x
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the quarterly period ended July 31, 2011
|
o
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from to
|
Nevada
|
88-1273503
|
(State or other jurisdiction of
|
(I.R.S. Employer
|
incorporation or organization)
|
Identification No.)
|
Large accelerated filer ¨
|
Accelerated filer ¨
|
|
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
|
Smaller reporting company x
|
PART I
|
||
Item 1.
|
Financial Statements
|
4
|
Condensed Consolidated Balance Sheets as of July 31, 2011 (unaudited) and October 31, 2010 (audited)
|
4 | |
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine months Ended July 31, 2011 and 2010 (unaudited)
|
5 | |
Condensed Consolidated Statements of Cash Flows for the Nine months Ended July 31, 2011 and 2010 (unaudited)
|
6 | |
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
7 | |
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
29
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
39
|
Item 4.
|
Controls and Procedures
|
39
|
PART II
|
||
Item 1.
|
Legal Proceedings
|
40
|
Item 1A.
|
Risk Factors
|
40
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
40
|
Item 3.
|
Defaults Upon Senior Securities
|
40
|
Item 4.
|
[Removed and Reserved]
|
40
|
Item 5.
|
Other Information
|
40
|
Item 6.
|
Exhibits
|
40
|
Signature Page
|
42
|
Note
|
July 31, 2011
|
October 31, 2010
|
||||||||||
(Unaudited)
|
(Audited)
|
|||||||||||
ASSETS
|
||||||||||||
Current assets:
|
||||||||||||
Cash and cash equivalents
|
$ | 38,321,244 | $ | 27,826,142 | ||||||||
Trade receivables, net
|
5 | 13,529,292 | 19,814,438 | |||||||||
Due from related parties
|
11 | 129,880 | 28,877 | |||||||||
Inventory, net
|
7 | 6,633,294 | 2,645,616 | |||||||||
Other receivables, net
|
6 | 325,880 | 200,994 | |||||||||
Total current assets
|
$ | 58,939,590 | $ | 50,516,067 | ||||||||
Property and equipment, net
|
8 | 1,860,724 | 2,069,460 | |||||||||
Intangible Assets
|
9 | 17,197,871 | 1,953,617 | |||||||||
Construction in progress
|
10 | 1,920,087 | ||||||||||
Deposits for properties
|
11,12 | 26,491,447 | 18,605,935 | |||||||||
Deferred tax assets
|
13 | 138,003 | ||||||||||
Total assets
|
$ | 106,547,722 | $ | 73,145,079 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||||||
Liabilities
|
||||||||||||
Accounts payable
|
16 | 7,956,716 | 333,555 | |||||||||
Tax payable
|
3,038,802 | 1,064,066 | ||||||||||
Accrued employee benefits
|
17 | 2,105,148 | 1,645,192 | |||||||||
Warrant Liabilities
|
18 | 36,973 | 342,770 | |||||||||
Total liabilities
|
$ | 13,137,639 | $ | 3,385,583 | ||||||||
Shareholders’ equity
|
||||||||||||
Preferred stock (no par value, 1,000,000 shares authorized; none issued and outstanding as of July 31, 2011 and October 31, 2010, respectively)
|
19 | |||||||||||
Common stock ($0.001 par value, 100,000,000 shares, authorized; 37,239,536 issued and outstanding as of July 31, 2011 and October 31, 2010, respectively)
|
19 | 37,240 | 37,240 | |||||||||
Additional paid-in capital
|
7,724,967 | 7,627,987 | ||||||||||
Common stock warrants
|
20 | 496,732 | 496,732 | |||||||||
Reserves
|
21 | 3,372,697 | 3,372,697 | |||||||||
Accumulated other comprehensive income
|
7,773,204 | 4,768,793 | ||||||||||
Retained earnings
|
74,005,243 | 53,456,047 | ||||||||||
Total shareholders’ equity
|
93,410,083 | 69,759,496 | ||||||||||
Total liabilities and shareholders’ equity
|
$ | 106,547,722 | $ | 73,145,079 |
For the three months
|
For the nine months
|
|||||||||||||||||||
ended July 31,
|
ended July 31,
|
|||||||||||||||||||
Note
|
2011
|
2010
|
2011
|
2010
|
||||||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||
Sales, net
|
$ | 12,376,352 | $ | 9,263,892 | $ | 53,875,101 | $ | 38,489,012 | ||||||||||||
Cost of goods sold
|
4,908,939 | 4,620,568 | 21,450,356 | 18,151,062 | ||||||||||||||||
Gross profit
|
7,467,413 | 4,643,324 | 32,424,745 | 20,337,950 | ||||||||||||||||
Operating and administrative expenses:
|
||||||||||||||||||||
Sales and distribution
|
1,559,863 | 1,284,990 | 4,430,053 | 3,689,290 | ||||||||||||||||
General and administrative
|
1,233,288 | 395,131 | 2,744,932 | 2,208,965 | ||||||||||||||||
Research and development
|
1,686,677 | 1,528,933 | 2,585,863 | 2,251,854 | ||||||||||||||||
Total operating expenses
|
4,479,828 | 3,209,054 | 9,760,848 | 8,150,109 | ||||||||||||||||
Income from operations
|
2,987,585 | 1,434,270 | 22,663,897 | 12,187,841 | ||||||||||||||||
Other income:
|
||||||||||||||||||||
Interest income
|
34,144 | 22,039 | 81,286 | 49,206 | ||||||||||||||||
Income before income tax expenses
|
3,021,729 | 1,456,309 | 22,745,183 | 12,237,047 | ||||||||||||||||
Income tax expenses
|
14 | 501,884 | 2,195,987 | |||||||||||||||||
Net income
|
$ | 2,519,845 | $ | 1,456,309 | $ | 20,549,196 | $ | 12,237,047 | ||||||||||||
Other comprehensive income:
|
||||||||||||||||||||
Cumulative currency translation adjustments
|
828,537 | 461,820 | 3,004,411 | 301,931 | ||||||||||||||||
Total comprehensive income
|
$ | 3,348,382 | $ | 1,918,129 | $ | 23,553,607 | $ | 12,538,978 | ||||||||||||
Earnings per common stock- Basic
|
15 | $ | 0.07 | $ | 0.04 | $ | 0.55 | $ | 0.33 | |||||||||||
Earnings per common stock - Diluted
|
$ | 0.07 | $ | 0.04 | $ | 0.54 | $ | 0.32 | ||||||||||||
Weighted average common stock outstanding
|
15 | |||||||||||||||||||
Basic
|
37,239,536 | 37,239,536 | 37,239,536 | 37,239,536 | ||||||||||||||||
Diluted
|
37,473,911 | 37,901,089 | 37,749,587 | 37,793,370 |
For the nine months ended July 31,
|
||||||||
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash flows from operating activities:
|
||||||||
Net income
|
$ | 20,549,196 | $ | 12,237,047 | ||||
Adjustments to reconcile net income to operating activities:
|
||||||||
Depreciation
|
286,379 | 261,572 | ||||||
Amortization
|
368,782 | |||||||
Warrants issued for service
|
(305,797 | ) | 342,770 | |||||
Share Compensation
|
96,981 | 42,759 | ||||||
Noncash rental expenses
|
572,065 | |||||||
Deferred tax assets
|
(135,409 | ) | ||||||
Changes in assets and liabilities:
|
||||||||
Decrease in trade receivables
|
6,891,867 | 12,385,586 | ||||||
(Increase)Decrease in due from related parties
|
(98,049 | ) | 130,199 | |||||
(Increase) in inventory, net
|
(3,815,951 | ) | (549,333 | ) | ||||
(Increase) in prepayments
|
(1,425,913 | ) | ||||||
(Decrease) in other receivables, net
|
(115,187 | ) | ||||||
(Decrease) in accounts payable
|
(159,845 | ) | (112,336 | ) | ||||
Increase(Decrease) in tax payable
|
1,898,697 | (715,360 | ) | |||||
Increase in accrued employee benefits
|
391,128 | 285,739 | ||||||
Net cash provided by operating activities
|
26,424,857 | 22,882,730 | ||||||
Cash flows from investing activities:
|
||||||||
Deposits for land use right and properties
|
(15,255,064 | ) | (2,558,870 | ) | ||||
Increase in construction in progress
|
(1,884,000 | ) | ||||||
Purchase of property and equipment
|
(5,862 | ) | ||||||
Net cash used in investing activities
|
(17,144,926 | ) | (2,558,870 | ) | ||||
Cash flows from financing activities:
|
||||||||
Net cash provided by financing activities
|
||||||||
Effect of exchange rate changes on cash
|
1,215,171 | 314,106 | ||||||
Net increase (decrease) in cash and cash equivalents
|
10,495,102 | 20,637,966 | ||||||
Cash and cash equivalents, beginning of year
|
27,826,142 | 8,111,514 | ||||||
Cash and cash equivalents, end of year
|
$ | 38,321,244 | $ | 28,749,480 | ||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the year for income taxes
|
||||||||
Interest paid during the year
|
1.
|
ORGANIZATION AND NATURE OF OPERATION
|
June 1997
|
ComTech Consolidation Group, Inc
|
|
February 1999
|
E-Net Corporation
|
|
May 1999
|
E-Net Financial Corporation
|
|
January 2000
|
E-Net.Com Corporation
|
|
February 2000
|
E-Net Financial.Com Corporation
|
|
January 2002
|
Anza Capital, Inc (“Anza”)
|
|
June 2006
|
Renhuang Pharmaceuticals, Inc.
|
|
October 2010
|
China Botanic Pharmaceutical Inc.
|
·
|
Harbin Renhuang Pharmaceutical Company Limited – Investment holding.
|
·
|
CBP China – Development, manufacturing and distribution of pharmaceutical products.
|
a.
|
Basis of presentation of financial statements
|
b.
|
Principles of consolidation
|
c.
|
Use of estimates
|
d.
|
Foreign currency translation
|
e.
|
Cash and cash equivalents
|
f.
|
Trade receivables, net
|
g.
|
Inventory, net
|
h.
|
Property and equipment, net
|
Machinery and equipment
|
10 years
|
Office equipment and furnishings
|
5-10 years
|
Motor vehicles
|
5-10 years
|
i.
|
Intangible assets, net
|
j.
|
Accounting for the impairment of long-lived assets
|
k.
|
Fair value of financial instruments
|
l.
|
Fair value measurements
|
|
·
|
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).
|
m.
|
Revenue recognition
|
n.
|
Sales returns and allowances
|
o.
|
Cost of goods sold
|
p.
|
Sales and marketing
|
q.
|
Research and development
|
r.
|
Employee benefit costs
|
s.
|
Share-based compensation
|
t.
|
Taxation
|
u.
|
Comprehensive Income
|
v.
|
Earnings per share
|
|
–
|
warrants,
|
|
–
|
employee stock options, and,
|
|
–
|
other equity awards, which include long-term incentive awards.
|
w.
|
Warrants
|
5.
|
TRADE RECEIVABLES, NET
|
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
Trade receivables
|
14,933,029 | 22,408,628 | ||||||
Less: Sales rebates
|
(933,708 | ) | (2,141,055 | ) | ||||
Less: Allowance for doubtful accounts
|
(470,029 | ) | (453,135 | ) | ||||
Trade receivables, net
|
13,529,292 | 19,814,438 |
6.
|
OTHER RECEIVABLES, NET
|
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
Other receivables
|
707,797 | 569,184 | ||||||
Less: Allowance for doubtful accounts
|
(381,917 | ) | (368,190 | ) | ||||
Other receivables, net
|
325,880 | 200,994 |
7.
|
INVENTORY, NET
|
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
Raw materials
|
3,779,437 | 1,951,185 | ||||||
Work-in-progress
|
1,310,985 | 52,411 | ||||||
Finished goods
|
1,610,946 | 707,648 | ||||||
Less: Inventory reserves
|
(68,074 | ) | (65,628 | ) | ||||
Inventory, net
|
6,633,294 | 2,645,616 |
8.
|
PROPERTY AND EQUIPMENT, NET
|
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
Machinery and equipment
|
3,677,690 | 3,545,146 | ||||||
Office equipment and furnishings
|
65,769 | 58,006 | ||||||
Motor vehicles
|
56,260 | 54,237 | ||||||
3,799,719 | 3,657,389 | |||||||
Less: Accumulated depreciation
|
(1,938,995 | ) | (1,587,929 | ) | ||||
Net book value
|
1,860,724 | 2,069,460 |
9.
|
INTANGIBLE ASSETS, NET
|
2011
|
201 0
|
|||||||
US $
|
US $
|
|||||||
Using right of undergrowth resources
|
15,547,264 | |||||||
Product patents
|
2,487,562 | 2,398,153 | ||||||
Less : Accumulated amortization
|
(836,955 | ) | (444,536 | ) | ||||
Intangible assets, net
|
17,197,871 | 1,953,617 |
10.
|
CONSTRUCTION IN PROGRESS
|
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
Ah City Industrial Park phase Two Project
|
1,920,087 | |||||||
Total Construction In Progress
|
1,920,087 |
11.
|
RELATED PARTY TRANSACTIONS
|
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
Due from related parties:
|
||||||||
Advances (1)
|
129,880 | 28,877 | ||||||
Deposits (2)
|
22,316,195 | 18,605,935 | ||||||
Total
|
22,446,075 | 18,634,812 |
12.
|
DEPOSIT
|
13.
|
DEFERRED TAX ASSETS
|
Allowance for doubtful
|
||||||||||||||
and Inventory provision
|
Temporary Difference
|
Income Tax Rate
|
Deferred Tax Assets
|
|||||||||||
920,020 | 920,020 | 0.15 | 138,003 |
14.
|
INCOME TAX EXPENSES
|
Three months ended
|
Nine months ended
|
|||||||||||||||
July 31,
|
July 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
US statutory rates
|
34.00 | % | 34.00 | % | 34.00 | % | 34.00 | % | ||||||||
Foreign tax rate difference
|
(9.0 | )% | (9.0 | )% | (9.0 | )% | (9.0 | )% | ||||||||
Income tax holiday
|
(10.0 | )% | (25.0 | )% | (10.0 | )% | (25.0 | )% | ||||||||
Tax per financial statements
|
15.00 | % | 0.00 | % | 15.00 | % | 0.00 | % |
Three months ended
|
Nine months ended
|
|||||||||||||||
July 31,
|
July 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
US$
|
US$
|
US$
|
US$
|
|||||||||||||
Tax savings
|
303,004 | 364,077 | 2,102,619 | 3,059,262 | ||||||||||||
Benefit per share:
|
||||||||||||||||
Basic
|
0.01 | 0.01 | 0.06 | 0.08 | ||||||||||||
Diluted
|
0.01 | 0.01 | 0.06 | 0.08 |
Three months ended
|
Nine months ended
|
|||||||||||||||
July 31,
|
July 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
US$
|
US$
|
US$
|
US$
|
|||||||||||||
Net income as reported
|
2,519,845 | 1,456,309 | 20,549,196 | 12,237,047 | ||||||||||||
Less Tax savings
|
(303,004 | ) | (364,077 | ) | (2,102,619 | ) | (3,059,262 | ) | ||||||||
Proforma Net income
|
2,216,841 | 1,092,232 | 18,446,577 | 9,177,785 | ||||||||||||
Proforma Net income per share:
|
||||||||||||||||
Basic
|
0.06 | 0.03 | 0.50 | 0.25 | ||||||||||||
Diluted
|
0.06 | 0.03 | 0.49 | 0.24 |
15.
|
EARNINGS PER SHARE
|
Income
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
US$
|
US$
|
|||||||||||
For the three months ended July 31, 2011:
|
||||||||||||
Net income
|
2,519,845 | |||||||||||
Basic EPS income available to common shareholders
|
2,519,845 | 37,239,536 | 0.07 | |||||||||
Effect of dilutive securities:
|
||||||||||||
Share options
|
||||||||||||
Warrants
|
234,375 | |||||||||||
Diluted EPS income available to common shareholders
|
2,519,845 | 37,473,911 | 0.07 | |||||||||
For the three months ended July 31, 2010:
|
||||||||||||
Net income
|
1,456,309 | |||||||||||
Basic EPS income available to common shareholders
|
1,456,309 | 37,239,536 | 0.04 | |||||||||
Effect of dilutive securities:
|
||||||||||||
Share options
|
26,392 | |||||||||||
Warrants
|
635,161 | |||||||||||
Diluted EPS income available to common shareholders
|
1,456,309 | 37,901,089 | 0.04 |
Income
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
US$
|
US$
|
|||||||||||
For the Nine months ended July 31, 2011:
|
||||||||||||
Net income
|
20,549,196 | |||||||||||
Basic EPS income available to common shareholders
|
20,549,196 | 37,239,536 | 0.55 | |||||||||
Effect of dilutive securities:
|
||||||||||||
Share options
|
||||||||||||
Warrants
|
510,051 | |||||||||||
Diluted EPS income available to common shareholders
|
20,549,196 | 37,749,587 | 0.54 | |||||||||
For the Nine months ended July 31, 2010:
|
||||||||||||
Net income
|
12,237,047 | |||||||||||
Basic EPS income available to common shareholders
|
12,237,047 | 37,239,536 | 0.33 | |||||||||
Effect of dilutive securities:
|
||||||||||||
Share options
|
21,416 | |||||||||||
Warrants
|
- | 532,418 | ||||||||||
Diluted EPS income available to common shareholders
|
12,237,047 | 37,793,370 | 0.32 |
16.
|
ACCOUNTS PAYABLE
|
17.
|
EMPLOYEE BENEFITS
|
18.
|
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
|
|
·
|
The holder of the Warrants (the “Holder”) is entitled to the benefits of Rule 144 promulgated under the Securities Act of 1933, as amended and any other rule or regulation of the SEC that may at any time permit the Holder to sell securities of the Company to the public without registration. Non compliance with such rules and regulations could result in the Company having to settle the Warrant obligation in cash.
|
|
·
|
The exercise price and number of shares issuable upon exercise of the Warrants (the “Warrant Shares”) are subject to adjustment for standard dilutive events, including the issuance of common stock, or securities convertible into or exercisable for shares of common stock, that will adversely affect the Holder’s rights under the Warrants. There were no dilutive events for the three and nine months ended July 31, 2011, which would have resulted in an adjustment to the exercise price or number of Warrant Shares.
|
Expected volatility
|
77.54 | % | ||
Expected dividends
|
||||
Expected term(in years)
|
1.65 years
|
|||
Risk-free rate
|
0.55 | % |
Fair value measurement
|
||||||||||
Quoted 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
|
36,973
|
Expected volatility
|
175.80 | % | ||
Expected dividends
|
||||
Expected term (in years)
|
3 years
|
|||
Risk-free rate
|
1.38 | % |
20.
|
OPTION PLAN AND WARRANTS
|
Expected volatility
|
227.9 | % | ||
Expected dividends
|
||||
Expected term (in years)
|
3 years
|
|||
Risk-free rate
|
1.65 | % |
Expected volatility
|
96.46 | % | ||
Expected dividends
|
||||
Expected term (in years)
|
3 years
|
|||
Risk-free rate
|
1.06 | % |
Year
|
Expensed
|
|||
2011
|
68,400 | |||
2012
|
89,205 | |||
2013
|
90,708 | |||
2014
|
10,938 | |||
Thereafter
|
||||
Total
|
$ | 259,251 |
Expected volatility
|
236.50 | % | ||
Expected dividends
|
||||
Expected term (in years)
|
3 years
|
|||
Risk-free rate
|
1.50 | % |
Weighted
|
||||||||||||||||
average
|
||||||||||||||||
Weighted
|
Aggregate
|
remaining
|
||||||||||||||
average
|
intrinsic
|
contractual
|
||||||||||||||
Options
|
exercise price
|
value
|
term
|
|||||||||||||
US$
|
US$
|
|||||||||||||||
Outstanding at November 1, 2010
|
70,000 | 2.57 | 166,832 | 1.70 | ||||||||||||
Granted
|
200,000 | 2. 15 | 259,251 | 2.37 | ||||||||||||
Exercised
|
||||||||||||||||
Forfeited or expired
|
||||||||||||||||
Outstanding at July 31, 2011
|
270,000 | 2.26 | 426,083 | 2.20 | ||||||||||||
Vested and expected to vest at July 31, 2011
|
29,165 | 2.57 | 71,411 | |||||||||||||
Exercisable at Jul y 31, 2011
|
29,165 | 2.57 | 71,411 |
Weighted average
|
||||||||
Options
|
granted date fair value
|
|||||||
US$
|
||||||||
Non-vested at November 1, 2010
|
58,334 | 2.57 | ||||||
Granted Since November 1, 2010
|
200,000 | 2.15 | ||||||
Vested Since November 1, 2010
|
17,499 | 2.57 | ||||||
Forfeited or expired
|
||||||||
Non-vested at July 31, 2011
|
240,835 | 2.22 |
Warrants
|
Average exercise Price
|
|||||||
US$
|
||||||||
Outstanding warrants at November 1, 2010
|
1,231,428 | 1.03 | ||||||
Warrants granted
|
||||||||
Exercised
|
||||||||
Expired/cancelled
|
||||||||
Outstanding warrants at July 31, 2011
|
1,231,428 | 1.03 |
Weighted Average Remaining
|
Weighted Average Exercise
|
||||||||||||||
Exercise Prices
|
Warrants Outstanding
|
Contractual Life (years)
|
Price
|
||||||||||||
US$
|
US$
|
||||||||||||||
0.88 | 1,071,428 | 0.79 | 0.88 | ||||||||||||
2.00 | 160,000 | 1.65 | 2.00 | ||||||||||||
1,231,428 | 0.90 | 1.03 |
21.
|
STATUORY RESERVES
|
2011
|
2010
|
|||||||
US$
|
US$
|
|||||||
Statutory surplus reserve
|
3,090,320 | 3,090,320 | ||||||
Public welfare fund
|
282,377 | 282,377 | ||||||
Total
|
3,372,697 | 3,372,697 |
22.
|
COMMITMENTS AND CONTINGENCIES
|
Year
|
Payment for properties
|
|||
2011
|
$ | 9,273,943 | ||
2012
|
18,580,438 | |||
2013
|
||||
2014
|
||||
2015
|
||||
Thereafter
|
||||
Total
|
$ | 27,854,381 |
23.
|
SUBSEQUENT EVENT
|
l
|
Ah City Phase Two Project. We have finished the architectural design of Ah City Phase Two Project and are in the process of obtaining approval from relevant government authorities. We expect to finish all the procedures by September, 2011 and will start the construction once received approval documents. As of July 31, 2011, we have incurred a total of $1,901,250 of construction-in-progress. The Ah City Phase Two Project is expected to be completed in end of 2012.
|
l
|
Renewable Fuel – Straw pellet. On April 21, 2011, Company issued a press release to announce that it will switch to a renewable fuel—straw pellet in October 2011. Straw pellets are a by-product of natural plants, such as corn and sorghum. The energy contained in the original raw material is highly concentrated, making straw pellets a clean fuel with very good energy qualities including calorific content with minimal amounts of ash. In comparison to coal, straw pellets are a lower cost and cleaner source of fuel. Moreover, straw pellets are carbon-neutral, since the fuel is made of plant which is part of the natural carbon cycle. The price of straw pellet is 15%-20% lower than coal and about 10%-15% than common fuel. Given that fuel costs account for approximately 10% of our total cost of goods, we expect the switch to bio-fuel will result in additional cost efficiency and improved profitability while supporting a healthy ecosystem.
|
l
|
Patent for “Extraction of effective ingredients of Siberian Ginseng and its preparation and application”. In June of 2011, the company was granted a patent by State Intellectual Property Office of PRC. The extraction method has helped the company successfully segregate effective ingredients from Siberian Ginseng, which include three main active elements, including, Syringin, Total Glucosides and Total Flavonoids. In particular, Syringin has significant effect in the treatment of depression and nerve regulation. This patent will be a catalyst to drive the development of the Company’s innovative Acanthopanax series, such as Lyophilized Syringin Powder and Total Glucosides Total Flavonoids Soft Capsule. The patent covers a wide variety of possible Siberian Ginseng extraction methods and applications, creating a high barrier to entry for competitors seeking to develop similar Siberian Ginseng products. The patent will also provide market exclusivity for a period of 20 years.
|
|
l
|
Siberian Ginseng (Acanthopanax) Total Glucosides Total Flavonoids Soft Capsule. We are in the process of developing Siberian Ginseng (Acanthopanax) Total Glucosides Total Flavonoids Soft Capsule for the treatment of senile dementia. Initial pharmacology and toxicology tests show the product to have few side effects, and is safe and reliable, and suitable for long-term use. Ongoing pharmaceutical research and evaluating quality standards and stability will last about half year. We will compile the clinical documents and apply for the clinic approval after the stage is finished. We expect to receive new drug certificate and production approval by the end of 2013 and start selling in 2014.
|
|
l
|
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. At present, the project is in the process of pharmacology and toxicology research and which will be completed by the end of 2012. We expect to receive new drug certificate and production approval by 2015 and start selling in 2015.
|
|
l
|
Schisandra Integrated Development Project. Schisandra is a wild plant with high medical and health values. Modern studies have shown that Schisandra contains lignin, which has strong efficacy in treating insomnia. The company has successfully completed the methodological work for medicinal Schisandra lignin determination and developed a sound Schizandra medicinal quality standard. At present, the project is in the process of pharmacology and toxicology test. We expect to receive new drug certificate and production approval by the end of 2015 and start selling in year 2016.
|
|
l
|
Siberian Ginseng (Acanthopanax) Lyophilized Syringin Powder. We have successfully segregated Syringin from Siberian Ginseng through our proprietary extraction technology. Syringin has significant effect in the treatment of depression and nerve regulation. We have created a sample of Syringin Freeze-dried Acanthopanax Powder. If successful, this achievement will represent a great pioneering work in the field of Chinese medicine, and will enhance our competitive edge in this area. We have finished pharmaceutical research. At present, the project is in the process of pharmacology and toxicology test. We plan to finish the analysis by the end of 2013 and apply for clinical trial from the State Food and Drug Administration of PRC in 2014. The new drug certificate and production approval is expected to be obtained in the end of year 2016 and start selling in 2017.
|
|
·
|
Pharmaceutical Industry Growth. We believe the market for pharmaceutical products in China is growing rapidly driven by China’s economic growth, increased pharmaceutical expenditure, an aging population, increased lifestyle-related diseases, government support of the pharmaceutical industry, as well as the increased availability of funding for medical insurance in China. In particular, in January 2009, the PRC’s State Council passed a far-reaching medical reform plan (“Health Reform”) to help provide universal primary medical insurance coverage and increased access to medical facilities to a greater majority of its citizens. Both the central government of China and provincial governments has published Lists of Essential Medicines to regulate the market. We expect these factors to continue to drive industry growth.
|
|
·
|
Pricing of Our Products. Seven of our products, namely Siberian Ginseng Tablets, Tianma Pills, Compond YangJiao Tablets, Banlangen Granules, Compound Honeysuckle Granules, ShengMai Granules and QingReJieDu Oral Liquid, which collectively accounted for 38% and 39%, respectively, of our total revenues in the three and nine months ended July 31, 2011, are listed on the National or HeiLongjiang Provincial List of Essential Medicines published by the Chinese government, and therefore subject to government pricing limits. We do not believe pricing controls will influence our sales significantly and expect that the health care reform will help increase our sales.
|
|
·
|
Production Capacity. We believe much of the pharmaceutical market in China is still underserved, particularly with respect to treatment of depression, melancholy and nerve regulation. The demand for our products that treat depression, melancholy and regulate nerves, continuously increased and we were able to increase our production of such products to capture much of this growth. We believe our facilities with the ability to manufacture 18 dosage forms and over 200 products will allow us to capture future market growth and increase our revenue and market share accordingly.
|
|
·
|
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.
|
The Three Months Ended July 31,
|
||||||||
2011
|
2010
|
|||||||
($ in thousands)
|
||||||||
Statements of Operations Data
|
||||||||
Sales, net
|
12,376 | 9,264 | ||||||
Cost of goods sold
|
4,909 | 4,621 | ||||||
Gross profit
|
7,467 | 4,643 | ||||||
Operating and administrative expenses
|
||||||||
Sales and marketing
|
1,560 | 1,285 | ||||||
General and administrative
|
1,233 | 395 | ||||||
Research and development
|
1,687 | 1,529 | ||||||
Other income
|
34 | 22 | ||||||
Income before income tax expenses
|
3,022 | 1,456 | ||||||
Income tax expenses
|
502 | |||||||
Net income
|
2,520 | 1,456 | ||||||
Other comprehensive income:
|
||||||||
Cumulative currency translation adjustments
|
829 | 462 | ||||||
Total comprehensive income
|
3,348 | 1,918 |
2011
|
2010
|
2011 over 2010
|
||||||||||||||||||||||||||||||||||
Quantity
|
Amount
|
% of
|
Quantity
|
Amount
|
% of
|
Quantity
|
Amount
|
% of
|
||||||||||||||||||||||||||||
Product name
|
(Pack’000)
|
($’000)
|
Sales
|
(Pack’000)
|
($’000)
|
Sales
|
(Pack’000)
|
($’000)
|
Sales
|
|||||||||||||||||||||||||||
Siberian Ginseng
|
||||||||||||||||||||||||||||||||||||
(Acanthopanax) Series
|
53 | 6,478 | 50 | % | 53 | 4,439 | 44 | % | 0 | 2,039 | 46 | % | ||||||||||||||||||||||||
Tianma Series
|
8 | 952 | 7 | % | 9 | 763 | 8 | % | -1 | 189 | 25 | % | ||||||||||||||||||||||||
Compound Yangjiao
|
||||||||||||||||||||||||||||||||||||
Tablets
|
11 | 1,342 | 10 | % | 13 | 1,352 | 13 | % | -2 | -10 | -1 | % | ||||||||||||||||||||||||
Shark Vital Capsules
|
0 | % | 1 | 235 | 2 | % | -1 | -235 | ||||||||||||||||||||||||||||
Shengmai Granules
|
9 | 423 | 3 | % | 16 | 677 | 7 | % | -7 | -254 | -38 | % | ||||||||||||||||||||||||
Banlangen Granules
|
8 | 320 | 2 | % | 9 | 290 | 3 | % | -1 | 30 | 10 | % | ||||||||||||||||||||||||
Compound Honeysuckle
|
||||||||||||||||||||||||||||||||||||
Granules
|
16 | 1,112 | 9 | % | 39 | 2,350 | 23 | % | -23 | -1,238 | -53 | % | ||||||||||||||||||||||||
QingReJieDu Oral Liquid
|
6 | 209 | 2 | % | 6 | 209 | ||||||||||||||||||||||||||||||
Compound Schizandra
|
||||||||||||||||||||||||||||||||||||
Tablets
|
3 | 334 | 3 | % | 3 | 334 | ||||||||||||||||||||||||||||||
Ginseng and Venison
|
||||||||||||||||||||||||||||||||||||
Extract
|
11 | 1,472 | 11 | % | 11 | 1,472 | ||||||||||||||||||||||||||||||
Badger Oil
|
2 | 401 | 3 | % | 2 | 401 | ||||||||||||||||||||||||||||||
Total
|
127 | 13,043 | 100 | % | 140 | 10,106 | 100 | % | -13 | 2,937 | 29 | % |
Average Price Per Pack
|
||||||||||||
Product
|
2011
|
2010
|
Change
|
|||||||||
Siberian Ginseng (Acanthopanax) Series
|
122 | 84 | 45 | % | ||||||||
Tianma Series
|
119 | 85 | 40 | % | ||||||||
Compound Yangjiao Tablets
|
122 | 104 | 17 | % | ||||||||
Shark Vital Capsules
|
235 | |||||||||||
Shengmai Granules
|
47 | 42 | 12 | % | ||||||||
Balangen Granules
|
40 | 32 | 25 | % | ||||||||
Compound Honeysuckle Granules
|
70 | 60 | 17 | % | ||||||||
QingReJieDu Oral Liquid
|
35 | |||||||||||
Compound Schizandra Tablets
|
111 | |||||||||||
Ginseng and Venison Extract
|
134 | |||||||||||
Badger Oil
|
201 |
The Nine months Ended July 31,
|
||||||||
2011
|
2010
|
|||||||
($ in thousands)
|
||||||||
Statements of Operations Data
|
||||||||
Sales, net
|
53,875 | 38,489 | ||||||
Cost of goods sold
|
21,450 | 18,151 | ||||||
Gross profit
|
32,425 | 20,338 | ||||||
Operating and administrative expenses
|
||||||||
Sales and marketing
|
4,430 | 3,689 | ||||||
General and administrative
|
2,745 | 2,209 | ||||||
Research and development
|
2,586 | 2,252 | ||||||
Other income
|
81 | 49 | ||||||
Income before income tax expenses
|
22,745 | 12,237 | ||||||
Income tax expenses
|
2,196 | |||||||
Net income
|
20,549 | 12,237 | ||||||
Other comprehensive income:
|
||||||||
Cumulative currency translation adjustments
|
3,004 | 302 | ||||||
Total comprehensive income
|
23,553 | 12,539 |
2011
|
2010
|
2011 over 2010
|
||||||||||||||||||||||||||||||||||
Quantity
|
Amount
|
% of
|
Quantity
|
Amount
|
% of
|
Quantity
|
Amount
|
% of
|
||||||||||||||||||||||||||||
Product name
|
(Pack’000)
|
($’000)
|
Sales
|
(Pack’000)
|
($’000)
|
Sales
|
(Pack’000)
|
($’000)
|
Sales
|
|||||||||||||||||||||||||||
Siberian Ginseng (Acanthopanax)
|
||||||||||||||||||||||||||||||||||||
Series
|
253 | 28,197 | 48 | % | 236 | 19,121 | 44 | % | 17 | 9,076 | 47 | % | ||||||||||||||||||||||||
Tianma Series
|
40 | 4,249 | 7 | % | 46 | 3,553 | 8 | % | -6 | 696 | 20 | % | ||||||||||||||||||||||||
Compound Yangjiao Tablets
|
54 | 6,213 | 11 | % | 59 | 5,528 | 13 | % | -5 | 685 | 12 | % | ||||||||||||||||||||||||
Shark Vital Capsules
|
0 | % | 4 | 1,973 | 5 | % | -4 | -1,973 | ||||||||||||||||||||||||||||
Shengmai Granules
|
44 | 2,055 | 3 | % | 68 | 2,772 | 6 | % | -24 | -717 | -26 | % | ||||||||||||||||||||||||
Banlangen Granules
|
31 | 1,267 | 2 | % | 45 | 1,230 | 3 | % | -14 | 37 | 3 | % | ||||||||||||||||||||||||
Compound Honeysuckle Granules
|
98 | 6,795 | 11 | % | 152 | 9,028 | 21 | % | -54 | -2,233 | -25 | % | ||||||||||||||||||||||||
QingReJieDu Oral Liquid
|
30 | 1,080 | 2 | % | 0 | % | 30 | 1,080 | ||||||||||||||||||||||||||||
Compound Schizandra Tablets
|
11 | 1,121 | 2 | % | 0 | % | 11 | 1,121 | ||||||||||||||||||||||||||||
Ginseng and Venison Extract
|
52 | 6,363 | 11 | % | 0 | % | 52 | 6,363 | ||||||||||||||||||||||||||||
Badger Oil
|
6 | 1,531 | 3 | % | 0 | % | 6 | 1,531 | ||||||||||||||||||||||||||||
Total
|
619 | 58,871 | 100 | % | 610 | 43,205 | 100 | % | 9 | 15,666 | 36 | % |
Average Price Per Pack
|
||||||||||||
Product
|
2011
|
2010
|
Change
|
|||||||||
Siberian Ginseng (Acanthopanax) Series
|
111 | 81 | 37 | % | ||||||||
Tianma Series
|
106 | 77 | 38 | % | ||||||||
Compound Yangjiao Tablets
|
115 | 94 | 22 | % | ||||||||
Shark Vital Capsules
|
493 | |||||||||||
Shengmai Granules
|
47 | 41 | 15 | % | ||||||||
Balangen Granules
|
41 | 27 | 52 | % | ||||||||
Compound Honeysuckle Granules
|
69 | 59 | 17 | % | ||||||||
QingReJieDu Oral Liquid
|
36 | |||||||||||
Compound Schizandra Tablets
|
102 | |||||||||||
Ginseng and Venison Extract
|
122 | |||||||||||
Badger Oil
|
255 |
Net cash provided by
|
Nine months ended July 31
|
|||||||||
(used in) :
|
2011
|
2010
|
||||||||
($ in thousands)
|
||||||||||
Operating
|
activities
|
26,425 | 22,883 | |||||||
Investing
|
activities
|
(17,145 | ) | (2,559 | ) |
Calendar Year
|
Payment for properties
|
|||
2011
|
$
|
9,273,943
|
||
2012
|
18,580,438
|
|||
2013
|
||||
2014
|
||||
2015
|
||||
Thereafter
|
||||
Total
|
$
|
27,854,381
|
Exhibit
No.
|
|
Description
|
3.1
|
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 Pharmaceutical Inc. (3)
|
|
10.1
|
Renhuang Pharmaceuticals, Inc. 2007 Non-Qualified Company Stock Grant and Option Plan (4)
|
|
10.2
|
2003 Omnibus Securities Plan (5)
|
|
10.3
|
Loan Conversion Agreement among the Company, Allied Merit International Inc. and Griffin Ventures Ltd. dated May 15, 2009 (6)
|
|
10.4
|
Employment Agreements with Weiqiu Dong (3)
|
|
10.5
|
English translation of Purchase Agreement for Patents dated September 1, 2009 (7)
|
|
10.6
|
English translation of Purchase Agreement for Ah City Natural and Biopharmaceutical Plant dated October 12, 2009 (7)
|
|
10.7
|
English translation of Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai Company dated April 10, 2010 (8)
|
|
10.8
|
Independent Director Agreement with Mr. Xiaoheng (Sean) Shao, dated April 13, 2010 (8)
|
|
10.9
|
Independent Director Agreement with Mr. Bingchun Wu, dated April 19, 2010 (8)
|
|
10.10
|
Independent Director Agreement with Mr. Changxiong Sun, dated April 19, 2010 (8)
|
|
10.11
|
Exclusive Purchase Agreement, with Yichun Red Star Forest Bureau, of Acanthopanax Resources (9)
|
|
21.1
|
Subsidiaries of the registrant (2)
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|
|
32.1
|
Certification of Principal Executive and Financial Officers pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
|
|
101.INS
|
XBRL Instance Document (10)
|
|
101.SCH
|
XBRL Taxonomy Extension Schema (10)
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase (10)
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase (10)
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase (10)
|
|
101.FRE
|
XBRL Taxonomy Extension Presentation Linkbase (10)
|
*
|
Filed herewith.
|
(1)
|
Incorporated by reference from Form 8-K filed with the SEC on April 22, 2003.
|
(2)
|
Incorporated by reference from Form 10-K filed with the SEC on February 13, 2007.
|
(3)
|
Incorporated by reference from Form 10-K filed with the SEC on January 24, 2011.
|
(4)
|
Incorporated by reference from Form S-8 filed with the SEC on May 2, 2007.
|
(5)
|
Incorporated by reference from Form 8-K filed with the SEC on April 22, 2003.
|
(6)
|
Incorporated by reference from Form 10-Q filed with the SEC on September 21, 2009.
|
(7)
|
Incorporated by reference from Form 10-K filed with the SEC on January 29, 2010.
|
(8)
|
Incorporated by reference from Form 10-Q filed with the SEC on June 7, 2010.
|
(9)
|
Incorporated by reference from Form 8-K filed with the SEC on July 14, 2010.
|
(10)
|
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1993, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
|
Date: September 14, 2011
|
CHINA BOTANIC PHARMACEUTICAL INC.
|
||
By:
|
/s/ Li Shoming
|
||
Li Shaoming, Chief Executive Officer and President
|
|||
(Principal Executive Officer)
|
|||
Date: September 14 , 2011
|
By:
|
/s/ Weiqiu Dong
|
|
Weiqiu Dong, Chief Financial Officer
|
|||
(Principal Financial Officer)
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of China Botanic Pharmaceutical Inc. (the “Registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
|
4.
|
The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
|
a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
|
b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
|
c)
|
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
|
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
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5.
|
The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
|
a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
|
b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
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Date: September 14, 2011
|
/s/ Li Shaoming
|
Li Shaoming
|
|
Chief Executive Officer and President
|
|
(Principal Executive Officer)
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q of China Botanic Pharmaceutical Inc. (the “Registrant”);
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
|
4.
|
The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
|
a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
|
b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
|
c)
|
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
d)
|
disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting;
|
5.
|
The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
|
a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
|
b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
|
Date: September 14, 2011
|
/s/ Weiqiu Dong
|
Weiqiu Dong
|
|
Chief Financial Officer
|
|
(Principal Financial Officer)
|
|
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
|
Dated: September 14, 2011
|
/s/ Li Shaoming
|
Li Shaoming
|
|
Chief Executive Officer and President
|
|
(Principal Executive Officer)
|
|
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
|
Dated: September 14, 2011
|
/s/ Weiqiu Dong
|
Weiqiu Dong
|
|
Chief Financial Officer
|
|
(Principal Financial Officer)
|
CONDENSED CONSOLIDATED BALANCE SHEETS [Parenthetical] (USD $)
|
Jul. 31, 2011
|
Oct. 31, 2010
|
---|---|---|
Preferred stock, no par value (in dollars per share) | $ 0 | $ 0 |
Preferred stock, shares authorized | 1,000,000 | 1,000,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 100,000,000 | 100,000,000 |
Common stock, shares issued | 37,239,536 | 37,239,536 |
Common stock, shares outstanding | 37,239,536 | 37,239,536 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
|
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Jul. 31, 2011
|
Jul. 31, 2010
|
Jul. 31, 2011
|
Jul. 31, 2010
|
|
Sales, net | $ 12,376,352 | $ 9,263,892 | $ 53,875,101 | $ 38,489,012 |
Cost of goods sold | 4,908,939 | 4,620,568 | 21,450,356 | 18,151,062 |
Gross profit | 7,467,413 | 4,643,324 | 32,424,745 | 20,337,950 |
Operating and administrative expenses: | Â | Â | Â | Â |
Sales and distribution | 1,559,863 | 1,284,990 | 4,430,053 | 3,689,290 |
General and administrative | 1,233,288 | 395,131 | 2,744,932 | 2,208,965 |
Research and development | 1,686,677 | 1,528,933 | 2,585,863 | 2,251,854 |
Total operating expenses | 4,479,828 | 3,209,054 | 9,760,848 | 8,150,109 |
Income from operations | 2,987,585 | 1,434,270 | 22,663,897 | 12,187,841 |
Other income: | Â | Â | Â | Â |
Interest income | 34,144 | 22,039 | 81,286 | 49,206 |
Income before income tax expenses | 3,021,729 | 1,456,309 | 22,745,183 | 12,237,047 |
Income tax expenses | 501,884 | Â | 2,195,987 | Â |
Net income | 2,519,845 | 1,456,309 | 20,549,196 | 12,237,047 |
Other comprehensive income: | Â | Â | Â | Â |
Cumulative currency translation adjustments | 828,537 | 461,820 | 3,004,411 | 301,931 |
Total comprehensive income | $ 3,348,382 | $ 1,918,129 | $ 23,553,607 | $ 12,538,978 |
Earnings per common stock- Basic (in dollars per share) | $ 0.07 | $ 0.04 | $ 0.55 | $ 0.33 |
Earnings per common stock - Diluted (in dollars per share) | $ 0.07 | $ 0.04 | $ 0.54 | $ 0.32 |
Weighted average common stock outstanding | Â | Â | Â | Â |
Basic (in shares) | 37,239,536 | 37,239,536 | 37,239,536 | 37,239,536 |
Diluted (in shares) | 37,473,911 | 37,901,089 | 37,749,587 | 37,793,370 |
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
|
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 31, 2011
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Fair Value Disclosures [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Text Block] | 18. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
On March 25, 2010, the Company issued warrants (the “Warrants”) of 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 ASC Topic 815, requires that the Warrants be classified at their fair value to liabilities each reporting period.
On July 31, 2011, the fair value of the Company’s warrants liability was $36,973. 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.
On July 31, 2011, the Company had no assets measured at fair value and the following liabilities measured at fair value:
|
DOCUMENT AND ENTITY INFORMATION
|
9 Months Ended | |
---|---|---|
Jul. 31, 2011
|
Aug. 23, 2011
|
|
Entity Registrant Name | China Botanic Pharmaceutical | Â |
Entity Central Index Key | 0000926844 | Â |
Current Fiscal Year End Date | --10-31 | Â |
Entity Filer Category | Smaller Reporting Company | Â |
Trading Symbol | cbp | Â |
Entity Common Stock, Shares Outstanding | Â | 37,239,536 |
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jul. 31, 2011 | |
Document Fiscal Period Focus | Q3 | Â |
Document Fiscal Year Focus | 2011 | Â |
STATUTORY RESERVES
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Jul. 31, 2011
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Statutory Reserves [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||
Statutory Reserves [Text Block] | 21. STATUORY RESERVES
(1) Statutory reserves
Pursuant to the relevant laws and regulations of the PRC, the Company is required to annually transfer 10% of its after tax profit as reported on the consolidated financial statements prepared under the accounting principles of the PRC to a statutory surplus reserve fund until the balance reaches 50% of the registered share capital. This reserve can be used to make up any losses incurred or to increase share capital. Except for reducing losses incurred, any other application may not result in this reserve balance falling below 25% of the registered capital.
(2) Public welfare funds
Prior to January 1, 2007, the Company was required each year to transfer 5% of its after tax profit as reported on 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 July 31, 2011 and October 31, 2010 were comprised of the following:
|
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INVENTORY, NET
|
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 31, 2011
|
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Inventory Disclosure [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory Disclosure [Text Block] | 7.
INVENTORY, NET
The inventory amounts included in the condensed consolidated balance sheets for as at July 31, 2011 and October 31, 2010 comprised of:
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COMMITMENTS AND CONTINGENCIES
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9 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Jul. 31, 2011
|
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Commitments and Contingencies Disclosure [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies Disclosure [Text Block] | 22. COMMITMENTS AND CONTINGENCIES
The Company has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for the Company’s business and at prevailing market prices. No material annual loss is expected from these commitments and there are no minimum purchase commitments.
The Company and its subsidiaries are self-insured, and they do not carry any property insurance, general liability insurance, or any other insurance that covers the risks of their business operations. As a result any material loss or damage to its properties or other assets, or personal injuries arising from its business operations would have a material adverse effect on the Company’s financial condition and operations.
The Company is not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might involve in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Capital commitments
On October 12, 2009, we entered into a purchase agreement with Stock Co. to acquire the land use right, property and plant located at our Ah City Natural and Biopharmaceutical plant for a total consideration of $24,875,622. Pursuant to the purchase agreement, a payment of $15,547,264 was made to Stock Co. in October 2009 and a payment of $ 7,773,632 was made to Stock Co. in January 2011, with a final payment of $1,554,726 due by December 31, 2011, at which time title for the assets will be transferred. According to the agreement, we were exempted from lease payments for the underlying assets starting from May 1, 2010.
On April 10, 2010, CBP China entered into a Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai Company, to acquire two office floors for a total consideration of $5,964,646. Pursuant to the Purchase Agreement, a payment of $4,175,252 was made in April 2010 and recorded as deposits on the condensed consolidated balance sheet. Pursuant to the Purchase Agreement, final payment of $1,789,394 is due by December 20, 2012, at which time title for the assets will be transferred. Accordingly the transaction is considered incomplete as at July 31, 2011.
On January 11, 2011, CBP China entered into an Exclusive Agreement of Utilizing Undergrowth Resources (the “Agreement”) with Yichun Red Star Forestry Bureau of Heilongjiang Province (the “Forestry Bureau”) for 30 years exclusive utilizing right of approximately 6,667 hectares of undergrowth resources, which in rich in wild Siberian Ginseng plant and also includes approximately 67 hectares of Siberian Ginseng GAP cultivation base in Heilongjiang Province. Pursuant to the Agreement, a payment of $7,773,632 was made to Forestry Bureau in January, 2011 and with a final payment of $7,773,632 due in 12 months from the date of Agreement approved by local government authorities for a total consideration of $15,547,264. Siberian Ginseng is a plant with medically-established anti-depressant and mood regulation qualities and is also an active ingredient in our market-leading line of all-natural anti-depressant medications. We will be responsible for continued maintenance and protection of wild resources to make this area a professional Siberian Ginseng base.
In January, 2011, CBP China started its Ah City Phase Two Project for Siberian Ginseng products development and industrialization and entered into a Construction and Engineering Design Contract (the “Contract”) with Heilongjiang Medical Architecture Design Institute (the “Institute”) for architectural design. A few payments have been made to Institute and relevant local government departments for design and start up fees and recorded $1,920,087 as deposit for Ah City Phase Two Project. The estimated total investment for Ah City Phase Two is $18,656,716 with approximately 60% will be paid in 2011 and rest paid in 2012. The project is predicted to finish in 2012.
As of July 31, 2011, the Company had capital commitments on purchasing Ah City Natural and Pharmaceutical Plant, office floors, undergrowth resources utilizing right and Ah City Phase Two Project from four parties with the total amounts of approximately $27,854,381. The amounts are expected to be paid in the following years:
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OPTION PLAN AND WARRANTS
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9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 31, 2011
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Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders' Equity and Share-based Payments [Text Block] | 20. OPTION PLAN AND WARRANTS
Share-based compensation amounted to $36,182 and $11,882, respectively, in the three months ended July 31, 2011 and 2010, and $96,981 and $25,815 in the nine months ended July 31, 2011 and 2010.
(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 July 31, of the immediately preceding year. As of July 31, 2011, the number of shares of common stock outstanding was 37,239,536 making 3,723,954 shares of common stock subject to the 2003 Plan.
a) On April 13, 2010, an option to purchase 70,000 shares was granted under the 2003 Plan to an independent director that vests on a quarterly basis beginning three months from the date of grant, conditioned upon continued service on such quarterly dates, and has a contractual life of 3 years. The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $171,397, of which $14,283 and $42,849 were recorded as compensation expenses for the three and nine months ended July 31, 2011 and $14,283 and 16,944 were recorded for the three and nine months ended July 31, 2010. The valuation was based on the assumptions noted in the following table.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since April 13, 2009. Our methodology is consistent with prior period volatility assumptions. The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
b) On December 14, 2010, we appointed Mr. Weiqiu Dong as our chief financial officer. Base on the employment agreement, Mr. Dong will receive an annual base salary of approximately $88,134. In accordance with the appointment, Mr. Dong received, on December 14, 2010, an option to purchase 200,000 shares of the Company's common stock under the 2003 Omnibus Plan. The option vests 60,000 shares on the first anniversary of the date of grant and 70,000 shares on each of the second and third anniversaries of the date of grant. The Option is conditioned upon continued employment on such date, and has a contractual life of 3 years.
The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $259,251, of which $19,001 and $49,398 were recorded as compensation expenses for the three and nine months ended July 31, 2011 and $0 was recorded for the three and nine months ended July 31, 2010. The valuation was based on the assumptions noted in the following table.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since December 13, 2009. Our methodology is consistent with prior period volatility assumptions. The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
The fair value of the option granted will be expensed according to following schedule:
(2) 2007 Non-Qualified Company Stock Grant and Option Plan
On March 19, 2007, our board of directors approved the 2007 Non-Qualified Company Stock Grant and Option Plan (the “2007 Plan”). The 2007 Plan is intended to serve as an incentive to and to encourage stock ownership by our directors, officers, and employees, and certain persons rendering service to us, so that such persons may acquire or increase their proprietary interest in our success, and to encourage them to remain in our service. Under the 2007 Plan, up to 200,000 shares of our common stock may be subject to options.
On January 13, 2010, an option to purchase 50,000 shares was granted under the 2007 Plan to an employee that vests on the 12-month anniversary of the date of grant, conditioned upon continued employment on such date, and has a contractual life of 3 years. The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $47,527. The valuation was based on the assumptions noted in the following table. The options were forfeited at departure of the employee on August 6, 2010.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since January 13, 2009. Our methodology is consistent with prior period volatility assumptions. The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.
A summary of option activity under the Company’s option plan as of July 31, 2011 and movement during the nine months then ended are as follow:
A summary of the status of the Company’s non-vested options as of July 31, 2011 and movements during the nine months then ended are as follow:
As of July 31, 2011, there was $302,205 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 2.20 years.
(3) Warrants
As of July 31, 2011, the Company has 1,231,428 warrants outstanding at an average exercise price of $1.03 per warrant for one share each of the Company’s common stock. The warrants expire in 2012 and 2013.
Information regarding the warrants outstanding at July 31, 2011 is summarized as below:
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DEPOSIT
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9 Months Ended |
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Jul. 31, 2011
|
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Deposit [Abstract] | Â |
Deposit [Text Block] | 12. DEPOSIT
On April 10, 2010, the Company through its wholly own subsidiary, CBP China, entered into a Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai Company, to acquire two office floors for a total consideration of $5,964,646. Pursuant to the Purchase Agreement, a payment of $4,175,252 was made in April 2010 and recorded as deposits on the condensed consolidated balance sheet. Pursuant to the Purchase Agreement, final payment of $1,789,394 is due by December 20, 2012, at which time title for the assets will be transferred. Accordingly the transaction is considered incomplete as of July 31, 2011.
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ACCOUNTING PRONOUNCEMENTS
|
9 Months Ended |
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Jul. 31, 2011
|
|
Accounting Changes and Error Corrections [Abstract] | Â |
Accounting Changes and Error Corrections [Text Block] | 3. ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued authoritative guidance that provides an entity the option of presenting total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in shareholders’ equity. This guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance should be applied retrospectively. For public entities, the amendments are effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company has not yet adopted this guidance and does not expect that its adoption will have a significant impact on the Company’s financial statements.
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.
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.
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.
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INTANGIBLE ASSETS, NET
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Goodwill and Intangible Assets Disclosure [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets Disclosure [Text Block] | 9. INTANGIBLE ASSETS, NET
Intangible assets and related accumulated amortization as of July 31, 2011 and October 31, 2010 were as follows:
On January 11, 2011, the company through its wholly own subsidiary, CBP China, entered into an Exclusive Agreement of Utilizing Undergrowth Resources (the “Agreement”) with Yichun Red Star Forestry Bureau of Heilongjiang Province (the “Forestry Bureau”) for 30 years exclusive utilizing right of approximately 6,667 hectares of undergrowth resources, which is rich of wild Siberian Ginseng plant and also includes an approximately 67 hectares of Siberian Ginseng GAP cultivation base. Pursuant to the Agreement, a payment of $7,773,632 was made to Forestry Bureau in January, 2011 and with a final payment of $7,773,632 due in 12 months for a total consideration of $15,547,264. The exclusive utilizing right was effected and started from February 1, 2011 through January 31, 2042 for total of 30 years of utilizing and cultivation right.
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INCOME TAX EXPENSES
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Income Tax Disclosure [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Tax Disclosure [Text Block] | 14. INCOME TAX EXPENSES
The Company adopted FIN No. 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption and there is no unrecognized tax benefits included in the balance sheet at July 31, 2011, that would, if recognized, affect the effective tax rate.
The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three and nine months ended July 31, 2011 and 2010:
Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the three and nine months at the rates of taxation prevailing in the PRC in which the Company operates after taking into effect the benefits from any special tax credits or “tax holidays” allowed in the country of operations. If the Company did not have any tax exemption, the effects of the tax per share were as follows:
Had the tax exemption not been in place for the three and nine months ended July 31, 2011 and 2010, the Company estimates the following pro forma financial statement impact:
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CONSTRUCTION IN PROGRESS
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Construction In Progress [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction In Progress [Text Block] | 10. CONSTRUCTION IN PROGRESS
Construction in progress as of July 31, 2011 and October 31, 2010 were as follows:
Plant and production lines currently under development at the Ah City Phase Two are accounted for as construction-in-progress. Construction-in-progress is recorded at historical cost, including development expenditures, professional fees and the interest expenses capitalized during the course of construction for the purpose of financing the project. Upon readiness for use of the project, the cost of construction-in-progress is transferred to property and equipment, at which time depreciation will commence. The Company had no capitalized interest and to date has funded this construction through operations without the use of outside debt financing. As of July 31, 2011, the Company has incurred a total of $1,920,087 of construction-in-progress. The Ah City Phase Two is expected to be completed in the end of 2012 and these amounts will be reclassified to fixed assets when it is ready to use.
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PROPERTY AND EQUIPMENT, NET
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Property, Plant and Equipment [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property, Plant and Equipment Disclosure [Text Block] |
8.
PROPERTY AND EQUIPMENT, NET
Property and equipment and related accumulated depreciation as of July 31, 2011 and October 31, 2010 were as follows:
Depreciation expense for the three months ended July 31, 2011 and 2010 were $97,648 and $80,496, respectively, of which $92,283 and $76,622 were included as a component of cost of goods sold in the respective periods. Depreciation expense for the nine months ended July 31, 2011 and 2010 was $286,379 and $261,572, respectively, of which $273,480 and $249,996 were included as a component of cost of goods sold in the respective periods. No assets were pledged for borrowings as at July 31, 2011 and October 31, 2010.
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ORGANIZATION AND NATURE OF OPERATION
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | Â | ||||||||||||||||||||||||||||||
Nature of Operations [Text Block] |
The accompanying unaudited condensed consolidated financial statements include the financial statements of China Botanic Pharmaceutical Inc. (“CBP”) and its subsidiaries. CBP and its subsidiaries are collectively referred to as the “Company.”
CBP was incorporated in the State of Nevada on August 18, 1988, originally under the corporate name of Solutions, Incorporated. It was inactive until August 16, 1996, when it changed its corporate name to Suarro Communications, Inc, and engaged in the business of providing internet based business services. This line of business was discontinued in 2006, and CBP became a non-operating public company. CBP underwent a number of corporate name changes as follows:
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 condensed consolidated financial statements are as follow:
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 operations are located in the PRC.
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CONCENTRATIONS OF BUSINESS AND CREDIT RISK
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Risks and Uncertainties [Abstract] | Â |
Concentration Risk Disclosure [Text Block] | 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 $ 38,321,244 and $27,826,142, as of July 31, 2011 and October 31, 2010, respectively. No cash balances were restricted as at July 31, 2011 and October 31, 2010.
As of July 31, 2011 and October 31, 2010, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC which management believes are of high credit quality.
(2) Sales and trade receivables
The Company provides credits to its clients in the normal course of business and all clients are located in the PRC. The Company performs ongoing credit evaluations of its clients and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific clients, historical trends, and other information. There was no client accounted for over 10% of sales revenue during the three months ended July 31, 2011 and there was one client accounted for 10% of total sales revenue during the nine months ended July 31, 2011. The Company’s products are sold throughout the PRC. For three months ended July 31, 2011 and 2010, Botanical anti-depression and nerve-regulation products accounted for 70% and 64%, respectively, of total sales. For nine months ended July 31, 2011 and 2010, botanical anti-depression and nerve-regulation products accounted for 68% and 65%, respectively, of total sales.
(3) Foreign currency
The Company operates in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between U.S. dollars and the Chinese currency RMB.
(4) Dividends
Payments of dividends may be subject to some restrictions due to the fact that the operating activities are conducted in a subsidiary residing in the PRC.
(5) Price control
The retail prices of certain pharmaceuticals sold in the PRC, primarily those included in the national and provincial Medical Insurance Catalogs are subject to price controls in the form of fixed prices or price ceilings. As such, the retail prices for certain of the Company’s pharmaceutical products can be adjusted downward or upward from time to time. Price controls did not have a material impact on the Company’s operation during the three and nine months ended July 31, 2011 and 2010.
(6) Cost of goods sold
Cost of goods sold is subject to price fluctuations due to various factors beyond the Company’s control, including, among other pertinent factors, inflation and changes in governmental regulations and programs. The Company expects cost of goods sold will continue to fluctuate and be affected by inflation in the future. The Company’s raw materials are purchased from various independent suppliers, and do not rely on any one supplier.
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TRADE RECEIVABLES, NET
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Trade Receivable Net [Abstract] | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trade Receivable Net [Text Block] | 5.
TRADE RECEIVABLES, NET
The trade receivables amount included in the consolidated balance sheets as at July 31, 2011 and October 31, 2010 were as follows:
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SUBSEQUENT EVENT
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Subsequent Events [Abstract] | Â |
Subsequent Events [Text Block] | 22. SUBSEQUENT EVENT
In May 2009, the FASB issued accounting guidance now codified as FASB ASC Topic 855, “Subsequent Events
,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC Topic 855 is effective for interim or fiscal periods ending after June 15, 2009.
Management has evaluated subsequent events from July 31, 2011 to September 14, 2011, the date which the Company’s condensed consolidated financial statements have been issued and were available to be issued, and has concluded no events need to be reported during this period. Subsequent events that may occur after September 14, 2011 have not been evaluated in the condensed consolidated financial statements as of July 31, 2011.
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DEFERRED TAX ASSETS
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Deferred Tax Assets [Text Block] | 13. DEFERRED TAX ASSETS
Deferred tax assets as of July 31, 2011was as follows:
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OTHER RECEIVABLES, NET
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Other Receivable Net [Abstract] | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Receivable Net [Text Block] | 6. OTHER RECEIVABLES, NET
The other receivables amount included in the condensed consolidated balance sheets as at July 31, 2011 and October 31, 2010 were as follows:
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ACCOUNTS PAYABLE
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Payables and Accruals [Abstract] | Â |
Accounts Payable and Accrued Liabilities Disclosure [Text Block] | 16. ACCOUNTS PAYABLE
We had accounts payable of $7,956,716 and $333,555 as of July 31, 2011 and October 31, 2010, respectively.
On January 11, 2011, the company through its wholly own subsidiary, CBP China, entered into an Exclusive Agreement of Utilizing Undergrowth Resources (the “Agreement”) with Yichun Red Star Forestry Bureau of Heilongjiang Province (the “Forestry Bureau”) for 30 years exclusive utilizing right of approximately 6,667 hectares of undergrowth resources, which is rich of wild Siberian Ginseng plant and also includes an approximately 67 hectares of Siberian Ginseng GAP cultivation base. Pursuant to the Agreement, a payment of $7,773,632 was made to Forestry Bureau in January, 2011 and with a final payment of $7,773,632 due in 12 months for a total consideration of $15,547,264. The exclusive utilizing right was effected and started from February 1, 2011 through January 31, 2042 for total of 30 years of utilizing and cultivation right.
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EMPLOYEE BENEFITS
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Compensation and Retirement Disclosure [Abstract] | Â |
Compensation and Employee Benefit Plans [Text Block] | 17. 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 condensed consolidated statements of operations and comprehensive income for such employee benefits amounted to approximately $99,183 and $84,783 for the three months ended July 31, 2011 and 2010, respectively, and $357,569 and $289,118 for the nine months ended July 31, 2011 and 2010.
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PREFERRED STOCK, COMMON STOCK AND EQUITY TRANSACTIONS
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Stockholders' Equity Note [Abstract] | Â | ||||||||||||||||||||
Stockholders' Equity Note Disclosure [Text Block] | 19. 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 July 31,
2011 and
October 31, 2010, there is no preferred stock outstanding.
(2) Common Stock and Equity Transactions
On May 15, 2009, the Company issued an aggregate of 2,142,856 shares of the Company’s common stock and 1,071,428 warrants with an exercise price of $0.875 per share to Allied Merit International Investments, Inc. and Griffin Ventures Ltd. Total consideration of the issuance was $ 1,500,000.
The fair value of the warrants is estimated on the date of grant using the Black-Scholes option valuation model to be $496,732. The valuation was based on the assumptions noted in the following table.
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.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation and Significant Accounting Policies [Text Block] | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles for completing financial statements and related notes. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended October 31, 2010 which are included in the Company’s Form 10-K/A for the year ended October 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 10, 2011.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheets of China Botanic Pharmaceutical Inc. and its subsidiaries as of July 31, 2011, and the results of their operations for the three and nine months ended July 31, 2011 and 2010, and cash flows for the nine months ended July 31, 2011 and 2010. The results of operations for the three and nine months ended July 31, 2011 are not necessarily indicative of the results to be expected for the entire year.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162
. This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies beginning in third quarter 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references.
The Company operates in one operating segment in accordance with accounting guidance FASB ASC Topic 280, “Segment Reporting.”
Our CEO has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
The condensed consolidated financial statements include the financial statements of CBP and its subsidiaries.
All inter-company transactions and balances have been eliminated in consolidation.
Effective beginning third quarter 2009, the FASB ASC Topic 810, “Consolidation Topic,”
revised the accounting treatment for noncontrolling minority interests of partially-owned subsidiaries. Noncontrolling minority interests represent the portion of earnings that are not within the parent company’s control. These amounts are now required to be reported as equity instead of as a liability on the balance sheet. In addition this statement requires net income from noncontrolling minority interest to be shown separately on the consolidated statements of operations and comprehensive income. As the Company has no noncontrolling interest at July 31, 2011, this change did not have an impact on the Company’s condensed consolidated financial statements.
The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of net sales and expenses during the reported periods.
Significant estimates and assumptions by management include, among others, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory, useful lives of 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.
The Company’s principal country of operations is the PRC. The financial position and results of operations of the subsidiaries are determined using the local currency (“Renminbi” or “RMB”) as the functional currency.
Translation of amounts from RMB into US dollars for reporting purposes is performed by translating the results of operations denominated in foreign currency at the weighted average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange ruling at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (US dollars) are reported as a component of accumulated other comprehensive income in shareholders’ equity.
As of July 31, 2011 and October 31, 2010, the exchange rate was RMB 6.43 and RMB 6.67, respectively. Translation adjustments totaled $828,537 and $461,820 for the three months ended July 31, 2011 and 2010, respectively, and $3,004,411 and $301,931 for the nine months ended July 31, 2011 and 2010, respectively.
Cash and cash equivalents represent cash on hand and demand deposits placed with banks or other financial institutions, which have maturities less than three months when purchased. There were no restrictions to cash at July 31, 2011 and October 31, 2010. Substantially all of the Company’s cash is held in bank accounts in the PRC and is not protected by the Federal Deposit Insurance Corporation (“FDIC”) insurance or any other similar insurance. Given the current economic environment and risks in the banking industry, there is a risk that deposits may not be readily available.
Trade receivables are recorded at the invoiced amount and do not bear interest. Trade receivable payment terms vary and amounts due from customers are stated in the condensed consolidated financial statements net of an allowance for doubtful accounts and sales rebates. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its trade receivables. Trade receivables outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time the trade receivable is past due, the Company’s previous loss history, the counter party’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off receivables when they are deemed uncollectible, and payments subsequently received on such trade receivables are credited to the allowance for doubtful accounts. There were no write offs for the three and nine months ended July 31, 2011 and 2010. The Company does not have any off-balance sheet credit exposure related to its customers.
Inventory consists of raw materials, work-in-progress and finished goods and is valued at the lower of cost or market value. The value of inventory is determined using the weighted average cost method and includes any related production overhead costs incurred in bringing the inventory to their present location and condition. Overhead costs included in finished goods include, direct labor cost and other costs directly applicable to the manufacturing process.
The Company estimates an inventory allowance for excessive, slow moving and obsolete inventories as well as inventory whose carrying value is in excess of net realizable value. Inventory amounts are reported net of such allowances. There were no inventory write offs for the three and nine months ended July 31, 2011 and 2010.
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 and equipment categories are as follows:
Intangible assets consist of purchased patents and land utilizing right. 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 30 years, which is the estimated economic life of the intangible 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 ASC Topic 360, “Property, Plant, and Equipment,”
FASB ASC Topic 360, "Intangibles - Goodwill and Others,"
and FASB ASC Topic 205 “Presentation of Financial Statements
.” The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through the three and nine months ended July 31, 2011 and 2010, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment of long-lived assets in the future.
The Company applies the provisions of accounting guidance, FASB ASC Topic 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 July 31, 2011 and October 31, 2010 the carrying value of cash and cash equivalents, trade receivables, other receivables, accounts payable, approximated their fair value. All financial instruments are recorded at fair value evaluated based on Black-Scholes option model.
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.
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.
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition
,” which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured.
Interest income is recognized when earned, taking into account the average principal amounts outstanding and the interest rates applicable.
As of July 31, 2011, the Company has no sales or contracts that included multiple deliverables that would fall under the scope of FASB ASC Topic 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 July 31, 2011 and October 31, 2010, the Company has accrued $ 933,708 and $2,141,055, respectively, for sales rebates, which offset the balance of account receivables. For the three months ended July 31, 2011 and 2010, the Company has deducted sales rebates in the amount of $790,792 and $1,018,359, respectively, from sales. For the nine months ended July 31, 2011 and 2010, the company has deducted sales rebates in the amount of $4,995,396 and $4,923,196, respectively, from sales. Sales rebates are calculated based on terms specified in contracts with individual distributors.
The Company does not allow return of products except for products that were damaged during shipment. The total amount of returned product is less than 0.05% of total sales. The cost of damaged products is netted against sales and cost of goods sold, respectively.
Cost of goods sold primarily consists of direct and indirect manufacturing costs, including production overhead costs, shipping and handling costs for the products sold.
Sales and marketing costs consist primarily of advertising and market promotion expenses, and other overhead expenses incurred by the Company’s sales and marketing personnel. Advertising expenses are expensed as incurred and amounted to $1, 504,412 and $1,232,000 during the three months ended July 31, 2011 and 2010, respectively, and $ 4,256,163
and $3,558,109 during the nine months ended July 31, 2011 and 2010, respectively.
Research and development (“R&D”) consists primarily of cost of materials and overhead expenses by research and development staff. Research and development costs are expensed as incurred. Research and development expenses amounted to $1,686,677 and $1,528,933 during the three months ended July 31, 2011 and 2010 respectively, and $2,585,863and $2,251,854during the nine months ended July 31, 2011 and 2010, respectively.
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%.
For purposes of determining the variables used in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, “Equity
” and FASB ASC Topic 718, “Compensation — Stock Compensation,”
we perform an analysis of current market data and historical Company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material effect on the results presented in our condensed consolidated statement of operations and other comprehensive income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our financial statements.
Taxation on profits earned in the PRC has been calculated on the estimated assessable profits for the three months and nine months at the rates of taxation prevailing in the PRC in which the Company operates after taking into effect the benefits from any special tax credits or “tax holidays” allowed in the country of operations.
The Company accounts for income tax under the provisions of FASB ASC Topic 740, “Income Taxes,”
which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company does not accrue United States income tax on unremitted earnings from foreign operations, as it is the Company’s intention to invest these earnings in the foreign operations indefinitely.
Generally, years beginning after fiscal 2006, the Company is open to examination by PRC taxing authorities. In the United States, we are open to examination from 2006 onward.
Enterprise income tax
On March 16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income Tax Law (“New EIT Law”) which became effective on January 1, 2008. Pursuant to the New EIT Law, a unified enterprise income tax rate of 25 percent and unified tax deduction standards will be applied consistently to both domestic-invested enterprises and foreign-invested enterprises. However, the New EIT Law repealed most of the existing preferential tax rates and tax holidays. A five-year transition period is allowed for enterprises that obtained preferential tax treatment under the prior tax regime. Under the prior tax regime, foreign-invested enterprises were generally subject to a 30 percent federal tax rate plus a 3 percent local tax rate for a total tax rate of 33 percent.
Before 2011, CBP China secured preferential tax treatment in the jurisdiction where it conducts its manufacturing activity, where it was granted tax holiday of 25% from the local government, for being a new and high-technology enterprise. Start from January 1, 2011, CBP China was granted 10% of tax exemption for the qualification of high/new technology enterprise and pays only 15% enterprise income tax.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the three and nine months in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and noncurrent based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
A provision has not been made at July 31, 2011 for U.S. or additional foreign withholding taxes on approximately $74,005,243 of undistributed earnings of foreign subsidiaries because it is the present intention of management to reinvest the undistributed earnings indefinitely in foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.
The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the government in the PRC. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current PRC officials.
The Company believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.
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.
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 $3,348,382 and $1,918,129 for the three months ended July 31, 2011 and 2010, respectively, and $23,553,607 and $12,538,978, for the nine months ended July 31, 2011 and 2010, respectively.
While total comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily the cumulative balance related to the currency adjustments and increased overall equity by $3,004,411 and $301,931 as of July 31, 2011 and 2010, respectively.
Basic net earnings per common stock are 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 are 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:
The FASB ASC Topic 260, “Earnings per Share,”
requires the Company to include additional shares in the computation of earnings per share, assuming dilution. The additional shares included in diluted earnings per share represent the number of shares that would be issued if all of the Company’s outstanding dilutive instruments were converted into common stock.
Diluted earnings per share are based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
The Company evaluates its warrants on an ongoing basis considering the accounting guidance of FASB ASC Topic 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 ASC Topic 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 ASC Topic 825, the Company accounts for financial instruments as a liability if it embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets. Freestanding financial instruments are financial instruments that are entered into separately and apart from any of the entity’s other financial instruments or equity transactions, or that is entered into in conjunction with some other transaction and is legally detachable and separately exercisable. The liability recorded is fair market value per Black-Scholes option model.
On May 15, 2009, we have issued warrants to purchase 1,071,428 shares of common stock to certain investors, associated with an offering of our common stock. The warrants were recognized at fair value and were recorded as equity.
On March 25, 2010, we issued 160,000 warrants to a certain investor relation service provider. The warrants were recognized at fair value and were recorded as liability.
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RELATED PARTY TRANSACTIONS
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Related Party Transactions Disclosure [Text Block] | 11. RELATED PARTY TRANSACTIONS
Due from related parties included in the condensed consolidated balance sheets as at July 31, 2011 and October 31, 2010 comprised of:
(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 July 31, 2011 and October 31, 2010, the Company has an amount due from Mr. Li Shaoming of $129,880 and $28,877 respectively, which is advanced for travelling and business expenses related with CBP China.
(2) Deposits
On October 12, 2009, we entered into a purchase agreement with Stock Co. to acquire the land use right, property and plant located at our Ah City Natural and Biopharmaceutical plant for a total consideration of $24,875,622. Pursuant to the purchase agreement, a payment of $15,547,264 was made to Stock Co. in October 2009 and a payment of $ 7,773,632 was made to Stock Co. in January 2011, with a final payment of $1,554,726 due by December 31, 2011, at which time title for the assets will be transferred. Accordingly the transaction is considered incomplete as of July 31, 2011.
(3) Rental Expenses
The Company leases property and plant from Stock Co. Rental expenses related to this lease, incurred and expensed to condensed consolidated statements of operations and comprehensive income during the three and nine months ended July 31, 2011 amounted to $193,036 and $572,065, respectively, which were noncash rental expenses and recognized to account for the rental exemption pursuant to the Purchase, and the deposits for the property were reduced accordingly.
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Earnings Per Share [Text Block] | 15. 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:
For the three months ended July 31, 2011, 270,000 share options and 160,000 warrants were excluded from the calculation of diluted earnings per share because the exercise price exceeded the average price of the Company’s common stock. For the three months ended July 31, 2010, 70,000 share options were excluded from the calculation of diluted earnings per share because the exercise price exceeded the average price of the Company’s common stock.
For the nine months ended July 31, 2011, 270,000 share options and 160,000 warrants were excluded from the calculation of diluted earnings per share because the exercise price exceeded the average price of the Company’s common stock. For the nine months ended July 31, 2010, 70,000 share options and 160,000 warrants were excluded from the calculation of diluted earnings per share because the exercise price exceeded the average price of the Company’s common stock.
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