BMP Sunstone CORP - FORM 10-Q

Attached files

file	filename
EX-32.1 - SECTION 906 CEO CERTIFICATION - BMP Sunstone CORP	dex321.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - BMP Sunstone CORP	dex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - BMP Sunstone CORP	dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - BMP Sunstone CORP	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

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

FOR THE TRANSITION PERIOD FROM TO

Commission file number 001-32980

BMP SUNSTONE CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		20-0434726
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

600 W. Germantown Pike, Suite 400 Plymouth Meeting, Pennsylvania		19462
(Address of principal executive offices)		(Zip Code)

(610) 940-1675

(Registrant’s telephone number, including area code)

(Former name, if changed since last report)

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


Large accelerated filer ¨	Accelerated filer þ	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

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

The number of shares of common stock of BMP Sunstone Corporation outstanding as of November 6, 2009 was 41,560,155.

BMP SUNSTONE CORPORATION

INDEX


		Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2009 and December 31, 2008		3
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2009 and 2008		4
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2009		5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2009 and 2008		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		39
Item 4. Controls and Procedures		40

Part II. OTHER INFORMATION
Item 1A. Risk Factors		42
Item 6. Exhibits		42
SIGNATURES		43

EX-31.1

EX-31.2

EX-32.1

EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands)

(Unaudited)


	September 30, 2009			December 31, 2008
Assets
Current Assets:
Cash and Cash Equivalents	$	13,182		$	15,740
Restricted Cash		1,563			1,150
Notes Receivable		10,595			15,797
Accounts Receivable, net of allowance for doubtful accounts of $193 and $127		42,493			30,897
Inventory		8,940			10,184
Receivable from Alliance Unichem		7,550			—
Due from Related Parties		5			1,834
Other Receivables		2,545			2,168
VAT Receivable		1,060			921
Prepaid Expenses and Other Current Assets		7,172			6,247

Total Current Assets		95,105			84,938
Property and Equipment, net		26,912			22,840
Investment in Alliance BMP Limited, at cost		—			15,093
Investment in Shengda		3,114			—
Investments at Cost		146			146
Goodwill		70,029			69,866
Other Assets		519			875
Land Use Rights, net of accumulated amortization		2,886			2,002
Intangible Assets, net of accumulated amortization		39,377			41,891

Total Assets	$	238,088		$	237,651

Liabilities and Equity
Current Liabilities:
Bank Borrowings	$	1,843		$	11,613
Notes Payable, net of debt discount		—			21,978
Accounts Payable		24,941			27,482
Due to Related Parties		2,297			4,361
Deferred Revenue		128			128
Accrued Expenses		15,704			14,601

Total Current Liabilities		44,913			80,163

Long-Term Debt, including debt premium		31,949			—
Deferred Taxes		9,510			9,856

Total Liabilities		86,372			90,019

Commitments and Contingencies		—			—

Equity:
Common Stock, $.001 Par Value; 75,000,000 Shares Authorized; 41,560,155 and 40,246,410 Shares Issued and Outstanding as of September 30, 2009 and December 31, 2008, respectively		42			40
Additional Paid in Capital		167,086			160,864
Common Stock Warrants		8,621			9,049
Accumulated Deficit		(34,956	)		(31,042	)
Accumulated Other Comprehensive Income		9,422			8,721

Total BMP Sunstone Corporation Stockholders’ Equity		150,215			147,632
Noncontrolling interest		1,501			—

Total Liabilities and Equity	$	238,088		$	237,651

See notes to condensed consolidated financial statements

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

($ in thousands except per share amounts)


	For the three months ended September 30,						For the nine months ended September 30,
	2009			2008			2009			2008
Net Revenues:
Third Parties	$	33,358		$	28,544		$	101,001		$	72,979
Related Parties		268			1,959			4,370			5,251

Total Revenues		33,626			30,503			105,371			78,230
Cost of Goods Sold		17,950			16,676			54,643			40,120

Gross Profit		15,676			13,827			50,728			38,110

Sales and Marketing Expenses		9,811			9,152			33,622			26,251
General and Administration Expenses		4,825			2,910			12,755			9,886

Total Operating Expenses		14,636			12,062			46,377			36,137

Profit From Operations		1,040			1,765			4,351			1,973

Other Income (Expense):
Interest Income		52			6			159			68
Interest Expense		(895	)		(1,590	)		(3,369	)		(4,770	)
Debt Issuance Cost Amortization		(101	)		(210	)		(326	)		(630	)
Equity Method Investment Income		107			—			189			675
Loss on Early Extinguishment of Debt		—			—			(4,573	)		—
Gain (Loss) on Derivatives		—			—			1,204			—

Total Other Expense		(837	)		(1,794	)		(6,716	)		(4,657	)

Profit (Loss) Before Provision For Income Taxes		203			(29	)		(2,365	)		(2,684	)
Provision For Income Taxes		430			787			1,583			2,198

Net Loss	$	(227	)	$	(816	)	$	(3,948	)	$	(4,882	)

Less: Net Loss Attributable to the Noncontrolling Interest		19			—			35			—

Net Loss Attributable to BMP Sunstone Corporation	$	(208	)	$	(816	)	$	(3,913	)	$	(4,882	)

Basic and Fully-Diluted Loss Per Share	$	(0.01	)	$	(0.02	)	$	(0.10	)	$	(0.13	)

Basic Weighted-average Shares Outstanding		41,559			39,650			41,291			38,070

Diluted Weighted-average Shares Outstanding		50,831			40,760			48,184			39,368

See notes to condensed consolidated financial statements

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

($ in thousands)


	Number of Shares	$.001 Par Value		Additional Paid-in Capital			Common Stock Warrants			Accumulated Deficit			Accumulated Other Comprehensive Income Foreign Currency Translation		Non controlling Interest			Stock- holders’ Equity
Balance as of December 31, 2008	40,246,410	$	40	$	160,864		$	9,049		$	(31,042	)	$	8,721	$	—		$	147,632
Stock-Based Compensation	—		—		585			—			—			—		—			585
Common Stock Issuance in connection with private placement	1,118,124		1		2,846			731			—			—		—			3,578
Common Stock Warrants Issuance	—		—		(838	)		—			—			—		—			(838	)
Cost Incurred in Connection with Stock Issuance	—		—		(579	)		—			—			—		—			(579	)
Common Stock Issuance in Connection with Debt Financing	135,875		—		417			—			—			—		—			417
Extinguishment of Derivative Liability	—		—		1,555			—			—			—		—			1,555
Net Loss	—		—		—			—			(1,990	)		—		—			(1,990	)
Other Comprehensive Loss
Foreign Currency Translation	—		—		—			—			—			245		—			245

Total Comprehensive Loss	—		—		—			—			—			—		—			(1,745	)

Balance as of March 31, 2009	41,500,409	$	41	$	164,850		$	9,780		$	(33,032	)	$	8,966	$	—		$	150,605
Stock-Based Compensation	—		—		599			—			—			—		—			599
Common Stock Warrants Exercised	58,496		1		197			(130	)		—			—		—			68
Common Stock Warrants Expired	—		—		1,029			(1,029	)		—			—		—			—
Extinguishment of Derivative Liability	—		—		1,342			—			—			—		—			1,342
Noncontrolling Interest					(439	)										439			—
Net Loss	—		—		—			—			(1,716	)		—		(16	)		(1,732	)
Other Comprehensive Loss
Foreign Currency Translation	—		—		—			—			—			348		—			348

Total Comprehensive Loss	—		—		—			—			—			—		—			(1,384	)

Balance as of June 30, 2009	41,558,905	$	42	$	167,578		$	8,621		$	(34,748	)	$	9,314	$	423		$	151,230
Stock Based Compensation	—		—		600			—			—			—		—			600
Option Exercise	1,250		—		5			—			—			—		—			5
Noncontrolling Interest	—		—		(1,097	)		—			—			—		1,097			—
Net Loss	—		—		—			—			(208	)		—		(19	)		(227	)
Other Comprehensive Loss
Foreign Currency Translation	—		—		—			—			—			108		—			108

Total Comprehensive Loss	—		—		—			—			—			—		—			(119	)

Balance as of September 30, 2009	41,560,155	$	42	$	167,086		$	8,621		$	(34,956	)	$	9,422	$	1,501		$	151,716

See notes to condensed consolidated financial statements

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

($ in thousands)


	For the nine months ended September 30,
	2009			2008
Cash Flows from Operating Activities:
Net Loss	$	(3,913	)	$	(4,882	)
Adjustments to Reconcile Net Loss to Net Cash Provided in Operating Activities:
Bad Debt Expense		—			3
Depreciation and Amortization of Property and Equipment		1,745			1,424
Amortization of Intangible Assets and Inventory at Fair Value		2,658			3,279
Amortization of Debt Discount and Deferred Debt Issuance Costs		695			2,931
Stock-Based Compensation		1,784			1,816
Gain on Fair Value of Derivatives		(1,204	)		—
Loss on Early Extinguishment of Debt		4,573			—
Equity Method Investment Income		(189	)		(675	)
Loss on Disposal of Asset		139			2
Non Controlling Interest		(35	)		—
Decrease in Deferred Taxes		(369	)		(561	)
Increase in Accounts Receivable		(11,547	)		(2,693	)
Decrease in Notes Receivable		5,237			—
Decrease (Increase) in Inventory		1,463			(4,387	)
Increase in Other Receivables		(616	)		(95	)
Increase in Value Added Tax Receivable		(136	)		(157	)
Increase in Prepaid Expenses and Other Current Assets		(205	)		(2,473	)
(Decrease) Increase in Accounts Payable		(3,029	)		3,724
Decrease in Due to Related Parties		(236	)		(2,559	)
Decrease in Deferred Revenue		—			(1,584	)
Increase in Accrued Expenses		1,253			1,462

Net Cash Used in Operating Activities		(1,932	)		(5,425	)

Cash Flows from Investing Activities:
Acquisition of Property and Equipment		(5,908	)		(2,950	)
Payment for Land Use Rights		(901	)		—
Cash Received in Acquisition of Sunstone China and Rongheng		—			2,587
Investment in Alliance BMP		—			(12,040	)
Disposal of Alliance BMP		7,543			—
Acquisition of Rongheng		—			(1,661	)
Note Receivable with Rongheng		—			214
Investment in Shengda		(1,637	)		—

Net Cash Used In Investing Activities		(903	)		(13,850	)

Cash Flows from Financing Activities:
Net Proceeds from Common Stock Issuance		2,999			—
Net Proceeds from Long Term Debt Issuance		12,031			—
Retirement of Long Term Debt		(11,350	)		—
Increase in Restricted Cash		(413	)		—
Net Proceeds from Exercise of Warrants and Options		73			968
Payments on Note Payable		—			(1,365	)
Net Payments on bank borrowings		(3,069	)		—

Net Cash Provided by (Used in) Financing Activities		271			(397	)

Effect of exchange rate changes on cash		6			622

Net Decrease in Cash and Equivalents		(2,558	)		(19,050	)
Cash and Equivalents, Beginning		15,740			22,837

Cash and Equivalents, Ending	$	13,182		$	3,787

Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Years for:
Income Taxes	$	3,394		$	1,832
Interest	$	2,636		$	1,895

Non-Cash Investing and Financing Activities:
Issuance of January Exchange Notes for 10.0% Notes of January Exchange Notes for 10.0% Notes	$	10,650			—
Issuance of March Exchange Notes for 10.0% Notes	$	1,000			—

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 of BMP Sunstone Corporation (formerly Beijing Med-Pharm Corporation) and subsidiaries (collectively, the “Company,” “we” or “our”) include the accounts of BMP Sunstone Corporation (the “Parent”) and its direct and indirect owned subsidiaries, Beijing Medpharm Co. Ltd. (“BMP China”), Beijing Wanwei Pharmaceutical Co., Ltd. (“Wanwei”), Sunstone China Limited (“Sunstone China”), the 100% owner of Sunstone (Tangshan) Pharmaceutical Co., Ltd (“Sunstone”), Shanghai Rongheng Pharmaceutical, Ltd (“Rongheng”), Dejee Company Limited and BMP Sunstone Corporation Beijing Representative Office and should be read in conjunction with the audited consolidated financial statements and accompanying footnotes of the Company as of December 31, 2008 and 2007, and for each of the three years for the period ended December 31, 2008, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2009. The condensed consolidated balance sheet of the Company at December 31, 2008, presented with in this report on Form 10-Q has been derived from audited financial statements at that date. In the opinion of management, the accompanying unaudited consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the Company’s interim results. Certain information and footnote disclosures required for complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to applicable rules and regulations. The operating results for the interim periods are not necessarily indicative of the results to be expected for the full year.

Earnings Per Share: The Company calculates basic earnings per share based on the weighted-average number of outstanding common shares. The Company calculates diluted earnings per share based on the weighted-average number of outstanding common shares plus the effect of dilutive stock options and warrants. Common stock equivalents have been excluded from the diluted per share calculations as of September 30, 2009 and 2008, as the Company has incurred a net loss during the three month and nine month period then ended, and their inclusion would have been anti-dilutive.

Recent Accounting Pronouncements: In June 2009, the Financial Accounting Standards Board (the “FASB”) issued the FASB Accounting Standards Codification (the “Codification”). The Codification has become the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. We applied the Codification to our Quarterly Report on Form 10-Q for the period ending September 30, 2009. The Codification does not change GAAP and did not have an effect on our financial position or results of operations

On January 1, 2008, the Company adopted a new accounting standard regarding fair value measurements as it relates to financial assets and financial liabilities. In February 2008, the FASB issued new accounting guidance, which delayed the effective date of the standard for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities.

The standard defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of the standard, as it relates to financial assets and financial liabilities, had no significant impact on the Company’s financial statements. Management has adopted the standard as of the effective date, as it relates to nonfinancial assets and nonfinancial liabilities and there was no significant impact on the Company’s financial statements. The standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3—Inputs that are both significant to the fair value measurement and unobservable.

In October 2008, the FASB issued new accounting guidance which clarifies prior guidance regarding the application of fair value in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The standard is effective upon issuance, including prior periods for which financial statements have not been issued. The Company adopted the standard for the period ended December 31, 2008 and the adoption did not have any significant impact on its consolidated balance sheets, statements of operations, or disclosures.

The fair value of cash equivalents and restricted cash was $14.7 million at September 30, 2009. These financial instruments are classified in Level 1 of the fair value hierarchy described above.

In December 2007, the FASB issued new accounting guidance regarding how an entity accounts for the acquisition of a business. The standard carries forward the existing requirements to account for all business combinations using the acquisition method (formerly called the purchase method). In general, the standard requires acquisition-date fair value measurement of identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree. The standard eliminates the current cost-based purchase method.

The new measurement requirements result in the recognition of the full amount of acquisition-date goodwill, which includes amounts attributable to noncontrolling interests. The acquirer recognizes in income any gain or loss on the remeasurement to acquisition-date fair value of consideration transferred or of previously acquired equity interests in the acquiree. Neither the direct costs incurred to effect a business combination nor the costs the acquirer expects to incur under a plan to restructure an acquired business may be included as part of the business combination accounting. As a result, those costs are charged to expense when incurred, except for debt or equity issuance costs, which are accounted for in accordance with other generally accepted accounting principles.

The standard also changes the accounting for in-process research and development, and restructuring costs. In addition, after the standard is adopted, changes in uncertain tax positions or valuation allowances for deferred tax assets acquired in a business combination are recognized as adjustments to income tax expense or contributed capital, as appropriate, even if the deferred tax asset or tax position was initially acquired prior to the effective date of the standard. The Company adopted the standard as of the required effective date of January 1, 2009. The adoption of the standard did not have any significant impact on the Company’s consolidated balance sheets, statement of operations or disclosures.

In April 2008, the FASB issued accounting guidance which amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under a previously issued standard with regards to Goodwill and Other Intangible Assets. This standard also requires expanded disclosure related to the determination of intangible asset useful lives. The standard is effective for fiscal years beginning after December 15, 2008. The Company has adopted the standard as of the required effective date of January 1, 2009 and the adoption did not have any significant impact on its consolidated balance sheets, statements of operations, or disclosures.

In June 2008, the FASB issued new accounting guidance which specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. The standard provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the standard’s scope exception. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The Company has adopted this standard as of January 1, 2009 in its evaluation of its derivatives.

In March 2008, the FASB issued accounting guidance which requires companies with derivative instruments to disclose information about how and why the company used derivative instruments; how the company accounts for derivative instruments and related hedged items; and how derivative instruments and related hedged items affect the company’s financial position, financial performance, and cash flows. The expanded disclosure guidance also requires a company to provide information about its strategies and objectives for using derivative instrument; disclose credit-risk-related contingent features in derivative agreements and information about counterparty credit risk; and present the fair value of derivative instruments and related gains or losses in a tabular format. The Company adopted the standard as of the required effective date of January 1, 2009 and applied its provisions prospectively by providing the additional disclosures in its financial statements.

In June 2008, the FASB issued new accounting guidance providing transition information for conforming changes made to standards regarding convertible securities with beneficial conversion features or contingently adjustable conversion ratios. This standard is effective for financial statements issued for fiscal years ending after December 15, 2008. The Company adopted the standard as of the required effective date of January 1, 2009 and the standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In November 2008, the FASB issued new accounting guidance which clarifies whether a financial instrument for which the payoff to the counterparty is based, in whole or in part, on the stock of an entity’s consolidated subsidiary is indexed to the reporting entity’s own stock. The standard is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The Company has adopted the standard and the standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In April 2009, the FASB issued new accounting guidance requiring disclosures about the fair value of financial instruments in interim as well as in annual financial statements. The adoption of this standard has resulted in additional disclosures only in our interim financial statements, and therefore did not impact our financial position, results of operations or cash flows. The Company has adopted the standard as of the required effective date of June 15, 2009. See Note 6 for discussion of fair value measurements of our derivative instruments.

In May 2009, the FASB issued new accounting guidance which provided accounting and disclosure requirements for subsequent events into GAAP. This standard introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and disclose events or transactions occurring after the balance-sheet date. The Company adopted this standard as of June 30, 2009, which was the required effective date.

The Company evaluated its September 30, 2009 financial statements for subsequent events through November 9, 2009, the date the financial statements were issued.

In August 2009, the FASB issued new accounting guidance regarding amendments to various topics containing SEC Staff Accounting Bulletins. This guidance represents technical corrections to various topics within the FASB Codification containing SEC Staff Accounting Bulletins, to update cross-references to Codification text. We have evaluated this new standard and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In August 2009, the FASB issued new accounting guidance amending “Accounting for Redeemable Equity Instruments.” This standard represents an update to prior accounting guidance regarding the Classification and Measurement of Redeemable Securities. We have evaluated this new standard and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In August 2009, the FASB issued new accounting guidance amending the fair value measurement of liabilities. The guidance provided in this standard is effective for the first reporting period (including interim periods) beginning after issuance. We have evaluated this new standard and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In September 2009, the FASB issued new accounting guidance related to technical corrections within the FASB Codification to various topics which contain SEC guidance. We have evaluated this new standard and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In September 2009, the FASB issued an accounting standard related to “Computation of Earnings Per Share for a Period that Includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and The Effect of the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.” We have evaluated this new standard, and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In September 2009, the FASB issued an accounting standard revising “Accounting for Equity Method Investments, Joint Ventures and Accounting for Equity-Based Payments to Non-Employees.” Previously this information was entered into the Codification incorrectly. Additionally, it adds and observer comment entitled “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees” to the Codification. We have evaluated this new standard and have determined that it will not have a significant impact on the determination or reporting of our financial results.

2. Acquisitions:

Acquisition of Zhangjiakou Shengda Pharmaceutical Co., Ltd

On December 19, 2008, Sunstone entered into an Equity Transfer Agreement with Beijing Penn Pharmaceutical Sci-Tech Development Co., Ltd. (“Beijing Penn”) to purchase 50% of the outstanding equity interests of Zhangjiakou Shengda Pharmaceutical Co., Ltd. (“Shengda”) for RMB 20.0 million (or $2,920,000 as of February 16, 2009) in cash. On February 16, 2009 we received the business license of Shengda and closed on the acquisition. Shengda has changed its name to Sunstone Shengda (Zhangjiakou) Pharmaceutical Co., Ltd.

The purchase price is payable in installments:

•

RMB 6 million (or $875,000 as of December 31, 2008) was payable within 15 business days following the signing of the Equity Transfer Agreement and was paid as of December 31, 2008;

•

RMB 14 million (or $2,045,000 as of September 30, 2009) is payable in five equal installments on the second, fourth, sixth, eighth and tenth month anniversary following the closing of the transactions contemplated by the Equity Transfer Agreement.

Pursuant to the Equity Transfer Agreement, the Company purchased 50% of the outstanding equity interests of Shengda from Beijing Penn. Shengda is a Sino-foreign joint venture corporation with a contract period of 30 years. Following the transactions as completed by the Equity Transfer Agreement, the Company is one of two shareholders of Shengda. The investment in Shengda was accounted for under the equity method of accounting. Our total investment in Shengda was $3,114,000 as of September 30, 2009, of which we had paid $2,514,000. There were no acquisition costs incurred during the three or nine months ended September 30, 2009.

The following table summarizes the allocation of the purchase price for the proportionate share of Shengda’s net assets acquired at fair value.


		($ in thousands)
Purchase Price		$	2,920
Less:	Fair value of identifiable assets
	Cash		398
	Accounts receivable		68
	Other receivable		84
	Prepaid expenses and other assets		38
	Inventory		512
	Fixed assets		743

			1,843
Plus:	Fair value of liabilities assumed
	Accounts payable		275
	Accrued liabilities and other payables		432

			707

Excess of cost over fair value of net assets acquired excluding intangible assets		$	1,784

The following is the relative fair value of the identifiable intangible assets as of the date of acquisition.


	Weighted Average Amortization Period	September 30, 2009
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization		Net Book Value
Intangible assets
Completed Technology	11.8 Years	$	983	$	51	$	932
Trademark	11.8 Years		357		17		340
In Process Research and Development	16.0 Years		209		7		202
Customer Relationship	5 Years		192		69		123
GMP License	2 Years		43		12		31

Intangible Assets		$	1,784	$	156	$	1,628

The intangible assets are being amortized over estimated useful lives as described above from the date of the acquisition and recorded against our equity in earnings. The following table provides a reconciliation of our equity method investment income for the period February 16, 2009 through September 30, 2009. Prior to purchase accounting adjustments, Shengda generated net income of $812,000, or $406,000 for our 50% equity ownership. The total of amortization and inventory write off for the period was $217,000 which resulted in equity method investment income of $189,000.

Reconciliation of Equity Method Investment Income:


	($ in thousands)
Equity in earnings of Shengda for the period
February 16 through September 30, 2009	$	406
Less adjustments of excess fair value:
Inventory sold		61
Depreciation and amortization expense on buildings and intangible assets, including land use rights		156

Total equity method investment income	$	189

Acquisition of Taiyangshi Fulai Tangshan Pharmaceutical Co., Ltd.

On April 12, 2009, Sunstone entered into a joint venture agreement with Tangshan Yangguang Fulai Business Consultants Co., Ltd. (“Tangshan SunshineFly”) to establish Taiyangshi Fulai Tangshan Pharmaceutical Co., Ltd. (“Sunstone Fulai”), located in Yutian County, Tangshan, China. Sunstone Fulai is owned 70% by Sunstone and 30% by Tangshan SunshineFly. The joint venture agreement requires Sunstone to inject RMB 35 million (or $5.1 million as of September 30, 2009) and Tangshan SunshineFly to contribute technology with an estimated value of RMB 15 million (or $2.2 million as of September 30, 2009) to the joint venture. On April 16, 2009, Sunstone Fulai received the business license.

In acquiring our 70 percent interest in Sunstone Fulai, Sunstone has agreed to inject RMB 35 million, all of which was injected as of September 30, 2009. Tangshan SunshineFly will contribute production technology at a later date once the manufacturing facility is completed. For financial reporting purposes, we have accounted for Sunstone Fulai as a consolidated subsidiary from April 16, 2009 through September 30, 2009.

The noncontrolling interest of Tangshan SunshineFly represents the fair value of 30 percent of Sunstone’s cash injection as of September 30, 2009, or RMB 35 million (or $5.1 million as of September 30, 2009), adjusted for 30% of the net loss of Sunstone Fulai. For the period April 16, 2009 through September 30, 2009, Sunstone Fulai generated a loss of $117,000.


	($ in thousands)
Noncontrolling interest:
30% of Sunstone’s payments allocated to Tangshan SunshineFly	$	1,536
Less: Loss in Sunstone Fulai for the period April 16, 2009 through September 30, 2009		35

Noncontrolling interest	$	1,501

Pro forma results have not been included as there is no operating history as the Sunstone Fulai manufacturing plant is currently being constructed and is expected to be completed in 2010.

3. Gain on Sale of Assets:

On August 3, 2009, the Company entered into a Share Purchase Agreement with Alliance UniChem Group Limited for the sale of the Company’s 20% ownership of Alliance BMP Limited (“Alliance BMP”), an investment vehicle based in the United Kingdom, for $15,100,000. The Company recorded Alliance BMP under the cost method investment and prior to the sale Alliance BMP did not record any impairment charges relating to this investment. The Company received $7,550,000 during the quarter ended September 30, 2009, and the remaining balance of $7,550,000, representing 50% percent of the total consideration, is due in August 2010. The Company recognized a gain on the sale of $7,000 during the quarter ended September 30, 2009.

4. Segment Information:

The Company has three reportable segments; (i) the branded OTC sale reportable segment which includes the operations of Sunstone, (ii) the Pharmaceutical Distribution reportable segment which includes the operations of Wanwei and Rongheng and (iii) the Licensed Products reportable segment which includes the operations of BMP China.

Branded OTC Segment (Sunstone)

The chief operating decision maker for the Branded OTC segment is the President and Chief Operating Officer of the Company, whose function is to allocate resources to, and assess the performance of, Sunstone and Sunstone Fulai. This segment primarily manufactures and sells branded products into the retail pharmacy supply chain. Sunstone operates in a high margin environment selling pediatric and women’s health pharmaceutical and nutritional products. Sunstone’s revenues are seasonal with the majority of sales related to cough, cold and flu products, which are in the most demand in the winter and spring seasons.

Pharmaceutical Distribution Segment (Wanwei and Rongheng)

The chief operating decision makers for the Pharmaceutical Distribution segment are the General Managers of Wanwei and Rongheng, whose function is to allocate resources to, and assess the performance of, their respective business. This segment services both pharmaceutical manufacturers and healthcare providers in the pharmaceutical supply channel. The warehousing and distribution of pharmaceutical drugs, which are purchased from different suppliers, is the primary business activity of Wanwei and Rongheng. Pharmaceutical Distribution operates in a high volume and low margin environment.

Wanwei and Rongheng distribute prescription pharmaceuticals, over-the-counter healthcare products and home healthcare supplies and equipment to a variety of healthcare providers.

Licensed Products Segment (BMP China)

The chief operating decision maker for the sales and marketing segment is the Corporate Vice President and General Manager of BMP China, whose function is to allocate resources to, and assess the performance of, BMP China. This segment markets exclusively licensed prescription drugs nationwide to healthcare providers of prescription drugs.

The following tables present reportable segment information for the periods indicated:


	Revenue Three months ended September 30,						Revenue Nine months ended September 30,
	2009			2008			2009			2008
	($ in thousands)						($ in thousands)
Branded OTC (i)	$	17,053		$	15,471		$	58,390		$	44,540
Pharmaceutical Distribution (ii)		16,643			14,939			47,159			33,537
Licensed Products		2,101			1,336			5,004			3,902
Eliminations		(2,171	)		(1,243	)		(5,182	)		(3,749	)

Total Revenue	$	33,626		$	30,503		$	105,371		$	78,230


	Operating Income (Loss) Three months ended September 30,						Operating Income (Loss) Nine months ended September 30,
	2009			2008			2009			2008
	($ in thousands)						($ in thousands)
Branded OTC (i)	$	2,770		$	3,222		$	10,450		$	8,588
Pharmaceutical Distribution (ii)		(95	)		464			(184	)		76
Licensed Products		50			(14	)		100			(1,330	)
Corporate		(1,798	)		(1,888	)		(5,901	)		(4,612	)
Eliminations		113			(19	)		(114	)		(749	)

Total Operating Profit	$	1,040		$	1,765		$	4,351		$	1,973

(i)	Sunstone’s revenues and operating income for the nine months ended September 30, 2008 is for the period February 18, 2008 through September 30, 2008. Sunstone Fulai is included for the period April 16, 2009 through September 30, 2009.

(ii)	Revenues and operating income includes Wanwei for the nine months ended September 30, 2009 and 2008, and Rongheng for the nine months ended September 30, 2009 and for the period July 5, 2008 through September 30, 2008.

5. Inventories:

Inventories by category as of September 30, 2009 and December 31, 2008 consist of the following:


($ amount in thousands)	2009		2008
Raw materials	$	2,687	$	3,028
Work in process		478		314
Finished goods		5,775		6,842

Total inventories	$	8,940	$	10,184

6. Goodwill:

Goodwill was recorded related to the acquisitions of Sunstone and Rongheng in RMB. For financial statement reporting, we translate our financial statements into US dollars. For the three and nine months ended September 30, 2009, goodwill increased $71,000 and $164,000 as a result of foreign currency fluctuation.

7. Long Term Debt:

January Exchange Notes

On January 20, 2009, BMP Sunstone Corporation (the “Company”) completed an exchange (the “Exchange”) of $10,650,000 in principal amount of its 10.0% senior secured promissory notes (the “10.0% Notes”) for $10,650,000 in principal amount of its 12.5% secured convertible notes (the “January Exchange Notes”), pursuant to note exchange agreements (the “Note Exchange Agreements”) by and between the Company and certain holders of the 10.0% Notes (the “Noteholders”). Following the Exchange, $12,350,000 in principal amount of 10.0% Notes remained outstanding.

Pursuant to the Note Exchange Agreements, the Company issued the January Exchange Notes in the aggregate principal amount of $10,650,000 to the Noteholders. The January Exchange Notes bear interest at a rate of 12.5% per annum, payable quarterly in arrears beginning on April 1, 2009. The January Exchange Notes have a maturity date of July 1, 2011. The accrued but unpaid interest on the 10.0% Notes prior to the Exchange was paid to the Noteholders participating in the Exchange on April 1, 2009.

Based upon the original terms of the January Exchange Notes, a Note holder may convert its January Exchange Note into fully paid and non-assessable shares of common stock, par value $0.001 per share (the “Common Shares”), of the Company from time to time at a conversion price, subject to certain adjustments, equal to $5.00. If the Company issues Common Shares in one or more offerings to investors on or prior to September 15, 2009 (other than any offerings following the issuance of Common Shares in one or more offerings to investors resulting in the receipt of proceeds (net of all commissions) by the Company in an aggregate amount of at least $16,000,000), the conversion price will equal the lesser of (i) $5.00 or (ii) 115% of the lowest price per Common Share for which the Company sells Common Shares in any offering.

Notwithstanding the foregoing, pursuant to certain amendments to the January Exchange Notes, dated as of January 29, 2009, if the conversion price of the January Exchange Notes would result, upon conversion of all such notes, in the issuance of Common Shares in amount equal to or greater than 8,049,282 Common Shares (which was equal to 20.00% of 40,246,410, which was the number of outstanding Common Shares on the date thereof), the conversion price shall be increased to $1.33 (which is equal to the principal amount of the January Exchange Notes of $10,650,000 divided by 8,049,282 increased to the nearest whole cent), which would result, upon conversion of all of the January Exchange Notes, in the issuance of Common Shares in an aggregate amount less than 20.00% of the outstanding Common Shares on the date thereof. The January Exchange Notes were further amended by that certain January Exchange Note Second Amendment (as defined below) and that certain January Exchange Note Third Amendment (as defined below).

At the date of issuance of the January Exchange Notes, the Company was subject to the terms of an embedded derivative instrument due to the fact that the related contract was not indexed to its own stock.

The Company determined that the January Exchange Notes contained an embedded derivative. The fair value of the embedded derivative was determined to be $3,262,000, and was recorded as a derivative liability at inception. The recorded amount is being accreted through charges to the consolidated statements of operations using the effective interest method over the period of the January Exchange Notes. At March 13, 2009, the date of the January Exchange Note Second Amendment (as defined below), the fair value of the derivative was $1,555,000. The decrease in the fair value of the derivative between January 20, 2009 and March 13, 2009 was recorded in the consolidated statements of operations as a gain on derivative during the quarter ended March 31, 2009.

The Company amended the January Exchange Notes (the “January Exchange Notes Second Amendment”) such that the definition of certain terms and the mechanics of conversion of the January Exchange Notes parallel those in the March Exchange Notes (as defined below) and to restrict the issuance of Company securities to officers and directors of the Company below an effective price of $3.00 per common share. A Noteholder may convert its January Exchange Note into fully paid and non-assessable shares of common stock, par value $0.001 per share (the “Common Shares”), of the Company from time to time at a conversion price, subject to certain adjustments, equal to $3.00. The Company further amended the January Exchange Notes on May 14, 2009 (the “January Exchange Notes Third Amendment”) such that the conversion price was set at an amount equal to $3.00 per share of common stock and to add a covenant stating that the Company shall not issue equity, convertible debt or securities convertible into equity at an amount equal to or less than $2.75 per share of common stock (with such $2.75 amount to include the fair value of any option, warrant or similar right offered by the Company and to be adjusted in the manner identical to the adjustment of the conversion price as provided in amended note agreement of the January Exchange Notes) until December 31, 2009. The January Exchange Notes Third Amendment was effective as of March 13, 2009.

As of March 13, 2009, the derivative liability was extinguished and recorded as additional paid-in capital, in accordance with accounting standards.

The derivative was not intended to hedge any specific risk exposures, such as fluctuating interest rates, exchange rates, commodity prices, etc. Therefore, the derivative constituted neither a cash flow hedge, nor a fair value hedge. The volume of derivative activity relates solely to the embedded derivative instrument itself, and changes in fair value thereon.

The effect of the derivative instrument on the consolidated statements of operations for the nine months ended September 30, 2009 follows:


	Location of Gain (Loss) Recognized in Income Statement	Amount of Gain (Loss) Recognized in Income Statement for the Nine months ended September 30, 2009
		($ in thousands)
Derivatives not designated as hedging instruments under ASC 815-10:
Embedded Derivative	Other Income (Expense)	$	1,707

Total		$	1,707

The fair value of the derivative liability was determined using the Black Scholes Option Pricing method. The valuation methodology uses a combination of observable (Level 2) and unobservable (Level 3) inputs in calculating fair value. As required, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The table below sets forth a summary of changes in the fair value of the Company’s level 3 derivative for the nine months ended September 30, 2009.


	($ in thousands)
Balance as of December 31, 2008	$	0
Record Derivative Liability on Conversion Option at January 20, 2009		3,262
Change in Fair Value of Derivative Liability		(1,707	)
Extinguishment of Derivative Liability		(1,555	)

Balance as of September 30, 2009	$	0

The terms of the January Exchange Notes entered into on January 20, 2009 were substantially different from the previous terms of the January Exchange Notes. Therefore, this transaction was accounted for as an extinguishment of debt. This resulted in a loss on debt extinguishment of $678,000, recognized in the consolidated statements of operations for the nine months ended September 30, 2009. In conjunction with this debt extinguishment, $548,000 of unamortized warrant discount and $130,000 of unamortized debt issuance costs were written off in the consolidated statements of operations for the nine months ended September 30, 2009.

As previously noted, the terms of the January Exchange Notes were amended effective as of the second amendment date of the notes of March 13, 2009 to fix the conversion price option at $3.00.

Based on evaluation, the terms of the January Exchange Notes, as amended and effective on March 13, 2009, were determined to be substantially different from the previous terms of the January Exchange Notes. As a result, this March 13, 2009 amendment was accounted for as an extinguishment of debt. This resulted in a loss on debt extinguishment, recognized in the consolidated statements of operations for the nine months ended September 30, 2009. In conjunction with this debt extinguishment, $3,156,000 of unamortized debt discount and $247,000 of unamortized debt issuance costs were written off in the consolidated statements of operations for the nine months ended September 30, 2009. The Company recorded the fair value of the amended notes at $10,927,000, as of March 13, 2009 which will be amortized to face value using the effective interest method over the remaining term of the notes. Amortization of debt premium of $33,000 and $74,000 was recorded, for the three months ended September 30, 2009 and the period from March 13, 2009 through September 30, 2009, respectively.

March Public Notes

On March 13, 2009, the Company entered into a Placement Agency Agreement with Philadelphia Brokerage Corporation (the “Placement Agent”), as placement agent relating to the issuance and sale to investors of up to $7,000,000 principal amount of 12.5% Subordinated Convertible Notes due July 1, 2011 (the “March Public Notes”) convertible into common shares of the Company (the “Placement”).

The March Public Notes bear interest at the annual rate of 12.5% from March 16, 2009, or the most recent interest payment date to which interest has been paid or provided for, payable quarterly in arrears on April 1, July 1, October 1 and January 1 of each year, commencing April 1, 2009 to the persons in whose names the March Public Notes are registered at the close of business on March 15, June 15, September 15 or December 15 (whether or not a business day), as the case may be, preceding the respective interest payment date.

Each note holder of a March Public Note is entitled, at his option, at any time after the close of business on May 15, 2009, to convert the March Public Notes (or any portion of the principal amount thereof which is $1,000 or an integral multiple thereof) into fully paid and non-assessable common shares of the Company, at a conversion price per share equal to $3.00.

On May 14, 2009, the Company amended the terms of the March Public Notes to fix the conversion price at an amount equal to $3.00 per share of common stock and to add a covenant stating that the Company shall not issue equity, convertible debt or securities convertible into equity at an amount equal to less than $2.75 per share of common stock (with such $2.75 amount to include the fair value of any option, warrant or similar right offered by the Company and to be adjusted in the manner identical to the adjustment of the conversion price as provided in the amendment) until December 31, 2009. The amendment of the March Public Notes was effective as of March 16, 2009.

March Exchange Notes

On March 13, 2009, the Company completed an exchange (the “March Exchange”) of $1,000,000 principal amount of its 10.0% Notes for the same principal amount of its 12.5% March Exchange Secured Convertible Notes due July 1, 2011 (the “March Exchange Notes”), pursuant to a note exchange agreement (the “Note Exchange Agreement”) by and between the Company and certain holders of the 10.0% Notes (the “March Exchange Noteholders”). The terms of the March Exchange Notes are substantially similar to those of the January Exchange Notes. The Company recorded the fair value of the amended notes at $1,026,000 as of March 13, 2009 which will be amortized to face value using the effective interest method over the remaining term of such notes. Amortization of debt premium of $3,000 was recorded for the three months ended September 30, 2009 and $7,000 was recorded for the period from March 13, 2009 through September 30, 2009.

March Cash Notes

In addition, on March 16, 2009, the Company completed a private placement (the “Private Placement”) of $6,350,000 principal amount of 12.5% March Cash Secured Convertible Notes due July 1, 2011 (the “March Cash Notes”). The terms of the March Cash Notes are substantially similar to the terms of the March Exchange Notes. The Company consummated the Private Placement by entrance into purchase agreements (the “Purchase Agreement”) with certain investors (the “Private Noteholders”).

The Company amended the March Exchange Notes (the “March Exchange Note Amendment”) and the March Cash Notes (the “March Cash Note Amendment”) on May 14, 2009. The terms of the March Exchange Note Amendment and March Cash Note Amendment are substantially similar to the terms of the January Exchange Note Third Amendment. The March Exchange Note Amendment was effective as of March 13, 2009 and the March Cash Note Amendment was effective as of March 16, 2009.

The terms of the March Exchange Notes entered into on March 13, 2009 were substantially different to the previous terms of the March Exchange Notes. Therefore, this transaction was accounted for as an extinguishment of debt. This resulted in a loss on debt extinguishment of $90,000, recognized in the consolidated statement of operations in the quarter ended March 31, 2009. In conjunction with this debt extinguishment, $52,000 of unamortized warrant discount and $12,000 of unamortized debt issuance costs were written off in the consolidated statement of operations in the nine months ended September 30, 2009.

On March 16, 2009 the Company called the remaining $11,350,000 of its 10.0% Secured Promissory Notes due May 1, 2009. This resulted in a loss on debt extinguishment of $125,000, recognized in the consolidated statement of operations in the nine months ended September 30, 2009.

Bank of Communication

On June 24, 2009, the Company entered into a RMB 30,000,000 (or $4,381,000 as of June 24, 2009) loan agreement with Bank of Communication in China. The term of the loan is June 24, 2009 through May 24, 2011 with a 5.4% annual rate of interest paid monthly. The Company’s obligations under the debt are secured by the assets of Sunstone. The loan agreement does not contain any covenants. As of September 30, 2009, RMB 30,000,000 (or $4,387,000) is outstanding and is due May 2011.

China Construction Bank

On July 17, 2009, the Company entered into a RMB 16,000,000 (or $2,339,000 as of July 17, 2009) loan agreement with China Construction Bank in China. The term of the loan is July 17, 2009 through July 16, 2012 at 5.4% annual rate of interest paid monthly. The Company’s obligations under the debt are secured by the assets of Sunstone. The loan does not contain any covenants. As of September 30, 2009, RMB 16,000,000 (or $2,340,000) is outstanding and is due July 2012.

Long-term debt consists of the following at September 30, 2009, and December 31, 2008:


($ amount in thousands)	2009		2008
January Exchange Notes, 12.5% secured convertible notes, due July 1, 2011 convertible into 3,550,000 shares of common stock at any time prior to maturity	$	10,650	$	—
March Public Notes, 12.5% unsecured convertible notes, due July 1, 2011 convertible into 2,333,333 shares of common stock at any time prior to maturity		7,000		—
March Exchange Notes, 12.5% secured convertible notes, due July 1, 2011 convertible into 333,333 shares of common stock at any time prior to maturity		1,000		—
March Cash Notes, 12.5% secured convertible notes, due July 1, 2011 convertible into 2,116,667 shares of common stock at any time prior to maturity		6,350		—
Bank of Communication Loan, 5.4% secured bank loan due May 24, 2011		4,387		—
China Construction Bank Loan, 5.4% secured bank loan due July 16, 2012		2,340
November 2007 Notes, 10.0% secured notes, due May 1, 2009		—		23,000

Total Long term debt		31,727		23,000
Add: Debt premium		222		—
Less: Debt discount		—		1,022
Less: Current portion of long term debt		—		21,978

Long-term debt, less current portion	$	31,949	$	—

8. Common Stock Warrants:

On February 20, 2009, the Company closed its offering of 559,062 units (the “Units”), each consisting of (i) two shares of the Company’s common stock, par value $0.001 per share (“Common Stock”), and (ii) a warrant (“Warrant”) to purchase one share of Common Stock at an exercise price of $4.00 per share, which exercise price is subject to potential re-pricing.

If on the 90th day after the closing date (the “Re-price Date”), the volume weighted average trading price calculated over the 20 trading days prior to the Re-price Date (the “VWAP”) of the Common Stock is less than $4.00 per share, the exercise price of the Warrants will be reset to the greater of (i) $1.80 or (ii) the VWAP. The Warrants are exercisable beginning any time on or after the Re-price Date and expiring on the fifth anniversary of the Closing Date. In no event, shall the number of shares of Common Stock and shares of Common Stock underlying the Warrants exceed 19.99% of the Company’s outstanding Common Stock as of February 13, 2009.

The Units were offered by the Company at a purchase price of $6.40 per Unit (the “Offering”). As a result of the Offering, the Company issued 1,118,124 shares of Common Stock and 559,062 Warrants. The net proceeds to the Company from the Offering were approximately $3,000,000.

At the date of issuance of the Warrants, the Company determined that the financial instrument constituted a derivative. The fair value of the derivative was determined to be $838,000, and was recorded as a derivative liability at inception. The recorded amount is being accreted through charges to the consolidated statements of operations using the effective interest method over the term of the Warrants. At March 31, 2009, the fair value of the derivative was $894,000. The increase in the fair value of the derivative was also recorded in the consolidated statements of operations as a loss on derivative during the quarter ended March 31, 2009. The loss on derivatives of $0 and $504,000 was recorded for the three months ended September 30, 2009 and for the period February 20, 2009 through September 30, 2009.

The Company is subject to a derivative warrant liability instrument due to the fact that the related contract is not indexed to its own stock. The derivative is accounted for and classified as a “Derivative Liability” within the other liabilities section of the consolidated balance sheet. The change in the fair value of the derivative is included within “other income (loss)” in the consolidated statements of operations. The change in the fair value of the derivative instrument affects the “Gain on Fair Value of Derivatives” line in the “cash flows from operating activities” section of the consolidated statements of cash flows.

After 90 days from the issuance of the warrants, or May 21, 2009, the warrant option reprice provisions expired and the warrant was deemed to be indexed to its own stock, accordingly the warrant liability was extinguished in the amount of $1,342,000 and recorded as additional paid in capital.

The derivative is not intended to hedge any specific risk exposures, such as fluctuating interest rates, exchange rates, commodity prices, etc. Therefore, the derivative constitutes neither a cash flow hedge, nor a fair value hedge. The volume of derivative activity relates solely to the derivative warrant liability instrument itself, and changes in fair value thereon.

The effect of the derivative instrument on the consolidated statements of operations for the nine months ended September 30, 2009 follows:


	Location of Gain (Loss) Recognized in Income Statement	Amount of Gain (Loss) Recognized in Income Statement Nine months ended September 30, 2009
		($ in thousands)
Derivatives not designated as hedging instruments under ASC 815-10:
Derivative Warrant Liability	Other Income (Expense)	$	(504	)

Total		$	(504	)

The fair value of the warrant liability was determined using the Black Scholes Option Pricing method. The valuation methodology uses a combination of observable (Level 2) and unobservable (Level 3) inputs in calculating fair value.

As required, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The table below sets forth a summary of changes in the fair value of the Company’s level 3 derivative for the nine months ended September 30, 2009:


	($ in thousands)
Balance as of December 31, 2008	$	0
Recording of Derivative Liability on Warrant Issuance		838
Change in Fair Value of Derivative Liability		504
Extinguishment of Derivative Liability		(1,342	)

Balance as of September 30, 2009	$	—

9. Accrued Expenses:

Accrued expenses as of September 30, 2009 and December 31, 2008 consist of the following:


	2009		2008
Accrued salary and related expenses	$	1,473	$	1,152
Accrued professional fees		178		418
Accrued taxes and related expenses		1,879		7,112
Accrued social welfare and related expenses		1,199		1,409
Accrued advertising		1,124		1,093
Accrued travel and entertainment		2,347		881
Accrued marketing		2,563		66
Accrued sales office expenses		2,827		823
Accrued interest expense		569		383
Accrued other		1,545		1,264

Total Accrued expenses	$	15,704	$	14,601

10. Shareholders’ Equity:

The following table shows weighted average basic shares for the respective periods:


	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Weighted average basic shares		41,558,919		39,649,813		41,290,569		38,070,234
The following table shows potential common stock equivalents outstanding to purchase shares of common stock that were included in the computation of diluted weighted average shares outstanding. The potential common shares related to the convertible notes are included in the computation of the diluted weighted average shares outstanding.
	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
Number of shares		9,272,219		1,109,849		6,893,923		1,297,707
Range of exercise price	$	1.5 - $4.00	$	1.15 - $5.12	$	1.15 - $4.00	$	1.15 - $5.84

11. Stock-Based Compensation:

The Company’s 2007 Omnibus Equity Compensation Plan (the “Plan”) which merged with the Company’s 2004 Stock Incentive Plan as of April 26, 2007 provides for grants of stock options (incentive stock options and nonqualified stock options), stock appreciation rights, restricted stock, restricted stock units, performance awards, other stock grants and other stock-based awards to all employees (including employees who are directors or officers), non-employee directors, consultants and independent contractors of the Company and its affiliates. The Plan authorizes the issuance of up to 5,000,000 shares of the Company’s common stock, subject to adjustment, and provides that no more than 400,000 shares of common stock, subject to adjustment, may be awarded to any one individual in any calendar year if the value of the award is based solely on an increase in the value of shares of the Company’s common stock after the date of grant of the award. The Plan also provides that no more than 100,000 shares of common stock, subject to adjustment, may be awarded to any one individual in any calendar year if the value of the award is not based solely on an increase in the value of shares of the Company’s common stock after the date of grant of the award. Options are granted for a term of ten years and vest over a four year period. Options granted under the Plan from 2005 through September 30, 2009 vest 25% after the first year of the date of grant and ratably each month over the remaining 36 month period. Options granted in 2004 under the Plan vest 50% after the first two years of the date of hire and ratably each month over the remaining 24 month period. The Plan is administered by the Company’s Compensation Committee. The Compensation Committee has the authority to

determine the individuals who will receive grants, the type of grant, the number of shares subject to the grant, the terms of the grant, the time the grants will be made and the duration of any exercise or restriction period, and has the authority to deal with any other matters arising under the Plan. Options granted under the Plan may be “incentive stock options,” which are intended to qualify with the requirements of section 422 of the Internal Revenue Code of 1986, as amended, and “nonqualified stock options,” which are not intended to so qualify. The Company’s board of directors may amend or terminate the Plan at any time if required under the Plan, subject to stockholder approval. Unless terminated earlier by the board of directors or extended by the board of directors, with the approval of the Company’s stockholders, no awards may be granted under the Plan after April 25, 2012.

There were no options issued during the three months ended September 30, 2009 or 2008. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	Three months ended September 30,		Nine months ended September 30,
	2009	2008	2009		2008
Expected life (years)	—	—	5.0	%	5.0	%
Risk-free interest rate	—	—	1.9	%	2.4-3.2	%
Expected Volatility	—	—	78.0	%	55.0	%
Expected Dividend yield	—	—	0.0	%	0.0	%

The weighted average estimated fair value of the options granted for the nine months ended September 30, 2009 was $2.21. The weighted average estimated fair value of the options granted for the nine months ended September 30, 2008 was $3.83.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Compensation cost which is based on the fair value of options granted is recognized on a straight line basis over the service period.

A summary of the options issued by the Company for the nine months ended September 30, 2009 is as follows:


	Options	Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding on January 1, 2009	3,157,801	$	5.17	7.18	$	5,796,000
Granted	—		—			—
Exercised	—		—			—
Canceled	605		10.90

Outstanding on March 31, 2009	3,157,196	$	5.17	6.94	$	2,172,000
Granted	310,000		3.49
Exercised	—		—
Canceled	4,918		7.45

Outstanding on June 30, 2009	3,462,278	$	5.02	6.96	$	4,828,000
Granted	—		—
Exercised	1,250		4.20
Canceled	3,523		9.58

Outstanding on September 30, 2009	3,457,505	$	5.01	6.71	$	3,558,000

Exercisable on September 30, 2009	2,306,373	$	4.08	5.80	$	3,355,000

The total fair value of shares vested during the three months ended September 30, 2009 was $1,021,000. A summary of the status of the Company’s non-vested shares as of September 30, 2009 is presented below:


	Non-vested Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2009	1,354,271	$	4.57
Granted	310,000		2.21
Vested	504,093		4.23
Canceled	9,046		5.63

Non-vested at September 30, 2009	1,151,132	$	4.07

The unrecognized share-based compensation cost related to non-vested stock options at September 30, 2009 is $4,214,000 and will be recognized over a weighted average of 2.3 years.

12. Related Party Transactions:

On July 5, 2008, the Company acquired 63.3% of Rongheng. Based upon the Share Transfer and Capital Increase Agreement related to Rongheng, the Company agreed to a guarantee arrangement for the outstanding debt due to Rongheng International Trade Co. Ltd of Orient International Holding Co. (“RHIT”) and Shanghai CAS Shenglongda Biotech Group Co, Ltd (“Shenglongda”). The amounts due to RHIT and Shenglongda are summarized as follows:


($ amounts in thousands)	Balance at September 30, 2009
	($ in thousands)
Amounts due to related parties:
Due to RHIT	$	1,361
Due to Shenglongda		387

	$	1,748

During the three and nine months ended September 30, 2009, the Company sold $268,000 and $4,370,000, respectively, in pharmaceutical products to related party entities of the Company’s President, Zhiqiang Han (“Han”).

During the three and nine months ended September 30, 2009 the Company leased office space in Beijing from an entity controlled by Zhijun Tong (“Tong”), a Company director, for $23,000 and $69,000, respectively. At September 30, 2009, the Company had balances due from and due to Han.

The balances due from and due to Han are summarized as follows:


	Balance at September 30, 2009
	($ in thousands)
Amounts due from related parties:
Accounts receivable due from entities controlled by Han	$	5

Amounts due to related parties:
Due to Han and entities controlled by Han	$	116

During the nine months ended September 30, 2009 the Company received an advance payment for the purchase of inventory of $433,000 from Shengda. The $433,000 remains outstanding as of September 30, 2009.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein and in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Forward-Looking Statements

Certain of the statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. The forward-looking statements herein include, among others, statements regarding derivative liabilities and accounting treatment thereof, statements addressing management’s views with respect to future financial and operating results, our ability to obtain an increased market share in the Chinese pharmaceutical marketing and distribution markets, the dependence of our future success on obtaining additional promotional and market research agreements and licensing rights for China, the significance of our acquisition of Wanwei and Sunstone, our cash and cash equivalents investments, our anticipated use of cash resources, our ability to fund our current level of operations through our cash and cash equivalents, our hiring goals for the next twelve months, our capital requirements and the possible impact on us if we are unable to satisfy these requirements, our approaches to raise additional funds and our expectation to continue to pursue strategic acquisitions in the near future. Various factors, including competitive pressures, success of integration, market interest rates, changes in customer mix, changes in pharmaceutical manufacturers’ pricing and distribution policies or practices, regulatory changes, changes in the People’s Republic of China’s policies, customer defaults or insolvencies, acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control, adverse resolution of any contract or other disputes with customers and suppliers, or the loss of one or more key customer or supplier relationships, could cause actual outcomes and results to differ materially from those described in forward-looking statements. Certain additional factors that management believes could cause actual outcomes and results to differ materially from those described in forward-looking statements are set forth in this report in Part II, Item 1A. “Risk Factors” in this quarterly report on Form 10-Q and in Part I, Item 1A. “Risk Factors — Risks Relating to Our Business” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

BMP Sunstone Corporation, a Delaware corporation (the “Company”), is a specialty pharmaceutical company with over-the-counter, or OTC, prescription drugs, manufacturing, marketing and distribution based in China. Through our subsidiary, Sunstone (Tangshan) Pharmaceutical Co., Ltd., or Sunstone, we manufacture, market and distribute OTC products in China. In addition, through Beijing Medpharm Co. Ltd., or BMP China, Beijing Wanwei Pharmaceutical Co., Ltd., or Wanwei and Shanghai Rongheng Pharmaceutical Company, or Rongheng, we offer to foreign and domestic pharmaceutical manufacturers in China, services focused primarily on marketing and promotional services and distribution services. The Company, Sunstone, BMP China, Wanwei and Rongheng are collectively referred to as the “Company,” “we” or “our”.

Financial Overview

Our future success will depend on the continued growth of Sunstone’s OTC and our Licensed Products. Sunstone’s sales and operating profit growth rate historically has been higher than China’s pharmaceutical industry average growth rate. Sunstone’s strong brands of “Goodbaby” and “Confort” have helped Sunstone expand its revenue and increase its profitability. Sunstone’s brand name and product portfolio are critical to the continued success of its business. Sunstone has been broadening its products pipeline through internal development, acquisition and licensing of the domestic products. Sunstone’s revenues are seasonal with the majority of sales related to cough, cold and flu products, which are in the most demand in the winter and spring seasons. Through the acquisition of Shengda we now have antibiotic products in our Goodbaby brand of products. The consumption of antibiotics has the highest market share for the pediatric drugs market in China. In addition, we expect the acquisition of Shengda will enrich our product brands.

We believe our Licensed Products segment will continue to have significant continued growth. During 2008 and 2009, we believe we have made significant adjustments to strengthen our sales and marketing capability by focusing on obstetrics and gynecology. In addition, we have pursued a strategy of consolidating our sales and marketing teams so that we can achieve higher growth and profitability. In addition, we are actively searching for new pharmaceutical products from foreign pharmaceutical companies for licensing into China.

Acquisitions

On December 19, 2008, Sunstone entered into an Equity Transfer Agreement with Beijing Penn Pharmaceutical Sci-Tech Development Co., Ltd. (“Beijing Penn”) to purchase 50% of the outstanding equity interests of Zhangjiakou Shengda Pharmaceutical Co., Ltd. (“Shengda”) for RMB 20.0 million (or $2,920,000 as of February 16, 2009) in cash. On February 16, 2009 we received the business license of Shengda and closed on the acquisition. The Company has changed its name to Sunstone Shengda (Zhangjiakou) Pharmaceutical Co., Ltd.

The purchase price is payable in installments:

•

RMB 6 million (or $875,000 as of December 31, 2008) was payable within 15 business days following the signing of the Equity Transfer Agreement and was paid as of December 31, 2008;

•

Pursuant to the Equity Transfer Agreement, the Company purchased 50% of the outstanding equity interests of Shengda from Beijing Penn. Shengda is a Sino-foreign joint venture corporation with a contract period of 30 years. Following the transactions as completed by the Equity Transfer Agreement, the Company is one of three shareholders of Shengda. The investment in Shengda was accounted for in accordance with APB 18 under the equity method of accounting. Our total investment in Shengda was $3,114,000 as of September 30, 2009, of which we had paid $2,514,000. There were no acquisition costs incurred during the three or nine months ended September 30, 2009.

On April 12, 2009, Sunstone entered into a joint venture agreement with Tangshan Yangguang Fulai Business Consultants Co., Ltd. (“Tangshan SunshineFly”) to establish Taiyangshi Fulai Tangshan Pharmaceutical Co., Ltd. (“Sunstone Fulai”) located in Yutian County, Tangshan. Sunstone Fulai is owned 70% by Sunstone and 30% by Tangshan SunshineFly. The joint venture agreement requires Sunstone to inject RMB 35 million (or $5.1 million as of September 30, 2009) and Tangshan SunshineFly to contribute technology with an estimated value of RMB 15 million (or $2.2 million as of April 15, 2009) to the joint venture. On April 16, 2009, Sunstone Fulai received the business license.

The noncontrolling interest of Tangshan SunshineFly represents the fair value of 30 percent of Sunstone’s cash injection as of September 30, 2009, or RMB 35.0 million (or $1,536,000 as of September 30, 2009), adjusted for 30% of the net loss of Sunstone Fulai. For the period April 16, 2009 through September 30, 2009, Sunstone Fulai generated a loss of $117,000.

Sale of Alliance BMP Limited

investment. The Company received $7,550,000 during the quarter ended September 30, 2009, and the remaining balance of $7,550,000, representing 50% percent of the total consideration, is due in August 2010. The Company recognized a gain on the sale of $7,000 during the quarter ended September 30, 2009.

Liquidity and Capital Resources

Cash

As of September 30, 2009, we had unrestricted cash and cash equivalents of approximately $13.2 million which represented 5.6% of our total assets. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at the time of purchase and are primarily invested in short-term money market instruments and investments. However, we do not anticipate any losses with respect to such cash balances because the balances are invested in government backed securities.

Long Term Debt

The January Exchange Notes were subsequently amended in March 2009 to fix the conversion price option at $3.00.

On June 24, 2009, the Company entered into a RMB 30,000,000 (or $4,381,000 as of June 24, 2009) loan agreement with the Bank of Communication in China. The term of the loan is June 24, 2009 through May 24, 2011 a 5.4% annual rate of interest and pays interest monthly. The Company’s obligations under the debt are secured by assets of Sunstone. The loan agreement does not contain any covenants. As of September 30, 2009, RMB 30,000,000 (or $4,383,000) is outstanding and is due May 2011.

Common Stock Warrants

After 90 days from the issuance of the warrants, or May 21, 2009, the warrant option reprice provisions expired, the exercise price remained at $4.00 and the warrant was deemed to be indexed to its own stock. Accordingly, the warrant liability was extinguished in the amount of $1,342,000 and recorded as additional paid capital.

Cash Flow

We anticipate that our September 30, 2009 balance of approximately $13.2 million in unrestricted cash and cash equivalents will be sufficient to fund our current level of operations for at least the next 12 months. Our future capital requirements will depend on many factors, including those factors described in Part II, Item 1A. “Risk Factors” in this quarterly report on Form 10-Q and in Part I, Item 1A. “Risk Factors — Risks Relating to Our Business” in our Annual Report on Form 10-K for the year ended December 31, 2008 as well as our ability to maintain our existing cost structure and return on sales, fund obligations for additional capital that will occur on additional product licenses and acquisitions and execution of our business and strategic plans as currently conceived.

Net cash used in operating activities was $1,932,000 for the nine months ended September 30, 2009. This amount reflected our loss of $3,913,000, offset by $9,797,000 in net non-cash charges including loss on early extinguishment of debt of $4,573,000, gain on fair value of derivatives of $1,204,000, amortization of intangible assets of $2,658,000 , amortization of debt discount and debt issuance costs of $695,000, stock based compensation expense of $1,784,000, depreciation and amortization of equipment and leasehold improvements of $1,745,000, decrease in deferred taxes of $369,000 , equity method investment income of $189,000, loss on disposal of asset of $139,000 and noncontrolling interest of $35,000 . In addition, we generated $7,953,000 of operating cash as result in changes in certain of our operating assets and liabilities during the nine months ended September 30, 2009. The most significant changes were the increase in accrued expenses of $1,253,000 and decreases inventory of $1,463,000 and notes receivable of $5,237,000. Offsetting these changes were increases in accounts receivable of $11,547,000, VAT receivable of $136,000, other receivables of $616,000, other current assets of $205,000 and decreases in accounts payable of $3,029,000 and amounts due to related parties of $236,000.

Cash used in investing activities was $903,000 and reflects the acquisition of property, plant and equipment of $5,908,000, payment for land use rights of $901,000 and the payment for Shengda of $1,637,000 and cash received for the sale of our investment in Alliance BMP of $7,543,000.

Net cash used in financing activities was $271,000, which consisted of proceeds from the exercise of warrants of options and $73,000, net proceeds from the issuance of common stock of $2,999,000, proceeds from the issuance of long term debt of $12,031,000, and was offset by the repayment of long term debt of $11,350,000 net payments on bank borrowings of $3,069,000 and the increase of restricted cash of $413,000.

Results of Operations

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets or liabilities as of the dates of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and various other factors and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results might differ materially from these estimates under different assumptions or conditions.

Our critical accounting policies are described in Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no changes in these accounting policies.

Our significant accounting policies are described in Note 1 to the consolidated financial statements contained in this quarterly report on Form 10-Q. Information concerning our implementation and the impact of recent accounting standards issued by the Financial Accounting Standards Board is included in the notes to our 2008 consolidated financial statements and also in Note 1 to the consolidated financial statements contained in this quarterly report on Form 10-Q. In addition, we believe the following new accounting estimates reflect our more significant estimates and assumptions used in the preparation of our financial statements:

Valuation of the Embedded and Warrant Derivatives

The valuation of our embedded derivatives and warrant derivatives are determined primarily by the Black-Scholes option pricing model. An embedded derivative is a derivative instrument that is embedded within another contract, which under the convertible note (the host contract), includes the right to convert the note by the holder. These embedded derivatives are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period. Warrants which are determined to be classified as derivative liabilities are marked-to-market each reporting period, with a corresponding non-cash gain or loss charged to the current period.

To determine the fair value of our embedded derivatives, management evaluates assumptions regarding the probability of certain future events. Other factors used to determine fair value include our period end stock price, historical stock volatility, risk free interest rate and derivative term. The fair value recorded for the derivative liability varies from period to period.

Notes receivable

As of September 30, 2009 we had notes receivable of approximately $10.6 million which represented 4.5% of our total assets. Notes Receivables are also known as Banker’s Acceptance Bills in China. Notes receivable are notes received from customers for the settlement of trade receivable balances. As of September 30, 2009, all notes receivables were issued by established banks in the People’s Republic of China and these notes are irrevocable, discountable and transferrable and have maturities of six months or less. The fair value of the notes receivable approximated their carrying value.

Three months ended September 30, 2009 Compared to Three months ended September 30, 2008

The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the three months ended September 30, 2009 and 2008:


	For the Three Months Ended September 30,						For the Three Months Ended September 30,
($ amounts in thousands)	2009			2008			2009		2008
Net Revenues	$	33,626		$	30,503		100.0	%	100.0	%
Cost of Sales		17,950			16,676		53.4	%	54.7	%

Gross Profit		15,676			13,827		46.6	%	45.3	%

Sales and Marketing Expenses		9,811			9,152		29.2	%	30.0	%
General and Administrative Expenses		4,825			2,910		14.3	%	9.5	%

Total Operating Expenses		14,636			12,062		43.5	%	39.5	%
Profit From Operations		1,040			1,765		3.1	%	5.8	%
Other Income (Expense):
Interest Income		52			6		0.2	%	0.0	%
Interest Expense		(895	)		(1,590	)	-2.7	%	-5.2	%
Debt Issuance Cost Amortization		(101	)		(210	)	-0.3	%	-0.7	%
Equity Method Investment Income		107			—		0.3	%	0.0	%
Loss on Early Extinguishment of Debt		—			—		0.0	%	0.0	%
Gain on Derivatives		—			—		0.0	%	0.0	%

Total Other Expense		(837	)		(1,794	)	-2.5	%	-5.9	%

Profit (Loss) Before Provision for Income Taxes		203			(29	)	0.6	%	-0.1	%
Provision for Income Taxes		430			787		1.3	%	2.6	%

Net Loss	$	(227	)	$	(816	)	-0.7	%	-2.7	%

Net Revenues

Net revenue was approximately $33,626,000 for the three months ended September 30, 2009 as compared with approximately $30,503,000 for the three months ended September 30, 2008. Revenue by product categories was as follows:


	Three months ended September 30,				$ Increase/ (Decrease)		% Change
($ amounts in thousands)	2009		2008		$ Increase/ (Decrease)		% Change
Branded OTC Sales	$	17,053	$	15,471	$	1,582	10.2	%
Distribution products		14,472		13,696		776	5.7	%
Licensed products		2,101		1,336		765	57.3	%

	$	33,626	$	30,503	$	3,123	10.2	%

Branded OTC Sales. Sunstone revenues were $17,053,000 for the three months ended September 30, 2009 as compared to $15,471,000 for the three months ended September 30, 2008. The top products were Pediatric Paracetamol and Amantadine Hydrochloride Granules, Pediatric Huatan Zhike Granules, Confort Pessaries, Pediatric Kechuanling Oral Solution and Pidotimod Tablets which accounted for approximately 82.9% of Sunstone’s revenue for the period. For the three months ended September 30, 2008, Sunstone’s top five products accounted for 96.0% of total revenue.

Distribution Products. Distribution revenue for the three months ended September 30, 2009, excluding licensed products, was $14,472,000 as compared to $13,696,000 for the three months ended September 30, 2009 and 2008, an increase of 5.7%. For the three months ended September 30, 2009 and 2008 the results include Wanwei and Rongheng. Wanwei’s top five products excluding our licensed products were Xingnaojing, Glurenorm, Xuebijing, Ferrous Succinate Tablets, and Jinlong Capsule which collectively accounted for 48.5% of Wanwei’s revenue (excluding licensed products) for the three months ended September 30, 2009. For the three months ended September 30, 2008 Wanwei’s top five products accounted for 30.0% of total revenue. Rongheng’s top five products were Selenious Yeast Tablets, Iohexol, Gemcitabine Hydrochloride, Almitrine and Raubasine compound and Cefotiam Hydrochloride, which collectively accounted for 27.0% of Rongheng’s revenue for the three months, ended September 30, 2009. For the three months ended September 30, 2008, Rongheng’s top five products accounted for 26.0% of total revenue.

Licensed Products. We provided sales and marketing and distribution services for Anpo and Propess used in obstetrics, and Ferriprox for iron overload in patients with Thalassemia. Revenues totaled $2,101,000 for the three months ended September 30, 2009 as compared to $1,336,000 for the three months ended September 30, 2008, an increase of 57.3%. As of September 30, 2009 there were 531 and 703 hospitals selling Propess and Anpo respectively, versus 456 and 489, respectively, as of September 30, 2008.

Cost of Goods Sold:


	Three months ended September 30,
($ amounts in thousands)	2009			2008			$ Increase (Decrease)			% Change
Branded OTC
Revenues	$	17,053		$	15,471		$	1,582		10.2	%
Cost of Sales		3,787			3,640			147		4.0	%

Gross Profit	$	13,266		$	11,831		$	1,435		12.1	%

Gross Margin%		77.8	%		76.5	%

Distribution
Revenues	$	14,472		$	13,696		$	776		5.7	%
Cost of Sales		13,355			12,453			902		7.2	%

Gross Profit	$	1,117		$	1,243		$	(126	)	(10.1	)%

Gross Margin%		7.7	%		9.1	%

Licensed Products
Revenues	$	2,101		$	1,336		$	765		57.3	%
Cost of Sales		808			583			225		38.6	%

Gross Profit	$	1,293		$	753		$	540		71.7	%

Gross Margin%		61.5	%		56.4	%

Total
Revenues	$	33,626		$	30,503		$	3,123		10.2	%
Cost of Sales		17,950			16,676			1,274		7.6	%

Gross Profit	$	15,676		$	13,827		$	1,849		13.4	%

Gross Margin%		46.6	%		45.3	%

Cost of goods sold was approximately $17,950,000 for the three months ended September 30, 2009 as compared with $16,676,000 for the three months ended September 30, 2008. The gross profit for the three months ended September 30, 2009 was 46.6% as compared to 45.3% for the three months ended September 30, 2008. The gross profit for the three months ended September 30, 2009 of Sunstone products was $13,266,000, which included $115,000 of amortization of intangibles resulting from the Sunstone acquisition. The gross profit for the three months ended September 30, 2008 of Sunstone was $11,831,000, which included $107,000 of amortization of intangibles resulting from the Sunstone acquisition. The gross profit for Sunstone was 77.8% for the three months ended September 30, 2009 as compared to 76.5% for the three months ended September 30, 2008.

The gross profit for the three months ended September 30, 2009 for distribution was $1,117,000 as compared to $1,243,000 for the three months ended September 30, 2008. The gross margin for the distribution was 7.7% for the three months ended September 30, 2009 as compared to 9.1% for the three months ended September 30, 2008.

The gross profit for the three months ended September 30, 2009 for licensed products was $1,293,000 as compared to $753,000 for the three months ended September 30, 2008. The gross margin for licensed products was 61.5% for the three months ended September 30, 2009 as compared to 56.4% for the three months ended September 30, 2008. The increase in gross margin was the result of the Company’s revenue mix changing to include a larger percentage of high gross profit products. In addition, the Company introduced a higher gross profit version of Propess in 2009.

Sales and Marketing Expenses:

Sales and marketing expenses were $9,811,000 for the three months ended September 30, 2009 as compared with $9,152,000 for the three months ended September 30, 2008. Selling and Marketing expenses as a percentage of net revenues decreased to 29.2% for the three months ended September 30, 2009 as compared to 30.0% for the three

months ended September 30, 2008. Advertising, travel and entertainment, marketing, salaries and related benefits, selling expenses and amortization of intangibles account for $8,112,000 or 82.7% of sales and marketing expenses for the three months ended September 30, 2009 as compared to $8,007,000 or 87.5% for the three months ended September 30, 2008. The most significant sales and marketing expense increases for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 are as follows: sales office expenses of $812,000, travel and transportation expenses of $496,000 and advertising expenses of $124,000. The most significant sales and marketing expense decreases for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 are as follows: salaries and related expenses of $557,000 and marketing expenses of $303,000.

General and Administrative Expenses:

General and administrative expenses were approximately $4,825,000 for the three months ended September 30, 2009 as compared to $2,910,000 for the three months ended September 30, 2008. General and administrative expenses as a percentage of net revenues increased to 14.3% for the three months ended September 30, 2009 as compared to 9.5% for the three months ended September 30, 2008. The most significant increase was $1,180,000 for research and development as compared to the three months ended September 30, 2008. Salary and related expenses increased $254,000 for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008, which was the result increased salaries at Sunstone. For the three months ended September 30, 2008, the Company reversed $525,000 which was an over accrual for socials taxes from prior years.

Interest Income:

Our interest income primarily consists of income earned on our cash and cash equivalents and debt premium amortization. We received interest income on our balances of cash and cash equivalents of $16,000 during the three months ended September 30, 2009 and $6,000 for the three months ended September 30, 2008. As of September 30, 2009, the unamortized debt premium amounted to $222,000. Total premium amortization was $36,000 for the three months ended September 30, 2009.

Interest Expense:

Our interest expense primarily consists of incurred interest and debt discount amortization from our November 2007, January 2009 and March 2009 long term debt financings. We had interest expense of $895,000 for the three months ended September 30, 2009 and $1,590,000 for the three months ended September 30, 2008, of which total amortization of debt discount was $0 for the three months ended September 30, 2009 as compared to $767,000 for the three months ended September 30, 2008.

Debt Issuance Cost Amortization:

Our issuance cost amortization is the result of the long term debt financing costs we incurred in November 2007, January 2009 and March 2009. The Company defers debt issuance costs and amortizes the amount over the life of debt on a straight-line basis which approximates the effective interest method. The unamortized debt issuance cost was $837,000 as of September 30, 2009 and $101,000 of debt issuance costs had been amortized for the three months ended September 30, 2009 as compared to $210,000 for the three months ended September 30, 2008.

Equity Method Investment Income:

Our 50% investment in Shengda is included in our financial statements under the equity method of accounting for the three months ended September 30, 2009. The difference between our cost of our investment and our proportionate share of the equity in the underlying net assets is accounted for under the purchase method of accounting. Under the purchase method of accounting we allocate the purchase price to the net assets acquired in the transaction at their respective estimated fair market values.

The following table provides a reconciliation of our equity method investment income. Prior to purchase accounting adjustments, Shengda generated net income of $337,000, or $169,000 for our 50% equity ownership. The total of amortization for the period was $62,000 which resulted in an equity method investment income of $107,000.


($ amounts in thousands)
Equity in earnings of Shengda for the three months ended September 30, 2009	$	169
Less adjustments of excess fair value:
Depreciation and amortization expense of buildings and intangible assets, including land use rights		62

Total equity method investment income	$	107

Income Taxes

For the three months ended September 30, 2009, we recognized $430,000 of income tax expense on profit before income taxes of $203,000. This compared to income tax expense for the three months ended September 30, 2008 of $787,000 on loss before income taxes of $29,000. China does not permit the filing of a consolidated tax return for the entities that are wholly owned by the Company, which results in Sunstone having income tax expense on profit before income taxes while the Company’s has a consolidated loss before income taxes. Prior to December 2008 we recorded taxes at a rate of 25% for Sunstone. On December 3, 2008, Sunstone obtained the Hi-tech Enterprise Certificate issued by the Hebei Science and Technology Department, which provides Sunstone with a preferential income tax rate of 15%. This designation entitled Sunstone to receive preferential treatment in 2008, 2009 and 2010 which reduced the income tax rate from 25% to 15%.

Nine months ended September 30, 2009 Compared to Nine months ended September 30, 2008

The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the nine months ended September 30, 2009 and 2008:


	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
($ amounts in thousands)	2009			2008			2009		2008
Net Revenues	$	105,371		$	78,230		100.0	%	100.0	%
Cost of Sales		54,643			40,120		51.9	%	51.3	%

Gross Profit		50,728			38,110		48.1	%	48.7	%

Sales and Marketing Expenses		33,622			26,251		31.9	%	33.6	%
General and Administrative Expenses		12,755			9,886		12.1	%	12.6	%

Total Operating Expenses		46,377			36,137		44.0	%	46.2	%

Profit (Loss) From Operations		4,351			1,973		4.1	%	2.5	%
Other Income (Expense):
Interest Income		159			68		0.2	%	0.1	%
Interest Expense		(3,369	)		(4,770	)	-3.2	%	-6.1	%
Debt Issuance Cost Amortization		(326	)		(630	)	-0.3	%	-0.8	%
Equity Method Investment Income		189			675		0.2	%	0.9	%
Loss on Early Extinguishment of Debt		(4,573	)		—		-4.3	%	—
Gain on Derivatives		1,204			—		1.1	%	—

Total Other Income (Expense)		(6,716	)		(4,657	)	-6.3	%	-5.9	%

Loss Before Provision for Income Taxes		(2,365	)		(2,684	)	-2.2	%	-3.4	%
Provision for Income Taxes		1,583			2,198		1.5	%	2.8

Net Loss	$	(3,948	)	$	(4,882	)	-3.7	%	-6.2	%

Net Revenues:

Net revenues were approximately $105,371,000 for the nine months ended September 30, 2009 as compared with approximately $78,230,000 for the nine months ended September 30, 2008. Sunstone revenues were included for the period February 18, 2008 through September 30, 2008. Rongheng revenues were included for the period July 5, 2008 through September 30, 2008.

Revenue by product categories was as follows:


	Nine months ended September 30,
($ amounts in thousands)	2009		2008		$ Increase		% Change
Branded OTC	$	58,390	$	44,540	$	13,850	31.1	%
Distribution products		41,977		29,788		12,189	40.9	%
Licensed products		5,004		3,902		1,102	28.2	%

	$	105,371	$	78,230	$	27,141	34.7	%

Branded OTC. Sunstone revenues were $58,390,000 for the nine months ended September 30, 2009 as compared to $44,540,000 for the period February 18, 2008 through September 30, 2008, an increase of 31.1%. Sunstone manufactures and sells pediatric products under the Goodbaby brand, women’s health products under the Confort brand and nutritional products under the Nemei brand. The Goodbaby franchise accounted for 80.0% of Sunstone’s total product sales for the nine months ended September 30, 2009 as compared to 79.0% for the period February 18, 2008 through September 30, 2008. The top products were Pediatric Paracetamol and Amantadine Hydrochloride Granules for the treatment of the common cold, Pediatric Huatan Zhike Granules for the treatment of coughing, Pediatric Kechuanling Oral Solution for the treatment of coughing and Pidotimod Tablets for pediatric diarrhea. These top five products accounted for approximately 86.1% of Sunstone’s revenue for the nine months ended September 30, 2009 as compared to 91.0% of Sunstone’s revenue for the period February 18, 2008 through September 30, 2008.

Distribution Products. Distribution revenue for the nine months ended September 30, 2008, excluding licensed products, was $41,977,000 as compared to $29,788,000 for the nine months ended September 30, 2008, an increase of 40.9%. For the nine months ended September 30, 2009, the results include Wanwei and Rongheng as compared to the nine months ended September 30, 2008, which includes nine months of Wanwei and Rongheng for the period July 5, 2008 through September 30, 2008. Wanwei’s top five products were Xingnaojing, Glurenorm, Xuebijing, Ferrous Succinate Tablets, and Jinlong capsules, which accounted for 44.7% of total distribution revenue for the nine months ended September 30, 2009 as compared to 34.0% for the nine months ended September 30, 2008. Rongheng’s top five products were Selenious Yeast Tablets, Iohetol, Gemeitabine Hydrochloride, Almitrine and Raubasine compound and Celotiam Hydrochloride, which collectively accounted for 24.4% of Rongheng’s revenue for the nine months ended September 30, 2009, as compared to 26.0% for the period July 5, 2008 through September 30, 2008.

Licensed Products. We provided sales and marketing and distribution services for Anpo, Propess, Galake and Ferriprox with revenue of $5,004,000 for the nine months ended September 30, 2009 as compared to $3,902,000 for the nine months ended September 30, 2008, an increase of 28.2%. This increase was the result of continued sales and marketing efforts promoting Propess, Anpo, Galake and initiating sales of Ferriprox in the third quarter of 2008. As of September 30, 2009 there were 531 and 703 hospitals selling Propess and Anpo respectively, versus 456 and 489 as of September 30, 2008.

Cost of Goods Sold:


	Nine months ended September 30,
($ amounts in thousands)	2009			2008			$ Increase/ (Decrease)		% Change
Branded OTC (1)
Revenues	$	58,390		$	44,540		$	13,850	31.1	%
Cost of Sales		13,643			10,675			2,968	27.8	%

Gross Profit	$	44,747		$	33,865		$	10,882	32.1

Gross Margin%		76.6	%		76.0	%

Distribution (2)
Revenues	$	41,977		$	29,788		$	12,189	40.9	%
Cost of Sales		39,045			27,710			11,335	40.9	%

Gross Profit	$	2,932		$	2,078		$	854	41.1	%

Gross Margin%		7.0	%		7.0	%

Licensed Products
Revenues	$	5,004		$	3,902		$	1,102	28.2	%
Cost of Sales		1,955			1,735			220	12.7	%

Gross Profit	$	3,049		$	2,167		$	882	40.7	%

Gross Margin%		60.9	%		55.5	%

Total
Revenues	$	105,371		$	78,230		$	27,141	34.7	%
Cost of Sales		54,643			40,120			14,523	36.2	%

Gross Profit	$	50,728		$	38,110		$	12,618	33.1	%

Gross Margin%		48.1	%		48.7	%

(1)	Revenue and cost of sales for the Sunstone OTC segment is for the period February 18, 2008 through September 30, 2008.

(2)	Revenue and cost of sales for Distribution includes Wanwei for the nine months ended September 30, 2009 and 2008 and Rongheng for the nine months ended September 30, 2009 and the period July 5, 2008 through September 30, 2008.

Cost of goods sold was approximately $54,643,000 for the nine months ended September 30, 2009 as compared with $40,120,000 for the nine months ended September 30, 2008. The gross profit for the nine months ended September 30, 2009 was 48.1% as compared to 48.7% for the nine months ended September 30, 2008. The gross profit of Sunstone products for the nine months ended September 30, 2009 was $44,747,000, which included $346,000 of purchase accounting adjustment of amortization of intangibles resulting from the Sunstone acquisition. The gross margin for the nine months ended September 30, 2009 was 76.6% as compared to 76.0% for the nine months ended September 30, 2008.

The gross profits for the nine months ended September 30, 2009 for distribution was $2,932,000 as compared to $2,078,000 for the nine months ended September 30, 2008. The gross margin for distribution products was 7.0% for the nine months ended September 30, 2009 as compared to 7.0% for the nine months ended September 30, 2008.

The gross profits for the nine months ended September 30, 2009 for licensed products was $3,049,000 as compared to $2,167,000 for the nine months ended September 30, 2008. The gross margin for licensed products was 60.9% for the nine months ended September 30, 2009 as compared to 55.5% for the nine months ended September 30, 2008. The increase in gross margin was the result of the Company’s revenue mix changing to include a larger percentage of high gross profit products. In addition, the Company introduced a higher gross profit version of Propess in 2009.

Sales and Marketing Expenses:

Sales and marketing expenses were $33,622,000 for the nine months ended September 30, 2009 as compared with $26,251,000 for the nine months ended September 30, 2008. Marketing, advertising, salaries and related benefits, office expenses, travel and entertainment and amortization of intangibles account for $29,199,000 or 86.8% of sales and marketing expenses for the nine months ended September 30, 2009 as compared to $22,966,000 or 88.0% of sales and marketing expenses for the nine months ended September 30, 2008. The most significant sales and marketing expense increases for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 were the result of increased revenues, the inclusion of Sunstone for the nine months ended September 30, 2009 as compared to the period February 18, 2008 through September 30, 2008 and the inclusion of Rongheng for the nine months ended September 30, 2009 as compared to the period July 5, 2008 through September 30, 2008. The most significant sales and marketing expense increases for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 are as follows: advertising expenses of $3,719,000, sales office selling expenses of $1,692,000 and travel and entertainment expenses of $1,602,000.

General and Administrative Expenses:

General and administrative expenses were approximately $12,755,000 for the nine months ended September 30, 2009 as compared to $9,886,000 for the nine months ended September 30, 2008. As a percentage of net revenues general and administrative expenses were 12.1% for the nine months ended September 30, 2009 as compared to 12.6% for the nine months ended September 30, 2008. Salaries and related benefits increased $769,000 for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. This increase is the result of the Sunstone and Rongheng acquisitions during 2008, the increase in additional senior management in China in 2008 and salary increases and expansion of our administrative and corporate staff in China in 2008. Research and development increased $1,374,000 for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. For the nine months ended September 30, 2008, the Company reversed $525,000, which was an over accrual for socials taxes from prior years.

Interest Income:

Our interest income primarily consists of income earned on our cash and cash equivalents and debt premium amortization. We received interest income on our balances of cash and cash equivalents of $78 ,000 during the nine months ended September 30, 2009 and $68,000 for the nine months ended September 30, 2008. As of September 30, 2009, the unamortized debt premium amounted to $222,000. Total premium amortization was $81,000 for the nine months ended September 30, 2009.

Interest Expense:

Our interest expense primarily consists of incurred interest and debt discount amortization from our November 2007, January 2009 and March 2009 long term debt financings. We had interest expenses of $3,369,000 for the nine months ended September 30, 2009 and $4,770,000 for the nine months ended September 30, 2008, of which amortization of debt discount was $450,000 for the nine months ended September 30, 2009 and $2,301,000 for the nine months ended September 30, 2008.

Debt Issuance Cost Amortization:

Our issuance cost amortization is the result of the long term debt financing costs we incurred in November 2007, January 2009 and March 2009. The Company defers debt issuance costs and amortizes the amount over the life of debt on a straight-line basis which approximates the effective interest method. The unamortized debt issuance cost was $837,000 as of September 30, 2009 and $326,000 of debt issuance costs had been amortized for the nine months ended September 30, 2009 as compared to $630,000 for the nine months ended September 30, 2008.

Equity Method Investment Income:

Our 50% investment in Shengda is included in our financial statements under the equity method of accounting for the period February 16, 2009 through September 30, 2009. The difference between our cost of our investment and our proportionate share of the equity in the underlying net assets is accounted for under the purchase method of accounting. Under the purchase method of accounting we allocate the purchase price to the net assets acquired in the transaction at their respective estimated fair market values.

The following table provides a reconciliation of our equity method investment income. Prior to purchase accounting adjustments, Shengda generated net income of $812,000, or $406,000 for our 50% equity ownership. The total of amortization for the period was $217,000 which resulted in an equity method investment income of $189,000.


	($ amounts in thousands)
Equity in earnings of Shengda for period February 16 through September 30, 2009	$	406
Less adjustments of excess fair value:
Inventory sold		61
Depreciation and amortization expense of buildings and intangible assets, including land use rights		156

Total equity method investment income	$	189

Our 49% investment in Sunstone China was included in our financial statements under the equity method of accounting for the period January 1, 2008 through February 17, 2008, the difference between our cost of our investment and our proportionate share of the equity in the underlying net assets is accounted for under the purchase method of accounting. The excess cost over book value of net assets acquired not representing trademarks and goodwill is amortized over the estimated useful life of acquired assets (with definitive useful lives) against our share of investee earnings.

The following table provides a reconciliation of our equity method investment loss. Prior to purchase accounting adjustments Sunstone China generated net income of $2,104,000 or $1,031,000 for our 49% equity ownership. The total amortization for the period was $356,000 which resulted in an equity method investment income of $675,000.


	($ amounts in thousands)
Equity in earnings of Sunstone China for the period January 1, 2008 through February 17, 2008	$	1,031
Less adjustments of excess fair value:
Amortization expense of intangible assets		356

Total equity method investment gain after amortization	$	675

Loss on Early Extinguishment of Debt:

During the nine months ended September 30, 2009, the Company recorded a loss of approximately $4,573,000 in deferred loan costs, debt discount and debt premium, relative to the early extinguishment of debt under the previously outstanding long term debt.

Gain on Derivatives:

The gain on derivatives liability is in connection with the convertible notes issued in January 2009, which were amended in March 2009 and May 2009, and the warrants which were issued as part of the common stock issuance in February 2009. The gain on derivatives was $1,204,000 for the nine months ended September 30, 2009.

Income Taxes:

For the nine months ended September 30, 2009, we recognized $1,583,000 of income tax expense on loss before taxes of $2,365,000. This compared to income tax expense for the nine months ended September 30, 2008 of $2,198,000 on loss before taxes of $2,684,000.

China does not permit the filing of a consolidated tax return for the entities that are wholly owned by the Company, which results in Sunstone having income tax expense on profit before income taxes while the Company’s has a consolidated loss before income taxes. Prior to December 2008 we recorded taxes at a rate of 25% for Sunstone. On December 3, 2008, Sunstone obtained the Hi-tech Enterprise Certificate issued by the Hebei Science and Technology Department, which provides Sunstone with a preferential income tax rate of 15%. This designation entitled Sunstone to receive preferential treatment in 2008, 2009 and 2010 which reduced the income tax rate from 25% to 15%.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Rate Sensitivity

We are exposed to cash flow and earnings fluctuations resulting from foreign exchange rate variation because our operations are in China. This exposure arises from the translation of financial statements of our foreign subsidiaries BMP China, Sunstone and Wanwei, from RMB, the functional currency of China, into United States dollars, our functional currency. For additional information on the risks associated with the RMB, see Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2008 “Risk Factors — Risks Related to Doing Business in China — Fluctuations in the Chinese Renminbi could adversely affect our results of operations.”

We do not, as a routine matter, use hedging vehicles to manage foreign exchange exposures. As of September 30, 2009, a 10% unfavorable change in the foreign exchange rates affecting balance sheet transactional exposures would have resulted in a reduction in pre-tax loss of approximately $0.7 million. This hypothetical reduction on transactional exposure is based on the difference between September 30, 2009 actual foreign exchange rates and hypothetical rates assuming a 10% unfavorable change in foreign exchange rates on that date.

The translation of the balance sheets of our Chinese operations from RMB into U.S. dollars is sensitive to changes in foreign exchange rates. These translation gains or losses are recorded as translation adjustments within shareholders’ equity on our balance sheet. Using the example above, the hypothetical change in translation adjustments would be calculated by multiplying the net assets of our Chinese operations by a 10% unfavorable change in the applicable foreign exchange rates. As of September 30, 2009, our analysis indicated that these hypothetical changes would reduce shareholders’ equity by approximately $5.7 million or 3.8% of our September 30, 2009 shareholder equity of $150.2 million.

Interest Rate Sensitivity

We invest in high-quality financial instruments, primarily money market funds, federal agency notes, corporate debt securities, bank certificates of deposit, commercial paper and United States treasury notes, which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

ITEM 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during our third fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1A.

Risk Factors.

In addition to the other information contained in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 6.

Exhibits.


3.1		Amended and Restated Bylaws, dated October 27, 2009 (incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K filed on October 28, 2009)

10.1		Share Purchase Agreement, dated as of August 3, 2009, by and between Alliance UniChem Group Limited and BMP Sunstone Corporation (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed on August 4, 2009)

31.1*		Certificate of the Chief Executive Officer of BMP Sunstone Corporation required by Rule 13a-14(a) under the Exchange Act.

31.2*		Certificate of the Chief Financial Officer of BMP Sunstone Corporation required by Rule 13a-14(a) under the Exchange Act

32.1*		Certificate of the Chief Executive Officer of BMP Sunstone Corporation required by Rule 13a-14(b) under the Exchange Act

32.2*		Certificate of the Chief Financial Officer of BMP Sunstone Corporation required by Rule 13a-14(b) under the Exchange Act

*	Filed herewith.

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.


				BMP SUNSTONE CORPORATION

Date: November 9, 2009				/s/ DAVID GAO
				David Gao Chief Executive Officer (Principal Executive Officer)

Date: November 9, 2009				/s/ FRED M. POWELL
				Fred M. Powell Chief Financial Officer (Principal Financial and Accounting Officer)

BMP Sunstone CORP - FORM 10-Q - November 9, 2009

Attached files

BMP Sunstone CORP Reports