
                      
                      
                      8,296,019
                      
                      
                      
                      8,320,445Income
      from operations
                      
                      
                      
                      
                      
                      14,804,133
                      
                      
                      
                      10,173,407Other
      income:Interest
      income
                      
                      
                      
                      
                      
                      42,724
                      
                      
                      
                      85,993Other
      income, net
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      31,699Income
      from operations before income tax expenses
                      
                      
                      
                      
                      
                      14,846,857
                      
                      
                      
                      10,291,099Income
      tax expenses
                      
                      5
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      income
                      
                      
                      
                      
                      
                      14,846,857
                      
                      
                      
                      10,291,099Other
      comprehensive income:Cumulative
      currency translation adjustments
                      
                      
                      
                      
                      
                      66,345
                      
                      
                      
                      2,391,856Total
      comprehensive income
                      
                      
                      
                      
                      
                      14,913,202
                      
                      
                      
                      12,682,955Earnings
      per common stock- Basic
                      
                      
                      
                      
                      
                      0.41
                      
                      
                      
                      0.29Earnings
      per common stock - Diluted
                      
                      
                      
                      
                      
                      0.41
                      
                      
                      
                      0.29Weighted
      average common stock outstandingBasic
                      
                      
                      
                      
                      
                      36,088,853
                      
                      
                      
                      35,096,681Diluted
                      
                      
                      
                      
                      
                      36,088,853
                      
                      
                      
                      35,096,681





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





F-5





RENHUANG
PHARMACEUTICALS, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY





Common
      stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Accumulated($0.001
      par value)
                    
                    
                    Additional
                    
                    
                    Common
                    
                    
                    
                    
                    
                    Other
                    
                    
                    
                    
                    
                    TotalNumber
      of
                    
                    
                    Par
                    
                    
                    Paid-in
                    
                    
                    Stock
                    
                    
                    Reserves
                    
                    
                    Comprehensive
                    
                    
                    Retained
                    
                    
                    Shareholders’Shares
                    
                    
                    Value
                    
                    
                    Capital
                    
                    
                    Warrants
                    
                    
                    
                    
                    
                    Income
                    
                    
                    Earnings
                    
                    
                    EquityUS$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$Balance
      as of November 1, 2007
                    
                    
                    35,096,680
                    
                    
                    
                    35,097
                    
                    
                    
                    6,595,400
                    
                    
                    
                    31,699
                    
                    
                    
                    1,841,734
                    
                    
                    
                    909,458
                    
                    
                    
                    11,980,112
                    
                    
                    
                    21,393,500Cancellation
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (31,699
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (31,699
                    )Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,291,099
                    
                    
                    
                    10,291,099Appropriation
      to statutory reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,025,940
                    
                    
                    
                    -
                    
                    
                    
                    (1,025,940
                    )
                    
                    
                    -Currency
      translation adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,391,856
                    
                    
                    
                    -
                    
                    
                    
                    2,391,856Balance as of October
      31, 2008 (Restated)
                    
                    
                    35,096,680
                    
                    
                    
                    35,097
                    
                    
                    
                    6,595,400
                    
                    
                    
                    -
                    
                    
                    
                    2,867,674
                    
                    
                    
                    3,301,314
                    
                    
                    
                    21,245,271
                    
                    
                    
                    34,044,756Common
      stock issued
                    
                    
                    2,142,856
                    
                    
                    
                    2,143
                    
                    
                    
                    1,001,125
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,003,268Warrants
      issued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    496,732
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    496,732Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,846,857
                    
                    
                    
                    14,846,857Appropriation
      to statutory reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    505,023
                    
                    
                    
                    -
                    
                    
                    
                    (505,023
                    )
                    
                    
                    -Currency
      translation adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    66,345
                    
                    
                    
                    -
                    
                    
                    
                    66,345Balance
      as of October 31, 2009
                    
                    
                    37,239,536
                    
                    
                    
                    37,240
                    
                    
                    
                    7,596,525
                    
                    
                    
                    496,732
                    
                    
                    
                    3,372,697
                    
                    
                    
                    3,367,659
                    
                    
                    
                    35,587,105
                    
                    
                    
                    50,457,958





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





F-6




RENHUANG
PHARMACEUTICALS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





For
      the years ended October 31,2009
                      
                      
                      2008US$
                      
                      
                      US$RestatedCash
      flows from operating activities:Net
      income
                      
                      
                      14,846,857
                      
                      
                      
                      10,291,099Adjustments
      to reconcile net income to operating activities:Depreciation
      of property and equipment
                      
                      
                      356,440
                      
                      
                      
                      339,257Allowance
      for doubtful accounts
                      
                      
                      -
                      
                      
                      
                      243,282Warrants
      cancelled
                      
                      
                      -
                      
                      
                      
                      (31,699
                      )Changes
      in assets and liabilities:Increase
      in trade receivables
                      
                      
                      (2,328,833
                      )
                      
                      
                      (11,431,340
                      )(Increase)
      decrease in due from related parties
                      
                      
                      (275,476
                      )
                      
                      
                      271,198Increase
      in inventory, net
                      
                      
                      (394,750
                      )
                      
                      
                      (1,513,512
                      )Increase
      in prepayments
                      
                      
                      (55,491
                      )
                      
                      
                      (22,109
                      )Decrease
      in other receivables, net
                      
                      
                      31,180
                      
                      
                      
                      112,338Increase
      in accounts payable
                      
                      
                      174,979
                      
                      
                      
                      22,642Increase
      in value added tax payable
                      
                      
                      491,666
                      
                      
                      
                      14,197Increase
      in accrued employee benefits
                      
                      
                      414,433
                      
                      
                      
                      300,480(Decrease)
      increase in other payable
                      
                      
                      (193,472
                      )
                      
                      
                      176,226Net
      cash provided by (used in) operating activities
                      
                      
                      13,067,533
                      
                      
                      
                      (1,227,941
                      )Cash
      flows from investing activities:Deposits
      for land use right and properties
                      
                      
                      (14,670,000
                      )
                      
                      
                      -Deposits
      for patents
                      
                      
                      (1,467,000
                      )
                      
                      
                      -Purchase
      of property and equipment
                      
                      
                      (84,371
                      )
                      
                      
                      (110,760
                      )Net
      cash used in investing activities
                      
                      
                      (16,221,371
                      )
                      
                      
                      (110,760
                      )Cash
      flows from financing activities:Proceeds
      from share issues
                      
                      
                      1,500,000
                      
                      
                      
                      -Net
      cash provided by financing activities
                      
                      
                      1,500,000
                      
                      
                      
                      -Effect
      of exchange rate changes on cash
                      
                      
                      17,659
                      
                      
                      
                      932,791Net
      decrease in cash and cash equivalents
                      
                      
                      (1,636,179
                      )
                      
                      
                      (405,910
                      )Cash
      and cash equivalents, beginning of year
                      
                      
                      9,747,693
                      
                      
                      
                      10,153,603Cash
      and cash equivalents, end of year
                      
                      
                      8,111,514
                      
                      
                      
                      9,747,693Supplemental
      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.





F-7





RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





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 consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“US GAAP”) and are expressed in terms of US dollars.




In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162.  This statement modifies the
Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only
two levels of GAAP, authoritative and nonauthoritative accounting literature.
Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also
known collectively as the “Codification,” is considered the single source of
authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC. 
Nonauthoritative guidance and literature would include, among other things, FASB
Concepts Statements, American Institute of Certified Public Accountants Issue
Papers and Technical Practice Aids and accounting textbooks. The Codification
was developed to organize GAAP pronouncements by topic so that users can more
easily access authoritative accounting guidance.  It is organized by topic,
subtopic, section, and paragraph, each of which is identified by a numerical
designation.  This statement applies beginning in third quarter
2009.  All accounting references have been updated, and therefore SFAS
references have been replaced with ASC references.
 
 The
Company operates in one operating segment in accordance with accounting guidance
FASB ASC Topic 280, “Segment
Reporting.”Our CEO has been identified as the chief operating decision
maker as defined by FASB ASC Topic 280.


Principles
of consolidation





The
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 October 31, 2009, 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.





F-8




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





Foreign
currency translation





The
Company’s principal country of operations is in 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
October 31, 2009 and 2008 the exchange rate was RMB6.82 and RMB6.82,
respectively. Translation adjustment totaled $66,345 and $2,391,856 for the year
ended October 31, 2009 and 2008, respectively.





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 October 31, 2009 and
2008.  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 years ended October 31, 2009 and 2008.  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 years ended October
31, 2009 and 2008.


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




F-9




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





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 operationswhenever 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 October 31, 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 October 31, 2009
and 2008 the fair value of cash, accounts 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 and/or liabilities carried at fair value on a
recurring basis at October 31, 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





F-10





RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





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
October 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 year.  At year 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
October 31, 2009 and 2008, the Company has accrued $3,020,898 and $3,893,304,
respectively, for sales rebates.   For the year ended October 31,
2009 and 2008, the Company has deducted sales rebates in the amount of
$8,848,658 and $8,229,838, respectively, from sales.  Sales rebates are
calculated based on terms specified in contracts with individual
distributors.





Sales
returns and allowances





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





Cost
of goods sold





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





Sales
and marketing





Sales and
marketing costs consist primarily of advertising and market promotion expenses,
and other overhead expenses incurred by the Group’s sales and marketing
personnel. Advertising expenses amounted to $3,590,965 and $3,155,063 during the
years ended October 31, 2009 and 2008 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.
  There was
no share-based compensation in the years ended October 2009 and
2008.
  F-11





RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





Taxation





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





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





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





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





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 two year 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 October 31, 2009 for U.S. or additional foreign
withholding taxes on approximately $35,587,105 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 October 31, 2009, 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, 2008, 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.





F-12





RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





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.





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 are 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
represent the activity for a period net of related tax and were $14,913,202 and
$12,682,955 for the year ended October 31, 2009 and 2008,
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
$66,345 and $2,391,856 as of October 31, 2009 and 2008,
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.




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.
  Basic and
diluted earnings per share are the same as there were no dilutive effects of the
warrants outstanding as of October 31, 2009.


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.





F-13





RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





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 October 31, 2009 and 2008, 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 Company has not determined the impact that
this guidance may have on its financial statements.
 
 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
Company has not determined the impact that this guidance may have on its
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 dependant 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 and time deposits





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 $8,111,514 and $9,747,693, as of October 31, 2009 and 2008,
respectively.  No cash balances were restricted as at October 31, 2009
and 2008.





As of
October 31, 2009 and 2008 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.  No individual
customer accounted for more than 10% of net revenues during the years ended
October 31, 2009 and 2008.




Siberian
Ginseng (Acanthopanax) Series accounted for 54% and 53%, 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.





(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 Peoples
Republic of China.





(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 2009 and 2008.





F-14





RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





(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:


Year
      ended October 31,2009
                    
                    
                    2008US$
                    
                    
                    US$Tax
      savings
                    
                    
                    3,711,714
                    
                    
                    
                    2,572,774Benefit
      per share:  Basic and Diluted
                    
                    
                    0.10
                    
                    
                    
                    0.07





Had the
tax exemption not been in place for the years ended October 31, 2009 and 2008,
the Company estimates the following proforma financial statement
impact:





Year
      ended October 31,2009
                      
                      
                      2008US$
                      
                      
                      US$Net
      income before tax provision, as reported
                      
                      
                      14,846,857
                      
                      
                      
                      10,291,099Less
      Tax savings
                      
                      
                      (3,711,714
                      )
                      
                      
                      (2,572,774
                      )Proforma
      Net income
                      
                      
                      11,135,143
                      
                      
                      
                      7,718,325Proforma
      Net income per share:  Basic and Diluted
                      
                      
                      0.31
                      
                      
                      
                      0.22





6.           EARNINGS
PER SHARE





When
calculating diluted earnings per share for stock option 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 year ended October 31, 2009:Net
      incomeBasic
      EPS income available to common shareholders
                                        
                                        
                                        14,846,857
                                        
                                        
                                        
                                        36,088,853
                                        
                                        
                                        
                                        0.41Effect
      of dilutive securities:Warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Diluted
      EPS income available to common shareholders
                                        
                                        
                                        14,846,857
                                        
                                        
                                        
                                        36,088,853
                                        
                                        
                                        
                                        0.41For
      the year ended October 31, 2008:Net
      incomeBasic
      EPS income available to common shareholders
                                        
                                        
                                        10,291,099
                                        
                                        
                                        
                                        35,096,681
                                        
                                        
                                        
                                        0.29Effect
      of dilutive securities:Warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Diluted
      EPS income available to common shareholders
                                        
                                        
                                        10,291,099
                                        
                                        
                                        
                                        35,096,681
                                        
                                        
                                        
                                        0.29





For the
year ended October 31, 2009, 1,071,428 warrants were excluded from the
calculation of diluted income per share because the conversion price or exercise
price exceeded the average price of the Company’s common stock.





For the
year ended October 31, 2008, there were no securities or other contracts to
issue common stock, that need to be considered in the diluted earnings per share
calculation.





F-15




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





7.           TRADE
RECEIVABLES, NET





The trade
receivables amount included in the consolidated balance sheets for the years
ended October 31, 2009 and 2008 were as follows:





2009
                      
                      
                      2008US$
                      
                      
                      US$Trade
      receivables
                      
                      
                      26,667,816
                      
                      
                      
                      25,180,695Less:
      Sales rebates
                      
                      
                      (3,020,898
                      )
                      
                      
                      (3,893,304
                      )Less:
      Allowance for doubtful accounts
                      
                      
                      (443,508
                      )
                      
                      
                      (442,912
                      )Trade
      receivables, net
                      
                      
                      23,203,410
                      
                      
                      
                      20,844,479





8.           OTHER
RECEIVABLES, NET





The other
receivables amount included in the consolidated balance sheets for the years
ended October 31, 2009 and 2008 were as follows:





2009
                      
                      
                      2008US$
                      
                      
                      US$Other
      receivables
                      
                      
                      462,980
                      
                      
                      
                      493,525Less:
      Allowance for doubtful accounts
                      
                      
                      (360,367
                      )
                      
                      
                      (359,883
                      )Other
      receivables, net
                      
                      
                      102,613
                      
                      
                      
                      133,642





9.           INVENTORY,
NET





The
inventory amounts included in the consolidated balance sheets for the years
ended October 31, 2009 and 2008 comprised of:





2009
                        
                        
                        2008US$
                        
                        
                        US$Raw
      materials
                        
                        
                        1,530,283
                        
                        
                        
                        1,533,472Work-in-progress
                        
                        
                        1,006,984
                        
                        
                        
                        906,957Finished
      goods
                        
                        
                        550,982
                        
                        
                        
                        249,103Less:  Inventory
      reserves
                        
                        
                        (64,233
                        )
                        
                        
                        (64,147
                        )Total
      inventories, net
                        
                        
                        3,024,016
                        
                        
                        
                        2,625,385





10.           PROPERTY
AND EQUIPMENT, NET





Property
and equipment and related accumulated depreciation as of October 31 2009 and
2008 were as follows:





2009
                          
                          
                          2008US$
                          
                          
                          US$Machinery
      and equipment
                          
                          
                          3,435,421
                          
                          
                          
                          3,350,762Office
      equipment and furnishings
                          
                          
                          53,086
                          
                          
                          
                          53,015Motor
      vehicles
                          
                          
                          54,749
                          
                          
                          
                          50,3883,543,256
                          
                          
                          
                          3,454,165Less:
      Accumulated depreciation
                          
                          
                          (1,191,093
                          )
                          
                          
                          (833,216
                          )Net
      book value
                          
                          
                          2,352,163
                          
                          
                          
                          2,620,949





Depreciation
expense for the years ended October 31 2009 and 2008 was $356,440 and $339,257,
respectively, of which $341,429   and $325,679 were included as a
component of cost of goods sold in the respective years.  No assets
were pledged for borrowings as at October 31, 2009 and 2008.





F-16




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





11.
            RELATED
      PARTY TRANSACTIONS





Due
from/to related parties included in the consolidated balance sheets for the
years ended October 31, 2009 and 2008 comprised of:





2009
                    
                    
                    2008US$
                    
                    
                    US$Due
      from related parties:Advances
      (1)
                    
                    
                    130,199
                    
                    
                    
                    -Deposits
      (2)
                    
                    
                    16,137,000
                    
                    
                    
                    -Total
                    
                    
                    16,267,199
                    
                    
                    
                    -





2009
                          
                          
                          2008US$
                          
                          
                          US$Due
      to related parties:Advances
      (1)
                          
                          
                          -
                          
                          
                          
                          159,664Total
                          
                          
                          -
                          
                          
                          
                          159,664





(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.





As of
October 31, 2008, the Comapny has a net amount due to Stock Co, of
$159,664.  This amount consists of $248,762 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 $408,426 of professional fees in
connection with the acquisition of Harbin Renhuang Pharmaceutical Company
Limited in 2006, paid for by Stock Co on the Company behalf.





(2)
Deposits





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.  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 October 31, 2009.





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.  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 October 31, 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 year ended October 2009 and 2008
amounted to $615,594 and $596,024, respectively.


.


During
the year ended October 31, 2009 and 2008, the Company sold goods in the amount
of $430,889 and $0, 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 $414,437 and $349,112 for the years
ended October 31, 2009 and 2008, respectively. The PRC government is responsible
for the medical benefits and ultimate pension liability to these
employees.





F-17




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





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 October
31, 2009 and 2008, no preferred stocks have been issued.





(2)  Common
Stock and Equity Transactions





The
Company issued 2,142,856 shares of its common stock and 1,071,428 warrants with
an exercise price of $0.875 per share, to Allied Merit International Investments
Inc and Griffin Ventures Ltd, for a total consideration of $1,500,000 paid in
cash.





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.




(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.


.


As of
October 31, 2009, there were no options or other financial instruments
outstanding under either the 2007 Plan or  2003 Plan.





(3)  Warrants





During
the year ended October 31, 2008, 25,000 warrants with an average exercise price
of $2.81 were cancelled.





On May
15, 2009 1,071,428 warrants, with an exercise price of $0.875 per warrant with
an expiration date in 2012, were issued to Merit International Investment Inc
and Griffin Ventures Ltd.





The
Company estimates the fair value of warrants using a Black-Scholes option
pricing valuation model, consistent with the accounting guidance FASB Topic ASC
815. Key inputs and assumptions used to estimate the fair value of warrants
include the grant price of the award, the expected warrant term, volatility of
the Company’s stock, the risk-free rate and the Company’s dividend yield.
Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by grantees, and subsequent events are not indicative
of the reasonableness of the original estimates of fair value made by the
Company.




The fair
value of the warrants is estimated on the date of the grant using the
Black-Scholes option pricing model. No dividends were assumed due to the nature
of the Company’s current business strategy. The following table presents the
assumptions used for warrants granted:





Expected
      volatility
                    
                    
                    306.6
                    %Expected
      dividends
                    
                    
                    0
                    %Expected
      term (in years)
                    
                    3
      yearsRisk-free
      rate
                    
                    
                    1.375
                    %




F-18




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





As of
October 31, 2009, 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, 2007
                    
                    
                    25,000
                    
                    
                    
                    2.81Warrants
      granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Expired/cancelled
                    
                    
                    (25,000
                    )
                    
                    
                    2.81Outstanding
      warrants at October 31, 2008
                    
                    
                    -
                    
                    
                    
                    -Warrants
      granted
                    
                    
                    1,071,428
                    
                    
                    
                    0.88Exercised
                    
                    
                    -
                    
                    
                    
                    -Expired/cancelled
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      warrants at October 31, 2009
                    
                    
                    1,071,428
                    
                    
                    
                    0.88





Information
regarding the warrants outstanding at October 31, 2009 is summarized as
below:





Warrants outstanding atOctober 31, 2009Weighted
                                              
                                              WeightedAverage
                                              
                                              AverageRemaining
                                              
                                              ExerciseExercise Prices
                                              
                                              Warrants
                                              
                                              Contractual
                                              
                                              PriceUS$
                                              
                                              Outstanding
                                              
                                              Life (years)
                                              
                                              US$0.88
                                              
                                              1,071,428
                                              
                                              2.5
                                              
                                              0.88





15.           STATUTORY
RESERVES





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





2009
                  
                  
                  2008US$
                  
                  
                  US$Statutory
      surplus reserve
                  
                  
                  3,090,320
                  
                  
                  
                  2,585,297Public
      welfare fund
                  
                  
                  282,377
                  
                  
                  
                  282,377Total
                  
                  
                  3,372,697
                  
                  
                  
                  2,867,674




(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.





F-19




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008


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 $10,514.





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 $51,345.





Minimum
lease payments due by year for the next five years and thereafter are as
follow:





Total
                    
                    
                    Related
      party
                    
                    
                    Third
      partyYear
      ended October 31,
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$2010
                    
                    
                    371,154
                    
                    
                    
                    308,070
                    
                    
                    
                    63,0842011
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Thereafter
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -371,154
                    
                    
                    
                    308,070
                    
                    
                    
                    63,084





During
the year ended October 31, 2009 and 2008, the Group incurred rental expenses in
the amount of $750,219 and $669,824, respectively.





(2)  Capital
commitments





Capital
commitments for purchase of land use right, property and equipment and
production patents as of October 31, 2009 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 October 31, 2009 to January 29, 2009, 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
January 29, 2009 have not been evaluated in the consolidated financial
statements as of October 31, 2009.




On
January 13, 2010, we entered into an employment agreement with Ms. Chen, who
became our chief financial officer on that date.  The agreement has a
three-year term and provides that Ms. Chen will receive a base salary of
approximately $58,700, and will be entitled to receive an option grant under the
2007 Non-Qualified Company Stock Grant and Option Plan to purchase 50,000
shares of our common stock, at an exercise price of $1.00 per share, on the
commencement date and on the first and second anniversary thereafter (for a
total of 150,000 shares). The options will be subject to a one year vesting
starting from each grant date. Ms. Chen is also eligible to receive
discretionary bonuses at times and in amounts determined by our Compensation
Committee and certain other benefits available to executive
officers.





F-20




RENHUANG
PHARMACEUTICALS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


October
31, 2009 and 2008





19.           RESTATEMENT





After
reviewing the detailed data in the issued audited consolidated financial
statements and certain accounting principles, the Company concluded that the
Company’s previously issued audited consolidated financial statements for the
year ended October 31, 2008, contained errors related to recalculation of sales
rebates.  Consequently, management restated its annual consolidated
financial statements as of October 31, 2008 and for the year
ended.  Theses restatements, as detailed below, were made in
accordance of FASB Topic ASC 250, “Accounting Changes and Error
Corrections”.  No prior period financial statements have been
restated because 2008 is the first year impacted by
restatements.  There was no tax effect as a result of the
restatements.





The
restatements include the adjustments of total assets, total stockholders’
equity, sales, net income and accounts receivable, and other relevant
adjustments, which is recalculation of sales rebates only and no other influence
adversely. The adjustments to the consolidated balance sheet, consolidated
statement of operations and comprehensive income, and consolidated statement of
cash flows are summarized as follows:





CONSOLIDATED
BALANCE SHEETS




AS
OF OCTOBER 31, 2008




Initial
      Filing
                      
                      
                      Restatement
                      
                      
                      RestatedUS$
                      
                      
                      US$
                      
                      
                      US$ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      
                      9,77,696
                      
                      
                      
                      
                      
                      
                      9,747,693Trade
      receivables, net
                      
                      
                      22,588,580
                      
                      
                      
                      (1,744,101
                      )
                      
                      
                      20,844,479Due
      from related parties
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -Inventory,
      net
                      
                      
                      2,625,385
                      
                      
                      
                      
                      
                      
                      
                      2,625,385Prepayments
                      
                      
                      33,695
                      
                      
                      
                      
                      
                      
                      
                      33,695Other
      receivables, net
                      
                      
                      133,642
                      
                      
                      
                      
                      
                      
                      
                      133,642Total
      current assets
                      
                      
                      33,384,894
                      
                      
                      
                      (1,744,101
                      )
                      
                      
                      33,384,894Property
      and equipment, net
                      
                      
                      2,620,949
                      
                      
                      
                      
                      
                      
                      
                      2,620,949Total
      assets
                      
                      
                      37,729,944
                      
                      
                      
                      (1,744,101
                      )
                      
                      
                      36,005,843LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilitiesCurrent
      liabilities:Accounts
      payable
                      
                      
                      193,934
                      
                      
                      
                      
                      
                      
                      
                      193,934Value
      added tax payable
                      
                      
                      693,607
                      
                      
                      
                      
                      
                      
                      
                      693,607Due
      to related parties
                      
                      
                      159,664
                      
                      
                      
                      
                      
                      
                      
                      159,664Accrued
      employee benefits
                      
                      
                      720,498
                      
                      
                      
                      
                      
                      
                      
                      720,498Other
      payable
                      
                      
                      193,384
                      
                      
                      
                      
                      
                      
                      
                      193,384Total
      current liabilities
                      
                      
                      1,961,087
                      
                      
                      
                      
                      
                      
                      
                      1,961,087Commitments
      and ContingenciesShareholders’
      equityPreferred
      stock (no par value, 1,000,000 shares authorized; none issued and
      outstanding as of October 31, 2008)
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -Common
      stock ($0.001 par value, 100,000,000 shares
                        authorized;
      35,096,680 issued and
                        outstanding
      as of October 31, 2008)
                      
                      
                      35,097
                      
                      
                      
                      
                      
                      
                      
                      35,097Additional
      paid-in capital
                      
                      
                      6,595,400
                      
                      
                      
                      
                      
                      
                      
                      6,595,400Common
      stock warrants
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -Reserves
                      
                      
                      3,036,617
                      
                      
                      
                      (168,943
                      )
                      
                      
                      2,867,674Accumulated
      other comprehensive income
                      
                      
                      3,355,986
                      
                      
                      
                      (54,672
                      )
                      
                      
                      3,301,314Retained
      earnings
                      
                      
                      22,765,757
                      
                      
                      
                      (1,520,486
                      )
                      
                      
                      21,245,271Total
      shareholders’ equity
                      
                      
                      35,788,857
                      
                      
                      
                      (1,744,101
                      )
                      
                      
                      34,044,756Total
      liabilities and shareholders’ equity
                      
                      
                      37,749,944
                      
                      
                      
                      (1,744,1010
                      
                      
                      
                      36,005,843




F-21





CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR
THE YEAR ENDED OCTOBER 31, 2008




Initial
      Filing
              
              
              Restatement
              
              
              RestatedUS$
              
              
              US$
              
              
              US$Sales,
      net
              
              
              36,163,919
              
              
              
              (1,689,429
              )
              
              
              34,474,490Cost
      of goods sold
              
              
              15,980,638
              
              
              
              
              
              
              
              15,980,638Gross
      profit
              
              
              20,183,281
              
              
              
              (1,689,429
              )
              
              
              18,493,852Operating
      and administrative expenses:Sales
      and distribution
              
              
              3,318,418
              
              
              
              
              
              
              
              3,318,418General
      and administrative
              
              
              2,877,516
              
              
              
              
              
              
              
              2,877,516Research
      and development
              
              
              2,124,511
              
              
              
              
              
              
              
              2,124,511Total
      operating expenses
              
              
              8,320,445
              
              
              
              
              
              
              
              8,320,445Income
      from operations
              
              
              11,862,836
              
              
              
              (1,689,429
              )
              
              
              10,173,407Other
      income:Interest
      income
              
              
              85,993
              
              
              
              
              
              
              
              85,993Other
      income, net
              
              
              31,699
              
              
              
              
              
              
              
              31,699Income
      from operations before income tax expenses
              
              
              11,980,528
              
              
              
              (1,689,429
              )
              
              
              10,291,099Income
      tax expenses
              
              
              -
              
              
              
              
              
              
              
              -Net
      income
              
              
              11,980,528
              
              
              
              (1,689,429
              )
              
              
              10,291,099Other
      comprehensive income:Cumulative
      currency translation adjustments
              
              
              2,446,528
              
              
              
              (54,672
              )
              
              
              2,391,856Total
      comprehensive income
              
              
              14,427,056
              
              
              
              (1,744,101
              )
              
              
              12,682,955Earnings
      per common stock- Basic
              
              
              0.34
              
              
              
              (0.05
              )
              
              
              0.29Earnings
      per common stock - Diluted
              
              
              0.34
              
              
              
              (0.05
              )
              
              
              0.29Weighted
      average common stock outstandingBasic
              
              
              35,096,681
              
              
              
              
              
              
              
              35,096,681Diluted
              
              
              35,096,681
              
              
              
              
              
              
              
              35,096,681





F-22





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEAR ENDED OCTOBER 31, 2008





Initial
      Filing
                
                
                Restatement
                
                
                RestatedUS$
                
                
                US$
                
                
                US$Cash
      flows from operating activities:Net
      income
                
                
                11,980,528
                
                
                
                (1,689,429
                )
                
                
                10,291,099Adjustments
      to reconcile net income to operating activities:Depreciation
      of property and equipment
                
                
                339,257
                
                
                
                
                
                
                
                339,257Allowance
      for doubtful accounts
                
                
                243,282
                
                
                
                
                
                
                
                243,282Warrants
      cancelled
                
                
                (31,699
                )
                
                
                
                
                
                
                (31,699
                )Changes
      in assets and liabilities:Increase
      in trade receivables
                
                
                (13,120,769
                )
                
                
                (1,689,429
                )
                
                
                (11,431,340
                )Decrease
      in due from related parties
                
                
                271,198
                
                
                
                
                
                
                
                271,198Increase
      in inventory, net
                
                
                (1,513,512
                )
                
                
                
                
                
                
                (1,513,512
                )Increase
      in prepayments
                
                
                (22,109
                )
                
                
                
                
                
                
                (22,109
                )Decrease
      in other receivables, net
                
                
                112,338
                
                
                
                
                
                
                
                112,338Increase
      in accounts payable
                
                
                22,642
                
                
                
                
                
                
                
                22,642Increase
      in value added tax payable
                
                
                14,197
                
                
                
                
                
                
                
                14,197Increase
      in accrued employee benefits
                
                
                300,480
                
                
                
                
                
                
                
                300,480Increase
      in other payable
                
                
                176,226
                
                
                
                
                
                
                
                176,226Net
      cash provided by (used in) operating activities
                
                
                (1,227,941
                )
                
                
                
                
                
                
                (1,227,941
                )Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (110,760
                )
                
                
                
                
                
                
                (110,760
                )Net
      cash used in investing activities
                
                
                (110,760
                )
                
                
                
                
                
                
                (110,760
                )Cash
      flows from financing activities:Proceeds
      from share issues
                
                
                -
                
                
                
                
                
                
                
                -Net
      cash provided by financing activities
                
                
                -
                
                
                
                
                
                
                
                -Effect
      of exchange rate changes on cash
                
                
                932,791
                
                
                
                
                
                
                
                932,791Net
      decrease in cash and cash equivalents
                
                
                (405,910
                )
                
                
                
                
                
                
                (405,910
                )Cash
      and cash equivalents, beginning of year
                
                
                10,153,603
                
                
                
                
                
                
                
                10,153,603Cash
      and cash equivalents, end of year
                
                
                9,747,693
                
                
                
                
                
                
                
                9,747,693Supplemental
      disclosure of cash flow information:Cash
      paid during the year for income taxes
                
                
                -
                
                
                
                
                
                
                
                -Interest
      paid during the year
                
                
                -
                
                
                
                
                
                
                
                -




F-23