Attached files
file | filename |
---|---|
EX-32 - SINOCOM PHARMACEUTICAL, INC. | exhibit321.htm |
EX-31 - SINOCOM PHARMACEUTICAL, INC. | exhibit311.htm |
EX-32 - SINOCOM PHARMACEUTICAL, INC. | exhibit322.htm |
EX-31 - SINOCOM PHARMACEUTICAL, INC. | exhibit312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
[] 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: 000-53213
SINOCOM PHARMACEUTICAL, INC
(Exact name of registrant as specified in its charter)
Nevada |
| 26-1188540 |
(State or other jurisdiction of incorporation) |
| (IRS Employer Identification Number) |
| ||
Room 3, 21/F, Far East Consortium Building 121 Des Voeux Road Central, Hong Kong | ||
(Address of principal executive offices) | ||
+852 2191 3863 | ||
(Registrants telephone number, including area code) |
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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [X] (Do not check if a smaller reporting company) | 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 [ X ] No
As of March 31, 2011 the Issuer had 71,416,660 shares of common stock issued and outstanding.
PART I-FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
The consolidated financial statements of Sinocom Pharmaceutical, Inc. (the "Company" or the Registrant"), a Nevada corporation, included herein were prepared, without audit, pursuant to rules and regulations of the Securities and Exchange Commission. Because certain information and notes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America were condensed or omitted pursuant to such rules and regulations, these financial statements should be read in conjunction with the Companys audited consolidated financial statements for the fiscal years ended December 31, 2010 and 2009, and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission on April 15, 2011.
2
SINOCOM PHARMACEUTICAL, INC
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 2011
INDEX TO FINANCIAL STATEMENTS: | Page |
|
|
Consolidated Balance Sheets (Unaudited) | 4 |
|
|
Consolidated Statements of Income (Unaudited) | 5 |
|
|
Consolidated Statements of Cash Flows (Unaudited) | 6-7 |
|
|
Notes to Unaudited Financial Statements | 8-17 |
3
SINOCOM PHARMACEUTICAL, INC. | ||||
CONSOLIDATED BALANCE SHEETS | ||||
(UNAUDITED) | ||||
| ||||
| ||||
|
| March 31, 2011 |
| December 31, 2010 |
|
|
|
|
|
Current Assets |
|
|
|
|
Cash and cash equivalents | $ | 25,649,704 | $ | 24,783,238 |
Accounts receivable |
| 46,110,223 |
| 41,322,702 |
Inventories |
| 3,005,470 |
| 2,032,008 |
Trade deposits |
| 5,298,843 |
| 4,998,251 |
Prepaid expenses and other receivables |
| 955,159 |
| 998,321 |
Total Current Assets |
| 81,019,399 |
| 74,134,520 |
|
|
|
|
|
Land use right |
| 3,035,032 |
| 2,925,589 |
Prepaid lease |
| 3,586,327 |
| 3,557,069 |
Deposit for construction |
| 2,977,736 |
| 2,856,775 |
Property and equipment, net |
| 840,444 |
| 704,888 |
Total Assets | $ | 91,458,938 | $ | 84,178,841 |
|
|
|
|
|
Liability and Stockholders' Equity |
|
|
|
|
Current Liabilities |
|
|
|
|
Accounts payable | $ | 15,436,866 | $ | 14,089,178 |
Due to related parties |
| 86,378 |
| 74,992 |
Accrued expenses and other payables |
| 1,724,972 |
| 2,091,758 |
Income tax payable |
| 2,200,333 |
| 3,032,920 |
Total Current Liabilities |
| 19,448,549 |
| 19,288,848 |
|
|
|
|
|
Stockholders' Equity |
|
|
|
|
Common stock, par value $.001; 150,000,000 shares authorized; |
| 71,417 |
| 71,417 |
71,416,660 shares issued and outstanding | ||||
Preferred stock, par value $.001; 20,000,000 shares authorized; |
| 15,847 |
| 15,847 |
15,847,099 shares issued and outstanding | ||||
Additional paid in capital |
| 15,112,290 |
| 15,112,290 |
Statutory reserves |
| 5,677,041 |
| 5,677,041 |
Other comprehensive income |
| 7,362,391 |
| 6,329,825 |
Retained earnings |
| 43,771,403 |
| 37,683,573 |
Total Stockholders' Equity |
| 72,010,389 |
| 64,889,993 |
Total Liabilities and Stockholders' Equity | $ | 91,458,938 | $ | 84,178,841 |
The accompanying notes are an integral part of these consolidated financial statements |
4
SINOCOM PHARMACEUTICAL, INC. | ||||
CONSOLIDATED STATEMENTS OF INCOME | ||||
(UNAUDITED) | ||||
| ||||
For the Three Months Ended | ||||
| March 31, 2011 | March 31, 2010 | ||
Sales, net | $ | 30,212,921 | $ | 24,896,351 |
|
|
|
|
|
Cost of sales |
| 20,380,092 |
| 16,169,013 |
Gross profit |
| 9,832,829 |
| 8,727,338 |
|
|
|
|
|
|
|
|
|
|
Selling expenses |
| 882,310 |
| 775,637 |
General and administrative expenses |
| 411,004 |
| 388,253 |
Income from operations |
| 8,539,515 |
| 7,563,448 |
|
|
|
|
|
Other income (expense) |
|
|
|
|
Non-operating income (expense), net |
| 90,281 |
| 69,047 |
Interest income |
| 19,244 |
| 6,187 |
Total other income (expense) |
| 109,525 |
| 75,234 |
Income before income taxes |
| 8,649,040 |
| 7,638,682 |
|
|
|
|
|
Provision for income taxes |
| 2,191,346 |
| 2,075,225 |
Net income | $ | 6,457,694 | $ | 5,563,457 |
Dividend on Series A preferred stock |
| (369,863) |
| (184,932) |
Net income available to common shareholders | $ | 6,087,831 | $ | 5,378,525 |
|
|
|
|
|
Net income per share of common stock |
|
|
|
|
Basic | $ | 0.09 | $ | 0.08 |
Diluted | $ | 0.07 | $ | 0.06 |
|
|
|
|
|
Weighted average shares of common stock outstanding |
|
|
|
|
Basic |
| 71,416,660 |
| 71,416,660 |
Diluted |
| 87,263,759 |
| 87,263,759 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements | ||||
|
5
SINOCOM PHARMACEUTICAL, INC. | ||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||
(UNAUDITED) | ||||
| ||||
For the Three Months Ended | ||||
| March 31, 2011 | March 31, 2010 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
Net Income | $ | 6,457,694 | $ | 5,563,457 |
Adjustments to reconcile net income to net cash |
|
|
|
|
provided by operating activities: |
|
|
|
|
Depreciation and amortization |
| 167,109 |
| 154,966 |
Loss on disposal of property and equipment |
| - |
| 3,161 |
|
|
|
|
|
(Increase) / decrease in current assets: |
|
|
|
|
Accounts receivables |
| (4,787,521) |
| 2,845,335 |
Inventories |
| (973,462) |
| (295,685) |
Trade deposits |
| (300,592) |
| (4,834,541) |
Prepaid expense and other receivables |
| 43,162 |
| 36,436 |
Increase / (decrease) in current liabilities: |
|
|
|
|
Accounts payable |
| 1,347,688 |
| (4,079,399) |
Accrued expenses and other payables |
| (736,640) |
| (678,369) |
Due to related parties |
| 11,386 |
| 117,838 |
Income taxes payable |
| (832,587) |
| (145,103) |
Total Adjustments |
| (6,061,466) |
| (6,875,361) |
Net cash provided/(used) by operating activities |
| 396,220 |
| (1,311,904) |
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
Purchase of property and equipment |
| (1,707) |
| (83,144) |
Payment to acquire land use right |
| - |
| (2,985,905) |
Prepaid lease |
| - |
| (2,689,091) |
Deposit paid for construction |
| - |
| (2,856,775) |
Net cash used by investing activities |
| (1,707) |
| (8,614,915) |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
Proceeds from issuance of preferred stock |
|
|
|
|
Issuance cost of preferred stock paid |
| - |
| (377,135) |
Preferred stock dividend paid |
| - |
| (184,932) |
Net cash used by financing activities |
| - |
| (562,067) |
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
| 471,945 |
| 18,700 |
Net change in cash and cash equivalents |
| 866,466 |
| (10,470,186) |
Cash and cash equivalents, beginning balance |
| 24,783,238 |
| 34,363,124 |
Cash and cash equivalents, ending balance | $ | 25,649,704 | $ | 23,892,938 |
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
6
Cash paid during the period for: |
|
|
|
|
Income tax |
| 3,023,933 |
| 2,220,328 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements |
7
SINOCOM PHARMACEUTICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - ORGANIZATION
Sinocom Pharmaceutical, Inc. (Sinocom or Company) was formed on September 13, 2007 in the State of Nevada. The Company was originally incorporated as Tiger Acquisitions, Inc. and changed its name to Sinocom on February 26, 2009. Through a share exchange, Rolling Rhine Holdings, Ltd (Rolling Rhine) and its wholly-owned subsidiaries, China Zhongxi Yao Group Ltd (China Zhongxi Yao) and Anqing Zhongxi Yao Ltd (Anqing Zhongxi Yao), became wholly-owned subsidiaries of the Company. Rolling Rhine was incorporated in December 2007, under the laws of the British Virgin Islands as a holding company for the purpose of owning 100% of China Zhongxi Yao. China Zhongxi Yao was incorporated in July 2008 under the laws of Hong Kong for the purpose of owning 100% of the equity interest of Anqing Zhongxi Yao. Anqing Zhongxi Yao was incorporated in December 1997 under the laws of the Peoples Republic of China (PRC). Anqing Zhongxi Yao was acquired by Full King International Group Limited (Full King) in December 2005. In October 2008, Full King transferred its entire equity interest in Anqing Zhongxi Yao to China Zhongxi Yao, which was under the same common control.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of only those of a normal recurring nature, considered necessary for a fair presentation of the financial position and interim results of the Company as of and for the periods presented, have been included. Interim results are not necessarily indicative of the results to be expected for a full year.
These financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The financial information included herein should be read in conjunction with the Companys consolidated financial statements and related notes in its 2010 Annual Report on Form 10-K filed on April 15, 2011.
8
Note 3 - SEGMENT REPORTING
The Company operates in one segment, which consists of distribution of pharmaceuticals, processed herbs, medical supplies and raw herbs. The Company sells their products solely in the PRC, and all of its long-lived assets are physically located in the PRC.
The following table sets forth a breakdown of our net sales by product categories for the periods.
| For the Three Months ended | |||
| March 31, 2011 | March 31, 2010 | ||
|
|
|
|
|
TCM pharmaceuticals | $ | 6,015,344 | $ | 4,810,221 |
TCM processed herbs |
| 4,017,795 |
| 3,091,239 |
Western pharmaceuticals |
| 11,516,188 |
| 8,646,261 |
Medical supplies |
| 1,065,310 |
| 861,620 |
TCM raw herbs |
| 7,598,284 |
| 7,487,010 |
Total | $ | 30,212,921 | $ | 24,896,351 |
Note 4 EARNINGS PER SHARE
|
| For the Three Months Ended | ||
| March 31, 2011 | March 31, 2010 | ||
Earnings per share Basic |
|
|
|
|
Income for the period | $ | 6,087,831 | $ | 5,378,525 |
Weighted average shares of common stock |
| 71,416,660 |
| 71,416,660 |
|
|
|
|
|
Basic earnings per share |
| 0.09 |
| 0.08 |
|
|
|
|
|
Earnings per share Diluted |
|
|
|
|
Income for the period | $ | 6,087,831 | $ | 5,378,525 |
Dividend on Series A preferred stock |
| 369,863 |
| 184,932 |
|
| 6,457,694 |
| 5,563,457 |
|
|
|
|
|
Weighted average shares of common stock |
| 71,416,660 |
| 71,416,660 |
Diluted effect from Series A preferred stock |
| 15,847,099 |
| 15,847,099 |
Weighted average shares of common stock and potential shares |
| 87,263,759 |
| 87,263,759 |
|
|
|
|
|
Diluted earnings per share |
| 0.07 |
| 0.06 |
9
Note 5 - INVENTORIES
The inventories consisted of the following:
|
|
| ||
|
| As of March 31, 2011 |
| As of December 31, 2010 |
|
|
|
|
|
Finished goods | $ | 3,005,470 | $ | 2,032,008 |
Note 6 - DEPOSIT FOR CONSTRUCTION
The Company entered into an agreement with a developer and paid a deposit for the construction of a distribution center. The construction is expected to commence in the fourth quarter of 2011.
Note 7 TOTAL COMPREHENSIVE INCOME
|
| For the Three Months Ended | ||
|
| March 31, 2011 |
| March 31, 2010 |
|
|
|
|
|
Net income | $ | 6,087,831 | $ | 5,378,525 |
Foreign currency transaction adjustments |
| 1,032,566 |
| 18,701 |
Total comprehensive income |
| 7,120,397 |
| 5,397,226 |
10
ITEM 2.
MANAGEMENTS DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS," "INTENDS," "WILL," "HOPES," "SEEKS," "ANTICIPATES," "EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD LOOKING STATEMENT. SUCH FORWARD LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT ON FORM 10-Q AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.
Results of Operations
Results of Operation for Sinocom Pharmaceutical, Inc., for the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010.
Net Sales
The following table sets forth a breakdown of our net sales by product categories for the periods indicated.
| For the Three Months Ended |
| ||||||||||
| March 31, 2011 |
| March 31, 2010 |
| % Change in Net Sales | |||||||
| $ |
| % of Net Sales |
| $ |
| % of Net Sales | |||||
|
|
|
|
|
|
|
|
| ||||
Pharmaceutical distribution |
|
|
|
|
|
|
|
|
|
| ||
TCM pharmaceuticals |
| 6,015,344 |
| 19.9% |
| 4,810,221 |
| 19.3% |
| 25.1% | ||
TCM processed herbs |
| 4,017,795 |
| 13.3% |
| 3,091,239 |
| 12.4% |
| 30.0% | ||
Western pharmaceuticals |
| 11,516,188 |
| 38.1% |
| 8,646,261 |
| 34.7% |
| 33.2% | ||
Medical supplies |
| 1,065,310 |
| 3.5% |
| 861,620 |
| 3.5% |
| 23.6% | ||
11
Subtotal sales, net |
| 22,614,637 |
| 74.8% |
| 17,409,341 |
| 69.9% |
| 29.9% | ||
|
|
|
|
|
|
|
|
|
|
| ||
TCM raw herb plantation management |
|
|
|
|
|
|
|
|
|
| ||
TCM raw herbs |
| 7,598,284 |
| 25.2% |
| 7,487,010 |
| 30.1% |
| 1.5% | ||
|
|
|
|
|
|
|
|
|
|
| ||
Total sales, net |
| 30,212,921 |
| 100.0% |
| 24,896,351 |
| 100.0% |
| 21.4% |
Net sales increased by 21.4% to $30.2 million for the three months ended March 31, 2011 from $24.9 million for the three months ended March 31, 2010. The increase in net sales was primarily attributable to higher revenue from the distribution sales of pharmaceutical products.
Net sales from the distribution of pharmaceutical products increased by 29.9% to $22.6 million for the three months ended March 31, 2011 from $17.4 million for the three months ended March 31, 2010, primarily due to the expansion of our existing distribution network, an increase in the number of customers to approximately 3,366 as at March 31, 2011 from approximately 2,882 as at March 31, 2010 and to a lesser extent, an increase in the number of products distributed to approximately 5,113 as at March 31, 2011 from approximately 4,768 as at March 31, 2010.
Net sales from our TCM raw herb plantation management increased by 1.5% to $7.6 million for the three months ended March 31, 2011 from $7.5 million for the three months ended March 31, 2010. There was a little change on revenue of TCM raw herb.
Cost of Sales
Cost of sales increased by 26.0% to $20.4 million for the three months ended March 31, 2011 from $16.2 million for the three months ended March 31, 2010. This increase was primarily due to the increase in our net sales driven by the increase in the volume of products sold.
Gross Profit and Gross Profit Margin
The following table sets forth the breakdown of our gross profits and gross profit margins by product categories for the periods indicated.
| For the Three Months Ended |
| ||||||||
| March 31, 2011 |
| March 31, 2010 |
| % Change in Gross Profit | |||||
| $ |
| Gross Profit Margin |
| $ |
| Gross Profit Margin | |||
|
|
|
|
|
|
|
|
| ||
Pharmaceutical distribution |
|
|
|
|
|
|
|
|
|
|
TCM pharmaceuticals |
| 1,323,936 |
| 22.0% |
| 971,210 |
| 20.2% |
| 36.3% |
TCM processed herbs |
| 1,712,838 |
| 42.6% |
| 1,285,941 |
| 41.6% |
| 33.2% |
Western pharmaceuticals |
| 2,565,609 |
| 22.3% |
| 1,795,271 |
| 20.8% |
| 42.9% |
Medical supplies |
| 249,617 |
| 23.4% |
| 198,551 |
| 23.0% |
| 25.7% |
12
Subtotal gross profit |
| 5,852,000 |
| 25.9% |
| 4,250,973 |
| 24.4% |
| 37.7% |
|
|
|
|
|
|
|
|
|
|
|
TCM raw herb plantation management |
|
|
|
|
|
|
|
|
|
|
TCM raw herbs |
| 3,980,829 |
| 52.4% |
| 4,476,365 |
| 59.8% |
| -11.1% |
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
| 9,832,829 |
| 32.5% |
| 8,727,338 |
| 35.1% |
| 12.7% |
Overall gross profit for the three months ended March 31, 2011 was $9.8 million, which represents an increase of 12.7%, from $8.7 million for the three months ended March 31, 2010. The increase in gross profit was primarily attributable to an increase in net sales of Western pharmaceuticals, TCM pharmaceuticals and TCM processed herbs. Overall gross profit margin was 32.5% and 35.1% for the three months ended March 31, 2011 and 2010, respectively. This change was attributable to the decrease in the proportions of net sales of TCM raw herbs which have a higher average gross profit margin.
Gross profit for the distribution of pharmaceutical products increased by 37.7% to $5.9 million for the three months ended March 31, 2011 from $4.3 million for the three months ended March 31, 2010, primarily due to higher sales volume. The gross profit margin of the distribution of pharmaceutical products was 25.9% and 24.4% for the three months ended March 31, 2011 and 2010, respectively.
Gross profit for TCM raw herb plantation management decreased by 11.1% to $4 million for the three months ended March 31, 2011 from $4.5 million for the three months ended March 31, 2010, primarily due to lower sales volume of the higher margin product, Gegen. The gross profit margin of the TCM raw herbs decreased to 52.4% for the three months ended March 31, 2011 from 59.8% for the three months ended March 31, 2010 as a result of different sales mix.
Selling Expenses
Selling expenses were $0.9 million for the three months ended March 31, 2011 as compared to $0.8 million for the three months ended March 31, 2010. The increase of 13.8%, was primarily attributable to the increase in the rates and the amounts of sales commission a result of increase in net sales.
General and Administrative Expenses
General and administrative expenses were $0.4 million for the three months ended March 31, 2011 as compared to $0.3 million for the three months ended March 31, 2010. The increase of $22,751, by 5.9% was mainly due to an increase in sales incentive and salaries.
Income from Operations
As a result of the foregoing, income from operations increased by 12.9% to $8.5 million for the three months ended March 31, 2011 from $7.6 million for the three months ended March 31, 2010.
Total Other Income (expense)
Total other income was $0.1 million for the three months ended March 31, 2011 and total other income was $75,234 for the three months ended March 31, 2010. This changes was mainly due to the increase in the non-operating income as a result of our receipt of rental income of $92,009 derived from leasing our old office premise to a third party.
Provision for Income Taxes
Provision for income taxes increased by 5.6% to $2.2 million for the three months ended March 31, 2011 from $2.1 million for the three months ended March 31, 2010, mainly due to the increase in net sales. Our
13
effective tax rate remained relatively steady at 25.3% for the three months ended March 31, 2011 and 27.2% for the three months ended March 31, 2010.
Net Income
As a result of the foregoing, our net income increased by 16.1% to $6.5 million for the three months ended March 31, 2011 from $5.6 million for the three months ended March 31, 2010.
Dividend on Series A Preferred Stock
Pursuant to the Purchase Agreement, holders of Series A preferred stock are entitled to receive cash dividends, which accrued at the rate of 5% per annum for the 12 month period following the issue date, December 3, 2009, and accrue at the rate of 10% per annum for each 12 month period thereafter. We paid Nil and $184,932 in dividends to holders of Series A preferred stocks for the three months ended March 31, 2011 and 2010, respectively.
Net Income Available to Common Stockholders
As a result of the foregoing, our net income available to common stockholders increased by 13.2% to $6.1 million for the three months ended March 31, 2011 from $5.4 million for the three months ended March 31, 2010.
Liquidity and Capital Resources
The following table sets forth a summary of our net cash flow information for the periods indicated:
|
| For the Three Months Ended | ||
|
| March 31, 2011 |
| March 31, 2010 |
Net cash provided by/(used) in operating activities | $ | 396,228 | $ | (1,311,904) |
Net cash provided by/(used) in investing activities |
| (1,707) |
| (8,614,915) |
Net cash provided by/(used) in financing activities |
| - |
| (562,067) |
Effect of exchange rate changes on cash and cash equivalents |
| 471,945 |
| 18,700 |
Net change in cash and cash equivalents |
| 866,466 |
| (10,470,186) |
Cash and cash equivalents, beginning balance |
| 24,783,238 |
| 34,363,124 |
Cash and cash equivalents, ending balance | $ | 25,649,704 | $ | 23,892,938 |
For the three months ended March 31, 2011, we financed our operations and capital investments mainly through our cash flows from operations. As of March 31, 2011, we had $25.6 million in cash and cash equivalents. Our cash and cash equivalents include cash in hand and cash in time deposits and certificates of deposit with original maturities within three months.
We may need additional cash resources in the future if we find and wish to pursue other opportunities for investment, acquisition, strategic cooperation and similar actions.
Operating Activities
Net cash provided by operating activities was $0.4 million for the three months ended March 31, 2011, which was derived from a net income of $6.5 million adjusted to reflect a net increase relating to non-cash items and a net decrease relating to changes in the balances of operating assets and liabilities. The adjustments relating to non-cash items and changes in the balances of operating assets and liabilities, a net of $6.1 million, primarily comprised of a $4.8 million increase in accounts receivable are primarily due to the increase in the amount of net sales, a $1 million increase in inventory primarily due to increased products purchased associated with increased sales order, a $1.3 million increase in accounts payable primarily due to increased supply procurement associated with increased sales, and a $0.7 million decrease in accrued expenses and other payables due to payment to bonus accrued.
14
Net cash provided by operating activities was negative $1.3 million for the three months ended March 31, 2010, which was derived from a net income of $5.6 million adjusted to reflect a net increase relating to non-cash items and a net decrease relating to changes in the balances of operating assets and liabilities. The adjustments relating to non-cash items and changes in the balances of operating assets and liabilities, a net of $6.9 million, primarily comprised of a $2.8 million decrease in accounts receivable primarily due to a good collection from the customers, a $4.8 million increase in trade deposit mainly due to the increased deposits associated with exclusive pharmaceutical procurement, a $4.1 million decrease in accounts payable mainly due to earlier payment to distribution suppliers made in order to secure better terms, and a $0.7 million decrease in accrued expenses and other payables due to payment to bonus accrued .
Investing Activities
Net cash used by investing activities was $1,707 and $8.6 million for the three months ended March 31, 2011 and 2010, respectively. The $8.6 million for the three months ended March 31, 2010, was primarily attributable to $2.7 million lease prepayments in connection with our TCM raw herb supplies, $3.0 million paid in connection with the acquisition of land use rights for our new warehouse facilities and $2.9 million construction deposits in connection with our new warehouse facilities.
Financing Activities
Net cash used in financing activities was $nil for the three months ended March 31, 2011 as compared to net cash used by financing activities of $0.5 million for the three months ended March 31, 2010. The net cash of $0.5 million used in financing activities for the three months ended March 31, 2010 was attributable to (i) the issuance costs of Series A preferred stock of $0.4 million and (ii) dividends of $0.2 million paid to holders of our preferred stock.
Capital Expenditures
For the three months ended March 31, 2011 and 2010 our capital expenditures totaled $1,707 and $5.9 million respectively. Our capital expenditure for the three months ended March 31, 2011 was primarily attributable to the purchase of property and equipment. Our capital expenditures for the three months ended March 31, 2010 were primarily attributable to the purchase of property and equipment.
Off-balance Sheet Arrangements
We did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011. We have adopted the new standard as required in January 2011 and have had no material impact on the financial statements.
15
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There were no material changes in the Companys market risk components since December 31, 2010. For a discussion of our market risk, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2010 Annual Report on Form 10-K.
ITEM 4.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
The Securities and Exchange Commission defines the term disclosure controls and procedures to mean the controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to principal executive and principal financial officers to allow timely decisions regarding disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to provide reasonable assurance of achieving the objectives of timely alerting them to material information required to be included in our periodic SEC reports and of ensuring that such information is recorded, processed, summarized and reported within the time periods specified. Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance of the achievement of these objectives.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting during the period ended March 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated. No director, officer or affiliate of the Company, and no owner of record or beneficial owner of more than 5.0% of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
ITEM 1A. RISK FACTORS.
The Company is updating the risk factors set forth under Part I, Item 1A, Risk Factors of its Annual Report on Form 10-K for the year ended December 31, 2010, by adding the following risk factor related to dividend payments made by its PRC subsidiary in 2007 and 2008.
Dividend payments made by our PRC subsidiary in 2007 and 2008 may not have complied with SAFE regulations and might subject us to liability and penalties that could materially and adversely affect our results of operation and financial condition.
Under SAFE regulations, dividend distributions to an offshore shareholder cannot be made to an onshore entity or any domestic resident, unless the relevant SAFE permit has been obtained. In 2007 and 2008, without a SAFE permit, our PRC subsidiary distributed to its then shareholder Full King, a British Virgin Islands company, dividends in the amount of RMB5 million and RMB336 million ($0.7 million and $47.6 million as recorded in our financial statements using the U.S. dollar as reporting currency), respectively, by paying three domestic individuals and an onshore entity that received such dividends on its behalf. Failure to comply with these SAFE regulations may result in liability and penalties to us, including, among others, for evasion of applicable PRC foreign exchange restrictions. We cannot assure you that the penalties would not be a substantial amount or that they would not have a material and adverse effect on our business, financial condition or results of operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4.
(REMOVED AND RESERVED)
ITEM 5.
OTHER INFORMATION.
None
ITEM 6.
EXHIBITS.
(a)
The following exhibits are filed herewith:
17
31.1
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* filed herewith
18
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.
SINOCOM PHARMACEUTICAL, INC.
By:
XueXiang Ai, Chief Executive Officer
Date: May 20, 2011
By: Tuck Wing Pang, Chief Financial Officer
19