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 August 31, 2010
| [ ] | | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number: 333-144910
| SINOBIOPHARMA, INC. |
| (Exact name of small business issuer as specified in its charter) |
| Nevada | 26-3002371 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer identification No.) |
8 Zhong Tian Road
Nantong City, Jiangsu Province, the People’s Republic of China 226009
(Address of principal executive offices)
011 - (86) 51-385328336
(Registrant’s telephone number, including area code)
Copies to:
Gregory Sichenzia, 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: 117,587,608 shares of common stock, $.0001 par value, were outstanding as of October 15, 2010.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
| SINOBIOPHARMA, INC. AND SUBSIDIARIES | |
| CONSOLIDATED BALANCE SHEETS | |
| | |
| | | August 31, 2010 | | | May 31, 2010 | |
| | | (UNAUDITED) | | | | |
| ASSETS | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 1,695,590 | | | $ | 1,331,959 | |
| Notes receivable | | | 292,528 | | | | 274,148 | |
| Accounts receivable, net | | | 476,733 | | | | 670,662 | |
| Inventories, net | | | 978,277 | | | | 758,090 | |
| Advance payments | | | 276,817 | | | | 67,971 | |
| Other receivables | | | 163,122 | | | | 321,493 | |
| Available for sale securities | | | - | | | | 293,064 | |
| Total Current Assets | | | 3,883,067 | | | | 3,717,387 | |
| | | | | | | | | |
| Advance payment to shareholder for intangible assets | | | 991,147 | | | | 985,760 | |
| Property, plant and equipment, net | | | 3,280,992 | | | | 2,912,983 | |
| Intangible assets, net | | | 4,321,454 | | | | 4,336,832 | |
| | | $ | 12,476,660 | | | $ | 11,952,962 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accounts payable | | $ | 305,796 | | | $ | 419,707 | |
| Loans from government | | | 1,010,915 | | | | 1,145,726 | |
| Advance from customers | | | 165,374 | | | | 135,521 | |
| Income tax payable | | | 128,070 | | | | 155,397 | |
| Other payables | | | 382,350 | | | | 343,780 | |
| Total Current Liabilities | | | 1,992,505 | | | | 2,200,131 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | | |
| Preferred stock, $0.0001 par value;10,000,000 shares authorized; | | | - | | | | | |
| 1,000,000 shares issued and outstanding at August 31, 2010 and May 31, 2010 | | | 100 | | | | 100 | |
| Common stock; $0.0001 par value; 2,490,000,000 shares authorized; 117,587,608 shares issued and outstanding at August 31 and May 31, 2010 | | | 11,759 | | | | 11,759 | |
| Additional paid-in capital | | | 14,360,487 | | | | 14,360,487 | |
| Accumulated deficit | | | (4,162,609 | ) | | | (4,847,707 | ) |
| Accumulated other comprehensive income | | | 274,418 | | | | 228,192 | |
| Total Stockholders' Equity | | | 10,484,155 | | | | 9,752,831 | |
| | | $ | 12,476,660 | | | $ | 11,952,962 | |
See notes to the consolidated financial statements
| SINOBIOPHARMA, INC. AND SUBSIDIARIES | |
| CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | |
| (UNAUDITED) | |
| | |
| | | Three months ended August 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | | | |
| SALES | | $ | 1,856,398 | | | $ | 1,293,764 | |
| COST OF GOODS SOLD | | | 427,205 | | | | 330,841 | |
| GROSS MARGIN | | | 1,429,193 | | | | 962,923 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Selling expenses | | | 119,438 | | | | 84,168 | |
| Research and development | | | 243,493 | | | | 64,302 | |
| Depreciation and amortization | | | 65,552 | | | | 110,041 | |
| General and administrative expenses | | | 220,704 | | | | 412,276 | |
| TOTAL OPERATING EXPENSES | | | 649,187 | | | | 670,787 | |
| | | | | | | | | |
| INCOME FROM OPERATIONS | | | 780,006 | | | | 292,136 | |
| | | | | | | | | |
| OTHER INCOME/(EXPENSES) | | | | | | | | |
| Interest income | | | 1,031 | | | | 1,852 | |
| Interest expenses | | | (14,920 | ) | | | (56,428 | ) |
| Other income/(expenses) | | | 14,604 | | | | (393 | ) |
| TOTAL OTHER INCOME/ (EXPENSES) | | | 715 | | | | (54,969 | ) |
| | | | | | | | | |
| INCOME BEFORE INCOME TAX EXPENSE | | | 780,721 | | | | 237,167 | |
| | | | | | | | | |
| INCOME TAX EXPENSE | | | (95,623 | ) | | | - | |
| | | | | | | | | |
| NET INCOME | | | 685,098 | | | | 237,167 | |
| | | | | | | | | |
| OTHER COMPREHENSIVE INCOME: | | | | | | | | |
| Foreign Currency Translation Adjustment | | | 46,226 | | | | 16,554 | |
| | | | | | | | | |
| COMPREHENSIVE INCOME | | $ | 731,324 | | | $ | 253,721 | |
| | | | | | | | | |
| Earnings per share: | | | | | | | | |
| Basic and Diluted | | $ | 0.01 | | | $ | 0.00 | |
| | | | | | | | | |
| Weighted average number of common shares outstanding – basic and diluted | | | 117,587,608 | | | | 79,977,609 | |
See notes to the consolidated financial statements
| SINOBIOPHARMA, INC. AND SUBSIDIARIES | |
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) | |
| | |
| | | Three months ended August 31, | |
| | | 2010 | | | 2009 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net income | | $ | 685,098 | | | $ | 237,167 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 123,400 | | | | 110,041 | |
| Stock-based payments | | | - | | | | 33,000 | |
| Stock-based compensation | | | - | | | | 324,125 | |
| Imputed interest expense on shareholders' loans | | | - | | | | 10,845 | |
| Amortization of discount in interest expense | | | 14,920 | | | | 25,244 | |
| Gain from discount of non-interest government loan | | | (8,783 | ) | | | - | |
| Gain from sales of available for sales securities | | | (1,764 | ) | | | - | |
| Notes receivable | | | (16,905 | ) | | | - | |
| Accounts receivable, net | | | 197,863 | | | | (92,636 | ) |
| Inventories | | | (216,339 | ) | | | 13,258 | |
| Advance payments | | | (208,758 | ) | | | (645,229 | ) |
| Other receivables | | | 160,266 | | | | (142,670 | ) |
| Accounts payable | | | (116,363 | ) | | | (145,755 | ) |
| Advance from customers | | | 29,152 | | | | 23,833 | |
| Income tax payable | | | (28,215 | ) | | | - | |
| Other payables | | | 37,115 | | | | 69,619 | |
| Net Cash Provided by/(Used in) Operating Activities | | | 650,687 | | | | (179,158 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Sales of available for sales securities | | | 296,564 | | | | - | |
| Acquisition of property and equipment | | | (436,840 | ) | | | (125,924 | ) |
| | | | | | | | | |
| Net Cash Used in Investing Activities | | | (140,276 | ) | | | (125,924 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Repayment of shareholder loans | | | - | | | | (610,021 | ) |
| Proceeds from loans due to bank loan and government loan | | | - | | | | 1,461,408 | |
| Repayment of loans from bank loan and government loan | | | (147,400 | ) | | | (730,704 | ) |
| | | | | | | | | |
| Net Cash (Used in)/Provided by Financing Activities | | | (147,400 | ) | | | 120,683 | |
| | | | | | | | | |
| EFFECT OF FOREIGN CURRENCY FLUCTUATIONON CASH | | | 620 | | | | 65,237 | |
| NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | | | 363,631 | | | | (119,162 | ) |
| CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | | $ | 1,331,959 | | | $ | 891,132 | |
| CASH AND CASH EQUIVALENTS - ENDING OF YEAR | | $ | 1,695,590 | | | $ | 771,970 | |
| | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| Cash paid for income taxes | | $ | 123,839 | | | $ | - | |
| Cash paid for interest expense | | $ | - | | | $ | 35,911 | |
| Non-cash investing and financing activities: | | | | | | | | |
| 100,000 common shares issued in exchange for consulting services received | | $ | - | | | $ | 33,000 | |
See notes to the consolidated financial statements
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. Effective July 29, 2008, the Company under its original name of Buzz Media, Ltd. incorporated a subsidiary, “Sinobiopharma, Inc.” with an investment of $0.001 and merged with it for the sole purpose of changing the name of the Company. As a result, the Company changed its name from “Buzz Media Ltd.” to “Sinobiopharma, Inc.”.
Effective July 29, 2008, the Company effected a fifty (50) for one (1) stock split of its authorized, issued and outstanding common stock. As a result, the Company’s authorized capital increased from 50,000,000 shares of common stock with a par value of $0.0001 to 2,500,000,000 shares of common stock with a par value of $0.0001. The Company’s issued and outstanding share capital increased as a result of the split from 2,000,010 shares of common stock to 100,000,500 shares of common stock. Share capital figures are presented in these financial statements giving retroactive effect to the stock split and accordingly all share capital figures are presented on a post-split basis as if the split had been affected upon inception.
On August 19, 2008, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Dongying Pharmaceutical Co, Limited (“Dongying BVI”), a company organized under the laws of the Territory of the British Virgin Islands, and all the shareholders of Dongying BVI, whereby the Company agreed to acquire 100% of the issued and outstanding shares of Dongying BVI through the issuance of approximately 40,000,000 shares of common stock of the Company in aggregate to the shareholders of Dongying BVI on a pro rata basis in accordance with each Dongying BVI shareholder’s percentage of ownership in Dongying BVI. The Share Exchange Agreement closed on September 22, 2008.
Concurrently with the closing of the Share Exchange Agreement, by a letter agreement entered into on September 8, 2008 between Dongying BVI and the Company’s majority shareholder, that shareholder agreed to cancel 60,100,500 shares of the 62,500,500 shares of common stock of the Company registered in his name within ten (10) days of the closing of the Share Exchange Agreement. The 60,100,500 shares were cancelled on September 26, 2008. After the cancellation, the shareholders of Sinobiopharma, Inc. owned 39,900,000 shares. The share cancellation completed the reverse merger with Dongying BVI as a recapitalization of the Company such that voting control of the Company was obtained by the former stockholders of Dongying BVI. The net assets of Dongying BVI and the Company have been brought forward at their historical bases. The costs associated with the reverse merger were expensed as incurred.
Dongying BVI was incorporated under the laws of the British Virgin Islands on January 29, 2008. On May 13, 2008 Dongying BVI acquired a 100% interest in Big Global Limited (“Big Global”) from the sole shareholder of Dongying BVI for consideration of $1.00. The purpose of the transaction was the change of domicile to the British Virgin Islands.
Big Global was incorporated under the laws of Hong Kong on November 26, 2007. On December 10, 2007 Big Global acquired a 100% interest in Dong Ying (Jiangsu) Pharmaceuticals Co., Ltd. (“Dong Ying China”) from the sole shareholder of Big Global for consideration of $1.00. The purpose of the transaction was the change of domicile to Hong Kong. The acquisition was approved by the Chinese government in May 2008.
Dong Ying China was incorporated under the laws of the People’s Republic of China (the “PRC”) in 2003. Dong Ying China’s business is the development, manufacture and sale of pharmaceutical products in China. There are two product lines currently as of August 31, 2010 and several other potential products in various stages of research and development. The product lines currently commercialized are Cisatracurium Besylate, a skeletal muscle relaxant, and Perindopril, a cardiovascular drug. Dong Ying China’s offices and manufacturing facility are in owned premises located on land used under license in Nantong, China and its research and development is carried out in Nanjing, China.
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 August 31, 2010, consolidated statements of operations and comprehensive income and consolidated statements of cash flows for the three months ended August 31, 2010 and 2009 include Sinobiopharma, Inc. and its directly owned subsidiaries, Dongying BVI, Big Global and Dong Ying China.
All significant intercompany transactions and balances are eliminated on consolidation.
The accompanying unaudited consolidated financial statements as of August 31, 2010 and for the three months ended August 31, 2010 and 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X applicable to smaller reporting companies. In the opinion of management, all adjustments necessary for a fair statement of the results for the interim periods have been made, and all adjustments are of a normal recurring nature (or a description of the nature and amount of any adjustments other than normal recurring adjustments). The consolidated interim financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended May 31, 20 10 that are included in the Company’s 2010 annual report on 10-K filed with the Securities and Exchange Commission.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
The FASB issued ASU 2010-17, Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition. This ASU codifies the consensus reached in EITF Issue No. 08-9, “Milestone Method of Revenue Recognition.” The amendments to the Codification provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and non substantive milestones, and each milestone should be evaluated individually to determine if it is substantive.
ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply 2010-17 retrospectively from the beginning of the year of adoption. Vendors may also elect to adopt the amendments in this ASU retrospectively for all prior periods. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company
ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310 - -30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.
ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Company does not expect the provisions of ASU 2010-18 to have a material effect on the financial position, results of operations or cash flows of the Company
In May 2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.
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 $292,528 as of August 31, 2010 and $274,148 as of May 31, 2010 represents bank acceptance notes the Company received from customers for sales of products. The notes are with maturity duration of 6 months, and are accepted by banks.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of receivables for sales of product on credit. Accounts receivable as of August 31, 2010 and May 31, 2010 was $476,733 and $670,662 respectively.
| | August 31, 2010 | | May 31, 2010 | |
| | (Unaudited) | | | |
| Accounts receivables | | $ | 476,733 | | | $ | 670,662 | |
| Allowance for doubtful accounts | | | - | | | | - | |
| | | $ | 476,733 | | | $ | 670,662 | |
5. INVENTORIES
Inventories at August 31, 2010 and May 31, 2010 consist of the following:
| | | August 31, 2010 | | | May 31, 2010 | |
| | | (Unaudited) | | | | |
| Raw materials | | $ | 157,546 | | | $ | 127,883 | |
| Goods in process | | | 723,642 | | | | 553,450 | |
| Finished goods | | | 97,089 | | | | 76,757 | |
| | | | | | | | | |
| | | $ | 978,277 | | | $ | 758,090 | |
6. ADVANCE PAYMENTS
Advance payments of $276,817 and $67,971 as of August 31, 2010 and May 31, 2010 represented payments in advance to suppliers of the Company’s raw materials.
7. SECURITIES AVAILABLE FOR SALE
On May 17, 2010, the Company purchased a low risk short term financial product from China Agricultural Bank. The maturity term of this product is three months with no guarantee from the bank of repayment of the principle. The principle is $292,800, the fair value as of May 31, 2010 is $293,064, and the accumulated unrealized gain is $264 which is booked into accumulated other comprehensive income. As of August 31, 2010, the security has been sold and the proceeds of $296,564 have been transferred to the Company’s bank account. $1,764 was recognized as realized gain during the three months ended August 31, 2010.
8. ADVANCE PAYMENTS FOR INTANGIBLE ASSETS TO A SHAREHOLDER
Advance payment to a shareholder for intangible assets of $991,147 and $985,760 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 August 31, 2010, the Company has not obtained the technologies. If these technologies cannot be delivered by the due date 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%. 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 then became a shareholder of the Company with 8% interest through another Intellectual Property purchase transaction (see Note 18) which occurred in December 2009.
9. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment at August 31, 2010 and May 31, 2010 consist of the following:
| | | August 31, 2010 | | | May 31, 2010 | |
| | | (Unaudited) | | | | |
| Buildings | | $ | 2,003,438 | | | $ | 1,990,207 | |
| Land use rights | | | 407,723 | | | | 405,507 | |
| Manufacturing equipment | | | 1,357,421 | | | | 999,665 | |
| Office furniture and equipment | | | 108,334 | | | | 102,263 | |
| Road and grounds | | | 213,954 | | | | 212,791 | |
| Vehicles | | | 146,969 | | | | 146,171 | |
| Leasehold improvements | | | 31,308 | | | | 31,138 | |
| Software | | | 2,139 | | | | 2,127 | |
| Construction-in-process | | | 205,843 | | | | 129,052 | |
| | | | 4,477,129 | | | | 4,018,921 | |
| Less: accumulated depreciation | | | 1,196,137 | | | | 1,105,938 | |
| | | $ | 3,280,992 | | | $ | 2,912,983 | |
Depreciation expense for the three months ended August 31, 2010 and 2009 was $ 90,199 and $ 89,884, respectively.
10. INTANGIBLE ASSETS, NET
Intangible assets consist of the cost of patent, certificates for clinical trial, technology and licensed rights to manufacture the company’s products.
The patent was purchased from Lei Wang and Lequn Huang by issuing 8,000,000 unregistered shares common stock at the price of $0.17 per share and preferred stock, respectively.
The certificates for clinical trial were purchased from Meisu Jining Science and Technology (Nanjing) Limited Company by issuing 9,500,000 unregistered shares of common stock at a price of $0.187 per share. The acquiring clinical trial certificates were approved by the government for the drug Eplerenone, the Company does not intend to continue the R&D process of this drug internally since obtaining these certificates, but want to use them to exchange for other “ready for production” drugs or profit sharing with other companies who complete 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-developme nt, manufacture, and marketing of the drug Eplerenone. According to the Agreement, LianHuan shall be responsible for all fees and expenses incurred in the clinical trials. Following the completion of clinical trials, LianHuan and DongYing shall jointly complete and submit the drug production application. Once production approval for Eplerenone is obtained, LianHuan and DongYing shall jointly own the new drug production certificate for Eplerenone. LianHuan shall be responsible for the manufacture of Eplerenone and its tablet form, though Dong Ying China retains the option to produce Eplerenone capsules. The net profit from the sales of Eplerenone shall be apportioned as 60 percent to Dong Ying China and 40 percent to LianHuan.
The unit prices per share of common stock issued with respect to the patent and certificates represents the estimated fair values of the Company’s unregistered common shares which were determined on the purchase dates, December 18, 2009 and December 20, 2009, using the Black-Scholes Model with level 2 inputs (See Note 14).
No cost was recorded for the consideration of preferred stock which has been issued on April 2, 2010. According to ASC 845-10-S99, transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the Company's initial public offering normally should be recorded at the transferors' historical cost basis determined under GAAP. The patent was internally developed by the shareholder, Lequn Huang, therefore, it has a basis of zero.
The patent has a useful life of 20 years from the date of application. There was 16.5 years of useful life remaining when the Company purchased patent. The certificates have a useful life of 20 years but, because they are not intentionally used in production, no amortization is recorded. The technology and rights have an estimated useful life of 20 years. The amounts related to the particular products are as follows:
| | | August 31, 2010 | | | May 31, 2010 | |
| | | (Unaudited) | | | | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Weight Average Useful Life | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Weight Average Useful Life | |
| | | | | | | | | | | | (in years) | | | | | | | | | | | | (in years) | |
| KuTai Patent | | $ | 1,364,635 | | | $ | (62,030 | ) | | $ | 1,302,605 | | | | 16.5 | | | $ | 1,357,219 | | | $ | (41,128 | ) | | $ | 1,316,091 | | | | 16.5 | |
| Clinical Trial Certificates for Eplerenone | | | 1,782,555 | | | | - | | | | 1,782,555 | | | | | | | | 1,772,867 | | | | - | | | | 1,772,867 | | | | | |
| Cisatracurium Besylate Technology | | | 736,000 | | | | (117,853 | ) | | | 618,147 | | | | 20 | | | | 732,000 | | | | (108,063 | ) | | | 623,937 | | | | 20 | |
| Perindopril Technology | | | 736,000 | | | | (117,853 | ) | | | 618,147 | | | | 20 | | | | 732,000 | | | | (108,063 | ) | | | 623,937 | | | | 20 | |
| Total intangible assets | | $ | 4,619,190 | | | $ | (297,736 | ) | | $ | 4,321,454 | | | | | | | $ | 4,594,086 | | | $ | (257,254 | ) | | $ | 4,336,832 | | | | | |
Amortization for the three months ended August 31, 2010 and August 31, 2009 in the amount of $40,482 and $20,157 is included in Depreciation and Amortization expense.
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 RMB20million ($2,928,000 at the exchange rate applicable at May 31, 2010) and was due for repayment in full in March 2007. During 2007 the Company repaid RMB3,000,000($439,200 at the exchange rate applicable at May 31, 2010). In December 2007 the Company was granted an extension to December 31, 2008. During the year ended December 31, 2008 the Company repaid RMB2,000,000 ($292,800 at the exchange rate applicable at May 31, 2010). On February 1, 2009 the Company repaid another RMB2,000,000 ($292,800 at the exchange rate applicable at May 31, 2010) and the Company was granted an extension to December 31, 2009 for the remainder of the loan of RMB13,000,000 ($1,90 3,200 at the exchange rate applicable at May 31, 2010). The Company repaid RMB3,000,000 ($439,200 at the exchange rate applicable at May 31, 2010) in December 2009, and was granted another extension to December 31, 2010 for the remaining loan balance of RMB10,000,000 ($1,464,000 at the exchange rate applicable at May 31, 2010). On April 7, 2010, the Company repaid RMB1,000,000 ($146,400 at the exchange rate applicable at May 31, 2010). On May 6, 2010, the Company repaid RMB1,000,000 ($146,400 at the exchange rate applicable at May 31, 2010) leaving a remaining balance of RMB8,000,000 ($1,171,200 at the exchange rate applicable at May 31, 2010). On August 31, 2010, the Company repaid RMB1,000,000 ($147,200 at the exchange rate applicable at August 31, 2010) leaving a remaining balance of RMB7,000,000 ($1,030,400 at the exchange rate applicable at August 31, 2010).
Since the loan bears no interest, the obligation is carried at its net present value using interest rates equal to the prevailing Bank of China one-year rate at the time the loan was received (5.6% in 2004, applied in respect of the 2006 year) or the date the extension was effective (6.4% in March 2007, applied in respect of the 2007 and 2008 years, 5.6% in February, 2009, applied in respect of the 2009 year and 5.31% in February 2010, applied in respect of the 2010 year). Imputed loan interest expense included in the accounts for the three months ended as of August 31, 2010 and 2009 was $14,920 and $25,244 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 was $8,783 and $0 for the three months end ed as of August 31, 2010 and 2009, respectively.
The present value of the total government loan was $1,010,915 as of August 31, 2010 and $1,145,726 as of May 31, 2010.
12. OTHER PAYABLES
Other payables of $382,350 and $343,780 as of August 31, 2010 and May 31, 2010, respectively, represent the deposits received from customers, payroll payables, accrued professional fees and VAT payables.
13. INCOME TAXES
The tax payables balance of $128,070 and $155,397 represents the income tax accrual of Dong Ying China as of August 31, 2010 and May 31, 2010, respectively.
The Company’s operating subsidiary Dong Ying China enjoy a tax benefit of no enterprise income taxes for two years and half income tax for three years starting January 1, 2008 due to the Company’s wholly-owned foreign enterprises status. Starting January 1, 2010, the Company’s Chinese operations will be subject to enterprise income tax with half of tax rate for next three years. The Company’s applicable tax rate will be 11% for 2010, 12% for 2011 and 12.5% for 2012 as approved by the Nantong Economic and Technical Development Zone Office of State Administration of Taxation.
Income tax expense of $95,623 for the three months ended August 31, 2010 represents PRC current income taxes.
The Company is subject to United States income tax to the extent of its operations in the United States. The Company accrued no U.S. income tax expense for the three months ended August 31, 2010 due to net loss.
The Company has a deferred tax asset on net operating losses of approximately $251,271 as of August 31, 2010. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those net operating losses are available. The Company considers projected future taxable income and tax planning strategies in making its assessment. At present, the Company does not have a sufficient operation in the United States to conclude that it is more-likely-than-not that the Company will be able to realize all of its tax benefits in the near future and therefore a valuation allowance of $251,271 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. PERFERRED STOCK
Effective March 29, 2010, the Company filed Amended and Restated Articles of Incorporation, pursuant to which the Company changed its authorized capital stock to consist of 2,500,000,000 shares, consisting of 2,490,000,000 shares of common stock, $0.0001 par value and 10,000,000 shares of preferred stock, $0.0001 par value. On the same day, the Company filed a Certificate of Designation with the Secretary of State of Nevada whereby it designated 1,000,000 shares of preferred stock as Series A Preferred Stock, par value $0.0001 per share. Each holder of the Series A Preferred Stock shall be entitled to vote on all matters submitted to shareholders of the Company and shall be entitled to 60 votes for each share of Series A Preferred Stock owned at the record date for the determination of shareholders entitled to vote on such matter or, if n o such record date is established, at the date such vote is taken or any written consent of shareholders is solicited. Except as otherwise required by law, the holders of shares of Series A Preferred Stock shall vote together with the holders of common stock on all matters and shall not vote as a separate class.
After majority shareholders’ approval process, on April 2, 2010, pursuant to the terms of the patent transfer agreement for "Composition for Lyophilized Powder of Atracurium” signed on December 22, 2009 (as mentioned in note 18), the Company issued 1,000,000 shares of the Series A Preferred Stock (the "Preferred Stock") to Mr. Lequn Huang as consideration for the patent. The issuance of the Preferred Stock to Mr. Huang was exempt from registration under Section 4(2) of the Securities Act based upon our compliance with Regulation S as promulgated by the SEC under the Securities Act of 1933, as amended.
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. 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 Share | |
| Options Outstanding, | | | | | | | | | |
| May 31, 2010 and August 31,2010 | | | 2,525,000 | | | $ | 1.8 | | | $ | 1.28 | |
Compensation cost related to options was recognized as the related options vest. The vesting period was the requisite service period for each option holder. The stock-based compensation cost was $0 and $324,125 for the three months ended August 31, 2010 and 2009. As of August 31, 2010, 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 share | |
| Options vested at , | | | | | | | | | |
| May 31, 2010 | | | 2,525,000 | | | $ | 3,241,250 | | | $ | 1.28 | |
| August 31, 2010 | | | 2,525,000 | | | $ | 3,241,250 | | | $ | 1.28 | |
If not previously exercised or canceled, options outstanding at May 31, 2010 will expire as follows:
| | | Range of Exercise Prices | | Number | | | Weighted average | |
| Expiry Date | | High | | | Low | | of Shares | | | exercise price | |
| | | | | | | | | | | | |
| September 29, 2013 | | $ | 1.8 | | | $ | 1.8 | | | | 1,800,000 | | | $ | 1.8 | |
| October 2, 2013 | | $ | 1.8 | | | $ | 1.8 | | | | 500,000 | | | $ | 1.8 | |
| October 22, 2013 | | $ | 1.8 | | | $ | 1.8 | | | | 225,000 | | | $ | 1.8 | |
The fair values of the options granted September 29, October 2 and October 22, 2008 were estimated at values of $1.25 per share, $1.42 per share and $1.25, respectively, using the Black-Scholes Option Pricing Model with the following weighted average assumptions:
| Volatility: | | | 88.3 | % |
| | | | | |
| Risk-free interest rate: | | | 2.30 | % |
| | | | | |
| Dividend yield: | | | — | |
| | | | | |
| Expected lives (years): | | | 5 | |
Option-pricing models require the use of highly subjective estimates and assumptions including the expected stock price volatility. Changes in the underlying assumptions can materially affect the fair value estimates and therefore, in management’s opinion, existing models do not necessarily provide reliable measure of the fair value of the Company’s stock options.
16. EARNINGS 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, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | | | (Unaudited) | |
| Numerator used in basic net income per share: | | | | | | |
| Net income | | $ | 685,098 | | | $ | 237,167 | |
| Shares (denominator): | | | | | | | | |
| Weighted average common shares outstanding | | | 117,587,608 | | | | 79,977,609 | |
| Weighted average common shares outstanding used in computing diluted earnings per ordinary share | | | 117,587,608 | | | | 79,977,609 | |
| Earnings per common share-basic | | $ | 0.01 | | | $ | 0.00 | |
| Earnings per common share-diluted | | $ | 0.01 | | | $ | 0.00 | |
As of August 31, 2010 and 2009, the Company had 2,525,000 common share equivalents outstanding that could potentially dilute basic income per share in the future, but which were excluded in the computation of diluted income per share in the periods presented, as their effect would have been anti-dilutive due to the fact that the weighted average exercise price per share of the stock option is higher than the weighted average market price per share of the common stock during the three months ended August 31, 2010 and 2009.
17. RELATED PARTY TRANSACTIONS AND BALANCES
The Company purchased two intangible assets in prior year from Meisu Jining Science and Technology (Nanjing) Limited Company, previously 25% owned by the Company’s CEO and shareholder Mr. Lequn Huang; and Bio-Medical Research and Development Limited Company, previously 30% owned by Mr. Lequn Huang at prices to be negotiated at the time. As of August 31, 2010, the cost of these two intangible assets is $736,000 for each. (See Note 10).
Addition of intangible assets
The patent and certificates for clinical trial are additional intangible assets. The patent was purchased from Lei Wang and Lequn Huang by issuing 8,000,000 unregistered shares common stock. The consideration is $1,360,000.The certificates for clinical trial were purchased from Meisu Jining Science and Technology (Nanjing) Limited Company by issuing 9,500,000 unregistered shares common stock. The consideration is $1,776,500. (See Note 10 and 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.
Advance payment for intangible assets to shareholder
Advance payments for intangible assets of $991,147 and $985,760 to a shareholder as of August 31, 2010 and May 31, 2010 represent the prepayments to Meisu Jining Science and Technology (Nanjing) Limited Company.
The company has signed two contracts for purchase of intellectual property with Meisu Jining Science and Technology (Nanjing) Limited Company. One was signed in July 2008, for an amount of $292,800. As of August 31, 2010 the company prepaid $255,147. The other contract was signed in July 2009, for a contract amount of $736,000 and as of August 31, 2010, the company prepaid $736,000.(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.
18. COMMITMENTS AND CONTINGENCIES
Commitment
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($1,171,200). As of August 31, 2010, the Company has paid RMB 4,800,000 ($706,560) which had been expensed and is committed to pay the remaining of RMB3, 200,000 ($471,040) before January 2015.
On May 30, 2010, the Company’s board resolved that the company would issue Ms. Luk 300,000 shares of the Company's common stock within three months from May 30, 2010 as compensation for serving as an independent director. As of August 31, 2010, the Company has not issued the shares to Ms. Luk. Ms. Luk was elected as a director of the company on May 30, 2010.Contingencies
Contingencies through August 31, 2010 have been considered by the Company and none were noted which were required to be disclosed.
19. CONCENTRATIONS AND CREDIT RISK
At August 31, 2010 and May 31, 2010, the Company had a credit risk exposure of cash in banks of $1,695,590 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 include Clindamycin Hydrochloride and Cisatracurium Besylate which accounted for 100% of the Company’s total sales.
| | | Three months ended August 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | | | (Unaudited) | |
| | | Amount of Sales | | | % of Total Sales | | | Amount of Sales | | | % of Total Sales | |
| Clindamycin Hydrochloride 0.75g | | $ | 3,062 | | | | 0 | % | | $ | 17,342 | | | | 1 | % |
| Clindamycin Hydrochloride 0.90g | | | - | | | | 0 | % | | | 36,025 | | | | 3 | % |
| Cisatracurium Besylate 5mg | | | 1,833,053 | | | | 99 | % | | | 1,240,397 | | | | 96 | % |
| Perindopril troche | | | 20,283 | | | | 1 | % | | | - | | | | - | |
| Total | | $ | 1,856,398 | | | | 100 | % | | $ | 1,293,764 | | | | 100 | % |
(2) Customers accounted for over 10% of the Company’s total sales are as follows:
| | | Three months ended August 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | | | (Unaudited) | |
| | | Amount of sales | | | % of Total Sales | | | Amount of sales | | | % of Total Sales | |
| Customer A | | $ | 312,341 | | | | 17 | % | | $ | 281,785 | | | | 22 | % |
| Customer B | | | 282,932 | | | | 15 | % | | | 114,123 | | | | 9 | % |
| Customer C | | | 236,974 | | | | 13 | % | | | 210,374 | | | | 16 | % |
| Total | | $ | 832,247 | | | | 45 | % | | $ | 606,282 | | | | 47 | % |
(3) Suppliers accounted for over 10% of the Company’s total purchases are as follows:
| | | Three months ended August 31, | |
| | | 2010 | | | 2009 | |
| | | (Unaudited) | | | (Unaudited) | |
| | | Amount of sales | | | % of Total Sales | | | Amount of sales | | | % of Total Sales | |
| Supplier A | | $ | 233,028 | | | | 44 | % | | $ | 266,681 | | | | 66 | % |
| Supplier B | | | 174,785 | | | | 33 | % | | | - | | | | - | % |
| Total | | $ | 406,813 | | | | 77 | % | | $ | 266,681 | | | | 66 | % |
20. SUBSEQUENT EVENTS
Management has considered all events occurring through October 15, 2010, 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.
Item 2. Management’s Discussion and Analysis or Plan of Operation Cautionary Notice Regarding Forward-Looking Statements
In this quarterly report, references to “Sinobiopharma,” “SNBP,” “the Company,” “we,” “our,” “us,” and the Company’s wholly-owned subsidiary, “Dong Ying China,” refer to Sinobiopharma, Inc.
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “ could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking s tatements 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; |
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. Sinobiopharma has successfully brought four drugs to the Chinese market, including its flagship product, KuTai (cisatracurium), a leading muscle relaxant and its recently launched product, YiTai (perindopril), a first-to-market cardiovascular ACE inhibitor. The company ha s six additional drug candidates in the pipeline. Sinobiopharma’s production facilities are GMP-certified by the China State Food and Drug Administration (SFDA) and the Company has an established distribution network in China. Results of Operations
The Company had revenue of $1,856,398 for the three months ended August 31, 2010, as compared to revenue of $1,293,764 for the three months ended August 31, 2009, and realized a net income of $685,098 for the three months ended August 31, 2010, as compared to a net income of $237,167 for the three months ended August 31, 2009.
Sales and cost of goods sold
Sales increased 43% to $1,856,398 for the three months ended August 31, 2010, from $1,293,764 for the three months ended August 31, 2009. Gross margin increased 48% to $1,429,193 (77% of sales) for the three months ended August 31, 2010, from $962,923 (74% of sales) for the three months ended August 31, 2009.
The increase in sales was due to the continuing growth in sales of Cisatracurium Besylate. Sales of this product increased to $1,833,053 for the three months ended August 31, 2010, from $1,240,937 for the three months ended August 31, 2009, representing 99% of sales and 96% of sales for the three months ended August 31, 2010 and 2009, respectively. The improvement in gross margin is attributable to the fact that, as volume increased, the unit production cost of Cisatracurium Besylate decreased because the allocation of the unit indirect cost decreased. The improvement in gross margin is also attributable to an increase in the price of Cisatracurium Bestylate for the sales to certain distributors, because these distributors only provide potential customer contact information to us, while all the marketing effort, quantity and delivery term negotiation were conducted by ourselves. Since this distributor is GSP-licensed, the sales have to go through it first to get to the final customer.
Operating Expenses
The operating expenses decreased $21,600 to $649,187 for the three months ended August 31, 2010 from $670,787 for the three months ended August 31, 2009.
The change is primarily attributable to the stock-based compensation expense of $324,125 in the three months ended August 31, 2009, offset by the increase in the research and development expense of $179,191 for the three months ended August 31, 2010.
Research and development expenses increased $179,191 from $64,302 for the three months ended August 31, 2009 to $243,493 for the three months ended August 31, 2010. The increase was due to the increased spending on research and development of pipeline products.
Other Income
Other income was $715 for the three months ended August 31, 2010 as compare to other expenses of $54,969 for the three months ended August 31, 2009. The change was due to the decrease in the balances of the shareholder loans, bank loans and government loans.
Income Tax Expense
Income tax expense was $95,624 for the three months ended August 31, 2010. There was no income tax expense for the three months ended August 31, 2010 because the company enjoyed tax free benefit in the calendar year 2009.
Net Income
Net income increased $447,931 from net income of $237,167 for the three months ended August 31, 2009 to net income of $685,098 for the three months ended August 31, 2010. The increase in net income was due to the increase in sales of Cisatracurium Besylate.
Liquidity and Capital Resources
The operations of Dong Ying China have generated profits for the three months ended August 31, 2010. The Company had $1,695,590 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 three months ended August 31, 2010 was $650,687 compared to the net cash used in the operating activities of $179,158 for the three months ended August 31, 2009, an increase of $829,845. The increase is primarily attributable to the increase in net income of $447,930, a decrease in the change in accounts receivables for the amount of $290,499 due to the Company’s increased collection efforts in the three months ended August 31, 2010 compared to the three months ended August 31, 2009, and a decrease of the change in advanced payment of $436,471due to the reduced amount paid to the suppliers for the purchasing of raw materials.
Net cash used in the investment activities for the three months ended August 31, 2010 and 2009 was $142,276 and $125,924, respectively. The Company has purchased $310,916 more fixed assets to upgrade the manufacture facilities in the three months ended August 31, 2010 than in the same period of last year. Additionally, the investment in a low risk short term financial product from China Agricultural Bank matured and was sold out for cash in the three months period ended August 31, 2010.
Net cash used in the financing activities for the three months ended August 31, 2010 was $147,400 and net cash provided by the financing activities for the three months ended August 31, 2009 was $120,683. During the three months ended August 31, 2010, the Company reduced through payment the loans from banks and government in the net amount of $147,400. In comparison, the Company has borrowed $1,461,408, repaid $730,704 in loans and another $610,021 in shareholder loans during the three months period ended August 31, 2009.
Loans from Government
The Company has a loan from the Nantong Economic and Technology Development Zone Administration. The loan bears no interest. The original principal amount of the loan was RMB20million ($2,928,000 at the exchange rate applicable at May 31, 2010) and was due for repayment in full in March 2007. During 2007 the Company repaid RMB3,000,000($439,200 at the exchange rate applicable at May 31, 2010). In December 2007 the Company was granted an extension to December 31, 2008. During the year ended December 31, 2008 the Company repaid RMB2,000,000 ($292,800 at the exchange rate applicable at May 31, 2010). On February 1, 2009 the Company repaid another RMB2,000,000 ($292,800 at the exchange rate applicable at May 31, 2010) and the Company was granted an extension to December 31, 2009 for the remainder of the loan of RMB13,000,000 ($1,9 03,200 at the exchange rate applicable at May 31, 2010). The Company repaid RMB3,000,000 ($439,200 at the exchange rate applicable at May 31, 2010) in December 2009, and was granted another extension to December 31, 2010 for the remaining loan balance of RMB10,000,000 ($1,464,000 at the exchange rate applicable at May 31, 2010). On April 7, 2010, the Company repaid RMB1,000,000 ($146,400 at the exchange rate applicable at May 31, 2010). On May 6, 2010, the Company repaid RMB1,000,000 ($146,400 at the exchange rate applicable at May 31, 2010) leaving a remaining balance of RMB8,000,000 ($1,171,200 at the exchange rate applicable at May 31, 2010). On August 31, 2010, the Company repaid RMB1,000,000 ($147,200 at the exchange rate applicable at August 31, 2010) leaving a remaining balance of RMB7,000,000 ($1,030,400 at the exchange rate applicable at August 31, 2010).
Since the loan bore no interest, the obligation is carried at its net present value using interest rates equal to the prevailing Bank of China one-year rate at the time the loan was received (5.6% in 2004, applied in respect of the 2006 year) or the date the extension was effective (6.4% in March 2007, applied in respect of the 2007 and 2008 years, 5.6% in February, 2009, applied in respect of the 2009 year and 5.31% in February2010, applied in respect of the 2010 year). Imputed loan interest expense included in the accounts for the three months ended as of August 31, 2010 and 2009 was $14,920 and $25,244 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 was $8,783 and $0 for the three months ende d as of August 31, 2010 and 2009, respectively.
The present value of the total government loan was $1,010,915 as of August 31, 2010 and $1,145,726 as of May 31, 2010.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
N/A.
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 princip al 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 three months ended August 31, 2010. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Excha nge 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 August 31, 2010. Based on that evaluation, our CEO and CFO concluded that no change occurred in the Company's internal controls over financial reporting during the quarter ended August 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
To our knowledge, there is no material litigation pending or threatened against us.
Not applicable.
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.
| 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. |
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: October 15, 2010 | By: | /s/ Lequn Huang |
| | |
| | Title: President, CEO and Director |
| | | |
| Dated: October 15, 2010 | By: | /s/ Xinjie Mu |
| | |
| | Title: Chief Financial Officer and Director |
