UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)[X]

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

For the quarterly period ended November 30, 2010





[   ]

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

For the transition period from _______ to _______





Commission file number:333-144910








SINOBIOPHARMA, INC.(Exact name of small business issuer as specified in its charter)





Nevada
26-3002371(State or other jurisdiction of incorporation or organization)
(IRS Employer identification No.)





8 Zhong Tian Road


Nantong City, Jiangsu Province, the People’s Republic of China 226009


(Address of principal executive offices)





011- (86) 51-385328336


(Registrant’s telephone number, including area code)





Copies to:


Gregory Sichenzia, Esg.


Sichenzia Ross Friedman Ference LLP


61 Broadway, 32nd Floor


New York, New York 10006


Phone: (212) 930-9700


Fax: (212) 930-9725





Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No  [   ]





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [   ]  No  [   ]





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





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





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








APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS:





Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [   ]  No [   ]








APPLICABLE ONLY TO CORPORATE ISSUERS:





State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 117,587,608 shares of common stock, $.0001 par value, were outstanding as of January 19, 2011.




































































2


TABLE OF CONTENTS








PagePART IItem 1. Financial Statements
4Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
18Item 3. Quantitative and Qualitative Disclosures About Market Risk
24Item 4. Controls and Procedures
25PART IIItem 1. Legal Proceedings
25Item 1A. Risk Factors
25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
25Item 3. Defaults Upon Senior Securities
25Item 4. (Removed and Reserved)
25Item 5. Other Information
25Item 6. Exhibits
25SIGNATURES
26
























































3





PART I – FINANCIAL INFORMATION





Item 1.  Financial Statements





SINOBIOPHARMA, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSNovember 30, 2010


May 31, 2010(UNAUDITED)ASSETSCURRENT ASSETSCash and cash equivalents

$
1,546,176


$
1,331,959Notes receivable


86,453



274,148Accounts receivable, net


466,095



670,662Inventories, net


1,110,859



758,090Advance payments


292,153



67,971Other receivables


20,014



321,493Available for sale securities


-



293,064Total Current Assets


3,521,750



3,717,387Advance payment for intangible assets


1,012,020



985,760Property, plant and equipment, net


3,561,420



2,912,983Intangible assets, net


4,372,509



4,336,832Advance payment for other long-term assets


601,200



-TOTAL ASSETS

$
13,068,899


$
11,952,962LIABILITIES AND STOCKHOLDERS’ EQUITYCURRENT LIABILITIESAccounts payable

$
583,966


$
419,707Loans from government


1,040,712



1,145,726Advance from customers


304,041



135,521Income tax payable


68,892



155,397Other payables


323,600



343,780Total Current Liabilities


2,321,211



2,200,131COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS' EQUITYPreferred stock, $0.0001 par value;10,000,000 shares authorized;1,000,000 shares issued and outstanding at November 30, 2010 and  May 31, 2010


100



100Common stock; $0.0001 par value; 2,490,000,000 shares authorized; 117,587,608 shares issued and outstanding at November 30, 2010 and May 31, 2010


11,759



11,759Additional paid-in capital


14,360,487



14,360,487Accumulated deficit


(4,103,795
)


(4,847,707
)Accumulated other comprehensive income


479,137



228,192Total Stockholders' Equity


10,747,688



9,752,831TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
13,068,899


$
11,952,962











See notes to the consolidated financial statements


4


SINOBIOPHARMA, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


(UNAUDITED)





Three Months Ended November 30,


Six Months Ended November 30,2010


2009


2010


2009SALES

$
1,334,486


$
2,137,471


$
3,190,884


$
3,431,235COST OF GOODS SOLD


346,730



417,163



773,935



748,004GROSS MARGIN


987,756



1,720,308



2,416,949



2,683,231OPERATING EXPENSESSelling expenses


422,875



165,185



542,313



249,353Research and development


150,711



222,411



394,204



286,713Depreciation and amortization


67,520



40,516



133,072



150,557General and administrative expenses


264,053



168,042



484,757



580,318TOTAL OPERATING EXPENSES


905,159



596,154



1,554,346



1,266,941INCOME FROM OPERATIONS


82,597



1,124,154



862,603



1,416,290OTHER INCOME/(EXPENSES)Interest income


3,515



3,322



4,546



5,174Interest expense


(12,684
)


(53,657
)


(27,604
)


(110,085
)Other income (expenses)


3,848



(269
)


18,452



(662
)(5,321
)


(50,604
)


(4,606
)


(105,573
)INCOME BEFORE INCOME TAX EXPENSE


77,276



1,073,550



857,997



1,310,717INCOME TAX EXPENSE


(18,463
)


-



(114,085
)


-NET INCOME


58,813



1,073,550



743,912



1,310,717OTHER COMPREHENSIVE INCOMEForeign Currency Translation Adjustment


204,719



4,985



250,944



21,540COMPREHENSIVE INCOME

$
263,532


$
1,078,535


$
994,856


$
1,332,257Earnings per share:Basic and diluted

$
0.00


$
0.01


$
0.01


$
0.02Weighted average shares used in computation:Basic and diluted


117,587,608



80,020,000



117,587,608



79,998,689














See notes to the consolidated financial statements


5


SINOBIOPHARMA, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six Months Ended November 30,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
743,912


$
1,310,717Adjustments to reconcile net income to net cashprovided by operating activitiesDepreciation and amortization


258,667



204,661Stock-based compensation


-



324,125Imputed interest expense on shareholders' loans


-



15,864Amortization of discount in interest expense


27,241



50,509Consulting fee by issuing stock


-



33,000Gain on securities for sale


(1,764)



-Gain from discount of non-interest government loan


(12,631)



-Changes in operating assets and liabilities:Notes receivable


194,484



(65,405)Accounts receivable, net


218,458



(429,977)Inventories


(327,871)



(185,604)Advance payments


(218,226)



(2,599)Other receivables


291,356



(6,405)Accounts payable


154,283



(238,459)Advance from customers


163,797



9,749Income tax payable


(89,844)



-Other payables


(28,147)



103,933Net Cash Provided by Operating Activities


1,373,715



1,124,109CASH FLOWS FROM INVESTING ACTIVITIESSales of available for sales securities


296,564



-Acquisition of property and equipment


(1,341,601)



(254,582)Advance payement for purchase of intangible assets


-



(731,317)Net Cash Used in Investing Activities


(1,045,037)



(985,899)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from bank loans


-



1,461,408Proceeds from shareholder loans


-



(651,694)Repayment of loans from bank loan and government loan


(147,400)



(1,462,021)Net Cash Used in Financing Activities


(147,400)



(652,307)EFFECT OF FOREIGN CURRENCY FLUCTUATION ON CASH


32,939



(11,867)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


214,217



(525,964)CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD


1,331,959



891,132CASH AND CASH EQUIVALENTS - ENDING OF PERIOD

$
1,546,176


$
365,168Supplemental cash flow information:Cash paid for income taxes

$
203,930


$
-Cash paid for interest expense

$
-


$
54,896Non-cash investing and financing activities100,000 common shares issued in exchange of consulting service received

$
-


$
33,000











See notes to the consolidated financial statements


6


SINOBIOPHARMA, INC. AND SUBSIDIARIES


Notes to the Unaudited Consolidated Financial Statements





1.  ORGANIZATION AND DESCRIPTION OF BUSINESS





Sinobiopharma, Inc. (the “Company”) is a fully integrated and highly innovative specialty biopharmaceutical company engaged in the research and development, manufacture and marketing of biopharmaceutical products in China. The Company's current therapeutic focus is on anesthesia-assisted agents and cardiovascular drugs. Sinobiopharma has patented new methods for synthesizing active pharmaceutical ingredients (API) at a lower cost and owns drug delivery formulations that improve usability.





The Company was incorporated in the State of Nevada under the name of Buzz Media Ltd. on October 26, 2006. Effective July 29, 2008, the Company under its original name of Buzz Media, Ltd. incorporated a subsidiary, “Sinobiopharma, Inc.” with an investment of $0.001 and merged with it for the sole purpose of changing the name of the Company. As a result, the Company changed its name from “Buzz Media Ltd.” to “Sinobiopharma, Inc.”.





Effective July 29, 2008, the Company effected a fifty (50) for one (1) stock split of its authorized, issued and outstanding common stock. As a result, the Company’s authorized capital increased from 50,000,000 shares of common stock with a par value of $0.0001 to 2,500,000,000 shares of common stock with a par value of $0.0001. The Company’s issued and outstanding share capital increased as a result of the split from 2,000,010 shares of common stock to 100,000,500 shares of common stock. Share capital figures are presented in these financial statements giving retroactive effect to the stock split and accordingly all share capital figures are presented on a post-split basis as if the split had been affected upon inception.





On August 19, 2008, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Dongying Pharmaceutical Co, Limited (“Dongying BVI”), a company organized under the laws of the Territory of the British Virgin Islands, and all the shareholders of Dongying BVI, whereby the Company agreed to acquire 100% of the issued and outstanding shares of Dongying BVI through the issuance of approximately 40,000,000 shares of common stock of the Company in aggregate to the shareholders of Dongying BVI on a pro rata basis in accordance with each Dongying BVI shareholder’s percentage of ownership in Dongying BVI. The Share Exchange Agreement closed on September 22, 2008.





Concurrently with the closing of the Share Exchange Agreement, by a letter agreement entered into on September 8, 2008 between Dongying BVI and the Company’s majority shareholder, that shareholder agreed to cancel 60,100,500 shares of the 62,500,500 shares of common stock of the Company registered in his name within ten (10) days of the closing of the Share Exchange Agreement.  The 60,100,500 shares were cancelled on September 26, 2008. After the cancellation, the shareholders of Sinobiopharma, Inc. owned 39,900,000 shares. The share cancellation completed the reverse merger with Dongying BVI as a recapitalization of the Company such that voting control of the Company was obtained by the former stockholders of Dongying BVI. The net assets of Dongying BVI and the Company have been brought forward at their historical bases. The costs associated with the reverse merger were expensed as incurred.





Dongying BVI was incorporated under the laws of the British Virgin Islands on January 29, 2008. On May 13, 2008 Dongying BVI acquired a 100% interest in Big Global Limited (“Big Global”) from the sole shareholder of Dongying BVI for consideration of $1.00. The purpose of the transaction was the change of domicile to the British Virgin Islands.





Big Global was incorporated under the laws of Hong Kong on November 26, 2007. On December 10, 2007 Big Global acquired a 100% interest in Dong Ying (Jiangsu) Pharmaceuticals Co., Ltd. (“Dong Ying China”) from the sole shareholder of Big Global for consideration of $1.00. The purpose of the transaction was the change of domicile to Hong Kong. The acquisition was approved by the Chinese government in May 2008.





Dong Ying China was incorporated under the laws of the People’s Republic of China (the “PRC”) in 2003. Dong Ying China’s business is the development, manufacture and sale of pharmaceutical products in China. There are two product lines currently as of November 30, 2010 and several other potential products in various stages of research and development. The product lines currently commercialized are Cisatracurium Besylate, a skeletal muscle relaxant, and Perindopril, a cardiovascular drug. Dong Ying China’s offices and manufacturing facility are in owned premises located on land used under license in Nantong, China and its research and development is carried out in Nanjing, China.


7


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation and Principles of Consolidation





The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the financial statements of the Company and its subsidiaries. The accompanying  unaudited consolidated balance sheet as of November 30, 2010, consolidated statements of operations and comprehensive income and consolidated statements of cash flows for the three months and six months ended November 30, 2010 and 2009 include Sinobiopharma, Inc. and its directly owned subsidiaries, Dongying BVI, Big Global and Dong Ying China.





All significant intercompany transactions and balances are eliminated on consolidation.





The accompanying unaudited consolidated financial statements as of November 30, 2010 and for the three months and six months ended November 30, 2010 and 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X applicable to smaller reporting companies. In the opinion of management, all adjustments necessary for a fair statement of the results for the interim periods have been made, and all adjustments are of a normal recurring nature (or a description of the nature and amount of any adjustments other than normal recurring adjustments).  The consolidated interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended May 31, 2010 that are included in the Company’s 2010 annual report on 10-K filed with the Securities and Exchange Commission.





RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





In September 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-25, Reporting Loans to Participants by Defined Contribution Pension Plans, (“ASU 2010-25”). The guidance in ASU 2010-25 indicated that participant loans should be classified as notes receivable from participants in the financial statements of a defined contribution pension plan, measured at the outstanding principal amount plus accrued, but unpaid interest. ASU 2010-25 is effective for fiscal years ending after December 15, 2010. Early adoption is permitted. The Plan applied the guidance retrospectively to all prior periods presented. This pronouncement is not expected to have a material impact on the consolidated financial statements upon adoption.





Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.





3.  NOTES RECEIVALBE





Notes receivables of $86,453 as of November 30, 2010 and $274,148 as of May 31, 2010 represents bank acceptance notes the Company received from customers for sales of products. The notes are with maturity duration of 6 months, and are accepted by banks.





4.  ACCOUNTS RECEIVABLE, NET





Accounts receivable consist of receivables for sales of product on credit. Accounts receivable as of November 30, 2010 and May 31, 2010 was $466,095 and $670,662, respectively. No allowance for doubtful accounts was recorded during the six months ended November 30, 2010 and 2009 as management believes no accounts are uncollectible as of November 30, 2010 and 2009.








8


5.  INVENTORIES





Inventories at November 30, 2010 and May 31, 2010 consist of the following:





November 30, 2010


May 31, 2010(Unaudited)Raw materials

$
279,767


$
127,883Goods in process


712,829



553,450Finished goods


118,263



76,757$
1,110,859


$
758,090





6.  ADVANCE PAYMENTS





Advance payments of $292,153 and $67,971 as of November 30, 2010 and May 31, 2010 represented payments in advance to suppliers of the Company’s raw materials.





7.  SECURITIES AVAILABLE FOR SALE





On May 17, 2010, the Company purchased a low risk short term financial product from China Agricultural Bank. The maturity term of this product is three months with no guarantee from the bank of repayment of the principle. The principle is $292,800, the fair value as of May 31, 2010 is $293,064, and the accumulated unrealized gain is $264 which is booked into accumulated other comprehensive income. The security was sold on August 23, 2010 and the proceeds of $296,564 have been transferred to the Company’s bank account. $1,764 was recognized as realized gain accordingly on the book.





8.  ADVANCE PAYMENTS FOR INTANGIBLE ASSETS





Advance payment for intangible assets of $1,012,020 and $985,760 as of November 30, 2010 and May 31, 2010, respectively, represent prepayments to the Meisu Jining Science and Technology (Nanjing) Limited Company for the purchase of two technologies for new product manufacturing (“intellectual property”).  As of November 30, 2010, the Company has not obtained the technologies. If these technologies cannot be delivered by the due date of January, 2015 stipulated in the contracts, the prepayment will be returned to the Company.





Meisu Jining Science and Technology (Nanjing) Limited Company was a related party prior February 22, 2010.  The Company’s CEO and shareholder Mr. Lequn Huang owned 25% of such entity.  On February 22, 2010, Mr. Lequn Huang sold his interest in Meisu Jining Science and Technology (Nanjing) Limited Company to a third party which was approved by Chinese Government.  Meisu Jining Science and Technology (Nanjing) Limited Company became a shareholder of the Company with 8% interest through another Intellectual Property Purchase Transaction (see Note 18) which occurred in December 2009. On October 20, 2010, Meisu Jining Science and Technology (Nanjing) Limited Company sold all the Company’s shares it owned to a third party, and is no longer  a shareholder of the Company.











9


9.  PROPERTY, PLANT AND EQUIPMENT, NET





Property, plant and equipment at November 30, 2010 and May 31, 2010 consist of the following:





November 30, 2010


May 31, 2010(Unaudited)Buildings

$
2,045,630


$
1,990,207Land use rights


416,310



405,507Manufacturing equipment


1,566,909



999,665Office furniture and equipment


114,123



102,263Road and grounds


233,490



212,791Vehicles


150,065



146,171Leasehold improvements


31,967



31,138Software


2,184



2,127Construction-in-process


317,926



129,0524,878,604



4,018,921Less: accumulated depreciation


1,317,184



1,105,938$
3,561,420


$
2,912,983





Depreciation expense for the three months ended November 30, 2010 and 2009 was $95,856 and $76,337, respectively. For the six months ended November 30, 2010 and 2009, the depreciation expense was $186,055 and $166,221, respectively.





10.  INTANGIBLE ASSETS, NET





Intangible assets consist of the cost of patent, certificates for clinical trial, technology and licensed rights to manufacture the company’s products.





The patent was purchased from Lei Wang and Lequn Huang by issuing 8,000,000 unregistered shares common stock at the price of $0.17 per share and preferred stock, respectively.





The certificates for clinical trial were purchased from Meisu Jining Science and Technology (Nanjing) Limited Company by issuing 9,500,000 unregistered shares of common stock at a price of $0.187 per share. The acquiring clinical trial certificates were approved by the government for the drug Eplerenone, the Company does not intend to continue the R&D process of this drug internally since obtaining these certificates, but wants to use them to exchange for other “ready for production” drugs or profit sharing with other companies who have completed the next development stage of this drug. On July 26, 2010, Dong Ying China, entered into a Cooperation Agreement with Jiangsu LianHuan Pharmaceuticals Co., Ltd. (“LianHuan”) for the co-development, manufacture, and marketing of the drug Eplerenone.  According to the Agreement, LianHuan shall be responsible for all fees and expenses incurred in the clinical trials.  Following the completion of clinical trials, LianHuan and DongYing shall jointly complete and submit the drug production application.  Once production approval for Eplerenone is obtained, LianHuan and DongYing shall jointly own the new drug production certificate for Eplerenone. LianHuan shall be responsible for the manufacture of Eplerenone and its’ tablet form, though Dong Ying China retains the option to produce Eplerenone capsules. The net profit from the sales of Eplerenone shall be apportioned as 60 percent to Dong Ying China and 40 percent to LianHuan.





The unit prices per share of common stock issued with respect to the patent and certificates represents the estimated fair values of the Company’s unregistered common shares which were determined on the purchase dates, December 18, 2009 and December 20, 2009, using the Black-Scholes Model with level 2 inputs (See Note 14).





10


No cost was recorded for the consideration of preferred stock which has been issued on April 2, 2010.  According to ASC 845-10-S99, transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the Company's initial public offering normally should be recorded at the transferors' historical cost basis determined under GAAP.  The patent was internally developed by the shareholder, Lequn Huang, therefore, it has a basis of zero.





The patent has a useful life of 20 years from the date of application. There was 16.5 years of useful life remaining when the Company purchased patent. The certificates have a useful life of 20 years but, because they are not intented to be used in production, no amortization is recorded. The technology and rights have an estimated useful life of 20 years. The amounts related to the particular products are as follows:




November 30, 2010


May 31, 2010(Unaudited)Gross Carrying Amount


Accumulated Amortization


Net Carrying Amount


Weight Average Useful Life


Gross Carrying Amount


Accumulated Amortization


Net Carrying Amount


Weight Average Useful Life(in years)











(in years)KuTai Patent

$
1,393,374


$
(84,502
)

$
1,308,872



16.5


$
1,357,219


$
(41,128
)

$
1,316,091



16.5Clinical Trial Certificates for Eplerenone


1,820,095



-



1,820,095







1,772,867



-



1,772,867Cisatracurium Besylate Technology


751,500



(129,729
)


621,771



20



732,000



(108,063
)


623,937



20Perindopril Technology


751,500



(129,729
)


621,771



20



732,000



(108,063
)


623,937



20Total intangible assets

$
4,716,469


$
(343,960
)

$
4,372,509






$
4,594,086


$
(257,254
)

$
4,336,832








Amortization for the three months ended November 30, 2010 and 2009 in the amount of $39,794 and $ 19,838 and for the six months ended November 30, 2010 and 2009 in the amount of $ 78,923 and $ 48,740 are included in depreciation and amortization expense, respectively.





11.  ADVANCE PAYMENT FOR OTHER LONG-TERM ASSETS




Advance payment for other long-term assets of $601,200 as of November 30, 2010 represents a prepayment for real property that the Company plans to purchase and use for the research and development center.





12.  LOANS FROM GOVERNMENT





The Company has a loan from the Nantong Economic and Technology Development Zone Administration. The loan bears no interest. The original principal amount of the loan was RMB20million ($3,006,000 at the exchange rate applicable at November 30, 2010) and was due for repayment in full in March 2007. During 2007 the Company repaid RMB3,000,000($450,900 at the exchange rate applicable at November 30, 2010).  In December 2007, the Company was granted an extension to December 31, 2008. During the year ended December 31, 2008 the Company repaid RMB2,000,000 ($300,600 at the exchange rate applicable at November 30, 2010). On February 1, 2009 the Company repaid another RMB2,000,000 ($300,600 at the exchange rate applicable at November 30, 2010) and the Company was granted an extension to December 31, 2009 for the remainder of the loan of RMB13,000,000 ($1,953,900 at the exchange rate applicable at November 30, 2010). The Company repaid RMB3,000,000 ($450,900 at the exchange rate applicable at November 30, 2010) in December 2009, and was granted another extension to December 31, 2010 for the remaining loan balance of RMB10,000,000 ($1,503,000 at the exchange rate applicable at November 30, 2010). On April 7, 2010, the Company repaid RMB1,000,000 ($150,300 at the exchange rate applicable at November 30, 2010). On May 6, 2010, the Company repaid RMB1,000,000 ($150,300 at the exchange rate applicable at November 30, 2010) leaving a remaining balance of RMB8,000,000  ($1,202,400 at the exchange rate applicable at November 30, 2010). On August 31, 2010, the Company repaid RMB1,000,000 ($150,300 at the exchange rate applicable at November 30, 2010) leaving a remaining balance of RMB7,000,000 ($1,052,100 at the exchange rate applicable at November 30, 2010).





11


Since the loan bears no interest, the obligation is carried at its net present value using interest rates equal to the prevailing Bank of China one-year rate at the time the loan was received (5.6% in 2004, applied in respect of the 2006 year) or on the date the extension was effective (6.4% in March 2007, applied in respect of the 2007 and 2008 years, 5.6% in February, 2009, applied in respect of the 2009 year and 5.31% in February 2010, applied in respect of the 2010 year).





Imputed loan interest expense included in the accounts for the three months ended as of November 30, 2010 and 2009 was $12,098 and $25,244; and for the six months ended November 30, 2010 and 2009 was in the amount of $27,241 and $50,509 which is determined as the amortization on the interest method basis of the discount over the remaining period to maturity of the loan.  Gain from discount of non-interest loans for the three months ended as of November 30, 2010 and 2009 was $3,848 and $0; and for the six months ended November 30, 2010 and 2009 was in the amount of $12,631and $0, respectively.





The present value of the total government loan was $1,040,712 as of November 30, 2010 and $1,145,726 as of May 31, 2010.





13.  OTHER PAYABLES





Other payables of $323,600 and $343,780 as of November 30, 2010 and May 31, 2010, respectively, represent the deposits received from customers, payroll payables, accrued professional fees and value-added tax (VAT) payables.





14.  INCOME TAXES





The tax payables balance of $68,892 and $155,397 represents the income tax accrual of Dong Ying China as of November 30, 2010 and May 31, 2010, respectively.





The Company’s operating subsidiary Dong Ying China enjoy a tax benefit of no enterprise income taxes for two years and half income tax for three years starting January 1, 2008 due to the Company’s wholly-owned foreign enterprises status. Starting January 1, 2010, the Company’s Chinese operations will be subject to enterprise income tax with half of tax rate for next three years. The Company’s applicable tax rate will be 11% for 2010, 12% for 2011 and 12.5% for 2012 as approved by the Nantong Economic and Technical Development Zone Office of State Administration of Taxation.





Income tax expense of $18,463 and $114,086 for the three and six months ended November 30, 2010 represents PRC current income taxes, respectively.





The Company is subject to United States income tax to the extent of its operations in the United States. The Company accrued no U.S. income tax expense for the three months ended November 30, 2010 due to net loss.





The Company has a deferred tax asset on net operating losses of approximately $277,746 as of November 30, 2010. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those net operating losses are available. The Company considers projected future taxable income and tax planning strategies in making its assessment. At present, the Company does not have a sufficient operation in the United States to conclude that it is more-likely-than-not that the Company will be able to realize all of its tax benefits in the near future and therefore a valuation allowance of $277,746 was established for the full value of the deferred tax asset.





A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance. Should the Company start operation in the United States in future periods with supportable trend, the valuation allowance will be reversed accordingly.





12


15. PERFERRED STOCK





Effective March 29, 2010, the Company filed Amended and Restated Articles of Incorporation, pursuant to which the Company changed its authorized capital stock to consist of 2,500,000,000 shares, consisting of 2,490,000,000 shares of common stock, $0.0001 par value and 10,000,000 shares of preferred stock, $0.0001 par value. On the same day, the Company filed a Certificate of Designation with the Secretary of State of Nevada whereby it designated 1,000,000 shares of preferred stock as Series A Preferred Stock, par value $0.0001 per share. Each holder of the Series A Preferred Stock shall be entitled to vote on all matters submitted to shareholders of the Company and shall be entitled to 60 votes for each share of Series A Preferred Stock owned at the record date for the determination of shareholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited. Except as otherwise required by law, the holders of shares of Series A Preferred Stock shall vote together with the holders of common stock on all matters and shall not vote as a separate class.





After majority shareholders’ approval process, on April 2, 2010, pursuant to the terms of the patent transfer agreement for "Composition for Lyophilized Powder of Atracurium” signed on December 22, 2009 (as mentioned in note 18), the Company issued 1,000,000 shares of the Series A Preferred Stock (the "Preferred Stock") to Mr. Lequn Huang as consideration for the patent. The issuance of the Preferred Stock to Mr. Huang was exempt from registration under Section 4(2) of the Securities Act based upon our compliance with Regulation S as promulgated by the SEC under the Securities Act of 1933, as amended.





16. STOCK-BASED COMPENSATION





On September 29, 2008, the Company adopted a stock option and incentive plan (the “2008 Stock Option and Incentive Plan”).  The 2008 Stock Option and Incentive Plan provides authorization to the Board of Directors to grant Stock Options and Incentives to a total number of shares of the Company’s common stock, not to exceed ten million (10,000,000) (post forward stock split) shares. The following option awards are part of this plan.





On September 29, 2008, the Company granted to certain directors, officers and consultants of the Company in aggregate 1,800,000 stock options having an exercise price of $1.80 per share and an expiry date of five years from the date of grant.  These stock options have vesting provisions of 10% on the date of grant and 10% on the last day of each month thereafter beginning on October 31, 2008.  The total vesting period is 9 months.





On October 2, 2008, the Company granted to certain mid-level managers of DongYing China an aggregate of 500,000 stock options with an exercise price of $1.80 per share and an expiration date of five years from the date of grant.  These stock options have vesting provisions of 10% on the date of grant and 10% on the last day of each month thereafter beginning on October 31, 2008. The total vesting period is 9 months.





On October 22, 2008, the Company granted to a scientific consultant and advisory board member of the Company 225,000 stock options having an exercise price of $1.80 per share and an expiration date of five years from the date of grant.  These stock options have vesting provisions of 10% on the date of grant and 10% on the last day of each month thereafter beginning on October 31, 2008. The total vesting period is 9 months.





A summary of the Company’s stock option activities is presented below:





Number of options


Weighted average

exercise price per share


Weighted average grant

date fair value Per ShareOptions Outstanding,

May 31, 2010 and November 30, 2010


2,525,000


$
1.8


$
1.28





Compensation cost related to options was recognized as the related options vest. The vesting period was the requisite service period for each option holder. No stock-based compensation cost for the three months ended November 30, 2010 and 2009. The stock-based compensation cost was $0 and $324,125 for the six months ended November 30, 2010 and 2009. As of November 30, 2010, all the outstanding options have vested as follows:





13


Vested options are as follows:





Number

outstanding


Total fair

value


Weighted average grant-

date fair value

per shareOptions vested at,May 31, 2010


2,525,000


$
3,241,250


$
1.28November 30, 2010


2,525,000


$
3,241,250


$
1.28





If not previously exercised or canceled, options outstanding at November 30, 2010 will expire as follows:





Range of

Exercise Prices

Number


Weighted averageExpiry Date

High


Low

of Shares


exercise priceSeptember 29, 2013

$
1.8


$
1.8



1,800,000


$
1.8October 2, 2013

$
1.8


$
1.8



500,000


$
1.8October 22, 2013

$
1.8


$
1.8



225,000


$
1.8





The fair values of the options granted September 29, October 2 and October 22, 2008 were estimated at values of $1.25 per share, $1.42 per share and $1.25, respectively, using the Black-Scholes Option Pricing Model with the following weighted average assumptions:





Volatility:


88.3
%Risk-free interest rate:


2.30
%Dividend yield:


—Expected lives      (years):


5





Option-pricing models require the use of highly subjective estimates and assumptions including the expected stock price volatility.  Changes in the underlying assumptions can materially affect the fair value estimates and therefore, in management’s opinion, existing models do not necessarily provide reliable measure of the fair value of the Company’s stock options.





17.  EARNINGS PER SHARE





The following table sets forth the computation of basic and diluted income per share for the period indicated:





Three months ended November 30,2010


2009(Unaudited)


(Unaudited)Numerator used in basic net income per share:Net income

$
78,398


$
1,073,550Shares (denominator):Weighted average common shares outstanding


117,587,608



80,020,000Weighted average common shares outstanding used in computing diluted earnings per ordinary share


117,587,608



80,020,000Earnings per common share-basic

$
0.00


$
0.01Earnings per common share-diluted

$
0.00


$
0.01





14





Six months ended November 30,2010


2009(Unaudited)


(Unaudited)Numerator used in basic net income per share:Net income

$
880,003


$
1,310,717Shares (denominator):Weighted average common shares outstanding


117,587,608



80,020,000Weighted average common shares outstanding used in computing diluted earnings per ordinary share


117,587,608



80,020,000Earnings per common share-basic

$
0.01


$
0.02Earnings per common share-diluted

$
0.01


$
0.02





As of November 30, 2010 and 2009, the Company had 2,525,000 common share equivalents outstanding that could potentially dilute basic income per share in the future, but which were excluded in the computation of diluted income per share in the periods presented, as their effect would have been anti-dilutive due to the fact that the weighted average exercise price per share of the stock option is higher than the weighted average market price per share of the common stock during the three and six months ended November 30, 2010 and 2009.





18.  RELATED PARTY TRANSACTIONS AND BALANCES





The Company purchased two intangible assets in prior year from Meisu Jining Science and Technology (Nanjing) Limited Company, previously 25% owned by the Company’s CEO and shareholder Mr. Lequn Huang; and Bio-Medical Research and Development Limited Company, previously 30% owned by Mr. Lequn Huang at prices to be negotiated at the time.  As of November 30, 2010, the cost of these two intangible assets is $751,500 for each. (See Note 10).





Additions to intangible assets





The patent and certificates for clinical trial are additional intangible assets. The patent was purchased from Lei Wang and Lequn Huang by issuing 8,000,000 unregistered shares common stock. The consideration is $1,360,000.The certificates for clinical trial were purchased from Meisu Jining Science and Technology (Nanjing) Limited Company by issuing 9,500,000 unregistered shares common stock. The consideration is $1,776,500. (See Note 10 and 15)





On February 22, 2010, Mr. Lequn Huang sold his interest in Meisu Jining Science and Technology (Nanjing) Limited Company to a third party. The transaction was approved by Chinese Government Agency and legally became effective on February 22, 2010. On January 12, 2010, Chinese Government Agency approved the application of transferring the legal representative of SUJI Bio-Medical Research and Development Limited Company from Mr. Lequn Huang to a third party. After these transactions, neither Mr. Lequn Huang nor any other person in the Company has any interest in Meisu Jining Science and Technology (Nanjing) Limited Company and SUJI Bio-Medical Research and Development Limited.





Meisu Jining became a shareholder of the Company through the above mentioned transaction of the intellectual property transfer at December 18, 2009. On October 20, 2010, Meisu Jining Science and Technology (Nanjing) Limited Company sold all the Company’s shares it owned to a third party, and is not a shareholder of the Company since then.





Advance payments for intangible assets





Advance payments for intangible assets of $1,012,020 and $985,760 as of November 30, 2010 and May 31, 2010 represent the prepayments to Meisu Jining Science and Technology (Nanjing) Limited Company. (On October 20, 2010, Meisu Jining Science and Technology (Nanjing) Limited Company sold all the Company’s shares it owned to a third party, and is not a shareholder of the Company since then.)





15


The Company has signed two contracts for the purchase of intellectual property with Meisu Jining Science and Technology (Nanjing) Limited Company. One contract was signed in July 2008, for an amount of RMB 2,000,000 ($300,600 at the exchange rate applicable at November 30, 2010) .  As of November 30, 2010 the Company prepaid RMB1,733,333($260,520 at the exchange rate applicable at November 30, 2010). The other contract was signed in July 2009 for a contract amounting tof RMB5,000,000 ($751,500 at the exchange rate applicable at November 30, 2010). As of November 30, 2010, the Company prepaid $751,500. (See Note 8)





Issuance of Preferred stock





On April 2, 2010, pursuant to the terms of the patent transfer agreement for "Composition for Lyophilized Powder of Atracurium” signed on December 22, 2009, the Company issued 1,000,000 shares of the Series A Preferred Stock (the "Preferred Stock") to Mr. Lequn Huang, the Company’s chairman, president and chief executive officer as consideration for the patent. Such number of shares of preferred stock was to give Mr. Huang approximately 51% of the voting rights and 0% of the equity rights of the Company.





19.  COMMITMENTS AND CONTINGENCIES





Commitments





In August 2009, the Company signed a technical support contract of Perindopril and Rocuronium with SUJI Bio-Medical Research and Development Limited Company for the total price of RMB8,000,000 ($1,202,400 ). As of November 30, 2010, the Company has paid RMB4,800,000 ($721,440 ) which had been expensed and is committed to pay the remaining  RMB3,200,000 ($480,960) before January 2015.





On May 30, 2010, the Company’s board resolved that the Company would issue Ms. Luk 300,000 shares of the Company's common stock within three months from May 30, 2010 as compensation for serving as an independent director. As of November 30, 2010, the Company has not issued the shares to Ms. Luk. Ms. Luk was elected as a director of the company on May 30, 2010. On December 30, 2010, the board of directors approved, and Ms. Luk agreed, to waive her rights to the 300,000 shares and instead receive $10,000 in cash, to be paid on or before January13, 2011, in full satisfaction of compensation for her services as independent director. The payment was made to Ms. Luk on January 4, 2010.




Contingencies





Contingencies through November 30, 2010 have been considered by the Company and none were noted which were required to be disclosed.





20.  CONCENTRATIONS AND CREDIT RISK





At November 30, 2010 and May 31, 2010, the Company had a credit risk exposure of cash in banks of $1,546,176 and $1,331,959, respectively that is uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits only with large financial institution in the PRC with acceptable credit rating.





The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.





(1)  Our main products Cisatracurium Besylate 5mg accounted for 99% and 96% of the Company’s total sales for the three and six months ended November 30, 2010 and 2009, respectively.





16


(2)  Customers that accounted for over 10% of the Company’s total sales are as follows:





Three months ended November 30,2010


2009(Unaudited)


(Unaudited)Amount of sales


% of Total Sales


Amount of sales


% of Total SalesCustomer A

$
145,862



11
%

$
-



-Customer B


72,931



5
%


277,847



13
%Customer C


-



-



902,333



42
%Total

$
218,793



16
%

$
1,180,180



55
%





Six months ended November 30,2010


2009(Unaudited)


(Unaudited)Amount of sales


% of Total Sales


Amount of sales


% of Total SalesCustomer A

$
382,835



12
%

$
-



-
%Customer B


385,272



12
%

$
562,634



16
%Customer C


175,935



6
%


1,114,724



32
%Total

$
944,042



30
%

$
1,677,358



48
%





(3)  Suppliers accounted for over 10% of the Company’s total purchases are as follows:





Three months ended November,2010


2009(Unaudited)


(Unaudited)Amount of sales


% of Total Sales


Amount of sales


% of Total SalesSupplier A

$
202,970



52
%

$
270,996



66
%Supplier B


68,884



18
%


77,002



18
%Total

$
271,854



70
%

$
347,998



84
%





Six months ended November,2010


2009(Unaudited)


(Unaudited)Amount of sales


% of Total Sales


Amount of sales


% of Total SalesSupplier A

$
436,227



47
%

$
536,005



53
%Supplier B


175,127



19
%


275,165



37
%Total

$
611,354



66
%

$
811,170



90
%





21. SUBSEQUENT EVENTS





Management has considered all events occurring through the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.


17





Item 2.  Management’s Discussion and Analysis or Plan of Operation




Cautionary Notice Regarding Forward-Looking Statements





In this quarterly report, references to “Sinobiopharma,” “SNBP,” “the Company,” “we,” “our,” “us,” and the Company’s wholly-owned subsidiary, “Dong Ying China,” refer to Sinobiopharma, Inc.





We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.




The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:





·
the effect of political, economic, and market conditions and geopolitical events;


·
legislative and regulatory changes that affect our business;


·
the availability of funds and working capital;


·
the actions and initiatives of current and potential competitors;


·
investor sentiment; and


·
our reputation.




We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.




The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.





18


Overview





The Company, through its operating subsidiary Dong Ying China, is involved in the Chinese biopharmaceutical industry. We are engaged in R&D, manufacturing, marketing and distribution of biopharmaceutical products, with a primary focus on the muscle relaxant and heart disease areas.  By using its innovative methods of active pharmaceutical ingredient (“API”) synthesis and drug delivery, the Company intends to introduce products that enhance usability, reduce drug development timelines and costs.  Sinobiopharma has successfully brought four drugs to the Chinese market, including its flagship product, KuTai (Cisatracurium), a leading muscle relaxant and its recently launched product, YiTai (Perindopril), a first-to-market cardiovascular ACE inhibitor.  The Company has six additional drug candidates in the pipeline. Sinobiopharma’s production facilities are GMP-certified by the China State Food and Drug Administration (SFDA) and the Company has an established distribution network in China.





Results of Operations





The Company realized a net income of $58,813 for the three months ended November 30, 2010, as compared to a net income of $1,073,550 for the three months ended November 30, 2009, and a net income of $743,911 for the six months ended November 30, 2010, as compared to a net income of $1,310,717 for the six months ended November 30, 2009.





Sales and cost of goods sold





Sales decreased 38% to $1,334,486 for the three months ended November 30, 2010, from $2,137,471 for the three months ended November 30, 2009.  Gross margin decreased 43% to $987,756 (74% of sales) for the three months ended November 30, 2010, from $1,720,308 (80% of sales) for the three months ended November 30, 2009.  The decrease was due to the fact that the Company stopped production of Cisatracurium Besylate in September and October, 2010.





Sales decreased 7% to $3,190,884 for the six months ended November 30, 2010, from $3,431,235 for the six months ended November 30, 2009.  Gross margin decreased 10% to $2,416,949 (76% of sales) for the six months ended November 30, 2010, from $2,683,231 (78% of sales) for the six months ended November 30, 2009.  The decrease was due to the fact that the Company stopped production of Cisatracurium Besylate in September and October, 2010.





The Company has upgraded the manufacture facilities and devices during the quarter ended November 30, 2010,  replacing an old freeze-dried powder device with an advanced one which will improve both production and the quality of Cisatracurium Besylate product. The Company had to halt the production of Cisatracurium Besylate for both September and October of 2010 in order to replace the old device, test the new device and resume the production. The decrease in sales was due to the fact that the Company stopped production of Cisatracurium Besylate in September and October. The Company had to hold the delivery of the products due to reduced inventory levesl in September and October even though the market need for Cisatracurium Besylate is still growing.





Operating Expenses





Operating expenses for the three months ended November 30, 2010 were $905,159, representing a 52% increase as compared to $596,154 for the three months ended November 30, 2009. The increase was primarily due to the increase in the selling expense and general and administrative expenses.   Operating expenses for the six months ended November 30, 2010 were $1,554,346, an increase of 23% as compared to $1,266,941 for the six months ended November 30, 2009. The increase was primarily due to the increase in the selling expense and research and development expenses.





The selling expenses increased $257,690 to $422,875 for the three months ended November 30, 2010, compared to $165,185 for the three months ended November 30, 2009. The Company has plans to set up four sales office in Beijing, Shanghai, Guangzhou and Nanjing respectively which the Company can build up its own sales team and increase both sales revenue and net income. The increased selling expenses were primarily used for the setting up of the sales offices. Also, the Company had a one time advertisement charge of approximately $100,000 in the quarter ended November 30, 2010 which is for the design of Company logo and  brochure. The selling expenses increased $292,960 to $542,313 for the six months ended November 30, 2010, compared to $249,353 for the six months ended November 30, 2009. The increase was primarily used for the setting up of the sales offices.


19





Research and development costs were $150,711 and $222,411 for the three months ended November 30, 2010 and 2009 respectively. This decrease of $71,700 was due to a one time spending on the technology consulting expenses related to the new drug in the three months ended November 30, 2009. Research and development cost increased $107,491 to $394,204 for the six months ended November 30, 2010 as compared to $286,713 for the six months ended November 30, 2009. The increase was due to the increased spending on research and development of pipeline products.





General and administrative expenses increased $96,011 from $168,042 for the three months ended November 30, 2009 to $264,053 for the three months ended November 30, 2010 and decreased $95,561 from $580,318 for the six months ended November 30, 2009 to $484,757 for the six months ended November 30, 2010. Even though the general and administrative expenses increased in the quarter ended November 30, 2010 due to  spending related to  setting up sales offices, the gross amount of G&A expenses for the six months ended November 30, 2010 decreased due to the Company’s effort in controlling G&A spending.





Other Expenses





Other expenses were $5,321 for the three months ended November 30, 2010 as compared to $50,604 for the three months ended November 30, 2009 and was $4,606 for the six months ended November 30, 2010 as compared to $105,573 for the six months ended November 30, 2009. The change was due to the decrease in the balances of the shareholder loans, bank loans and government loans which resulted in a decrease of interest expense of $40,973 and $82,481 for the three and six months ended November 30, 2010 compared to November 30, 2009.





Income Tax Expense





Income tax expense was $114,086 for the six months ended November 30, 2010 and $18,463 for the three months ended November 30, 2010. There was no income tax expense for the three and six months ended November 30, 2009 because the Company enjoyed tax free benefit in the calendar year 2009.





Net Income





Net income decreased $1,014,737 from $1,073,550 for the three months ended November 30, 2009 to $58,813 for the three months ended November 30, 2010. The decrease in net income was due to the upgrade of  manufacturing facilities where the production of Cisatracurium Besylate has been halted in September and October 2010. Net income decreased $566,805 from  $1,310,717 for the six months ended November 30, 2009 to  $743,912 for the six months ended November 30, 2010.  The decrease in net income was due to the upgrade of  manufacturing facilities where the production of Cisatracurium Besylate has been halted in September and October 2010.





Liquidity and Capital Resources




The operations of Dong Ying China have generated profits for the six months ended November 30, 2010. The Company had $1,546,176 in cash. The profit generated from operation is sufficient to enable the Company to support its current operations and pay current debt due for repayment.  However, the Company plans to raise more capital through equity finance to provide cash to expand its business development, fund further drug product development and launch new products.




Net cash provided by the operating activities for the six months ended November 30, 2010 was $1,373,715 compared to the net cash provided in the operating activities of $1,124,109 for the six months ended November 30, 2009, a increase of $249,606, even though the net income decreased $566,805 for the six months ended November 30, 2010 as compared to  November 30, 2009. The increase is primarily attributable to the  increase in the cash provided by collections of accounts receivables and note receivables in the amount of $908,324 in the six months ended November 30, 2010 compared to  November 30, 2009; a decrease in cash paid for accounts payable for the amount of $392,742 from the decreased purchase of raw material in the six months ended November 30, 2010 compared to the six months ended November 30, 2009 and a change in stock based compensation for the amount of $324,125 in the six months period ended November 30, 2009 compared to zero in the six months ended November 30, 2010.




20


Net cash used in the investment activities for the six months ended November 30, 2010 and 2009 was $1,045,037 and $985,899, respectively. The Company has purchased $488,219 more fixed assets to upgrade the manufacture facilities during  the six months ended November 30, 2010 as compared to the same period of last year. Also, the Company had an advanced payment of $601,200 for the purchase of a research and development lab in the six months ended November 30, 2010. Additionally, the investment in a low risk short term financial product from China Agricultural Bank matured and was sold out for cash during the six months period ended November 30, 2010. The Company had an advanced payment of $731,317 in the six months period ended November 30, 2009 and there was no such payment in the six months ended November 30, 2010.





Net cash used in the financing activities for the six months ended November 30, 2010 was $147,400 and net cash used in the financing activities for the six months ended November 30, 2009 was $652,307, which was a decrease of $504,907. During the six months ended November 30, 2010, the Company reduced  loans from banks and government in the net amount of $147,400. In comparison, the Company has borrowed $1,461,408,  and repaid $1,462,021 in loans as well as repaying another $651,694 in shareholder loans during the six months period ended November 30, 2009.





Loans from Government





The Company has a loan from the Nantong Economic and Technology Development Zone Administration. The loan bears no interest. The original principal amount of the loan was RMB20million ($3,006,000 at the exchange rate applicable at November 30, 2010) and was due for repayment in full in March 2007. During 2007 the Company repaid RMB3,000,000($450,900 at the exchange rate applicable at November 30, 2010).  In December, 2007,  the Company was granted an extension to December 31, 2008. During the year ended December 31, 2008,  the Company repaid RMB2,000,000 ($300,600 at the exchange rate applicable at November 30, 2010). On February 1, 2009 the Company repaid another RMB2,000,000 ($300,600 at the exchange rate applicable at November 30, 2010) and the Company was granted an extension to December 31, 2009 for the remainder of the loan of RMB13,000,000 ($1,953,900 at the exchange rate applicable at November 30, 2010). The Company repaid RMB3,000,000 ($450,900 at the exchange rate applicable at November 30, 2010) in December 2009, and was granted another extension to December 31, 2010 for the remaining loan balance of RMB10,000,000 ($1,503,000 at the exchange rate applicable at November 30, 2010). On April 7, 2010, the Company repaid RMB1,000,000 ($150,300 at the exchange rate applicable at November 30, 2010). On May 6, 2010, the Company repaid RMB1,000,000 ($150,300 at the exchange rate applicable at November 30, 2010) leaving a remaining balance of RMB8,000,000  ($1,202,400 at the exchange rate applicable at November 30, 2010). On August 31, 2010, the Company repaid RMB1,000,000 ($150,300 at the exchange rate applicable at November 30, 2010) leaving a remaining balance of RMB7,000,000 ($1,052,100 at the exchange rate applicable at November 30, 2010).





Since the loan bears no interest, the obligation is carried at its net present value using interest rates equal to the prevailing Bank of China one-year rate at the time the loan was received (5.6% in 2004, applied in respect of the 2006 year) or the date the extension was effective (6.4% in March 2007, applied in respect of the 2007 and 2008 years, 5.6% in February, 2009, applied in respect of the 2009 year and 5.31% in February 2010, applied in respect of the 2010 year).





Imputed loan interest expense included in the accounts for the three months ended as of November 30, 2010 and 2009 was $12,098 and $25,244 respectively; and for the six months ended November 30, 2010 and 2009 was in the amount of $27,241 and $50,509 respectively which is determined as the amortization on the interest method basis of the discount over the remaining period to maturity of the loan.  Gain from discount of non-interest loans for the three months ended as of November 30, 2010 and 2009 was $3,848 and $0 respectively and for the six months ended November 30, 2010 and 2009 was in the amount of $12,631and $0, respectively.





The present value of the total government loan was $1,040,712 as of November 30, 2010 and $1,145,726 as of May 31, 2010.





Off Balance Sheet Arrangements




None.





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Critical Accounting Policies and Estimates


The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those estimates.





Use of Estimates





The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Management makes its best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared.    Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value determination of financial and equity instruments, the realizability of deferred tax assets and inventories; the recoverability of intangible assets, land use right and property, plants and equipment; and accruals for income tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.





Cash and cash equivalents





The Company’s cash and cash equivalents consist of all cash deposited in large financial institution in the PRC with acceptable credit rating. For purposes of the statements of cash flows the Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.





Accounts receivable and allowance for doubtful accounts





Accounts receivable consist of receivables for sales of product on credit. Management allows credit sales with six months terms only to customers with a long time business relationship and high transaction value. All the other customers are required to make prepayments for  purchasing our products. The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. The Company reviews delinquent accounts over six months old, management considers many factors in estimating its allowance, including historical data, experience, credit worthiness, and economic trends. From time to time, management may adjust its assumptions for anticipated changes in any of those or other factors expected to affect collectibility.  Account balances are charged against the allowance after all collection efforts have been exhausted and the potential for recovery is considered remote.





Property, plant and equipment





Property, plant and equipment are stated at cost less accumulated depreciation and amortization.





The cost of an asset comprises its purchase price and any directly attributable costs of bringing that asset to its present working condition and location for its intended use.  Expenditures incurred after the assets have been put into operation, such as repairs and maintenance, overhaul and minor renewals and betterments, are normally charged to operating expenditures.  Expenditures that expect to enhance the life of the assets are  capitalized.





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Depreciation is computed using the straight line method over the estimated useful life from the date on which they become fully operational and after taking into account their estimated residual values as follows:





Mould
Useful livesBuildings
10-20 yearsLand use rights
40 yearsManufacturing equipment
5-10 yearsOffice furniture and equipment
5 yearsRoad and grounds
20 yearsVehicles
8 yearsLeasehold improvements
5 yearsSoftware
5years





Intangible Assets





Intangible assets are carried at cost less a provision for amortization on a straight-line basis over their estimated useful lives of 20 years.





Revenue recognition





Revenues are recognized in accordance with ASC topic 605 (formely SEC Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition.").  Under ASC No 605, product revenues (or service revenues) are recognized when persuasive evidence of an arrangement exists, delivery has occurred (or service has been performed), the sales price is fixed and determinable and collectibility is reasonably assured. Sales revenue represents the invoiced value of goods, net of value-added tax. All sales are final. Therefore, we do not estimate deductions or allowances for sales returns.





Research and development





Research and development costs are expensed as incurred.  These costs consist primarily of cost of materials used and salaries paid for the development of the Company’s products.  Research and development costs are $816,262 and $197,286 for the years ended May 31, 2010 and 2009, respectively.





Income taxes





The Company records deferred taxes in accordance with ASC topic 740 (formerly Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes.")  The statement requires recognition of deferred tax assets and liabilities for temporary differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse.  A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.





Fair value measurements





The Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements.  ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.





ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.





ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:


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·
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.·
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.·
Level 3 inputs are unobservable inputs for the asset or liability.





The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.





The Company’s financial instruments consist of cash, accounts receivable, notes receivable, securities available for sale, accounts payable and loans payable.  Accounts receivable and notes receivable are carried at estimated net realizable values net of provisions for uncollectible amounts. Uncollectible accounts are charged off when determined to be unrecoverable. The loan payable is carried at discounted present value. Securities available for sale are carried at market value with any unrealized gain or loss is recorded in comprehensive income or loss. The carrying values of the remaining financial instruments reflected in these financial statements approximate their fair values due to the short-term maturity of the instruments.





Earning/(Los)s Per Share





Basic earnings (loss) per share of common stock are computed by dividing the net income (loss) by the weighted average number of (post-split) common shares outstanding during the year. Diluted earnings (loss) per share are equal to the basic earnings (loss) per share for the years ended May 31, 2010 and 2009 because the common stock equivalents outstanding are anti-dilutive due to the fact that the weighted average exercise price per share of the stock option is higher than the weighted average market price per share of the common stock during the year ended May 31, 2010.





Stock-based compensation





ASC 718-10 requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company records the cost as expense over the offering period and vesting term in connection with compensation expense for stock-based employee compensation plans.





Comprehensive Income / (Loss)





The Company has adopted ASC topic 220 (formerly Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”.)   Comprehensive income / (Loss) include net income (loss) and all changes in equity during the period that arise from non-owner sources, such as foreign currency items and unrealized gains and losses on certain investments in equity securities.





Recent Accounting Pronouncements





In September 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-25, Reporting Loans to Participants by Defined Contribution Pension Plans, (“ASU 2010-25”). The guidance in ASU 2010-25 indicated that participant loans should be classified as notes receivable from participants in the financial statements of a defined contribution pension plan, measured at the outstanding principal amount plus accrued, but unpaid interest. ASU 2010-25 is effective for fiscal years ending after December 15, 2010. Early adoption is permitted. The Plan applied the guidance retrospectively to all prior periods presented. This pronouncement is not expected to have a material impact on the consolidated financial statements upon adoption.





Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.





Item 3.
Quantitative and Qualitative Disclosures about Market Risk.




N/A.





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Item 4.
Controls and Procedures.





Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.




Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Lequn Huang, the Company’s Chief Executive Officer (“CEO”), and Xinjie Mu, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the six months ended November 30, 2010. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  The Company’s CEO and CFO also conluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports required to to be filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.





Changes in internal controls




Our management, with the participation of our CEO and CFO, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the quarter ended November 30, 2010.  Based on that evaluation, our CEO and CFO concluded that no change occurred in the Company's internal controls over financial reporting during the quarter ended November 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.





PART II – OTHER INFORMATION





Item 1.  Legal Proceedings.





To our knowledge, there is no material litigation pending or threatened against us.





Item 1A.  Risk Factors.





N/A.





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





None.





Item 3.  Defaults Upon Senior Securities.





To our knowledge, there are no material defaults upon senior securities.





Item 4.  (Removed and Reserved)





Item 5.  Other Information.





None.





Item 6.
Exhibits.




(a)  Exhibits





31.1

Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.31.2

Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.32.1

Certification Required Under Section 906 of Sarbanes-Oxley Act of 2002.32.2

Certification Required Under Section 906 of Sarbanes-Oxley Act of 2002.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.








SINOBIOPHARMA, INC.Dated:   January 19, 2011
By:
/s/ Lequn HuangName: Lequn HuangTitle: President, CEO, Treasurer and Director





Dated:   January 19, 2011
By:
/s/ Xinjie MuName: Xinjie MuTitle: Chief Financial Officer and Director








































































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