ESPORTS ENTERTAINMENT GROUP, INC. - Quarter Report: 2010 September (Form 10-Q)

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from _______ to _______

Commission file number: 333-156302

DK SINOPHARMA, INC.

(Exact name of small business issuer as specified in its charter)

Nevada	26-3062752
(State or other jurisdiction of incorporation or organization)	(IRS Employer identification No.)

Dongxing Building, 4th Floor

No.1 Xinke Road,

Xi’an, the People’s Republic of China 710043

(Address of principal executive offices)

011 - (86) 29-8224-7500

(Registrant’s telephone number, including area code)

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 T 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 o	Accelerated filero

Non-accelerated filer o (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 T

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: 30,000,005 shares of common stock, $.001 par value per share as of November 15, 2010.

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
	PART II
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	(Removed and Reserved)	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
SIGNATURES		28

DK SINOPHARMA, INC.

CONSOLIDATED BALANCE SHEETS

		September 30,			December 31,
		2010			2009
	Notes	(Unaudited)			(Audited)

ASSETS
Current Assets
Cash and cash equivalents		$	4,809,889		$	1,058,157
Accounts receivable			5,155,948			3,460,649
Other receivables	3		517,237			762,158
Advances to suppliers			7,465			537,578
Amount due from shareholder			80,096			-
Prepaid expenses			1,525			326,783
Inventories	2		10,185,352			10,509,797
Amount due from related parties			-			172,655
Total Current Assets			20,757,512			16,827,777

Property, plant and equipment, net	2		4,714,740			5,067,401
Construction in progress			1,171			-
Intangible assets, net	2		6,322,279			6,636,900

Total Assets		$	31,795,702		$	28,532,078

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable		$	2,625,212		$	2,812,073
Accrued expenses and other payable			2,459,158			4,379,631
Customer and other deposits			-			384,084
Value-added tax payable			270,108			-
Short-term bank loan	5		4,180,290			1,320,190
Total Current Liabilities			9,534,768			8,895,978

Derivative liability	10		71,358			-
Long-term bank loan	5		-			2,787,068

Total Liabilities			9,606,126			11,683,046


Stockholders' Equity
Common stock, $.001 par value, 70,000,000 shares authorized,
30,000,005 and 30,000,005 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively			30,000			30000
Subscription receivable			(750	)		(750	)
Additional paid-in capital			10,310,340			10,310,340
Statutory reserves	11		2,448,456			2,448,456
Accumulated other comprehensive loss	12		51,439			(127,703	)
Retained earnings			9,350,091			4,188,689
Total Stockholders' Equity			22,189,576			16849,032

Total Liabilities and Stockholders' Equity		$	31,795,702		$	28,532,078

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

DK SINOPHARMA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

	Three months ended							Nine months ended
	2010			2009				2010			2009


Sales, net	$	7,290,685			$	4,382,522		$	20,018,100			$	13,575,614

Cost of sales		(4,201,839	)			(2,426,503	)		(11,755,556	)			(7,503,360	)

Gross profit		3,088,846				1,956,019			8,262,544				6,072,254
Selling, general and administrative expenses		(998,913)				(1,177,302	)		(2,846,732)				(2,814,031	)
Research and development cost		-				-			(172,391	)			-

Income from operations		2,089,333				778,717			5,243,421				3,258,223

Other Income (Expense)
Interest income		-				-			20,999				2,986
Interest expense		(66,283	)			(50,285	)		(216,802	)			(242,196	)
Other income		169,841				190,756			193,319				191,294
Derivative expense		-							(71,358	)			-
Other expense		(2,129	)			(922	)		(8,177	)			(6,888	)
Total other Income (Expense)		101,429				139,549			(82,019	)			(54,804	)

Income before income taxes		2,191,362				918,266			5,161,402				3,203,419

Provision for income taxes		-				-			-				-

Net income	$	2,191,362			$	918,266		$	5,161,402			$	3,203,419

Weighted average common shares outstanding
Basic		30,000,005				30,000,005			30,000,005				30,000,005
Diluted		30,000,005				30,000,005			30,000,005				30,000,005

Net income per common share
Basic	$	0.07			$	0.03		$	0.17			$	0.11
Diluted	$	0.07			$	0.03		$	0.17			$	0.11

Net income	$	2,191,362			$	918,266		$	5,161,402			$	3,203,419
Foreign currency translation adjustment		165,377				-			179,142				11,067
Comprehensive income	$	2,356,739			$	918,266		$	5,340,544			$	3,214,486

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

DK SINOPHARMA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

	2010		2009


CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	5,161,402	$	3,203,419
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization		732,812		884,985
Written off of payable		20,999		-
Recovery of deposits paid to suppliers		(336,284)		-
Derivative liability		71,358		-
Changes in operating assets and liabilities:
Accounts receivable		(1,614,049)		1,095,153
Inventories		504,035		(4,157,759)
Advances to suppliers		868,575		(1,395,095)
Prepaid expenses and other receivable		604,044		(1,116,808)
Amount due from shareholder		55,975		(9,938)
Amount due to a related company				(5,866)
Accounts payable		(239,097)		1,766,095
Accrued expense and other payable		(2,050,627)		2,600,622
Customer and other deposits		(383,262)		-
VAT payable		306,212		-

Net cash provided by operating activities		3,702,093		2,864,808

CASH FLOWS FROM INVESTING ACTIVITIES
Addition in share capital		-		300
Purchase of property and equipment		(41,405)		(1,361,617)
Purchase of intangible assets		(25,296)		-

Net cash used in Investing activities		(66,701)		(1,361,317)

CASH FLOWS FROM FINANCING ACTIVITIES
Payment from short-term loans		-		(1,315,307)

Net cash used in financing activities		-		(1,315,307)

Effect of exchange rate changes on cash and cash equivalents		116,340		(134,448)

Net Increase (Decrease) in cash and cash equivalents		3,751,732		53,736

Cash and cash equivalents, beginning balance		1,058,157		491,626

Cash and cash equivalents, ending balance	$	4,809,889	$	545,362

SUPPLEMENTAL DISCLOSURES:
Interest payments	$	216,802	$	242,196

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

DK SINOPHARMA, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND YEAR ENDED DECEMBER 31, 2009

(UNAUDITED)

	Capital Stock		Subscription			Additional Paid-in		Other Comprehensive			Statutory		Retained			Total Stockholders
	Amount		Receivables			Capital		Income			Reserves		Earnings			Equity

Balance December 31, 2008	$	30,000	$	(750	)	$	10,310,340	$	(138,770	)	$	275,233	$	1,973,568		$	12,449,621
																	-
Foreign currency translation adjustments		-		-			-		11,067			-		-			11,067

Transferred to Statutory reserve		-		-			-		-			2,173,223		(2,173,223	)		-

Dividend paid		-		-			-		-			-		(439,264	)		(439,264	)

Income for the year ended December 31, 2009		-		-			-		-			-		4,827,608			4,827,608

Balance December 31, 2009		30,000		(750	)		10,310,340		(127,703	)		2,448,456		4,188,689			16,849,032


Foreign currency translation adjustments		-		-			-		179,142			-		-			179,142

Income for the nine months ended September 30, 2010		-		-			-		-			-		5,161,402			5,161,402

Balance September 30, 2010	$	30,000	$	(750	)	$	10,310,340	$	51,439		$	2,448,456	$	9,350,091		$	22,189,576

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

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 1 - ORGANIZATION

DK Sinopharma, Inc. ("the Company") was incorporated on July 22, 2008 in the state of Nevada. The Company was originally incorporated under the name Virtual Closet, Inc. and changed its name to DK Sinopharma Inc. on June 30, 2010. The new ticker symbol for the Company’s common stock is “DKSP.OB”. Dongke Pharmaceuticals Inc. ("Dongke") was incorporated in the state of Delaware on December 11, 2009. Dongke formed Yangling Slovan Pharmaceuticals Co., Ltd. (“Slovan or “WOFE”) on January 25, 2010. Slovan is a "wholly owned foreign enterprise" incorporated in People's Republic of China ("PRC") and is a wholly owned subsidiary of Dongke. Yangling Dongke Maidisen Pharmaceuticals Co., Ltd. (“Maidisen”), the Company’s operating entity (consolidated through VIE, see below), was incorporated in the PRC on June 23, 2004.

On May 10, 2010 the Company completed its merger with Dongke in accordance with the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, the Company acquired all of the outstanding capital stock and ownership interests of Dongke from the Dongke shareholders. In exchange for their interests, the Company issued to Dongke shareholders an aggregate of 1,941,818 shares of the Company’s common stock.

In January 2010, WOFE has entered into an Agreement on Entrustment for Operation and Management, Exclusive Option Agreement, Shareholders’ Voting Proxy Agreement and Agreement on share pledge Agreement (collectively, the “Control Agreements”) with Maidisen through which the Company operates the restricted businesses. Under accounting principles generally accepted in the United States of America, or US GAAP, Maidisen is considered a Variable Interest Entity (“VIE”) and the related accounts are recorded at carrying value. US GAAP requires the Company to consolidate entities controlled by contract as a VIE in financial statements because the control agreements related to those entities provide the Company with the risks and rewards associated with equity ownership. Although the Company does not currently own any of the outstanding equity interests in Maidisen, it has: (1) exclusive decision making authority over all business decisions, (2) a significant financial interest in the entity giving it the right to receive income as well as the right to unilaterally sell or transfer these rights to a 3rd party based upon the exclusive option agreement and (3) a long-term commitment expected to be in excess of ten years. Accordingly, all of the income since the inception of Maidisen is included in the consolidated financial statements

The following are brief descriptions of contracts entered between WOFE and Maidisen:

(1)Agreement on Entrustment for Operation and Management. The domestic companies, Maidisen and WOFE, have entered into an Entrusted Management Agreement, which provides that WOFE will be fully and exclusively responsible for the management of Maidisen. As consideration for such services, Maidisen has agreed to pay WOFE the management fee during the term of this agreement and the management fee shall equal to Maidisen’s the earnings before tax. Also, WOFE will assume all operating risks related to this entrusted management service to Maidisen and bear all losses of Maidisen.

(2) Exclusive Option Agreement. All the shareholders of Maidisen as well as Maidisen have entered into an Exclusive Option Agreement with WOFE, which provides that WOFE will be entitled to acquire such shares form the current shareholders upon certain terms and conditions. Meanwhile, WOFE will be entitled an irrevocable exclusive purchase option to purchase all or part of the assets and business of Maidisen, if such a purchase is or becomes allowable under PRC laws and regulations. The Exclusive Option Agreement also prohibits the current shareholders of Maidisen as well as Maidisen from transferring any portion of their equity interests, business or assets to anyone other than WOFE. WOFE has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such times as it may wish to do so.

(3) Shareholders’ Voting Proxy Agreement. All the shareholders of Maidisen have executed a Shareholders’ Voting Proxy Agreement to irrevocably appoint the persons designated by WOFE with the exclusive right to exercise, on their behalf, all of their Voting Rights in accordance with the laws and Maidisen’s Articles of Association, including but not limited to the rights to sell or transfer all or any of their equity interests of Maidisen, and to appoint and elect the directors and Chairman as the authorized legal representative of Maidisen. This agreement can only be terminated prior to the completion of acquisition of all of the equity interests in, or all assets or business of Maidisen.

(4) Share Pledge Agreement. WOFE and the shareholders of Maidisen have entered into a Share Pledge Agreement, pursuant to which all shareholders pledge all of their shares (100%) of Maidisen, as appropriate, to WOFE. If Maidisen or any of its respective shareholders breaches its respective contractual obligations in the “Entrusted Management Agreement”, “Exclusive Option Agreement” and “Shareholders’ Voting Proxy Agreement”, WOFE as Pledge, will be entitled to certain rights to foreclose on the pledged equity interests. Such Maidisen shareholders cannot dispose of the pledged equity interests or take any actions that would prejudice WOFE’s interest

Except for the disclosed above, there are no arrangements that could require WOFE to provide financial support to the variable interest entity, including events or circumstances that could expose WOFE to a loss. As stated in the disclosure of various agreements between WOFE and its VIE, WOFE has rights to acquire any portion of the equity interests of the VIE. Also, WOFE may allocate its available funds to its VIE for business purpose. There are no fixed terms of such arrangements.

The Company, through its subsidiary, and exclusive contractual arrangement with Maidisen, is engaged in the business of developing and marketing over-the-counter ("OTC") and pharmaceutical products based on traditional Chinese medicines designed to address for a variety of diseases and conditions.

These consolidated financial statements present the Company and its subsidiaries on a historical pro forma basis.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and represent the historical results of the consolidated group. The Company's functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in the United States Dollars.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its subsidiaries and variable interest entity (“VIE”) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The Company has adopted FIN 46R which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.

Translation Adjustments

As of September 30, 2010 and December 31, 2009, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars (“USD”) in accordance with the Foreign Currency Matters Topic of the Codification, with the CNY as the functional currency. According to the Codification, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the Codification, as a component of shareholders’ equity. Transaction gains and losses are reflected in the income statement.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Comprehensive Income

The Company follows the Comprehensive Income Topic of the Codification. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

Risks and Uncertainties

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, and by the general state of the PRC’s economy. The Company’s 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.

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. There were no contingencies of this type as of September 30 , 2010 and December 31, 2009.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserve balances at September 30, 2010 and December 31, 2009 were $0.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. As of September 30, 2010 and December 31, 2009, inventories consist of the following:

	At		At
	9/30/2010		12/31/2009
Raw materials	$	2,065,602	$	7,090,312
Work in process		645,150		701,317
Finished goods		7,474,600		2,718,168
Total	$	10,185,352	$	10,509,797

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property, Plant & Equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

Buildings	10- 30 years
Leasehold improvement	6-10 years
Transportation equipment	5-10 years
Fixture and furniture	5-10 years
Machinery and equipment	5 -12 years

As of September 30, 2010 and December 31, 2009 Property, Plant & Equipment consist of the following:

	At			At
	9/30/2010			12/31/2009
Buildings	$	4,389,792		$	4,389,792
Leasehold improvements		41,715			41,715
Transportation equipment		126,576			99,604
Fixture and furniture		117,922			117,922
Machinery and equipment		2,403,137			2,389,875

Total	$	7,079,142		$	7,038,908
Accumulated depreciation		(2,364,402	)		(1,971,507	)
	$	4,714,740		$	5,067,401

Depreciation expenses for the nine months ended September 30, 2010 and 2009 was $392,895 and $345,383, respectively.

Construction in progress - Assets under construction are stated at cost, which includes all direct cost relating to acquisition or construction cost, including interest charges on borrowings, are capitalized as construction in progress. No depreciation is provided until the construction is completed and the assets are ready for their intended use.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from six to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land use rights will expire in 2056 and 2058. The proprietary technologies were contributed by four shareholders of the Company and relate to the production of the Company's five state approved drugs. All of the Company’s intangible assets are subject to amortization with estimated lives of:

Land use right	50 years
Software	6 years
Proprietary technologies	10-20 years

The components of finite-lived intangible assets are as follows:

	At			At
	9/30/2010			12/31/2009
Land use right	$	1,691,077		$	1,691,077
Software		29,863			4,567
Proprietary technologies		7,138,063			7,138,063
		8,859,003			8,833,707
Less: Accumulated amortization		(2,536,724	)		(2,196,807	)
	$	6,322,279		$	6,636,900

Amortization expense for the nine months September 30, 2010 and 2009 was $339,917 and $539,602 respectively.

The estimated future amortization expenses related to intangible asset as of September 30, 2010 are as follows:

2011	$	453,223
2012		453,223
2013		453,223
2014		453,223
2015		453,223
Thereafter	$	4,056,164

Long-Lived Assets

The Company accounts for long-lived assets in accordance with Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), included in the Codification as ASC 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”, included in the Codification as ASC 225, Income Statement. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

Based on its review, the Company believes that, as of September 30, 2010 and December 31, 2009, there were no impairments of its long-lived assets.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments”, included in the Codification as ASC 820, Fair Value Measurements and Disclosures, requires that the Company discloses estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Value Added Tax Payable

The Company is subject to a value added tax rate of 17% on product sales by the People’s Republic of China. Value added tax payable is computed net of value added tax paid on purchases for all sales in the People’s Republic of China.

Revenue Recognition

The Company records revenues for goods shipped at the time of shipment. For goods delivered by the Company to a customer’s site, revenues are recognized at time of delivery.

Research and development cost

Research and development costs are expensed in the period when they are incurred. During nine months ended September 30, 2010 and 2009, research and development costs were $172,391 and $0, respectively. There were no costs for the three month periods ended September 30, 2010 and 2009.

Advertising

Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.

Advertising costs for the nine months ended September 30, 2010 and 2009 were $216,732 and $328,831, respectively. Advertising costs for the three months ended September 30, 2010 and 2009 were $61,310 and $139,890 respectively.

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes”, included in the Codification as ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

It is the Company’s intention to permanently reinvest earnings from activity with china. And thereby indefinitely postpone repatriation of these funds to the US. Accordingly, no domestic deferred income tax provision has been made for US income tax which could result from paying dividend to the Company.

There were no deferred tax difference in 2010 and 2009

Comprehensive Income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income, foreign currency translation adjustments.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows”, included in the Codification as ASC 230, Statement of Cash Flows, cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Basic and Diluted Earnings (Loss) per Share (EPS)

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is similarly computed, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to have been exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

The following table presents a reconciliation of basic and diluted earnings per share for three and nine months ended September 30, 2010:

	Three Months Ended				Nine Months Ended
	2010		2009		2010		2009
Net income	$	2,191,362	$	918,266	$	5,161,402	$	3,203,419
Weighted average shares outstanding - basic		30,000,005		30,000,005		30,000,005		30,000,005
Effect of dilutive securities:
Weighted average shares outstanding – diluted		30,000,005		30,000,005		30,000,005		30,000,005
Earnings per share – basic	$	0.07	$	0.03	$	0.17	$	0.11
Earnings per share – diluted	$	0.07	$	0.03	$	0.17	$	0.11

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Segment Reporting

Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information”, included in Codification ASC 280, Segment Reporting, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131 has no effect on the Company’s financial statements as substantially all the Company’s operations are conducted in one industry segment of manufacturing and marketing products over-the-counter and prescription pharmaceutical products. All of the Company’s assets are located in the PRC.

Recently Accounting Pronouncements

No new accounting pronouncements issued or effective during the fiscal years has had, or is expected to have a material impact on the consolidated financial statements.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 3 - OTHER RECEIVABLES

Other receivables mainly consist of cash advances to employees. As of September 30, 2010 and December 31, 2009, the other receivables were $517,237 and $762,158, respectively.

Note 4 - COMPENSATED ABSENCES

Regulation 45 of local labor law entitles employees to annual vacation leave after 1 year of service. In general all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.

Note 5 - DEBT

As of September 30, 2010 and December 31, 2009, the Company had debt as follows:

	09/30/2010			12/31/2009
China Merchant Bank	$	1,343,665	China Merchant Bank	$	1,320,190
Terms of the loan call for interest 7.00% per annum, with principal due in November 2010			Terms of the loan call for interest 7.00% per annum, with principal due in 2010

Commercial Bank of China –Zhonglou Branch		2,836,625	Commercial Bank of China –Zhonglou Branch		2,787,068
Term of the loan called for interest 5.94% per annum, with principal due in July 2011			Term of these loans called for interest 5.94% per annum, with principal due in July 2011

Total	$	4,180,290		$	4,107,258
Less current portion		4,180,290			1,320,190
Non current portion	$	-		$	2,787,068

The Company is using these loans for working capital purposes and secured by land use rights and building of the Company and a PRC state-owned company.

Note 6 - CONSTRUCTION IN PROGRESS AND COMMITMENTS

Construction in progress represented the construction of an exhibition hall. The Company paid $1,171 and $0 as of September 30, 2010 and December 31, 2009, respectively, and is committed to pay an additional $178,000 in accordance with the terms of an agreement. During the nine months ended September 30, 2010, there were no transfer from construction in progress to property, plant & equipment.

Note 7 - INCOME TAXES

Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) at a statutory rate of 25%. The Company is a high tech enterprise and under PRC Income Tax Laws, it is entitled to a five-year exemption for 2007 through 2011. If the Company were subject to the standard 25% enterprise income tax rate, it would have incurred $1,290,351 and $800,855 of income tax expense for the nine months ended September 30, 2010 and 2009, respectively. The standard income tax rate would have caused the Company to incur an additional expense of $0.04 and $0.03 per share for the nine months ended September 30, 2010 and 2009, respectively.

ASC 740, Accounting for Income Taxes (“ASC 740”), requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent that the Company believes a portion, more likely than not, will not be realized. The Company considers many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available for tax reporting purposes, and other relevant factors.

The Company through its VIE adopted the provisions of FASB Accounting Standards Codification Topic 740, Accounting for Uncertainty in Income Taxes. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The standard prescribes a recognition and measurement method for the financial statement recognition measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on recognition, classification, interest and penalties, accounting interim periods, disclosure and transition. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which ay require periodic adjustments and which may not accurately forecast actual outcomes.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Based on a review of tax positions, the Company was not required to record a liability for unrecognized tax benefits as a result of adopting ASC 740. Further, there has been no change during the nine months ended September 30, 2010 and the year ended December 2009. Accordingly, no interest and penalties was accrued through September 30, 2010 and December 31, 2009.

A reconciliation of the PRC Statutory income tax rate to the effective income tax rate is as follows:

	September 30, 2010			September 30,2009
PRC Statutory income tax rate		25	%		25	%
Preferential allowance as permitted		-25	%		-25	%
Other adjustments		0	%		0	%
Total		0	%		0	%

Note 8 - MAJOR CUSTOMERS AND CREDIT RISK

For the nine months ended September 30, 2010, two customers accounted for approximately 16% and 10% of sales. For the nine months ended September 30, 2009, one customer accounted approximately 26% of sales.

For the three months ended September 30, 2010, two customers accounted for approximately 16% and 11% of sales. For the three months ended September 30, 2009, one customer accounted approximately 28% of sales.

At September 30, 2010 and December 31, 2009, the total receivable due from these customers was approximately $1,065,000 and $298,000 respectively.

Two vendors provided 18% and 10% of the Company’s purchases of raw materials for the nine months ended September 30, 2010; three vendors provided 22%, 21% and 10% of the Company’s purchase of raw materials for the nine months ended September 30, 2009. Three vendors provided 17%, 13% and 12% of the Company’s purchases of raw materials for the three months ended September 30, 2010; two vendor provided 33%, and 31% of the Company’s purchase of raw materials for the three months ended September 30, 2009. At September 30, 2010, the total payable due to these vendors was approximately $1,181,673.

Note 9 - WARRANTS

On January 7, 2010, the Company entered into an agreement with Jinhao Zhang to provide for public shell referral services. As consideration for the referral services to be performed by Jinhao Zhang, the Company agreed to issue to Jinhao Zhang warrants to acquire 72,727 common shares of the Company’s common stock, subject to any forward or reverse splits, with registration rights, at a $13.75 exercise price and expiration date of three years after acquiring control of or merging with said public shell for time spent on referral services, at the time of acquiring control or merging with said public shell. The agreement had no fixed term of expiry.

On March 9, 2010, Dongke entered into an agreement with NSD Consulting Services, Inc. Dongke requires assistance in the public company sector including advising on a merger/acquisition transaction, regulatory filings and other consulting services support as requested. As consideration for the Consulting Services to be performed by Consultant under this agreement, Dongke agreed to issue NSD Consulting Services, Inc. warrants to acquire 72,727 common shares of the Company’s common stock, adjusted for any forward or reverse splits, with registration rights, at a $13.75 exercise price and expiration date of three years after the closing of the acquisition or merger for time spent on consulting services.

On April 2, 2010, Dongke entered into an investor relations agreement with Avisair IR Services, Inc., pursuant to which the Company required assistance in the public company sector including advising on and with respect to investor relations services. The term of the contract expires April 30, 2011. As consideration for certain investor relations services to be performed by Avisair IR Services, Inc., Dongke agreed to issue to Avisair IR Services, Inc. warrants to acquire 72,727 common shares of the Company’s common stock, adjusted for any forward or reverse splits, with registration rights, at a $13.75 exercise price and expiration date of April 26, 2013, for time spent on consulting services.

The fair market value of warrants, $71,358, has been recorded as derivative liability, see Note 10.

Total

Exercise Price

Remaining Life

Aggregate

Intrinsic Value

Outstanding, December 31, 2009

Granted in 2010

218,181

13.75

3 years

Outstanding, September 30, 2010

218,181

The Company determined the fair value of the reset provisions at September 30, 2010 was $71,358. The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions: dividend yield: -0-%; volatility: 105.1%, risk free rate: 1.79%, expected term: 2.61 years.

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 10 - DERIVATIVE LIABILITY

The balance sheet caption derivative liabilities consist of warrants issued to consultants in connection with the merger agreements. These derivative financial instruments are indexed to an aggregate of 218,181 and -0- shares of the Company’s common stock as of September 30, 2010 and December 31, 2010, respectively, and are carried at fair value. The following tabular presentations set forth information about the derivative instruments for the nine months ended September 30, 2010 and for the year ended December 31, 2009:

Derivative income (expense)		Nine months ended September 30, 2010				Year ended December 31, 2009
Warrant derivative		$	71,358			$	-

Liabilities		September 30, 2010				December 31, 2009
Warrant derivative		$	( 71,358	)			-

The Company has revalued the derivative at September 30, 2010. Based on this revaluation, there has been an immaterial change in the fair value of the derivative. Therefore, the Company has not adjusted the derivative amount brought forward from June 30, 2010.

Freestanding derivative instruments, consisting of warrants are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in the Black Scholes models included: conversion or strike prices $13.75; volatility 105.1% based upon forward terms of instruments; terms-remaining of 2.61 life; and a risk free rate of 1.79%.

Note 11 - STATUTORY RESERVE

In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises and the VIE’s income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital. Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of September 30, 2010 and December 31, 2009, the Company had allocated $2,448,456 and $2,448,456, respectively, to these non-distributable reserve funds.

Note 12 - OTHER COMPREHENSIVE INCOME

Balances of related after-tax components comprising accumulated other comprehensive income, included in stockholders’ equity, at September 30, 2010 and December 31, 2009, are as follows:

	Foreign Currency Translation Adjustment			Accumulated Other Comprehensive Income
Balance at December 31, 2008	$	(138,770	)	$	(138,770	)
Change for 2009		11,067			11,067
Balance at December 31, 2009		(127,703	)		(127,703	)
Change for 2010		179,142			179,142
Balance at September 30, 2010	$	51,439		$	51,439

DK SINOPHARMA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED AND RESTATED)

Note 13 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

The Company’s major operations are carried out in the PRC; therefore the Company is subject to the risks not typically associated with entities operating in the United States of America. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. All of the following risks may impair the Company’s business operations. If any of the following risks actually occurs, the Company’s business, financial condition or results of operations could be materially adversely affected. In such case, investor may lose all or part of the investment. Additional risks include:

§	The Company may not be able to adequately protect and maintain its intellectual property.
§	The Company may not be able to obtain regulatory approvals for its products.

§	The Company may have difficulty competing with larger and better financed companies in the same sector. New legislative or regulatory requirements may adversely affect the Company’s business and operations. The Company is dependent on certain key existing and future personnel.
§	The Company’s growth is dependent on its ability to successfully develop, market, or acquire new drugs. The Company may be subject to product liability claims in the future.

§	Changes in the laws and regulations in the PRC may adversely affect the Company’s ability to conduct its business.
§	The Company may experience barriers to conducting business due to governmental policy.

§	Capital outflow policies in the PRC may hamper the Company’s ability to remit income to the United States.
§	Fluctuation of the Renminbi could materially affect the Company’s financial condition and results of operations.

§	The Company may face obstacles from the communist system in the PRC.
§	The Company may have difficulty establishing adequate management, legal and financial controls in the PRC.

§	Trade barriers and taxes may have an adverse affect on the Company’s business and operations.
§	There may not be sufficient liquidity in the market for the Company’s securities in order for investors to sell their securities.

Note 14 – COMMITMENTS

The Company has future minimum obligations under a construction contract totaling approximately $178,000 as of September 30, 2010, due as follows:

2011

178,000

Note 15 - SUBSEQUENT EVENTS

For the nine months ended September 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued.

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

Cautionary Notice Regarding Forward-Looking Statements

In this quarterly report, references to “DK Sinopharma,” “the Company,” “we,” “our,” “us,” and the Company’s variable interest entity, “Maidisen,” refer to DK Sinopharma, Inc.

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

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

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

·	legislative and regulatory changes that affect our business;

·	the availability of funds and working capital;

·	the actions and initiatives of current and potential competitors;

·	investor sentiment; and

·	our reputation.

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

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

Overview

Since the completion of our recent restructuring in May 2010, we, through our variable interest entity (“VIE”), Yangling Dong Ke Maidisen Pharmaceuticals, Co. Ltd. (“Maidisen”), are primarily engaged in the research, development, manufacture, packaging, marketing and distribution of pharmaceutical and medical products in China for human use for a variety of diseases and conditions. All of our operations are conducted in the People’s Republic of China (the “PRC”) where our manufacturing facility is located. Through various contractual arrangements completed on January 27, 2010, our indirect wholly-owned subsidiary, Yangling Slovan Pharmaceutical Co., Ltd. (“Slovan”), has a controlling interest in Maidisen and therefore we are required to consolidate Slovan's and Maidisen’s financial statements with the financial statements of DK Sinopharma.

Our current operations, based in Yangling, Shaanxi Province, involve the manufacture and sale of 38 pharmaceutical products in the form of capsules, plasters, tablets, granules, semisolid ointment, power, ointment, and paste ointment. We currently focus our medicine on a variety of diseases relating to the respiratory system, digestive system, cardio-cerebral vascular system, antineoplastic, bone disease-modifying antirheumatic, gynecologyl, and refill nutrition, among others. Our products are sold to distributors who distribute our products to the public as well as through representatives that we employ. Our focus is on the development and sale of pharmaceutical products and over the counter products based on traditional Chinese medicines designed to address varying diseases and conditions. During the past few years 230 representative offices have been established nationwide and the business has extended to 26 provinces in the PRC.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2010 and 2009

Revenue

	Three Months Ended September 30,								% of
	2010				2009				change
Plasters		1,001,482	14	%		766,654	17	%		31	%
Granules		1,793,760	25	%		1,214,686	28	%		48	%
Tablets		689,683	9	%		519,529	12	%		33	%
Capsules		2,825,044	39	%		1,881,653	43	%		50	%
Others		980,716	13	%		-	-			100	%

Total net sales	$	7,290,685	100	%	$	4,382,522	100	%		66	%

		Nine Months Ended September 30,
		2010				2009			% of
Plasters		2,770,072	14	%		2,364,255	17	%	17	%
Granules		4,983,405	25	%		3,853,838	28	%	29	%
Tablets		1,863,840	9	%		1,563,680	12	%	19	%
Capsules		7,148,035	36	%		5,793,841	43	%	23	%
Others		3,252,748	16	%		-	-		100	%

Total net sales	$	20,018,100	100	%	$	13,575,614	100	%	47	%

In the three months ended September 30, 2010, we achieved revenue of $7,290,685, an increase of 66% as compared with $4,382,524 for products sold in the same period ended September 30, 2009. This increase is primarily due to an increase in sales for our new products, Galanthamine Hydrobromide, Cow-bezoar Detoxicating tables, Ganhai Stomach Recovery capsules, Camptothecine, VC Honeysuckle-fructusforsythiae tables and compound Salvia Root tablets. Sales to new customers have also contributed to the increase in sales.

In the nine months ended September 30, 2010, we achieved revenue of $20,018,100, an increase of 47% as compared with $13,575,614 for products sold in the same period ended September 30, 2009. This increase is primarily due to the lauch of new products and successful sales to new customers. The Company’s new products lauched in 2010 were Galanthamine Hydromide, Hydroxycamptothecin, Tanshinone IIA, Cow-bezoar Detoxicating table, Ganhai Stomach Recovery capsule, Camptothecine, VC Honeysuckle-fructus Forsythiae table and compound Salvia Root. Increase in sales prices of Company’s major products, namely, Huanglong Cough & Dyspenca Capsules, Gynecological Inflammation Relieving Capules. Hepatitis B Relieving and Curing Capsules and Sprain Relieving Plaster and successful market penetration into a new province, Jilin province, have also contributed to the increase in sales revenue.

Cost of Sales

	Three Months Ended September 30,								% of
	2010				2009				change
Plasters		481,969	11	%		362,331	15	%		33	%

Granules		910,456	22	%		649,873	27	%		40	%

Tablets		402,868	9	%		319,729	13	%		26	%

Capsules		1,624,905	39	%		1,094,570	45	%		48	%

Others		781,641	19	%		-	-			100	%

Total cost of sales	$	4,201,839	100	%	$	2,426,503	100	%		73	%

	Nine Months Ended September 30,								% of
	2010				2009				change
Plasters		1,344,319	11	%		1,116,937	15	%		20	%

Granules		2,798,298	24	%		2,202,346	29	%		27	%

Tablets		1,007,485	9	%		960,537	13	%		5	%

Capsules		4,197,998	36	%		3,223,540	43	%		30	%

Others		2,407,456	20	%		-	-			100	%

Total cost of sales	$	11,755,556	100	%	$	7,503,360	100	%		57	%

Cost of sales increased to $4,201,839 for the three months ended September 30, 2010, representing a 73% increase as compared with $2,426,503 for the same period of 2009. This increase was primarily due to an increase in subcontracting charges to cope with the increase in sales.

Cost of sales increased to $11,755,556 for the nine months ended September, 30, 2010, representing a 57% increase as compared with $7,503,360 for the same period of 2009. This increase is primarily due to (i) an increase in subcontracting charges and (ii) an increase in costs for raw and packing materials in line with the increase in sales revenue. As of the beginning of 2010, the Company has started a new production process of extracting useable substances from raw materials. This production process is still in its infancy stage, hence, subcontractors have been engaged to meet growing demand. The increase in costs of raw and packng materials such as PVC, Geosaurus, Savia Miltiorrhiza and Veneum Bufonis have also contributed to the increase in cost of sales.

Gross Profit

	Three Months Ended September 30,										% of
	2010					2009					change
			Gross					Gross
			Profit					Profit
			Margin					Margin
Plasters		519,513		17	%		404,323		21	%		28	%

Granules		883,304		29	%		564,813		29	%		56	%

Tablets		286,815		9	%		199,800		10	%		44	%

Capsules		1,200,139		39	%		787,083		40	%		52	%

Others		199,075		6	%		-		-			100	%

Total	$	3,088,846		100	%	$	1,956,019		100	%		58	%

		Nine Months Ended September 30,									% of
		2010					2009				Change
			Gross					Gross
			Profit					Profit
			Margin					Margin
Plasters		1,425,753		17	%		1,247,318		21	%		14	%

Granules		2,185,107		27	%		1,651,492		27	%		32	%

Tablets		856,355		10	%		603,143		10	%		42	%

Capsules		2,950,037		36	%		2,570,301		42	%		15	%

Others		845,292		10	%		-		-			100	%

Total	$	8,262,544		100	%	$	6,072,254		100	%		36	%

Gross profit increased 58% to $3,088,846 for the three months ended September 30, 2010, as compared to $1,956,019 for the three months ended September 30, 2009. Our gross profit margin fell 3% to 42% as of the three months ended September 30, 2010 from 45% as of the same period in 2009, mainly due to the increase in subcontracting charges.

Gross profit increased 36% to $8,262,544 for the nine months ended September 30, 2010, as compared to $6,072,254 for the nine months ended September 30, 2009. Our gross profit margin fell 4% to 41% as of the nine months ended September 30, 2010 from 45% as of the same period in 2009, mainly due to the increase in subcontracting charges and costs of raw and packing materials; effectively, the overall percentage increase in cost of sales offset an overall percentage increase in net sales.

Net income achieved for the three months and nine months ended September 30,2010 was $2,191,362 and $5,161,402, respectively, as compared with the corresponding periods in 2009 of $918,266 and $3,203,419, respectively, representing a increase of 139% and 61%, respectively.

Selling, General and Administrative Expenses

	Three Months Ended September 30,										% of
	2010					2009					change
			% net of total sales					% net of total sales
Selling, general and administrative expenses	$	998,913		14	%	$	1,177,302		27	%		(15	%)

	Nine Months Ended September 30,										% of
	2010					2009					Change
			% net of total sales					% net of total sales
Selling, general and administrative expenses	$	2,846,732		14	%	$	2,814,031		21	%		1	%

Selling, general and administrative expenses were $998,913 and $2,846,732, respectively, for the three and nine months ended September 30, 2010, a (decrease) of (15%) and an increase of 1%, respectively, as compared to $1,177,302 and $2,814,031, respectively, for the same periods in 2009. The (decrease) for the 3 months ended September 30, 2010 was due primarily to decrease in amortization of intangible assets, advertising expenses and the reversal of a write-off related to an advance made to a supplier.

Interest Expenses

Total interest expense during the three and nine months ended September 30, 2009 increased and (decreased) approximately 32% and (10%) from $50,285 and $242,196, respectively, to $66,283 and $216,802 for the three and nine months ended September 30, 2010, respectively. The increase for the three months ended September 30, 2010 was mainly due to the fact that in the three months ended September 30, 2009, one of our two outstanding loans was settled in August 2009, and as such no interest paid during the months of August and September 2009.

Other Income

Total other income (decreased) and increased approximately (11%) and 1% from $190,756 and $191,294 respectively, during the three and nine months ended September 30, 2009 to $ 169,841 and $193,319, respectively, for the three and nine months ended September 30, 2010. In the three months ended September 30, 2010, the $169,841 in total other income was comprised of the reversal of a write-off for deposits paid to suppliers. The suppliers subsequently delivered goods in accordance with their contract while in the comparable period for 2009, total other income was comprised solely of local government subsidies.

Liquidity and Capital Resources

As of September 30, 2010, we had cash and cash equivalents of approximately $4.8 million. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at present level for at least the next twelve months. We plan to review acquisition opportunities as a strategy for further growth.

Maidisen’s primary sources and uses of cash for the nine months ended September 30, 2010 included income from continuing operations, adjusted for non-cash items of income and expenses, and purchases of equipments and intangible assets.

Net cash provided by operating activities from continuing operations was approximately $3.6 million for the nine months ended September 30, 2010. This was primarily due tonet income of approximately 5.1 million, adjusted by non-cash related expenses including depreciation and amortization of approximately $0.8 million and non-cash related income including reversal of a write-down on advance to suppliers of approximately $0.3 million. The net decrease in working capital items was mainly due to a decrease in accounts payables, accruals and other payables resulting from the decrease in purchases during this period as the Company reached its inventory buffer level to meet future sales. The net decrease in working capital items was partially offset by trade receivables, advance to suppliers and inventories.

Net cash used in investing activities for the nine months ended September 30, 2010 was approximately $66,700, primary representing acquisition of property, plant and equipment and intangible assets.

Contractual Obligations

To date, our business has been dependent upon short term bank loans. As of September 30, 2010, we had total outstanding bank loans of $4,180,290, of which $4,180,290 represented short term debt. As of September 30, 2010, we had $1,343,665 outstanding under our loan from the China Merchant's Bank and $2,836,625 outstanding under our loans from the Xi'an City Commercial Bank. The following table sets forth our bank loan obligations as of September 30, 2010:

	September 30, 2010
China Merchant's Bank
Terms of this loan call for interest 7% per annum, with principal due November 23, 2010. Loan is secured by personal guarantee of Dongke Zhao and Jinkun Wei.	$	1,343,665
Xi’an City Commercial Bank, Zhonglou Branch
Terms of this loan call for interest 4.95% per annum, with principal due July 22, 2011. Loan is secured by the land and building of the Yangling factory.	$	2,836,625

Total	$	4,180,290

Our anticipated needs for the future are to be negotiated in accordance with manufacturing and operation needs, and market conditions of next year.

Accounting for Stock-Based Compensation

The account for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", as amended by the Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." Accounting Principles Board Opinion No. 25 and Financial Accounting Standards Board Interpretation No. 44 state that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the company’s common stock on the grant date. We adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which requires compensation expense to be disclosed based on the fair value of the options granted at the date of the grant.

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the first quarter of fiscal 2006.

We did not issue any stock options to employees during the three months ended September 30, 2010, therefore financial statement disclosures are not required.

Valuation of Intangibles

From time to time, we acquire intangible assets that are beneficial to our product development processes. Management periodically evaluates the carrying value of intangibles, including the related amortization periods. In evaluating acquired intangible assets, management determines whether there has been impairment by comparing the anticipated undiscounted cash flows from the operation and eventual disposition of the product line with its carrying value. If the undiscounted cash flows are less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on either a discounted cash flows analysis or market analysis. Future operating income is based on various assumptions, including regulatory approvals, patents being granted, and the type and nature of competing products. If regulatory approvals or patents are not obtained or are substantially delayed, or other competing technologies are developed and obtain general market acceptance or market conditions otherwise change, our intangibles may have a substantially reduced value, which could be material.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this new FSP did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Fair Value Option for Financial Assets and Financial Liabilities

In February, 2007, FASB issued SFAS 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Income Taxes

The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for uncertainty in Income Taxes." FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, "Accounting for Contingencies." FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of implementing FIN 48, there have been no adjustments to the Company's financial statements.

Statutory Reserve

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase/decrease in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of September 30, 2010 and December 31, 2009, the Company had allocated $2,448,456 and $2,448,456, respectively, to these non-distributable reserve funds.

Restrictions on Currency Exchange

We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency. According to the opinions of our employees and our PRC counsel, if the payment from the parent company has previously been filed in the project, PRC accounting law and regulations do not forbid payment of income to foreign investors outside China. This policy is reflected in China People’s Bank 1996 No.210 Regulation of Foreign Exchange, Payment and Settlement (the “1996-210 Regulation”). Below is the relevant statute provision of 1996-210 Regulation:

XXI. In a foreign-invested enterprise, if a foreign investor wants to transfer abroad the after-tax profit and dividend, on the prerequisite of full compliance with PRC laws, he/she can transfer from correspondent foreign currency account or through a state- designated foreign exchange bank with presentation of a board resolution authorizing the profit distribution.

XXII. Dividends that need to be paid in foreign currency should be paid with after-tax profit, in accordance with the board resolution on profit distribution, from correspondent foreign currency account or be transferred from a state-designated foreign exchange bank.

The shortage of foreign currency supply may restrict us from remitting enough foreign currency to pay dividend or fulfill other foreign currency obligations. Under current PRC Foreign Exchange Management Regulations, the payment of existing accounts including profit distribution, dividend payment and transactional payment can be paid without the pre-approval of of the State Administration for Foreign Exchange, so long as the payment procedure complies with correspondent regulations. However, government approval is required for converting Renminbi to foreign currency and remitting foreign currency aboard to pay for the cost of capital (eg. foreign loan repayment).

As of September 30, 2010, Maidisen, our PRC operating entity, had net assets of $22,247,621. Because substantially all of our earnings and cash assets are denominated in Renminbi and the net proceeds from any future offering will be denominated in U.S. dollars, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of future proceeds and our balance sheet and earnings per share in U.S. dollars following such transaction. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue after this offering that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

We do not believe that we currently have any significant foreign currency exchange risk and we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.

Inflation

Inflation in recent years has affected the business results of the Company. First of all, on the global economic expansion, supply has been restricted and coupled with the fact that USA has adopted a relaxed currency policy etc., these increase inflation risks. Secondly, GNP increases in China also elevates consumption ability and production cost, prices increase as a natural tendency. Finally, as a result of the macro-economic trend, prices increase, the Company’s procurement prices are also affected resulting in increase in cost of sales.

The Company operates in China and as such, the Company’s business activities, financial position and operational results will be affected by PRC politics, economic and legal environments and also affected by the overall economic situation of China. The business of the Company may be affected by the relevant laws, regulations, anti-inflation measures, currency conversion and overseas remittance and exchange rates issues etc that are related to China politics.

Off-Balance Sheet Commitments and Arrangements

We do not have any financial undertaking or any other guarantee responsible for third party obligations and commitments. We have not entered into any derivative products contracts having the Company’s equity linked or that have not been reflected in the consolidated financial statements. Furthermore, in passing our assets to those providing credits, clearing or providing market risks support bodies, we have not reserved any rights or undefined rights on the assets passing. The Company does not have any benefits from bodies providing finance, clearing or market risks or credit support or with bodies we engage in leasing, hedging or research and development services.

Off-Balance Sheet Commitments and Arrangements

Recent Accounting Pronouncements

No new accounting pronouncements issued or effective during the fiscal year has had, or is expected to have, a material impact on the consolidated financial statements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

N/A.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Dongke Zhao, the Company’s Chief Executive Officer (“CEO”), and Yanhong Ren, 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 September 30, 2010. Based upon that evaluation, the Company’s CEO and CFO concluded that, as of the date of evaluation, there was a material weakness in the Company’s internal controls and therefore the Company’s internal controls over financial reporting was not effective. The material weakness was related to a lack of technical accounting expertise due to the lack of a sufficient number of personnel with an appropriate level of knowledge of and experience in generally accepted accounting principles in the United States of America (U.S. GAAP) that are appropriate to the Company's financial reporting requirements. As a result of such evaluation, the Company's CEO concluded that, as of the date of evaluation, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, or that such information 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.

During the course of internal evaluation, the Company determined that accounting errors were made in connection with the Company’s classification of certain warrants pursuant to ASC 815-40-15 as well its disclosure of certain other accounting policies.

Based on the impact of the aforementioned accounting errors, the Company determined to restate our consolidated financial statements as of June 30, 2010.

The Company plans to take the following steps to remediate the deficiencies in disclosure controls and procedures that are identified above:

1. Hire additional accounting and operations personnel, as needed, to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions.

2. Require senior accounting personnel and the principal accounting officer to review complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions.

3. Interview prospective new Directors for our Board, including a member who is appropriately credentialed as a financial expert as well as sufficient independent Directors.

We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

Changes in internal controls

Other than as disclosed above, there were no changes in the Company's internal controls over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

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

Item 1A.

Risk Factors.

N/A.

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

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

Item 4.

(Removed and Reserved).

Item 5.

Other Information.

None.

Item 6.

Exhibits.

(a)

Exhibits

31.1		Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.
31.2		Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.
32.1		Certification Required Under Section 906 of Sarbanes-Oxley Act of 2002.
32.2		Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.

SIGNATURES

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

	DK SINOPHARMA, INC.

Dated: November 22, 2010	By:	/s/ Dongke Zhao
		Name: Dongke Zhao
		Title: Chief Executive Officer


Dated: November 22, 2010	By:	/s/ Yanhong Ren
		Name: Yanhong Ren
		Title: Chief Financial Officer