UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





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





For the quarterly period ended January 31, 2011





o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from                                                                to





Commission File Number: 001-34808





CHINA BOTANIC PHARMACEUTICAL 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)





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


x Yes   o No





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


o Yes   o No





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





Large accelerated filer o
Accelerated filer oNon-accelerated filer   o (Do not check if a smaller

reporting company)
Smaller reporting company x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


o Yes   x No


As ofFebruary 24, 2011, there were 37,239,536 shares of the registrant’s $0.001 par value common stock issued and outstanding.










TABLE OF CONTENTS





PART IItem 1.
Financial Statements

4Condensed Consolidated Balance Sheets as of January 31, 2011 (unaudited) and October 31,   2010 (audited)

5Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended January 31, 2011 and 2010 (unaudited)

6Condensed Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2011 and 2010 (unaudited)

7Notes to the Condensed Consolidated Financial Statements (unaudited)

8Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

37Item 3.
Quantitative and Qualitative Disclosures About Market Risk

43Item 4.
Controls and Procedures

43PART IIItem 1.
Legal Proceedings

44Item 1A.
Risk Factors

44Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

44Item 3.
Defaults Upon Senior Securities

44Item 4.
[Removed and Reserved]

44Item 5.
Other Information

44Item 6.
Exhibits

44Signature Page

46




ii





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





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





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





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





iii


PART I





Item 1.  Financial Statements.





4





CHINA BOTANIC PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS





Note


January 31,2011


October 31,2010(Unaudited)


(Audited)ASSETSCurrent assets:Cash and cash equivalents




$
12,384,621


$
27,826,142Trade receivables, net

5



26,092,584



19,814,438Due from related parties

11



56,424



28,877Inventory, net

7



7,425,234



2,645,616Other receivables, net

6



459,961



200,994Total current assets




$
46,418,824


$
50,516,067Property and equipment, net

8



1,998,403



2,069,460Intangible Assets

9



1,935,435



1,953,617Construction in progress

10



1,867,392Deposits  for properties

11,12



33,701,821



18,605,935Total assets




$
85,921,875


$
73,145,079LIABILITIES AND SHAREHOLDERS’ EQUITYLiabilitiesAccounts payable





486,287



333,555Tax payable





2,073,744



1,064,066Accrued employee benefits

15



1,808,409



1,645,192Warrant Liabilities

16



155,428



342,770Total liabilities




$
4,523,868


$
3,385,583Shareholders’ equityPreferred stock (no par value, 1,000,000 shares authorized; none issued and outstanding as of October 31, 2009 and 2008)

17Common stock ($0.001 par value, 100,000,000 shares, authorized; 37,239,536  issued and outstanding as of October 31, 2009 and 2008, respectively)

17



37,240



37,240Additional paid-in capital





7,653,782



7,627,987Common stock warrants

18



496,732



496,732Reserves

19



3,372,697



3,372,697Accumulated other comprehensive income





5,433,214



4,768,793Retained earnings





64,404,342



53,456,047Total shareholders’ equity





81,398,007



69,759,496Total liabilities and shareholders’ equity




$
85,921,875


$
73,145,079





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





5





CHINA BOTANIC PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME





For the three months ended January 31,Note


2011


2010(Unaudited)


(Unaudited)Sales, net




$
22,625,060


$
17,132,614Cost of goods sold





8,807,787



7,652,638Gross profit





13,817,273



9,479,976Operating and administrative expenses:Sales and distribution





1,329,179



1,138,981General and administrative





659,882



816,969Research and development





180,674



152,364Total operating expenses





2,169,735



2,108,314Income from operations





11,647,538



7,371,662Other income:Interest income





24,189



11,467Other income netIncome before income tax expenses





11,671,727



7,383,129Income tax expenses

13



723,432Net income




$
10,948,295


$
7,383,129Other comprehensive income:Cumulative currency translation adjustments





664,421



2,515Total comprehensive income





11,612,716



7,385,644Earnings per common stock- Basic

14


$
0.29


$
0.20Earnings per common stock - Diluted




$
0.29


$
0.20Weighted average common stock outstanding

14Basic





37,239,536



37,239,536Diluted





37,895,878



37,293,393





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





6





CHINA BOTANIC PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS




For the three months ended January 31,2011


2010US$


US$(Unaudited)


(Unaudited)Cash flows from operating activities:Net income


10,948,295



7,383,129Adjustments to reconcile net income to operating activities:Depreciation


94,091



90,599Amortization


35,253Warrants issued for service






2,344Option granted to directors


25,796Noncash rental expenses


188,202remeasurement of warrants


(187,342
)Changes in assets and liabilities:(Increase)Decrease in trade receivables


(6,077,469
)


2,241,436(Increase)Decrease in due from related parties


(27,177
)


538,947Increase in inventory, net


(4,736,029
)


(290,982
)Decrease in prepayments






89,251Increase in other receivables, net


(256,099
)


(262,378
)Increasein accounts payable


149,153



121,241Increase(Decrease) in tax payable


996,035



(428,884
)Increase in accrued employee benefits


148,081



104,966Net cash provided by (used in) operating activities


1,300,790



9,589,669Cash flows from investing activities:Deposits for land use right and properties


(15,056,160
)Increase in construction in progress


(1,859,436
)Purchase of property and equipment


(5,171
)Net cash used in investing activities


(16,920,767
)Cash flows from financing activities:Net cash provided by financing activitiesEffect of exchange rate changes on cash


178,456



3,266Net (decrease) increase in cash and cash equivalents


(15,441,521
)


9,592,935Cash and cash equivalents, beginning of year


27,826,142



8,111,514Cash and cash equivalents, end of year


12,384,621



17,704,449Supplemental disclosure of cash flow information:Cash paid during the year for income taxesInterest paid during the year




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





7





CHINA BOTANIC PHARMACEUTICAL INC.


NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


January 31, 2011 and 2010





1.  ORGANIZATION AND NATURE OF OPERATION




The accompanying condensed consolidated financial statements include the financial statements of China Botanic Pharmaceutical Inc. (“CBP”) and its subsidiaries.  CBP and its subsidiaries are collectively referred to as the “Company.”




CBP 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 CBP became a non-operating public company.  CBP 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.October 2010

China Botanic Pharmaceutical Inc.





Effective August 28, 2006, CBP 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 CBP




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




8





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




·
Harbin Renhuang Pharmaceutical Company Limited – Investment holding.




·
CBP China – Development, manufacturing and distribution of pharmaceutical products.




CBP 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.




9




2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




a.
Basis of presentation of financial statements





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended October 31, 2010 which are included in the Company’s Form 10-K/A for the year ended October 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 10, 2011.




In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated balance sheets of China Botanic Pharmaceutical Inc. and its subsidiaries as of January 31, 2011, and the results of their operations for the three months ended January 31, 2011 and 2010, and cash flows for the three months ended January 31, 2011 and 2010. The results of operations for the three months ended January 31, 2011 are not necessarily indicative of the results to be expected for the entire year.




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.




b.
Principles of consolidation





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




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




Effective beginning third 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 are not within the parent company’s control. These amounts are now required to be reported as equity instead of as a liability on the balance sheet.  In addition this statement requires net income from noncontrolling minority interest to be shown separately on the consolidated statements of operations and comprehensive income.  As the Company has no noncontrolling interest at January 31, 2011, this change did not have an impact on the Company’s condensed consolidated financial statements.




10




c.
Use of estimates





The preparation of these condensed 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 condensed 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.




d.
Foreign currency translation





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




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




As of January 31, 2011 and October 31, 2010 , the exchange rate was RMB 6.61  and RMB 6.67 , respectively. Translation adjustments totaled $664,421 and $2,515 for the three months ended January 31, 2011 and 2010, respectively.




e.
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 were no restrictions to cash at January 31, 2011 and October 31, 2010.  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.




f.
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 condensed consolidated financial statements net of an allowance for doubtful accounts and sales rebates. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its trade receivables.  Trade receivables outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time the trade receivable is past due, the Company’s previous loss history, the counter party’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off receivables when they are deemed uncollectible, and payments subsequently received on such trade receivables are credited to the allowance for doubtful accounts.  There were no write offs for the three months ended January 31, 2011 and 2010.  The Company does not have any off-balance sheet credit exposure related to its customers.




11




g.
Inventory, net





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




The Company estimates an inventory allowance for excessive, slow moving and obsolete inventories as well as inventory whose carrying value is in excess of net realizable value.  Inventory amounts are reported net of such allowances.  There were no inventory write offs for the three months ended January 31, 2011 and 2010.




h.
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




i.
Intangible assets, net





Intangible assets consist of purchased patents. Intangible assets are carried at cost less accumulated amortization and any impairment. Intangible assets with a finite useful life are amortized using the straight-line method over valid periods varied from 10 to 20 years, which is the estimated economic life of the intangible assets.




12




j.
Accounting for the impairment of 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,” FASB Topic ASC 360, "Intangibles - Goodwill and Others,"and FASB ASC Topic 205 “Presentation of Financial Statements.”  The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows.  Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions.  Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through the three months ended January 31, 2011 and 2010, 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.





k.
Fair value of financial instruments





The Company applies the provisions of accounting guidance, FASB Topic ASC 825 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.  As of January 31, 2011 and October 31, 2010 the carrying value of cash, trade receivables, other receivables, accounts payable, approximated their fair value. All derivatives are recorded at fair value evaluated based on Black-Scholes option model.




l.
Fair value measurements





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




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




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




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




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




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




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




13




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 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.




m.
Revenue recognition





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




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




As of January 31, 2011, the Company has no sales or contracts that included multiple deliverables that would fall under the scope of FASB Topic ASC 605, “Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force.”




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




As of January 31, 2011 and October 31, 2010, the Company has accrued $3,230,479 and $2,141,055, respectively, for sales rebates, which offset the balance of account receivables.  For the three months ended January 31, 2011 and 2010, the Company has deducted sales rebates in the amount of $3,431,869 and $2,402,954, respectively, from sales.  Sales rebates are calculated based on terms specified in contracts with individual distributors.




n.
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.




14




o.
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.




p.
Sales and marketing





Sales and marketing costs consist primarily of advertising and market promotion expenses, and other overhead expenses incurred by the Company’s sales and marketing personnel. Advertising expenses are expensed as incurred and amounted to $1,264,717 and $1,099,875 during the three months ended January 31, 2011 and 2010, respectively.




q.
Research and development





Research and development (“R&D”) consists primarily of cost of materials and overhead expenses by research and development staff. Research and development costs are expensed as incurred. Research and development expenses amounted to $180,674 and $152,364 during the three months ended January 31, 2011 and 2010 respectively.




r.
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 CBP 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 CBP China contributes the balance of 16%.




s.
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 operations and other comprehensive income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our financial statements.




t.
Taxation





Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the three months 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.




15




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.




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




Enterprise income tax




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




Before 2011, CBP China secured preferential tax treatment in the jurisdiction where it conducts its manufacturing activity, where it was granted tax holiday of 25% from the local government, for being a new and high-technology enterprise. Start from January 1, 2011, CBP China was granted 10% of tax exemption for the qualification of high/new technology enterprise and pays 15% enterprise income tax.




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 carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the three months in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and noncurrent based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.




A provision has not been made at January 31, 2011 for U.S. or additional foreign withholding taxes on approximately $64,404,342 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 government in the PRC. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current PRC officials.




The Company 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.




16




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.




u.
Comprehensive Income





Total comprehensive income is defined as all changes in shareholders’ equity during a period, other than those resulting from investments by and distributions to shareholders (i.e., issuance of equity securities and dividends).  Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation.  Total comprehensive income represents the activity for a period net of related tax and was $11,612,716 and $7,385,644 for the three months ended January 31, 2011 and 2010, 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 $664,421 and $2,515 for the three months ended January 31, 2011 and 2010 respectively.




v.
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:




17


–        warrants,
 –        employee stock options, and
  –        other equity awards, which include long-term incentive awards.
 The FASB Topic ASC 260, “Earnings per Share,” requires the Company to include additional shares in the computation of earnings per share, assuming dilution.  The additional shares included in diluted earnings per share represent the number of shares that would be issued if all of the Company’s outstanding dilutive instruments were converted into common stock.
  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.
  w.
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.
  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 fair market value per Black-Scholes option model.
  On May 15, 2009, we have issued warrants to purchase 1,071,428 shares of common stock to certain investors, associated with an offering of our common stock. The warrants were recognized at fair value and were recorded as equity.
  On March 25, 2010, we issued 160,000 warrants to a certain investor relation service provider. The warrants were recognized at fair value and were recorded as liability.
  3.  ACCOUNTING PRONOUNCEMENTS
  Accounting Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends Subsequent Events Recognition and Disclosures, ASU No. 2009-16 (ASC Topic 860), which amends Accounting for Transfer of Financial Assets, ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU No. 2009-08, Earnings per Share, ASU No. 2009-12 (ASC Topic 820), Investments in Certain Entities That Calculate Net Asset Value per Share, and various other ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company, or their effect on the financial statements would not have been significant.
  18
  In July 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-20, Receivables – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses ("ASU No. 2010-20"). ASU No. 2010-20 will require a company to provide more information about the credit quality of its financing receivables in the disclosures to the financial statements, including aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on both how a company develops its allowance for credit losses and it manages its credit exposure. ASU No. 2010-20 is effective for interim and annual reporting periods after December 15, 2010. The adoption of ASU 2010-20 is not expected to have a material effect on our financial statements.
  In May, 2010, the FASB issued ASU 2010-19 ̧ "Foreign Currency" (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (SEC Update). The purpose of this Update is to codify the SEC Staff Announcement made at the March 18, 2010 meeting of the FASB Emerging Issues Task Force (EITF) by the SEC Observer to the EITF. The Staff Announcement provides the SEC staff’s view on certain foreign currency issues related to investments in Venezuela. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations, or cash flows of the Company.
  In April 2010, the FASB issued Accounting Standards Update, 2010-17, Revenue Recognition—Milestone Method (Topic 605): “Milestone Method of Revenue Recognition—a consensus of the FASB Emerging Issues Task Force.” This is an update regarding the milestone method of revenue recognition. The scope of this update is limited to arrangements that include milestones relating to research or development deliverables. The update specifies criteria that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The criteria apply to milestones in arrangements within the scope of this update regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The update will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. This update is not expected to have a material impact on the Company’s financial statements.
  In March 2010, the FASB issued Accounting Standards Update, 2010-13, Compensation—Stock Compensation (Topic 718): “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades—a consensus of the FASB Emerging Issues Task Force.” This is an update regarding the effect of denominating the exercise price of a share-based payment awards in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The update clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The update will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. This update is not expected to have a material impact on the Company’s financial statements.
  19
  In March, 2010, the FASB issued Accounting Standards Update, 2010-11, Derivatives and Hedging (Topic 815): “Scope Exception Related to Embedded Credit Derivatives.”  This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Specifically, only one form of embedded credit derivative qualifies for the exemption – one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. This update also has transition provisions, which permit entities to make a special one-time election to apply the fair value option to any investment in a beneficial interest in securitized financial assets, regardless of whether such investments contain embedded derivative features. This update is effective on the first day of the first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of any fiscal quarter beginning after March 5, 2010. This update is not expected to have a material impact on the Company’s financial statements
  In January 2010, the FASB issued Accounting Standards Update, 2010-06, Fair Value Measurements and Disclosures (Topic 820): “Improving Disclosures about Fair Value Measurements.”  This update provides guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This update also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this update did not have a significant impact on the Company’s financial statements.
  In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue Recognition (Topic 605): “ Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force.” This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The Company has not determined the impact that this update may have on its financial statements.
  In June 2009, the FASB issued guidance related to accounting for transfers of financial assets. This guidance improves the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a continuing interest in transferred financial assets. In addition, this guidance amends various ASC concepts with respect to accounting for transfers and servicing of financial assets and extinguishments of liabilities, including removing the concept of qualified special purpose entities.  This guidance must be applied to transfers occurring on or after the effective date. On February 1, 2010, the Company adopted this guidance.  The adoption of this guidance did not have a material impact on the Company’s financial statements.
  20
  In June 2009, the FASB issued guidance which amends certain ASC concepts related to consolidation of variable interest entities. Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. On February 1, 2010, the Company adopted this guidance.  The adoption of this guidance did not have a material impact on the Company’s financial statements.
  4. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
  The Company conducts all of its primary trade in the PRC.  There can be no assurance that the Company will be able to successfully conduct its trade, and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, price of raw material, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on foreign trade in the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.
  (1) Cash and cash equivalents
  The Company maintains certain bank accounts in the PRC which are not protected by FDIC insurance or other insurance.  Cash balance held in PRC bank accounts to $ 12,384,621 and $27,826,142, as of January 31, 2011 and October 31, 2010, respectively.  No cash balances were restricted as at January 31, 2011 and October 31, 2010.
  As of January 31, 2011 and October 31, 2010, 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 one individual customer accounted for over 10% of sales revenues during the three months ended January 31, 2011.
  The Company’s products are sold throughout the PRC. For three months ended January 31, 2011 and 2010, Botanical anti-depression and nerve-regulation products accounted for 73% and 69%, respectively, of total sales.
  (3) Foreign currency
  The Company operates in the PRC, 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.
  21
  (4) Dividends
  Payments of dividends may be subject to some restrictions due to the fact that the operating activities are conducted in a subsidiary residing in the PRC.
  (5) Price control
  The retail prices of certain pharmaceuticals sold in the PRC, 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 during the three months ended January 31, 2011 and 2010.
  (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.
TRADE RECEIVABLES, NET
  The trade receivables amount included in the condensed consolidated balance sheets as at January 31, 2011 and October 31, 2010 were as follows:
  2011


2010US$


US$Trade receivables


29,780,193



22,408,628Less: Sales rebates


(3,230,479
)


(2,141,055
)Less: Allowance for doubtfulaccounts


(457,130
)


(453,135
)Trade receivables, net


26,092,584



19,814,438
  6.
OTHER RECEIVABLES, NET
 
 The other receivables amount included in the condensed consolidated balance sheets as at January 31, 2011 and October 31, 2010 were as follows:
  22
  2011


2010US$


US$Other receivables


831,396



569,184Less: Allowance for doubtful accounts


(371,435
)


(368,190
)Other receivables, net


459,961



200,994
  7.
INVENTORY, NET
 
 The inventory amounts included in the condensed consolidated balance sheets for as at January 31, 2011 and October 31, 2010 comprised of:
  2011


2010US$


US$Raw materials


5,912,979



1,951,185Work-in-progress


722,087



52,411Finished goods


856,374



707,648Less: Inventory reserves


(66,206
)


(65,628
)Inventory, net


7,425,234



2,645,616
  8.
PROPERTY AND EQUIPMENT, NET
 
 Property and equipment and related accumulated depreciation as of January 31, 2011 and October 31, 2010 were as follows:
  2011


2010US$


US$Machinery and equipment


3,576,761



3,545,146Office equipment and furnishings


63,347



58,006Motor vehicles


54,716



54,2373,694,824



3,657,389Less: Accumulated depreciation


(1,696,421
)


(1,587,929
)Net book value


1,998,403



2,069,460
  23
 
 Depreciation expense for the three months ended January 31, 2011 and 2010 was $94,091 and $90,599, respectively, of which $89,969and $86,787 were included as a component of cost of goods sold in the respective periods.  No assets were pledged for borrowings as at January 31, 2011 and October 31, 2010.
  24
  9.
INTANGIBLE ASSETS, NET
  Intangible assets and related accumulated amortization as of January 31, 2011 and October 31, 2010 were as follows:
  2011


2010US$


US$Intangible assetsProduct patents


2,419,294



2,398,153Less: Accumulated amortization


(483,859
)


(444,536
)Intangible assets, net


1,935,435



1,953,617
  10.
CONSTRUCTION IN PROGRESS
  Construction in progress as of January 31, 2011 and October 31, 2010 were as follows:
  2011


2010US$


US$Ah City Natural and Biopharmaceutical plant phase 2


1,867,392


-Total construction in progress


1,867,392



-
  Plant and production lines currently under development at the Ah City Phase Two are accounted for as construction-in-progress. Construction-in-progress is recorded at historical cost, including development expenditures, professional fees and the interest expenses capitalized during the course of construction for the purpose of financing the project. Upon readiness for use of the project, the cost of construction-in-progress is transferred to property and equipment, at which time depreciation will commence. The Company had no capitalized interest and to date has funded this construction through operations without the use of outside debt financing.  As of January 31, 2011, the Company has incurred a total of $1,867,392 of construction in progress.  The Ah City Phase Two is expected to complete in the end of 2012 and these amounts will be reclassed to buildings when it is ready to use.
  11.
RELATED PARTY TRANSACTIONS
  Due from related parties included in the condensed consolidated balance sheets as at January 31, 2011 and October 31, 2010 comprised of:
  25
  2011


2010US$


US$Due fromrelatedparties:Advances(1)


56,424



28,877Deposits(2)


22,080,861



18,605,935Total


22,137,285



18,634,812
  (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 January 31, 2011 and October 31, 2010, the Company has a net amount due from Mr. Li Shaoming of $56,424 and $28,877 respectively, which is advance for travelling and business.
  (2) Deposits
  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 and a payment of $ 7,560,293 was made to Stock Co. in January 2011, with a final payment of $1,512,059 due by December 31, 2011, at which time title for the assets will be transferred. Accordingly the transaction is considered incomplete as of January 31, 2011.
  (3) Rental Expenses
  The Company leases property and plant from Stock Co.  Rental expenses related to this lease, incurred and expensed to the condensed consolidated statements of operations and comprehensive income during the three months ended January 31, 2010 amounted to $ 153,735. A noncash rental expense of $188,202 was recognized to account for the rental exemption pursuant to the Purchase Agreement for the three months ended January 31, 2011, and the deposits for the property was reduced accordingly.
  12.
DEPOSIT
  On April 10, 2010, the Company through its wholly own subsidiary, CBP China, entered into a Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai Company, to acquire two office floors for a total consideration of $5,750,263.  Pursuant to the Purchase Agreement, a payment of $4,025,184 was made in April 2010 and recorded as deposits on the condensed consolidated balance sheet.  Pursuant to the Purchase Agreement, final payment of $1,725,079 is due by December 20, 2012, at which time title for the assets will be transferred.  Accordingly the transaction is considered incomplete as of January 31, 2011.
  26
  On January 11, 2011, the company through its wholly own subsidiary, CBP China, entered into an Exclusive Using Agreement of Undergrowth Resources (the “Agreement”) with Yichun Red Star Forestry Bureau of Heilongjiang Province (the “Forestry Bureau”) for30 yearsexclusiveusing rightof approximately 6,667 hectaresofundergrowth resources including approximately 67 hectares of Siberian Ginseng GAP cultivation basein Heilongjiang Province.Pursuant to the Agreement, a payment of $7,560,293 was made to Forestry Bureau in January, 2011 and with a final payment of $7,560,293 due in 12 months from the Agreement been approved by local government for a total consideration of $15,120,586.Siberian Ginseng is a plant with medically-established anti-depressant and mood regulation qualities and is also an active ingredient in our market-leading line of all-natural anti-depressant medications. We will be responsible for continued maintenance and protection of wild resources to make this area a professional Siberian Ginseng base.
  13.
INCOME TAXES
  The Company adopted FIN No. 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption and there is no unrecognized tax benefits included in the condensed consolidated balance sheet at January 31, 2011, that would, if recognized, affect the effective tax rate.
  The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended January 31, 2011 and 2010:
  2011


2010US statutory rates


34.00
%


34.00
%Foreign tax rate difference


(9.0
)%


(9.0
)%Income tax holiday


(10.0
)%


(25.0
)%Tax per financial statements


15.00
%


0.00
%
 
 27
  Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the three months 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 any tax exemption, the effects of the tax per share were as follows:
  Three months ended January 31,2011


2010US$


US$Tax savings


1,000,000



1,845,782Benefit per share:Basic


0.03



0.05Diluted


0.03



0.05
  Had the tax exemption not been in place for the three months ended January 31, 2011 and 2010, the Company estimates the following proforma financial statement impact:
  Three months ended January 31,2011


2010US$


US$Net income before tax provision, as reported


10,948,295



7,383,129Less Tax savings


(1,000,000
)


(1,845,782
)Proforma Net income


9,948,295



5,537,347Proforma Net income per share:Basic


0.27



0.15Diluted


0.26



0.15
  28
  14.
EARNINGS PER SHARE
  When calculating diluted earnings per share for common stock equivalents, the Earnings Per Share Topic, ASC 260, requires the Company to include the potential shares that would be outstanding if all outstanding stock options or warrants were exercised.   This is offset by shares the Company could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.
  The following reconciles the components of the EPS computation:
  Income


Shares


Per Share(Numerator)


(Denominator)


AmountUS$





US$For the three months ended January 31, 2011:Net income


10,948,295Basic EPS income available to common shareholders


10,948,295



37,239,536



0.29Effect of dilutive securities:Warrants and Options






656,342Diluted EPS income available to common shareholders


10,948,295



37,895,878



0.29For the three months ended January 31, 2010:Net income


7,383,129Basic EPS income available to common shareholders


7,383,129



37,239,536



0.20Effect of dilutive securities:Warrants


-



53,857Diluted EPS income available to common shareholders


7,383,129



37,293,393



0.20
  For the three months ended January 31, 2011, option of 70,000 shares were excluded from calculation of diluted earnings, because the exercise prices exceeded the average price of the Company’s common stock.
  15.
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 $134,612 and $ 104,963 for the three months ended January 31, 2011 and 2010, respectively.
  29
  16.
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
  On March 25, 2010, the Company issued warrants (the “Warrants”) for 160,000 common shares to an investor relation service provider that have an exercise price of $2.00 per share and a contractual life of 3 years.  The terms of the Warrant agreement include the following factors that in accordance with FASB Topic ASC 815, requires that the Warrants be classified at their fair value to liabilities each reporting period.
  ·
The holder of the Warrants (the “Holder”) is entitled to the benefits of Rule 144 promulgated under the Securities Act of 1933, as amended and any other rule or regulation of the SEC that may at any time permit the Holder to sell securities of the Company to the public without registration.  Non compliance with such rules and regulations could result in the Company having to settle the Warrant obligation in cash.
  ·
The exercise price and number of shares issuable upon exercise of the Warrants (the “Warrant Shares”) are subject to adjustment for standard dilutive events, including the issuance of common stock, or securities convertible into or exercisable for shares of common stock, that will adversely affect the Holder’s rights under the Warrants.  There were no dilutive events for the three months ended January 31, 2011, which would have resulted in an adjustment to the exercise price or number of Warrant Shares.
  At January 31, 2011 and October 31, 2010, the fair value of the Company’s warrants liability was $155,428 and $342,770, respectively.  The Company used the Black-Scholes valuation model to estimate the fair value of the Warrants.  The valuation was based on the assumptions noted in the following table.
  Expected volatility


81.70
%Expected dividends


0
%Expected term(in years)

2.15 yearsRisk-free rate


0.98
%
 
 On January 31, 2011, the Company had no assets measured at fair value and the following liabilities measured at fair value:
  Fair value measurementQuoted prices in active markets of identical assets

Significant other observable inputs

Significant unobservable inputs(Level 1)

(Level 2)

(Level 3)US$

US$

US$January 31, 2011

Warrants liability



155,428October 31, 2010

Warrants liability



342,770
  17.
PREFERRED STOCK, COMMON STOCK AND EQUITY TRANSACTIONS
  (1)  Preferred Stock
  The Company’s articles of incorporation provide that our board of directors will be authorized to issue from time to time, without further stockholder approval, up to 1,000,000 additional shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, rights of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights.  As at January 31, 2011 andOctober 31, 2010, there is no preferred stock outstanding.
  30
  (2) Common Stock and Equity Transactions
  On May 15, 2009, the Company issued 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 to Allied Merit International Investments, Inc. and Griffin Ventures Ltd. Total consideration of the issuance was $ 1,500,000.The fair value of the warrants is estimated on the date of grant using the Black-Scholes option valuation model to be $496,732. The valuation was based on the assumptions noted in the following table.
  Expected volatility


175.80
%Expected dividendsExpected term (in years)

3 yearsRisk-free rate


1.38
%
 The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the warrants at the time of grant.  The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future.  The market price volatility of our common stock was based on historical volatility since May 15, 2008.  Our methodology is consistent with prior period volatility assumptions.  The expected life of the warrants is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
  18.
OPTION PLAN AND WARRANTS
  Share-based compensation amounted to $14,400 and $0 in the three months ended January 31, 2011 and 2010, respectively.
 
 (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 October 31, of the immediately preceding year. As of January 31, 2011, the number of shares of common stock outstanding was 37,239,536 making 3,723,954 shares of common stock subject to the 2003 Plan.
  a) On April 13, 2010, an option to purchase 70,000 shares was granted under the 2003 Plan to an independent director that vests on a quarterly basis beginning three months from the date of grant, conditioned upon continued service on such quarterly dates, and has a contractual life of 3 years.  The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $171,397, of which $14,400 was recorded as compensation expense for the three months ended January 31, 2011.  The valuation was based on the assumptions noted in the following table.
  Expected volatility
227.9 %Expected dividends
0 %Expected term (in years)
3 years
 31
 The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.  The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future.  The market price volatility of our common stock was based on historical volatility since April 13, 2009.  Our methodology is consistent with prior period volatility assumptions.  The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
  b) On December 14, 2010, we appointed Mr. Weiqiu Dong as our chief financial officer. Base on the employment agreement, Mr. Dong will receive an annual base salary of approximately $88,134.  In accordance with the appointment, Mr. Dong received, on December 14, 2010, an option to purchase 200,000 shares of the Company's common stock under the 2003 Omnibus Plan. The option vests 60,000 shares on the first anniversary of the date of grant and 70,000 shares on each of the second and third anniversaries of the date of grant. The Option is conditioned upon continued employment on such date, and has a contractual life of 3 years.
  The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $259,251.The valuation was based on the assumptions noted in the following table.
  Expected volatility


96.46
%Expected dividends


0
%Expected term (in years)

3 yearsRisk-free rate


1.06
%
  The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.  The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future.  The market price volatility of our common stock was based on historical volatility since December 13, 2009.  Our methodology is consistent with prior period volatility assumptions.  The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
  The fair value of the option granted will be expensed according to following schedule:
  Year

Expensed2011


68,4002012


89,2052013


90,7082014


10,938Thereafter


-Total

$
259,251
  (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 Plan, up to 200,000 shares of our common stock may be subject to options.
  32
  On January 13, 2010, an option to purchase 50,000 shares was granted under the 2007 Plan to an employee that vests on the 12-month anniversary of the date of grant, conditioned upon continued employment on such date, and has a contractual life of 3 years.  The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $47,527.  The valuation was based on the assumptions noted in the following table. The options were forfeited at departure of the employee on August 6, 2010.
  Expected volatility


236.5
%Expected dividends


0
%Expected term (in years)

3 yearsRisk-free rate


1.5
%
 The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.  The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future.  The market price volatility of our common stock was based on historical volatility since January 13, 2009.  Our methodology is consistent with prior period volatility assumptions.  The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
  A summary of option activity under the Company’s option plan as of January 31, 2011 and movement during the three months then ended are as follow:
  Options


Weighted average exercise price


Weighted average remaining contractual terms


Aggregate intrinsic valueUS$





US$Outstanding at November 1, 2010


70,000



2.57



2.45



166,832Granted


200,000



2.15



3



259,251ExercisedForfeited or expiredOutstanding at January 31, 2011


270,000



2.26



2.86



426,083Vested and expected to vest at January 31, 2011


270,000



2.26







426,083Exercisable at January 31, 2011


17,499



2.57







41,706
  A summary of the status of the Company’s non-vested options as of January 31, 2011 and movements during the three months then ended are as follow:
  Options


WeightedaveragegranteddatefairvalueUS$Non-vested at November 1, 2010


58,334



2.57Granted


200,000



2.15Vested


5,833



2.57Forfeited or expired


-



-Non-vested at January 31, 2011


252,501



2.24
 33
  As of January 31, 2011, there was $25,796 of unrecognized compensation cost related to non-vested share-based compensation granted under the Company’s option plan.  The cost is expected to be recognized over a period of 2.86 years.
  (3)  Warrants
  As of January 31, 2011, the Company has 1,231,428 warrants outstanding at an average exercise price of $1.25 per warrant for one share each of the Company’s common stock. The warrants expire in 2012 and 2013.
  Warrants


AverageexercisePriceUS$Outstanding warrants at November 1, 2010


1,231,428



1.25Warrants grantedExercised


-



-Expired/cancelled


-



-Outstanding warrants at January 31, 2011


1,231,428



1.25
  Information regarding the warrants outstanding at January 31, 2011 is summarized as below:
  WarrantsoutstandingatJanuary31,2011ExercisePrices


WarrantsOutstanding

WeightedAverageRemainingContractualLife(years)


WeightedPriceUS$







US$0.88



1,071,4282.00



160,0001,231,428

1.65


1.02
  19.
STATUTORY RESERVES
  (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 the condensed consolidated 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 the condensed 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.
  34


The reserve funds as of January 31, 2011 and October 31, 2010 were comprised of the following:




2011


2010US$


US$Statutory surplus reserve


3,090,320



3,090,320Public welfare fund


282,377



282,377Total


3,372,697



3,372,697




20.           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.




Capital commitments




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 and a payment of $ 7,560,293 was made to Stock Co. in January 2011, with a final payment of $1,512,059 due by December 31, 2011, at which time title for the assets will be transferred. According to the agreement, we were exempted from lease payments for the underlying assets starting from May 1, 2010.




On April 10, 2010, CBP China entered into a Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai Company, to acquire two office floors for a total consideration of $5,750,263.  Pursuant to the Purchase Agreement, a payment of $4,025,184 was made in April 2010 and recorded as deposits on the condensed consolidated balance sheet.  Pursuant to the Purchase Agreement, final payment of $1,725,079 is due by December 20, 2012, at which time title for the assets will be transferred.  Accordingly the transaction is considered incomplete as at January 31, 2011.




On January 11, 2011, CBP China entered into an Exclusive Using Agreement of Undergrowth Resources (the “Agreement”) with Yichun Red Star Forestry Bureau of Heilongjiang Province (the “Forestry Bureau”)for 30 years exclusiveusing rightof approximately 6,667 hectaresofundergrowth resources including approximately 67 hectares of Siberian Ginseng GAP cultivation basein Heilongjiang Province. Pursuant to the Agreement, a payment of $7,560,293 was made to Forestry Bureau in January, 2011 and with a final payment of $7,560,293 due in 12 months from the Agreement been approved by local government for a total consideration of $15,120,586. Siberian Ginseng is a plant with medically-established anti-depressant and mood regulation qualities and is also an active ingredient in our market-leading line of all-natural anti-depressant medications. We will be responsible for continued maintenance and protection of wild resources to make this area a professional Siberian Ginseng base.




35


In January, 2011, CBP China started its Ah City Phase Two Project for Siberian Ginseng products development and industrialization and entered into a Construction and Engineering Design Contract (the “Contract”) with Heilongjiang Medical Architecture Design Institute (the “Institute”). Pursuant to the Contract, a payment of $396,159 was made to the Institute and a final payment of $81,651 will be due by June 30, 2011 for a total consideration of $477,810. The company also made payments of $393,135 for construction support fee to City Programming Bureau, $494,443 for construction support fee to City construction Bureau and $583,655 for audit fee to City Fire Department of Public Security Bureau. The total deposit for Ah City Phase Two was $1,867,392. The estimated total investment for Ah City Phase Two is $18,144,704 with approximately 60% will be paid in 2011 and rest paid in 2012. The project is predicted to finish in 2012.




As of January 31, 2011, the Company has capital commitments for purchase of land use rights, property and equipment, office floors, undergrowth resources and Ah City Phase Two from four parties of approximately $27,074,743. The amounts to be paid in the future years are as follows:




Year

Payment for properties2011

$
10,531,4892012


16,543,254201320142015


-Thereafter


-Total

$
27,074,743




21.           SUBSEQUENT EVENT




Tax Treatment of Subsidiary CBP China





As a recipient of the PRC’s State High-Technology Enterprise certificate, our CBP China is eligible for a number of national and local government support programs, including preferential tax treatment.  In order to receive these benefits CBP China must, on an annual basis, pass a High-Tech Enterprise assessment.  CBP China passed this assessment in February, 2011 with a 10% tax exemption and, as a result, pays a reduced tax rate of 15% in the year of 2011.




36


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





The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report.  In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report. See also Risk Factors contained in our Form 10-K for the year ended October 31, 2010.





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 (i) botanical anti-depression and nerve-regulation products, (ii) biopharmaceutical products, and (iii) botanical antibiotic and traditional OTC Chinese medicines.  Botanical anti-depression and nerve-regulation products account for approximately 70% of our revenues and we intend to strengthen our developments in this area.  We have entered into sales agency agreements with sales agents in 19 provinces and four municipalities, through which our products are sold to over 3,000 distributors and over 70 sales centers across 24 provinces in China.





Tax Treatment of Subsidiary





As a recipient of the PRC’s State High-Technology Enterprise certificate, CBP China is eligible for a number of national and local government support programs, including preferential tax treatment.  In order to receive these benefits CBP China must, on an annual basis, pass a High-Tech Enterprise assessment.  CBP China passed this assessment in February 2011 and, as a result, pays a reduced tax burden in the year of 2011.  Specifically, CBP China’s tax liability is reduced from the statutory enterprise income tax rate of 25% to an enterprise income tax rate of 15%.




Factors Affecting our Results of Operations





Our operating results are primarily affected by the following factors




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





·
Pricing of Our Products.Seven of our products, namely Siberian Ginseng Tablets, Tianma Pills, Compond YangJiao Tablets, Banlangen Granules, Compound Honeysuckle Granules, ShengMai Granules and QingReJieDu Oral Liquid, which accounted for 36.8% of our total revenues in the first quarter of fiscal year 2011, are listed on the HeiLongjiang Provincial List of Essential Medicines published by the Chinese government, and therefore subject to government pricing limits.We do not believe pricing controls will influence our sales significantly and expect that the health care reform will help increase our sales.





·
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. The demand for our products that treat depression, melancholy and regulate nerves, continuously 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.




37




·
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.





·
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.





·
Expenses Associated with Research and Development. In order to enhance our existing products and develop new products for the market, we have devoted significant resources to R&D.





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





·
Demand for Our Products.We expect the market demand for our botanic anti-depression and nerve-regulation products will increase along with the growth of the general market for such products.




Results of Operations





Three-Month Period Ended January 31, 2011 Compared to Three-Month Period Ended January 31, 2010





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


Three Months Ended January 31,2011


2010($ in thousands)Statements of Operations DataSales, net


22,625,060



17,132,614Cost of goods sold


8,807,787



7,652,638Gross profit


13,817,273



9,479,976Operating and administrative expensesSales and marketing


1,329,179



1,138,981General and administrative


659,882



816,969Research and development


180,674



152,364Other income


24,189



11,467Income before income tax expenses


11,671,727



7,383,129Income tax expenses


723,432Net income


10,948,295



7,383,129Other comprehensive income:Cumulative currency translation adjustments


664,421



2,515Total comprehensive income


11,612,716



7,380,614





38





Comparison of Three Months Ended January 31, 2011 and 2010





Total Comprehensive Income




Total comprehensive income increased by approximately $4,227, thousand, or 57.2%, from approximately $7,386 thousand in 2010 to approximately $11,613 thousand in 2011.  This increase was primarily attributable to an increase of approximately $5,492 thousand, or 32.1%, in sales ,an decrease of approximately $157 thousand, or 19.2% in general and administrative expenses and an increase of $662 thousand, or 26,318% in cumulative currency translation adjustments, offsets in part by an increase of $1,155 thousand, or 15.1% in cost of goods sold, an increase of approximately $190 thousand, or 16.7%, in sales and marketing, an increase of approximately $723 thousand in income tax expenses and an increase of approximately $28 thousand, or 18.6% in research and development expenses.  Our gross profit margin increased from 55.3% in 2010 to 61.1% in 2011.




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 $5,492 thousand, or 32.1%, from approximately $17,133 thousand in 2010 to approximately $22,625 thousand in 2011.  This increase in sales was primarily attributable to increased demand and strong market acceptance of our products as a result of our marketing efforts, in addition to price increases for a number of our products.




We provide incentive sales rebates to our sales agents.  The rebate rate, which is determined on a product basis, averaged 13% and 12% of sales for the three months ended January 31, 2011 and 2010, respectively.  Sales rebates are netted against total sales.




The following table sets forth information regarding the sales of our principal products before sales rebate during the three months ended January 31, 2011 and 2010:




2011


2010


2011 over 2010Quantity


Amount


% of


Quantity


Amount


% of


Quantity


Amount


% ofProduct name

(Pack’000)


($’000)


Sales


(Pack’000)


($’000)


Sales


(Pack’000)


($’000)


SalesSiberian Ginseng(Acanthopanax) Series


125



13,547



52



106



9,161



46.9



19



4,386



23Tianma Series


22



2,152



8.3



24



1,816



9.3



-2



336



1.7Compound Yangjiao Tablets


28



3,001



12



28



2,423



12.4



0



578



3Shark Vital Capsules














2



1,084



5.5



(2
)


(1,084
)


(5.5
)Shengmai Granules


15



682



2.6



29



1,118



5.7



(14
)


(436
)


(2.2
)Banlangen Granules


11



432



1.7



21



539



2.8



(10
)


(107
)


(0.5
)Granules


35



2,346



9



58



3,395



17.4



(23
)


(1049
)


(5.4
)Qing Re Jie Du Oral Liquid


13



443



1.7



-



-



-



13



443



2.3Tablets


4



411



1.6



-



-



-



4



411



2.1Ginseng and Venison Extract


22



2,439



9.4



-



-



-



22



2,439



13Badger Fat


3



605



2.3



-



-



-



3



605



3.1Total


278



26,058



100



268



19,536



100



10



6522



33.4




Since June 2010, we have introduced four new products to the market, namely Qing Re Jie Du Oral Liquid, Compound Schizandra Tablets, Ginseng and Venison Extract, Badger Fat. They have been well accepted in the  market  and contributed 15% of sales revenue to our first quarter of 2011.   In 2011, we also experienced an increase in the average selling price per pack of our products, as demonstrated in the table below:




39




for the three months ended January 31,2011


2010Sales revenues (in thousands)

$
26,058


$
19,536Total sales quantity (pack in thousands)


278



268Average selling prices/pack (in thousands)

$
93.73


$
72.9




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, Compound Yangjiao Tablets and Tianma Series, as demonstrated in the following table, which reflects the average sales price per pack by product for the three months ended January 31, 2011 and 2010 and the percentage change in the sales price per pack:




Average Price Per PackProduct

2011


2010


ChangeSiberian Ginseng (Acanthopanax) Series

$
108.33


$
86.31



25.50
%Tianma Series


95.97



75.21



27.60
%Compound Yangjiao Tablets


107.95



85.6



26.10
%Shark Vital Capsules






462.51Shengmai Granules


45.42



39.04



16.30
%Banlangen Granules


38.31



26.07



46.90
%Compound Honeysuckle Granules


67.49



58.16



16.00
%Qing Re Jie Du Oral Liquid


33.06Compound Schizandra Tablets


96.39Ginseng and Venison Extract


112.6Badger Fat


232.69Total

$
93.73


$
72.9



28.60
%





Cost of Goods Sold




Our costs of goods sold consist primarily of direct and indirect manufacturing costs, including production overhead costs, and shipping and handling costs for the products sold.  Cost of goods sold increased approximately $1,155 thousand, or 15.1%, from approximately $7,653 thousand in 2010 to approximately $8,808 thousand in 2011.  This increase was primarily attributable to increase in products sold.




Although we anticipate that the cost of goods will increase due to inflationary price increases, we do not believe that such increases will be material for fiscal year 2010. We anticipate that beyond 2011, our price for raw materials and other production costs will continue to increase due to inflation. If our costs of goods increase, this may have a negative effect on our net income because, due to market conditions and competitive conditions, we may not be able to increase the price for our products in proportion to the increase of our costs of goods sold.




Operating and Administrative Expenses




Our total operating expenses increased by approximately $61 thousand, or 2.9%, from approximately $2,108 thousand in 2010 to approximately $2,170 thousand in 2011. This increase was primarily attributable to an increase of approximately $190 thousand, or 16.7%, in sales and marketing, an decrease of approximately $157 thousand, or 19.2% in general and administrative expenses and an increase of approximately $28 thousand, or 18.6% in research and development expenses.  Increased operating and administrative expenses relate to our efforts to expand our distribution network, market share, and awareness of our premium quality products throughout China.




40


Income from Operations




As a result of the foregoing, our income from operations increased by approximately $4,289 thousand, or 57.7%, from approximately $7,383 thousand in 2010 to approximately $11,672 thousand in 2011.




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 calendar year of 2011 and 2010, CBP China was granted a 10% and 25% tax exemption respectively and pays enterprise income taxes of 15% and 0%, respectively.




Cumulative Currency Translation Adjustments




Our principal country of operations is the PRC and our functional currency is the Renminbi, but our reporting currency is the U.S. dollar.  All translation adjustments resulting from the translation of our financial statements into U.S. dollars are reported as cumulative currency translation adjustments.  Our cumulative currency translation adjustments increased by approximately 661 thousand, or 26,318%, from approximately $3 thousand in 2010 to approximately $661 thousand in 2011.




Liquidity and Capital Resources




We had retained earnings of approximately $64,404 thousand and $53,456 thousand as of January 31, 2011 and October 31, 2010, respectively.  As of January 31, 2011, we had cash and cash equivalents of approximately $12,385 thousand and total current assets of approximately $46,419 thousand.  As of January 31, 2011, we had a working capital surplus of approximately $41,895 thousand.   Our summary cash flow information is as follows:




Three months ended January 31Net cash provided by(usedin) :

2011


2010($ inthousands)Operatingactivities


1, 301



9, 590Investingactivities


(16, 921
)Financingactivities


-



-




As of January 31, 2011, the Company has capital commitments for purchase of land use rights, property and equipment, office floors, undergrowth resources and Ah City Phase Two from four parties of approximately $27,074,743. The amounts to be paid in the future years are as follows:




41




Year

Payment for properties2011

$
10,531,4892012


16,543,254201320142015


-Thereafter


-Total

$
27,074,743


The company will utilize its current and future cash and cash equivalents from its ongoing operational income to support future capital commitments and sustain our ongoing operations for the next twelve months.




Net Cash Provided by Operating Activities




Net cash provided by operating activities decreased approximately $8,289 thousand, from net cash provided by operating activities of approximately $9,590 thousand in 2010 to net cash provided by operating activities of approximately $1,301 thousand in 2011.  This decrease was primarily attributable to an increase in net income from operations of approximately $3,565 thousand, this increase was offset in part by a decrease in the level of increase in trade receivables of approximately $8,319 thousand, a increase in inventory of approximately $4,445 thousand.




Net Cash Used in Investing Activities




Approximately $16,921 thousand was invested in land use rights, property and equipment, undergrowth resources and Ah City Phase Two construction in the three months ended January 31, 2011.  No cash was provided by or used in investing activities in the three months ended January 31, 2010.




Outstanding Long-Term Indebtedness




The company has no other contractual obligations except the items listed in Notes 20. COMMITMENTS AND CONTINGENCIES




Off-balance Sheet Arrangements




We do not have any off-balance sheet arrangements.




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Item 3. Quantitative and Qualitative Disclosures about Market Risk.




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





Item 4. Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





As of January 31, 2011, 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.  On February 3, 2011, we filed a Form 8-K, Item 4.02, Non-Reliance on Previously Issued Financial Statements or A Related Audit Report or Completed Interim Review, in connection with an error in calculating the weighted average common stock outstanding on a diluted basis as of October 31, 2010 which affected the calculation of the diluted earnings per share.  Accordingly, based upon that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and regulations.





Changes in Internal Controls





As previously disclosed in our Form 10-K for the year ended October 31, 2010, since the third quarter of our 2009 fiscal year, we have begun the implementation of remedial measures including hiring of a new chief financial officer in January 2010 (who resigned on August 3, 2010 for personal reason and was replaced by an interim chief financial officer; and on December 14, 2010, we subsequently hired Mr. Weiqiu Dong as our new chief financial officer), adding additional staff, appointing three independent Directors to our board of directors, engaging consultants to advise management on the preparation of Sarbanes-Oxley Section 404 compliance with internal controls over financial reporting for fiscal year 2010, providing relevant training to our staff, implementing more rigorous policies and procedures relating to period-end financial reporting and other key processes, strengthening key controls such as journal-entry approval, reconciliation procedures and maintaining relevant supporting documentation. We expect to continue to implement additional financial and management controls and procedures going forward.  As results of these measures and until we have completed the remediation process, there has been and will be changes and further improvement to our internal controls over financial reporting.





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PART II


Item 1. Legal Proceedings.





As of March 15, 2011, we are not a party to, or threatened by, any legal proceedings.


Item 1A. Risk Factors.





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





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





None.





Item 3.  Defaults upon Senior Securities.





In the three-month period ended January 31, 2011, and subsequent period through the date hereof, we did not default upon any senior securities.





Item 4. [Removed and Reserved].





Item 5.  Other Information.





Item 6.  Exhibits.





Exhibit

No.

Description3.1

Restated Articles of Incorporation(1)3.2

Second Restated Bylaws(1)3.3

Certificate of Amendment to Articles of Incorporation(2)3.4

Certificate of Amendment to Articles of Incorporation reflecting change of  name to China Botanic Pharmaceuticals Inc.(3)10.1

Renhuang Pharmaceuticals, Inc. 2007 Non-Qualified Company Stock Grant and Option Plan(4)10.2

2003 Omnibus Securities Plan(5)10.3

Loan Conversion Agreement among the Company, Allied Merit International Inc. and Griffin Ventures Ltd. dated May 15, 2009(6)10.4

Employment Agreements with Weiqiu Dong(3)10.5

English translation of Purchase Agreement for Patents dated September 1, 2009(7)10.6

English translation of Purchase Agreement for Ah City Natural and Biopharmaceutical Plant dated October 12, 2009(7)10.7

English translation of Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai Company dated April 10, 2010(8)10.8

Independent Director Agreement with Mr. Xiaoheng (Sean) Shao, dated April 13, 2010(8)10.9

Independent Director Agreement with Mr. Bingchun Wu, dated April 19, 2010(8)10.10

Independent Director Agreement with Mr. Changxiong Sun, dated April 19, 2010(8)10.11

Exclusive Purchase Agreement, with Yichun Red Star Forest Bureau, of Acanthopanax Resources(9)21.1

Subsidiaries of the registrant(2)31.1

Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2

Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1

Certification of Principal Executive and Financial Officers pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*




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*
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 10-K filed with the SEC on January 24, 2011.


(4)
Incorporated by reference from Form S-8 filed with the SEC on May 2, 2007.


(5)
Incorporated by reference from Form 8-K filed with the SEC on April 22, 2003.


(6)
Incorporated by reference from Form 10-Q filed with the SEC on September 21, 2009.


(7)
Incorporated by reference from Form 10-K filed with the SEC on January 29, 2010.


(8)
Incorporated by reference from Form 10-Q filed with the SEC on June 7, 2010.


(9)
Incorporated by reference from Form 8-K filed with the SEC on July 14, 2010.




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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized.





Date: March 16, 2011
CHINA BOTANIC PHARMACEUTICAL INC.By:
/s/ Li ShaomingLi Shaoming, Chief Executive Officer and President(Principal Executive Officer)Date: March 16 , 2011
By:
/s/ Weiqiu DongWeiqiu Dong, Chief Financial Officer(Chief Accounting and Financial Officer)





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