biostar-10q063008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2008
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from ________________ to _______________
333-147363
(Commission
file number)
BIOSTAR
PHARMACEUTICALS, INC.
(Exact
name of small business issuer as specified in its charter)
Maryland
|
20-5101287
|
(State
or other jurisdiction
|
(IRS
Employer
|
of
incorporation or organization)
|
Identification
No.)
|
Shiji
Avenue, Xianyang City
Shaanxi
province, P.R. China, 712000
(Address
of principal executive offices)
011-86-029-33686638
(Issuer’s
telephone number)
N/A
(Former
name, former address and former fiscal year, 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.
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 o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
(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).
As of
August 12, 2008 there were 22,152,311 shares of common stock were
outstanding.
Index
|
|
Page Number
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
|
Item
2.
|
|
22
|
Item
3.
|
|
31
|
Item
4T.
|
|
31
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
32
|
Item
1A.
|
|
32
|
Item
2.
|
|
32
|
Item
3.
|
|
32
|
Item
4.
|
|
32
|
Item
5.
|
|
32
|
Item
6.
|
|
32
|
|
|
33
|
|
34
|
FINANCIAL
STATEMENTS
JUNE
30, 2008
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
694,538 |
|
|
$ |
2,286,419 |
|
Accounts
receivable
|
|
|
10,533,962 |
|
|
|
4,123,135 |
|
Inventories
|
|
|
367,728 |
|
|
|
207,895 |
|
Deposit
|
|
|
280,712 |
|
|
|
- |
|
Prepaid
expenses and other receivables
|
|
|
369,919 |
|
|
|
18,225 |
|
Total
Current Assets
|
|
|
12,246,859 |
|
|
|
6,635,674 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
6,064,716 |
|
|
|
6,206,994 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
7,248,469 |
|
|
|
7,404,011 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
25,560,044 |
|
|
$ |
20,246,679 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,588,927 |
|
|
$ |
537,780 |
|
Customer
advances and other deposit
|
|
|
2,585,610 |
|
|
|
2,412,846 |
|
Short-term
bank loan
|
|
|
552,985 |
|
|
|
519,544 |
|
Value-added
tax payable
|
|
|
426,283 |
|
|
|
298,032 |
|
Income
tax payable
|
|
|
249,071 |
|
|
|
187,089 |
|
Total
Current Liabilities
|
|
|
5,402,876 |
|
|
|
3,955,291 |
|
|
|
|
|
|
|
|
|
|
Commitment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Series
A, convertible preferred stock, $0.001 par value, 5,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
72,500
shares issued and outstanding at June 30, 2008 and December 31,
2007
|
|
|
725,000 |
|
|
|
725,000 |
|
Undesignated
preferred stock, $.001 par value, 5,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
none
issued and outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock, $.001 par value, 100,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
22,152,311
shares issued and outstanding at June 30, 2008 and December 31,
2007
|
|
|
22,152 |
|
|
|
22,152 |
|
Additional
paid-in capital
|
|
|
8,244,017 |
|
|
|
8,244,017 |
|
Statutory
reserves
|
|
|
1,162,011 |
|
|
|
902,113 |
|
Accumulated
other comprehensive income (loss)
|
|
|
233,167 |
|
|
|
(53,517 |
) |
Retained
earnings
|
|
|
9,770,821 |
|
|
|
6,451,623 |
|
Total
Stockholders' Equity
|
|
|
20,157,168 |
|
|
|
16,291,388 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
25,560,044 |
|
|
$ |
20,246,679 |
|
The
accompanying notes are an integral part of these financial
statements.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
|
$ |
9,420,774 |
|
|
$ |
3,905,829 |
|
|
|
16,231,033 |
|
|
|
5,477,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
4,028,527 |
|
|
|
1,022,183 |
|
|
|
6,667,206 |
|
|
|
1,731,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,392,247 |
|
|
|
2,883,646 |
|
|
|
9,563,827 |
|
|
|
3,745,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
3,374,617 |
|
|
|
1,522,893 |
|
|
|
5,427,295 |
|
|
|
1,897,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,017,630 |
|
|
|
1,360,753 |
|
|
|
4,136,532 |
|
|
|
1,847,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,442 |
|
|
|
2,206 |
|
|
|
1,521 |
|
|
|
2,507 |
|
Interest expense
|
|
|
(15,529 |
) |
|
|
(17,098 |
) |
|
|
(29,482 |
) |
|
|
(26,765 |
) |
Other
|
|
|
- |
|
|
|
(33 |
) |
|
|
- |
|
|
|
(33 |
) |
Total
other Income (Expense)
|
|
|
(14,087 |
) |
|
|
(14,925 |
) |
|
|
(27,961 |
) |
|
|
(24,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,003,543 |
|
|
|
1,345,828 |
|
|
|
4,108,571 |
|
|
|
1,823,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
245,577 |
|
|
|
232,805 |
|
|
|
529,475 |
|
|
|
316,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,757,966 |
|
|
$ |
1,113,023 |
|
|
$ |
3,579,096 |
|
|
$ |
1,506,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
$ |
0.16 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
22,152,311 |
|
|
|
19,832,311 |
|
|
|
22,152,311 |
|
|
|
19,832,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
|
|
|
|
|
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
23,240,899 |
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,579,096 |
|
|
$ |
1,506,692 |
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
319,598 |
|
|
|
290,167 |
|
Provision
for doubtful accounts
|
|
|
186,085 |
|
|
|
48,238 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(6,163,071 |
) |
|
|
(1,607,234 |
) |
Inventories
|
|
|
(141,382 |
) |
|
|
(450,416 |
) |
Deposit
|
|
|
(276,775 |
) |
|
|
(13,050 |
) |
Prepaid
expenses and other receivables
|
|
|
(336,134 |
) |
|
|
(13,491 |
) |
Accounts
payable and accrued expenses
|
|
|
992,489 |
|
|
|
210,135 |
|
Customer
advances and other deposit
|
|
|
17,218 |
|
|
|
(93,587 |
) |
VAT
tax payable
|
|
|
102,520 |
|
|
|
(60,033 |
) |
Income
tax payable
|
|
|
46,484 |
|
|
|
231,910 |
|
Net
cash provided by (used in) operating activities
|
|
|
(1,673,872 |
) |
|
|
49,331 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(21,778 |
) |
|
|
(3,746 |
) |
Construction
in progress
|
|
|
- |
|
|
|
(37,523 |
) |
Net
cash (used in) Investing activities
|
|
|
(21,778 |
) |
|
|
(41,269 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings
from short-term bank loan
|
|
|
- |
|
|
|
384,931 |
|
Proceeds
from issuance of preferred stock
|
|
|
- |
|
|
|
725,000 |
|
Net
cash provided by (used in) financing activities
|
|
|
- |
|
|
|
1,109,931 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
103,769 |
|
|
|
5,098 |
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in cash and cash equivalents
|
|
|
(1,591,881 |
) |
|
|
1,123,091 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning balance
|
|
|
2,286,419 |
|
|
|
11,934 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending balance
|
|
$ |
694,538 |
|
|
$ |
1,135,025 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
|
Interest
payments
|
|
$ |
29,344 |
|
|
$ |
21,456 |
|
Income
tax payments
|
|
$ |
482,992 |
|
|
$ |
84,510 |
|
The
accompanying notes are an integral part of these financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
1 - ORGANIZATION
Biostar
Pharmaceuticals, Inc. (“Biostar” or “the Company”) was incorporated in the State
of Maryland on March 27, 2007. On June 15, 2007, Biostar formed Shaanxi Biostar
Biotech Ltd (“Shaanxi Biostar” or the “WFOE). Shaanxi Biostar is a wholly-owned
subsidiary of Biostar and a limited liability company organized under the laws
of the People's Republic of China (the "PRC").
On
November 1, 2007, Shaanxi Biostar entered into a series of agreements including
a Management Entrustment Agreement, a Shareholders’ Voting Proxy Agreement, an
Exclusive Option Agreement and a Share Pledge Agreement (the “Agreements”) with
Shaanxi Aoxing Pharmacy Co., Ltd ("Aoxing Pharmaceutical") and its shareholders
(the “Transaction”). Aoxing Pharmaceutical is a corporation formed under the
laws of the PRC. According to these Agreements, Shaanxi Biostar acquired
management control of Aoxing Pharmaceutical whereby Shaanxi Biostar is entitled
to all of the net profits of Aoxing Pharmaceutical as a management fee, and is
obligated to fund Aoxing Pharmaceutical’s operations and pay all of the debts.
In exchange for entering into the Agreements, on November 1, 2007, the Company
issued 19,832,311 shares of its common stock to Aoxing Pharmaceutical owners,
representing approximately 90% of the Company’s common stock outstanding after
the Transaction. Among the 19,832,311 shares of common stock issued, 15,436,005
shares were held by BVI trust on behalf of some Aoxing Pharmaceutical owners.
Consequently, the owners of Aoxing Pharmaceutical own a majority of the
Company's common stock immediately following the Transaction, therefore, the
Transaction is being accounted for as a "reverse acquisition", and Aoxing
Pharmaceutical is deemed to be the accounting acquirer in the reverse
acquisition.
These
contractual arrangements completed on November 1, 2007 provide that Shaanxi
Biostar has controlling interest in Aoxing Pharmaceutical as defined by FASB
Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN
46R”), an Interpretation of Accounting Research Bulletin No. 51, which
requires Shaanxi Biostar to consolidate the financial statements of Aoxing
Pharmaceutical and ultimately consolidate with its parent company, Biostar (see
Note 2 “Principles of Consolidation”).
The
Company, through its subsidiary and exclusive contractual arrangement with
Aoxing Pharmaceutical, is engaged in the business of discovering, developing,
manufacturing and marketing of over-the-counter (“OTC”) and prescription
pharmaceutical products as well as medical supplement products which include
capsules, granules and powder type medicines for a variety of diseases and
conditions such as hepatitis, gynecopathy and various male diseases in the
PRC.
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America.
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company, its
subsidiary and variable interest entity (“VIE”) for which the Company is the
primary beneficiary. All inter-company accounts and transactions have been
eliminated in consolidation. The Company has adopted FIN 46R which requires a
VIE to be consolidated by a company if that company is subject to a majority of
the risk of loss for the VIE or is entitled to receive a majority of the VIE’s
residual returns.
In
determining Aoxing Pharmaceutical is the VIE of Shaanxi Biostar, the Company
considered the following indicators, among others:
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
·
|
Shaanxi
Biostar has the full right to control and administrate the financial
affairs and daily operation of Aoxing Pharmaceutical and has the right to
manage and control all assets of Aoxing Pharmaceutical. The equity holders
of Aoxing Pharmaceutical as a group have no right to make any decision
about Aoxing Pharmaceutical’s activities without the consent of Shaanxi
Biostar.
|
·
|
Shaanxi
Biostar was assigned all voting rights of Aoxing Pharmaceutical and has
the right to appoint all directors and senior management personnel of
Aoxing Pharmaceutical. The equity holders of Aoxing Pharmaceutical possess
no substantive voting rights.
|
·
|
Shaanxi
Biostar will provide financial support if Aoxing Pharmaceutical requires
additional funds to maintain its operations and to repay its
debts.
|
·
|
Shaanxi
Biostar should be paid a management fee equal to Aoxing Pharmaceutical’s
net profits and should assume all operation risks of Aoxing Pharmaceutical
and bear all losses of Aoxing Pharmaceutical. Therefore,
Shaanxi Biostar is the primary beneficiary of Aoxing
Pharmaceutical.
|
Aoxing
Pharmaceutical is wholly owned by the majority shareholders of the Company. The
capital provided to Aoxing Pharmaceutical by the Company was recorded as
interest-free loan to Aoxing Pharmaceutical. There was no written note to this
loan and the loan is not interest bearing and was eliminated during
consolidation. Under various contractual agreements, the shareholders of Aoxing
Pharmaceutical are required to transfer their ownership to the Company’s
subsidiary in China when permitted by PRC laws and regulations or to designees
of the Company at any time when the Company considers it is necessary to acquire
Aoxing Pharmaceutical. In addition, the shareholders of Aoxing Pharmaceutical
have pledged their shares in Aoxing Pharmaceutical as collateral to secure these
contractual arrangements.
Foreign
Currency
The
Company’s reporting currency is the U.S. dollar. The Company’s operation in
China uses Chinese Yuan Renminbi (CNY) as its functional currency. The financial
statements of the subsidiary are translated into U.S. Dollars (USD) in
accordance with Statement of Financial Accounts Standards (SFAS) No. 52, Foreign
Currency Translation. According to the Statement, all assets and liabilities
were translated at the current exchange rate, stockholders equity are translated
at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income as a Component of Shareholders Equity. Foreign exchange
transaction gains and losses are reflected in the income
statement. During the six months ended June 30, 2008, the foreign
currency translation adjustments to the Company’s comprehensive income were
$286,684.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
Cash and Cash
Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful accounts
amounted to $325,793 and $126,314 as at June 30, 2008 and December 31, 2007,
respectively.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Management compares the cost of inventories with the market value
and allowance is made for writing down the inventories to market value, if
lower. Inventories consist of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
227,672 |
|
|
$ |
110,946 |
Work
in process
|
|
|
22,562 |
|
|
|
8,445 |
Finished
goods
|
|
|
117,494 |
|
|
|
88,504 |
|
|
$ |
367,728 |
|
|
$ |
207,895 |
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant &
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. As the real property
is situated on the land with 50 years of land use rights, thus the 50-year-life
is used as the estimated life of real property. Depreciation of property and
equipment is provided using the straight-line method for substantially all
assets with estimated lives of:
Real
property
|
50
years
|
Machinery
& equipment
|
15
years
|
Leasehold
improvements
|
10
years
|
Computers
& office equipment
|
5
years
|
Property,
plant & equipment consist of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Real
property
|
|
$ |
4,393,371 |
|
|
$ |
4,393,372 |
|
Machinery
& equipment
|
|
|
510,694 |
|
|
|
508,353 |
|
Leasehold
improvements
|
|
|
1,946,831 |
|
|
|
1,946,831 |
|
Furniture
& fixtures
|
|
|
62,982 |
|
|
|
62,981 |
|
Vehicle
|
|
|
19,437 |
|
|
|
- |
|
|
|
|
6,933,315 |
|
|
|
6,911,537 |
|
Less:
Accumulated depreciation
|
|
|
(868,599 |
) |
|
|
(704,543 |
) |
|
|
$ |
6,064,716 |
|
|
$ |
6,206,994 |
|
Intangible
Assets
Intangible
assets are amortized using the straight-line method over their estimated period
of benefit, ranging from ten to fifty years. Management evaluate the
recoverability of intangible assets periodically and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists. No impairments of intangible assets have been identified
during any of the periods presented. The land rights purchased in August of 2006
will expire in 2056. The proprietary technologies were contributed by four
shareholders of the Company and relate to the production of the Company's five
state approved drugs. All of the Company’s intangible assets are subject to
amortization with estimated lives of:
Land
use right
|
50
years
|
Proprietary
technologies
|
10
years
|
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The
components of finite-lived intangible assets are as follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Land
use right
|
|
$ |
6,202,238 |
|
|
$ |
6,202,238 |
|
Proprietary
technologies
|
|
|
1,511,544 |
|
|
|
1,511,544 |
|
|
|
|
7,713,782 |
|
|
|
7,713,782 |
|
Less:
Accumulated amortization
|
|
|
(465,313 |
) |
|
|
(309,771 |
) |
|
|
$ |
7,248,469 |
|
|
$ |
7,404,011 |
|
The
estimated future amortization expenses related to intangible asset as of June
30, 2008 are as follows:
Years
Ending December 31,
|
|
|
2008,
six months
|
|
$ |
157,800 |
2009
|
|
|
315,600 |
2010
|
|
|
315,600 |
2011
|
|
|
315,600 |
2012
|
|
|
315,600 |
Thereafter
|
|
|
5,828,269 |
Long-Lived
Assets
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a Disposal of a Segment of a Business. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes that, as of
June 30, 2008 there were no significant impairments of its long-lived
assets.
Fair Value of Financial
Instruments
Statement
of financial accounting standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company discloses estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Value Added Tax
Payable
The
Company is subject to a value added tax rate of 17% on product sales by the
Peoples Republic of China. Value added tax payable is computed net of
value added tax paid on purchases for all sales in the Peoples Republic of
China.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
The
Company does not allow its customers to return products. The
Company’s customers can exchange products only if they are damaged in
transportation.
Stock-Based
Compensation
In
October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights.
In
December 2004, the FASB issued FASB Statement No. 123R ("SFAS 123R"),
"Share-Based Payment, an Amendment of FASB Statement No. 123". SFAS 123R
requires companies to recognize in the statement of operations the grant date
fair value of stock options and other equity-based compensation issued to
employees. SFAS 123R is effective beginning in the Company's first quarter of
fiscal 2006.
The
Company did not issue any stock options to employees during the six months ended
June 30, 2008, therefore pro forma disclosures are not required.
Advertising
Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred.
Income
Taxes
The
Company utilizes SFAS No. 109, Accounting for Income Taxes, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007 The Interpretation
addresses the determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial statements. Under
FIN 48, we may recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also
provides guidance on derecognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased
disclosures.
Net Income (Loss) Per
Share
Basic net
income (loss) per share is computed on the basis of the weighted average number
of common shares outstanding during the period.
Diluted
net income (loss) per share is computed on the basis of the weighted average
number of common shares and common share equivalents outstanding. Dilutive
securities having an anti-dilutive effect on diluted net income (loss) per share
are excluded from the calculation.
Dilution
is computed by applying the treasury stock method. Under this method, options
and warrants are assumed to be exercised at the beginning of the period (or at
the time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the
period.
Comprehensive
income
Comprehensive
income is defined as the change in equity of a company during a period from
transactions and other events and circumstances excluding transactions resulting
from investments from owners and distributions to owners. For the Company,
comprehensive income for the periods presented includes net income, foreign
currency translation adjustments.
Statement of Cash
Flows
In
accordance with SFAS No. 95, Statement of Cash Flows, cash flows from the
Company’s operations is based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, most of which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowance
is limited.
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment
Reporting
Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosure about Segments
of an Enterprise and Related Information requires use of the management approach
model for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
For the
Company, the reportable business segments are based on products.
Recent accounting
pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”).
SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. This statement is effective for fiscal years beginning on
or after December 15, 2008 and will be applied prospectively. The Company
is currently evaluating the potential impact of the adoption of SFAS 141R
on its consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”).
SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. This statement is effective for fiscal years beginning
October 1, 2009. The Company is currently evaluating the potential impact of the
adoption of SFAS 160 on its consolidated financial position, results of
operations or cash flows.
In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. Management is
currently evaluating the effect of this pronouncement on financial
statements.
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In
September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87,
88, 106, and 132(R)”. This Statement improves financial reporting by requiring
an employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded statues in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial
reporting by requiring an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions. An employer with publicly traded equity securities is required to
initially recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after December 15, 2006. An employer without publicly traded equity
securities is required to recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end of the
fiscal year ending after June 15, 2007. However, an employer without
publicly traded equity securities is required to disclose the following
information in the notes to financial statements for a fiscal year ending after
December 15, 2006, but before June 16, 2007, unless it has applied the
recognition provisions of this Statement in preparing those financial
statements.
A brief
description of the provisions of this Statement
The date
that adoption is required
The date
the employer plans to adopt the recognition provisions of this Statement, if
earlier.
The
requirement to measure plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is
currently evaluating the effect of this pronouncement on financial
statements.
Note
3 – SHORT-TERM BANK
LOAN
The
Company’s VIE in China has a RMB 3,800,000 ($552,985 translated at the June 30,
2008 exchange rate of $1=RMB 6.8718) short-term bank loan, which will expire on
August 12, 2008. Interest is payable monthly at 0.816% per
month. The loan is secured by the Company's real
property.
Note
4 – SERIES A
CONVERTIBLE PREFERRED STOCK
Between
May 29, 2007 and June 4, 2007, the Company raised $725,000 from two investors in
a private placement of its Series A Convertible Preferred Stock at a purchase
price of $10.00 per unit, for a unit consisting of one share of Preferred Stock
and one Warrant.
The
Series A Preferred Stock has no voting rights except that the approval of the
holders of at least 51% of the Series A Preferred Stock is required for the
authorization, creation, or issuance, or any increase in the authorized or
issued amount, of any class or series of stock ranking equal or prior to the
Series A Preferred; or the amendment, alteration, or repeal of any of the
provisions of the Articles of Incorporation of the corporation which would alter
or change the powers, preferences, or special rights of the shares of the Series
A Preferred so as to affect them adversely.
Each
share of Series A Preferred Stock is convertible into shares of common stock at
the option of the holder at a conversion price of $.67 per share. The aggregate
number of shares of common stock which may be issued upon conversion of the
Series A Preferred Stock shall be no more than 2 million shares.
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
4 – SERIES A
CONVERTIBLE PREFERRED STOCK (CONTINUED)
Upon
completion of the conversion of the Series A Preferred Stock into common stock,
the Company will record a deemed dividend and as an increase in additional
paid-in capital, the intrinsic value of the beneficial conversion feature (the
"BCF"). The intrinsic value of the BCF will be the difference between
the fair value of the common stock received upon conversion and the amount of
proceeds to be allocated to the BCF. The amount to be allocated to
the BCF is the difference between the $725,000 proceeds received and the fair
value of the warrants which is calculated using Black-Scholes option pricing
model.
The
Warrant is exercisable, in whole or in part, at any time and from time to time
from and after the Effective Date on which a Conversion Price is first
determinable through and including the Termination Date which is the third
anniversary date, at an exercise price per Share equal to 150% of the Conversion
Price.
Assuming
a valuation of $2.00 per share and the conversion of the Series A Preferred
Stock into 1,088,588 shares of common stock at an effective conversion price of
approximately $0.57 per
share which is obtained by dividing the amount to be allocated to the BCF by the
1,088,588 common shares, pro forma net income per common share would
be:
|
|
Six
Months Ended
|
|
|
|
June
30, 2008
|
|
Pro
forma basic and diluted net income:
|
|
|
|
Net
income
|
|
$ |
3,579,096 |
|
Deemed
dividend from beneficial conversion feature of preferred
stock
|
|
|
(1,551,818 |
) |
Net
income applicable to common shareholders
|
|
$ |
2,027,278 |
|
|
|
|
|
|
Pro
forma weighted average shares outstanding:
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
22,152,311 |
|
Common
shares to be issued upon conversion of preferred stock
|
|
|
1,088,588 |
|
Pro
forma weighted average shares outstanding
|
|
|
23,240,899 |
|
|
|
|
|
|
Pro
forma basic and diluted net income per share
|
|
$ |
0.09 |
|
Management
estimated a valuation of $2.00 per share by using the Discounted Cash Flow (DCF)
Method with the following assumptions.
1.
|
Discount
rate of 27% as calculated by the build-up discount rate summary as
follows.
|
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
4 – SERIES A
CONVERTIBLE PREFERRED STOCK (CONTINUED)
|
Discount
Rate Build Up Computation /Capital Asset Pricing Model (CAPM) Utilizing
Re-Levered Beta
|
Riskless
Rate:
|
4.90%
|
|
Market
yield to maturity on 20 yr U. S. Treasuries
|
Original
General Equity Risk Premium:
|
7.10%
|
|
This
incorporates the earnings Distributions and Capital Gains, obtained from
Ibbotson's Stocks, Bonds, & Inflation Yearbook
|
Adjust
Historical Equity Risk Premium:
|
-1.25%
|
|
Elimination
of stock returns on major up movements according to a study conducted by
Ibbotson and Chen
|
General
Equity Risk Premium, as adjusted:
|
5.85%
|
|
This
incorporates the earnings Distributions and Capital Gains, obtained from
Ibbotson's Stocks, Bonds, & Inflation Yearbook
|
CAPM
(Beta) Adjustment: 1.66
|
3.86%
|
|
General
estimate of additional risk for Chinese Cos trading in the U.
S.
|
Ibbotson's
Size Premium:
|
6.30%
|
|
Represents
the premium on the micro cap: capitalization below small company (not less
than $627,000,000 in sales)
|
Additional
Size Premium:
|
3.00%
|
|
Represents
additional premium for companies below the $627 million Deal threshold
included in the 10th size decile above
|
Specific
Company Risk Adjustment:
|
3.00%
|
|
Per
Specific Company Risk Adjustment Computation (rounded)
|
Total
Discount Rate
|
26.9%
|
|
|
2.
|
The
Company’s management’s anticipated future results of the benefit stream to
the owners of the Company based on its four year
forecasts.
|
3.
|
Growth
rate estimate of 9% for the periods after 2010 and the terminal period
which is a combination of the PRC economy, Pharmaceutical industry, and
the Company’s long term
expectation.
|
4.
|
Discount
for Lack of Marketability (DLOM) of 30% based on the observation of the
range of DLOM from 16% (difference in discount from registered private
placements and unregistered placements) to 43% to 44% (mean and median
from the IPO studies).
|
The DCF
method resulted in a value of approximately $66.7 million, discounted by the 30%
DLOM resulted in an adjusted value of approximately $46.7 million, then divide
by the 23,240,899 common shares assuming the conversion of preferred stock to
arrive at the value of approximately $2.00 per share.
Note
5 – UNDESIGNATED
PREFERRED STOCK
The Blank
Check Preferred Stock may be issued from time to time in one or more classes or
series.
Note
6 - INCOME
TAXES
The
Company was incorporated in the United States of America and has operations in
two tax jurisdictions - the United States of America and the PRC. For the
operation in the United States of America, the Company has incurred net
accumulated operating losses for income tax purposes. The Company believes that
it is more likely than not that these net accumulated operating losses will not
be utilized in the future. Therefore, the Company has provided full valuation
allowance for the deferred tax assets arising from the losses in the United
States as of June 30, 2008. The Company generated substantially all of its net
income from its PRC operations for the six months ended June 30, 2008 and has
recorded income tax provision for the period.
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
6 - INCOME TAXES
(CONTINUED)
United States of
America
As of
June 30, 2008, the Company had federal and state net operating loss
carryforwards of approximately $116,357 available to offset future taxable
income in the United States of America. The net operating loss carryforwards
will expire, if unused, in varying amounts through the year ending
December 31, 2028. The deferred tax assets for the United States operation
at June 30, 2008 consists mainly of net operating loss carryforwards and for
which a full valuation allowance has been provided, as the management believes
it is more likely than not that these assets will not be realized in the
future.
The
following table sets forth the significant components of the net deferred tax
assets for operation in the United States of America as of June 30, 2008 and
2007:
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
45,000 |
|
|
$ |
6,700 |
|
Total
deferred tax assets
|
|
|
45,000 |
|
|
|
6,700 |
|
Less:
valuation allowance
|
|
|
(45,000 |
) |
|
|
(6,700 |
) |
Net
deferred tax assets
|
|
$ |
- |
|
|
$ |
- |
|
China
The
Company’s subsidiary and VIE were incorporated in the PRC which is governed by
the Income Tax Law of the PRC and various local income tax laws (the “Income Tax
Laws"). Effective January 1, 2008, China adopted a uniform tax rate of 25% for
all enterprises (including foreign-invested enterprises).
The
Company’s VIE is a high-tech enterprise and under PRC Income Tax Laws, it is
entitled to a two-year tax exemption followed by three years with a 50%
reduction in the tax rate, commencing the first profitable year. The
VIE’s application for an income tax reduction was accepted on December 4, 2005
by the Tax Department of Xian Yang Government. That is a reduction of
income tax payable by 50% from January 1, 2007 to December 31, 2009 and an
exemption from income tax from January 1, 2005 to December 31,
2006. The deferred tax assets for the Company’s China subsidiary and
VIE were immaterial at June 30, 2008.
The
income tax expenses for China operation consist of the following:
|
|
Six
Months Ended
|
|
|
June
30,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Income
tax provision
|
|
$ |
529,475 |
|
|
$ |
316,420 |
Change
in deferred tax assets
|
|
|
- |
|
|
|
- |
Change
in valuation allowance
|
|
|
- |
|
|
|
- |
Income
tax expenses
|
|
$ |
529,475 |
|
|
$ |
316,420 |
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
6 - INCOME TAXES
(CONTINUED)
Uncertain Tax
Positions
As a
result of the implementation of Interpretation 48, the Company recognized no
material adjustments to liabilities or stockholders’ equity. Interest associated
with unrecognized tax benefits are classified as income tax and penalties are
classified in selling, general and administrative expenses in the statements of
operations. The adoption of FIN 48 did not have a material impact on the
Company’s financial statements.
For the
six months ended June 30, 2008 and 2007, the Company had no unrecognized tax
benefits and related interest and penalties expenses. Currently, the
Company is not subject to examination by major tax jurisdictions.
Note
7 – MAJOR
CUSTOMER
For the
six months ended June 30, 2008, no sales to single customer were over 10% of net
sales. Approximately 10% of net sales were made to one customer for the six
months ended June 30, 2007.
Note
8 - STATUTORY
RESERVES
The
Company’s subsidiary and VIE in China are required to make appropriations to
certain non-distributable reserve funds. In accordance with the laws and
regulations applicable to China’s Foreign Investment Enterprises and the China
Company Laws, an enterprise’s income, after the payment of the PRC income taxes,
shall be allocated to the statutory surplus reserves and statutory public affair
fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10
percent of the profit after tax to the surplus reserve fund and additional 5-10
percent to the public affair fund. The public affair fund reserve was limited to
50 percent of the registered capital. Effect January 1, 2006 there is
now only one fund requirement. The reserve is 10 percent of income after tax,
not to exceed 50 percent of registered capital.
Statutory
Reserve funds are restricted for set off against losses, expansion of production
and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for the
collective welfare of employees. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of June 30,
2008 and December 31, 2007, the Company’s VIE had allocated $1,162,011 and
$902,113 to these non-distributable reserve funds, respectively.
Note
9 - OTHER
COMPREHENSIVE INCOME
Balance
of related after-tax components comprising accumulated other comprehensive
income (loss) included in stockholders’ equity at June 30, 2008 and December 31,
2007 were as follows:
|
|
Six
Months Ended
|
|
|
Year
Ended
|
|
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss, beginning of period
|
|
$ |
(53,517 |
) |
|
$ |
(94,161 |
) |
Change
in cumulative translation adjustment
|
|
|
286,684 |
|
|
|
40,644 |
|
Accumulated
other comprehensive income (loss), end of period
|
|
$ |
233,167 |
|
|
$ |
(53,517 |
) |
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note
10 - COMMITMENT
Corporate Finance Advisory
Services Agreement
On March
8, 2007, the Company executed a Corporate Finance Advisory Services Agreement
(the “Advisory Agreement") with Friedland Capital Inc. (“Friedland”). The
advisory agreement stated that Friedland would provide to the Company corporate
finance advisory services designed to achieve its corporate finance objectives,
specifically to result in the Company's shares (or a successor entity's shares)
becoming publicly-traded in the United States. As consideration for these
services, the Company paid Friedland RMB 1,650,000 in 2007 and is obligated to
pay Friedland additional RMB 750,000 ($109,142 translated at $1=RMB 6.8718)
within five working days after the Company’s shares becoming listed in public
market.
Lease
Agreements
The
Company utilizes office space provided by one of its directors at no
cost.
Note 11 - SEGMENT
INFORMATION
The
following is a summary of revenues by reportable business:
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Xin
Aoxing Oleanolic Acid Capsule
|
|
$ |
8,744,532 |
|
|
$ |
3,577,183 |
|
Taohuasan
Pediatrics Medicine
|
|
|
2,257,019 |
|
|
|
590,805 |
|
Gan
Wang Compound Paracetamol Capsule
|
|
|
1,776,468 |
|
|
|
491,386 |
|
Tianqi
Dysmenorrhea Capsule
|
|
|
1,838,341 |
|
|
|
450,049 |
|
Danshen
Granule
|
|
|
1,614,673 |
|
|
|
367,638 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,231,033 |
|
|
$ |
5,477,061 |
|
Note 12 - CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS
The
Company’s major operations are carried out in the PRC, therefore the Company is
subject to the risks not typically associated with entities operating in the
United States of America. Accordingly, the Company’s business, financial
condition and results of operations may be influenced by the political, economic
and legal environments in the PRC, by the general state of the PRC's economy.
All of the following risks may impair the Company’s business operations. If any
of the following risks actually occurs, the Company’s business, financial
condition or results of operations could be materially adversely
affected. In such case, investor may lose all or part of the
investment. Additional risks include:
§
|
The
Company may not be able to adequately protect and maintain its
intellectual property.
|
§
|
The
Company may not be able to obtain regulatory approvals for its
products.
|
§
|
The
Company may have difficulty competing with larger and better financed
companies in the same sector. New legislative or regulatory requirements
may adversely affect the Company’s business and operations. The Company is
dependant on certain key existing and future
personnel.
|
§
|
The
Company’s growth is dependent on its ability to successfully develop,
market, or acquire new drugs. The Company may be subject to product
liability claims in the future.
|
§
|
Changes
in the laws and regulations in the PRC may adversely affect the Company’s
ability to conduct its business.
|
§
|
The
Company may experience barriers to conducting business due to governmental
policy.
|
BIOSTAR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
Note 12 - CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS (CONTINUED)
§
|
Capital
outflow policies in the PRC may hamper the Company’s ability to remit
income to the United States.
|
§
|
Fluctuation
of the Renminbi could materially affect the Company’s financial condition
and results of operations.
|
§
|
The
Company may face obstacles from the communist system in the
PRC.
|
§
|
The
Company may have difficulty establishing adequate management, legal and
financial controls in the PRC.
|
§
|
Trade
barriers and taxes may have an adverse affect on the Company’s business
and operations.
|
§
|
There
may not be sufficient liquidity in the market for the Company’s securities
in order for investors to sell their
securities.
|
ITEM
2.
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our financial statements
and the notes thereto which appear elsewhere in this report. The results shown
herein are not necessarily indicative of the results to be expected in any
future periods. This discussion contains forward-looking statements based on
current expectations, which involve uncertainties. In some cases, you can
identify forward-looking statements by terminology such as "anticipate,"
"estimate," "plan," "project," "predict," "potential," "continue," "ongoing,"
"expect," "believe," "intend," "may," "will," "should," "could," or the negative
of these terms or other comparable terminology. All forward-looking statements
included in this document are based on information available to the management
on the date hereof. Actual
results and the timing of events could differ materially from the
forward-looking statements as a result of a number of factors. Readers should
also carefully review factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission.
OVERVIEW
Biostar
Pharmaceuticals, Inc. (“We”, the “Company” or “Biostar”) was incorporated on
March 27, 2007, under the laws of the State of Maryland. Our business operation
in China is conducted primarily through wholly-owned subsidiary, Shaanxi Biostar
Biotech Ltd., and our variable interest entity (“VIE”), Shaanxi Aoxing
Pharmaceutical Co., Ltd (“Aoxing Pharmaceutical”).
Aoxing
Pharmaceutical currently has five state approved drugs on the market as listed
below, with additional nine drugs in development, and derives all of its
revenues in China.
§
|
Xin
AoXing Oleanolic Acid Capsule: an over-the-counter (“OTC”) drug that
treats chronic hepatitis B disease.
|
§
|
Compound
Paracetamol & Amantadine Hydrochloride Capsule: an OTC drug that
treats common cold.
|
§
|
Danshen
Granule: a prescription drug treating coronary heart disease, myocardditis
and angina pectoris.
|
§
|
Pediatrics
Medicine: a prescription drug used for treating children’s cough and
respiratory tract infection.
|
§
|
Tianqi
Dysmenorrhea: an OTC traditional Chinese medicine for treating
dysmenorrhea.
|
The
best-selling product of Aoxing Pharmaceutical, Xin Aoxing Oleanolic Acid
Capsule, is the only non-prescription drug in China that treats hepatitis and
the only oral intake hepatitis treatment product licensed for sale by the PRC
government. Xin Aoxing Oleanolic Acid Capsule meets the requirements of China’s
“Chronic Hepatitis Prevention Guide” and is listed as a designated quality
product for Hepatitis B in China.
Aoxing
Pharmaceutical currently has three patents pending approval. Its marketing
network covers 21 provinces and it sells products in more than 28 provinces
throughout China.
RECENT
DEVELOPMENT
In 2007,
in order to extend its sales network, Aoxing Pharmaceutical activated a series
of strategic projects as follows:
§
|
High-margin-product
marketing network promotion plan I, or “Hundred City” project, targets 31
provinces in China and hundreds of cities and counties within those
provinces with the goal of building Aoxing Pharmaceutical’s Xin Aoxing
Oleanolic Acid Capsule brand as one of the biggest brand names for
hepatitis treatment medicine in China, and building the largest and most
efficient hepatitis treatment medicine distribution network in China. The
“Hundred City” project was implemented on March 1, 2007. Since its
implementation, it has generated sales of about RMB 60.4 million
(approximately $8 million) as of December 31, 2007 and about RMB 45.9
million (approximately $6.5 million) for the six months ended June 30,
2008. Aoxing Pharmaceutical anticipates the “Hundred City” project will
generate total sales of approximately $17 million in the year 2008. The
implementation costs of the project are mainly advertising expense and
sales commission which vary with sales. Advertising expense is
approximately 25% of sales and sales commission is approximately
20%.
|
§
|
China
new rural medical supply cooperative program or “Blue Sea” project,
targets six provinces in China and 300 counties within those provinces
with the goal of making Aoxing Pharmaceutical one of the largest and most
innovative pharmaceutical products supplier to China's rural market. The
“Blue Sea” project was started on September 1, 2007. Since its
implementation, it has generated sales for about RMB 7 million
(approximately $0.9 million) as of December 31, 2007 and about RMB 24
million (approximately $3.4 million) for the six months ended June 30,
2008. Aoxing Pharmaceutical anticipates the project will generate total
sales of approximately $11 million in the year 2008. The costs to
undertake the “Blue Sea” project vary with sales generated. It
is estimated that the salary expense is about 2.5% of sales, commission is
about 25% of sales and other expense is about 3% of
sales.
|
§
|
High-margin-product
marketing network promotion plan II, or “China Hepatitis Internet
Hospital” project, targets every region in China that has internet access
to provide hepatitis patients diagnosis, specialist consultation, drug
prescription and many more hospital type services online and to provide an
online drug store selling hepatitis treating medicines that recommends
Aoxing Pharmaceutical’s Xin Aoxing Oleanolic Acid Capsule as the preferred
product. The hepatitis internet hospital (http://www.zggbyy.com) went live
in December 2007. Aoxing Pharmaceutical will advertise for the internet
hospital through the largest Chinese internet search website, Bidu.com. It
is anticipated that the internet hospital will increase sales by
approximately $5 million in the year 2008. The cost of website
construction was about RMB 60,000 (approximately $8,000). The ongoing
implementation costs include advertising expense and consulting fee paid
to doctors which are in direct proportion to the sales generated. The
advertising expense is estimated to be 2.8% of sales and the consulting
fees are about 0.7% of sales.
|
§
|
Retail
agent network promotion strategy, or “Mercury” project, targets counties
within 31 provinces in China to promote Aoxing Pharmaceutical’s “Gan Wang”
Compound Paracetamol & Amantadine Hydrochloride Capsule with the goal
of making it one of the most important brand OTC drugs for flu treatment.
The “Mercury” project is planned to begin in early 2009. Aoxing
Pharmaceutical anticipates the project will generate total sales of
approximately $13 million in the first year. The estimated costs to
undertake the project are advertising expenses of approximately 25% of
sales and salary expenses of approximately 9% of
sales.
|
§
|
The
merger and acquisition strategic plan of Aoxing Pharmaceutical
contemplates the acquisition of four or five pharmaceutical manufacturers
and one medical supplement company over the next five-year period.
Currently, Aoxing Pharmaceutical is still searching for and reviewing
acquisition opportunities. In the event that we obtain future
financing, we may use the funds for future acquisitions. And the amount of
future financing we are able to obtain will affect Aoxing Pharmaceutical’s
decision on acquisition.
|
Aoxing
Pharmaceutical’s goal is to have its various pharmaceutical and medical
supplement products, such as the medicines for hepatitis, gynecopathy and
various male diseases, and other conditions, distributed to 31 provinces in
China and to expand the sales network to approximately 300 cities, and
ultimately become the pharmaceutical industry leader in northwestern
China.
LIQUIDITY
AND CAPITAL RESOURCES AND RESULTS OF OPERATIONS AS OF JUNE 30, 2008 AND 2007 AND
FOR THE SIX MONTHS THEN ENDED
LIQUIDITY
AND CAPITAL RESOURCES
As of
June 30, 2008, we had cash and cash equivalents of approximately $694,538. We
believe our existing cash and cash equivalents will be sufficient to maintain
our operations at present level for at least the next twelve months. We plan to
review acquisition opportunities as a strategy for further growth. We expect to
be the primary financing vehicle for Aoxing Pharmaceutical and will forward them
the equity financing proceeds we receive. The additional funds would
be provided to Aoxing Pharmaceutical through Shaanxi Biostar; would be accounted
for as loan to Aoxing Pharmaceutical and would be eliminated during
consolidation. The loan would not be interest bearing and would not be evidenced
by a written note. The foregoing treatment is consistent with the prior
financing of Series A Convertible Preferred Stock.
Net cash
used in operating activities for the six months ended June 30, 2008 was
$1,673,872. This was primarily due to the net income of $3,579,096, adjusted by
non-cash related expenses including depreciation and amortization of $319,598,
and allowance for doubtful accounts of $186,085, offset by a net decrease in
working capital items of $5,758,651. The net decrease in working capital items
was mainly due to increase in accounts receivable which resulted from the
significant increase in revenues during the six months ended June 30, 2008 and
the longer credit term provided to customers as part of the sales promotion (for
customers with two years or more business relationship, the payment term may be
extended to six months as opposed to the general payment term of three
months), increase in prepayments to suppliers, and increase in inventories to
prepare for the ongoing sales promotion. The net decrease in working capital
items was partially offset by the increase in accounts payable and accrued
expenses, VAT tax payable and income tax payable.
Net cash
provided in operating activities for the six months ended June 30, 2007, was
$49,331. This was primarily due to the net income of $1,506,692, adjusted by
non-cash related expenses including depreciation and amortization of $290,167,
and allowance for doubtful accounts of $48,238, offset by a net decrease in
working capital items of $1,795,766. The net decrease in working capital items
was mainly due to increase in accounts receivable, increase in prepayments to
suppliers, increase in inventories, decrease in customer advances and a decrease
in VAT tax payable. The net decrease in working capital items was partially
offset by the increase in accounts payable and accrued expenses and income tax
payable.
Net cash
used in investing activities for the six months ended June 30, 2008, was
$21,778. This was primarily due to capital expenditures on equipment and vehicle
of $21,778.
Net cash
used in investing activities for the six months ended June 30, 2007, was
$41,269. This was primarily due to capital expenditures on equipment and
construction in progress of $41,269.
Net cash
provided by financing activities for the six months ended June 30, 2007, was
$1,109,931 representing the additional capital from a short-term bank loan and
the proceeds from the issuance of preferred stock.
COMPARISON
OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2008, TO THE SIX MONTHS ENDED JUNE
30, 2007
NET
SALES.
|
|
Six
Months Ended June 30,
|
|
|
%
of
|
|
|
|
2008
|
|
|
2007
|
|
|
change
|
|
Xin
Aoxing Oleanolic Acid Capsule
|
|
$ |
8,744,532 |
|
|
|
54 |
% |
|
$ |
3,577,183 |
|
|
|
65 |
% |
|
|
144 |
% |
Taohuasan
Pediatrics Medicine
|
|
|
2,257,019 |
|
|
|
14 |
% |
|
|
590,805 |
|
|
|
11 |
% |
|
|
282 |
% |
Gan
Wang Compound Paracetamol Capsule
|
|
|
1,776,468 |
|
|
|
11 |
% |
|
|
491,386 |
|
|
|
9 |
% |
|
|
262 |
% |
Tianqi
Dysmenorrhea Capsule
|
|
|
1,838,341 |
|
|
|
11 |
% |
|
|
450,049 |
|
|
|
8 |
% |
|
|
308 |
% |
Danshen
Granule
|
|
|
1,614,673 |
|
|
|
10 |
% |
|
|
367,638 |
|
|
|
7 |
% |
|
|
339 |
% |
Total
net sales
|
|
$ |
16,231,033 |
|
|
|
100 |
% |
|
$ |
5,477,061 |
|
|
|
100 |
% |
|
|
196 |
% |
During the six months ended June 30,
2008, total net sales increased by approximately $10.8 million or approximately
196% compared to the same period of 2007. This was mainly due to the sales
increases in all Aoxing Pharmaceutical’s five state approved drugs. The increase
in the sales of Xin Aoxing Oleanolic Acid Capsule was the result of the
continued push of the “Hundred City” project which markets directly to consumers
through retail pharmacies at higher retail price. The sales in other products
increased mainly due to the continued implementation of the “Blue Sea” project
which markets directly to consumers in China’s rural area through retail
pharmacies at higher retail price. Domestic Chinese customers still accounted
for 100% of total sales.
COST OF SALES.
|
|
Six
Months Ended June 30,
|
|
|
%
of
|
|
|
|
2008
|
|
|
2007
|
|
|
change
|
|
Xin
Aoxing Oleanolic Acid Capsule
|
|
$ |
2,620,242 |
|
|
|
39 |
% |
|
$ |
941,995 |
|
|
|
54 |
% |
|
|
178 |
% |
Taohuasan
Pediatrics Medicine
|
|
|
667,870 |
|
|
|
10 |
% |
|
|
141,089 |
|
|
|
8 |
% |
|
|
373 |
% |
Gan
Wang Compound Paracetamol Capsule
|
|
|
992,774 |
|
|
|
15 |
% |
|
|
223,104 |
|
|
|
13 |
% |
|
|
345 |
% |
Tianqi
Dysmenorrhea Capsule
|
|
|
662,402 |
|
|
|
10 |
% |
|
|
127,350 |
|
|
|
7 |
% |
|
|
420 |
% |
Danshen
Granule
|
|
|
1,723,918 |
|
|
|
26 |
% |
|
|
298,128 |
|
|
|
18 |
% |
|
|
478 |
% |
Total
cost of sales
|
|
$ |
6,667,206 |
|
|
|
100 |
% |
|
$ |
1,731,666 |
|
|
|
100 |
% |
|
|
285 |
% |
Compared to the same period of 2007,
cost of sales increased about $4.9 million or 285% in the six months ended June
30, 2008. This was primarily as a result of the $10.8 million increase in
product net sales. As the sales increased for all Aoxing Pharmaceutical’s five
state approved drugs, so did the cost of sales for those five drugs increase.
The increase in raw material costs of the five drugs in the first six months of
2008 compared to the same period of 2007 also contributed to the increase in
cost of sales. The period-over-period percentage increase of cost of
sales in the first six months of 2008 compared to the same period of 2007 was
more than the percentage increase of net sales because in the first six months
of 2008, the average unit cost increased more than the average unit sales price.
The increase in average unit cost was mainly caused by the increase in raw
material costs of the five drugs, and the increase in average unit sales price
was achieved by selling more products at higher retail prices through retail
pharmacies.
GROSS PROFIT.
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
gross
profit
|
|
|
|
|
|
gross
profit
|
|
|
%
of
|
|
|
|
|
|
|
margin
|
|
|
|
|
|
margin
|
|
|
change
|
|
Xin
Aoxing Oleanolic Acid Capsule
|
|
$ |
6,124,290 |
|
|
|
70 |
% |
|
$ |
2,635,187 |
|
|
|
74 |
% |
|
|
132 |
% |
Taohuasan
Pediatrics Medicine
|
|
|
1,589,149 |
|
|
|
70 |
% |
|
|
449,717 |
|
|
|
76 |
% |
|
|
253 |
% |
Gan
Wang Compound Paracetamol Capsule
|
|
|
783,694 |
|
|
|
44 |
% |
|
|
268,281 |
|
|
|
55 |
% |
|
|
192 |
% |
Tianqi
Dysmenorrhea Capsule
|
|
|
1,175,939 |
|
|
|
64 |
% |
|
|
322,700 |
|
|
|
72 |
% |
|
|
264 |
% |
Danshen
Granule
|
|
|
(109,245 |
) |
|
|
-7 |
% |
|
|
69,510 |
|
|
|
19 |
% |
|
|
-257 |
% |
Total
|
|
$ |
9,563,827 |
|
|
|
59 |
% |
|
$ |
3,745,395 |
|
|
|
68 |
% |
|
|
155 |
% |
Gross profit for the six months ended
June 30, 2008 increased approximately $5.8 million or 155% compared to the same
period of 2007. The increase in gross profit was due primarily to the $10.8
million increase in net sales achieved through the planned marketing expansion
of highly profitable products to retail market.
The
overall gross profit margin decreased 9% period-over-period in the first six
months of 2008 compared to the same period of 2007 was primarily due to the
increase in the raw material costs without a proportionate increase in the
selling prices. In China, the raw material costs have been increasing in the
past six months, however in order for us to keep the market share, we were not
able to raise our products’ prices at the moment in a pace to keep up with the
increase in raw material costs.
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
%
of total
|
|
|
|
|
|
%
of total
|
|
|
%
of
|
|
|
|
|
|
|
net
sales
|
|
|
|
|
|
net
sales
|
|
|
change
|
|
Selling,
general and administrative expenses
|
|
$ |
5,427,295 |
|
|
|
33 |
% |
|
$ |
1,897,992 |
|
|
|
35 |
% |
|
|
186 |
% |
The increase in selling, general and
administrative expenses from the six months ended June 30, 2007 to the six
months ended June 30, 2008 in absolute dollars of $3.5 million and as a
percentage of total net sales were mainly due to the increase in promotional and
advertising expenditures of $1.7 million, increase in sales commissions and
sales personnel expenses of $1.3 million, and increase in travel expenses of
$133,426, all resulting from the direct marketing campaign, and also due to
increase in sales related tax levy of $183,242, shipping expenses of $91,875,
and provision for doubtful accounts of $137,846, as a result of increased
revenues. Other items contributed to the increase in selling, general and
administrative expenses for the six months ended June 30, 2008, compared to the
same period of 2007, included increase in administrative personnel expenses of
$44,497, and increase of professional fees of $28,423 relating to our plan of
going public in the United States.
INTEREST EXPENSE.
We
incurred interest expense of $29,482 for the six months ended June 30, 2008,
compared to $26,765 for the six months ended June 30, 2007, an increase of
$2,717 or approximately 10%. This increase was mainly due to more interest paid
on the short-term bank loan, compared to the same period of 2007.
PROVISION FOR INCOME
TAXES.
|
|
Six
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Provision
for income taxes
|
|
$ |
529,475 |
|
|
$ |
316,420 |
|
Effective
tax rate
|
|
|
12.9 |
% |
|
|
17.4 |
% |
Our provision for income taxes
increased from the six months ended June 30, 2007 to the six months ended June
30, 2008, primarily as a result of increases in income taxes, driven by higher
taxable income period over period. Our effective tax rate decreased from the six
months ended June 30, 2007 to the six months ended June 30, 2008, primarily as a
result of reduction in the statutory tax rate of China effective on January 1,
2008, accordingly, our China operation’s effective tax rate was reduced. Based
on our current operating structure and the preferential tax treatments available
to us in China, our China operation, Aoxing Pharmaceutical qualifies as a
high-tech enterprise entitled to a 50% income tax reduction from January 1, 2007
to December 31, 2009. Therefore, the effective tax rate for Aoxing
Pharmaceutical was 13% for the six months ended June 30, 2008 and 17% for the
six months ended June 30, 2007. If the tax benefits currently available to us in
China becomes unavailable, the effective income tax rate for Aoxing
Pharmaceutical could increase to 25%. We expect our effective tax rate to
increase in the future, as we experience further expiration of tax
incentives.
NET INCOME.
As a
result of the above, in the six months ended June 30, 2008, the net income was
about $3,6 million compared to a net income of $1.5 million for the six months
ended June 30, 2007. The increase is the result of the aforementioned increase
in net sales of $10.8 million, net of the increases in cost of sales of $4.9
million, operating expenses of $3.5 million, and provision for income taxes of
$213,055.
CRITICAL
ACCOUNTING POLICIES
We believe the following critical
accounting policies, among others, affect management’s more significant
judgments and estimates used in the preparation of the financial
statements:
Allowance
for Doubtful Accounts
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. The allowance for
doubtful accounts is based on specific identification of customer accounts and
management’s best estimate of the likelihood of potential loss, taking into
account such factors as the financial condition and payment history of major
customers. Management evaluates the collectability of the receivables at least
quarterly. If the financial condition of the customers were to deteriorate
further, resulting in an impairment of their ability to make payments,
additional allowances may be required. The differences could be
material and could significantly impact cash flows from operating
activities.
The
following table sets out the aging of our accounts receivable for each balance
sheet periods presented.
Accounts
Receivable Aging
|
|
Total
|
|
|
1-30
days
|
|
|
31-60
days
|
|
|
61-90
days
|
|
|
91-120
days
|
|
|
121-365
days
|
|
|
>
365 days
|
|
As
of June 30, 2008
|
|
$ |
10,859,754 |
|
|
$ |
2,947,033 |
|
|
$ |
3,656,844 |
|
|
$ |
2,792,932 |
|
|
$ |
900,551 |
|
|
$ |
562,394 |
|
|
$ |
- |
|
As
of December 31, 2007
|
|
$ |
4,249,448 |
|
|
$ |
1,975,938 |
|
|
$ |
1,378,157 |
|
|
$ |
781,628 |
|
|
$ |
113,725 |
|
|
$ |
- |
|
|
$ |
- |
|
The
following table presents the days sales outstanding calculated based on sales
and accounts receivables in RMB term for the six months ended June 30, 2008 and
2007.
|
Six
Months Ended June 30,
|
|
2008
|
|
2007
|
Days
sales outstanding
|
117
|
|
66
|
The
number of days that sales were outstanding increased to 117 days for the six
months ended June 30, 2008 from 66 days for the same period last year and was
due to the longer credit term provided to customers as part of a sales
promotion. For customers with two years or more of a business relationship with
Aoxing Pharmaceutical, the payment term could be extended to six months as
opposed to the general payment term of three months.
The
followings are the steps Aoxing Pharmaceutical takes in collecting accounts
receivable.
Step 1:
After the payment term has been exceeded, Aoxing Pharmaceutical stops taking
orders from the delinquent customer and allows the sales person three to six
months to collect the accounts receivable. Most of the accounts receivable will
be collected in this step because the sales person’s compensation is tied to
sales receipts.
Step 2:
If the sales person’s collection efforts are not successful in step 1, Aoxing
Pharmaceutical hires a collection agent and allows the agent another three to
six months to collect the accounts receivable.
Step 3:
If the collection agent’s efforts are failed, then Aoxing Pharmaceutical will
commence legal action to collect the accounts receivable.
Our
policies for writing off the accounts receivable are as follows.
1.
|
If
after taking the legal action, it appears that the accounts receivable is
not likely to become collectible, the accounts receivable will be written
off if more than two years old.
|
2.
|
If
during the collection period, the customer provides bankruptcy or other
insolvency documentation, the accounts receivable will be written
off.
|
3.
|
If
we are no longer able to locate a particular customer in order for us to
take any collection or legal actions, the accounts receivable will be
written off if more than two years
old.
|
Inventory
We
write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand, future pricing and market
conditions. If actual future demands, future pricing or market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required and the differences could be material. Such
differences might significantly impact cash flows from operating
activities.
Property
and Equipment
Property and equipment are stated at
historical cost less accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. Judgment is required to determine the estimated useful lives of assets,
especially for computer equipment, including determining how long existing
equipment can function and when new technologies will be introduced at
cost-effective price points to replace existing equipment. Changes in these
estimates and assumptions could materially impact the financial position and
results of operations.
Accounting
for Stock-Based Compensation
The account for stock-based
compensation based on the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", as amended by the Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." Accounting Principles Board Opinion
No. 25 and Financial Accounting Standards Board Interpretation No. 44 state that
no compensation expense is recorded for stock options or other stock-based
awards to employees that are granted with an exercise price equal to or above
the estimated fair value per share of the company’s common stock on the grant
date. We adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which
requires compensation expense to be disclosed based on the fair value of the
options granted at the date of the grant.
In December 2004, the FASB issued FASB
Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No.
123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the
statement of operations the grant date fair value of stock options and other
equity-based compensation issued to employees. FAS No. 123R is effective
beginning in the first quarter of fiscal 2006.
We did not issue any stock options to
employees during the six months ended June 30, 2008, therefore pro forma
disclosures are not required.
Valuation
of Intangibles
From time to time, we acquire
intangible assets that are beneficial to our product development processes.
Management periodically evaluates the carrying value of intangibles, including
the related amortization periods. In evaluating acquired intangible assets,
management determines whether there has been impairment by comparing the
anticipated undiscounted cash flows from the operation and eventual disposition
of the product line with its carrying value. If the undiscounted cash flows are
less than the carrying value, the amount of the impairment, if any, will be
determined by comparing the carrying value of each intangible asset with its
fair value. Fair value is generally based on either a discounted cash
flows analysis or market analysis. Future operating income is based on various
assumptions, including regulatory approvals, patents being granted, and the type
and nature of competing products. If regulatory approvals or patents are not
obtained or are substantially delayed, or other competing technologies are
developed and obtain general market acceptance or market conditions otherwise
change, our intangibles may have a substantially reduced value, which could be
material.
Income
Taxes
We use the asset and liability method
of accounting for income taxes. Under this method, income tax expense is
recognized for the amount of taxes payable or refundable for the current year.
In addition, deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities and for operating losses and tax credit
carry-forwards. Management must make assumptions, judgments and estimates to
determine the current provision for income taxes and the deferred tax assets and
liabilities and any valuation allowance to be recorded against a deferred tax
asset. Management’s judgments, assumptions and estimates relative to the current
provision for income tax take into account current tax laws, management’s
interpretation of current tax laws and possible outcomes of current and future
audits conducted by foreign and domestic tax authorities. Changes in tax law or
management’s interpretation of tax laws and the resolution of current and future
tax audits could significantly impact the amounts provided for income taxes in
the financial statements. Management’s assumptions, judgments and estimates
relative to the value of a deferred tax asset take into account predictions of
the amount and category of future taxable income, such as income from
operations. Actual operating results and the underlying amount and category of
income in future years could render management’s current assumptions, judgments
and estimates of recoverable net deferred taxes inaccurate. Any of the
assumptions, judgments and estimates mentioned above could cause our actual
income tax obligations to differ from the estimates, thus materially impact the
financial position and results of operations.
Foreign
Currency
Our functional currency is the U.S.
dollar and our subsidiary and our VIE in China use their respective local
currencies as their functional currencies, i.e. the Chinese Yuan Renminbi (CNY).
An entity’s functional currency is the currency of the primary economic
environment in which the entity operates. Management must use judgment in
determining an entity’s functional currency, assessing economic factors
including cash flow, sales price, sales market, expense, financing and
inter-company transactions and arrangements. Impact from exchange rate changes
related to transactions denominated in currencies other than the functional
currency is recorded as a gain and loss in the statements of operations, while
impact from exchange rate changes related to translating a foreign entity’s
financial statements from the functional currency to its reporting currency, the
U.S. dollar, is disclosed and accumulated in a separate component under the
equity section of the balance sheets. Different judgments or assumptions
resulting in a change of functional currency may materially impact our financial
position and results of operations.
CONTRACTUAL
OBLIGATIONS
The
following table sets forth our contractual obligations as of June 30,
2008:
|
|
Payments
due by period
|
|
|
|
Total
|
|
|
Within
1 year
|
|
|
1–3
years
|
|
|
3–5
years
|
|
|
5+
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
bank loan
|
|
$ |
552,985 |
|
|
$ |
552,985 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Advisory
services payment obligation
|
|
|
109,142 |
|
|
|
109,142 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
contractual obligations
|
|
$ |
662,127 |
|
|
$ |
662,127 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Short-term
bank loan includes a RMB 3,800,000 ($552,985 translated at the June 30, 2008
exchange rate of $1=RMB 6.8718) short-term bank loan, which will expire on Aug.
12, 2008.
Advisory
services payment obligation includes the commitment under the Corporate Finance
Advisory Services Agreement for our planned going public in the U.S. Based on
the Corporate Finance Advisory Services Agreement, we are obligated to pay
Friedland RMB 750,000 ($109,142 translated at $1=RMB 6.8718) within five working
days after our shares becoming listed in public market.
INFLATION
Management
believes that inflation has not had a material effect on our results of
operations.
OFF-BALANCE
SHEET ARRANGEMENTS
We have
no off-balance sheet arrangements, as defined in Regulation S-K Section
303(a)(4).
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
Item 4T. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934 (“Exchange Act”), as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control
objectives.
At the
conclusion of the six months ended June 30, 2008 we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that as of the end of the period covered by this report, our disclosure controls
and procedures were effective and adequately designed to ensure that the
information required to be disclosed by us in the reports we submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the applicable rules and forms and that such information
was accumulated and communicated to our Chief Executive Officer and Chief
Financial Officer, in a manner that allowed for timely decisions regarding
required disclosure.
There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) under the Exchange Act) during our most
recently completed fiscal quarter which is the subject of this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Part II. OTHER
INFORMATION
Item
1. Legal
Proceedings
We know
of no pending legal proceedings to which we are a party which are material or
potentially material, either individually or in the aggregate. We are from time
to time, during the normal course of our business operations, subject to various
litigation claims and legal disputes. We do not believe that the ultimate
disposition of any of these matters will have a material adverse effect on our
consolidated financial position, results of operations or
liquidity.
Item
1A. Risk
Factors
Not
required.
None.
Item
3. Defaults Upon Senior
Securities
None.
Item
4. Submission of
Matters to a Vote of Security Holders
None.
Item
5. Other
Information
None.
Exhibit
Number
|
|
Description
of Exhibit
|
31.1
|
|
|
31.2
|
|
|
32.1
|
|
|
32.2
|
|
|
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
BIOSTAR
PHARMACEUTICALS, INC.
|
|
|
|
August
14, 2008
|
By:
|
/s/ Ronghua
Wang
|
|
Name:
Ronghua Wang
Title:
Chief Executive Officer and President (Principal Executive
Officer)
|
|
|
|
|
|
August
14, 2008
|
By:
|
/s/ Elaine
Lanfeng
Zhao
|
|
Name:
Elaine Lanfeng Zhao
Title: Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|