Sun BioPharma (SNBP) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2009.

Or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to to 

Commission File Number :                   333-144910

SINOBIOPHARMA, INC.

(Exact name of registrant as specified in its charter)

Nevada	26-3002371
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
8 Zhong Tian Road Nantong City, Jiangsu Province, China (Address of principal executive offices)	226009 (Zip Code)

011-86-51-385328336

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

x Yes        ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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*

*The registrant has not yet been phased into the interactive data requirements.

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        x No

80,020,000 shares of common stock with a par value of $0.0001 issued and outstanding as of October 15, 2009.

TABLE OF CONTENTS

USE OF NAMES	3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS	3
PART I – FINANCIAL INFORMATION	4
Item 1. Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	18
Item 4T. Controls and Procedures	18
PART II - OTHER INFORMATION	20
Item 1. Legal Proceedings	20
Item 1A. Risk Factors	20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults upon Senior Securities	20
Item 4. Submission of Matters to a Vote of Security Holders	20
Item 5. Other Information	20
Item 6. Exhibits	20
Signature	21

2

USE OF NAMES

In this quarterly report, the terms “Sinobiopharma”, “Company”, “we”, or “our”, unless the context otherwise requires, mean Sinobiopharma, Inc. and its subsidiaries.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q and other reports that we file with the SEC contain statements that are considered forward-looking statements.  Forward-looking statements give the Company’s current expectations, plans, objectives, assumptions or forecasts of future events.  All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding the Company’s future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,” “projects,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” and similar expressions.  These statements are based on the Company’s current plans and are subject to risks and uncertainties, and as such the Company’s actual future activities and results of operations may be materially different from those set forth in the forward looking statements.  Any or all of the forward-looking statements in this quarterly report may turn out to be inaccurate and as such, you should not place undue reliance on these forward-looking statements.  The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs.  The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions due to a number of factors, including:

· dependence on key personnel;

· competitive factors;

· degree of success of research and development programs;

· the operation of our business; and

· general economic conditions in the United States and China.

These forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this quarterly report.

3

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SINOBIOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(US Dollars)

	August 31,			May 31,
	2009			2009
	(UNAUDITED)			(AUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	771,970		$	891,132
Accounts receivable, net of allowance for doubtful accounts		306,503			214,178
Inventories		555,174			547,317
Advance payments		645,373			293,585
Other receivables		435,832			-
Total Current Assets		2,714,852			1,946,212
Property and Equipment, at cost- net of Accumulated Depreciation		2,721,246			2,691,258
Intangible assets, net		1,298,658			1,318,973
	$	6,734,756		$	5,956,443
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		265,565			655,064
Short-term bank loans		1,461,732			732,000
Loans from government		1,866,585			1,844,193
Due to shareholders		549,242			1,169,032
Advance from customers		160,382			136,755
Other payables		1,032,728			642,568
Total Current Liabilities		5,336,234			5,179,612
STOCKHOLDERS' EQUITY
Common stock; $0.0001 par value; 2,500,000,000 shares authorized; Issued and outstanding 80,020,000 shares at August 31,2009 and 79,920,000 shares at May 31, 2009		8,002			7,992
Additional paid-in capital		8,622,951			8,254,991
Retained earnings		(7,474,111	)		(7,711,278	)
Accumulated other comprehensive income		241,680			225,126
Total Stockholders' Equity		1,398,522			776,831
	$	6,734,756		$	5,956,443

See accompanying notes to the unaudited consolidated financial statements

4

SINOBIOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

(US DOLLARS)

	Three Months Ended August 31,
	2009			2008
SALES	$	1,293,764		$	931,203
COST OF GOODS SOLD		330,841			318,775
GROSS PROFIT		962,923			612,428
Selling expenses		84,168			78,012
Research and development		64,302			97,404
Depreciation and amortization		110,041			75,656
Stock-based compensation		324,125			426
General and administrative expenses		88,151			142,473
		670,787			393,971
INCOME FROM OPERATIONS		292,136			218,457
OTHER INCOME (EXPENSE)
Interest income		1,852			65
Interest expense		(56,428	)		(70,659	)
Other income(expense)		(393	)		-
TOTAL OTHER INCOME (EXPENSES)		(54,969	)		(70,594	)
INCOME BEFORE INCOME TAX EXPENSE		237,167			147,863
INCOME TAX EXPENSE		-			-
NET INCOME		237,167			147,863
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign Currency Translation Adjustment		16,554			(8,090	)
COMPREHENSIVE INCOME	$	253,721		$	139,773
Net income (loss) per share:
Basic and Diluted	$	0.00			0.00
Weighted average shares used in computation:
Basic and Diluted		79,977,609			40,000,000

See accompanying notes to the unaudited consolidated financial statements

5

SINOBIOPHARMA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(US DOLLARS)

	Three Months Ended August 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	237,167		$	147,863
Adjustments to reconcile net loss to net cash provided (used) in operating activities
Depreciation and amortization		110,041			75,656
Stock based compensation		324,125			426
Imputed interest expenses on shareholders' loans		10,845			19,691
Amortization of discount in interest expenses		25,244			39,385
Stock based payment		33,000			-
Changes in assets and liabilities:
Accounts receivable, net		(92,636	)		(94,828	)
Inventories		13,258			37,920
Other receivables, net		(142,670	)		7,833
Advances to suppliers		(645,229	)		-
Accounts payable		(145,755	)		70,649
Deposit received		23,833			(153,036	)
Other payables		69,619			31,091
Net Cash (Used in) Provided by Operating Activities		(179,158	)		182,650
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(125,924	)		(6,120	)
Net Cash Used in Investing Activities		(125,924	)		(6,120	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans		1,461,408			-
Proceeds from share capital		-			20,000
Proceeds from shareholder loans		(610,021	)		-
Repayment of bank loans		(730,704	)		(285,600	)
Repayment of loans by related parties		-			5,712
Loans received from shareholders		-			8,698
Net Cash Provided by (Used in) Financing Activities		120,683			(251,190	)
EFFECT OF FOREIGN CURRENCY FLUCTUATION ON CASH AND CASH EQUIVALENTS		65,237			(9,775	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(119,162	)		(84,435	)
CASH AND CASH EQUIVALENTS - BEGINNING		891,132			267,327
CASH AND CASH EQUIVALENTS - ENDING	$	771,970		$	182,892
Supplemental cash flow information:
Cash paid for income taxes	$	-		$	-
Cash paid for interest	$	35,911		$	-

See accompanying notes to the unaudited consolidated financial statements

6

SINOBIOPHARMA, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. ORGANIZATION ANDDESCRIPTION OF BUSINESS

Sinobiopharma, Inc. (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.

The Company’s business plan through the year ended May 31, 2008 was design, publishing, and distribution of a magazine called “Buzz” through Buzz Nova Scotia. Buzz is a student lifestyle magazine, which features stories, articles, and photographs submitted by current college and university students from across the country. The magazine was intended to be distributed free of charge via direct mail, via physical distribution boxes at specified locations, via email, and via the internet at www.ReadBuzzMagazine.com. On May 18, 2007 the Company filed a trademark application with the United States Patent and Trademark Office, seeking a trademark on "Buzz Magazine" used as the name, or title, of a magazine.

On July 14, 2008 the Company’s President and majority shareholder sold all of her shares in the company, representing a 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) forward 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 in the capital 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 shareholders’ 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. 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.

7

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.

During 2007 the shareholder of Dong Ying China commenced a plan to sell some of his interest in Dong Ying China. Funds were received by Dong Ying China on behalf of the shareholder from potential purchasers, then refunded when a new plan was commenced aimed at getting shares listed for trading in the US over-the-counter market.

Dong Ying China was incorporated under the laws of the People’s Republic of China in 2003. Dong Ying China’s business is the development, manufacture and sale of pharmaceutical products in China. There are two product lines currently manufactured and sold as at August 31, 2009 and several other potential products in various stages of research and development. The product lines currently sold are Cisatracurium Besylate, a skeletal muscle relaxant, and Clindamycin Hydrochloride, an antibiotic for penicillin-allergic patients. In May 2008 the Company discontinued production and sale of its Perphenazine product, an anti-psychotic drug, due to the cost of manufacturing this product exceeding the market price. Perphenazine accounted for 14% of sales revenue in the year ended May 31, 2008. 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 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.

Basis of presentation – going concern

These consolidated financial statements of Sinobiopharma, Inc. (the “Company”) have been prepared on a going-concern basis which assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future.

For the first quarter ended August 31, 2009, the Company had a net income of $237,167, but the cumulative losses since commencement of operations is amounting to $7,474,111 and has negative working capital as of August 31, 2009, which raises substantial doubt about the Company's ability to continue as a going concern.  The ability of the Company to meet its commitments as they become payable is dependent on the ability of the Company to obtain necessary financing or achieve a consistently profitable level of operations.  There are no assurances that the Company will be successful in achieving these goals.

These financial statements do not give effect to adjustments to the amounts and classifications to assets and liabilities that would be necessary should the Company be unable to continue as a going concern.

8

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Change of Reporting Entity

As a result of the Share Exchange closed on September 22, 2008, the former Dongying BVI shareholders owned a majority of the common stock of the Company. The transaction was regarded as a reverse merger whereby Dongying BVI was considered to be the accounting acquirer as its shareholders retained control of the Company after the Share Exchange, although the Company is the legal parent company. As such, Dongying BVI (and its historical financial statements) is the continuing entity for financial reporting purpose. Financial Statements have been prepared as if Dongying BVI had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.  
  

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles 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 August 31, 2009, unaudited consolidated statements of income and comprehensive income for the three months ended August 31, 2009 include Sinobiopharma, Inc. and its directly owned subsidiaries, Dongying BVI, Big Global and Dong Ying China. The Company’s unaudited consolidated statements of income and comprehensive income and cash flows for the three months ended August 31, 2008 consist of the financial results of Dongying BVI and its directly owned subsidiaries, Big Global and Dong Ying China.  

All significant intercompany transactions and balances are eliminated on consolidation.

The accompanying unaudited consolidated financial statements as of August 31, 2009 and for the three months ended August 31, 2009 and 2008 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, the accompanying unaudited consolidated interim financial statements include all adjustments considered necessary to ensure the financial statements are not misleading. Management has evaluated subsequent events that have occurred through October 15, 2009, the date of issuance of the accompanying interim financial statements as of and for the three months ended August 31, 2009.

The unaudited 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, 2009 that are included in the Company’s 2009 annual report on 10-K filed with the Securities and Exchange Commission.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurement” (FAS 157). While this statement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. FAS157 is effective for the Company beginning in fiscal 2008, 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 on a recurring basis, and is effective beginning in fiscal 2009, for fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption of FAS 157 has no material impact on the Company’s financial statement.

In December 2007, the FASB issued FASB Statement No. 141(R), Business Combinations , and FASB Statement No. 160, No controlling Interests in Consolidated Financial Statements – an amendment to ARB No. 51 . SFAS No. 141(R) and No. 160 require most identifiable assets, liabilities, no controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require no controlling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with no controlling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS No. 141(R) will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all no controlling interests, including any that arose before the effective date.  In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies , which amends and clarifies FAS141(R) to address application issues on initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination. Other than the change in presentation of no controlling interests, the adoption of FAS 141(R) and FAS 160 has no impact on the Company’s financial statement.

9

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (FAS 165). The statement established general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This Statement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. FAS 165 is effective for the Company beginning in this second quarter of fiscal 2009.

3. ACCOUNTS RECEIVABLE

Trade accounts receivable consists of receivable for sales of product on credit. Accounts receivable as at August 31, 2009 and May 31, 2009 was $306,503 and 214,178 respectively.

	August 31, 2009 (Unaudited)			May 31, 2009  (Audited)
Accounts receivable	$	308,652		$	246,515
Allowance for doubtful accounts		(2,149	)		(32,337	)
	$	306,503		$	214,178

4. OTHER RECEIVABLES

The total amount include $423,902 receivable from Agricultural Bank of China representing the overnight lending made on August 31, 2009, the lending bear no interest and due on September 1, 2009. Agricultural Bank of China paid back to the company the whole amount on September 1, 2009.

The rest $11,930 is the prepaid expenses to Agricultural Bank of China.

5. INVENTORIES

Inventories at August 31, 2009 and May 31, 2009 consist of the following:

	August 31, 2009 (Unaudited)		May 31, 2009 (Audited)
Raw materials	$	257,985	$	401,782
Goods in process		59,272		-
Finished goods		237,917		145,535
	$	555,174	$	547,317

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6. PROPERTY AND EQUIPMENT

Property and equipment at August 31, 2009 and May 31, 2009 consist of the following:

	August 31, 2009 (Unaudited)		May 31, 2009 (Audited)
Buildings	$	1,987,124	$	1,990,207
Land use right		404,879		405,507
Manufacturing equipment		782,143		769,317
Office furniture and equipment		86,911		79,391
Road and grounds		212,461		212,791
Vehicles		83,197		10,011
Leasehold improvement		31,089		-
		3,587,804		3,467,224
Less: Accumulated depreciation		866,558		775,966
	$	2,721,246	$	2,691,258

The depreciation expense for three months ended August 31, 2009 and August 31, 2008 was $89,884 and $55,195 respectively.

The Company’s land license, road and grounds and buildings with carrying value of $2,053,853 are pledged as collateral for the loan from the Agricultural Bank of China. The face value of the loan is RMB10,000,000 ($1,462,000). The loan bears interest at the rate of 5.31% per annum paid monthly. The loan is due for repayment in half May 12, 2010 and June 9, 2010.

7. INTANGIBLE ASSETS

Intangible assets consist of the cost of purchased rights to manufacture and sell the company’s products. The rights were acquired by the Company from two companies owned 25% and 30% by the Company’s shareholder. The rights have unlimited duration. The amounts related to particular products are as follow:

	August 31, 2009 (Unaudited)		May 31, 2009 (Audited)
Cisatracurium Besylate	$	732,000	$	732,000
Perindopril (manufacturing permit pending)		732,000		732,000
		1,464,000		1,464,000
Less: Accumulated amortization		165,342		145,027
	$	1,298,658	$	1,318,973

Amortization for the three months ended August 31, 2009 and August 31, 2008 in the amount of $20,157 and $20,461 is included in Depreciation and Amortization expense.

8. SHORT TERM BANK LOAN

As of May 31, 2009, the balance RMB 5,000,000($732,000) represents loan from Bank of Communications and it has been repaid in full at June 8, 2009. The loan bears interest at the rate of 6.37% per annum paid monthly.

11

On June 10, 2009 the Company received a loan in the amount of RMB 10,000,000 (approximately $1,462,000) from the Agricultural Bank of China. The loan bears interest at the rate of 5.31% per annum paid monthly. The loan is due for repayment in half May 12, 2010 and June 9, 2010. The Company’s land license, road and grounds and buildings with carrying value of $2,053,853 are pledged as collateral for this loan.

The interest expense from bank loans for the three months ended August 2009 and 2008 was $20,339 and $11,583.

9. 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 ($2,923,464 at the exchange rate applicable at August 31, 2009) and was due for repayment in full in March 2007. During 2007 the Company repaid RMB3,000,000($438,520 at the exchange rate applicable at August 31, 2009).  In December 2007 the Company was granted an extension of the due date to December 31, 2008. During the year ended December 31, 2008 the Company repaid RMB2,000,000 ($292,346 at the exchange rate applicable at August 31, 2009). On February 1, 2009 the Company repaid another RMB2,000,000 ($292,346 at the exchange rate applicable at August 31, 2009) and the Company was granted an extension to December 31, 2009 over the remainder of the loan RMB13, 000, 000 ($1,900,251 at the exchange rate applicable at August 31, 2009)

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). Loan interest expense included in the accounts for the three months ended August 31, 2009 in the amount of $25,244 (three months ended August 31, 2008 - $39,385) is determined as the amortization on the interest method basis of the discount over the remaining period to maturity of the loan.

The present value of the total government loan was $1,866,585 as of August 31, 2009 and $1,844,193 as of May 31, 2009.

10. SHAREHOLDER LOANS

Shareholder loans carry the value of $549,242 and $1,169,032 at August 31, 2009 and May 31, 2009. The loans are all due to Mr. Lequan Huang, the principle shareholder of the Company and do not bear interest and have no stated repayment terms.

Imputed interest of $10,845 and $19,691 three months ended August 31, 2009 and August 31, 2008 has been recorded on the shareholder loans at prevailing Bank of China one-year rate, (5.6% in 2009 and 7.3% in 2008). The

net interest calculated is included in interest expense and has been recorded as additional paid-in capital since the imputed interest is not payable.

11. RELATED PARTY TRANSACTIONS AND BALANCES

The Company has a right of first refusal to purchase rights to any new products developed by two companies owned 25% and 30% by the Company’s CEO (also a shareholder), at prices to be negotiated at the time. All of the Company’s intangible assets ($1,464,000 at cost) have been purchased from those related companies.

In July 2008, the Company has signed a contract to purchase the technology of L-Alanyl-L-Glutamine from Meisujining Technology Limited Company (Owned 25% by the Company’s CEO also a shareholder) for the total price of RMB2,000,000 ($292,346), the company paid RMB1,733,333 ($253,367), and recorded as advanced payment.

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In July 2009, the Company has signed a contract with Meisujining Technology Limited Company to purchase the technology of gabexate mesilate for the total price of RMB 5,000,000 ($730,866). The Company has paid RMB2, 500,000 ($365,433) in August 2009 and booked as advanced payment.

In August 2009, the Company has signed a technical support contract of Perindopril rocuronium with SUJI Bio-Medical (Research and Development Limited Company (Owned 30% by the Company’s CEO also a shareholder) for the total price of RMB8,000,00 ($1,169,385). The term of contract is from Oct 2010 to Jan 2015. The Company has accrued RMB400, 000 ($58,469) for the three months ended August 31, 2009 as research and development expenses according to the contract.

12. CONCENTRATIONS AND CREDIT RISK

At August 31, 2009 and May 31, 2009, the Company had a credit risk exposure of cash in banks of approximately $771,970 and $891,132 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 include Clindamycin Hydrochloride and Cisatracurium Besylate which accounted for 100% of the Company’s total sales.

	Three months ended August 31,
	2009 (Unaudited)					2008 (Unaudited)
	Amount of Sales		% of Total Sales			Amount of Sales		% of Total Sales
Clindamycin Hydrochloride 0.75g	$	17,342		1	%		21,792		2	%
Clindamycin Hydrochloride 0.90g		36,025		3	%		24,216		3	%
Cisatracurium Besylate 5mg		1,240,397		96	%		885,195		95	%
Total	$	1,293,764		100	%		931,203		100	%

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

	Three months ended August 31,
	2009					2008
	(Unaudited)					(Unaudited)
	Amount of sales		% of Total Sales			Amount of sales		% of Total Sales
Customer A	$	1,948,718		22	%	$	227,472		25	%
Customer B	$	1,454,871		16	%	$	-		0	%

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(3)   One supplier accounted for 69% ($266,681) and 10% ($32,000) of the Company’s total purchase for the three months ended August 31, 2009 and August 31, 2008. The materials that the company is purchasing from that supplier are Tetrahydropapaverine Hydrocholide, DMPEA and Homoveratric acid which are in the fully competitive market and can easily be purchased from other suppliers.

13. INCOME TAXES

The Company’s operating subsidiary Dongying China is not subject to Chinese enterprise income taxes in 2009 due to a two-year tax holiday for wholly-owned foreign enterprises. The Company’s Chinese operations will be subject to enterprise income tax starting from January 1, 2010. The Company is subject to United States income tax to the extent of its operations in the United States. The Company had no U.S. income tax expense in 2008 or 2009 due to net losses.

Significant components of deferred income tax assets as a result of the net losses in U.S. are as follows:

	2009			2008
Operating losses carried forward	$	303,274		$	193,072
Valuation allowance		(303,274	)		(193,072	)
Net deferred income tax assets	$	-		$	-

The Company has tax losses carried forward for United States tax purposes of approximately $567,858 which will expire in 2029 if not utilized.

14. COMMON STOCK

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.

15. 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.

On October 2, 2008, the Company granted to certain mid-level managers of Dong Ying China in aggregate 500,000 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.

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 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.

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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 Share		Aggregate Intrinsic Value
Options Outstanding,
June 1, 2009		2,525,000	$	1.8	$	1.28	$	100,000
Options granted:
August 31, 2009		2,525,000	$	1.8	$	1.28	$	100,000

Compensation cost related to options to vest in the future will be recognized as the related options vest.  As of August 31, 2009, all the outstanding options have been vested as follows:

Vested options are as follows:

	Number outstanding		Total fair value		Weighted average grant- date fair value per share
Options vested ,
August 31, 2009		2,525,000	$	3,241,250	$	1.28

If not previously exercised or canceled, options outstanding at August 31, 2009 will expire as follows:

	Range of Exercise Prices				Number		Weighted average
Expiry Date	High		Low		of Shares		exercise price
September 29, 2013	$	1.80	$	1.80		1,800,000	$	1.80
October 2, 2013	$	1.80	$	1.80		500,000	$	1.80
October 22, 2013	$	1.80	$	1.80		225,000	$	1.80

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.

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16.  NET INCOME PER SHARE

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

	Three months ended
	August 31, 2009		August 31, 2008
	(Unaudited)		(Unaudited)
Numerator used in basic net income per share:
Net income	$	237,167		147,863
Shares (denominator):
Weighted average common shares outstanding		79,977,609		40,000,000
Weighted average common shares outstanding used in computing diluted net income per ordinary share		79,977,609		40,000,000
Net income per common share-basic	$	0.00		0.00
Net income per common share-diluted	$	0.00		0.00

As of August 31, 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.

17.  SUBSEQUENT EVENTS

Management has considered all events occurring through October 15, 2009, 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.

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ITEM 2 . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following plan of operation together with our financial statements and related notes appearing elsewhere in this quarterly report.  This plan of operation contains forward-looking statements that involve risks, uncertainties, and assumptions.  The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors.

Overview

The Company, through its operating subsidiary Dong Ying China, is involved in the Chinese biopharmaceutical industry. We are engaged in the research, development, manufacture and marketing of biopharmaceutical products in China. The company has developed new methods for synthesis of active pharmaceutical ingredient (“API”) and innovative drug delivery (new formulation) that dramatically reduces the time and cost of drug development. Our current therapeutic focus is on anesthesia-assisted agents and cardiovascular drugs. Our R&D focus is new, innovative methods of synthesizing compounds more rapidly at lower cost, and/or improved drug formulation with enhanced usability.

Results of Operations

The Company realized a net income of $237,167 for the three months ended August 31, 2009, as compared to $147,863 for the three months ended August 31, 2008.

Sales revenues and cost of sales

Sales revenue increased 39% to $1,293,764 for the three months ended August 31, 2009, from $931,203 for the three months ended August 31, 2008.  Gross profit increased 57% to $962,923 (74% of sales revenue) for the three months ended August 31, 2009, from $612,428 (66% of revenue) for the three months ended August 31, 2008.  The increase in sales volume and the improvement in gross margin are both due to growth in sales of Cisatracurium Besylate.  Sales of this product increased to $1,240,405 for the three months ended August 31, 2009, from $865,407 for the three months ended August 31, 2008, representing 96% of sales revenue and 95% of sales revenue for the three months ended August 31, 2009, and August 31, 2008, respectively.  At the same time, as volume has increased, cost of manufacturing Cisatracurium Besylate has decreased which also contributed to the increased gross margin.

Operating Expenses

The operating expensesfor the three months ended August 31, 2009 is $670,787, representing a 70% increase as compared to $393,971 for the three months ended August 31, 2008.  The most significant category of expenses was for the stock-based compensation of $324,125 for the three months ended August 31, 2009, compared to $426 for the three months ended August 31, 2008. As of August 31, 2009, all the stock options have been fully vested and expensed.

The Company incurred $88,151 in general and administrative expenses for the three months ended August 31, 2009, and decrease from $142,473 for the three months ended August 31, 2008.  The decrease is attributed to the expense spent on the reverse takeover activities in the three months ended August 31, 2008.

The Research and development expenses declined 34% from $97,404 for the three months ended August 31, 2008 to $64,302 for the three months ended August 31, 2009. That’s because after years of development, the technology became mature and the research and development expenses decreased correspondingly.

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Liquidity and Capital Resources

The Company had $771,970 in cash at August 31, 2009.  The Company had a working capital deficiency of $2,621,382 at August 31, 2009.  The Company has insufficient cash available to sustain operations.  The operations of Dong Ying China have generated profits for the three months ended August 31, 2009, but not in a sufficient amount to enable Dong Ying China to pay current debt due for repayment.  The Company plans to raise capital through equity finance to provide cash to pay debt of Dong Ying China, fund further drug product development and to launch new products. The company is also working in developing markets for the existing products to increase sales and positive cash flow. In addition, management has arranged a line of credit of RMB 10,000,000 (approximately $1,464,000) with a Chinese bank and is involved in negotiations for a possible extension of the due date of the interest-free loan.

Net cash used in the operating activities for the three months ended August 31, 2009 was $179,158 compared to the net cash provided in the operating activities of $182,650 for the three months ended August 31, 2008, a decrease of $361,808. The decrease was attributed to the deposit for the purchase of the new technologies in the amount of $645,229 during the three months ended August 31, 2009 which net the accrual of stock compensation for the amount $324,125 for the three months ended August 31, 2009. Net cash used in the investment activities for the three months ended August 31, 2009 and 2008 was $125,924 and $6,120 respectively. The Company has purchased more fixed assets in the three months period ended August 31, 2009 than in the same period last year.

Net cash provided by the financing activities for the three months ended August 31, 2009 was $120,683 and net cash used in the financing activities for the three months ended August 31, 2008 was $251,190. The difference was because during the three months ended August 31, 2009 period, the Company had generated cash of $851,387 from net borrowing, and repaid the bank loan in the amount of $730,704. The payment for the loan during the three months ended August 31, 2008 amounted to $285,600.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company” (as defined by §229.10(f)(1)), we are not required to provide the information required by this Item.

ITEM 4T. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our President, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, our President concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and (ii) accumulated and communicated to our management, including our President, as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

1. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

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2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

As of August 31, 2009, management assessed the effectiveness of our internal control over financial reporting and based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) lack of a formal whistleblower policy. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of August 31, 2009.

Management believes that the material weaknesses set forth in items (2) and (3) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.

Management’s Remediation Initiatives

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:

1. We plan to create a position to segregate duties consistent with control objectives and plan to increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us; and

2. We plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.

Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.

We anticipate that these initiatives will be at least partially, if not fully, implemented by May 31, 2010.

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Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during our fiscal quarter of the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

ITEM 1A. RISK FACTORS

As a “smaller reporting company” (as defined by §229.10(f)(1)), we are not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters have been submitted to our security holders for a vote, through the solicitation of proxies or otherwise, during the quarterly period ended August 31, 2009.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

(a) Exhibit List

31.1 Certificate pursuant to Rule 13a-14(a)

31.2 Certificate pursuant to Rule 13a-14(a)

32.1 Certificate pursuant to 18 U.S.C. §1350

32.2 Certificate pursuant to 18 U.S.C. §1350

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SIGNATURE

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. (Registrant)
Date:  October 15, 2009	By: /s/ Lequn Lee Huang
	Lequn Lee Huang
	President, CEO, Treasurer and Director (Principal Executive Officer)

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