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Table of Contents

 

 

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 JUNE 30, 2010

OR

 

¨ 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 August 6, 2010 was 42,145,320.

 

 

 


Table of Contents

BMP SUNSTONE CORPORATION

INDEX

 

     Page
No.

Part I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009

   3

Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June  30, 2010 and 2009

   4

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the six months ended June 30, 2010

   5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June  30, 2010 and 2009

   6

Notes to Condensed Consolidated Financial Statements (Unaudited)

   7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

   15

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   24

Item 4. Controls and Procedures

   25

Part II. OTHER INFORMATION

  

Item 1A. Risk Factors

   26

Item 6. Exhibits

   27

SIGNATURES

   28

EX-31.1

  

EX-31.2

  

EX-32.1

  

EX-32.2

  

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

     (Unaudited)
June 30,
2010
    December 31,
2009
 

Assets

    

Current Assets:

    

Cash and Cash Equivalents

   $ 22,284      $ 21,544   

Restricted Cash

     1,125        1,125   

Notes Receivable

     15,087        17,541   

Accounts Receivable, net of allowance for doubtful accounts of $771 and $481

     47,590        37,752   

Inventory, net of allowance for obsolescence of $178 and $98

     10,461        9,811   

Receivable from Alliance Unichem

     —          7,550   

Other Receivables

     3,634        3,648   

VAT Receivable

     1,009        1,093   

Prepaid Expenses and Other Current Assets

     7,336        6,322   
                

Total Current Assets

     108,526        106,386   

Property and Equipment, net

     31,492        30,967   

Investment in Shengda

     —          2,950   

Investments at Cost

     367        146   

Goodwill

     70,317        70,033   

Other Assets

     327        405   

Land Use Rights, net accumulated amortization

     2,991        2,860   

Intangible Assets, net of accumulated amortization

     39,980        38,508   
                

Total Assets

   $ 254,000      $ 252,255   
                

Liabilities and Equity

    

Current Liabilities:

    

Notes Payable and Bank Borrowings

   $ 2,791      $ 6,406   

Accounts Payable

     24,047        24,465   

Due to Related Parties

     1,315        1,437   

Deferred Revenue

     128        208   

Accrued Expenses

     20,521        18,478   
                

Total Current Liabilities

     48,802        50,994   
                

Long-Term Debt, including debt premium

     33,991        36,749   

Deferred Taxes

     8,834        9,097   
                

Total Liabilities

   $ 91,627      $ 96,840   
                

Commitments and Contingencies

     —          —     

Equity:

    

Common Stock, $.001 Par Value; 75,000,000 Shares Authorized as of June 30, 2010 and December 31, 2009; 42,145,320 and 41,931,987 Shares Issued and Outstanding as of June 30, 2010 and December 31, 2009, respectively

     42        42   

Additional Paid in Capital

     170,722        168,772   

Common Stock Warrants

     8,621        8,621   

Accumulated Deficit

     (31,661     (32,946 )

Accumulated Other Comprehensive Income

     10,235        9,486   
                

Total BMP Sunstone Corporation Stockholders’ Equity

   $ 157,959      $ 153,975   
                

Non Controlling Interest

     4,414        1,440   
                

Total Liabilities and Equity

   $ 254,000      $ 252,255   
                

See notes to condensed consolidated financial statements.

 

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Table of Contents

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

($ in thousands except per share amounts)

 

     For the three months ended June 30,     For the six months ended June 30,  
     2010     2009     2010     2009  
     (in $ thousands except per share amounts)     (in $ thousands except per share amounts)  

Net Revenues:

        

Third Parties

   $ 40,863      $ 32,123      $ 79,879      $ 67,644   

Related Parties

     —          360        —          4,102   
                                

Total Revenues

     40,863        32,483        79,879        71,746   

Cost of Goods Sold

     22,188        18,089        40,212        36,694   
                                

Gross Profit

     18,675        14,394        39,667        35,052   
                                

Sales and Marketing Expenses

     11,768        10,300        23,938        23,811   

General and Administrative Expenses

     4,589        4,001        10,400        7,930   
                                

Total Operating Expenses

     16,357        14,301        34,338        31,741   
                                

Profit From Operations

     2,318        93        5,329        3,311   
                                

Other Income (Expense):

        

Interest Income

     53        84        100        108   

Interest Expense

     (995     (1,058 )     (2,347     (2,475 )

Debt Issuance Cost Amortization

     (109     (97 )     (235     (225 )

Equity Method Investment Income

     —          65        —          82   

Loss on Early Extinguishment of Debt

     —          —          —          (4,573 )

Gain (Loss) on Derivatives

     —          (447 )     —          1,204   
                                

Total Other Expense

     (1,051     (1,453 )     (2,482     (5,879 )
                                

Profit (Loss) Before Provision For Income Taxes

     1,267        (1,360 )     2,847        (2,568 )

Provision For Income Taxes

     669        372        1,585        1,154   
                                

Net Profit (Loss)

   $ 598      $ (1,732 )   $ 1,262      $ (3,722 )
                                

Less: Net Loss Attributable to Non Controlling Interest

     62        16       23        16  
                                

Net Profit (Loss) Attributable to BMP Sunstone

   $ 660      $ (1,716 )   $ 1,285      $ (3,706 )
                                

Basic and Fully-Diluted Profit (Loss) Per Share Attributable to BMP Sunstone

   $ 0.02      $ (0.04 )   $ 0.03      $ (0.09 )
                                

Basic Weighted-average Shares Outstanding

     42,145        41,539        42,055        41,154   
                                

Fully Diluted Weighted-average Shares Outstanding

     51,062        50,699        51,022        46,875   
                                

See notes to condensed consolidated financial statements

 

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Table of Contents

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
    Total
Stockholder’s
Equity

Balance as of December 31, 2009

   41,931,987    $ 42    $ 168,772    $ 8,621    $ (32,946 )   $ 9,486    $ 1,440      $ 155,415

Stock-Based Compensation

   —        —        850      —        —          —        —          850

Note Conversion

   133,333      —        400      —        —          —        —          400

Option Exercise

   60,000      —        186      —        —          —        —          186

Non controlling Interest

   —        —        —        —        —          —        2,996        2,996

Net Profit

   —        —        —        —        625        —        39        664

Other Comprehensive Profit

                     

Foreign Currency Translation

   —        —        —        —        —          34      —          34
                             

Total Comprehensive Profit

   —        —        —        —        —          —        —          698
                                                       

Balance as of March 31, 2010

   42,125,320    $ 42    $ 170,208    $ 8,621    $ (32,321 )   $ 9,520    $ 4,475      $ 160,545

Stock-Based Compensation

   —        —        491      —        —          —        —          491

Option Exercise

   20,000      —        23      —        —          —        —          23

Non controlling Interest

   —        —        —        —        —          —        1        1

Net Profit

   —        —        —        —        660       —        (62  )     598

Other Comprehensive Profit

                     

Foreign Currency Translation

   —        —        —        —        —          715      —          715
                         

Total Comprehensive Profit

   —        —        —        —        —          —        —          1,313
                                                       

Balance as of June 30, 2010

   42,145,320    $ 42    $ 170,722    $ 8,621    $ (31,661  )   $ 10,235    $ 4,414      $ 162,373
                                                       

See notes to condensed consolidated financial statements.

 

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Table of Contents

BMP SUNSTONE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

($ in thousands)

     For the six months ended June 30,  
     2010     2009  

Cash Flows from Operating Activities:

    

Net Profit (Loss)

   $ 1,285      $ (3,706 )

Adjustments to Reconcile Net Profit (Loss) to Net Cash Provided in Operating Activities:

    

Bad Debt and Obsolescence Expense

     369        —     

Depreciation and Amortization of Property and Equipment

     1,516        1,153   

Amortization of Intangible Assets and Inventory at Fair Value

     1,961        1,772   

Amortization of Debt Discount and Deferred Debt Issuance Costs

     174        630   

Stock-Based Compensation

     1,341        1,184   

Gain on Fair Value of Derivatives

     —          (1,204 )

Loss on Alliance BMP payment

     300        —     

Loss on Early Extinguishment of Debt

     —          4,573   

Equity Method Investment Income

     —          (82 )

Loss on Disposal of Asset

     8        79   

Non Controlling Interest

     (23     (16  )

Decrease in Deferred Taxes

     (300     (223 )

Increase in Accounts Receivable

     (8,819     (6,873 )

Decrease in Notes Receivable

     2,518        2,914   

Decrease in Inventory

     320        804   

Decrease in Due to Related Parties

     (128     (1,132 )

Increase in Other Receivables

     (27     (185 )

Decrease (Increase) in Value Added Tax Receivable

     88        (219 )

(Increase) Decrease in Prepaid Expenses and Other Current Assets

     (1,307     305   

Decrease in Accounts Payable

     (1,437     (2,195 )

Decrease in Deferred Revenue

     (80     —     

Increase in Accrued Expenses

     1,328        1,025   
                

Net Cash Used in Operating Activities

     (913     (1,396 )
                

Cash Flows from Investing Activities:

    

Acquisition of Property and Equipment

     (603     (1,861 )

Payment for Land Use Rights

     —          (901

Investment in Shengda

     —          (818 )

Cash Recorded through Shengda Consolidation

     700        —     

Proceeds from Disposal of Alliance BMP

     7,250        —     
                

Net Cash Provided by (Used in) Investing Activities

     7,347        (3,580 )
                

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

     209        68  

Net Payments on Note Payable

     (5,969     (5,407 )
                

Net Cash Used in Financing Activities

     (5,760     (2,072 )
                

Effect of exchange rate changes on cash

     66        209   
                

Net Increase (Decrease) in Cash and Equivalents

     740        (6,839 )
                

Cash and Equivalents, Beginning

     21,544        15,740   
                

Cash and Equivalents, Ending

   $ 22,284      $ 8,901   
                

Supplemental Disclosure of Cash Flow Information:

    

Cash Paid During the Years for:

    

Income Taxes

   $ 2,774      $ 3,191   

Interest

   $ 1,881      $ 2,307   

Non-Cash Investing and Financing Activities:

    

Conversion of Convertible Debt

   $ 400      $ —     

Issuance of January Exchange Notes for 10% Notes

   $ —        $ 10,650   

Issuance of March Exchange Notes for 10% Notes

   $ —        $ 1,000   

 

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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 June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 of BMP Sunstone Corporation and Subsidiaries (collectively referred to as “the Company”, “we” or “our”) ) include the accounts of BMP Sunstone Corporation (the “Parent”) and its direct and indirect wholly-owned subsidiaries which it controls, 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, BMP Sunstone Corporation Beijing Representative Office, and, effective beginning January 1, 2010, Sunstone Shengda (Zhangjiakou) Pharmacy Co., Ltd. (formerly named Zhangjiakou Shengda Pharmaceutical Co., Ltd.) (“Shengda”) and should be read in conjunction with the audited consolidated financial statements and accompanying footnotes of the Company as of December 31, 2009 and 2008, and for each of the three years for the periods ended December 31, 2009, 2008 and 2007, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2010. 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.

With respect to the basis for consolidation, control is determined based on ownership rights, management control or, when applicable, based on whether the Company is considered to be the primary beneficiary of a variable interest entity. The Company’s interest in 20% to 50%-owned companies that are not controlled is accounted for using the equity method, unless the Company does not sufficiently influence the management of the investee. The Company’s 50% ownership in Shengda is included in our consolidation as we maintain management control. For investments in which the Company owns less than 20% of the voting shares or does not have significant influence, the cost method of accounting is used. Under the cost method of accounting, the Company does not record its share in the earnings and losses of the companies in which it has an investment. Non-controlling interest represents the interest not owned by the Company, and is recorded for consolidated entities in which the Company owns less than 100% of the interest. All significant intercompany accounts and transactions have been eliminated in consolidation.

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 three and six months ended June 30, 2010 and 2009, their inclusion would have been anti-dilutive.

Recent Accounting Pronouncements: In December 2009, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance which amends the Codification as a result of the FASB’s issuance of “Amendments to FASB Interpretation No. 46(R)” during June of 2009. This amendment requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This guidance requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This amendment eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both. This guidance requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This amendment is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We have adopted this new guidance as of the required effective date of January 1, 2010 and the adoptions did not have any significant impact on our consolidated balance sheets, statements of operations or disclosures.

 

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In January 2010, the Company adopted FASB ASC 810, Consolidation (FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements). ASC 810 requires that noncontrolling interests are reported as a separate line in stockholders’ equity. The net income for both BMP Sunstone and the noncontrolling interests is included in “Net Income.” The “Net income (loss) attributable to noncontrolling interests” is deducted from “Net Income” to determine the “Net Income Attributable to BMP Sunstone,” which will continue to be used to determine earnings per share. ASC 810 also requires certain prospective changes in accounting for noncontrolling interests primarily related to increases and decreases in ownership and changes in control. As required, the presentation and disclosure requirements were adopted through retrospective application, and the consolidated financial statement prior period information has been adjusted accordingly. The adoption did not have a material effect on the Company’s consolidated financial statements.

In January 2010, the FASB issued new accounting guidance which amends “Fair Value Measurements and Disclosures” that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2 and 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual periods beginning after December 15, 2009, except for certain disclosures which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are in the process of evaluating this new guidance and assessing its impact on the determination or reporting of our financial results.

In February 2010, the FASB issued new accounting guidance which addresses both the interaction of requirements per the Codification’s “Subsequent Events” Topic, with the SEC’s reporting requirements, and the intended breadth of the reissuance disclosures provision related to subsequent events. The amendments in this update have the potential to change reporting by both private and public entities; however, the nature of the change may vary depending on facts and circumstances. We have evaluated this new guidance, and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In February 2010, the FASB issued new accounting guidance which defers the effective date of the amendments to the “Consolidation” Topic to a reporting entity’s interest in certain types of entities and clarifies other aspects of the “Consolidation” amendments. As a result of the deferral, a reporting entity will not be required to apply the new amendments to the “Consolidation” Topic’s requirements to its interest in an entity that meets the criteria to qualify for the deferral. This update also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining when a decision maker or service provider fee represents a variable interest. In addition, the update also clarifies that a quantitative calculation should not be the only basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. We have evaluated this new guidance, and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In April 2010, the FASB issued new accounting guidance which codifies an SEC Staff Announcement relating to accounting for certain tax effects within the “Income Taxes” Topic from the Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act. We have evaluated this new guidance, and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In April 2010, the FASB issued new accounting guidance which amends “Compensation-Stock Compensation” and addresses the classification of share-based payment awards with an exercise price denominated in the currency of a market in which the underlying equity security trades. The update clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The objective of the amendments is to address the diversity in practice regarding such share-based payment awards. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 31, 2010. We are in the process of evaluating this new guidance and assessing its impact on the determination or reporting of our financial results.

 

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In April 2010, the FASB issued new accounting guidance which amends “Revenue Recognition” and provides guidance on defining a milestone under “Revenue Recognition” and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. The objective of the amendments is to provide guidance related to the use of the milestone method as authoritative guidance on this topic did not previously exist. The amendments are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We have evaluated this new guidance, and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In April 2010, the FASB issued new accounting guidance which amends “Receivables” and clarifies that modifications of loans that are accounted for within a pool under “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality,” which provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition, do not result in the removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality” that are not accounted for within pools, which will continue to be subject to troubled debt restructuring accounting provisions. The objective of the amendments is to address the diversity in practice regarding such modifications. The amendments are effective for modifications of loans accounted for within pools under “Receivables- Loans and Debt Securities Acquired with Deteriorated Credit Quality” occurring in the first interim or annual period ending on or after July 15, 2010. We have evaluated this new guidance, 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 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 from Zhangjiakou Shengda Pharmaceutical Co., Ltd. to Sunstone Shengda (Zhangjiakou) Pharmaceutical Co., Ltd.

The purchase price was paid in installments as follows:

 

   

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 $2,050,000 as of December 30, 2009) was 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 and was paid as of December 31, 2009.

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 had become 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 $2,950,000 as of December 31, 2009, of which we had paid $2,925,000. There were no acquisition costs incurred during the years ended December 31, 2009 or 2008.

 

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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

   $ 1,784
         

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

 

     Weighted Average
Amortization
Period
   December 31, 2009    Net Book
Value
        Gross Carrying
Amount
   Accumulated
Amortization
  

Intangible assets

           

Completed Technology

   12 Years    $ 983    $ 75    $ 908

Trademark

   12 Years      357      25      332

In Process Research and Development

   16 Years      209      11      198

Customer Relationship

   5 Years      192      99      93

GMP License

   2 Years      43      18      25
                       

Intangible Assets

      $ 1,784    $ 228    $ 1,556
                       

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 17, 2009 through June 30, 2009. Prior to purchase accounting adjustments, Shengda generated net income of $474,000 or $237,000 for our 50% equity ownership. The total of amortization and inventory write off for the period was $155,000 which resulted in equity method investment income of $82,000.

Reconciliation of Equity Method Investment Income:

 

     ($ in thousands)  

Equity in earnings of Shengda for the period

  

February 17 through June 30, 2009

   $ 237   

Less adjustments of excess fair value:

  

Inventory sold

     (61

Depreciation and amortization expense on buildings and intangible assets, including land use rights

     (94
        

Total equity method investment income

   $ 82   
        

On January 7, 2010, the Company appointed Yanping Zhao, the Company’s Chief Operating Officer and Corporate Vice President, and Zhijun Tong, one of the Company’s directors and General Manager of Sunstone, as its representatives on the Board of Shengda. Zhijun Tong was elected Chairman of the Board of Shengda and is Shengda’s legal representative.

Sunstone, as of January 7, 2010 has management control of Shengda and has consolidated its 50% ownership interest effective January 1, 2010.

 

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3. Segment Information:

The Company had three reportable segments for the three and six months ended June 30, 2010 and 2009: (i) Manufactured Products reportable segment which includes the operations of Sunstone and Shengda, (ii) Distribution Products reportable segment which includes the operations of Wanwei and Rongheng and (iii) Licensed Products reportable segment which includes the operations of BMP China.

Manufactured Products (Sunstone and Shengda)

The chief operating decision makers for the Manufactured Products segment are the General Managers of Sunstone and Shengda, whose function is to allocate resources to, and assess the performance of their respective businesses Sunstone and Shengda. This segment primarily manufactures and sells branded products into the retail pharmacy supply chain. Sunstone and Shengda operate in high margin environments selling pediatric and women’s health pharmaceutical and nutritional products.

Distribution Products (Wanwei and Rongheng)

The chief operating decision makers for the Distribution Products segment are the General Managers of Wanwei and Rongheng, whose functions are to allocate resources to, and assess the performance of their respective businesses. 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 the same suppliers, are the primary business activities 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 (BMP China)

The chief operating decision maker for the Licensed Products segment is the 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 June 30,
    Revenue
Six months ended June 30,
 
     2010     2009     2010     2009  
     ($ in thousands)              

Manufactured Products

   $ 22,498      16,810      $ 47,902      $ 41,337   

Distribution Products

     18,457      15,758        32,074        30,516   

Licensed Products

     1,936      1,551        3,685        2,903   

Eliminations

     (2,028   (1,636     (3,782     (3,010 )
                              

Total Revenue

   $ 40,863      32,483      $ 79,879      $ 71,746   
                              
     Operating Income (Loss)
Three months ended June 30,
    Operating Income (Loss)
Six months ended June 30,
 
     2010     2009     2010     2009  
     ($ in thousands)     ($ in thousands)  

Manufactured Products

   $ 4,029      2,435      $ 9,922      $ 7,680   

Distribution Products

     196      (287     128        (398

Licensed Products

     90      38        60        134   

Corporate

     (1,997   (2,093      (4,781     (4,105
                              

Total Operating Profit

   $ 2,318      93      $ 5,329      $ 3,311   
                              

 

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4. Inventories:

Inventories by category as of June 30, 2010 and December 31, 2009 consist of the following:

 

     2010    2009
     ($ amount in thousands)

Raw materials

   $ 2,972    $ 2,801

Work in process

     963      816

Finished goods

     6,526      6,194
             

Total inventories, net

   $ 10,461    $ 9,811
             

5. Prepaid Expenses and Other Current Assets:

Prepaid expenses and other current assets as of June 30, 2010 and December 31, 2009 consist of the following:

 

     2010    2009
     ($ amounts in thousands)

Advance payments to Sunstone suppliers

   $ 5,110    $ 3,774

Advance payments to Wanwei and Rongheng suppliers

     1,380      1,693

Prepaid and other current assets

     846      855
             
   $ 7,336    $ 6,322
             

6. Property and Equipment:

Property and equipment as of June 30, 2010 and December 31, 2009 consist of the following:

 

     Useful Lives    2010    2009
     ($ amounts in thousands)

Buildings

   20 Years    $ 18,946    $ 17,078

Machinery and equipment

   5-10 Years      13,332      12,115

Furniture, fixtures and office equipment

   2-10 Years      1,615      1,450

Motor Vehicles

   5-10 Years      1,556      1,556

Leasehold Improvements

   2-5 Years      583      581
                
        36,032      32,780

Less: Accumulated Depreciation

        12,128      9,775

Add: Construction in Progress

        7,588      7,962
                
      $ 31,492    $ 30,967
                

7. 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 six months ended June 30, 2010, goodwill increased $273,000 and $284,000, respectively, as a result of foreign currency fluctuation.

8. Accrued Expenses:

Accrued expenses as of June 30, 2010 and December 31, 2009 consist of the following:

 

     2010    2009

Accrued salary and related expenses

   $ 2,319    $ 2,423

Accrued taxes and related expenses

     3,181      4,022

Accrued social welfare and related expenses

     1,033      795

Accrued advertising

     137      191

Accrued travel and entertainment

     2,184      1,751

Accrued marketing

     4,711      3,584

Accrued sales office expenses

     3,777      3,032

Accrued interest expense

     738      750

Accrued other

     2,441      1,930
             

Total Accrued expenses

   $ 20,521    $ 18,478
             

 

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9. Earnings per Share:

The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share for the respective periods:

 

     Three months
Ended June 30,
   Six months
Ended June 30,
     2010    2009    2010    2009

Weighted-average shares – Basic

   42,145,100    41,538,978    42,054,676    41,154,170

Effect of dilutive securities

           

Stock options

   930,625    808,182    965,845    756,641

Warrants

   120,005    18,366    134,541    —  

Convertible debt

   7,866,667    8,333,333    7,866,667    4,964,273
                   

Weighted-average shares – Diluted

   51,062,397    50,698,859    51,021,729    46,875,084
                   

For the three months ended June 30, 2010 and 2009, there were 2,677,162 and 2,857,215 shares, respectively, of the Company’s ordinary shares attributable to the stock options and warrants that were excluded from the calculation of diluted income per share because the conversion price or exercise price exceeded the average price of the Company’s ordinary shares. For the six months ended June 30, 2010 and 2009, there were 2,672,996 and 3,416,977 shares, respectively, of the Company’s ordinary shares attributable to the stock options and warrants that were excluded from the calculation of diluted income per share because the conversion price or exercise price exceeded the average price of the Company’s ordinary shares.

10. 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 June 30, 2010 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.

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:

 

     Six months ended
June 30, 2010
 

Expected life (years)

   5.0   

Risk-free interest rate

   2.41 %

Expected volatility

   65 %

Expected dividend yield

   0.00 %

There were no options granted for the three months ended June 30, 2010. The weighted average estimated fair value of the options granted for the six months ended June 30, 2010 was $3.04. The weighted average estimated fair value of the options granted for the three and six months ended June 30, 2009 was $2.21.

 

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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 six months ended June 30, 2010 is as follows:

 

     Options    Weighted-
Average
Exercise
Price
per Share
   Weighted-
Average
Remaining
Contractual
Term
(in  years)
   Aggregate
Intrinsic
Value

Outstanding on January 1, 2010

   3,446,232    $ 5.00      

Granted

   100,000      5.42      

Exercised

   80,000      2.61      

Canceled

   238,044      8.16      
                 

Outstanding on June 30, 2010

   3,228,188    $ 4.84    5.77    $ 5,296,000
                       

Exercisable on June 30, 2010

   2,501,865    $ 4.38    5.06    $ 4,953,000
                       

The total fair value of shares vested during the three months ended June 30, 2010 was $538,000. A summary of the status of the Company’s non-vested shares as of June 30, 2010 is presented below:

 

     Non-vested
Shares
   Weighted-Average
Grant-Date Fair
Value

Nonvested at January 1, 2010

   1,063,249    $ 3.91

Granted

   100,000      3.04

Vested

   353,864      3.93

Canceled

   83,062      4.14
           

Non-vested at June 30, 2010

   726,323    $ 3.75
           

The unrecognized share-based compensation cost related to stock option expense at June 30, 2010 is $2,632,000 and will be recognized over a weighted average of 1.9 years.

11. 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:

 

     Balance at
June 30, 2010
     ($ in thousands)

Amounts due to related parties:

  

Due to RHIT

   $ 925

Due to Shenglongda

     390
      
   $ 1,315
      

During the three and six months ended June 30, 2010, the Company leased office space in Beijing from an entity controlled by Zhijun Tong, a Company director, for $23,000 and $46,000, respectively.

 

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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, 2009.

Forward-Looking Statements

Certain of the statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or 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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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 and on acquiring additional distribution companies, 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, 2009.

Overview

BMP Sunstone Corporation, or the Company, a Delaware corporation, is a specialty pharmaceutical company with over-the-counter, or OTC, prescription drugs, manufacturing, marketing and distribution based in China. Through our subsidiaries, Sunstone (Tangshan) Pharmaceutical Co., Ltd., or Sunstone, and Sunstone Shengda (Zhangjiakou) Pharmacy Co., Ltd. (formerly named Zhangjiakou Shengda Pharmaceutical Co., Ltd.), or Shengda, 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, Shengda, 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. 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 that the acquisition of Shengda will enrich our product brands and allow us to provide additional high, medium and low end drugs.

On January 7, 2010, the Company appointed Yanping Zhao, the Company’s Chief Operating Officer and Corporate Vice President, and Zhijun Tong, one of the Company’s directors and General Manager of Sunstone, as its representatives on the Board of Shengda. Zhijun Tong was elected Chairman of the Board of Shengda and is Shengda’s legal representative.

 

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Sunstone, as of January 7, 2010 has management control of Shengda and has consolidated its 50% ownership interest effective January 1, 2010.

On July 9, 2010, the Company appointed Zhijun Tong, one of the Company’s directors and General Manager of Sunstone, as the Company’s President.

Liquidity and Capital Resources

Cash

As of June 30, 2010, we had unrestricted cash and cash equivalents of approximately $22.3 million which represented 8.8% 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.

Cash Flow

We anticipate that our June 30, 2010 balance of approximately $22.3 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, 2009 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 execute our business and strategic plans as currently conceived.

Net cash used in operating activities was $913,000 for the six months ended June 30, 2010. This amount reflected our profit of $1,285,000, increased by $5,346,000 in net non-cash charges including bad debt and obsolesce expense of $369,000 amortization of intangible assets of $1,961,000, amortization of debt discount, debt premium and debt issuance costs of $174,000, stock based compensation expense of $1,341,000 depreciation and amortization of equipment and leasehold improvements of $1,516,000, loss on Alliance BMP payment of $300,000, decrease in deferred taxes of $300,000, increase on loss on disposal of assets of $8,000, and a decrease in non controlling interest of $23,000. In addition, we generated $7,544,000 of operating cash as a result in changes in certain of our operating assets and liabilities during the six months ended June 30, 2010. The most significant changes were an increase in accrued expenses of $1,328,000 and decreases in Value Added Tax Receivable of $88,000, notes receivable of $2,518,000 and inventory of $320,000. Offsetting these changes were increases in accounts receivable of $8,819,000, prepaid and other current assets of $1,307,000 and other receivables of $27,000 and decreases due to related parties of $128,000, accounts payable of $1,437,000 and deferred revenues of $80,000.

Cash provided by investing activities was $7,347,000 which includes the proceeds from the disposal of Alliance BMP of $7,250,000, and cash received from the consolidation of Shengda of $700,000, reduced by the acquisition of property, plant and equipment of $603,000.

Net cash used in financing activities was $5,760,000, which consisted of the repayment of long term debt of $5,969,000 offset by proceeds from the exercise of options of $209,000.

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, 2009. There have been no changes in these accounting policies.

 

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Our significant accounting policies are described in Note 1 of these 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 2009 consolidated financial statements and also in Note 1 to our 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.

Notes receivable

As of June 30, 2010 we had notes receivable of approximately $15.1 million which represented 5.9% 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 June 30, 2010, 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 June 30, 2010 Compared to Three Months Ended June 30, 2009

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 June 30, 2010 and 2009:

 

     For the Three  Months
Ended June 30,
    For the Three Months
Ended June 30,
 

($ amounts in thousands)

   2010     2009     2010     2009  

Net Revenues

   $ 40,863      $ 32,483      100.0 %   100.0 %

Cost of Sales

     22,188        18,089      54.3 %   55.7 %
                            

Gross Profit

     18,675        14,394      45.7 %   44.3 %
                            

Sales and Marketing Expenses

     11,768        10,300      28.8 %   31.7 %

General and Administrative Expenses

     4,589        4,001      11.2 %   12.3 %
                            

Total Operating Expenses

     16,357        14,301      40.0 %   44.0 %
                            

Profit (Loss) From Operations

     2,318        93      5.7 %   0.3 %

Other Income (Expense):

        

Interest Income

     53        84      0.1 %   0.3 %

Interest Expense

     (995     (1,058 )   -2.4 %   -3.3 %

Debt Issuance Cost Amortization

     (109     (97 )   -0.3 %   -0.3 %

Equity Method Investment Income

     —          65      —     0.2 %

Loss on Derivatives

     —          (447 )   —     -1.4 %
                            

Total Other Income (Expense)

     (1,051     (1,453 )   -2.6 %   -4.5 %
                            

Profit (Loss) Before Provision for Income Taxes

     1,267        (1,360 )   3.1 %   -4.2 %

Provision for Income Taxes

     669        372      1.6 %   -1.1 %
                            

Net Profit (Loss)

   $ 598      $ (1,732 )   1.5 %   -5.3  %
                            

Net Revenues

Net revenue was approximately $40,863,000 for the three months ended June 30, 2010, as compared with approximately $32,483,000 for the three months ended June 30, 2009.

Revenue by product categories was as follows:

 

($ amounts in thousands)

   Three Months Ended June 30,    $  Increase
(Decrease)
   % Increase
(Decrease)
 
   2010    2009      

Manufactured Products (1)

   $ 22,498    $ 16,810    $ 5,688    33.8 %

Distribution Products

     16,429      14,122      2,307    16.3 %

Licensed Products

     1,936      1,551      385    24.8 %
                           
   $ 40,863    $ 32,483    $ 8,380    25.8 %
                           

 

(1) Revenue for the Manufactured Products segment includes Sunstone for three months ended June 30, 2010 and 2009 and Shengda for the three months ended June 30, 2010.

 

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Manufactured Products. Manufactured revenues were $22,498,000 for the three months ended June 30, 2010, as compared to $16,810,000 for the three months ended June 30, 2009. For the three months ended June 30, 2010, the results include Sunstone and Shengda, as compared to the three months ended June 30, 2009, which only include the results of Sunstone. The top five Sunstone products were Pediatric Paracetamol and Amantadine Hydrochloride Granules, Pediatric Huatan Zhike Granules, Confort Pessaries, Pediatric Kechuanling Oral Solution and Pidotimod Tablets, which collectively accounted for approximately 91.5% of Sunstone revenue for the three months ended June 30, 2010. The top five Sunstone products accounted for 83.8% of total revenue for the three months ended June 30, 2009. The top five Shengda products were Amoxicillin and Clavulanate Potassium Dispersible Tablets (2:1), Amoxicillin and Clavulanate Potassium Dispersible Tablets (4:1), Amoxicillin capsules, Cefradine capsules and Amoxicillin Clavulanate Potassium Tablets, which accounted for 65.1% of Shengda’s revenue for the three months ended June 30, 2010.

Distribution Products. Distribution revenue for the three months ended June 30, 2010 was $16,429,000, as compared to $14,122,000 for the three months ended June 30, 2009. Rongheng’s top five products were Selenious Yeast Tablets, Iohexol, Gemcitabine Hydrochloride, Almitrine and Raubasine compound and Cefotiam Hydrocloride, which collectively accounted for 28.8% of Rongheng’s revenue for the three months ended June 30, 2010. For the three months ended June 30, 2009, Rongheng’s top five products accounted for 24.5% of total revenue. Wanwei’s top five products, excluding our licensed products, were Xingnaojing, Glurenorm, Xuebijing, Ferrous Succinate Tablets and Jinlong Capsule, which collectively accounted for 35.7% of Wanwei’s revenue for the three months ended June 30, 2010. For the three months ended June 30, 2009, Wanwei’s top five products accounted for 38.2% 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 $1,936,000 for the three months ended June 30, 2010, as compared to $1,551,000 for the three months ended June 30, 2009, an increase of 24.8%. As of June 30, 2010 there were 742 and 554 hospitals selling Anpo and Propess respectively, versus 650 and 506 respectively, as of June 30, 2009. In addition, there were 34 hospitals selling Ferriprox as of June 30, 2010 versus 20 as of June 30, 2009.

Cost of Goods Sold:

Cost of goods sold was approximately $22,188,000 for the three months ended June 30, 2010, as compared with $18,089,000 for the three months ended June 30, 2009. The gross profit for the three months ended June 30, 2010 was 45.7%, as compared to 44.3% for the three months ended June 30, 2009.

 

($ amounts in thousands)

   Three Months Ended June 30,     $  Increase
(Decrease)
   % Increase
(Decrease)
 
   2010     2009       

Manufactured Products (1)

         

Revenues

   $ 22,498      $ 16,810      $ 5,688    33.8 %

Cost of Sales

     6,363        4,115        2,248    54.6 %
                             

Gross Profit

   $ 16,135      $ 12,695      $ 3,440    27.1 %
                             

Gross Margin %

     71.7 %     75.5 %     
                     

Distribution Products

         

Revenues

   $ 16,429      $ 14,122      $ 2,307    16.3 %

Cost of Sales

     15,139        13,395        1,744    13.0 %
                             

Gross Profit

   $ 1,290      $ 727      $ 563    77.4 %
                             

Gross Margin %

     7.9 %     5.1 %     
                     

Licensed Products

         

Revenues

   $ 1,936      $ 1,551      $ 385    24.8 %

Cost of Sales

     686        579        107    18.5 %
                             

Gross Profit

   $ 1,250      $ 972      $ 278    28.6 %
                             

Gross Margin %

     64.6 %     62.7 %     
                     

Total

         

Revenues

   $ 40,863      $ 32,483      $ 8,380    25.8 %

Cost of Sales

     22,188        18,089        4,099    22.7 %
                             

Gross Profit

   $ 18,675      $ 14,394      $ 4,281    29.7 %
                             

Gross Margin %

     45.7 %     44.3 %     
                     

 

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(1) Revenue and cost of goods sold for the Manufactured Products segment includes Sunstone for the three months ended June 30, 2010 and 2009 and Shengda for the three months ended June 30, 2010.

Manufactured Products. The gross profit for the three months ended June 30, 2010 of manufactured products was $16,135,000, which included $164,000 of amortization resulting from the Sunstone and Shengda acquisitions. The gross profit for the three months ended June 30, 2009 of manufactured products was $12,695,000, which included $115,000 of amortization resulting from the Sunstone acquisition. For the three months ended June 30, 2010, the results include Sunstone and Shengda, as compared to three months ended June 30, 2009, which only includes Sunstone. The gross profit for manufactured products was 71.7% for the three months ended June 30, 2010, as compared to 75.5% for the three months ended June 30, 2009. The reduction in gross margin was the result of including Shengda for the three months ended June 30, 2010 and increases in raw materials for Sunstone products.

Distribution Products. The gross profit for the three months ended June 30, 2010 for distribution products was $1,290,000, as compared to $727,000 for the three months ended June 30, 2009. The gross profit for distribution products was 7.9% for the three months ended June 30, 2010, as compared to 5.1% for the three months ended June 30, 2009. The increase in gross margin was the result of the Company’s decision to drop certain lower margin products.

Licensed Products. The gross profits for the three months ended June 30, 2010 licensed products was $1,250,000, as compared to $972,000 for the three months ended June 30, 2009. The gross margin for licensed products was 64.6% for the three months ended June 30, 2010, as compared to 62.7% for the three months ended June 30, 2009. 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.

Sales and Marketing Expenses:

Sales and marketing expenses were $11,768,000 for the three months ended June 30, 2010, as compared with $10,300,000 for the three months ended June 30, 2009. Sales and marketing expenses include Shengda for the three months ended June 30, 2010. Shengda was initially consolidated in results as of January 2010. Sales and marketing expenses as a percentage of net revenues decreased to 28.8% for the three months ended June 30, 2010, as compared to 31.7% for the three months ended June 30, 2009. Advertising, travel and entertainment, marketing, salaries and related benefits, selling expenses and amortization of intangibles account for $10,119,000, or 86.0% of sales and marketing expenses, for the three months ended June 30, 2010, as compared to $9,212,000, or 89.4%, for the three months ended June 30, 2009. The most significant sales and marketing expense increases for the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, are as follows: increases of television, newspaper and magazine advertising expenses of $380,000, business travel expenses of $1,516,000 and marketing expenses of $432,000; offsetting these increases was a decrease in sales office expenses of $1,355,000.

General and Administrative Expenses:

General and administrative expenses were approximately $4,589,000 for the three months ended June 30, 2010, as compared to $4,001,000 for the three months ended June 30, 2009. General and administrative expenses include Shengda for the three months ended June 30, 2010. Shengda was initially consolidated in results as of January 2010 and accounted for $405,000 of the $588,000 increase in general and administrative expenses. General and administrative expenses as a percentage of net revenues decreased to 11.2% for the three months ended June 30, 2010, as compared to 12.3% for the three months ended June 30, 2009.

Interest Income:

Our interest income primarily consists of income earned on our cash and cash equivalents. We received interest income on our balances of cash and cash equivalents of $23,000 during the three months ended June 30, 2010 and $46,000 for the three months ended June 30, 2009. As of June 30, 2010, the unamortized debt premium amounted to $110,000. Total premium amortization was $30,000 for the three months ended June 30, 2010 and $38,000 for the three months ended June 30, 2009.

Interest Expense:

Our interest expense primarily consists of incurred interest from our long term debt financings. We had interest expense of $995,000 for the three months ended June 30, 2010 and $1,058,000 for the three months ended June 30, 2009.

 

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Table of Contents

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 $483,000 as of June 30, 2010, and $109,000 of debt issuance costs had been amortized for the three months ended June 30, 2010, as compared to $97,000 for the three months ended June 30, 2009.

Loss on Derivatives:

The loss on derivative liability is in connection with the warrants which were issued as part of the common stock issuance in February 2009. The loss on derivatives was $447,000 for the three months ended June 30, 2009.

Equity Method Investment Income:

For our 50% investment in Shengda that was not fully consolidated but instead is included in our financial statements under the equity method of accounting for the three months ended June 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 premium we pay that represents the excess cost over the underlying fair value of our proportionate share of the net assets acquired is referred to as equity method goodwill.

The following table provides a reconciliation of our equity method investment income. Prior to purchase accounting adjustments, Shengda generated net income of $334,000, or $167,000 for our 50% equity ownership. The total of amortization for the period was $102,000 which resulted in an equity method investment income of $65,000.

 

($ amounts in thousands)

      

Equity in earnings of Shengda for three months ended June 30, 2009

   $ 167   

Less adjustments of excess fair value:

  

Inventory sold

     (8 )

Depreciation and amortization expense of buildings and intangible assets, including land use rights.

     (94 )
        

Total equity method investment income

   $ 65   
        

Income Taxes

For the three months ended June 30, 2010, we recognized $669,000 of income tax expense on profit before income taxes of $1,267,000. This compared to income tax expense for the three months ended June 30, 2009 of $372,000 on loss before income taxes of $1,360,000. China does not permit the filing of a consolidated tax return for the entities which 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.

 

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Table of Contents

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

The following table sets forth the amounts and the percentage relationship to revenues of certain items in our consolidated statements of income for the six months ended June 30, 2010 and 2009:

 

     For the Six Months
Ended June 30,
    For the Six  Months
Ended June 30,
 

($ amounts in thousands)

   2010     2009     2010     2009  

Net Revenues

   $ 79,879      $ 71,746      100.0 %   100.0 %

Cost of Sales

     40,212        36,694      50.3 %   51.1 %
                            

Gross Profit

     39,667        35,052      49.7 %   48.9 %
                            

Sales and Marketing Expenses

     23,938        23,811      30.0 %   33.2 %

General and Administrative Expenses

     10,400        7,930      13.0 %   11.1 %
                            

Total Operating Expenses

     34,338        31,741      43.0 %   44.3 %
                            

Profit (Loss) From Operations

     5,329        3,311      6.7 %   4.6 %

Other Income (Expense):

        

Interest Income

     100        108      0.1 %   0.2 %

Interest Expense

     (2,347     (2,475   -2.9 %   -3.4 %

Debt Issuance Cost Amortization

     (235     (225 )   -0.3 %   -0.3 %

Equity Method Investment Income

     —          82      —     0.1 %

Loss on Early Extinguishment of Debt

     —          (4,573 )   —     -6.4 %

Gain on Derivatives

     —          1,204      —     1.7 %
                            

Total Other Income (Expense)

     (2,482     (5,879 )   -3.1 %   -8.1 %
                            

Profit (Loss) Before Provision for Income Taxes

     2,847        (2,568 )   3.6 %   -3.5 %

Provision for Income Taxes

     1,585        1,154      2.0 %   -1.6 %
                            

Net Profit (Loss)

   $ 1,262      $ (3,722 )   1.6 %   -5.1 %
                            

Net Revenues

Net revenue was approximately $79,879,000 for the six months ended June 30, 2010, as compared with approximately $71,746,000 for the six months ended June 30, 2009.

Revenue by product categories was as follows:

 

     Six Months Ended June 30,    $ Increase
(Decrease)
   % Increase
(Decrease)
 

($ amounts in thousands)

   2010    2009      

Manufactured Products (1)

   $ 47,902    $ 41,337    $ 6,565    15.9 %

Distribution Products

     28,292      27,506      786    2.9 %

Licensed Products

     3,685      2,903      782    26.9 %
                           
   $ 79,879    $ 71,746    $ 8,133    11.3 %
                           

 

(1) Revenue for the Manufactured Products segment includes Sunstone for six months ended June 30, 2010 and 2009 and Shengda for the six months ended June 30, 2010.

Manufactured Products. Manufactured revenues were $47,902,000 for the six months ended June 30, 2010, as compared to $41,337,000 for the six months ended June 30, 2009. For the six months ended June 30, 2010, the results include Sunstone and Shengda, as compared to the six months ended June 30, 2009, which only include the results of Sunstone. The top five Sunstone products were Pediatric Paracetamol and Amantadine Hydrochloride Granules, Pediatric Huatan Zhike Granules, Confort Pessaries, Pediatric Kechuanling Oral Solution and Pidotimod Tablets which collectively accounted for approximately 92.1% of Sunstone’s revenue for the six months ended June 30, 2010. The top five products accounted for 87.5% of total revenue for the six months ended June 30, 2009. The top five Shengda products were Amoxicillin and Clavulanate Potassium Dispersible Tablets (2:1), Amoxicillin and Clavulanate Potassium Dispersible Tablets (4:1), Amoxicillin capsules, Cefradine capsules and Amoxicillin Clavulanate Potassium Tablets which accounted for 68.1% of Shengda’s revenue for the six months ended June 30, 2010.

 

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Table of Contents

Distribution Products. Distribution revenue for the six months ended June 30, 2010 was $28,292,000, as compared to $27,506,000 for the six months ended June 30, 2009. The small increase in distribution revenue was the result of the Company’s decision to drop certain products and the delay in bidding in Beijing for new hospital contracts. Rongheng’s top five products were Selenious Yeast Tablets, Iohexol, Gemcitabine Hydrochloride, Almitrine and Raubasine compound and Cefotiam Hydrocloride, which collectively accounted for 28.8% of Rongheng’s revenue for the six months ended June 30, 2010. For the six months ended June 30, 2009, Rongheng’s top five products accounted for 24.5% of total revenue. Wanwei’s top five products excluding our licensed products were Xingnaojing, Glurenorm, Xuebijing, Ferrous Succinate Tablets and Jinlong Capsule, which collectively accounted for 37.2% of Wanwei’s revenue for the six months ended June 30, 2010. For the six months ended June 30, 2009, Wanwei’s top five products accounted for 36.8% 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 $3,685,000 for the six months ended June 30, 2010, as compared to $2,903,000 for the six months ended June 30, 2009, an increase of 26.9%. As of June 30, 2010 there were 742 and 554 hospitals selling Anpo and Propess respectively, versus 650 and 506, respectively, as of June 30, 2009. In addition, there were 34 hospitals selling Ferriprox as of June 30, 2010 versus 20 as of June 30, 2009.

Cost of Goods Sold:

Cost of goods sold was approximately $40,212,000 for the six months ended June 30, 2010, as compared with $36,694,000 for the six months ended June 30, 2009. The gross profit for the six months ended June 30, 2010 was 49.7%, as compared to 48.9% for the six months ended June 30, 2009.

 

     Six Months Ended June 30,     $  Increase
(Decrease)
   % Increase
(Decrease)
 

($ amounts in thousands)

   2010     2009       

Manufactured Products (1)

         

Revenues

   $ 47,902      $ 41,337      $ 6,565    15.9 %

Cost of Sales

     12,785        9,856        2,929    29.7 %
                             

Gross Profit

   $ 35,117      $ 31,481      $ 3,636    11.6 %
                             

Gross Margin %

     73.3 %     76.2 %     
                     

Distribution Products

         

Revenues

   $ 28,292      $ 27,506      $ 786    2.9 %

Cost of Sales

     26,095        25,690        405    1.6 %
                             

Gross Profit

   $ 2,197      $ 1,816      $ 381    21.0 %
                             

Gross Margin %

     7.8 %     6.6 %     
                     

Licensed Products

         

Revenues

   $ 3,685      $ 2,903      $ 782    26.9 %

Cost of Sales

     1,332        1,148        184    16.0 %
                             

Gross Profit

   $ 2,353      $ 1,755      $ 598    34.1 %
                             

Gross Profit %

     63.9 %     60.5 %     
                     

Total

         

Revenues

   $ 79,879      $ 71,746      $ 8,113    11.3 %

Cost of Sales

     40,212        36,694        3,518    9.6 %
                             

Gross Profit

   $ 39,667      $ 35,052      $ 4,615    13.2 %
                             

Gross Margin %

     49.7 %     48.9 %     
                     

 

(1) Revenue and cost of goods sold for the Manufactured Products segment includes Sunstone for the six months ended June 30, 2010 and 2009 and Shengda for the six months ended June 30, 2010.

Manufactured Products. The gross profit for the six months ended June 30, 2010 of manufactured products was $35,117,000, which included $328,000 of amortization resulting from the Sunstone and Shengda acquisitions. The gross profit for the six months ended June 30, 2009 of manufactured products was $31,481,000, which included $230,000 of amortization resulting from the Sunstone acquisition. For the six months ended June 30, 2010, the results include Sunstone and Shengda, as compared to six months ended June 30, 2009, which only includes Sunstone. The gross profit for manufactured products was 73.3% for the six months ended June 30, 2010, as compared to 76.2% for the six months ended June 30, 2009. The reduction in gross margin was the result of including Shegda for the six months ended June 30, 2010 and increases in raw materials for Sunstone products.

 

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Table of Contents

Distribution Products. The gross profit for the six months ended June 30, 2010 for distribution products was $2,197,000, as compared to $1,816,000 for the six months ended June 30, 2009. The gross profit for distribution products was 7.8% for the six months ended June 30, 2010, as compared to 6.6% for the six months ended June 30, 2009.

Licensed Products. The gross profits for the six months ended June 30, 2010 licensed products was $2,353,000, as compared to 1,755,000 for the six months ended June 30, 2009. The gross margin for licensed products was 63.9% for the six months ended June 30, 2010, as compared to 60.5% for the six months ended June 30, 2009. 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.

Sales and Marketing Expenses:

Sales and marketing expenses were $23,938,000 for the six months ended June 30, 2010, as compared with $23,811,000 for the six months ended June 30, 2009. Sales and marketing expenses include Shengda for the six months ended June 30, 2010. Shengda was initially consolidated in results as of January 2010. Sales and marketing expenses as a percentage of net revenues decreased to 30.0% for the six months ended June 30, 2010, as compared to 33.2% for the six months ended June 30, 2009. Advertising, travel and entertainment, marketing, salaries and related benefits, selling expenses and amortization of intangibles account for $20,680,000, or 86.4% of sales and marketing expenses, for the six months ended June 30, 2010, as compared to $21,087,000, or 88.6%, for the six months ended June 30, 2009. The most significant sales and marketing expense increases for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009 are as follows: business travel of $2,610,000, salary and commissions of $533,000, consulting of $152,000 and amortization of $125,000; offsetting these increases were decreases in sales office expenses of $2,480,800 and advertising expenses of $1,314,000.

General and Administrative Expenses:

General and administrative expenses were approximately $10,400,000 for the six months ended June 30, 2010, as compared to $7,930,000 for the six months ended June 30, 2009. General and administrative expenses include Shengda for the six months ended June 30, 2010. Shengda was initially consolidated in results as of January 2010 and accounted for $518,000 of the $2,470,000 increase in general and administrative expenses. General and administrative expenses as a percentage of net revenues increased to 13.0% for the six months ended June 30, 2010, as compared to 11.1% for the six months ended June 30, 2009. The most significant general and administrative increases were salary and related expenses of $1,296,000, research and development of $275,000, professional fees of $350,000, stock compensation expense of $155,000 and depreciation of $126,000.

Interest Income:

Our interest income primarily consists of income earned on our cash and cash equivalents. We received interest income on our balances of cash and cash equivalents of $39,000 during the six months ended June 30, 2010 and $63,000 for the six months ended June 30, 2009. As of June 30, 2010, the unamortized debt premium amounted to $110,000. Total premium amortization was $61,000 for the six months ended June 30, 2010 and $45,000 for the six months ended June 30, 2009.

Interest Expense:

Our interest expense primarily consists of incurred interest from our long term debt financings. We had interest expense of $2,347,000 for the six months ended June 30, 2010 and $2,475,000 for the six months ended June 30, 2009, of which total amortization of debt discount was $450,000 for the six months ended June 30, 2009. During the six months ended June 30, 2010, we received the remaining balance from Alliance BMP. The company recorded $300,000 discount on the early receipt of the cash.

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 $483,000 as of June 30, 2010, and $235,000 of debt issuance costs had been amortized for the six months ended June 30, 2010, as compared to $225,000 for the six months ended June 30, 2009.

Loss on Early Extinguishment of Debt:

During the six months ended June 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 the debt under the previously outstanding long term debt.

 

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Gain on Derivatives:

The gain on derivative liability is in connection with the convertible notes issued in January 2009 which were amended in March 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 six months ended June 30, 2009.

Equity Method Investment Income:

For our 50% investment in Shengda that was not fully consolidated but instead is included in our financial statements under the equity method of accounting for the period February 16, 2009 through June 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 premium we pay that represents the excess cost over the underlying fair value of our proportionate share of the net assets acquired, is referred to as equity method goodwill.

The following table provides a reconciliation of our equity method investment income. Prior to purchase accounting adjustments, Shengda generated net income of $474,000, or $237,000 for our 50% equity ownership. The total of amortization for the period was $155,000 which resulted in an equity method investment income of $82,000.

 

($ amounts in thousands)

      

Equity in earnings of Shengda for period February 16 through June 30, 2009

   $ 237   

Less adjustments of excess fair value:

  

Inventory sold

     (61 )

Depreciation and amortization expense of buildings and intangible assets, including land use rights

     (94
        

Total equity method investment income

   $ 82   
        

Income Taxes

For the six months ended June 30, 2010, we recognized $1,585,000 of income tax expense on profit before income taxes of $2,847,000. This compared to income tax expense for the six months ended June 30, 2009 of $1,154,000 on loss before income taxes of $2,497,000. China does not permit the filing of a consolidated tax return for the entities which are wholly owned by the Company, which results in Sunstone having income tax expense on profit before income taxes.

 

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 Sunstone, Shengda, BMP China, Wanwei and Rongheng, 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 “Risk Factors — Risks Related to Doing Business in China — Fluctuations in the Chinese Renminbi could adversely affect our results of operations” in our Annual Report on Form 10-K for the year ended December 31, 2009.

We do not, as a routine matter, use hedging vehicles to manage foreign exchange exposures. As of June 30, 2010, a 10% unfavorable change in the foreign exchange rates affecting balance sheet transactional exposures would have resulted in a reduction in pre-tax profit of approximately $0.9 million. This hypothetical reduction on transactional exposure is based on the difference between June 30, 2010 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 June 30, 2010, our analysis indicated that these hypothetical changes would reduce shareholders’ equity by approximately $18.5 million or 11.7% of our June 30, 2010 shareholder equity of $158.1 million.

 

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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, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Changes in Internal Control Over Financial Reporting

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

 

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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, 2009, 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.

 

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ITEM 6. Exhibits

 

  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.

 

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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: August 9, 2010   /s/ DAVID GAO
   

David Gao

Chief Executive Officer

(Principal Executive Officer)

Date: August 9, 2010   /s/ FRED M. POWELL
   

Fred M. Powell

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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