UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





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





For
      the fiscal year ended October 31,
2010





 ̈
            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)





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


Titleofeachclass
                NameofeachexchangeonwhichregisteredCommon Stock, $0.001 par value
                NYSE Amex LLC





Securities
registered under Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈
Yes   x
No





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


 ̈
Yes   x
No





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


x
Yes    ̈
No





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


 ̈
Yes    ̈
No





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





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





Large accelerated filer   ̈
            
            Accelerated filer   ̈Non-accelerated filer     ̈
            (Do not check if a smaller reporting company)
            Smaller reporting company x





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


 ̈
Yes   x
No




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of April 30, 2010, the last business day of
the registrant’s most recently completed second fiscal quarter, was
approximately $43,821,232 based upon the closing price of $2.70 as quoted on the
Pink Sheet OTC.  Shares of common stock held by each executive officer
and director and by each person who is known to own 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates of the Company. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.




As of
January 11, 2011, there were 37,239,536 shares of the registrant’s $0.001 par
value common stock issued and outstanding.




No
documents are incorporated into the text by reference.








TABLE
OF CONTENTS





PART
      IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              19Item
      1B.
              Unresolved
      Staff Comments
              32Item
      2.
              Properties
              32Item
      3.
              Legal
      Proceedings
              33Item
      4.
              [Removed
      and Reserved.]
              33PART
      IIItem
      5.
              Market
      for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              34Item
      6.
              Selected
      Financial Data
              35Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              35Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              45Item
      8.
              Financial
      Statements and Supplementary Data
              45Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              45Item
      9A.
              Controls
      and Procedures
              46Item
      9B
              Other
      Information
              47PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              48Item
      11.
              Executive
      Compensation
              52Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              55Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              57Item
      14.
              Principal
      Accountant Fees and Services
              58PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              59




ii


FORWARD
LOOKING STATEMENTS





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





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




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




We undertake no obligation to publicly
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.  Business.




Overview





We are a high-tech enterprise engaged
in the development, manufacturing, and distribution of botanical products,
bio-pharmaceutical products, and traditional Chinese medicines, or TCM, in the
People’s Republic of China (“PRC” or “China”). We have three “Good Manufacturing
Practice” or GMP certified production facilities - Ah City natural and
biopharmaceutical plant, Dongfanghong pharmaceutical plant and Qingyang natural
extraction plant - capable of producing 18 dosage forms and over 200 different
products. Our products include, but are not limited to, botanical
anti-depression and nerve-regulation products, biopharmaceutical products, and
botanical antibiotic and traditional over-the-counter (“OTC”) Chinese
medicines.  Botanical anti-depression and nerve-regulation products
account for over 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





Corporate
History and Structure





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





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





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





June
      1997
            
            ComTech
      Consolidation Group, IncFebruary
      1999
            
            E-Net
      CorporationMay
      1999
            
            E-Net
      Financial CorporationJanuary
      2000
            
            E-Net.Com
      CorporationFebruary
      2000
            
            E-Net
      Financial.Com CorporationJanuary
      2002
            
            Anza
      Capital, Inc (“Anza”)July
      2006
            
            Renhuang
      Pharmaceuticals, IncNovember
      2010
            
            China
      Botanic Pharmaceutical Inc.




1





Substantially
all of our assets and operations are located in the PRC. The following diagram
illustrates our corporate structure as of October 31, 2010










China
Botanic Pharmaceutical Inc. and its subsidiaries will be referred collectively
as “We”, “us” or “the Company” hereinafter.





Recent
Developments





On
October 14, 2010, our board of directors approved, and recommended that our
Articles of Incorporation be amended (the “Amendment”) to change our name to
China Botanic Pharmaceutical Inc. (the “Name Change”). On October 14, 2010, the
holders of approximately 75.89% of the outstanding shares of Common Stock
executed a written consent adopting and approving the
Amendment.  Pursuant to the provisions of the Nevada Revised Statutes
(the “NRS”) and our Articles of Incorporation, the holders of at least a
majorityof the
outstanding voting shares are permitted to approve the Amendment by written
consent in lieu of a meeting, provided that notice of such action is given to
our other shareholders. Pursuant to the rules and regulations promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), an information statement was sent to the holders
of voting stock who did not sign the written consent at least 20 days prior to
the effective date of the action.  On or about October 27, 2010, the
information statement was sent to all holders of record on October 13, 2010 (the
“Record Date”).  On November 18, 2010, the Name Change was effectuated
upon the filing of the Amendment with the Secretary of State of
Nevada.





On July 8, 2010, we executed an
Exclusive Purchase Agreement with Yichun Red Star Forest Bureau of Heilongjiang
Province (the “Forest Bureau”) for indefinite exclusive right to purchase
harvested wild Siberian Ginseng from forest of approximately 6,667
hectares. The company is negotiating with the Forest Bureau about specific
terms of certain definitive acquisition agreement. In addition to generating
income for the Forest Bureau, this resource base will provide employment
opportunities for local farmers. 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. The Siberian Ginseng plant yield is expected to amount to an
estimated 500 tons annually. The Siberian Ginseng fields will be maintained and
harvested by personnel supervised by the Forest Bureau and we will pay a whole
sales price lower than market retail price for the Siberian Ginseng harvested.
We will be responsible for continued maintenance and protection of wild
resources to make this area a professional Siberian Ginseng base.




2


Our
Products





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





Product Category
              
              Product
              
              Main FunctionsBotanical
      anti-depression and nerve-regulation products
              
              Siberian
      Ginseng (Acanthopanax) Series:
                Siberian
      Ginseng (Acanthopanax) Tablets
                Siberian
      Ginseng (Acanthopanax) Syrup
                Siberian
      Ginseng (Acanthopanax) Extract(200g)
                Siberian
      Ginseng (Acanthopanax) Extract(338g)
                [Note:
      The Drug Approval Number of Ginseng (Acanthopanax) Extract is under the
      name of Stock Co.*]
              
              Antidepressant
      properties: Regulation of nervous excitation and inhibition; calm and
      inhibit spontaneous activities; improve sleep and anticonvulsant
      properties
                
                Improve
      blood properties: Improve blood flow, blood lipid profile and blood
      viscosity; prevent and improve cerebral thrombosis, hyperlipidemia,
      hypotension (low blood pressure), coronary heart disease, diabetes,
      leukopenia, and gonadotrophic dilation of blood vesselsTianma
      Series:
                Tianma
      Pills (sugar coated, 48 tablets)
                Tianma
      Pills (sugar coated, 100 tablets)
              
              Dispel
      coldness; relieve pain and headache caused by blood supply shortage and
      blood stasisCompound
      Yangjiao Tablets (sugar coated, 50 tablets)
              
              Relieve
      pain from migraines, vascular headaches, tension headaches and nervous
      headachesCompound
      Schizandra  Tablets
              
              Regulation
      of the central nervous system. to generate body fluids and alleviate
      thirst, nourish the kidneys, cure insomnia and palpitations, and is also
      widely used as treatment for neurasthenia.Biopharmaceutical
      products
              
              Shark
      Vital Capsules
              
              Improve
      the cerebral and cardiovascular oxygen supply; resist radiation; increase
      white blood cells; and prevent cancerBadger
      Fat
                [Note:
      The Drug Approval Number of Badger Fat is under the name of Stock
      Co.*]
                
                Ginseng
      and Venison Extract
                [Note:
      The Drug Approval Number of Ginseng and Venison Extract are under the name
      of Stock Co.*]
              
              Treatment
      of burn and scald
                
                
                
                
                Nourish
      the blood and the kidneys, restore the body's energy and increase
      endurance.




3





Product Category
              
              Product
              
              Main FunctionsBotanical
      antibiotics and traditional OTC Chinese medicines
              
              Banlangen
      Granules
              
              Antiviral
      (anti-influenza) and broad-spectrum antibioticCompound
      Honeysuckle Granules
              
              Antiviral;
      antibacterial; and anti-inflammatoryShengmai
      Granules
              
              Regulate
      blood flow; strengthen heart beat; and improve the immune system and blood
      qualityQing
      Re Jie Du Oral Liquid
              
              Treating
      the flu, upper respiratory infections, and sore
  throats





*
            The
      Siberian Ginseng (Acanthopanax) Extract, Badger Fat, and Ginseng and
      Venison Extract are registered by Renhuang Stock Co. (“Stock Co.”),
      a company of which Mr. Shaoming Li, our chairman, chief executive officer
      and president, serves as chairman and is a 50% shareholder.  In
      2010, we received licenses from Stock Co. to produce Siberian Ginseng
      (Acanthopanax) Extract.




The following table reflects the
approximate sales, before sales rebates, of our three product categories during
the fiscal years ended October 31, 2010 and 2009:




2010
                          
                          
                          2009
                          
                          
                          Change (2010–2009)Product Category
                          
                          Quantity
                            (Pack’000)
                          
                          
                          Amount
                            ($’000)
                          
                          
                          % of
                            Sales
                          
                          
                          Quantity
                            (Pack’000)
                          
                          
                          Amount
                            ($’000)
                          
                          
                          % of
                            Sales
                          
                          
                          Quantity
                            (Pack’000)
                          
                          
                          Amount
                            ($’000)
                          
                          
                          % of
                            SalesBotanical
      anti-depression andnerve-regulationproducts
                          
                          
                          529
                          
                          
                          
                          44,697
                          
                          
                          
                          71.3
                          
                          
                          
                          567
                          
                          
                          
                          40,748
                          
                          
                          
                          78.0
                          
                          
                          
                          (38
                          )
                          
                          
                          3,949
                          
                          
                          
                          (6.7
                          )Biopharmaceutical
      products
                          
                          
                          15
                          
                          
                          
                          3,210
                          
                          
                          
                          5.1
                          
                          
                          
                          13
                          
                          
                          
                          5,803
                          
                          
                          
                          11.1
                          
                          
                          
                          (2
                          )
                          
                          
                          (2,593
                          )
                          
                          
                          (6.0
                          )Botanical
      antibiotics and traditional OTC Chinese medicines
                          
                          
                          307
                          
                          
                          
                          14,794
                          
                          
                          
                          23.6
                          
                          
                          
                          147
                          
                          
                          
                          5,709
                          
                          
                          
                          10.9
                          
                          
                          
                          160
                          
                          
                          
                          9,085
                          
                          
                          
                          12.7Total
                          
                          
                          851
                          
                          
                          
                          62,701
                          
                          
                          
                          100.0
                          
                          
                          
                          727
                          
                          
                          
                          52,260
                          
                          
                          
                          100.0
                          
                          
                          
                          124
                          
                          
                          
                          10,441
                          
                          
                          
                          -




4


The
following table reflects the approximate sales rebates and net sales, of our
three product categories during the fiscal years ended October 31, 2010 and
2009:





2010
                                
                                
                                2009
                                
                                
                                Change(2010-2009)Sales
                                
                                
                                Sales
                                  rebates
                                
                                
                                Net sales
                                
                                
                                Sales
                                
                                
                                Sales
                                  rebates
                                
                                
                                Net sales
                                
                                
                                Sales
                                
                                
                                Sales
                                  rebates
                                
                                
                                Net salesProduct Category
                                
                                ($’000)
                                
                                
                                ($’000)
                                
                                
                                ($’000)
                                
                                
                                ($’000)
                                
                                
                                ($’000)
                                
                                
                                ($’000)
                                
                                
                                %
                                
                                
                                %
                                
                                
                                %Botanical
      anti-depressionand
      nerve-regulationproducts
                                
                                $
                                44,698
                                
                                
                                $
                                5,459
                                
                                
                                $
                                39,239
                                
                                
                                $
                                40,747
                                
                                
                                $
                                5,517
                                
                                
                                $
                                35,230
                                
                                
                                
                                9.7
                                
                                
                                
                                (1.1
                                )
                                
                                
                                11.4Biopharmaceutical
      products
                                
                                
                                3,209
                                
                                
                                
                                1,004
                                
                                
                                
                                2,205
                                
                                
                                
                                5,803
                                
                                
                                
                                2,484
                                
                                
                                
                                3,319
                                
                                
                                
                                (44.7
                                )
                                
                                
                                (59.6
                                )
                                
                                
                                (33.6
                                )Botanical
      antibiotics and traditional OTC Chinese medicines
                                
                                
                                14,794
                                
                                
                                
                                1,054
                                
                                
                                
                                13,740
                                
                                
                                
                                5,709
                                
                                
                                
                                847
                                
                                
                                
                                4,862
                                
                                
                                
                                159.1
                                
                                
                                
                                24.4
                                
                                
                                
                                182.6Total
                                
                                $
                                62,701
                                
                                
                                $
                                7,517
                                
                                
                                $
                                55,184
                                
                                
                                $
                                52,259
                                
                                
                                $
                                8,848
                                
                                
                                $
                                43,411
                                
                                
                                
                                19.7
                                
                                
                                
                                (15.0
                                )
                                
                                
                                27.1




Botanical
anti-depression and nerve-regulation products





Botanical anti-depression and
nerve-regulation products contributed approximately $39.23 million to our
revenue in 2010 ($35.23 million in 2009) and accounted for approximately
71.1% of total product sales in 2010 (81.1% in 2009).





Siberian
Ginseng (Acanthopanax):





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





·
            Antidepressant





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





Treating neurasthenia:
Siberian Ginseng (Acanthopanax) can significantly reduce the symptoms of
neurasthenia; improves insomnia, restless sleep, heart palpitations,
forgetfulness, and fatigue. (Source: “Chinese Patent MedicineStudies,AcanthopanaxResearchSituation atHome andAbroad” - Traditional Chinese
Medicine Research Section of Heilongjiang Institute of Chinese
Medicine)





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


5





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





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





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





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





Tianma
Pills and Compound Yangjiao Tablets:





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





Compound
Schisandra Tablets





Compound
Schisandra Tablets are also botanic drug which is used to regulate central
nervous system, generate body fluids and alleviate thirst, nourish the kidneys,
cure insomnia and palpitations, and is also widely used as treatment for
neurasthenia.





Biopharmaceutical
products





Biopharmaceutical products contributed
approximately $2.21 million to our revenue net of sales rebate in 2010
($3.32 million in 2009) and accounted for approximately 4.0% of total
product sales net of sales rebate, in 2010 (7.6% in 2009).





Shark
Vital Capsule





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





Ginseng
and Venison Extract





Ginseng
and Venison Extract comprises nutrients from ginseng and deer, and is used
to nourish the blood and the kidneys, restore the body's energy and increase
endurance.


6





We plan to introduce Badger oil, a new
biopharmaceutical product, which, according to the Chinese Pharmacopoeia, treats
burns and scalds, in 2011.





Botanical
antibiotics and traditional OTC Chinese medicine products




Botanical antibiotics and traditional
OTC Chinese medicines contributed approximately $13.74 million to our revenue
net of sales rebate in 2010 ($4.86 million in 2009) and accounted for
approximately 24.9% of total product sales net of sales rebate in 2010 (11.2% in
2009).





Raw
materials and Suppliers





The raw materials of Siberian Ginseng
(Acanthopanax) based products are effective ingredients extracted from the
Siberian Ginseng (Acanthopanax) plant.  In China, about 94% of the
wild Siberian Ginseng (Acanthopanax) resources grow in the Heilongjiang Province
(Source: Heilongjiang Dongbei net).  Through our Exclusive Purchase
Agreement with Dongfanghong Forestry Bureau, we have the exclusive rights for an
indefinite term to purchase the wild Siberian Ginseng (Acanthopanax) grown on
6,667 hectares of land in Dongfanghong, which represents approximately 500
tons, or 70% of the annual production, of wild Siberian Ginseng (Acanthopanax)
resources in China.  Additionally, since 2006, we have been developing
our own Siberian Ginseng (Acanthopanax) cultivation base in Dongfanghong,
Heilongjiang, China.





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





Manufacturing
and production facilities





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





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





Quality
Assurance





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


7





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





Marketing
and Product Distribution





We 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. Our products are mainly sold by our distributors
to pharmacies, medicine wholesale centers, hospitals and other medical agencies.
One customer has contributed to 11.01% and 10.44% of our total revenue in 2010
and 2009.





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





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





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





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





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





Research
and Development





We are committed to developing new
products and improving our current products.  During the fiscal years
ended October 31, 2010 and 2009, we spent approximately $3,043,000 and
$2,529,000, respectively, on research and development.




8


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





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


·
            Extraction
      of certain components from Siberian
Genseng


·
            Cultivation
      of Siberian Genseng; and


·
            Development
      of OTC product upgrades.





In 2010,
we focused our research on cultivation techniques of Siberian Ginseng to
solidify our future raw material supply. We are also researching on new
drugs containing certain effective ingredients from Siberian Ginseng, which
we expect to launch in the following years.





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





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





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





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





R&D
Strategy





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





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





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


9





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





R&D
Achievements





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





2009
            
            The
      Siberian Ginseng (Acanthopanax) Polysaccharides products were awarded
      “Key Products in Heilongjiang Province” by Heilongjiang Science and
      Technology OfficeThe
      “Pollution-Free and Environment-Friendly Extraction Process for Total
      Alkaloids of Sophora Flavescens and Colorless Sterile Injection against
      Hepatitis B” project was listed as a Major Intellectual Property
      Rights Project by Harbin Intellectual Property Bureau.The “Industrialization of
      Siberian Ginseng (Acanthopanax) Extraction: Total Glucosides, Total
      Flavonoids and Polysaccharides” project was listed as a special
      high-tech project by Heilongjiang Development and Reform
      Commission.The
      “Siberian Ginseng (Acanthopanax) Oral liquid” project was listed as a new
      industrialization special project by Harbin Development and Reform
      Commission.2008
            
            The
      “Research on New Siberian Ginseng (Acanthopanax) Anti-depression
      Drugs” project was listed as a Harbin technological innovation
      talents project by Harbin Science and Technology
Bureau.2007
            
            The
      “Secondary Development and Industrialization of Genuine Medical Materials
      Siberian Ginseng (Acanthopanax) Series Products” project was listed
      as a major provincial-level pre-project by Heilongjiang Development and
      Reform Commission.





Current
R&D Projects





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





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


10





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





Intellectual
Property





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





Patents





We have purchased from Harbin Renhuang
Pharmaceutical Stock Co., Ltd (“Stock Co.”) two patents, Injection Preparation
Method against Hepatitis B (Patent No.: ZL200410043718.5) and Total
Alkaloids of Sophora Flavescens Extraction Method (Patent No.:
ZL200410043717.0).  Our PRC subsidiary has been registered as the
owner of such patents with the Intellectual Property Office of the PRC. Stock
Co. is a company of which Mr. Shaoming Li, our chairman, chief executive officer
and president, serves as chairman and is a 50% shareholder. The patents will be
expired in 2024.





Trademarks





We have received from Stock Co. a
perpetual and non-exclusive license to use the word “RENHUANG” in our trade name
and as a trademark in connection with the sale of our
products.





Design
Patents





Design
patents are one of three patent categories available under Chinese patent law
and are awarded to recognize a unique shape, pattern, or a combination of the
two, in an industrial application. A design patent can strengthen brand value by
protecting a valuable item of intellectual property.  On December 20,
2009, the State Intellectual Property Office of China ("SIPO") of the People's
Republic of China recently granted us patent protection for the product
packaging design for its Compound Honeysuckle Granules.  The patent
term is 10 years. The package design of Compound Honeysuckle Granule is unique
and instantly recognizable with an array of bright colors.  The packaging
features images of the plants which form the key ingredients of the remedies,
reminding consumers that the products are all-natural, plant-based
products.  We now hold a total of four patents for packaging designs
for Tianma Pills, Shengmai Granules, Compound Honeysuckle Granules, and Ginseng
and Venison Extract and we intend to seek patents for other proprietary designs
by 2011.





Growth
Strategy





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





Global
market condition of depression and melancholy





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


11





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





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





Medical
Reform in China





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





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





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





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





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





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


12





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




Pursuant to the Notice Concerning Releasing the
State Medicine Catalogue for Basic Medical Insurance, Occupational Injury
Insurance and Maternity Insuranceof the PRC, all medicines in
the national essential drug list are Tier A medicines in the national medical
insurance catalog; a vast majority of patients will be fully reimbursed for
medicines listed in the national essential drug list. And therefore terminal
sales of the listed medicines at hospitals and drug stores will be spurred. Two
of our products, Banlangen Granules and Shengmai Granules, have been included in
the national essential drug list. We believe we will enjoy long-term benefits
from the healthcare reform as more patients could afford our products due to
such full reimbursement. In addition, we expect to become one of
China’s essential medicine suppliers as the PRC government moves forward with
its reforms in 2010 and 2011.





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





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





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





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





Competition





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





Botanical
anti-depression and nerve-regulation products





As a result of our low-cost access to
significant wild Siberian Ginseng (Acanthopanax) resources, our advanced
technology and equipment, our R&D efforts and our ability to effectively set
the standard on the market, we have become the main manufacturer of these
products, with approximately 51% market share as of fiscal year 2010. Our major
competitors are Heilongjiang Gerun Pharmaceutical Co., Ltd. and Harbin Shengyuan
Biological Engineering Co., Ltd. We intend to further develop this market
and strengthen our leadership position.


13





Biopharmaceutical
products





We are the main Shark Vital Capsules
manufacturer in China, with a market share of 3.7% as of fiscal year 2010. We
believe this product is approaching the end of its life cycle and have decreased
the marketing efforts for this product.  Our major competitors are
Beijing Saishali Biotechnology Research Center and Shantou Xianle
Pharmaceuticals Co., Ltd.




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





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





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




Botanical
Antibiotics and traditional OTC Chinese medicines





Our Banlangen Granules have a market
share of 13% as of fiscal year 2010.  Our major competitors are
Guangzhou Baiyunshan Hutchison Whampoa Chinese Medicine Co., Ltd. and Guangzhou
Xiangxue Bio-Medical Engineering Co., Ltd.





Our Compound Honeysuckle Granules have
a market share of 15.5% as of fiscal year 2010. Our major competitors are Hebei
Guojin Pharmaceutical Co., Ltd. and Shiyitang Pharmaceutical Factory of Harbin
Pharmaceutical Group.





Our Shengmai Granules have a market
share of 5% as of fiscal year 2010. Our major competitors are Hebei Meibao
Pharmaceutical Co., Ltd. and Guangxi Nanjing Weiwei Pharmacy Co.
Ltd.





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




Government
Regulation





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





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


14





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





Pharmaceutical
Manufacturer





As a manufacturer of pharmaceutical
products and raw materials, we are subject to continuing regulation by the SFDA.
Pursuant to the PRC laws and regulations on the administration and supervision
of the pharmaceutical manufacturers in the PRC, a pharmaceutical manufacturer
must obtain pharmaceutical manufacturing permit from SFDA’s provincial branch.
This permit is valid for five years and is renewable upon its expiration. Our
current pharmaceutical manufacturing permit, issued by the Heilongjiang branch
of SFDA, will be valid until January 1, 2011. We have renewed our pharmaceutical
manufacturing permit as of October 31, 2010. The new permission would be
effective until 2015.





A pharmaceutical manufacturer must meet
the GMP standards for each of its production facilities in the PRC in respect of
each form of pharmaceutical products it produces. If a manufacturer meets the
GMP standards, SFDA will issue to the manufacturer a GMP certificate with a
five-year validity period. We have obtained GMP certification from SFDA to
produce pharmaceutical products and raw materials in China for all of our
manufacturing facilities.  The GMP certification criteria include
institution and staff qualifications, production premises and facilities,
equipment, raw materials, hygiene conditions, production management, quality
controls, product distributions, maintenance of sales records and manner of
handling customer complaints and adverse reaction reports. In addition, we have
obtained pharmaceutical manufacturing permits from the provincial food and drug
administration. Our current pharmaceutical manufacturing permit, issued by
the Heilongjiang branch of SFDA, will be valid until August 17,
2011. We expect to renew our GMP in due course.





Approval
and Registration of Pharmaceutical Products





A medicine must be registered and
approved by the SFDA before it can be manufactured. A pharmaceutical
manufacturer is allowed to manufacture a medicine only if it has obtained the
medicine registration approval of such medicine. The registration and approval
process requires the manufacturer to submit to SFDA a registration application
containing detailed information concerning the efficacy and quality of the
medicine and the manufacturing process and the production facilities the
manufacturer expects to use. The effective term of such medicine registration
approval is five years and the pharmaceutical manufacturer needs to apply
for and obtain the renewed medicine registration approval if it intends to
continue manufacturing such medicine upon the expiration of the first five-year
term. The process by SFDA for issuing and renewing the medicine registration
approvals can be lengthy, and the results are unpredictable.





All of our products other than Ginseng
and Venison Extract have received medicine registration approvals from SFDA,
which approves their manufacturing with a national standard. We are applying for
transfer the production approval of Ginseng and Venison Extract from Stock Co,
to us, and expected to complete the transfer in 2011. Our PRC subsidiary is in
the process of renewing the drug approval registrations for certain of its
products and medicines that are currently in production. Such applications have
been accepted by SFDA and our PRC subsidiary is allowed by SFDA to continue to
use the current drug approval numbers to manufacture its products and medicines
during the application process.


15




Pursuant to a license agreement of drug
approval numbers between Stock Co. and our PRC subsidiary, our PRC subsidiary is
also producing two additional products (namely Siberian Ginseng
Extract and Ginseng and Venison Extract) which are registered under the
name of Stock Co. These three products are produced in Dofanghong pharmaceutical
plant, the ownership of which is still under Stock Co. We have submitted
applications to SFDA for the transfer of the registrations of these three
products from Stock Co. to us. We will not be charged of any license fee under
the agreement before the transfer is completed. Such arrangement made by
our PRC subsidiary may be deemed as producing these three products without
obtaining required drug approvals before we obtain the production permission of
the drugs, which may result in administrative penalties including confiscation
of the inventories of these three products, confiscation of the gains arising
from the manufacturing of these three products, fines, suspension of the
operation and/or revocation of the Drug Production Permit of our PRC
subsidiary.





Price
Controls





The retail prices of certain
pharmaceuticals sold in China, primarily those included in the national and
provincial Medical Insurance Catalogs and those pharmaceuticals whose production
or trading are deemed to constitute monopolies are subject to price controls in
the form of fixed prices or price ceilings. The retail prices of medicines that
are subject to price controls are administered by the Price Control Office of
the National Development and Reform Commission, or the NDRC, and provincial and
regional price control authorities.  Of our products, .are subject to
price controls. These seven products accounted for 47.54% of our total sales in
fiscal year 2010.





Reimbursement
Under the National Medical Insurance Program





The Ministry of Labor and Social
Security, together with other government authorities of the PRC, determines
which medicines are to be included in or removed from the national insurance
medicine catalog (including Tier A and Tier B medicines) for the National
Medical Insurance Program, which may affect the amounts reimbursable to program
participants for their purchases of medicines. These determinations are based on
a number of factors, including price and efficacy of a medicine. Although it is
designated as a national program, the implementation of the National Medical
Insurance Program is delegated to provincial governments, each of which has
established its own medicine catalog. A provincial government must include all
Tier A medicines listed in the national insurance medicine catalog in its
provincial medicine catalog, but may at its sole discretion add other medicines
to, or exclude Tier B medicines listed in the national insurance medicine
catalog from, its provincial medicine catalog, so long as the combined numbers
of the medicines added and excluded do not exceed 15% of the Tier B medicines
listed in the national catalog. Depending on which Tier A or Tier B medicine is
classified as in the provincial medicine catalog, a National Medical Insurance
Program participant residing in that province can be reimbursed for the full
cost of a Tier A medicine and for part of the cost of a Tier B
medicine.





Currently, four dosages of our
products, including Siberian Ginseng Tablets, Shengmai Granules, Banlangen
Granules and Qing Re Jie Du Oral Liquid, are included in the national catalog of
the 2009 version which is currently effective and seven dosages of our products,
including Siberian Ginseng Tablets, Shengmai Granules, Banlangen Granules,
Compound Honeysuckle Granules, Tianma Pills, Compound Yangjiao Tablets and Qing
Re Jie Du Oral Liquid, are included in the provincial medicine catalogs of
Heilongjiang province.


16


National
essential drug list





The national essential drug list is a
part of the recent 2009 healthcare reform of the PRC. This new catalog is
considered superior to the national medical insurance catalog because all
medicines in the essential drug list are Tier A medicines in the national
medical insurance catalog. Under the healthcare reform, the Chinese government
proposed to establish a national basic medicine system based on a national
essential drug list. According to the relevant policy, 90% of China’s citizens
will be covered by a universal healthcare system by the year 2012. As a result,
a vast majority of patients will be fully reimbursed for medicines listed in the
national essential drug list and partially reimbursed for medicines listed in
the national medicine insurance catalog for the National Medical Insurance
Program. Two of our products, Shengmai Granules and Banlangen Granules, have
been included in the national essential drug list. We therefore believe we will
enjoy long-term benefits from the healthcare reform as more patients could
afford our products due to such full reimbursement. In addition, we expect that
we will become one of China’s essential medicine suppliers as the PRC government
moves forward with its reforms in  2011.





Environmental
Matters





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





Employees





As of December 31, 2010, we have 66
full-time employees who have entered into labor contracts with our PRC
subsidiary; we have approximately 561 employees dispatched from a labor
dispatching company.  We have approximately 104 employees in
management positions, 30 in research and development, 400 in the production,
storage and distribution, and 27 in the marketing and sales (excluding our 3,000
distributors in over 70 sales centers across 24 provinces in China). Our PRC
subsidiary may not fully contribute the social insurance and housing fund for
such 66 employees, and may not fully contribute the social insurance for the 450
dispatched employees as required by the agreement between our PRC subsidiary and
the relevant employee dispatching agency.





Properties





We lease our Ah City Natural and
Biopharmaceutical plant and our Dongfanghong Pharmaceutical plant from Stock
Co., a company of which Mr. Shaoming Li, our chairman, chief executive officer
and president, is a 50% shareholder and chairman of our board of directors. The
lease is approximately 105,000 square feet used for production and inventory and
is paid monthly.





On October 12, 2009, we entered into a
purchase agreement with Stock Co. to acquire the land use right, property and
plant located at our Ah City Natural and Biopharmaceutical plant for a total
consideration of $23,472,000. Pursuant to the purchase agreement, a payment of
$14,670,000 was made to Stock Co. in October 2009, with a final payment of
$8,802,000 due by December 31, 2011, at which time title for the assets will be
transferred.




17





Our PRC subsidiary entered into a
Contract Letter dated March 3, 2007 with Yerui Pharmaceutical Co of Zhongfa
Industry Group (“Yerui”), under which our PRC subsidiary may, at a consideration
of RMB 3,600,000 (including repayment of a bank loan granted by Agricultural
Bank of China originally borrowed by Yerui with the amount of RMB 1,090,000),
acquire the properties and assets of Yerui’s Chinese traditional extraction
plant located at Qingyang Area of Harbin. Our PRC subsidiary is currently
allowed by Yerui to occupy and use the Qingyang plant. However, our PRC
subsidiary has not fully paid the bank loan on behalf of Yerui nor has the
ownership of the properties of Qingyang plant been transferred to our PRC
subsidiary. Additionally, the properties of Qingyang plant have been mortgaged
to Agricultural Bank of China as collateral for the bank loan, and the
Agricultural Bank of China will have the right to dispose of the mortgaged
properties.





Our PRC subsidiary entered into a
Property Purchase Contract dated April 10, 2010 with Heilongjiang Yongtai Co,
pursuant to which our PRC subsidiary may purchase the 10th and
11th
floors of the building located at No. 28, Changjiang St., Nangang District of
Harbin Municipal. Our PRC subsidiary has paid the 1st
installment of the total purchase price pursuant to such Property Purchase
Contract and upon the full payment of the purchase price, Heilongjiang Yongtai
Co. will transfer the ownership of such property to our PRC
subsidiary.





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




Legal
Proceedings





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





Corporate
Information




Our principal executive office is
located at The 11th Floor, Changjiang International Building, No. 28, Changjiang
Road, Nangang District, Harbin, Heilongjiang Province, P.R. China 150090. Our
telephone number at that address is 86-451-8260-2162. Our website address is
www.renhuang.com. The information on our website is not a part of this Form
10-K.


18


Item
1A.  Risk
Factors.




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





Risks
Related to our Business





Our
products may not achieve or maintain widespread market acceptance.





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





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


·
            the
      brand effect of our products and channel
  loyalty;


·
            the
      effectiveness of our sales and marketing
  efforts;


·
            the
      pricing and cost effectiveness of our
products;


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


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





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





Our
future research and development projects may not be successful.





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





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


19





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





Our products compete with products with
similar medical efficacy in similar market areas. Some of our competitors are
well established and may have greater financial, marketing, personnel and other
resources. The pharmaceutical industry is also characterized by the frequent
introduction of new products. We may be unable to compete successfully or our
competitors may develop products which have greater medical efficacy or gain
wider market acceptance than ours.





Our
disclosure controls and procedures and our internal control over financial
reporting were ineffective until recently,  although we have taken
remedial measures, if we are unable to effectively improve and maintain such
controls and procedures, investors could lose confidence in our financial and
other reports, the price of our shares of common stock may decline, and we may
be subject to increased risks and liabilities.





As a public company, we are subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended,
and the Sarbanes-Oxley Act of 2002. The Securities Exchange Act requires, among
other things, that we file annual, quarterly and current reports with respect to
our business and financial condition. Section 404 of the Sarbanes-Oxley Act
requires, among other things, that we include a report of our management on our
internal control over financial reporting.  We are also required to
include quarterly reports and certifications of our management regarding the
effectiveness of our disclosure controls and procedures. In the past, our
management has concluded that our disclosure controls and procedures and
internal control over financial reporting were ineffective due to our late
filings, and more recently, that we lack sufficient qualified accounting and
financial personnel with an appropriate level of US GAAP knowledge and
experience appropriate to meet our financial reporting
requirements.  Although we have been diligent in implementing remedial
measures since the third quarter of fiscal 2009, including hiring a new chief
financial officer with US GAAP and SEC reporting experience, 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, there is no assurance that we will continue to have effective
disclosure controls and procedures and internal control over financial
reporting. If we cannot effectively and efficiently improve our controls and
procedures, we could suffer material misstatements in our financial statements
and other information we report and fail to meet our reporting obligations,
which would likely cause investors to lose confidence in our reported financial
and other information. This could lead to a decline in the trading price of our
shares of common stock. Additionally, ineffective internal control over
financial reporting could expose us to increased risk of fraud or misuse of
corporate assets and subject us to potential delisting from NYSE Amex,
regulatory investigations and civil or criminal sanctions.





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





As of October 31, 2010, Mr. Shaoming
Li, our chairman, chief executive officer and president, owns 17,850,000 shares
of our common stock, which represents approximately 48% of our outstanding
shares of common stock. Mr. Li is able to exercise significant influence over
all matters requiring stockholder approval, including the election of a majority
of the directors and determination of significant corporate actions. This
concentration of ownership could also have the effect of delaying or preventing
a change in control that could otherwise be beneficial to our
stockholders.




20




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





We have entered into, and may continue
to enter into, transactions with our related parties, including without
limitation Heilongjiang Renhuang Pharmaceutical Limited and Harbin Renhuang
Pharmaceutical Stock Co., Ltd. (“Stock Co.”), during the normal course of our
business or otherwise.  Mr. Shaoming Li, a major stockholder of ours
and our chairman, chief executive officer and president, is a major stockholder
of Heilongjiang Renhuang Pharmaceutical Limited and chairman of the board of
directors and 50% stockholder of Stock Co.  Among others, in 2009, we
entered into purchase agreements with Stock Co. to acquire certain real property
and intellectual property for a total consideration of $23,472,000 and
$2,347,200, respectively.  The purchase prices were based on fair
market value appraised by independent third party appraisal
firm.  Although we believe that the transactions we have entered into
with Heilongjiang Renhuang Pharmaceutical Limited and Stock Co. are, on the
whole, no more favorable, and no less favorable, than those available from
unaffiliated third parties, there were no independent directors on our board at
those times to approve such transactions. As such, the transactions were
approved by only Mr. Shaoming Li in his capacity as our sole director. See
“Certain Relationships and Related Party Transactions.” We may continue to enter
into transactions with Heilongjiang Renhuang Pharmaceutical Limited and Stock
Co. in the future.





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





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





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





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





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





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


21




Currently, of our products, Siberian
Ginseng Tablets, Compound Yangjiao Tablets, Tianman Pills, Banlangen Granules,
Qing Re Jie Du Oral Liquid, Compound Honeysuckle Granules and Shengmai Granules,
are subject to such price controls. These seven products accounted for 47.54% of
our total sales in fiscal year 2010.





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





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





·
            increasing
      market demand;


·
            inflation;


·
            severe
      climatic and environmental
conditions;


·
            seasonal
      factors, and


·
            changes
      in governmental regulations and
programs.





Changes to our raw materials prices may
result in increases in production and packaging costs, and we may be unable to
raise the prices of our products to offset the increased costs in the short-term
or at all. As a result, our results of operations may be materially and
adversely affected.





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





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





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





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





·
            unforeseen
      safety issues;


·
            determination
      of dosing issues;


·
            lack
      of effectiveness during clinical
trials;


·
            slower
      than expected rates of patient
recruitment;


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


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





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


22





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





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





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





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





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


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


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





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





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





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





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





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


23





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





·
            developing
  drugs;


·
            undertaking pre-clinical testing and human
      clinical trials;


·
            obtaining regulatory approvals of
      drugs;


·
            formulating and manufacturing drugs;
      and


·
            launching, marketing and selling
      drugs.





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





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





We
have limited patent protection and are subject to substantial
competition.





We only have two patented production
techniques, Injection Preparation Method against Hepatitis B (Patent No.:
ZL200410043718.5) and Total Alkaloids of Sophora Flavescens
Extraction Method (Patent No.: ZL200410043717.0). Many pharmaceutical
companies compete in the same market segment with similar products or products
having comparable medicinal applications or therapeutic effects which may be
used as direct substitutes for our products.  As a result of the lack
of patent protection, competitors with potential substitutes could launch
similar products in the market with their prices analogous to or lower than
those manufactured and sold by us.  Further, the lack of patent
protection could also attract an even greater number of competitors who believe
they can develop products that are substantially similar to ours at a lower
cost.





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





The sale and marketing of our products
are subject to regulation in the PRC and in most other countries where we intend
to conduct business. For a significant portion of our products, we need to
obtain and renew licenses and registrations with the PRC State Food and Drug
Administration, or SFDA, and its equivalent in other markets. The processes for
obtaining regulatory clearances or approvals can be lengthy and expensive, and
the results are unpredictable. Our PRC subsidiary is in the process of renewing
the approval registrations for its products and medicines that are currently in
production. Such applications have been accepted by SFDA and our PRC subsidiary
is allowed by SFDA to continue to use the current drug approval numbers to
manufacture its products and medicines during the application period. If we are
unable to obtain clearances or approvals needed to market existing or new
products, or obtain such clearances or approvals in a timely fashion, our
business could be significantly disrupted and our sales and profitability could
be materially and adversely affected.


24





In addition, our PRC subsidiary is
producing three products which are registered under the name of Stock Co.
pursuant to the agreements between Stock Co. and our PRC subsidiary related to
the free use of drug approval numbers. We have submitted applications to SFDA
for the transfer of the registrations of these three products from Stock Co. to
us.  Before the transfer is completed, such arrangement made by our
PRC subsidiary may be deemed as producing these three products without obtaining
required drug approvals, which may result in administrative penalties including
confiscation of the inventories of these three products, confiscation of the
gains arising from the manufacturing of these three products, fines, suspension
of the operation and/or revocation of the Drug Production Permit of our PRC
subsidiary.





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





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





We will continue to incur significant
legal, accounting and other expenses to comply with regulatory requirements. The
Sarbanes-Oxley Act of 2002, together with rules implemented by the Securities
and Exchange Commission has required and will require us to make changes in our
corporate governance, public disclosure and compliance practices. Compliance
with these rules and regulations has increased our legal and financial
compliance costs, which have had, and may continue to have, an adverse effect on
our profitability.





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





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





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





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


25




We
are unable to assure that all of the distributors and sales centers which are
selling our products have obtained the medicine supply approvals and meet the
Good Supply Practice standards.





A distributor of pharmaceutical
products in China must obtain pharmaceutical distribution permit from the
competent provincial or local SFDA branch. Furthermore, SFDA applies Good Supply
Practice standards, or GSP standards, to all pharmaceutical wholesale and retail
distributors to ensure quality of drug distribution in China.





We believe that our PRC subsidiary does
not need to apply for the pharmaceutical distribution permit or GSP
certification because our PRC subsidiary does not engage in the wholesale or
retail of pharmaceutical manufacturer’s medicines. Instead, 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 in China. Such distributors need to obtain the
pharmaceutical distribution permit and GSP certification to sell our products.
We are unable to assure that all of the distributors and sales centers which are
selling our products have obtained the medicine supply approvals and meet the
Good Supply Practice standards.





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





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





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





Our success is dependent, to a large
extent, on our ability to retain the services of our executive management, who
have contributed to our growth and expansion to date. Our chairman, chief
executive officer and president, Mr. Shaoming Li, has been, and will continue to
be, instrumental to our success. Accordingly, the loss of his services, without
suitable replacements, will have an adverse effect on our business generally,
operating results and future prospects. We have not entered into an employment
agreement with Mr. Li.





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





Our
holding company structure may hinder the payment of dividends.




China Botanic Pharmaceutical Inc. has
no direct business operations, other than its ownership of our subsidiaries. We
intend reinvest all undistributed earnings to expand our PRC operations,
which the management would be most benefit our shareholder. Should we decide in
the future to payout dividends, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us due to
restrictive covenants in agreements, restrictions on the conversion of local
currency into U.S. dollars or other hard currency and other regulatory
restrictions applicable to our subsidiaries. If future dividends are paid in
Renminbi, fluctuations in the exchange rate for the conversion of Renminbi into
U.S. dollars may reduce the amount received by U.S. stockholders upon conversion
of the dividend payment into U.S. dollars.


26




A provision has not been made at
October 31, 2010 for U.S. or additional foreign withholding taxes on
approximately $53,456,047 of undistributed earnings of foreign subsidiaries
because it is the present intention of management to reinvest the undistributed
earnings indefinitely in foreign operations.





Risks
Related to Doing Business in China





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





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





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





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





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





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





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


27




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





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





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





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





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





We are also subject to numerous
national, provincial and local governmental regulations, including
environmental, labor, waste management, health and safety matters and product
specifications and regulatory approvals from healthcare agencies. We are subject
to laws and regulations governing our relationship with our employees including:
wage requirements, limitations on hours worked, working and safety conditions,
citizenship requirements, work permits and travel restrictions. These local
labor laws and regulations may require substantial resources for compliance. Our
PRC subsidiary may not fully contribute the social insurance and housing fund
for the employees and the failure to do so may result in penalties and fines
from PRC labor administration authorities at the provincial and local
level.  We are alsosubject to significant
government regulation with regard to property ownership and use in connection
with our facilities in the PRC, import restrictions, currency restrictions and
restrictions on the volume of domestic sales and other areas of regulation.
These regulations can limit our ability to react to market pressures in a timely
or effective way, thus causing us to lose business or miss opportunities to
expand our business.


28




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





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




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





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





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





For the fiscal years of 2010 and 2009,
our PRC subsidiary was granted by the national tax office of Ah City a tax
holiday and was fully exempt from the 25% enterprise income tax. This tax
holiday was granted, without a statutory basis at the national level, by the
governmental authorities of Ah City for the purposes of promoting local economic
development.  As a result, this tax holiday may be terminated and our
PRC subsidiary may be subject to the 25% enterprise income tax upon the
termination of the tax holiday.


29




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





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





Risks
Related to our Securities





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





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





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





Our articles of incorporation provide
that our board of directors will be authorized to issue from time to time,
without further stockholder approval, up to 1,000,000 additional shares of
preferred stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each series, including the dividend rights, dividend rates, conversion
rights, voting rights, rights of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of any series. Such shares of preferred
stock could have preferences over our common stock with respect to dividends and
liquidation rights. We may issue additional preferred stock in ways which may
delay, defer or prevent a change of control of our company without further
action by our stockholders. Such shares of preferred stock may be issued with
voting rights that may adversely affect the voting power of the holders of our
common stock by increasing the number of outstanding shares having voting
rights, and by the creation of class or series voting rights.




30




We
do not expect to pay dividends.





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




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





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





The
market price for our shares may be volatile.





The
market price for our shares is likely to be highly volatile and subject to wide
fluctuations in response to factors including the following:





·
            actual
      or anticipated fluctuations in our quarterly operating results and changes
      or revisions of our expected
results;


·
            changes
      in financial estimates by securities research
  analysts;


·
            conditions
      in the markets for our products;


·
            changes
      in the economic performance or market valuations of companies in our
      industry;


·
            announcements
      by us, or our competitors of new products, acquisitions, strategic
      relationships, joint ventures or capital
  commitments;


·
            addition
      or departure of senior management and key personnel;
  and


·
            fluctuations
      of exchange rates between the RMB and the U.S.
  dollar.





Volatility
in the price of our shares may result in stockholder litigation that could in
turn result in substantial costs and a diversion of our management’s attention
and resources.





The
financial markets in the United States and other countries have experienced
significant price and volume fluctuations, and market prices have been and
continue to be extremely volatile. Volatility in the price of our shares may be
caused by factors outside of our control and may be unrelated or
disproportionate to our results of operations. In the past, following periods of
volatility in the market price of a public company’s securities, stockholders
have frequently instituted securities class action litigation against that
company. Litigation of this kind could result in substantial costs and a
diversion of our management’s attention and resources.





Because
we do not intend to pay dividends on our shares, stockholders will benefit from
an investment in our shares only if those shares appreciate in
value.


31




We
currently intend to retain all future earnings, if any, for use in the
operations and expansion of the business. As a result, we do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the declaration and payment of cash dividends will be at the discretion of our
board of directors and will depend on factors our board of directors deems
relevant, including among others, our results of operations, financial condition
and cash requirements, business prospects, and the terms of our credit
facilities, if any, and any other financing arrangements. Accordingly,
realization of a gain on stockholders’ investments will depend on the
appreciation of the price of our shares, and there is no guarantee that our
shares will appreciate in value.





We
may need additional capital, and the sale of additional shares or equity or debt
securities could result in additional dilution to our stockholders.





We
believe that our current cash and cash equivalents, anticipated cash flow from
operations will be sufficient to meet our anticipated cash needs for the
foreseeable future. As of October 31, 2010, we had cash and cash
equivalents of approximately $27.83 milloion and total current assets of
approximately $50.52 million. As of October 31, 2010, we had a working capital
surplus of approximately $47.13 million. We may, however, require additional
cash resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If these
resources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or obtain one or more additional credit
facilities. The sale of additional equity securities could result in additional
dilution to our stockholders. The incurrence of indebtedness would result in
increased debt service obligations and could result in operating and financing
covenants that would restrict our operations. It is uncertain whether financing
will be available in amounts or on terms acceptable to us, if at
all.





Sales
of a substantial number of shares of our common stock may adversely affect the
market price of our common stock and the issuance of additional shares will
dilute all other stockholdings.





Sales of
a substantial number of shares of our common stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of our common stock. Our Articles of Incorporation permits the issuance of up to
approximately100,000,000 shares of common stock, of which there are 37,239,536outstanding as of October
31, 2010. . Thus, we have the ability to issue substantial amounts of common
stock in the future, which would dilute the percentage ownership held by our
current stockholders.




Item
1B.Unresolved
Staff Comments.





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





Item
2.  Properties.





We lease our principal executive
offices located at No. 281 Taiping Road, Taiping District, Harbin, Heilongjiang
Province, 150050, China, our Ah City Natural and Biopharmaceutical plant and our
Dongfanghong Pharmaceutical plant from Stock Co., a company 50% owned by Mr.
Shaoming Li, our chairman, chief executive officer and president.  The
lease is a total of 105,416 square foot office space, with approximately 15,000
square feet used for executive offices and approximately 90,000 square feet used
for production and inventory.  The lease is year-to-year lease, with a
monthly rent of $52,246.




32




On October 12, 2009, we entered into a
purchase agreement with Stock Co. to acquire the land use right, property and
plant located at our Ah City Natural and Biopharmaceutical plant for a total
consideration of $23,472,000.  Pursuant to the purchase agreement, a
payment of $14,670,000 was made to Stock Co., in October 2009 with a final
payment of $8,802,000 due by December 31, 2011, at which time title for the
assets will be transferred.





We lease a 970 square meter office
space in Harbin, Heilongjiang Province from a third party with a current monthly
rent of $10,742. This lease is from May 1, 2007 to April 30, 2010.





We own our Qingyangnatural Extraction
plant.





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





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




Item
3.  Legal
Proceedings.





From time to time, we may be involved
in litigation relating to claims arising out of its operations in the normal
course of business. Any of these claims could subject us to costly litigation
and, while we generally believe that we have adequate insurance to cover many
different types of liabilities, our insurance carriers may deny coverage or our
policy limits may be inadequate to fully satisfy any damage awards or
settlements. If this were to happen, the payment of any such awards could have a
material adverse effect on our results of operations and financial position.
Additionally, any such claims, whether or not successful, could damage our
reputation and business. As of January 10, 2011, we are not a party to, or
threatened by, any legal proceedings, the adverse outcome of which, in
management’s opinion, individually or in the aggregate, would have a material
adverse effect on our results of operations or financial position.




Item
4.[Removed and
Reserved.]




33




PART
II





Item
5.  Market for the Registrant’s Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities





Market
Information





On July 2, 2010, our common stock
started trading on the NYSE Amex under the symbol “CBP.”  Prior to the
listing on the NYSE Amex, our common stock was quoted on the Pink Sheets OTC
Markets and OTC Bulletin Board.  The table below lists the high and
low sales price or bid price, as applicable, per share of our common stock for
the respective periods as reported on the Pink Sheet OTC Market, OTC Bulletin
Board or the NYSE Amex, as applicable.  The following prices for each
quarter during the past two fiscal years reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.





High
                
                
                LowYear
      Ended October 31, 2009:1st
      Quarter
                
                $
                0.65
                
                
                $
                0.162nd
      Quarter
                
                $
                0.51
                
                
                $
                0.163rd
      Quarter
                
                $
                0.69
                
                
                $
                0.204th
      Quarter
                
                $
                1.69
                
                
                $
                0.50Year
      Ending October 31, 2010:1st
      Quarter
                
                $
                1.18
                
                
                $
                0.522nd
      Quarter
                
                $
                3.00
                
                
                $
                1.003rd
      Quarter
                
                $
                2.79
                
                
                $
                1.694th
      Quarter
                
                $
                2.36
                
                
                $
                1.26





On
January 18, 2011, the closing sale price of our shares of common stock was $2.12
per share and there were 37,239,536 shares of our common stock
outstanding.  On October 31, 2010, our shares of common stock were
held by approximately 78 stockholders of record.  The number of
record holders was determined from the records of our transfer agent and does
not include beneficial owners of our common stock whose shares are held in the
names of various security brokers, dealers, and registered clearing
agencies.





Dividend
Policy





We presently do not expect to declare
or pay such dividends in the foreseeable future and reinvest all undistributed
earnings to expand our PRC operations, which the management would most benefit
our shareholder.. Undistributed earnings will be reinvested in our
operations in PRC. Payment of dividends to our stockholders would require
payment of dividends by our PRC subsidiary to us.  This, in turn,
would require a conversion of Renminbi into US dollars and repatriation of funds
to the US.  Under current PRC law, the conversion of Renminbi into
foreign currency generally requires government consent. Further, government
authorities may impose restrictions that could have a negative impact in the
future on the conversion process or on our cash needs, which, in turn, affects
our ability to pay cash dividends to our stockholders.  Although our
subsidiary’s classification as a wholly foreign owned enterprise under PRC law
permits them to declare dividends and repatriate their funds to us in the United
States, any change in this status or the regulations permitting such
repatriation could prevent them from doing so.  Any inability to
repatriate funds to us would in turn prevent payments of dividends to our
stockholders.


34




Item
6. Selected Financial Data





Not
applicable.





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





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements and related notes appearing elsewhere in this Annual Report. In
addition to historical financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Annual Report,
particularly in “Item 1A. Risk Factors.”





Overview





We are 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 over 71.1% 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.





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, which accounted for 47.54% of our total revenues in
      fiscal year 2010, are listed on the National 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.




35




·
            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.





·
            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.


36




Results
of Operations





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





For the years ended October 31,2010
                                  
                                  
                                  2009($ in thousands)Statements
      of Operations DataSales,
      net
                                  
                                  
                                  55,184
                                  
                                  
                                  
                                  43,411Cost
      of goods sold
                                  
                                  
                                  25,766
                                  
                                  
                                  
                                  20,311Gross
      profit
                                  
                                  
                                  29,418
                                  
                                  
                                  
                                  23,100Operating
      and administrative expenses:
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Sales
      and distribution
                                  
                                  
                                  4,966
                                  
                                  
                                  
                                  3,650General
      and administrative
                                  
                                  
                                  3,615
                                  
                                  
                                  
                                  2,117Research
      and development
                                  
                                  
                                  3,043
                                  
                                  
                                  
                                  2,529Total
      operating expenses
                                  
                                  
                                  11,624
                                  
                                  
                                  
                                  8,296Income
      from operations
                                  
                                  
                                  17,794
                                  
                                  
                                  
                                  14,804Other
      income:
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Other
      income, net
                                  
                                  
                                  75
                                  
                                  
                                  
                                  43Income
      from operations before income tax expenses
                                  
                                  
                                  17,869
                                  
                                  
                                  
                                  14,847Income
      tax expensesNet
      income
                                  
                                  
                                  17,869
                                  
                                  
                                  
                                  14,847Other
      comprehensive income:
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Cumulative
      currency translation adjustments
                                  
                                  
                                  1,401
                                  
                                  
                                  
                                  66Total
      comprehensive income
                                  
                                  
                                  19,270
                                  
                                  
                                  
                                  14,913





Comparison
of Years Ended October 31, 2010 and 2009





Total
Comprehensive Income


Total
comprehensive income increased by approximately $4.36 million, or 29.2%, from
approximately $14.91 million in 2009 to approximately $19.27 million in
2010.  This increase was primarily attributable to an increase of
approximately $11.77 million, or 27.11%, in sales, and an increase of
approximately $5.46 million, or 26.9%, in cost of goods sold and an increase of
approximately $1.32 million, or 36.05%, in sales and marketing expenses, an
increase of approximately $1.50 million, or 70.7%, in general and administration
expenses an increase of approximately $0.51 million, or 20.3%, in research and
development expenses, and an increase of $1.33 million in cumulative currency
translation adjustments.  Our gross profit margin increased from 53.2%
in 2009 to 53.3% in 2010.





Sales


Our sales
consist primarily of revenues generated from sales of Botanical anti-depression
and nerve regulation products; Biopharmaceutical products and Botanical
antibiotics and traditional OTC Chinese medicines.  Sales increased by
approximately $11.77 million, or 27.12%, from approximately $43.41 million in
2009 to approximately $55.18 million in 2010.  This increase in sales
was primarily attributable to launching of the new OTC medicines, and increased
demand and strong market acceptance of our products as a result of our marketing
efforts, in addition to price increase for a number of our
products.




37




We
provide incentive sales rebates to our sales agents.  The rebate rate,
which is determined on a product basis, averaged from 12% to 19% of sales for
the year ended October 31, 2010 and 2009, respectively.  Sales rebates
are netted against total sales. The following table sets forth information
regarding the net sales of our principal products before sales rebate during the
fiscal years ended October 31, 2010 and 2009:





2010
                          
                          
                          2009
                          
                          
                          2010 over 2009Product name
                          
                          Quantity
                            (Pack’000)
                          
                          
                          Amount
                            ($’000)
                          
                          
                          % of
                            Sales
                          
                          
                          Quantity
                            (Pack’000)
                          
                          
                          Amount
                            ($’000)
                          
                          
                          % of
                            Sales
                          
                          
                          Quantity
                            (Pack’000)
                          
                          
                          Amount
                            ($’000)
                          
                          
                          % of
                            SalesSiberian
      Ginseng (Acanthopanax) Series
                          
                          
                          388
                          
                          
                          
                          27,971
                          
                          
                          
                          50.6
                          
                          
                          
                          408
                          
                          
                          
                          24,022
                          
                          
                          
                          55.4
                          
                          
                          
                          (21
                          )
                          
                          
                          3,949
                          
                          
                          
                          (4.65
                          )Tianma
      Series
                          
                          
                          59
                          
                          
                          
                          3,661
                          
                          
                          
                          6.6
                          
                          
                          
                          68
                          
                          
                          
                          3,927
                          
                          
                          
                          9.0
                          
                          
                          
                          (9
                          )
                          
                          
                          (266
                          )
                          
                          
                          (2.41
                          )Compound
      Yangjiao Tablets
                          
                          
                          77
                          
                          
                          
                          7,271
                          
                          
                          
                          13.2
                          
                          
                          
                          91
                          
                          
                          
                          7,281
                          
                          
                          
                          16.8
                          
                          
                          
                          (14
                          )
                          
                          
                          (10
                          )
                          
                          
                          (3.60
                          )Shark
      Vital Capsules
                          
                          
                          5
                          
                          
                          
                          1,341
                          
                          
                          
                          2.4
                          
                          
                          
                          13
                          
                          
                          
                          3,319
                          
                          
                          
                          7.6
                          
                          
                          
                          (8
                          )
                          
                          
                          (1,978
                          )
                          
                          
                          (5.22
                          )Shengmai
      Granules
                          
                          
                          79
                          
                          
                          
                          2,469
                          
                          
                          
                          4.5
                          
                          
                          
                          104
                          
                          
                          
                          2,774
                          
                          
                          
                          6.4
                          
                          
                          
                          (25
                          )
                          
                          
                          (305
                          )
                          
                          
                          (1.91
                          )Banlangen
      Granules
                          
                          
                          49
                          
                          
                          
                          1,374
                          
                          
                          
                          2.5
                          
                          
                          
                          12
                          
                          
                          
                          306
                          
                          
                          
                          0.7
                          
                          
                          
                          37
                          
                          
                          
                          1,068
                          
                          
                          
                          1.79Compound
      Honeysuckle Granules
                          
                          
                          163
                          
                          
                          
                          9,423
                          
                          
                          
                          17.1
                          
                          
                          
                          31
                          
                          
                          
                          1,782
                          
                          
                          
                          4.1
                          
                          
                          
                          132
                          
                          
                          
                          7,641
                          
                          
                          
                          12.97Compound
      Schizandra  Tablets
                          
                          
                          5
                          
                          
                          
                          336
                          
                          
                          
                          0.6
                          
                          
                          
                          -
                          
                          
                          
                          0
                          
                          
                          
                          -
                          
                          
                          
                          5
                          
                          
                          
                          336
                          
                          
                          
                          0.61Ginseng
      and Venison Extract
                          
                          
                          10
                          
                          
                          
                          865
                          
                          
                          
                          1.6
                          
                          
                          
                          -
                          
                          
                          
                          0
                          
                          
                          
                          -
                          
                          
                          
                          10
                          
                          
                          
                          865
                          
                          
                          
                          1.57Qing
      Re Jie Du Oral Liquid
                          
                          
                          16
                          
                          
                          
                          473
                          
                          
                          
                          0.9
                          
                          
                          
                          -
                          
                          
                          
                          0
                          
                          
                          
                          -
                          
                          
                          
                          16
                          
                          
                          
                          473
                          
                          
                          
                          0.86851
                          
                          
                          
                          55,184
                          
                          
                          
                          100.0
                          
                          
                          
                          727
                          
                          
                          
                          43,411
                          
                          
                          
                          100
                          
                          
                          
                          124
                          
                          
                          
                          11,772
                          
                          
                          
                          -





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




In the
third quarter of our fiscal year 2010, we introduced two new products to the
market, Qing Re Jie Du Oral Liquid, which is used to cure seasonal
flu, and Compound Schisandra Tablets, also known as magnolia vine, has been
clinically proven to have significant benefits to the functioning and
regulation of the central nervous system. In the last quarter of 2009,
we introduced two new products to the market, Banlangen Granules and Compound
Honeysuckle Granules, both of which have well accepted anti-viral qualities, and
were in great demand during the H1N1 pandemic.


38




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




2010
                    
                    
                    2009Sales
      revenues (in thousands)
                    
                    $
                    62,701
                    
                    
                    $
                    52,260Total
      sales quantity (pack in thousands)
                    
                    
                    851
                    
                    
                    
                    727Average
      selling prices/pack (in thousands)
                    
                    $
                    73.68
                    
                    
                    $
                    71.88





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 Shengmai Granules as demonstrated in the following table, which
reflects the average sales price per pack by product for 2010 and 2009 and the
percentage change in the sales price per pack.





Average Price Per Pack
                          
                          
                          PercentageProduct
                          
                          2010
                          
                          
                          2009
                          
                          
                          ChangeSiberian
      Ginseng (Acanthopanax) Series
                          
                          $
                          83
                          
                          
                          $
                          69
                          
                          
                          
                          20.3Tianma
      Series
                          
                          
                          81
                          
                          
                          
                          75
                          
                          
                          
                          8.0Compound
      Yangjiao Tablets
                          
                          
                          94
                          
                          
                          
                          80
                          
                          
                          
                          17.5Shark
      Vital Capsules
                          
                          
                          469
                          
                          
                          
                          446
                          
                          
                          
                          5.2Shengmai
      Granules
                          
                          
                          41
                          
                          
                          
                          35
                          
                          
                          
                          17.1Banlangen
      Granules
                          
                          
                          28
                          
                          
                          
                          26
                          
                          
                          
                          7.7Compound
      Honeysuckle Granules
                          
                          
                          60
                          
                          
                          
                          57
                          
                          
                          
                          5.3Compound
      Schizandra  Tablets
                          
                          
                          88
                          
                          
                          
                          -
                          
                          
                          
                          -Ginseng
      and Venison Extract
                          
                          
                          86
                          
                          
                          
                          -
                          
                          
                          
                          -Qing
      Re Jie Du Oral Liquid
                          
                          
                          30
                          
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          73.79
                          
                          
                          $
                          71.85
                          
                          
                          
                          2.7





We expect
the demand for our products will continue to increase as a result of gaining
greater market acceptance, in particular the benefits of our Siberian Ginseng
(Acanthopanax) Series in treating depression and nerve-regulation. Further, we
believe many of our products will be listed in the reimbursement catalog of
essential medicine for health insurance. In addition, we anticipate that we will
be successful in becoming one of China’s essential medicine suppliers as the PRC
government moves forward with its Health Reforms in 2011.





Cost
of Goods Sold


Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs shipping and handling costs for the products
sold.  Cost of goods sold increased approximately $5.45 million, or
26.9%, from approximately $20.31 million in 2009 to approximately $25.77 million
in 2010.  This increase was primarily attributable to increase in
products sold and increases in certain raw material prices such as
sugar.





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


39




Operating
and Administrative Expenses


Our total
operating expenses consist primarily of sales and marketing expenses, general
and administrative expenses and research and development
expenses.  Our total operating expenses increased by approximately
$3.33 million, or 40.1%, from approximately $8.30 million in 2009 to
approximately $11.62 million in 2010.





Sales and
Marketing.  Our sales and marketing expenses consist primarily
of advertising and market promotion expenses, and other overhead expenses
incurred by the Company’s sales and marketing personnel. Sales and
marketing expenses increased approximately $1.32 million, or 36.1%, from
approximately $3.65 million for 2009 to approximately $4.97 million for
2010. This increase was primarily attributable to an increase of
approximately $1.21 million, or 33.47%, in advertising expenses as the company
intensified TV advertisements in Heilongjiang province for our botanic
anti-depression series. Sales and marketing expenses are likely to increase as
we continue expanding our distribution network throughout China and seek to
increase our market share and awareness of our products.





General and Administrative.
Our general and administrative expenses consist primarily of salary, travel,
entertainment expenses, benefits, share-based compensation, and professional
service fees.  General and administrative expenses increased by
approximately $1.50 million, or 70.7%, from approximately $2.11 million for 2009
to approximately $3.61 million for 2010.  This increase was primarily
attributable to increase of approximately $0.34 million, in warrants and options
granted for investor relation services, an increase in audit fees of $0.16
million, or 109.02% in professional service fee for SOX 404 compliance, an
increase in legal fees of $92,000, and an increase in amortization of
approximately $0.44 million. General and administrative expenses are likely to
increase as we continue to expand our production, sourcing capacity, and
distribution capacity throughout China.





Research and Development. Our
research and development expenses consist primarily of salary, equipment rental
expenses, and Siberian Ginseng (Acanthopanax) cultivation related
expenses.  Research and development expenses increased approximately
$0.51 million, or 20.3%, from approximately $2.53 million for 2009 to
approximately $3.04 million for 2010.  This increase was primarily
attributable to development of Siberian Ginseng (Acanthopanax) cultivation and
extraction of effective components of the Siberian Ginseng (Acanthopanax) plant,
and development of other products, and research in cultivation techniques for
Siberian Ginseng.  Research and development expenses are likely to
increase as we continue to devote our resources to development of new products
and enhancement of our existing products.





Income
from Operations


As a
result of the foregoing, our income from operations increased by approximately
$2.99 million, or 20.20%, from approximately $14.80 million to approximately
$17.79 million in 2010.





Income
Tax Expenses


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





Cumulative
Currency Translation Adjustments


Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar.  All
translation adjustments resulting from the translation of our financial
statements into U.S. dollars are reported as cumulative currency translation
adjustments.  Our cumulative currency translation adjustments
increased by approximately $1.33 million, from approximately $0.07 million in
2009 to approximately $1.40 million in 2010.


40




Liquidity
and Capital Resources





We had
retained earnings of approximately $53.46 million and $35.59 million as of
October 31, 2010 and 2009, respectively.  As of October 31, 2010,
we had cash and cash equivalents of approximately $27.83 million and total
current assets of approximately $50.52 million. As of October 31, 2010, we had a
working capital surplus of approximately $47.13 million.   We
believe our cash and cash equivalents are adequate to satisfy our working
capital needs and sustain our ongoing operations for the next twelve
months.





Our
summary cash flow information is as follows:




Year ended October 31Net cash provided by (used in):
                      
                      2010
                      
                      
                      2009($ in thousands)Operating
      activities
                      
                      
                      23,835
                      
                      
                      
                      13,068Investing
      activities
                      
                      
                      (4,699
                      )
                      
                      
                      (16,221
                      )Financing
      activities
                      
                      
                      -
                      
                      
                      
                      1,500





Net
Cash Provided by Operating Activities


Net cash
provided by operating activities increased approximately $10.77 million, from
net cash provided by operating activities of approximately $13.07 million in
2009 to net cash provided by operating activities of approximately $23.84
million in 2010.  This increase was primarily attributable to an
increase in net income from operations of approximately $3.02 million, a
increase in the level of decrease in trade receivables of approximately $6.14
million as a result of tightened credit terms given to customers, a decrease in
the level of increase in inventories of approximately $0.82 million, and an
decrease in value added tax payable of approximately $0.64 million.





Net
Cash Used in Investing Activities


Net cash
used in investing activities decreased approximately $11.52 million, from
approximately $16.22 million in 2009 to approximately $4.70 million in
2009. This decrease was primarily attributable to decrease in payments made
to purchase land use rights of approximately $10.73 million.





Net
Cash Provided by Financing Activities


Net cash
provided by financing activities decreased approximately $1.50 million, from
$1.50 million in 2009 to approximately $0 thousand in 2010.  This
decrease was attributable to consideration received from Allied Merit
International Investments, Inc. and Griffin Ventures Ltd for an aggregate of
2,142,856 shares of the Company’s common stock and 1,071,428 warrants with an
exercise price of $0.875 per share, and that no offering of our common stock was
made during 2010.





Outstanding
Long-Term Indebtedness





None


41




Expansion
Strategy
 
 We
believe the market for pharmaceutical products in China is growing
rapidly.  Our growth strategy involves capturing as much of this
market as possible during this rapid growth phase.  To implement this
strategy we plan to strengthen our dominant position in the Siberian Ginseng
(Acanthopanax) market, expand our Siberian Ginseng (Acanthopanax) cultivating
bases and improving the quality standards of Siberian Ginseng (Acanthopanax),
and extend our distribution network through internal distribution channels
reforms.  Our expansion strategy will require the continued retention
and investment of our earnings from operations and, we believe, additional
funding from private debt and equity financing.  In general, the
commitment of funds to research and development, or acquisition or construction
of plant and equipment tends to impair liquidity.  However, we believe
that because of the upward trend in our revenues in recent years, even if this
trend levels off, our income from continuing operations coupled with such
additional financing, if required, should provide sufficient liquidity to meet
our expansion needs.
 
 Off-balance
Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements.
 
 Capital
commitments
 
 We have
capital commitments for purchase of land use right, property and equipment and
resource rights from a related party, Stock Co, of approximately
$10,718,154.  We expect to fund this commitment with cash provided
from operation.
 
 Contractual
Obligations
 
 We lease
office premise from a third party, Heilongjiang JiuSanYouZhi Co.,
Ltd.  The lease is from May 1, 2007 to April 30, 2010, with average
monthly rental payment of $10,527.  We also lease property and plant
from a related party, Stock Co.  The lease is from April 30, 2009 to
May 1, 2010, with average monthly rental payment of $52,246. The lease expired
at May 1, 2010.
 
 On
October 12, 2009, the Company through its wholly own subsidiary, CBP China,
entered into a Purchase Agreement with Stock Co, to acquire the land use right,
property and plant, for a total consideration of
$23,406,185.  Pursuant to the Purchase Agreement, a payment of
$14,670,000 was made to Stock Co, in October 2009 and $14,988,459 and
$14,670,000 was recorded as deposits on the consolidated balance sheet as at
October 31, 2010 and 2009, respectively.  Pursuant to the Purchase
Agreement, final payment of $8,417,726 is due by December 31, 2011, at which
time title for the assets will be transferred.  Accordingly the
transaction is considered incomplete as at October 31, 2010.
 
 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
at October 31, 2010.
  42
  Critical
Accounting Policies
 
 The
consolidated financial statements include the financial statements of the
Company and our subsidiaries.  All transactions and balances among us
and our subsidiaries have been eliminated upon consolidation.
 
 Accounting
Judgments and Estimates
 
 Certain
amounts included in or affecting our consolidated financial statements and
related disclosures must be estimated, requiring us to make certain assumptions
with respect to values or conditions that cannot be known with certainty at the
time the financial statements are prepared. These estimates and assumptions
affect the amounts we report for assets and liabilities and our disclosure of
contingent assets and liabilities at the date of our financial statements. We
routinely evaluate these estimates, utilizing historical experience, consulting
with experts and other methods we consider reasonable in the particular
circumstances. Nevertheless, actual results may differ significantly from our
estimates. Any effects on our business, financial position or results of
operations resulting from revisions to these estimates are recorded in the
period in which the facts that give rise to the revision become
known.
 
 We
believe that certain accounting policies are of more significance in our
consolidated financial statement preparation process than others, which policies
are discussed below. See also Note 2 to the consolidated financial
statements for a summary of our principal accounting policies.
 
 Estimates of allowances for bad
debts – We must periodically review our trade and other receivables to
determine if all are collectible or whether an allowance is required for
possible uncollectible balances.
 
 Estimate of the useful lives of
property and equipment– We must estimate the useful lives and proper
salvage values of our property and equipment. We must also review property and
equipment for possible impairment.
 
 Estimate of the useful lives of
intangible assets– We must estimate the useful lives of our intangible
assets. We must also review intangible assets for possible
impairment.
 
 Inventory – We must determine
whether we have any obsolete or impaired inventory.
 
 Revenue recognition – Revenue
from the sale of goods is recognized on the transfer of risks and rewards of
ownership, which generally coincides with the time when the goods are shipped to
customers and the title has passed.
 
 Please
refer to the notes to the financial statements included elsewhere in this filing
for a more complete listing of all of our critical accounting
policies.
 
 New
Accounting Pronouncements
 
 Accounting Standards Update ("ASU") ASU No. 2009-05 (ASC Topic
820), which amends Fair Value Measurements and Disclosures - Overall, ASU No.
2009-08, Earnings per Share, ASU No. 2009-12 (ASC Topic 820), Investments in
Certain Entities That Calculate Net Asset Value per Share, and various other
ASU's No. 2009-2 through ASU No. 2009-15 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the Company, or
their effect on the financial statements would not have been
significant.
  43
  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.
  44
  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.
 
 Item
7A. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
Applicable.
 
 Item
8. Financial Statements and Supplementary Data
 
 Financial
Statements
 
 Please
see the accompanying Financial Statements attached hereto beginning on page
F-1.
 
 Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
 
 (a)  On
January 9, 2009, we dismissed Schwartz Levitsky Feldman, LLP (“Schwartz”) as our
principal independent accountant.  Schwartz issued an Independent
Auditor’s Report for the fiscal year ended October 31, 2007 and the six months
ended October 31, 2006.  Schwartz also reviewed the interim financial
statements of our wholly-owned subsidiary, Harbin Renhuang Pharmaceutical Stock
Co., Ltd, a company incorporated in the People’s Republic of China, for the six
months ended April 30, 2006.
  During
the fiscal year ended October 31, 2007 and six months ended October 31, 2006,
and through January 9, 2009, (i) there were no disagreements between us and
Schwartz on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Schwartz would have caused Schwartz to make reference to the
matter in its reports on our financial statements, and (ii) Schwartz’s reports
on our financial statements did not contain an adverse opinion or disclaimer of
opinion, nor were they modified as to audit scope or accounting principles.
During the fiscal year ended October 31, 2007 and six months ended October 31,
2006 and through January 9, 2009, there were no reportable events as that term
is described in Item 304(a)(1)(iv) of Regulation S-K.
 
 On
January 9, 2009, our board of directors appointed MSPC, Certified Public
Accountants and Advisors a Professional Corporation (“MSPC”) as the principal
independent accountant.  Our board of directors participated in and
approved the decision to change principal independent accountant.
 
 (b)  On
January 13, 2010, we dismissed MSPC as our independent registered public
accounting firm.
 
 For
fiscal year ended October 31, 2008, MSPC issued an audit report on our
consolidated balance sheet as of October 31, 2008, and the related consolidated
statements of income and comprehensive income, shareholders’ equity, and cash
flows for the year then ended.  The report of MSPC on the foregoing
financial statements did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to any uncertainty, audit scope
or accounting principles.
  45
  During
the fiscal year ended October 31, 2008 and through January 13, 2010, (i) there
were no disagreements between us and MSPC on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreement(s), if not resolved to the satisfaction of MSPC would have
caused MSPC to make reference to the subject matter of disagreement in
connection with its reports on our financial statements, and (ii) there were no
reportable events as that term is described in Item 304(a)(1)(iv) of Regulation
S-K.
 
 On
January 13, 2010, we engaged Windes & McClaughry Accountancy Corporation
(“W&M”) as our new independent registered public accounting firm. Our board
of directors recommended, authorized, and approved the decision to dismiss MSPC
as our independent registered public accounting firm and to engage W&M to
serve as our independent registered public accounting firm.
 
 Item
9A. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of October 31, 2010, we carried out
an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (Exchange Act”).  
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.  Based on the management's
assessment and review of our financial statements and results for the year ended
October 31, 2010, we have not established effective internal
controls.
 
 Management’s
Report on Internal Control Over Financial Reporting
 
 Management,
under the supervision of our chief executive officer and chief financial
officer, is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act)
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States, or GAAP.  Internal control over financial reporting
includes those policies and procedures that (a) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets, (b) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, (c) provide reasonable assurance that
receipts and expenditures are being made only in accordance with appropriate
authorization of management and the board of directors, and (d) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect on
the financial statements.  A “material weakness” is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
registrant’s annual or interim financial statements will not be prevented or
detected on a timely basis by our  internal controls.  A
“significant deficiency” is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of the registrant’s financial reporting.  A “deficiency” in
internal control over financial reporting exists when the design or operation of
a control does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect misstatements on a
timely basis.
  46
  During
our review of our financial statements and results for the year ended October
31, 2010, our management, under the supervision and with the participation of
our chief executive officer and chief financial officer, assessed the
effectiveness of our internal control over financial reporting. During
the course of auditing, the auditors has made adjustment entries to correct
errors in accounts including intangible assets, revenue, general and
administration expenses and cost of goods sold. The management considers the
error corrections to be signs of deficiencies or material
weaknesses in financial reporting pertaining to a lack of sufficient
qualified accounting and financing personnel with an appropriate level of US
GAAP knowledge and experience appropriate to its financial reporting
requirements.
 
 This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to Dodd-Frank Wall Street
Reform and Consumer Protection Act that permit us, as a smaller
reportingcompany, permit us
to provide only management’s report in this Annual Report.
 
 Remediation
Plan
 
 We are
devoting significant resources to remediating, improving and documenting our
disclosure controls and procedures and internal controls and procedures,
including hiring a new chief financial officer with US GAAP and SEC reporting
experience, additional accounting, and finance staff, and consultants to assist
with these functions, and implementing additional financial and management
controls, reporting systems and procedures.  These measures may not
ensure the adequacy of our internal controls over our financial processes and
reporting in the future.
 
 On
December 14, 2010, we hired Mr. Weiqiu Dong as the Company's new Chief Financial
Officer. Mr. Dong's career spans over 10 years with key positions in finance,
audit, investment advisory and tax planning, and has served as an investment
manager with Hatitac Inc, as an advisor to publicly and privately held
institutional clients. From 1998 to 2000, he worked as a senior audit manager
with TianHua Accounting Firm. Mr. Dong holds a Bachelor of Engineering from
North-Western Polytechnic University in China and is a Certified Financial
Planner in Canada.
 
 Changes
in Internal Controls
 
 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. As discussed above, 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.
 
 Item
9B. Other Information
 
 None.
  47
  PART
III
 
 Item
10.  Directors, Executive Officers and Corporate
Governance
 
 Directors,
Executive Officers and Significant Employees
 
 The
following table sets forth the name and age of each member of our current
members of our board of directors and/or executive officers, the positions and
offices held by each of them with us, and the period during which they have
served in their respective position.  Directors serve until the
election and qualification of their successors.   There was no
arrangement or understanding between any executive officer or director and any
other person pursuant to which any person was elected as an executive officer or
director.  There are no family relationships among our officers,
directors, or persons nominated for such positions.
 
 Name
                      
                      Age
                      
                      Position
                      
                      Period ServedShaoming
      Li
                      
                      48
                      
                      Chairman
      of the board of directors, Chief Executive Officer, and
      President
                      
                      2006-presentWeiqiu
      Dong
                      
                      40
                      
                      Chief
      Financial Officer
                      
                      2010-presentXiaoheng
      Shao
                      
                      53
                      
                      Independent
      Director, Chairman of Audit Committee
                      
                      2010-presentBingchun
      Wu
                      
                      77
                      
                      Independent
      Director, Chairman of Compensation Committee
                      
                      2010-presentChangxiong
      Sun
                      
                      65
                      
                      Independent
      Director, Chairman of Nominations Committee
                      
                      2010-presentDianjun
      Pi
                      
                      56
                      
                      Director
                      
                      2010-presentJiang
      He
                      
                      39
                      
                      Secretary
                      
                      2006-present
  
  Shaoming
Li.  Shaoming Li has
served as the Chairman of the board of directors, Chief Executive Officer and
President since founding Harbin Renhuang Pharmaceutical Co. Ltd. in
2006.  Mr. Li has more than 20 years experience in the pharmaceutical
and finance industry.  Mr. Li has been the Chairman and Chief
Executive Officer of Harbin Renhuang Pharmaceutical Stock Co. Ltd since
1996.  From 1984 to 1996, Mr. Li served as Vice Chairman of Shenzhen
Health Pharmaceutical Co. Ltd, a company dedicated to drug research, production,
and sales.  Mr. Li is a professor at Harbin Business University and
Northeastern Agriculture University.  Mr. Li also served as Vice
Chairman of Heilongjiang Provincial Chinese Traditional Medicine Association and
Heilongjiang Provincial Medicine Association.  Mr. Li graduated from
Central University of Finance and Economics in Beijing, China with a degree in
finance.
 
 Weiqiu
Dong.  Weiqiu Dong was
appointed to the position of Chief Financial Officer effective December 14,
2010.   Prior to joining us, Mr. Dong had been the investment
manager with Hatitac Inc. for 10 years, and senior audit manager with TianHua
Accounting firm for 3 years. Mr. Dong holds a Bachelor of Engineering from
North-Western Polytechnic University in China and is a Certified Financial
Planner in Canada.
  48
  Xiaoheng
Shao.  Xiaoheng Shao was
appointed to our board of directors in April 2010. Mr. Shao currently serves as
(i) independent director and chairman of the audit committee of: Xueda Education
Group, a Chinese personalized tutoring services company listed on the NYSE;
American Dairy, Inc., a Chinese dairy products company listed on NYSE; China
Biologic Products, Inc., a biopharmaceutical company listed on NASDAQ; China
Recycling Energy Corporation, an energy recycling system design company listed
on NASDAQ and Yongye International, Inc., a Chinese agricultural company listed
on NASDAQ; (ii) independent director of AsiaInfo-Linkage, Inc., a Chinese
telecom software solutions provider listed on NASDAQ and China Medicine
Corporation, a distributor and developer of medicine listed on bulletin board;
(iii) independent director and chairman of the nominating committee of Agria
Corporation, a Chinese agricultural company listed on NYSE; and (iv) independent
director and chairman of the audit and compensation committees of China Nuokang
Bio-Pharmaceutical, Inc., a biopharmaceutical company listed on
NASDAQ.  He served as the chief financial officer of Trina Solar
Limited from 2006 to 2008.  In addition, Mr. Shao served from 2004 to
2006 as the chief financial officer of ChinaEdu Corporation, an educational
service provider, and of Watchdata Technologies Ltd., a Chinese security
software company.  Prior to that, Mr. Shao worked at Deloitte Touche
Tohmatsu CPA Ltd. for approximately a decade.  Mr. Shao received his
master’s degree in health care administration from the University of California
at Los Angeles in 1988 and his bachelor’s degree in art from East China Normal
University in 1982.  Mr. Shao is a member of the American Institute of
Certified Public Accountants.
 
 Bingchun
Wu.  Bingchun Wu was appointed to our board of
directors in April 2010.  Mr. Wu is Chairman of the Compensation
Committee of the board of directors.  Since 2006, Mr. Wu has served as
the Team Leader of the Chinese Medicine Research Group at the Heilongjiang
Province Chinese Medicine Research Institute.  From 2006 to 2007, Mr.
Wu served as the Chief Expert of the Chinese Medicine Group of the Innovation
System of Heilongjiang Province Science and Technology
Department.  From 2004 to 2006, Mr. Wu served as the Director of the
Chinese Pharmacology Research Office and the Head of Chinese Medicine Research
at the Heilongjiang Province Science and Technology Department.  Mr.
Wu has a degree in Pharmaceutical Science from Shenyang Medicine University and
a bachelor’s degree in financial management from Harbin University of
Commerce.
 
 Changxiong
Sun.  Changxiong Sun
was appointed to our  board of directors on April 2010.  Mr.
Sun is Chairman of the Nominations Committee of the board of
directors.  Since 2005, Mr. Sun has served as a Professor and Doctoral
Tutor at the Management College of Harbin Institute of
Technology.  Since 2005 Mr. Sun has served as the Executive Director
of the Overseas Development and Layout Association of China Industry, and as the
Director of the Heilongjiang Dongbeiya Economy and Technology
Committee.  From 2004 to 2005, Mr. Sun served as the Vice Secretary
General of the Harbin Municipal Government Committee.  From 1999 to
2004, Mr. Sun served as the Director of the Harbin Finance Management
Department.  Mr. Sun has a degree in management science and
engineering from the Harbin Institute of Technology.
 
 Dianjun
Pi.  Dianjun Pi was
appointed to the board of directors on April 27, 2010.  Since 2004,
Mr. Pi has served as our Executive Manager.  From 2003 to 2004, Mr. Pi
served as the Assistant General Manager of Sunflower
Pharmaceuticals.  From 1992 to 2003, Mr. Pi served as the Vice General
Manager of China Resources Snow Breweries Co., Ltd.  Mr. Pi has a post
graduate degree from Renmin University of China.
 
 Jiang
He.  Jiang He was
hired as special assistant to the President in 2004 and has served as our
Secretary since 2006.  In this role he is in charge of asset
management, risk and crisis management, and internal audit.  From 2001
to 2004, prior to joining us, he was the Vice General Manager of Heilongjiang
Tiansheng High Tech Co. Ltd.  In this position Mr. He was primarily
responsible for managing projects, including, but not limited to, Clean Coal
Projects. He received his master’s degree in industrial economics in July, 2004,
and his bachelor’s degree in management from Jilin University in
1992.
  49
  Our Board of Directors
 
 Our board of directors is comprised of
a majority of independent directors as defined under NYSE Amex listing
standards. Messrs. Shao, Sun and Wu satisfy the independence requirements
established by Section 803(A)(2) of the NYSE AMEX Rules. The board of directors
has determined that none of the designated independent directors have any
relationship that, under NYSE Amex rules, would preclude their service on any of
the standing committees of the board of directors. In making its determination,
the board considered transactions and relationships between each director or his
immediate family and the Company and its subsidiaries.
 
 We have the following board
committees: Audit Committee, Compensation Committee and Nominations Committee.
Each Board Committee consists entirely of independent
and  non-employee directors.
 
 Board
Leadership Board’s Role in Risk Oversight
 
 Our chairman of the board of director
and chief executive officer is Mr. Li.  The majority of directors are
independent and our Audit Committee, Compensation Committee and Nominating
Committee are comprised entirely of independent directors.  Audit
Committee is responsible for oversight of risks relating to our accounting
matters, financial reporting and legal and regulatory compliance. To satisfy
these oversight responsibilities, the Audit Committee meets regularly with
management, our internal auditor and independent registered public accounting
firm. The Compensation Committee is responsible for overseeing risks relating to
employment policies and our policies on structuring compensation programs. To
satisfy these oversight responsibilities, the Compensation Committee meets
regularly with management to understand the implications of compensation
decisions, and particularly risks our compensation policies pose to our
finances, human resources and stockholders.
 
 Audit
Committee
 
 Our board of directors has established
an Audit Committee in accordance with section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) which currently consists
of the following independent directors: Messrs. Shao, Sun and Wu.  The
primary purpose of the Audit Committee is to oversee our accounting and
financial reporting processes and the function of the Audit Committee includes
retaining our independent auditors, reviewing their independence standards,
reviewing and approving the planned scope of our annual audit, reviewing and
approving any fee arrangements with our auditors, overseeing their audit work,
reviewing and pre-approving any non-audit services that may be performed by
them, reviewing the adequacy of accounting and financial controls, reviewing our
critical accounting policies and reviewing and approving any related party
transactions.
 
 Audit
Committee Financial Expert
 
 In April, 2010, Mr. Xiaoheng Shao was
appointed as the chairman of audit committee of our board of directors. Mr. Shao
currently serves as chairman of audit committee as an audit committee expert of
a number of NYSE or NASDAQ listed companies. He also have 10 years experience
working with Deloitte Touche Tohmatsu CPA Ltd. Mr. Shao received his master’s
degree in health care administration from the University of California at Los
Angeles in 1988 and his bachelor’s degree in art from East China Normal
University in 1982.  Mr. Shao is a member of the American Institute of
Certified Public Accountants.Mr. Shao’s extensive finance, industry, and executive experience provides
our Board with a valuable resource in understanding company operations and
evaluating strategic opportunities.
  50
  Other
Board Committees
 
 Our board of directors has two
additional board committees: the Compensation Committee and the Nominations
Committee. The members of our Compensation Committee and Nominations Committee
are comprised of the following independent directors: Messrs. Sun, Wu and
Shao.
 
 Nominations
to the Board of Directors
 
 There were no material changes to the
procedures by which security holders may recommend nominees to our board of
directors.
 
 Code
of Ethics
 
 We have adopted a Code of
Ethics.  It is available on our website, located at
http://www.renhuang.com
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires our executive officers and directors
and persons who own more than 10% of a registered class of our equity
securities, to file with the Securities and Exchange Commission (hereinafter
referred to as the “Commission”) initial statements of beneficial ownership,
reports of changes in ownership and Annual Reports concerning their ownership,
of Common Stock and other of our equity securities on Forms 3, 4, and 5,
respectively.  Executive officers, directors and greater than 10%
shareholders are required by Commission regulations to furnish us with copies of
all Section 16(a) reports they file.
 
 To the best of our knowledge, based
solely on information publicly available, during the fiscal year ended October
31, 2010, all of our directors and executive officers complied with Section
16(a) filing requirements except for late Form 3 filings by, Mr. Xiaoheng Shao
and Ms. Yan Yi Chen.
 
 Involvement
in Certain Legal Proceedings
 
 None of our directors, executive
officers or control persons has been involved in any of the events described in
Rule 401(f) of Regulation S-K in the last 10 years.
  51
  Item
11. Executive Compensation
 
 Summary
Compensation Table
 
 Our Compensation Committee, which
currently consists of Messrs. Shaoming Li and Bingchun Wu, assists our board of
directors in reviewing and approving the compensation structure of our directors
and executive officers, including all forms of compensation to be provided to
our directors and executive officers.  With the responsibility of
establishing, implementing and monitoring our executive compensation program
philosophy and practices, our Compensation Committee seeks to ensure that the
total compensation paid to our directors and executive officers is fair and
competitive.
 
 The
following table sets forth information for the fiscal years ended October 31,
2010 and 2009, regarding all forms of compensation received by all persons who
served as our Principal Executive Officer, and Principal Financial Officer
during the fiscal year ended October 31, 2010.   We did not have
any executive officer who received more than $100,000 for services during the
fiscal year ended October 31, 2010.
  Name
      and Principal
                                      Position
                                    
                                    Year
                                    
                                    Salary
                                    
                                    
                                    Bonus
                                    
                                    
                                    Stock
                                      Awards
                                    
                                    
                                    Option
                                      Awards
                                    
                                    
                                    All
      Other
                                      Compensation
                                    
                                    
                                    Total(a)
                                    
                                    (b)
                                    
                                    (c)
                                    
                                    
                                    (d)
                                    
                                    
                                    (e)(1)
                                    
                                    
                                    (f)(1)
                                    
                                    
                                    (g)
                                    
                                    
                                    (h)Shaoming
      Li,Chairman of Boardof Directors, ChiefExecutive
      Officer,and President
                                    
                                    2010
                                    
                                    $
                                    31,250
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    31,2502009
                                    
                                    $
                                    31,250
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    31,250Xiaoying
      Lu,
                                      Former Interim
      ChiefFinancial Officer(2)
                                    
                                    2010
                                    
                                    $
                                    7,051
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    7,0512009
                                    
                                    $
                                    7,051
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    7,051Yan
      Yi Chen,
                                      Former Interim
      ChiefFinancial Officer(3)
                                    
                                    2010
                                    
                                    $
                                    33,590
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    (4)
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    32,2422009
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Wang
      Zuoliang
                                      Former Interim
      ChiefFinancial Officer(5)
                                    
                                    2010
                                    
                                    $
                                    4,500
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    4,5002009
                                    
                                    $
                                    4,500
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    4,500Jiang
      He,
                                      Secretary
                                    
                                    2010
                                    
                                    $
                                    4,500
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    4,5002009
                                    
                                    $
                                    4,500
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    -0-
                                    
                                    
                                    $
                                    4,500
  
 (1)
Reflects the grant date fair value of the awards calculated in accordance with
FASB ASC Topic 718 – Stock    Compensation.
 (2) Ms.
Lu was appointed to the position of interim Chief Financial Officer effective
August 20, 2010. Before the appointment, Ms Lu was served as our accounting
manager.
 (3) Ms.
Chen resigned as interim chief financial officer on August 19,
2010.
  52




(4) On
January 13, 2010, Ms. Chen was granted an option to purchase 50,000 shares of
our common stock at $1.00 per share.  The option becomes exercisable
on January 13, 2013. The Options was cancelled on August 8, 2010, as Ms Chen
resigned for personal reasons.


(5) Mr.
Wang resigned as interim chief financial officer on January 13,
2010.





Employment
Agreements with Executive Officers





On January 13, 2010, we entered into an
employee agreement with Ms. Chen, who became our chief financial officer on that
date.  The agreement had a three-year term and provided that Ms. Chen
would receive a base salary of approximately $58,700, and would be entitled to
receive an option grant to purchase 50,000 shares of our common stock, at an
exercise price of $1.00 per share, and valid for 3 years since the date of
grant, on the commencement date and on the first and second anniversary under
the 2007 Non-Qualified Company Stock Grant and Option Plan thereafter (for a
total of 150,000 shares).  The option is subject to a one year vesting
schedule starting from each grant date.  Ms. Chen was also eligible to
receive discretionary bonuses at times and in amounts determined by our
Compensation Committee and certain other benefits available to executive
officers.  Ms. Chen resigned on August 19, 2010. As a result, the
options issued to Ms. Chen were cancelled.





On December 14, 2010, we entered into
the CFO Appointment Agreement with Mr. Weiqiu Dong, who became our chief
financial officer on that date. The agreement provides that Mr. Dong will
receive an annual base salary of RMB 600,000 per year.  In accordance
with the appointment, Mr. Dong received, on December 16, 2010, an option to
purchase 200,000 shares of the Company's common stock under our 2003 Omnibus
Plan.  The option has a three (3) year term and 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, conditioned upon continued
employment on such date. The exercise price of the option grant is $2.12, the
closing price on the date of the grant. Fair market value of the option granted
was $259,251. Please refer to NOTE 20, SUBSEQUENT EVENT for valuation
details.





We have no other employment agreements
with our executive officers.  Our chairman, chief executive officer
and president, Mr. Li receives $31,250 in annual salary and is reimbursed for
out of pocket expenses. Our secretary, Mr. He receives $4,500 in annual salary
and is reimbursed for out of pocket expenses.





Benefit
Plans





We do not have any profit sharing plan
or similar plans for the benefit of our officers, directors or
employees.  However, we may establish such plans in the
future.  Certain employees of our subsidiary, including Mr. Shaoming
Li, our Chairman, Chief Executive Officer, and President, receive pension and
healthcare benefits through plans offered by such subsidiary, as required by
local Chinese laws.





2007
Non-Qualified Company Stock Grant and Option Plan and 2003 Omnibus Securities
Plan





On March 19, 2007, our board of
directors approved the2007 Non-Qualified
Company Stock Grant and Option Plan (the “2007 Plan”).  The 2007 Plan
is intended to serve as an incentive and to encourage stock ownership by our
directors, officers, and employees, and certain persons rendering service to us,
so that such persons may acquire or increase their proprietary interest in our
success, and to encourage them to remain in our service.  Under the
2007 Plan, up to 200,000 shares of our common stock may be subject to
options.


53


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





Outstanding
Equity Awards at October 31, 2010





On January 13, 2010, 70,000 option was
granted to Ms. Yan Yi Chen. On August 19, 2010, this option was forfeited since
Ms. Chen resigned for her personal reasons. As of October 31, 2010, no equity
awards that issued to any executive officers were outstanding.





Compensation
of Directors





The following table sets forth
compensation paid to our non-executive directors for the fiscal year ended
October 31, 2010.





Name
                  
                  Fees
                    Paid
      in
                    Cash
                    ($)
                  
                  
                  Stock
                    Awards
                    ($)
                  
                  
                  Option
                    Awards
                    ($)
                  
                  
                  Non-Equity
                    Incentive
      Plan
                    Compensation
                    ($)
                  
                  
                  Nonqualified
                    Deferred
                    Compensation
                    Earnings
                    ($)
                  
                  
                  All
      Other
                    Compensation
                    ($)
                  
                  
                  Total
                    ($)(a)
                  
                  (b)(1)
                  
                  
                  (c)(2)
                  
                  
                  (d)(2)
                  
                  
                  (e)
                  
                  
                  (f)
                  
                  
                  (g)Xiaoheng
      Shao
                  
                  
                  19,500
                  
                  
                  
                  -0-
                  
                  
                  
                  70,000
                  (3)
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-Bingchun
      Wu
                  
                  
                  2,703
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-Changxiong
      Sun
                  
                  
                  2,703
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-Dianjun
      Pi
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-
                  
                  
                  
                  -0-





(1)  The
dollar value reflected is based on a conversion ratio of 1 RMB to every 0.1502
US dollars as of December 1, 2010.


(2)  Reflects
the grant date fair value of the awards calculated in accordance with FASB ASC
Topic 718 – Stock    Compensation.


(3)  We
entered into a independent director agreement with Mr. Shao dated April 13,
2010, pursuant to which we granted Mr. Shao an option to purchase a total amount
of 70,000 shares of our common stock under the 2003 Plan at a purchase price of
$2.57 per share.  The option will vest on a quarterly basis such that,
for the first 11 quarter anniversaries, Mr. Shao will be entitled to purchase
5,833 shares of our common stock and, for the 12th quarter
anniversary of the grant, he will be entitled to purchase 5,837 shares of our
common stock.  As of October 31, 2010, Mr. Shao was entitled to
purchase 17,499 shares of our common stock under the option.  Note
that, the dollar amount disclosed in this table relates to a different number of
acquirable shares than that in the beneficial ownership table below since the
beneficial ownership table reflects that number of shares which are acquirable
within 60 days of October 31, 2010.  Accordingly, for purposes of the
beneficial ownership table, the 5,833 shares that become acquirable on December
13, 2010 are reflected.


54


Independent
Director Agreements





We currently have agreements with our
independent directors.





On April 19, 2010, we entered into an
independent director agreement with Mr. Wu, who became a director on April 20,
2010.  The agreement provides that Mr. Wu will receive a base salary
of approximately RMB 3,000 per month for board meeting attendance as well as
expense reimbursement. The Agreement expires on the earlier of (i) the date Mr.
Wu ceases to be a member of the board, or (ii) the date of termination of the
Agreement.





On April 19, 2010, we entered into an
independent director agreement with Mr. Sun, who became a director on April 20,
2010.  The agreement provides that Mr. Sun will receive a base salary
of approximately RMB 3,000 per month for board meeting attendance as well as
expense reimbursement. The Agreement expires on the earlier of (i) the date Mr.
Sun ceases to be a member of the board, or (ii) the date of termination of the
Agreement.





On April 13, 2010, we entered into an
independent director agreement with Mr. Shao, who became a director on April 15,
2010.  The agreement provides that Mr. Shao,the Chair of our Audit
Committee, will receive a base salary of approximately $3,000 per month for
board meeting attendance as well as expense
reimbursement.  Additionally, Mr. Shao was granted an option to
purchase up to 70,000 shares of our common stock under the 2003 Plan, at an
exercise price of $2.57 per share.  The option will vest on a
quarterly basis such that Mr. Shao will be entitled to purchase 5,833 shares of
our common stock on the first 11 quarter anniversaries of the grant date (April
15, 2010) and 5,837 shares of our common stock on the twelfth quarter
anniversary of the grant date.  The option has a term of 3 years,
starting from the date of grant. The Agreement expires on the earlier of (i) the
date Mr. Shao ceases to be a member of the board, or (ii) the date of
termination of the Agreement.





There is currently no agreement with
Mr. Li or Mr. Pi for compensation.  Mr. Li and Mr. Pi are entitled to
reimbursement for travel expenses.  We do not pay additional amounts
for committee participation or special assignments of the board of
directors.





Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





The following table sets forth, as of
December 31, 2010, information concerning the beneficial ownership of shares of
our common stock held by our directors, our named executive officers, our
directors and executive officers as a group, and each person known by us to be a
beneficial owner of 5% or more of our outstanding common stock.





Beneficial ownership is determined
according to the rules of the SEC.  Beneficial ownership means that a
person has or shares voting or investment power of a security and includes any
securities that person has the right to acquire within 60 days after the
measurement date, such as those acquirable pursuant to options, warrants or
convertible notes.  Except as otherwise indicated, we believe that
each of the beneficial owners of our common stock listed below, based on
information each of them has given to us, has sole investment and voting power
with respect to such beneficial owner’s shares, except where community property
or similar laws may apply.  For purposes of the column for shares
underlying convertible securities, in accordance with rules of the SEC, shares
of our common stock underlying securities that a person has the right to acquire
within 60 days of December 31, 2010 are deemed to be beneficially owned by such
person for the purpose of computing the percentage ownership of that person, but
we do not treat them as outstanding for the purpose of computing the ownership
percentage of any other person.


55





Common Stock Beneficially OwnedName and Address of Beneficial
                                        Owner
                                      
                                      Total Outstanding
                                      
                                      
                                      Shares Underlying
                                        Convertible
                                        Securities(1)
                                      
                                      
                                      Total
                                      
                                      
                                      Percent(2)Directors
      and Named Executive Officers(3)Shaoming  Li
                                      
                                      
                                      17,850,000
                                      (4)
                                      
                                      
                                      0
                                      
                                      
                                      
                                      17,850,000
                                      
                                      
                                      
                                      47.9
                                      %Weiqiu
      Dong
                                      
                                      
                                      21,800
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0.1
                                      %Xiaoheng
      Shao
                                      
                                      
                                      0
                                      
                                      
                                      
                                      23,332
                                      5
                                      
                                      
                                      23,322
                                      
                                      
                                      
                                      *Bingchun
      Wu
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      *Changxiong
      Sun
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      *Dianjun
      Pi
                                      
                                      
                                      3,195,450
                                      (6)
                                      
                                      
                                      0
                                      
                                      
                                      
                                      3,195,450
                                      
                                      
                                      
                                      8.5
                                      %Jiang
      He
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      *Directors
      and executive officers asgroup
      (7  persons)
                                      
                                      
                                      21,067,250
                                      (7)
                                      
                                      
                                      23,332
                                      
                                      
                                      
                                      21,090,572
                                      
                                      
                                      
                                      56.6
                                      %5%
      Beneficial OwnersTuya
      Wulan – New BVI Co.(8)
                                        P.O.
      box 957, Offshore Incorporation
                                        Center,
      Road Town,
                                        Tortola,
      British Virgin Islands
                                      
                                      
                                      2,975,000
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      2,975,000
                                      
                                      
                                      
                                      7.9
                                      %Cheung
      Yunman – China Wealth Sources Co. (9)
                                        P.O.
      box 957, Offshore Incorporation
                                        Center,
      Road Town,
                                        Tortola,
      British Virgin Islands
                                      
                                      
                                      4,278,000
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      4,278,000
                                      
                                      
                                      
                                      11.5
                                      %





*Individual
owns less than 1% of our securities.





(1)
            Includes
      shares of our common stock issuable upon exercise of options or upon
      conversion of warrants or convertible notes within 60
  days.


(2)
            Based
      on 37,239,536 shares of our common stock outstanding as of December 31,
      2010.


(3)
            The
      address for this beneficial owner is No. 281, Taiping Road, Taiping
      District, Harbin, Heilongjiang Province, China
  150050.


(4)
            Includes
      17,850,000 shares of Common Stock owned by Celebrate Fortune Company
      Limited, an entity controlled by Mr. Shaoming
  Li.


(5)
            Includes
      23,332 shares of Common stock which have vested as of December 31, 2010,
      with an exercise price of $2.57 per share,  in connection with
      option granted on April 2010  to purchase 70,000 shares of our
      common stock. The option vest on a quarterly basis such that Mr. Shao is
      entitled to purchase 5,833 shares of our common stock on the first 11
      quarter anniversaries of the grant date and 5,837 shares of our common
      stock on the twelfth quarter anniversary of the grant
  date.


(6)
            Includes
      3,159,450 shares of Common Stock owned by Total Prosperity Company Ltd, an
      entity controlled by Mr. Dianjun
Pi.


(7)
            Includes
      17,850,000 shares of Common Stock owned by Celebrate Fortune Company
      Limited, an entity controlled by Mr. Shaoming Li, and 3,159,450 shares of
      Common Stock owned by Total Prosperity Company Ltd, an entity controlled
      by Mr. Dianjun Pi.


(8)
            Includes
      2,975,000 shares of Common Stock owned by New BVI Co., an entity
      controlled by Mr. Tuya Wulan.


(9)
            Includes
      4,278,000 shares of Common Stock owned by New China Wealth Sources Co., an
      entity controlled by Mr. Cheung
Yunman.





Securities Authorized for Issuance under Equity Compensation
Plans





The following table provides aggregate
information as of October 31, 2010 with respect to all compensation plans
(including individual compensation arrangements) under which equity securities
are authorized for issuance.  As of October 31, 2010, no shares of our
common stock have been reserved for issuance under either the 2003 Omnibus
Securities Plan nor 2007 Non-Qualified Company Stock Grant and Option
Plan.


56





A
                  
                  
                  B
                  
                  
                  CPlan Category
                  
                  Number of securities to be
                    issued upon exercise of
                    outstanding options, and
                    warrants
                  
                  
                  Weighted-average exercise
                    price of outstanding
                    options, and warrants
                  
                  
                  Number of securities
                    remaining available for
                    future issuance under
                    equity compensation plans
                    (excluding securities
                    reflected in column A)Equity
      compensation plans approved by security holders
                  
                  
                  120,000
                  
                  
                  $
                  1.91
                  
                  
                  
                  3,389,678Equity
      compensation plans not approved bysecurity
      holders
                  
                  
                  0
                  
                  
                  $
                  0.00
                  
                  
                  
                  200,000Total
                  
                  
                  120,000
                  
                  
                  $
                  0.00
                  
                  
                  
                  3,589,678





Item
13. Certain Relationships and Related Transactions, and Director
Independence





Transactions
with Related Persons:





Mr. Shaoming Li, our chairman, chief
executive officer and president, is also chairman and a 50% shareholder of Stock
Co.  We lease property and a plant from Stock Co.  Our
rental expenses for this lease during the years ended October 31, 2010 and 2009
amounted to $367,224 and $615,594, respectively.





During the years ended October 31, 2010
and 2009, we sold goods in the amount of $0 and $430,889, respectively, to
Heilongjiang Renhuang Pharmaceutical Limited, a company in which Mr. Li is a
major shareholder.





On October 12, 2009, we through
our  wholly own subsidiary, Renhuang China, entered into a Purchase
Agreement with Stock Co, to acquire the land use right, property and plant, for
a total consideration of $23,472,000.  Pursuant to the Purchase
Agreement, a payment of $14,670,000 was made to Stock Co., in October 2009 and
recorded as deposits on the consolidated balance sheet.  Pursuant to
the Purchase Agreement, final payment of $8,417,726 is due by December 31, 2011,
at which time title for the assets will be transferred. Accordingly the
transaction is considered incomplete as at October 31, 2010.





On September 1, 2009, we through our
wholly-owned subsidiary, Renhuang China, entered into a Purchase Agreement with
Stock Co., to acquire two production patents, for a total consideration of
$2,347,200.  Pursuant to the Purchase Agreement, a payment of
$1,467,000 was made to Stock Co., in October 2009 and recorded as deposits on
the consolidated balance sheet.  Pursuant to the Purchase Agreement,
final payment of $880,200 is due by December 31, 2010, at which time title for
the assets will be transferred. In August, 2010, final payment was made to Stock
Co. and the tile of the patent was transferred at the same month.





On April 10, 2010, the Company through
its wholly own subsidiary, CBP China, entered into a Purchase Agreement with
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
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 October 31, 2010.


57


Review,
Approval or Ratification of Transactions with Related Persons





Our Audit Committee reviews and
approves or ratifies any related person transaction that is required to be
disclosed. As such transactions required the approval of our Audit
Committee, the above related party transactions during fiscal years ended
October 31, 2010 and 2009 were reviewed, approved or ratified by our Audit
Committee.





Item
14. Principal Accountant Fees and Services





As previously disclosed, on January 13,
2010, we dismissed MSPC as our independent registered public accounting firmand engaged Windes & McClaughry Accountancy Corporation
(“W&M”) as our new independent registered public accounting firm for fiscal
year ended October 31, 2009. Our board of directors recommended, authorized, and
approved the decision to dismiss MSPC as our independent registered public
accounting firm and to engage W&M to serve as our independent registered
public accounting firm.





Audit
Fees





During the year ended October 31, 2010
and October 31, 2009, W&M’s fees were approximately $195,000 and $0,
respectively.  The fees were for professional services for the audit
of our financial statements and review of financial statements included in our
Forms 10-K and 10-Q’s, as applicable.





Audit-Related
Fees





During the years ended October 31, 2010
and 2009, there were no fees relating to the performance of any other audit or
review of our financial statements by W&M.





Tax
Fees





During the years ended October 31, 2010
and 2009, there were no fees relating to professional tax services by
W&M.





All
Other Fees





During the years ended October 31, 2010
and 2009, there were no other fees relating to services provided by
W&M.





The above-mentioned fees are set forth
as follows in tabular form:





2010
                  
                  
                  2009Total
      Audit Fees
                  
                  $
                  195,000
                  
                  
                  $
                  127,500Total
      Audit Related Fees
                  
                  $
                  -0-
                  
                  
                  $
                  -0-Total
      Tax Fees
                  
                  $
                  -0-
                  
                  
                  $
                  -0-Total
      of All Other Fees
                  
                  
                  -0-
      -
                  
                  
                  
                  -0--





All services and fees described above
for the years ended October 31, 2010 and October 31, 2009 were approved by
either the entire board of directors or the Audit Committee. The Audit
Committee’s pre-approval policies and procedures were detailed as to the
particular service and the audit committee was informed of each service and such
policies and procedures did not include the delegation of the audit committee’s
responsibilities.


58


PART
IV





Item
15. Exhibits and Financial Statement Schedules





Financial
Statements





The
following documents are filed as part of this Annual Report:





(a)           Financial
Statements:


PageReport
      of Windes & McClaughry Accountancy Corporation
                F-2Consolidated
      Balance Sheets at October 31, 2010 and 2009
                F-3Consolidated
      Statements of Operations and Comprehensive Income for the Years Ended
      October 31, 2010 and 2009
                F-4Consolidated
      Statements of Changes in Shareholders’ Equity for the Years Ended October
      31, 2010 and 2009
                F-5Consolidated
      Statements of Cash Flows for the Years Ended October 31, 2010 and
      2009
                F-6Notes
      to Consolidated Financial Statements
                F-7





Exhibits


The
following exhibits are filed as a part of this Annual Report.




Exhibit
                No.
              
              Description3.1
              
              Restated
      Articles of Incorporation(1)3.2
              
              Second
      Restated Bylaws(1)3.3
              
              Certificate
      of Amendment to Articles of Incorporation(2)3.4
              
              Certificate
      of Amendment to Articles of Incorporation reflecting change
      of  name to China Botanic Pharmaceuticals
  Inc.*10.1
              
              2007
      Non-Qualified Company Stock Grant and Option Plan(3)10.2
              
              2003
      Omnibus Securities Plan(4)Loan
      Conversion Agreement among the Company, Allied Merit International Inc.
      and Griffin Ventures Ltd. dated May 15, 2009(5)10.3
              
              Employment
      Agreements with Weiqiu Dong*10.4
              
              English
      translation of Purchase Agreement for Patents dated September 1, 2009(6)10.5
              
              English
      translation of Purchase Agreement for Ah City Natural and
      Biopharmaceutical Plant dated October 12, 2009(6)10.6
              
              English
      translation of Purchase Agreement with Hongxiangmingyuan of Heilongjiang
      Yongtai Company dated April 10, 2010(7)10.7
              
              Independent
      Director Agreement with Mr. Xiaoheng (Sean) Shao, dated April 13,
      2010(7)10.8
              
              Independent
      Director Agreement with Mr. Bingchun Wu, dated April 19, 2010(7)10.9
              
              Independent
      Director Agreement with Mr. Changxiong Sun, dated April 19, 2010(7)10.10
              
              Exclusive
      Purchase Agreement, with Yichun Red Star Forest Bureau, of Acanthopanax
      Resources(8)21.1
              
              Subsidiaries
      of the registrant(2)23.2
              
              Consent
      Of Windes & McClaughry Accountancy Corporation*31.1
              
              Certification
      of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*31.2
              
              Certification
      of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002*


59





32.2
              
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*





*
            Filed
      herewith.


(1)
            Incorporated
      by reference from Form 8-K filed with the SEC on April 22,
      2003.


(2)
            Incorporated
      by reference from Form 10-K filed with the SEC on February 13,
      2007.


(3)
            Incorporated
      by reference from Form 8-K filed with the SEC on May 2,
    2007.


(4)
            Incorporated
      by reference from Form 8-K filed with the SEC on April 22,
      2003.


(5)
            Incorporated
      by reference from Form 10-Q filed with the SEC on September 21,
      2009.


(6)
            Incorporated
      by reference from Form 10-K filed with the SEC on January 29,
      2010.


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


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


60


SIGNATURES




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





Date:
      January 24, 2011
              
              CHINA
      BOTANIC PHARMACEUTICAL INC.By:
              /s/ Shaoming LiShaoming
      Li, Chief Executive Officer and President(Principal
      Executive Officer)Date:
      January 24, 2011
              
              By:
              /s/ Weiqiu DongWeiqiu
      Dong, Chief Financial Officer(Principal
      Accounting and Financial
Officer)





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following person on behalf of the registrant and in the capacity and on the
dates indicated.





Date:
      January 24, 2011
              
              /s/ Shaoming LiShaoming
      Li,Chief
      Executive Officer, President, Chairman of the BoardDate:
      January 24, 2011
              
              /s/ Xiaoheng ShaoXiaoheng
      Shao, DirectorDate:
      January 24, 2011
              
              /s/ Changxiong SunChangxiong
      Sun, DirectorDate:
      January 24, 2011
              
              /s/ Bingchun WuBingchun
      Wu, DirectorDate:
      January 24, 2011
              
              /s/ Dianjun PiDianjun
      Pi, DirectorDate:
      January 24, 2011
              
              /s/ Weiqiu DongWeiqiu
      Dong, Chief Financial
Officer


61


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Report
      of Independent Registered Public Accounting Firm
                
                F-2Consolidated
      Balance Sheets As of October 31, 2010 and 2009
                
                F-3Consolidated
      Statements of Operations and Comprehensive Income for Years Ended October
      31, 2010 and 2009
                
                F-4Consolidated
      Statements of Changes in Shareholders’ Equity for Years Ended October 31,
      2010 and 2009
                
                F-5Consolidated
      Statements of Cash Flows for Years Ended October 31, 2010 and
      2009
                
                F-6Notes
      to Consolidated Financial Statements for Years Ended October 31, 2010
      and 2009
                
                F-7


F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and


Stockholders
of China Botanic Pharmaceutical Inc.





We have
audited the accompanying consolidated balance sheets of China Botanic
Pharmaceutical Inc. as of October 31, 2010 and 2009, and the related
consolidated statements of operations and comprehensive income, shareholders’
equity, and cash flows for each of the years in the two-year period ended
October 31, 2010. China Botanic Pharmaceutical Inc.’s management is responsible
for these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Botanic Pharmaceutical
Inc. as of October 31, 2010 and 2009, and the results of their operations and
their cash flows for the years in the two-year period  ended October
31, 2010 in conformity with accounting principles generally accepted in the
United States of America.





/s/
Windes &
McClaughry


Windes
& McClaughry Accountancy Corporation




Long
Beach, California


January
24, 2011


F-2


CHINA
BOTANIC PHARMACEUTICAL INC. AND SUBSIDIAIRES


CONSOLIDATED
BALANCE SHEETS





As
      of October 31,Note
                  
                  2010
                  
                  
                  2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  
                  $
                  27,826,142
                  
                  
                  $
                  8,111,514Trade
      receivables, net
                  5
                  
                  
                  19,814,438
                  
                  
                  
                  23,203,410Due
      from related parties
                  10
                  
                  
                  28,877
                  
                  
                  
                  130,199Inventory,
      net
                  7
                  
                  
                  2,645,616
                  
                  
                  
                  3,024,016Prepayments
                  
                  
                  
                  -
                  
                  
                  
                  89,281Other
      receivables, net
                  6
                  
                  
                  200,994
                  
                  
                  
                  102,613Total
      current assets
                  
                  
                  
                  50,516,067
                  
                  
                  
                  34,661,033Property
      and equipment, net
                  8
                  
                  
                  2,069,460
                  
                  
                  
                  2,352,163Intangible
      assets , net
                  9
                  
                  
                  1,953,617Deposits for
      properties
                  10,
      11
                  
                  
                  18,605,935
                  
                  
                  
                  16,137,000Total
      assets
                  
                  
                  $
                  73,145,079
                  
                  
                  $
                  53,150,196LIABILITIES
      AND SHAREHOLDERS’ EQUITYLiabilitiesAccounts
      payable
                  
                  
                  $
                  333,555
                  
                  
                  $
                  369,329Value
      added tax payable
                  
                  
                  
                  1,064,066
                  
                  
                  
                  1,186,642Accrued
      employee benefits
                  14
                  
                  
                  1,645,192
                  
                  
                  
                  1,136,267Warrant
      liabilities
                  15
                  
                  
                  342,770
                  
                  
                  
                  -Total
      liabilities
                  
                  
                  $
                  3,385,583
                  
                  
                  $
                  2,692,238Shareholders’
      equityPreferred
      stock (no par value, 1,000,000 shares authorized; none issued and
      outstanding as of October 31, 2010 and 2009)
                  16
                  
                  
                  -
                  
                  
                  
                  -Common
      stock ($0.001 par value, 100,000,000 shares, authorized;
      37,239,536  issued and outstanding as of October 31, 2010 and
      2009, respectively)
                  16
                  
                  
                  37,240
                  
                  
                  
                  37,240Additional
      paid-in capital
                  
                  
                  
                  7,627,987
                  
                  
                  
                  7,596,525Common
      stock warrants
                  17
                  
                  
                  496,732
                  
                  
                  
                  496,732Reserves
                  18
                  
                  
                  3,372,697
                  
                  
                  
                  3,372,697Accumulated
      other comprehensive income
                  
                  
                  
                  4,768,793
                  
                  
                  
                  3,367,659Retained
      earnings
                  
                  
                  
                  53,456,047
                  
                  
                  
                  35,587,105Total
      shareholders’ equity
                  
                  
                  
                  69,759,496
                  
                  
                  
                  50,457,958Total
      liabilities and shareholders’ equity
                  
                  
                  $
                  73,145,079
                  
                  
                  $
                  53,150,196





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


F-3


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME





For the year ended October 31,Note
                                    
                                    2010
                                    
                                    2009US$
                                    
                                    US$Sales,
      net
                                    
                                    
                                    $
                                    55,183,941
                                    
                                    $
                                    43,411,562Cost
      of goods sold
                                    
                                    
                                    
                                    25,765,835
                                    
                                    
                                    20,311,410Gross
      profit
                                    
                                    
                                    
                                    29,418,106
                                    
                                    
                                    23,100,152Operating
      and administrative expenses:Sales
      and distribution
                                    
                                    
                                    
                                    4,966,062
                                    
                                    
                                    3,649,820General
      and administrative
                                    
                                    
                                    
                                    3,614,809
                                    
                                    
                                    2,117,114Research
      and development
                                    
                                    
                                    
                                    3,042,815
                                    
                                    
                                    2,529,085Total
      operating expenses
                                    
                                    
                                    
                                    11,623,686
                                    
                                    
                                    8,296,019Income
      from operations
                                    
                                    
                                    
                                    17,794,420
                                    
                                    
                                    14,804,133Other
      income:Interest
      income
                                    
                                    
                                    
                                    74,522
                                    
                                    
                                    42,724Income
      from operations before income tax expenses
                                    
                                    
                                    
                                    17,868,942
                                    
                                    
                                    14,846,857Income
      tax expenses
                                    12
                                    
                                    
                                    -
                                    
                                    
                                    -Net
      income
                                    
                                    
                                    $
                                    17,868,942
                                    
                                    $
                                    14,846,857Other
      comprehensive income:Cumulative
      currency translation adjustments
                                    
                                    
                                    
                                    1,401,134
                                    
                                    
                                    66,345Total
      comprehensive income
                                    
                                    
                                    
                                    19,270,076
                                    
                                    
                                    14,913,202Earnings
      per common stock- Basic
                                    13
                                    
                                    $
                                    0.48
                                    
                                    $
                                    0.41Earnings
      per common stock – Diluted
                                    
                                    
                                    $
                                    0.44
                                    
                                    $
                                    0.41Weighted
      average common stock outstanding
                                    13Basic
                                    
                                    
                                    
                                    37,239,536
                                    
                                    
                                    36,088,853Diluted
                                    
                                    
                                    
                                    40,174,637
                                    
                                    
                                    36,088,853





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


F-4


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY





Common
      stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Accumulated($0.001 par
      value)
                    
                    
                    Additional
                    
                    
                    Common
                    
                    
                    
                    
                    
                    Other
                    
                    
                    
                    
                    
                    TotalNumber
      of
                    
                    
                    Par
                    
                    
                    Paid-in
                    
                    
                    Stock
                    
                    
                    
                    
                    
                    Comprehensive
                    
                    
                    Retained
                    
                    
                    Shareholders’Shares
                    
                    
                    Value
                    
                    
                    Capital
                    
                    
                    Warrants
                    
                    
                    Reserves
                    
                    
                    Income
                    
                    
                    Earnings
                    
                    
                    EquityUS$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$
                    
                    
                    US$Balance as of October 31, 2008 (Restated)
                    
                    
                    35,096,680
                    
                    
                    
                    35,097
                    
                    
                    
                    6,595,400
                    
                    
                    
                    -
                    
                    
                    
                    2,867,674
                    
                    
                    
                    3,301,314
                    
                    
                    
                    21,245,271
                    
                    
                    
                    34,044,756Common
      stock issued
                    
                    
                    2,142,856
                    
                    
                    
                    2,143
                    
                    
                    
                    1,001,125
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,003,268Warrants
      issued
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    496,732
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    496,732Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,846,857
                    
                    
                    
                    14,846,857Appropriation
      to statutory reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    505,023
                    
                    
                    
                    -
                    
                    
                    
                    (505,023
                    )
                    
                    -Currency
      translation adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    66,345
                    
                    
                    
                    -
                    
                    
                    
                    66,345Balance
      as of October 31, 2009
                    
                    
                    37,239,536
                    
                    
                    
                    37,240
                    
                    
                    
                    7,596,525
                    
                    
                    
                    496,732
                    
                    
                    
                    3,372,697
                    
                    
                    
                    3,367,659
                    
                    
                    
                    35,587,105
                    
                    
                    
                    50,457,958Net
      income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    17,868,942
                    
                    
                    
                    17,868,942Appropriation
      to statutory reserves
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Option
      Granted
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    31,462
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    31,462Currency
      translation adjustments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,401,134
                    
                    
                    
                    -
                    
                    
                    
                    1,401,134Balance
      as of October 31, 2010
                    
                    
                    37,239,536
                    
                    
                    
                    37,240
                    
                    
                    
                    7,627,987
                    
                    
                    
                    496,732
                    
                    
                    
                    3,372,697
                    
                    
                    
                    4,768,793
                    
                    
                    
                    53,456,047
                    
                    
                    
                    69,759,496





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


F-5


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





For
      the years ended October 31,2010
                
                
                2009US$
                
                
                US$Cash
      flows from operating activities:Net
      income
                
                
                17,868,942
                
                
                
                14,846,857Adjustments
      to reconcile net income to operating activities:Depreciation
                
                
                363,567
                
                
                
                356,440Amortization
                
                
                435,653
                
                
                
                -Warrants
      issued for service
                
                
                342,770
                
                
                
                -Option
      granted to directors
                
                
                31,462
                
                
                
                -Forgiven
      rent
                
                
                367,224
                
                
                
                -Changes
      in assets and liabilities:Increase
      in trade receivables
                
                
                3,814,889
                
                
                
                (2,328,833
                )Decrease
      in due from related parties
                
                
                (28,300
                )
                
                
                (275,476
                )Decrease
      (Increase) in inventory, net
                
                
                423,480
                
                
                
                (394,750
                )Decrease
      (Increase)  in prepayments
                
                
                89,397
                
                
                
                (55,491
                )Decrease
      in other receivables, net
                
                
                (94,232
                )
                
                
                31,180Increase
      in accounts payable
                
                
                (44,546
                )
                
                
                174,979Increase
      in value added tax payable
                
                
                (145,371
                )
                
                
                491,666Increase
      in accrued employee benefits
                
                
                442,040
                
                
                
                414,433(Decrease)
      increase in other payable
                
                
                (31,413
                )
                
                
                (193,472
                )Net
      cash provided by (used in) operating activities
                
                
                23,835,562
                
                
                
                13,067,533Cash
      flows from investing activities:Deposits
      for land use right and properties
                
                
                (3,944,749
                )
                
                
                (14,670,000
                )Deposits
      for patents
                
                
                (717,926
                )
                
                
                (1,467,000
                )Purchase
      of property and equipment
                
                
                (36,473
                )
                
                
                (84,371
                )Net
      cash used in investing activities
                
                
                (4,699,148
                )
                
                
                (16,221,371
                )Cash
      flows from financing activities:Proceeds
      from share issues
                
                
                -
                
                
                
                1,500,000Net
      cash provided by financing activities
                
                
                -
                
                
                
                1,500,000Effect
      of exchange rate changes on cash
                
                
                578,214
                
                
                
                17,659Net
      decrease in cash and cash equivalents
                
                
                19,714,628
                
                
                
                (1,636,179
                )Cash
      and cash equivalents, beginning of year
                
                
                8,111,514
                
                
                
                9,747,693Cash
      and cash equivalents, end of year
                
                
                27,826,142
                
                
                
                8,111,514Supplemental
      disclosure of cash flow information:Cash
      paid during the year for income taxes
                
                
                -
                
                
                
                -Interest
      paid during the year
                
                
                -
                
                
                
                -





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


F-6


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





1. 
ORGANIZATION AND NATURE OF OPERATION





The
accompanying consolidated financial statements include the financial statements
of China Botanic Pharmaceuticals, 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”).





The core
activities of subsidiaries included in the 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.





2. 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





a.
            Basis
      of presentation of financial
statements





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




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


F-7


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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
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 is not within the parent company’s control. These
amounts are now required to be reported as equity instead of as a liability on
the balance sheet.  In addition this statement requires net income from
noncontrolling minority interest to be shown separately on the consolidated
statements of operations and comprehensive income.  As the Company has no
noncontrolling interest at October 31, 2010, this change did not have an impact
on the Company’s condensed consolidated financial statements.




c.
            Use
      of estimates





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





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




d.
            Foreign
      currency translation





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





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





As of
October 31, 2010 and 2009, the exchange rate was RMB 6.67 and RMB 6.82,
respectively. Translation adjustments totaled $1,401,134 and $66,345 for the
year ended October 31, 2010 and 2009, 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 are no restriction to cash at October 31, 2010 and
2009.  Substantially all of the Company’s cash is held in bank accounts in
the PRC and is not protected by the Federal Deposit Insurance Corporation
(“FDIC”) insurance or any other similar insurance.  Given the current
economic environment and risks in the banking industry, there is a risk that
deposits may not be readily available.


F-8


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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
financial statements net of an allowance for doubtful accounts and sales
rebates. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its trade receivables.  Trade receivables outstanding
longer than the payment terms are considered past due. The Company determines
its allowance by considering a number of factors, including the length of time
the trade receivable is past due, the Company’s previous loss history, the
counter party’s current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole. The Company writes
off receivables when they are deemed uncollectible, and payments subsequently
received on such trade receivables are credited to the allowance for doubtful
accounts.  There were no write offs for the years ended October 31, 2010
and 2009.  The Company does not have any off-balance sheet credit exposure
related to its customers.




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 years ended October
31, 2010 and 2009.





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.





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 years ended October 31, 2010 and 2009, the
Company had not experienced impairment losses on its long-lived assets. However,
there can be no assurances that demand for the Company’s products or services
will continue, which could result in an impairment of long-lived assets in the
future.




F-9





CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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 October 31, 2010 and
2009 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.





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.


F-10


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





As of
October 31, 2010, the Company has no sales or contracts that included multiple
deliverables that would fall under the scope of FASB Topic ASC 605, “Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging Issues Task
Force.”





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





As of
October 31, 2010 and, 2009, the Company has accrued $2,141,055 and $3,020,898,
respectively, for sales rebates, which offset the balance of account
receivables.  For the years ended October 31, 2010 and 2009, the
Company has deducted sales rebates in the amount of $7,516,231 and $8,848,658,
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.





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
$4,803,286 and $3,590,965 during the years ended October 31, 2010 and 2009
respectively.




q.
            Research
      and development





Research
and development (“R&D”) consists primarily of cost of materials and overhead
expenses r by research and development staff. Research and development costs are
expensed as incurred. Research and development expenses amounted to $3,042,815
and $2,529,085 during the years ended October 31, 2010 and 2009
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 income and other comprehensive income. In addition, any differences
between estimated forfeitures and actual forfeitures could also have a material
impact on our financial statements.


F-11


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





t.
            Taxation





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





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





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





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




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.





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





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





A
provision has not been made at October 31, 2010 for U.S. or additional foreign
withholding taxes on approximately $53,456,047 of undistributed earnings of
foreign subsidiaries because it is the present intention of management to
reinvest the undistributed earnings indefinitely in foreign operations.
Generally, such earnings become subject to U.S. tax upon the remittance of
dividends and under certain other circumstances. It is not practicable to
estimate the amount of deferred tax liability on such undistributed
earnings.





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


F-12


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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





Value
added tax





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





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 $19,270,076 and
$14,913,202 for the years ended October 31, 2010 and 2009,
respectively.





While
total comprehensive income is the activity in a period and is largely driven by
net earnings in that period, accumulated other comprehensive income or loss
(“AOCI”) represents the cumulative balance of other comprehensive income as of
the balance sheet date.  For the Company, AOCI is primarily the cumulative
balance related to the currency adjustments and increased overall equity by
$1,401,134 and $66,345 as of October 31, 2010 and 2009
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:





–
            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.


F-13


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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, 2010, 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 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.




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.


F-14


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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.





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.


F-15


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED 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.




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 $ 27,826,142 and $8,111,514, as of October 31, 2010 and 2009,
respectively.  No cash balances were restricted as at October 31, 2010 and
2009.





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





(2)
Sales and trade receivables





The
Company provides credit in the normal course of business and substantially all
customers are located in the PRC.  The Company performs ongoing credit
evaluations of its customers and maintains allowances for doubtful accounts
based on factors surrounding the credit risk of specific customers, historical
trends, and other information.  Prior to deduction of sales rebates, one
individual customer accounted for 11% of net revenues during the year ended
October 31, 2010




The
Company’s products are sold throughout the PRC. For years ended October 31, 2010
and 2009, Botanical anti-depression and nerve-regulation products accounted for
71.1% and 81.1%, respectively, of total sales.





(3)
Foreign currency





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


F-16


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





(4)
Dividends





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





(5)
Price control





The
retail prices of certain pharmaceuticals sold in China, primarily those included
in the national and provincial Medical Insurance Catalogs are subject to price
controls in the form of fixed prices or price ceilings. As such, the retail
prices for certain of the Company’s pharmaceutical products can be adjusted
downward or upward from time to time. Price controls did not have a material
impact on the Company’s operation during the years ended October 31, 2010 and
2009.





(6)
Cost of goods sold





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




5. 
      TRADE RECEIVABLES, NET





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





2010
                  
                  
                  2009US$
                  
                  
                  US$Trade
      receivables
                  
                  
                  22,408,628
                  
                  
                  
                  26,667,816Less:
      Sales rebates
                  
                  
                  (2,141,055
                  )
                  
                  
                  (3,020,898
                  )Less:
      Allowance for doubtful accounts
                  
                  
                  (453,135
                  )
                  
                  
                  (443,508
                  )Trade
      receivables, net
                  
                  
                  19,814,438
                  
                  
                  
                  23,203,410





6.           OTHER
RECEIVABLES, NET





Other
receivables are travel and business advances to employees. As of October 31,
2010 and 2009,amount included in the consolidated balance sheets as at October
31, 2010 and 2009 were as follows:





2010
                  
                  
                  2009US$
                  
                  
                  US$Other
      receivables
                  
                  
                  569,184
                  
                  
                  
                  462,980Less:
      Allowance for doubtful accounts
                  
                  
                  (368,190
                  )
                  
                  
                  (360,367
                  )Other
      receivables, net
                  
                  
                  200,994
                  
                  
                  
                  102,613





7.           INVENTORY,
NET





The
inventory amounts included in the consolidated balance sheets as of October 31,
2010 and, 2009 comprised of:





2010
                  
                  
                  2009US$
                  
                  
                  US$Raw
      materials
                  
                  
                  1,951,185
                  
                  
                  
                  1,530,283Work-in-progress
                  
                  
                  52,411
                  
                  
                  
                  1,006,984Finished
      goods
                  
                  
                  707,648
                  
                  
                  
                  550,982Less:  Inventory
      reserves
                  
                  
                  (65,628
                  )
                  
                  
                  (64,233
                  )Inventory,
      net
                  
                  
                  2,645,616
                  
                  
                  
                  3,024,016




F-17


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





8.         PROPERTY
AND EQUIPMENT, NET





Property
and equipment and related accumulated depreciation as at October 31, 2010 and
2009 were as follows:





2010
                  
                  
                  2009US$
                  
                  
                  US$Machinery
      and equipment
                  
                  
                  3,545,146
                  
                  
                  
                  3,435,421Office
      equipment and furnishings
                  
                  
                  58,006
                  
                  
                  
                  53,086Motor
      vehicles
                  
                  
                  54,237
                  
                  
                  
                  54,7493,657,389
                  
                  
                  
                  3,543,256Less:
      Accumulated depreciation
                  
                  
                  (1,587,929
                  )
                  
                  
                  (1,191,093
                  )Net
      book value
                  
                  
                  2,069,460
                  
                  
                  
                  2,352,163





Depreciation
expense for the years ended October 31, 2010 and 2009 was $363,567 and $356,440,
respectively, of which $374,973 and $341,429 were included as a component of
cost of goods sold in the respective periods.





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





9.         INTANGIBLE
ASSETS, NET


2010
                  
                  
                  2009US$
                  
                  
                  US$Intangible
      assetsProduct patents
                  
                  
                  2,398,153
                  
                  
                  
                  -Less:
      Accumulated amortization
                  
                  
                  (444,536
                  )
                  
                  
                  -Intangible
      assets, net
                  
                  
                  1,953,617
                  
                  
                  
                  -





10.       RELATED PARTY
TRANSACTIONS





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





2010
                      
                      
                      2009US$
                      
                      
                      US$Due
      from related parties:Advances
      (1)
                      
                      
                      28,877
                      
                      
                      
                      130,199Deposits
      (2)
                      
                      
                      18,605,935
                      
                      
                      
                      16,137,000Total
                      
                      
                      18,634,812
                      
                      
                      
                      16,267,199





(1)
Advances





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





As of
October 31, 2010, the Company has a net amount due from Mr. Li Shaoming of
$28,877, which is advance for travelling and business.





As of
October 31, 2009, the Company has a net amount due from Stock Co, of
$130,199.  This amount consists of $539,130 of repair and maintenance
work performed on property and plant leased from Stock Co and paid for on Stock
Co’s behalf.  This is offset by $408,931 of professional fees in
connection with the acquisition of Harbin Renhuang Pharmaceutical Company
Limited in 2006, paid for by Stock Co on the Company’s behalf. As of
October 31, 2010, the Company has no amount was due to or from Stock
Co.


F-18


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





(2)
Deposits





On
September 1, 2009, the Company through its wholly own subsidiary, CBP China,
entered into a Purchase Agreement with Stock Co, to acquire two production
patents, for a total consideration of $2,398,153.  Pursuant to the
Purchase Agreement, a payment of $1,467,000 was made to Stock Co, in October
2009 and $1,467,000 was recorded as deposits on the consolidated balance sheet
as at October 31, 2009.  In October 2010, the considerations for the
patents are fully paid, and $2,398,153 was recognized as intangible assets. The
intangible assets was recognized at historical value. For the year 2010,
$435,653 was recognized as amortization expenses.





On
October 12, 2009, the Company through its wholly own subsidiary, CBP China,
entered into a Purchase Agreement with Stock Co, to acquire the land use right,
property and plant, for a total consideration of
$23,406,185.  Pursuant to the Purchase Agreement, a payment of
$14,670,000 was made to Stock Co, in October 2009 and $14,988,459 and
$14,670,000 was recorded as deposits on the consolidated balance sheet as at
October 31, 2010 and 2009, respectively.  Pursuant to the Purchase
Agreement, final payment of $8,417,726is due by December
31, 2011, at which time title for the assets will be
transferred.  Accordingly the transaction is considered incomplete as
at October 31, 2010.




(3)
Related party transactions





The
Company leases property and plant from Stock Co.  Rental expenses
related to this lease, incurred and expensed to consolidated statements of
operations and comprehensive income during the years ended October 31, 2010 and
2009 amounted to $734,448 and $ 615,594, respectively. A noncash rental expenses
of $367,224 was recognized to account for the rental exemption pursuant to the
Purchase Agreement for the ended October 31, 2010, and the deposits for the
property was reduced accordingly..





During
the years ended October 31, 2010 and 2009, the Company sold goods at market
price in the amount of $0 and $430,889, respectively, to Heilongjiang Renhuang
Pharmaceutical Limited, a company where Mr. Li Shaoming is a major
shareholder.





11.       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 at October 31, 2010.





12.       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 are no unrecognized tax benefits
included in the balance sheet at October 31, 2010, 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 years ended October 31, 2010 and 2009:





2010
                
                
                2009US
      statutory rates
                
                
                34.00
                %
                
                
                34.00
                %Foreign
      tax rate difference
                
                
                (9.0
                )%
                
                
                (9.0
                )%Income
      tax holiday
                
                
                (25.0)
                %
                
                
                (25.0)
                %Tax
      per financial statements
                
                
                0.00
                %
                
                
                0.00
                %




F-19


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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





YearendedOctober31,2010
                
                
                2009US$
                
                
                US$Tax
      savings
                
                
                4,467,236
                
                
                
                3,711,714Benefit
      per share:Basic
                
                
                0.12
                
                
                
                0.10Diluted
                
                
                0.11
                
                
                
                0.10





Had the
tax exemption not been in place for the years ended October 31, 2010 and 2009,
the Company estimates the following proforma financial statement
impact:





For the years ended October
    31,2010
                
                
                2009US$
                
                
                US$Net
      income before tax provision, as reported
                
                
                17,868,942
                
                
                
                14,846,857Less
      Tax savings
                
                
                (4,467,236
                )
                
                
                (3,711,714
                )Proforma
      Net income
                
                
                13,401,706
                
                
                
                11,135,143Proforma
      Net income per share:Basic
                
                
                0.35
                
                
                
                0.31Diluted
                
                
                0.33
                
                
                
                0.31





13.       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 year ended October 31, 2010:Net
      incomeBasic
      EPS income available to common shareholders
                    
                    
                    17,868,942
                    
                    
                    
                    37,239,536
                    
                    
                    
                    0.48Effect
      of dilutive securities:Warrants
      issued in certain offering
                    
                    
                    -
                    
                    
                    
                    2,755,101
                    
                    
                    
                    -Warrants
      Liability
                    
                    
                    
                    
                    
                    
                    180,000Options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Diluted
      EPS income available to common shareholders
                    
                    
                    17,868,942
                    
                    
                    
                    40,174,637
                    
                    
                    
                    0.44For
      the year ended October 31, 2009:Net
      incomeBasic
      EPS income available to common shareholders
                    
                    
                    14,846,857
                    
                    
                    
                    36,088,853
                    
                    
                    
                    0.41Effect
      of dilutive securities:Warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Diluted
      EPS income available to common shareholders
                    
                    
                    14,846,857
                    
                    
                    
                    36,088,853
                    
                    
                    
                    0.41




F-20


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





For the
year ended October 31, 2010, all options and warrants were included the
calculation of diluted earnings.





For the
year ended October 31, 2009, there were no securities or other contracts to
issue common stock that need to be considered in the diluted earnings per share
calculation.





14.       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 $401,543 and $ 414,437 for the years
ended October 31, 2010 and 2009, respectively.




15.       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 year ended October
      31, 2010, which would have resulted in an adjustment to the exercise price
      or number of Warrant Shares.




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




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




F-21





CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





At
October 31, 2010, the Company had no assets measured at fair value and the
following liabilities measured at fair value:





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





16.      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 October 31, 2010 and 2009, there is no preferred stock
outstanding.





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





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.





17.      OPTION
PLAN AND WARRANTS





Share-based
compensation amounted to $31,462 and $0 in the years ended October 31, 2010 and
2009, 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
October 31, 2010, the number of shares of common stock outstanding was
37,239,536 making 3,723,954 shares of common stock subject to the 2003
Plan.


F-22


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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 $31,462 was
recorded as compensation expense fot the year ended October 31,
2010.  The valuation was based on the assumptions noted in the
following table.





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





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




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





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





On
January 13, 2010, an option to purchase 50,000 shares was granted under the 2007
Plan to an employee that vests on the 12-month anniversary of the date of grant,
conditioned upon continued employment on such date, and 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 was 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.


F-23





CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





A summary
of option activity under the Company’s option  plan as of October 31,
2010 and movement during the twelve months then ended are as
follow:




Options
                    
                    
                    Weighted
                      average
                      exercise price
                    
                    
                    Aggregate
                      intrinsic
                      value
                    
                    
                    Weighted
                      average
                      remaining
                      contractual
                      termUS$
                    
                    
                    US$Outstanding
      at November 1, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Granted
                    
                    
                    120,000
                    
                    
                    
                    1.92
                    
                    
                    
                    63,000
                    
                    
                    
                    2.35Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
      or expired
                    
                    
                    (50,000
                    )
                    
                    
                    0.99
                    
                    
                    
                    (63,000
                    )
                    
                    
                    2.21Outstanding
      at October 31, 2010
                    
                    
                    120,000
                    
                    
                    
                    2.57
                    
                    
                    
                    -
                    
                    
                    
                    2.45





A summary
of the status of the Company’s non-vested options as of October 31, 2010 and
movements during the nine months then ended are as follow:





Options
                    
                    
                    Weighted average
                      granted date fair
                      valueUS$Non-vested
      at November 1, 2009
                    
                    
                    -
                    
                    
                    
                    -Granted
                    
                    
                    70,000
                    
                    
                    
                    1.91Vested
                    
                    
                    -
                    
                    
                    
                    -Forfeited
      or expired
                    
                    
                    -
                    
                    
                    
                    -Non-vested
      at October 31, 2010
                    
                    
                    70,000
                    
                    
                    
                    1.91





As of
October 31, 2010, there was $139,935 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 2.45
years.





(3)  Warrants





As of
October 31, 2010, the Company has 1,231,428 warrants outstanding at an average
exercise price of $1.25 per warrant for one share each of the Company’s common
stock. The warrants expire in 2012 and 2013.





Warrants
                    
                    
                    Average exercise
                      PriceUS$Outstanding
      warrants at November 1, 2009
                    
                    
                    1,071,428
                    
                    
                    
                    0.88Warrants
      granted
                    
                    
                    160,000
                    
                    
                    
                    2.00Exercised
                    
                    
                    -
                    
                    
                    
                    -Expired/cancelled
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      warrants at October  31, 2010
                    
                    
                    1,231,428
                    
                    
                    
                    1.25




F-24





CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Information
regarding the warrants outstanding at October 31, 2010 is summarized as
below:




Warrants outstanding atOctober  31, 2010Weighted
                              
                              WeightedAverage
                              
                              AverageRemaining
                              
                              ExerciseExercise
      Prices
                              
                              
                              Warrants
                              
                              Contractual
                              
                              PriceUS$
                              
                              
                              Outstanding
                              
                              Life (years)
                              
                              US$0.88
                              
                              
                              
                              1,071,4282.00
                              
                              
                              
                              160,0001,231,428
                              
                              1.65
                              
                              1.02





18.      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 financial
statements prepared under the accounting principles of the PRC to a statutory
surplus reserve fund until the balance reaches 50% of the registered share
capital.  This reserve can be used to make up any losses incurred or
to increase share capital.  Except for reducing losses incurred, any
other application may not result in this reserve balance falling below 25% of
the registered capital.





(2)
Public welfare funds





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





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




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





19.      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.


F-25


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





(1)  Operating
lease arrangements





The
Company leases office premise from a third party, Heilongjiang Jiusanyouzhi Co.,
Ltd.  The lease is from May 1, 2007 to April 30, 2010, with monthly
rental payment of $10,527. No payment is to be made in the future
years.





The
Company also leases property and plant from a related party, Harbin Renhuang
Pharmaceutical Stock Co. Ltd.  The lease is from April 30, 2009 to May
1, 2010, with monthly rental payment of $51,411. No payment is to be made in the
future years.





During
the years ended October 31, 2010 and 2009, the Company incurred rental expenses
in the amount of $367,224 and $750,219, respectively.





(2)  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, with a final payment of $8,802,000 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.




Our PRC subsidiary entered into a
Property Purchase Contract dated April 10, 2010 with Heilongjiang Yongtai Co,
pursuant to which our PRC subs Our PRC subsidiary entered into a Property
Purchase Contract dated April 10, 2010 with Heilongjiang Yongtai Co, pursuant to
which our PRC subsidiary may purchase the 10th and
11th
floors of the building located at No. 28, Changjiang St., Nangang District of
Harbin Municipal. Our PRC subsidiary has paid the 1st
installment of the total purchase price pursuant to such Property Purchase
Contract and upon the full payment of the purchase price, Heilongjiang Yongtai
Co. will transfer the ownership of such property to our PRC
subsidiary.





Our PRC
subsidiary may purchase the 10th and 11th floors of the building located at No.
28, Changjiang St., Nangang District of Harbin Municipal. Our PRC subsidiary has
paid the 1st installment of the total purchase price pursuant to such Property
Purchase Contract and upon the full payment of the purchase price, Heilongjiang
Yongtai Co. will transfer the ownership of such property to our PRC
subsidiary.





As of
October 31, 2010, the Company has capital commitments for purchase of land use
rights, property and equipment, office floors and production patents from
related parties of approximately $10,718,154. The amounts to be paid in the
future years are as follows:





Year
                  
                  Paymentforproperties2010
                  
                  $
                  -2011
                  
                  
                  -2012
                  
                  
                  8,993,0752013
                  
                  
                  1,725,0792014
                  
                  
                  -Thereafter
                  
                  
                  -Total
                  
                  $
                  10,718,154





20.      SUBSEQUENT
EVENT





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.


F-26


CHINA
BOTANIC PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





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 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.





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




F-27