CHINA BOTANIC PHARMACEUTICAL, INC.

BALANCE SHEETS

(Unaudited)

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

CHINA BOTANIC PHARMACEUTICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income ( Unaudited )STATEMENTS OF OPERATIONS

(Unaudited)

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

CHINA BOTANIC PHARMACEUTICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows ( Unaudited )STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

CHINA BOTANIC PHARMACEUTICAL, INC.

Notes to Unaudited Condensed Consolidated Financial StatementsSTATEMENTS OF CASH FLOWS

July 31, 2012 and 2011(Unaudited)

NOTE 1 – DESCRIPTION OF THE BUSINESS

The accompanying condensed consolidatednotes are an integral part of these financial statements include the financial statements of statements.

NOTES TO (UNAUDITED) FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

China Botanic Pharmaceutical Inc. (“CBP”) and its subsidiaries.  CBP and its subsidiaries are collectively referred to as the “Company.”

CBPCompany”, CBPI, “we” “us”) 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 CBPCBPI became a non-operating public company.  CBPCBPI underwent a number of corporate name changes as follows:

Effective August 28, 2006, CBP completed the acquisition of 100% ownership of Harbin Renhuang PharmaceuticalThe Company Limited, a company incorporated in the British Virgin Islands.  Ashas been inactive since September 2012.

On February 4, 2021 as a result Harbin Renhuangof a custodianship in Clark County, Nevada, Case Number: A-20-827231-B Custodian Ventures LLC (“Custodian”) was appointed custodian of China Botanic Pharmaceutical, Company Limited became a wholly owned subsidiary of CBP.

Harbin Renhuang Pharmaceutical Company Limited owns 100%Inc. (the “Company”). On the same date Custodian appointed David Lazar as the Company’s Chief Executive Officer, President, Secretary, Chief Financial Officer, Chief Executive Officer and Chairman of the registered capitalBoard of Harbin Renhuang Pharmaceutical Co. Ltd (“CBP China”).Directors.

The core activitiesCompany’s year-end is October 31.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of subsidiaries includedPresentation

The accompanying financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) “FASB Accounting Standard Codification™” (the “Codification”) which is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. 

Management’s Representation of Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements are as follow:

CBP China’s principal countryhave been prepared by the Company without audit pursuant to the rules and regulations of operations is the People’s Republic of China (the “PRC”)Securities and maintains their accounting records in RenminbiExchange Commission (“RMB”SEC”). SubstantiallyThe Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements include all of the Company’s assets and operation are locatedadjustments, which in the PRC.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company has included all adjustments, consisting onlyopinion of normal and recurring adjustments,management are necessary forto a fair presentation of the resultfinancial position and results of operationsoperations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for the three and nine months ended July 31, 2012 and 2011. Thea full year. These condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes for the year endedthereto at October 31, 2011 included2020 as presented in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors.

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s condensed consolidated financial statements. The condensed consolidated financial statements and notes are representation of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the consolidated financial statements for July 31, 2012 and October 31, 2011.Going Concern

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally acceptedassuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the United Statesnormal course of America (“US GAAP”)business for the twelve months following the date of these financial statements. As of January 31, 2021, the Company had no cash and are expressed in termsan accumulated deficit of US dollars.$11,747,149.

Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. Recently the Company being funded by David Lazar who extended interest-free demand loans to the Company. Historically, the Company raised capital through private placements, to finance working capital needs and may attempt to raise capital through the sale of common stock or other securities and obtaining some short-term loans. 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.

FASB ASC Topic 810, “Consolidation”,requires noncontrolling minority interests to represent the portion of earnings that is not within the parent company’s control. The noncontrolling minority interests arewill be required to be reported as equity instead of as a liability oncontinue to so until its operations become profitable. Also, the balance sheet.  In addition this statement requires net income from noncontrolling minority interest to be shown separately on the condensed consolidated statements of income and comprehensive income. The Company has, no noncontrolling interest asin the past, paid for consulting services with its common stock to maximize working capital, and intends to continue this practice where feasible.

Use of July 31, 2012 and October 31, 2011.Estimates

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

Significantreporting period. The most significant estimates relate to income taxes and contingencies. The Company bases its estimates on historical experience, known or expected trends, and various other assumptions by management include, among others, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory,that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amountamounts of propertyassets and equipment and intangible assets, reserve for employee benefit obligations, stock warrant valuation, share-based compensation, noncash rental expense andliabilities that are not readily apparent from other uncertainties.sources. Actual results maycould 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 in PRC. The financial position and results of operations of the subsidiaries are determined using the local currency (“Renminbi” or “RMB”) as the functional currency.

Translation of amounts from RMB into US dollars for reporting purposes is performed by translating the results of operations denominated in foreign currency at the weighted average rate of exchange during the reporting period. AssetsCash 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, 2012 and October 31, 2011, the exchange rates were RMB 6.33 and RMB 6.38, respectively. For the three months ended July 31, 2012 and 2011, the average exchange rates were RMB 6.33 and RMB 6.48, and the net income translation adjustments totaled $143,931 and $828,537, respectively. For the nine months ended July 31, 2012 and 2011, the average exchange rates were RMB 6.34 and RMB 6.56, and the net income translation adjustments totaled $819,577 and $3,004,411, respectively.

There are no restriction to cash at July 31, 2012 and October 31, 2011. 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 trade receivables write offs for the three and nine months ended July 31, 2012 and 2011. The Company does not have any off-balance sheet credit exposure related to its customers.

Inventory consists of raw materials, packaging 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.equivalents

The Company estimatesconsiders all highly liquid temporary cash investments with an inventory provision for excessive, slow moving and obsolete inventories as well as inventory whose carrying value is in excessoriginal maturity 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, 2012 and 2011.

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 resource using 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 350,"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.equivalents. As of JulyJanuary 31, 20122021 and October 31, 2011,2020, the Company had not experienced impairment lossesno cash 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.hand.

The Company applies the provisions of accounting guidance, FASB ASC Topic 825, “Financial Instruments,Income taxes” 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, 2012 and October 31, 2011 the carrying value of cash, trade receivables, other receivables and accounts payable, approximated their fair value. All derivatives are recorded at fair value evaluated based on Black-Scholes option model.

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.

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

As of July 31, 2012 and October 31, 2011, the Company has accrued $1,225,303 and $1,681,721, respectively, for sales rebates, which offset the balance of trade receivables.  For the three months ended July 31, 2012 and 2011, the Company has deducted sales rebates in the amount of $1,408,448 and $790,792, respectively, from sales. For the nine months ended July 31, 2012 and 2011, the Company has deducted sales rebates in the amount of $6,061,247 and $4,995,396, respectively, from sales. 

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 raw material, packaging material, production overhead costs, city construction tax and educational tax 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. Sales and marketing expenses are expensed as incurred and amounted to $1,832,351 and $1,559,863 during the three months ended July 31, 2012 and 2011, respectively, and $5,247,122 and $4,430,053 during the nine months ended July 31, 2012 and 2011, respectively.

Research and development (“R&D”) consists primarily of cost of materials and overhead expenses incurred by research and development staff. Research and development costs are expensed as incurred. Research and development expenses amounted to $1,900,363 and $1,686,677 during the three months ended July 31, 2012 and 2011, respectively, and $2,928,875 and $2,585,863 for the nine months ended July 31, 2012 and 2011, 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 22% of the employees’ salaries above a fixed threshold amount.

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 variables could have a material effect on the results presented in our condensed consolidated statement of income and comprehensive income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our condensed consolidated financial statements.

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

The Company accounts for income taxtaxes under the provisions of FASB ASC Topic 740,“”Accounting for Income Taxes,”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 condensed consolidated financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

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

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

Generally, years beginning after fiscal 2007, the Company is open to examination by PRC taxing authorities.  In the United States, we are open to examination from 2008 onward.

Enterprise income tax

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

CBP China secured preferential tax treatment in the jurisdiction where it conducts its manufacturing activity, where it was granted tax exemption of 10% from the government, for being a new and high-technology enterprise. The Company currently pays 15% enterprise income tax.

DeferredFASB ASC 740, 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.bases. 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 years in which those temporary differences are expected to be recovered or settled. TheUnder FASB ASC 740, the effect ofon deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred incomeFASB ASC 740-10-05, ”Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax expense represents the change during the periodpositions taken or expected to be taken in the deferreda tax assets and deferredreturn. For those benefits to be recognized, a 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 reducedposition must be more-likely-than-not to be sustained upon examination 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, 2012 and October 31, 2011 for U.S. or additional foreign withholding taxes on the 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.taxing authorities.  

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company recognizes that virtually allassesses the validity of its conclusions regarding uncertain tax positions inquarterly to determine if facts or circumstances have arisen that might cause it to change its judgment regarding the PRC are not freelikelihood of some degree of uncertainty due toa tax law and policy changes by the State. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current State officials.position’s sustainability under audit.

Net Loss per Share

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of July 31, 2012 and October 31, 2011 are not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of July 31, 2012 and October 31, 2011, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current Chinese tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

Value added tax

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

Value added tax payable in The People’s Republic of China is charged on an aggregated basis at a rate of 13% or 17% (depending on the type of goods involved) on the full price collected for the goods sold or, in the case of taxable services provided, at a rate of 17% on the charges for the taxable services provided, but excluding, in respect of both goods and services, any amount paid in respect of value added tax included in the price or charges, and less any deductible value added tax already paid by the taxpayer on purchases of goods and services in the same financial year to get the net value added tax payable in the period.

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 $3,399,469 and $3,348,382 for the three months ended July 31, 2012 and 2011, respectively, and $24,232,468 and $23,553,607 for the nine months ended July 31, 2012 and 2011, 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 orNet 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 $9,440,272 and $8,620,695 as of July 31, 2012 and October 31, 2011, respectively.

Basic net earnings per common stock areshare is computed by dividing net earnings applicable to common shareholdersloss by the weighted-average number ofweighted average common stock outstanding during the period. Diluted net earnings per common stock is determined using the weighted-average number of common stockshares 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.

as defined by Financial Accounting Standards, ASC Topic 260, “Earnings per Share.” Basic earnings per common share (“EPS”) calculations are based ondetermined by dividing net income by the weighted-average number of shares of common stock outstanding.  Earnings per share, assuming dilution, is based on the weighted-averageweighted average number of shares of common stock outstanding adjusted forduring 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.

year. Diluted earnings per common share calculations are based ondetermined by dividing net income by the assumption that allweighted average number of common shares and 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.share equivalents outstanding.

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. Recent Accounting Pronouncements

In accordance withThere are no recent accounting guidance FASB ASC Topic 825,pronouncements that impact 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 at fair market value per Black-Scholes option model.Company’s operations.

On March 25, 2010, we issued warrants to purchase 160,000 shares of our common stock to a certain investor relation service provider. The warrants were recognized at fair value and were recorded as liability.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTSRELATED PARTY TRANSACTIONS

In December 2011, the FASB issued ASU No. 2011-10, “Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate – a Scope Clarification (a consensus of the FASB Emerging Issues Task Force). The ASU No. 2011-10 requires that a parent deconsolidate a subsidiary if the parent ceases to have a controlling financial interest in the subsidiary (except for a sale of in substance real estate). However, in situations other than a sale of in substance real estate, differing views exist in practice on whether the parent of an in substance real estate subsidiary must satisfy the criteria in Subtopic 360-20, Property, Plant, and Equipment – Real Estate Sales, in order to derecognize the in substance real estate. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities: The amendments in this Update will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. It is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12 Comprehensive Income (Topic 220): In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report 2 reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this ASU is not expected to have a material impact on the Company’s condensed consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which allows an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform a quantitative impairment test for that asset. Entities are required to test indefinite-lived assets for impairment at least annually, and more frequently if indicators of impairment exist. This ASU will be effective for the Company on February 3, 2013, with early adoption permitted. The adoption of this ASU is not expected to have a significant effect on our results of operations or financial position.

Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

NOTE 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

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 amounted to $41,308,177 and $15,283,583, as of July 31, 2012 and October 31, 2011, respectively.  No cash balances were restricted as of July 31, 2012 and October 31, 2011.

As of July 31, 2012 and October 31, 2011, substantially all of the Company’s cash were held by major financial institutions located in the PRC which management believes are of high credit quality.

(2) Sales and trade receivables

The Company provides credit in the normal course of business and substantially all customers are located in the PRC. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. Prior to deduction of sales rebates, there is one individual customer accounted for 12% of total sales and there is none accounted for over 10% of total sales duringDuring the three months ended JulyJanuary 31, 20122021 the Custodian extended the Company an interest-free demand loan of $5,500 to help fund the Company’s expenses. As of January 31, 2021 and 2011,October 31, 2020, the balance of related party loans was $5,500 and $-0-, respectively. This individual customer is accounted for 12%

NOTE 4 – EQUITY

Common Stock

The Company has authorized 100,000,000 shares of accounting receivables as$0.001 par value, common stock. As of JulyJanuary 31, 2012. There is one individual customer accounted for 10%2021 and October 31, 2020 there were 37,239,536 shares of total salesCommon Stock issued and there is none accounted for over 10% of total sales during nine months ended July 31, 2012 and 2011, respectively. This individual customer is accounted for 12% of account receivables as of July 31, 2012.outstanding.

NOTE 5 – COMMITMENTS AND CONTINGENCIES

The Company’s products are sold throughout the PRC. For three months ended July 31, 2012 and 2011, botanical anti-depression and nerve-regulation products accounted for 71% and 70%, respectively, of total sales. For nine months ended July 31, 2012 and 2011, botanical anti-depression and nerve-regulation products accounted for 68% and 68%, 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, 2012 and 2011.

(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. The Company does have long term relationships with major suppliers to ensure quality material, good service with competitive prices. The Company maintains an updated qualified supplier list to secure the Company’s material needs in case of changing situation from any one of our major suppliers. There are three and four individual suppliers of over 10% of total purchasing accounted for 59% and 68% of total purchasing during the three months ended July 31, 2012 and 2011, respectively. These three and four individual suppliers are accounted for 87% and 100% of trade payable as of July 31, 2012 and October 31, 2011, respectively. There are three and two individual suppliers of over 10% of total purchasing accounted for 43% and 36% of total purchasing during nine months ended July 31, 2012 and 2011, respectively. These three and two individual suppliers are accounted for 87% and 75% of trade payable as of July 31, 2012 and October 31, 2011.

NOTE 5 - TRADE RECEIVABLES, NET

The trade receivables amount included in the condensed consolidated balance sheets as of July 31, 2012 and October 31, 2011 were as follows:

NOTE 6 - OTHER RECEIVABLES, NET

The other receivables amount included in the condensed consolidated balance sheets as of July 31, 2012 and October 31, 2011 were as follows:

The Company advanced Siberian Ginseng payment to two of our employees in our Dongfanghong branch, Mr. Zhao, Fengwu and Mr. Deng, Fujie before October 31, 2011 for the purchasing of Siberian Ginseng raw material in the Siberian Ginseng harvest season. There was no such advance at July 31, 2012.

NOTE 7 - INVENTORY, NET

The inventory amounts included in the condensed consolidated balance sheets for as of July 31, 2012 and October 31, 2011 comprised of:

NOTE 8 - PROPERTY AND EQUIPMENT, NET

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 $6,064,878.  Pursuant to the Purchase Agreement, a payment of $4,245,415 was made in April 2010 and recorded as deposits on the condensed consolidated balance sheet.  Pursuant to the Purchase Agreement, final payment of $1,819,463was paid in May 2012. The title of one office floor was transferred in May 2012, the Company reclassified $2,829,699 from deposits to property and equipment and started depreciation over the estimated useful life of the asset. The other office floor is still in the process of title transfer.

Property and equipment and related accumulated depreciation as of July 31, 2012 and October 31, 2011 were as follows:

The depreciation expense incurred and recognized on our condensed consolidated statements of income and comprehensive income during the three and nine months ended July 31, 2012 and 2011 were as follow:

No assets were pledged for borrowings as of July 31, 2012 and October 31, 2011.

NOTE 9 - INTANGIBLE ASSETS, NET

Intangible assets and related accumulated amortization as of July 31, 2012 and October 31, 2011 were as follows:

The amortization expense of intangible assets incurred and recognized on our condensed consolidated statements of income and comprehensive income during the three and nine months ended July 31, 2012 and 2011 were as follow:

The following table shows the estimated amortization expenses expected to be incurred in the next five years:

NOTE 10 - CONSTRUCTION-IN-PROGRESS

The total capital expenses in Construction-in-progress as of July 31, 2012 and October 31, 2011 were as follows:

Plant and production lines currently under development at the Ah City Pharmaceutical Plant 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.  The Ah City Phase Two is expected to be completed in the end of 2013 and these amounts will be reclassified to property and equipment when it is ready to use.  

NOTE 11 - RELATED PARTY TRANSACTIONS

On October 12, 2009, we entered into a purchase agreement with Renhuang Stock, which Mr. Shaoming Li, our chairman, chief executive officer and president, is also chairman and a 50% shareholder of Harbin Renhuang Pharmaceutical Stock Co. Ltd (“Renhuang Stock”), to acquire the land use right, property and plant located at our Ah City Natural and Biopharmaceutical plant for a total consideration of $25,293,644. Pursuant to the purchase agreement, a payment of $15,808,527 was made to Renhuang Stock in October 2009 and a payment of $7,904,264 was made to Renhuang Stock in January 2011, with a final payment of $1,580,853 due by the date of receiving all the related government transfer documents, at which time title for the assets will be transferred. Accordingly the transaction is considered incomplete as of July 31, 2012. The Company recorded the payments under the Deposits for properties on condensed consolidated balance sheet.

Before the transaction is completed, the Company is deemed to lease property and plant from Renhuang Stock. Rental expenses related to this lease, incurred and expensed to condensed consolidated statements of income and comprehensive income, which were forgiven rental expenses and recognized to account for the rental exemption pursuant to the purchase agreement, and the deposits for the property were reduced accordingly. Under the purchase terms, the Company does not pay rent to Renhuang Stock for the use of the property and plant before the title is transferred. The detailed forgiven rental expense incurred and recognized to date is explained at Note. 12.

NOTE 12 - DEPOSITS FOR PROPERTIES

Deposits for properties as of July 31, 2012 and October 31, 2011 were listed as following:

Forgiven rental expenses incurred and recognized to the condensed consolidated financial statements of income and comprehensive income during the three and nine months ended July 31, 2012 and 2011, respectively, were listed as following:

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 $6,064,878.  Pursuant to the Purchase Agreement, a payment of $4,245,415 was made in April 2010 and recorded as deposits on the condensed consolidated balance sheet.  Pursuant to the Purchase Agreement, a final payment of $1,819,463 was made in May 2012. The title of one office floor was transferred in May 2012, the Company reclassified $2,829,699 from deposits to property and equipment and started depreciation over the estimated useful life of the asset. The other office floor is still in the process of title transfer.

Based on the purchase agreement between CBP China and Hongxiangmingyuan, the Company does not pay any rental fees before the title is transferred. Rental expenses related to this lease incurred and expensed before transfer of title were forgiven rental expenses and recognized to account for the rental exemption pursuant to the purchase agreement, and the deposits for the property were reduced accordingly.

In the fourth quarter of our fiscal year 2011, we entered into contracts to purchase Patent of Ingredients and preparation for Parkinson Drug, Patent of Ingredients and preparation for Xiangdousu, etc. and deposited $11,559,878 towards the purchase. The Company decided not to purchase two other patents and received $2,509,607 amount of deposit.

NOTE 13 - DEFERRED TAX ASSETS

Deferred tax assets as of July 31, 2012 and October 31, 2011 were listed as following:

NOTE 14 - INCOME TAX EXPENSES

Pursuant to FASB ASC Topic 740, there is no unrecognized tax benefits included in the condensed consolidated balance sheet at July 31, 2012 and October 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, 2012 and2011:

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

Had the tax exemption not been in place for the three and nine months ended JulyJanuary 31, 2012 and 2011, the Company estimates the following pro forma financial statement impact:

NOTE 15 - EARNINGS PER SHARE

When calculating diluted earnings per share for common stock equivalents, the Earnings per Share, FASB ASC Topic 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, 2012 and 2011:

For the three months ended July 31, 2012, warrants of 160,000 shares and option of 284,998 shares were excluded from calculation of diluted earnings, because the exercise prices exceeded the average price of the Company’s common stock. For the three months ended July 31, 2011, warrants of 160,000 shares and option of 270,000 shares were excluded from calculation of diluted earnings, because the exercise prices exceeded the average price of the Company’s common stock.

The following reconciles the components of the EPS computation for the nine months ended July 31, 2012 and 2011:

For the nine months ended July 31, 2012, warrants of 160,000 shares and option of 284,998 shares were excluded from calculation of diluted earnings, because the exercise prices exceeded the average price of the Company’s common stock. For the nine months ended July 31, 2011, warrants of 160,000 shares and option of 270,000 shares were excluded from calculation of diluted earnings, because the exercise prices exceeded the average price of the Company’s common stock.

NOTE 16 - 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 income and comprehensive income for such employee benefits amounted to approximately $257,207 and $99,183 for the three months ended July 31, 2012 and 2011, respectively, and $509,246 and $357,569 for the nine months ended July 31, 2012 and 2011, respectively.

NOTE 17 - ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

On March 25, 2010, the Company issued warrants (the “Warrants”) for 160,000 common shares to an investor relation service provider that have an exercise price of $2.00 per share and a contractual life of 3 years.  The terms of the Warrant agreement include the following factors that in accordance with FASB ASC Topic 815, requires that the Warrants be classified at their fair value to liabilities in each reporting period.

The Company had no assets measured at fair value at July 31, 20122021 and October 31, 2011. The Company had the following warrant liability measured at fair value on July 31, 2012 and October 31, 2011:

The Company used the Black-Scholes valuation model to estimate the fair value of the Warrants.  The valuation of warrants liability on July 31, 2012 was based on the assumptions noted in the following table.

NOTE 18 - PREFERRED STOCK, COMMON STOCK AND EQUITY TRANSACTIONS2020.

(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 of July 31, 2012 and October 31, 2011, there was 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 warrants expired on May 15, 2012 and there was no warrants exercised by the expire date.

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.

NOTE 19 - OPTIONS AND WARRANTS

Share-based compensation amounted to $22,877 and $36,182 for the three months ended July 31, 2012 and 2011, respectively, and $71,493 and $96,981, respectively, for the nine months ended July 31, 2012 and 2011.

(1)  2003 Omnibus Plan6 – SUBSEQUENT EVENTS

On February 28, 2003, our board4, 2021 as a result of directors approveda custodianship in Clark County, Nevada, Case Number: A-20-827231-B Custodian Ventures LLC (“Custodian”) was appointed custodian of China Botanic Pharmaceutical, Inc. (the “Company”). On 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,same date Custodian appointed David Lazar as the Company’s Chief Executive Officer, President, Secretary, Chief Financial Officer, Chief Executive Officer and consultants opportunitiesChairman of the Board of Directors.

On July 2, 2021 the Company issued to acquire our common stock,Custodian Ventures 1,000,000 shares of newly designated A-1 Preferred Stock for service performed and serves to encourage such persons to remain employed by us and to attract new employees. The 2003 Plan allows for the awardas repayment of stock and options, up to 25,000 (after giving effectfunds loaned to the 1-for-30 reverse stock split in 2006) sharesCompany. Each share of our common stock. On May 1, of each year, the number of shares in the 2003 Securities PlanA-1 Preferred Stock is automatically adjusted to an amount equal to ten percent of our outstanding stock on October 31, of the immediately preceding year. As of July 31, 2012 and October 31, 2011, there were 3,723,954 shares available for issuing subject to the 2003 Omnibus Securities Plan.

a) On December 14, 2010, we appointed Mr. Weiqiu Dong as our chief financial officer. Based on the employment agreement, Mr. Dong received, on December 14, 2010, an option to purchase 200,000 shares of the Company's common stock with an exercise price of $2.15 per share, 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 $20,040 and $62,982 were recorded as compensation expenses for the three and nine months ended July 31, 2012. 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.

 b) On October 15, 2011, we enteredconvertible into an independent director agreement with Mr. Pan, who became our director on October 15, 2011. The agreement provides that Mr. Pan, the Chair of our Audit Committee, will receive (i) a fee of $2,500 per month, (ii) options to purchase 50,0001,000 shares of common stock under the 2003 Plan, at an exercise price of $0.80 per share, which is equal to the closing price of the Company’s common stock on October 15, 2011, subject to vesting on a quarterly basis (4,166 shares of option to vest on the first 11 quarter anniversaries of the grant and 4,174 shares of option to vest on the 12th quarter anniversary of the grant with the initial 4,166 shares of option vesting to commence on January 15, 2012), and with all vesting conditional upon continued service as a director of the Company as of each such anniversary; and (iii) a reimbursement of out-of pocket expenses incidental to his services on the Board. The agreement expires on the earlier of (i) the date Mr. Pan ceases to be a member of the board, or (ii) the date of termination of the Agreement.

The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $34,042, of which $2,837 and $8,511 were recorded as compensation expenses for the three and nine months ended July 31, 2012.  The valuation was based on the assumptions noted in the following table.stock.

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 October 14, 2010.  Our methodology is consistent with prior period volatility assumptions.  The expected life of the options is based upon our anticipated expectations of exercise behavior since no options have been exercised in the past to provide relevant historical data.

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

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

(3)  Option Activity and Status

A summary of option activity and movement during the three and nine months ended at July 31, 2012 and 2011, respectively, are as follow:

A summary of the status of the Company’s non-vested options as of July 31, 2012 and 2011, respectively, and movements during the three and nine months then ended are as follow: