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 February 28, 2011





[   ]

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, Esq.


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: 117,587,608shares of common stock, $.0001 par value, were outstanding as of April 14, 2011.





TABLE OF CONTENTS





PagePART IItem 1.
Financial Statements
3Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
19Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22Item 4.
Controls and Procedures
23PART IIItem 1.
Legal Proceedings
23Item 1A.
Risk Factors
23Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23Item 3.
Defaults Upon Senior Securities
23Item 4.
(Removed and Reserved)
23Item 5.
Other Information
23Item 6.
Exhibits
24SIGNATURES
25


















































2





PART I – FINANCIAL INFORMATION


Item 1.  Financial Statements





SINOBIOPHARMA, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSFebruary 28, 2011


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

$
830,066


$
1,331,959Accounts receivable


1,439,414



670,662Notes receivable


392,500



274,148Inventories, net


1,080,295



758,090Advance payments


254,894



67,971Other receivables


267,423



321,493Available for sale securities


-



293,064Total Current Assets


4,264,592



3,717,387Property, plant and equipment, net


3,723,987



2,912,983Intangible assets, net


4,381,670



4,336,832Long term advance payment


1,707,467



985,760TOTAL ASSETS

$
14,077,716


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

$
618,169


$
419,707Loans from government


-



1,145,726Advances from customers


136,291



135,521Income tax payable


332,340



155,397Other payables


730,179



343,780Total Current Liabilities


1,816,979



2,200,131COMMITMENTS AND CONTINGENCIES


-



-STOCKHOLDERS' EQUITYPreferred stock, $0.0001 par value;10,000,000 shares authorized; 1,000,000 shares issued and outstanding at February 28, 2011 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 February 28, 2011 and May 31, 2010


11,759



11,759Additional paid-in capital


14,360,487



14,360,487Accumulated deficit


(2,619,453
)


(4,847,707
)Accumulated other comprehensive income


507,844



228,192Total Stockholders' Equity


12,260,737



9,752,831TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
14,077,716


$
11,952,962








See notes to the consolidated financial statements





3


SINOBIOPHARMA, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(UNAUDITED)Three Months ended


Nine Months endedFebruary 28,


February 28,2011


2010


2011


2010SALES

$
4,018,561


$
1,993,412


$
7,209,445


$
5,424,647COST OF GOODS SOLD


857,728



380,799



1,631,663



1,128,803GROSS MARGIN


3,160,833



1,612,631



5,577,782



4,295,844OPERATING EXPENSESSelling expenses


425,036



144,956



967,349



394,309Research and development


228,068



30,683



622,272



317,396Depreciation and amortization


74,122



59,241



207,194



209,798General and administrative expenses


670,893



358,165



1,155,650



938,483TOTAL OPERATING EXPENSES


1,398,119



593,045



2,952,465



1,859,986INCOME FROM OPERATIONS


1,762,714



1,019,568



2,625,317



2,435,858OTHER INCOME/(EXPENSES)Interest income


1,668



1,896



6,214



7,070Interest expense


(7,956
)


(38,193
)


(35,560
)


(148,278
)Other income (expenses)


(4,988
)


55,048



13,464



54,386(11,276
)


18,751



(15,882
)


(86,822
)INCOME BEFORE INCOME

TAX EXPENSE


1,751,438



1,038,319



2,609,435



2,349,036INCOME TAX EXPENSE


(267,095
)


(97,096
)


(381,181
)


(97,096
)NET INCOME


1,484,343



941,223



2,228,254



2,251,940OTHER COMPREHENSIVE INCOMEForeign Currency Translation Adjustment


28,707



5,209



279,652



26,748COMPREHENSIVE INCOME

$
1,513,050


$
946,432


$
2,507,906


$
2,278,688Earnings per shareBasic and diluted

$
0.01


$
0.01


$
0.02


$
0.03Weighted average shares used

in computation:Basic and diluted


117,587,608



104,117,920



117,587,608



87,950,083








See notes to the consolidated financial statement


4


SINOBIOPHARMA, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Nine Months Ended February 28,2011


2010CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
2,228,254


$
2,251,940Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization


407,060



318,412Stock-based compensation


-



324,125Imputed interest expense on shareholders' loans


-



15,864Amortization of discount in interest expense


38,689



68,235Gain on securities for sale


(1,764
)


-Common shares issued for consulting services


-



33,000Gain from discount of non-interest government loan


(12,631
)


(55,694
)Changes in operating assets and liabilities:Notes receivable


(108,780
)


5,600Accounts receivable, net


(743,857
)


(920,879
)Inventories


(284,999
)


(264,843
)Advance payments


(172,303
)


(170,993
)Other receivables


44,029



(297,856
)Accounts payable


181,717



(286,315
)Advance from customers


(6,379
)


(34,120
)Income tax payable


171,270



97,096Other payables


373,421



(96,856
)Net Cash Provided by Operating Activities


2,113,727



986,716CASH FLOWS FROM INVESTING ACTIVITIESProceeds from selling securities


296,564



-Acquisition of property and equipment


(966,331
)


(323,472
)Advance payment for purchase of real property


(604,400
)


-Advance payment for purchase of intangible assets


(75,550
)


(731,317
)Net Cash Used in Investing Activities


(1,349,717
)


(1,054,789
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from bank loans


-



2,194,608Repayment of bank loans and government loans


(1,205,100
)


(3,148,381
)Repayment of shareholder loans


(133
)


(651,694
)Proceeds from common stock issued


-



1,600,000Payment for common stock issuance costs


-



(15,000
)Net Cash Used in Financing Activities


(1,205,233
)


(20,467
)EFFECT OF FOREIGN CURRENCY FLUCTUATION ON CASH


(60,670
)


(12,450
)NET DECREASE IN CASH AND CASH EQUIVALENTS


(501,893
)


(100,990
)CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD


1,331,959



891,132CASH AND CASH EQUIVALENTS - ENDING OF PERIOD

$
830,066


$
790,142Supplemental cash flow information:Cash paid for income taxes

$
209,911


$
27,893Cash paid for interest expense

$
-


$
65,349Non-cash investing and financing activities100,000 common shares issued in exchange of consulting service received(see Note 14)

$
-


$
33,00017,500,000 common shares issued in exchange of intangible assets(see Note 14)

$
-


$
3,136,5004,234,275 common shares issued to settle debts (see Note 14)

$
-


$
508,1131,000,000 preferred shares issued in exchange for intangible assets (see Note 15)

$
-


$
100




See notes to the consolidated financial statements


5


SINOBIOPHARMA, INC. AND SUBSIDIARIES


Notes to the 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. On November 8, 2006 the Company acquired all the issued and outstanding shares of Buzz Media Ltd. (“Buzz Nova Scotia”), a corporation incorporated in the province of Nova Scotia, Canada on October 26, 2006. The transaction was treated as an acquisition for accounting purposes. The consideration for the acquisition of Buzz Nova Scotia was 500 shares (on a post-forward stock split basis) of the Company valued at $0.10, the book value of the net assets of Buzz Nova Scotia, since the acquisition was from a related party.





On July 14, 2008 the Company’s President and majority shareholder sold all of her 62.5% interest in the Company, to an unrelated individual. On the same day, she resigned from all of her positions as officer and director of the Company and the purchaser was appointed the sole director and officer of the Company.





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.





6


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 February 28, 2011 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.





On August 20, 2008, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with the Company’s former majority shareholder, effective concurrently with the closing of the Share Exchange Agreement.  Pursuant to the Share Purchase Agreement, the former majority shareholder acquired all of the capital of Buzz Media, Ltd. (“Buzz Nova Scotia”), the wholly-owned subsidiary of the Company incorporated in the Province of Nova Scotia, Canada, in exchange for the payment of $10.00.





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 February 28, 2011, consolidated statements of income and comprehensive income for the three months and nine months ended, and consolidated statements of cash flows for the nine months ended February 28, 2011 and 2010 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 February 28, 2011 and for the three months and nine months ended February 28, 2011 and 2010 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.





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.





7


Impairment of long-lived assets





The Company reviews for impairment of long-lived assets and intangibles assets subject to amortization whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recognized when sum of the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. The assessment is based on the carrying amount of the long-lived asset at the date it is tested for recoverability, whether in use or under development. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. There were no events or changes in circumstances that necessitated a review of impairment of long-lived assets as of February 28, 2011 and May 31, 2010, respectively.





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.





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 $392,500 as of February 28, 2011 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





Accounts receivable consist of receivables for sales of product on credit. Accounts receivable as of February 28, 2011 and May 31, 2010 was $1,439,414 and $670,662, respectively. No allowance for doubtful accounts was recorded during the three and nine months ended February 28, 2011 and 2010 as management believes no accounts are uncollectible as of February 28, 2011 and 2010.





5.  INVENTORIES





Inventories at February 28, 2011 and May 31, 2010 consist of the following:





February 28, 2011


May 31, 2010(Unaudited)Raw materials

$
204,902


$
127,883Goods in process


606,280



553,450Finished goods


269,113



76,757$
1,080,295


$
758,090





8





6.  ADVANCE PAYMENTS





Advance payments of $254,894 and $67,971 as of February 28, 2011 and May 31, 2010 represented payments in advance to suppliers of the Company’s raw materials.





7.  AVAILABLE FOR SALE SECURITIES





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.  LONG TERM ADVANCE PAYMENTS





February 28, 2011


May 31, 2010(Unaudited)Prepayment for technologies A


1,023,467



985,760Prepayment for technologies B


76,000



-Prepayment for real property


608,000



-$
1,707,467


$
985,760





Advance payment for intangible assets of $1,023,467 and $985,760 as of February 28, 2011 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 February 28, 2011, 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 10) 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.





On August 9, 2010, the Company signed a technology transfer contract of 10mg and 20mg Cisatracurium Besylate with third party Nanjing Huanxi Science & Consulting Ltd., Co. for the total price of RMB1,500,000 ($228,000 at the exchange rate applicable at February 28, 2011). As of February 28, 2011, the Company has paid RMB500,000 ($76,000 at the exchange rate applicable at February 28, 2011) and has not obtained the technology. If the technology cannot be delivered by the due date of January, 2015 stipulated in the contracts, the prepayment will be returned to the Company.





On December 20, 2010, the Company entered into a real property purchase agreement with JiangSu Artall Real Estate Ltd., Co. to acquire an office with 200 square meters to use as a research and development center. As of February 28, 2011, the Company paid all the contract price of $608,000. The building was under construction and expected to be completed in 2011, the ownership will be transferred to the Company at the same time.


9


9.  PROPERTY, PLANT AND EQUIPMENT, NET





Property, plant and equipment at February 28, 2011 and May 31, 2010 consist of the following:





February 28, 2011


May 31,

2010(Unaudited)Buildings

$
2,068,767


$
1,990,207Land use rights


421,018



405,507Manufacturing equipment


2,098,678



999,665Office furniture and equipment


134,072



102,263Road and grounds


236,130



212,791Vehicles


165,442



146,171Leasehold improvements


32,329



31,138Software


2,210



2,1275,158,646



3,889,869Less: accumulated depreciation


1,434,659



1,105,9383,723,987



2,783,931Construction-in-process


-



129,052$
3,723,987


$
2,912,983





Depreciation expense for the three months ended February 28, 2011 and 2010 was $101,970 and $80,113, respectively. For the nine months ended February 28, 2011 and 2010, the depreciation expense was $288,025 and $246,334, respectively.





10.  INTANGIBLE ASSETS, NET





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





The patent was purchased on December 22, 2009 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 on December 18, 2009 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. As of February 28, 2011, the Agreement hasn’t been executed.





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.





10


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 haven’t been used in production, no amortization is recorded. The technologyies have an estimated useful life of 20 years. The amounts related to the particular products are as follows:





February 28, 2011


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

$
1,409,189


$
(106,919
)

$
1,302,270



16.5


$
1,357,219


$
(41,128
)

$
1,316,091



16.5Clinical Trial Certificates for Eplerenone


1,840,682



-



1,840,682







1,772,867



-



1,772,867Cisatracurium Besylate Technology


760,000



(140,641
)


619,359



20



732,000



(108,063
)


623,937



20Perindopril Technology


760,000



(140,641
)


619,359



20



732,000



(108,063
)


623,937



20Total intangible assets

$
4,769,871


$
(388,201
)

$
4,381,670






$
4,594,086


$
(257,254
)

$
4,336,832





Amortization for the three months ended February 28, 2011 and 2010 in the amount of $40,112 and $33,638 and for the nine months ended February 28, 2011 and 2010 in the amount of $119,035 and $72,078 are included in depreciation and amortization expense, respectively.





11.  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 RMB20 million ($3,040,000 at the exchange rate applicable at February 28, 2011) and was due for repayment in full in March 2007. During 2007 the Company repaid RMB3,000,000 ($456,000 at the exchange rate applicable at February 28, 2011).  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 ($304,000 at the exchange rate applicable at February 28, 2011). On February 1, 2009 the Company repaid another RMB2,000,000 ($304,000 at the exchange rate applicable at February, 2011) and the Company was granted an extension to December 31, 2009 for the remainder of the loan of RMB13,000,000 ($1,976,000 at the exchange rate applicable at February 28, 2011). The Company repaid RMB3,000,000 ($456,000 at the exchange rate applicable at February 28, 2011) in December 2009, and was granted another extension to December 31, 2010 for the remaining loan balance of RMB10,000,000 ($1,520,000 at the exchange rate applicable at February 28, 2011). On April 7, 2010, the Company repaid RMB1,000,000 ($152,000 at the exchange rate applicable at February 28, 2011). On May 6, 2010, the Company repaid RMB1,000,000 ($152,000 at the exchange rate applicable at February 28, 2011) leaving a remaining balance of RMB8,000,000  ($1,216,000 at the exchange rate applicable at February 28, 2011). On August 31, 2010, the Company repaid RMB1,000,000 ($152,000 at the exchange rate applicable at February 28, 2011). On December 31, 2010, the Company repaid RMB4,000,000 ($608,000 at the exchange rate applicable at February 28, 2011). On January 14, 2011, the Company repaid off the loan balance of RMB3,000,000($456,000 at the exchange rate applicable at February 28, 2011).





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 and January 2011 year).


11


Imputed loan interest expense included in the accounts for the three months ended as of February 28, 2011 and 2010 was $11,448 and $17,726, respectively; and for the nine months ended February 28, 2011 and 2010 was in the amount of $38,689 and $68,235, 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 February 28, 2011 and 2010 was $0 and $55,694, respectively; and for the nine months ended February 28, 2011 and 2010 was in the amount of $12,631 and $55,694, respectively.





The present value of the total government loan was $0 as of February 28, 2011 and $1,145,726 as of May 31, 2010.





12.  OTHER PAYABLES





Other payables of $730,179 and $343,780 as of February 28, 2011 and May 31, 2010, respectively, represent the deposits received from customers, payroll payables, accrued professional fees and value-added tax (VAT) payables.





13.  INCOME TAXES





The tax payables balance of $332,340 and $155,397 represents the income tax accrual of Dong Ying China as of February 28, 2011 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 $267,095 and $381,181 for the three and nine months ended February 28, 2011, and the income tax expense of $97,096 for the three months and nine months ended February 28, 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 and nine months ended February 28, 2011 due to net loss.





The Company has a deferred tax asset on net operating losses of approximately $429,592 as of February 28, 2011. 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 $429,592 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.





14. COMMON STOCK





As of May 31, 2009, the Company has 79,920,000 share of common stock issued and outstanding.





On July 10, 2009 the Company issued 100,000 common shares to Emissary Capital Group LLC in exchange of financial advisory and independent equity research consultation. The common stock par value is $0.0001 and the market price on July 10, 2009 as fair value is $0.33. No cash proceed will be paid to the Company for this issuance.





12


On December 18, 2009, the Company authorized its wholly-owned subsidiary Dong Ying China entered into three intellectual property transfer agreements with Meisu Jining Science and Technology (Nanjing) Limited Company for transfer of the approval certificates to engage in clinical trials for the drug Eplerenone and its tablet and capsule forms in China (‘Intellectual Property”). As consideration for Intellectual Property to Dong Ying China, the Company issued an aggregate of 9,500,000 unregistered shares of the Company's common stock which at a price of $0.1870 per share and $1,776,500 was recorded to Meisu Jining Science and Technology (Nanjing) Limited Company on the same day. As a result of this transaction, Meisu Jining Science and Technology (Nanjing) Limited Company became the shareholder of the company with 8% interests.





On December 22, 2009, the Company's wholly-owned subsidiary Dong Ying China entered into a patent transfer agreement with Lei Wang the employee of Dong Ying China and Lequn Huang, the Company's chief executive officer and director, for the transfer of a patent, "Composition for Lyophilized Powder of Atracurium," jointly owned by Mr. Wang and Mr. Huang. As consideration for the patent, the Company issued 8,000,000 unregistered shares of the Company's common stock to Mr. Wang, of which the value was determined at the market price as of the same date, and also agreed to issue the preferred stock to Mr. Huang, but prior to the issuance of the preferred stock, the Company shall: (i) undertake its commercially reasonable best efforts to seek shareholder, board, and relevant governmental approval to authorize a class of blank check preferred stock, and (ii) following the effectiveness of the authorization of blank check preferred stock, designate and issue such number of shares of preferred stock as to give Mr. Huang approximately 51% of the voting rights and 0% of the equity rights of the Company. Should the Company fail to obtain sufficient approval to authorize any preferred stock after having made commercially reasonable best efforts to do so, Mr. Huang waived his right to redress under the dispute settlement terms of the agreement. The preferred stocks were issued on April 2, 2010, please refer to Note 15. The fair value of the consideration of issuance of 8,000,000 common stock on December 22, 2009 was $1,360,000 at a price of $0.17 per share.





On January 15, 2010, Sinobiopharma, Inc. entered into a Subscription Agreement with certain accredited investors (collectively, the "Buyers") to sell to the Buyers an aggregate of 15,000,000 unregistered shares of the Company’s common stock, par value $0.0001, for an aggregate purchase price of $1,500,000.  On January 15, 2010, the Company issued an aggregate of 15,000,000 unregistered shares to the Buyers in the private placement.


On January 11, 2010, the Company settled certain outstanding debt owed to its chief executive and financial officers by issuing an aggregate of 5,067,608 unregistered shares of common stock of the Company. The Company's chief executive officer, Lequn Huang, was issued 4,234,275 shares of common stock for the outstanding $508,113 in loans owed to Mr. Huang, while the Company's chief financial officer, Xinjie Mu, was issued 833,333 unregistered shares of common stock for the outstanding $100,000 in loans due to Mr. Mu.  The shares were issued at the price of $0.12 per share.  At the conversion date, the stock market trading price of the Company’s stock was $0.22 per share. The difference of $423,427 and $83,333 was treated as compensation to Mr. Huang and Mr. Mu.





As of February 28, 2011 and May 31, 2010, the Company has 117,587,608 shares of common stock issued and outstanding.





15. PREFERRED 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 14), 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.





As of February 28, 2011 and May 31, 2010, the Company has 1,000,000 shares of preferred stock issued and outstanding.


13





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 February 28, 2011


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 February 28, 2011 and 2010. The stock-based compensation cost was $0 and $324,125 for the nine months ended February 28, 2011 and 2010. As of February 28, 2011, all the outstanding options have vested as follows:





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


$
1.28February 28, 2011


2,525,000


$
3,241,250


$
1.28





If not previously exercised or canceled, options outstanding at February 28, 2011 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





14





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.





As of February 28, 2011 and May 31, 2010, non of options were exercised.





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 February 28,2011


2010(Unaudited)


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

$
1,484,343


$
941,223Shares (denominator):Weighted average common shares outstanding


117,587,608



104,117,920Weighted average common shares outstanding used in computing diluted earnings per ordinary share


117,587,608



104,117,920Earnings per common share-basic

$
0.01


$
0.01Earnings per common share-diluted

$
0.01


$
0.01





Nine months ended February 28,2011


2010(Unaudited)


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

$
2,228,254


$
2,251,940Shares (denominator):Weighted average common shares outstanding


117,587,608



87,950,083Weighted average common shares outstanding used in computing diluted earnings per ordinary share


117,587,608



87,950,083Earnings per common share-basic

$
0.02


$
0.03Earnings per common share-diluted

$
0.02


$
0.03





As of February 28, 2011 and 2010, 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 nine months ended February 28, 2011 and 2010.





15


18.  RELATED PARTY TRANSACTIONS AND BALANCES





Purchase of intangible assets





The Company purchased two technologies 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 February 28, 2011, the cost of these two intangible assets is $760,000 for each. (See Note 10).





The Company also purchased the patent and certificates for clinical trial. 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 14)





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 $1,023,467 and $985,760 as of February 28, 2011 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.)





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 ($304,000 at the exchange rate applicable at February 28, 2011).  As of February 28, 2011 the Company prepaid RMB1,733,333 ($263,467 at the exchange rate applicable at February 28, 2011). The other contract was signed in July 2009 for a contract amounting to RMB5,000,000 ($760,000 at the exchange rate applicable at February 28, 2011). As of February 28, 2011, the Company prepaid $760,000. (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. (See Note 15)





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 ($1,216,000 at the exchange rate applicable at February 28, 2011 ). As of February 28, 2011, the Company has paid RMB4,800,000 ($729,600 at the exchange rate applicable at February 28, 2011) which had been expensed and is committed to pay the remaining  RMB3,200,000 ($486,400 at the exchange rate applicable at February 28, 2011) before January 2015.





16





On August 9, 2010, the Company signed a technology transfer contract of 10mg and 20mg Cisatracurium Besylate with Nanjing Huanxi Science & Consulting Ltd., Co. for the total price of RMB1,500,000 ($228,000 at the exchange rate applicable at February 28, 2011). As of November 31, 2010, the Company has paid RMB500,000 ($76,000 at the exchange rate applicable at February 28, 2011). The Company is committed to pay RMB500,000 ($76,000 at the exchange rate applicable at February 28, 2011) when the technical documents are transferred to the Company and to pay the remaining RMB500,000 ($76,000 at the exchange rate applicable at February 28, 2011) when the manufacturing testing is finished.





Contingencies





Contingencies through February 28, 2011 have been considered by the Company and none were noted which were required to be disclosed.





20.  CONCENTRATIONS AND CREDIT RISK





At February 28, 2011 and May 31, 2010, the Company had a credit risk exposure of cash in banks of $830,066 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 100% and 98.5% of the Company’s total sales for the three months ended February 28, 2011 and 2010, respectively and accounted for 99% and 96% of the Company’s total sales for the nine months ended February 28, 2011 and 2010, respectively.





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





Three months ended February 28,2011


2010(Unaudited)


(Unaudited)Amount of sales


% of Total Sales


Amount of sales


% of Total SalesCustomer A

$
785,449



20
%

$
572,949



29
%Customer B


485,845



12
%


171,456



9
%Customer C


460,080



11
%


394,349



20
%Total

$
1,731,374



43
%

$
1,138,754



58
%





Nine months ended February 28,2011


2010(Unaudited)


(Unaudited)Amount of sales


% of Total Sales


Amount of sales


% of Total SalesCustomer A

$
1,170,721



16
%

$
1,135,583



21
%Customer B


867,822



12
%


399,618



7
%Customer C


636,015



9
%


1,509,073



28
%Total

$
2,674,558



37
%

$
3,044,274



56
%





17





(3) The accounts receivable of the largest three customers A, B and C represented about 37% ($536,131), 0% and 37% ($529,919) respectively and 57% ($384,619), 0% and 39% ($264,419) respectively of the Company’s total account receivables as of February 28, 2011 and May 31, 2010.





(4) One supplier accounted for 11% ($564,189) and 46% ($630,107) of the Company’s total purchase for the nine months ended February 28, 2011 and February 28, 2010. No suppliers accounted for over 10% of the company’s total purchases in the three months ended February 28, 2011 and February 28, 2010.





(5) The accounts payable of this supplier  above accounted for 56% ($346,108) and 87% ($365,937) of the Company’s total account payable as of February 28, 2011 and May 31, 2010.




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.









































18


Item2.  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.





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.  We have successfully brought four drugs to the Chinese market, including our flagship product, KuTai (Cisatracurium), a leading muscle relaxant and its recently launched product, YiTai (Perindopril), a first-to-market cardiovascular ACE inhibitor. We have has six additional drug candidates in the pipeline.  Our production facilities are GMP-certified by the China State Food and Drug Administration (SFDA) and we have has an established distribution network in China.


19


Results of Operations





The Company realized a net income of $1,484,343 for the three months ended February 28, 2011, as compared to a net income of $941,223 for the three months ended February 28, 2010. The increases of $543,120 or 57.7% was primarily due to increased product demand in last quarter from customer because of the halt of production of Cisatracurium Besylate in September and October, 2010. We realized a net income of $2,228,254 for the nine months ended February 28, 2011, as compared to a net income of $2,251,940 for the nine months ended February 28, 2010. The decrease of $23,686 or 1.05% was primarily due to increased income tax expenses.





Sales and cost of goods sold





Sales increased 102% to $4,018,561 for the three months ended February 28, 2011, from $1,993,412 for the three months ended February 28, 2010.  Gross margin increased 96% to $3,160,833 (79% of sales) for the three months ended February 28, 2011, from $1,612,631 (81% of sales) for the three months ended February 28, 2010.  The increase was mainly due to the fact that distributor’s demand of Cisatracurium Besylate increased from prior quarter to resume their normal inventory level because of the halt of production of Cisatracurium Besylate in September and October, 2010.





Sales increased 33% to $7,209,445 for the nine months ended February 28, 2011, from $5,424,647 for the nine months ended February 28, 2010.  Gross margin increased 30% to $5,577,782 (77% of sales) for the nine months ended February 28, 2011, from $4,295,844 (79% of sales) for the nine months ended February 28, 2010. The increase was mainly due to the growing demand for the Company’s main product Cisatracurium Besylate and the Company’s increased input in selling and marketing efforts.





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 Company had to hold the delivery of the products due to reduced inventory level in September and October. Starting the quarter ended February 28, 2011, the Company resumed production and delivered the products satisfied the distributors’ both current sales need and the inventory need for the three and nine months ended February 28, 2011.





Operating Expenses





Operating expenses for the three months ended February 28, 2011 were $1,398,119, representing a 136% increase as compared to $593,045 for the three months ended February 28, 2010. The increase was primarily due to the increase in the selling expense, research and development expense and general and administrative expenses.  Operating expenses for the nine months ended February 28, 2011 were $2,952,465, an increase of 59% as compared to $1,859,986 for the nine months ended February 28, 2010. The increase was primarily due to the increase in the selling expense, research and development expenses and general and administrative expense.





Selling expenses increased $280,080 to $425,036 for the three months ended February 28, 2011, compared to $144,956 for the three months ended February 28, 2010. The increased in selling expenses were primarily used for the sales offices, and due to the fact that the Company increased marketing expense in the quarter ended February 28, 2011. The selling expenses increased $573,040 to $967,349 for the nine months ended February 28, 2011, compared to $394,309 for the nine months ended February 28, 2010. The increase was primarily used for the setting up of the sales offices and marketing expenses.





Research and development costs were $228,068 and $30,683 for the three months ended February 28, 2011 and 2010 respectively. This increase of $197,385 was due to increased spending on the technology consulting expenses related to both existing products and potential new drugs. Research and development cost increased $304,876 to $622,272 for the nine months ended February 28, 2011 as compared to $317,396 for the nine months ended February 28, 2010. The increase was due to the increased spending on research and development of pipeline products.


20


General and administrative expenses increased $312,728 from $358,165 for the three months ended February 28, 2010 to $670,893 for the three months ended February 28, 2011. The increase was primarily attributable to the increased year end commission and bonus to sales personnel and management rewarding the increased sales for calendar year 2010 as compare to calendar year 2009. General and administrative expense increased $217,167 from $938,483 for the nine months ended February 28, 2010 to $1,155,650 for the nine months ended February 28, 2011. The increase was primarily attributable to the increased year end commission and bonus to sales personnel and management in the quarter ended February 28, 2011 rewarding increased sales for calendar year 2010 as compare to calendar year 2009. Additionally, the Company increased spending related to  setting up sales offices, as a result the G&A expenses for the quarter ended November 30, 201 raised. The Company has inputted efforts in controlling G&A spending in general in the nine months period ended February 28, 2011 even though the total G&A expenses increased.





Other Income and Expenses





Other expenses were $11,276 for the three months ended February 28, 2011 as compared to other income of $18,751 for the three months ended February 28, 2010. The decrease of $30,027 or 160.14% was mainly due to the imputed gain from debt negotiation for the amount of $55,048 from the government loan in the quarter ended February 28, 2010. The government loan was paid off during the quarter ended February 28, 2011.





Other expenses were $15,882 for the nine months ended February 28, 2011 as compared to $86,822 for the nine months ended February 28, 2010. The decrease of $70,940 or 81.70% 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 $112,718 for the nine months ended February 28, 2011 compared to the same period in 2010.





Income Tax Expense





Income tax expense was $267,095 for the three months ended February 28, 2011 and $381,181 for the nine months ended February 28, 2011 as compared to $97,096 for both three and nine months ended February 28, 2010. The increase in income tax expense was due to the Company enjoyed tax free benefit the Company enjoyed in the calendar year 2009 and being subject to only two months of income tax for both three and nine months ended February 28, 2010.





Net Income





Net income increased $543,120 from $941,223 for the three months ended February 28, 2010 to $1,484,343 for the three months ended February 28, 2011. The increase in net income was due to the fact that the Company has picked up some product demand in last quarter from customer because of the halt of production of Cisatracurium Besylate in September and October, 2010.





Net income decreased $23,686 from $2,251,940 for the nine months ended February 28, 2010 to $2,228,254 for the nine months ended February 28, 2011.  The decrease in net income was a result of increased income tax expense. The Company enjoyed a tax free benefit in the calendar year 2009 and was subject to two months of income taxes for both three and nine months ended February 28, 2010.





Liquidity and Capital Resources





The operations of Dong Ying China have generated profits for the nine months ended February 28, 2011. The Company had $830,066 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 nine months ended February 28, 2011 was $2,113,727 compared to the net cash provided in the operating activities of $986,716 for the nine months ended February 28, 2010, an increase of $1,127,011, The increase is primarily attributable to the  increase in the cash provided by increase in accounts payable, other payable and income tax payable in the amount of $468,032, $470,277 and $74,174 respectively due to the increase in sales and input in selling and marketing expenses in the nine months ended February 28, 2011 compared to  February 28, 2010; an increase in cash paid for advanced payments for the amount of $1,310 due to the Company’s prepayment for the purchase of raw and materials  in the nine months ended February 28, 2011 compared to the nine months ended February 28, 2010 and a change in stock based compensation for the amount of $324,125 in the nine months period ended February 28, 2010 compared to zero in the nine months ended February 28, 2011.


21


Net cash used in the investment activities for the nine months ended February 28, 2011 and 2010 was $1,349,717 and $1,054,789, respectively. The Company has purchased $642,859 more fixed assets to upgrade the manufacture facilities during the nine months ended February 28, 2011 as compared to the same period of last year. The investment in a low risk short term financial product from China Agricultural Bank matured and was sold out for cash for the amount of $296,564 during the nine months period ended February 28, 2011. The Company had an advanced payment for the purchase of technologies of $75,550 and $731,317 in the nine months period ended February 28, 2011 and same period in 2010. The company has an advanced payment for purchasing real property of $604,400 in nine months period ended February 28, 2011 and there was no such payment in the same period in 2010.





Net cash used in the financing activities for the nine months ended February 28, 2011 was $1,205,233 and net cash used in the financing activities for the nine months ended February 28, 2010 was $20,467. During the nine months ended February 28, 2011, the Company reduced loans from bank and government in the net amount of $1,205,100. In comparison, the Company borrowed $2,194,608  and repaid $3,148,381 in loans as well as repaying another $651,694 in shareholder loans during the nine months period ended February 28, 2010. Also, the Company issued stocks in exchange of $1,600,000 and payment for common stock issued cost is $15,000 during the nine months period ended February 28, 2010.





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 ($3,040,000 at the exchange rate applicable at February 28, 2011) and was due for repayment in full in March 2007. During 2007 the Company repaid RMB3,000,000 ($456,000 at the exchange rate applicable at February 28, 2011).  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 ($304,000 at the exchange rate applicable at February 28, 2011). On February 1, 2009 the Company repaid another RMB2,000,000 ($304,000 at the exchange rate applicable at February, 2011) and the Company was granted an extension to December 31, 2009 for the remainder of the loan of RMB13,000,000 ($1,976,000 at the exchange rate applicable at February 28, 2011). The Company repaid RMB3,000,000 ($456,000 at the exchange rate applicable at February 28, 2011) in December 2009, and was granted another extension to December 31, 2010 for the remaining loan balance of RMB10,000,000 ($1,520,000 at the exchange rate applicable at February 28, 2011). On April 7, 2010, the Company repaid RMB1,000,000 ($152,000 at the exchange rate applicable at February 28, 2011). On May 6, 2010, the Company repaid RMB1,000,000 ($152,000 at the exchange rate applicable at February 28, 2011) leaving a remaining balance of RMB8,000,000  ($1,216,000 at the exchange rate applicable at February 28, 2011). On August 31, 2010, the Company repaid RMB1,000,000 ($152,000 at the exchange rate applicable at February 28, 2011). On December 31, 2010, the Company repaid RMB4,000,000 ($608,000 at the exchange rate applicable at February 28, 2011). On January 14, 2011, the Company repaid off the loan balance of RMB3,000,000 ($456,000 at the exchange rate applicable at February 28, 2011).





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 and January 2011 year).





Imputed loan interest expense included in the accounts for the three months ended as of February 28, 2011 and 2010 was $11,448 and $17,726, respectively; and for the nine months ended February 28, 2011 and 2010 was in the amount of $38,689 and $ 68,235, 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 February 28, 2011 and 2010 was $0 and $55,694, respectively; and for the nine months ended February 28, 2011 and 2010 was in the amount of $12,631 and $55,694, respectively.





The present value of the total government loan was $0 as of February 28, 2011 and $1,145,726 as of May 31, 2010.





Item3.  Quantitative and Qualitative Disclosures about Market Risk.




N/A.




22


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 nine months ended February 28, 2011. 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 concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports required 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 February 28, 2011.  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 February 28, 2011 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.


23





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.






















































































24





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: April 14, 2011
By:
/s/ Lequn HuangName: Lequn HuangTitle: President, CEO, Treasurer and Director

(Principal Executive Officer)





Dated: April 14, 2011
By:
/s/ Xinjie MuName: Xinjie MuTitle: Chief Financial Officer and Director(Principal Financial and Accounting Officer)





























































25