We recognize distribution revenues and related cost of sales at the later of (a) the time of shipment or (b) when title passes to the customers, provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, collectibility is probable and the price is fixed. Revenues consist of gross sales less provisions for estimated customer returns, discounts, vendor payments and volume rebates. Amounts billed to a customer for shipping and handling are reported as revenue. We recognize commission revenue, net of returns, on products delivered by the distribution provider at the time of delivery, provided that there is evidence of a final arrangement, there are no uncertainties surrounding acceptance, collectibility is probable and the price is fixed. Under the terms of these agreements revenues are generally receivable from manufacturers within 45 days of delivery. We estimate the reserve for product returns at the time revenue is recognized based on various market data, historical trends, and information from customers.
Net revenue was approximately $6,899,000 for the three months ended September 30, 2006, an increase of $6,876,000, as compared with approximately $23,000 for the three months ended September 30, 2005. This significant increase was primarily due to the acquisition of Wanwei in October 2005. Wanwei generated revenues of $6,869,000 from distribution activities during the three months ended September 30, 2006.
Marketing commissions and registration revenue was increased by $7,000 from $23,000 to $30,000 for the three months ended September 30, 2006 as compared to the three months ended September 30, 2005. This increase was the result of our licensing and initiating sales of Propess during the fourth quarter of 2005.
Cost of sales was $6,684,000 for the three months ended September 30, 2006, an increase of $6,598,000, as compared with $86,000 for the three months ended September 30, 2005. This increase is primarily attributable to our acquisition of Wanwei in October 2005. During the three months ended September 30, 2006, Wanwei cost of sales was $6,386,000. The remaining increase in cost of sales is directly related to the sales and marketing efforts to promote Propess during the three months ended September 30, 2006.
Sales and marketing expenses were $296,000 for the three months ended September 30, 2006, an increase of $282,000, as compared with $14,000 for the three months ended September 30, 2005. The increase was the result of our acquisition of Wanwei which was completed in October 2005. During the three months ended September 30, 2006, Wanwei’s sales and marketing expenses were $280,000.
General and administrative expenses were $1,117,000 for the three months ended September 30, 2006, an increase of $20,000, as compared to $1,097,000 for the three months ended September 30, 2005. Our acquisition of Wanwei in October 2005 accounted for $270,000 of general and administrative expenses for the three months ended September 30, 2006.
The remaining reduction in general and administrative expenses of $250,000 for the three months ended September 30, 2006 as compared to September 30, 2005 was mainly the result of decreased dependence on professional services. Significant reductions in legal fees $173,000, accounting $56,000 and financial printing $44,000 was the result of no SEC stock registration ongoing during the three months ended September 30, 2006 as well as the determination to move the corporate accounting function internal to the Company. The other significant reduction in general and administrative expenses was travel and related expenses $38,000. Offsetting these reductions was an $75,000 increase in salary and related benefits and taxes reflecting an expansion of our corporate staff in China over the prior year.
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Interest Income and Expense:
Our interest income primarily consists of income earned on our cash and cash equivalents. In October 2005, we completed a private placement of our shares of common stock to investors of $5,941,000, net of issuance costs. We received interest income of $32,000 during the three months ended September 30, 2006, a decrease of $11,000, as compared to $43,000 for the three months ended September 30, 2005. Interest expense of $28,000 is primarily for short term loans and software financing.
Other Income (Expense):
Other income was $46,000 for the three months ended September 30, 2006, an increase of $36,000, as compared with other income of $10,000 for the three months ended September 30, 2005. The increase was the result of accounts receivable collections received from customers which receivable balance was valued at zero as part of the acquisition accounting of Wanwei.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Net Revenue:
Net revenue was approximately $17,020,000 for the nine months ended September 30, 2006, an increase of $16,896,000, as compared with approximately $124,000 for the nine months ended September 30, 2005. This significant increase was due to the acquisition of Wanwei in October 2005. Wanwei generated revenues of $17,014,000 from distribution activities during the nine months ended September 30, 2006.
Cost of Sales:
Cost of sales was $16,457,000 for the nine months ended September 30, 2006, an increase of $15,673,000, as compared with $784,000 for the nine months ended September 30, 2005. This increase is attributable to our acquisition of Wanwei in October 2005. During the nine months ended September 30, 2006, Wanwei cost of sales was $15,739,000.
Sales and Marketing Expenses:
Sales and marketing expenses were $885,000 for the nine months ended September 30, 2006, an increase of $850,000, as compared with $35,000 for the nine months ended September 30, 2005. The increase was the result of our acquisition of Wanwei which was completed in October 2005. During the nine months ended September 30, 2006, Wanwei’s sales and marketing expenses were $866,000.
General and Administrative Expenses:
General and administrative expenses were $4,055,000 for the nine months ended September 30, 2006, an increase of $978,000, as compared to $3,077,000 for the nine months ended September 30, 2005. Our acquisition of Wanwei in October 2005 accounted for $662,000 of general and administrative expenses for the nine months ended September 30, 2006.
The remaining increase in general and administrative expenses is $316,000 for the nine months ended September 30, 2006 as compared to September 30, 2005. Stock based compensation recognized under SFAS No. 123R for the nine months ended September 30, 2006 was $660,000 as compared to $299,000 for the nine months ended September 30, 2005, an increase of $361,000. Salary and related benefits and taxes increased $285,000 for the nine months ended September 30, 2006 as compared to 2005, reflecting the increase in US and China corporate staff and salary adjustments. Business development and operational consultants increased $215,000, reflecting the expansion of our development related activities. Insurance costs increased $51,000 for the nine months ended September 30, 2006 as compared to 2005, reflecting higher Directors and Officers and Key Man Life insurance premiums. Offsetting these increases were significant reductions in legal fees $295,000 and accounting $350,000 reflecting the decision to move internal the corporate accounting function as well as the reduction in SEC registration filings in 2006.
Loss on Disposal of Asset:
Loss on disposal of asset were $407,000 for the nine months ended September 30, 2006, an increase of $407,000, as compared with zero for the three months ended September 30, 2005. The increase was the result of our write-off of the software license and implementation cost of an Enterprise Resource Planning (ERP) system during the nine months ended September 30, 2006. In 2005 we identified the need to implement an ERP system to provide for the growth of the Company. In February 2006 we initiated the implementation of the ERP system which was planned to be completed by September 30, 2006. During the system implementation, the Company was made aware of a recently released ERP system which is a better fit for our company’s operation and is expected to be more cost effective. During the quarter ended September 30, 2006 we made the determination to discontinue the selected ERP system and to replace it with the recently released system.
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Interest Income and Expense:
Our interest income primarily consists of income earned on our cash and cash equivalents. In October 2005, we completed a private placement of our shares of common stock to investors of $5,941,000, net of issuance costs. We received interest income of $123,000 during the nine months ended September 30, 2006, a decrease of $2,000, as compared to $125,000 for the nine months ended September 30, 2005. Interest expense of $51,000 primarily relates to short term loans and software financing.
Other Income (Expense):
Other income was $42,000 for the nine months ended September 30, 2006, an increase of $43,000, as compared with other expense of $1,000 for the nine months ended September 30, 2005. The increase was primarily the result of accounts receivable collections received from customers which receivable balance was valued at zero as part of the acquisition accounting of Wanwei.
Liquidity and Capital Resources
As of September 30, 2006, we had unrestricted cash and cash equivalents of approximately $3.8 million, which represented 24.7% 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 highly-rated securities.
Since we acquired BMP China in February 2004, we have funded our operations primarily through the issuance of shares of our common stock. In March 2004, we completed a private placement of 8,695,652 shares of our common stock at a purchase price of $1.15 per share, which yielded gross proceeds to us of approximately $10.0 million and net proceeds to us of approximately $8.8 million. On October 19, 2005, we completed a private placement of 4,199,981 shares of our common stock to a group of institutional and individual accredited investors, for gross proceeds of $6.3 million and net proceeds of approximately $5.9 million. In addition, these investors also received our Series A Warrants to purchase an aggregate of 619,414 shares of our common stock at an exercise price of $1.875 per share and Series B Warrants to purchase 619,414 shares of common stock at an exercise price of $2.25 per share.
On February 21, 2006 we notified the holders of Series A Warrants that, pursuant to the terms of the Series A Warrants, we were exercising our rights to force the conversion of Series A Warrants because the trading price of our common stock had exceeded 200% of the exercise price of Series A Warrants for twenty consecutive days. On March 28, 2006 we notified the holders of Series B Warrants that pursuant to the terms of the Series B Warrants, we were exercising our rights to force the conversion of Series B Warrants because the trading price of our common stock exceeded 200% of the exercise price of Series B Warrants for twenty consecutive days. During the nine months ended September 30, 2006, we received $2,554,000 from Series A and Series B Warrant exercises. We issued 1,238,485 shares for the funds received from Series A and Series B exercises during the nine months ended September 30, 2006.
The use of our cash flows has primarily consisted of salaries and wages for our employees, professional fees, fees related to sales and promotion of our current products and the acquisition of Wanwei.
To date, we have had negative cash flows from operations. Net cash used in operating activities was $5,023,000 for the nine months ended September 30, 2006. This amount principally reflected our net loss of $4,704,000, partially offset by $1,330,000 in non-cash charges including stock-based compensation expense of $660,000, depreciation and intangible amortization of $263,000 and a loss on assets disposed of $407,000. We used $1,649,000 of operating cash as a result of changes in certain of our operating assets and liabilities during the nine months ended September 30, 2006. The most significant changes were the increase in accounts receivables of $1,915,000, inventory of $195,000 and Value Added Taxes Receivable of $125,000 and the decrease of accrued professional fees of $165,000 and accrued payable of $24,000. Offsetting these changes was the increase in accounts payable of $649,000 and accrued other liabilities of $129,000. Cash used in investing activities for the purchase of equipment was $209,000 and the payment to Wanhui was $412,000. Net cash provided by financing activities was $2,511,000 and consisted of $2,594,000 proceeds from the exercise of warrants and options offset by $83,000 in repayments of notes payable.
Our net loss of $1,554,000 and negative cash flow from operations of $1,756,000 during the three months ended September 30, 2006 raise substantial doubt about our ability to continue as a going concern. We anticipate that our September 30, 2006 balance of approximately $3.8 million in unrestricted cash and cash equivalents will be sufficient to fund our current level of operations for at least the next nine months.
We currently plan to use our remaining cash primarily to fund: our operating expenses and general working capital; the marketing of our current and future products; our pursuit of internal growth and strategic acquisitions including our proposed acquisition of Shanghai Rongheng Pharmaceutical Company Limited; and the expenses necessary to maintain our status as an Exchange Act reporting company.
Our future capital requirements will depend on many factors, including those factors are set forth 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, 2005 and Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and in this report, as well as our ability to maintain our existing cost structure and return on sales, fund obligations for additional capital that will occur on additional product licenses and acquisitions and execution of our business and strategic plans as currently conceived.
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Our capital requirements are likely to increase, particularly as we pursue internal growth, add personnel, fund inventory purchases and support increased levels of accounts receivables prior to receiving collections from our customers. To support our internal growth and acquisitions, it is our expectation that we will be adding financial, marketing, product and medical managers over the next 12 months. As a result of our continuing capital needs, we are considering to raise additional funds in the next six months through public or private equity offerings, debt financings or from other sources. There is no assurance that such funding will be available on favorable terms or at all to the Company. If we are not able to raise additional capital through fund raising activities our ability to continue as a going concern will be in substantial doubt; we could be forced to curtail some of the currently anticipated expenditures in the above mentioned areas and our anticipated future growth will be adversly affected.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Rate Sensitivity
We are exposed to cash flow and earnings fluctuations resulting from foreign exchange rate variation because our operations are in China. This exposure arises from the translation of financial statements of our foreign subsidiaries, BMP China and Wanwei, from RMB, the functional currency of China, into United States dollars, our functional currency of our parent entity. On July 21, 2005, China increased the value of its currency, the RMB, by 2.1% to RMB 8.11 to the dollar, and announced that its currency, the RMB will no longer be pegged to the US dollar, but will be allowed to float in a band (and, to a limited extent, increase in value) against a basket of foreign currencies. Any devaluation of the RMB could adversely affect the value of our common stock in foreign currency terms because we will receive substantially all of our revenues in RMB. Fluctuations in exchange rates also could adversely affect the value, translated or converted into United States dollars, of our net assets, earnings and any declared dividends. In addition, a devaluation of the RMB is likely to increase the portion of our cash flow required to satisfy any foreign currency denominated obligations.
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.
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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 third fiscal quarter that materially affected, or is reasonably likely to material affect, our internal control over financial reporting.
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PART II- OTHER INFORMATION
ITEM 1A. Risk Factors
We may not be able to fund our operations and continue as a going concern.
Our recurring losses from operations and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Substantial doubt about our ability to continue as a going concern may create negative reactions to the price of shares of our common stock and we may have experience difficulty in obtaining financing.
We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence.
We believe that we have adequate cash and cash equivalents to fund our current level of operations through June 30, 2007. We are considering raising additional funds in the next six months through public or private equity offerings, debt financing or from other sources. There is no assurance that such funding will be available on favorable terms or at all to us.
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ITEM 6. Exhibits
| 31.1 | Certificate of the Chief Executive Officer of Beijing Med-Pharm Corporation required by Rule 13a-14(a) under the Exchange Act. |
| 31.2 | Certificate of the Chief Financial Officer of Beijing Med-Pharm Corporation required by Rule 13a-14(a) under the Exchange Act |
| 32.1 | Certificate of the Chief Executive Officer of Beijing Med-Pharm Corporation required by Rule 13a-14(b) under the Exchange Act |
| 32.2 | Certificate of the Chief Financial Officer of Beijing Med-Pharm Corporation required by Rule 13a-14(b) under the Exchange Act |
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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.
| | | Beijing Med-Pharm Corporation |
Date: November 14, 2006
| | |
/s/ DAVID GAO
|
| | |
|
| | | David Gao
Chief Executive Officer
(Principal Executive Officer) |
Date: November 14, 2006
| | |
/s/ FRED M. POWELL
|
| | |
|
| | | Fred M. Powell
Chief Financial Officer
(Principal Financial and Accounting Officer) |
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