Edgar Filing: Biostar Pharmaceuticals, Inc.

biostarpharma10q033114.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the quarterly period ended: March 31, 2014

¨	Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the transition period from ______________ to _______________

Commission File Number: 001-34708

BIOSTAR PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Maryland		20-8747899
(State or other jurisdiction of incorporation of origination)		(I.R.S. Employer Identification Number)

No. 588 Shiji Xi Avenue Xianyang, Shaanxi Province People’s Republic of China		712046
(Address of principal executive offices)		(Zip code)

011-86-29-33686638

(Registrant’s telephone number, including area code)

(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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨			Accelerated filer ¨

Non-accelerated filer ¨			Smaller reporting company x

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

As of May 9, 2014, the Company had 14,326,113 shares issued and outstanding.

Table of Contents

TABLE OF CONTENTS

		Page

PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	F-1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	10
Item 4.	Controls and Procedures	10

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	11
Item 1A.	Risk Factors	11
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3.	Defaults Upon Senior Securities	11
Item 4.	Mine Safety Disclosures	11
Item 5.	Other Information	11
Item 6.	Exhibits	12
Signatures		13

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

BIOSTAR PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Contents

	Page(s)
Financial Statements

Condensed Consolidated Balance Sheets (unaudited)	F-2

Condensed Consolidated Statements of Operations (unaudited)	F-3

Condensed Consolidated Statements of Cash Flows (unaudited)	F-4

Notes to Condensed Consolidated Financial Statements (unaudited)	F-5

F-1

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BIOSTAR PHARMACEUTICALS, INC
CONSOLIDATED BALANCE SHEETS

	March 31,				December 31,
	2014				2013
	(Unaudited)
ASSETS

Current Assets
Cash and cash equivalents		$	7,132,558			$	80,072
Note receivable - note 2)			1,622,876				1,636,072
Accounts receivable, net			18,992,045				17,965,082
Inventories - note 2)			732,878				830,311
Deposits and other receivables - note 3)			3,164,607				5,282,574
Income tax recoverable			30,794				374,958
Loan receivables			10,049,382				9,816,433
Total Current Assets			41,725,140				35,985,502

Non-current Assets
Deposits - note 3)			3,894,903				3,926,573
Deferred tax assets			2,902,771				2,789,175
Property and equipment, net - note 2)			7,527,318				7,728,700
Intangible assets, net - note 2)			16,378,191				17,134,494

Total Assets		$	72,428,323			$	67,564,444

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts and other payables		$	5,367,568			$	4,447,314
Due to a related party			107,677				-
Value-added tax payable			445,365				344,191
Warrant liabilities - note 5)			960,894				-
Total Current Liabilities			6,881,504				4,791,505

Commitment and contingencies - note 9)

Stockholders' Equity
Common stock, $0.001 par value, 100,000,000 shares authorized, 14,326,113 and 12,676,113 shares issued and outstanding as at March 31, 2014 and December 31, 2013			14,326				12,676
Additional paid-in capital			28,648,658				25,748,669
Deferred stock-based compensation			(265,467	)			(365,017	)
Statutory reserve			7,126,432				7,126,432
Retained earnings			23,956,395				23,649,725
Accumulated other comprehensive income			6,066,475				6,600,454
Total Stockholders' Equity			65,546,819				62,772,939

Total Liabilities and Stockholders' Equity		$	72,428,323			$	67,564,444

The accompanying notes are an integral part of these financial statements.

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BIOSTAR PHARMACEUTICALS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)

	Three Months Ended March 31,
	2014			2013

Sales, net	$	13,181,164		$	12,091,909
Cost of sales		5,928,076			5,403,019
Gross profit		7,253,088			6,688,890

Operating expenses:
Advertising expenses		1,788,541			1,886,681
Selling expenses		1,934,722			2,197,346
General and administrative expenses		3,597,993			1,077,748
Research and development expenses		694,944			796,001
Total operating expenses		8,016,200			5,957,776

Income (Loss) from operations		(763,112	)		731,114

Other income (expense)
Interest income		316,431			455,231
Interest expense		-			(95,688	)
Other income		1,099,292			-
Other expense		(46,700	)		(2,098	)
		1,369,023			357,445

Income before income taxes		605,911			1,088,559

Provision for income tax		299,241			527,585

Net income	$	306,670		$	560,974

Other comprehensive income - foreign currency translation adjustment		(533,979	)		437,833

Comprehensive income (loss)	$	(227,309	)	$	998,807

Net income per share
Basic	$	0.02		$	0.06
Diluted	$	0.02		$	0.06

Weighted average number of common shares outstanding
Basic		13,024,446			9,993,549
Diluted		13,030,643			9,993,549

The accompanying notes are an integral part of these financial statements.

F-3

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BIOSTAR PHARMACEUTICALS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended March 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	306,670		$	560,974
Adjustments to reconcile net income to net cash provided by operating activities:
Accrued interest		(314,489	)		(449,075	)
Deferred tax expense (benefit)		(137,124	)		360,387
Depreciation and amortization		736,124			458,931
Provision for doubtful accounts		2,269,688			-
Recognition of deferred research and development expenses		694,943			796,001
Stock-based compensation		99,550			6,147

Changes in operating assets and liabilities:
Accounts receivable		(3,450,423	)		5,457,403
Inventories		91,423			(562,015	)
Deposits and other receivables		1,396,128			(764,161	)
Accounts payable and accrued expenses		963,311			507,140
Value-added tax payable		104,737			(170,796	)
Income tax payable/recoverable		343,723			(21,547	)
Net cash provided by operating activities		3,104,261			6,179,389

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(1,957	)		(4,352	)
Net cash (used in) investing activities		(1,957	)		(4,352	)

CASH FLOWS FROM FINANCING ACTIVITIES
Advance from (repayment to) a related party		107,692			(1,592,002	)
Proceeds from stock issuance and warrants		3,862,533			-
Net cash provided by (used in) financing activities		3,970,225			(1,592,002	)

Effect of exchange rate changes on cash and cash equivalents		(20,043	)		115,013

Net increase in cash and cash equivalents		7,052,486			4,698,048

Cash and cash equivalents, beginning balance		80,072			1,759,078
Cash and cash equivalents, ending balance	$	7,132,558		$	6,457,126

SUPPLEMENTAL DISCLOSURES:
Interest received	$	1,943		$	6,945
Interest (payments)	$	-		$	93,132
Income tax (payments)	$	92,641		$	188,745

The accompanying notes are an integral part of these financial statements.

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BIOSTAR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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”). 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 (collectively the “Agreements”) with Shaanxi Aoxing Pharmaceutical Co., Ltd. (“Aoxing Pharmaceutical”) and its registered owners (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’s registered owners, representing approximately 90% of the Company’s common stock outstanding immediately after the Transaction. Therefore, the Transaction is accounted for as a reverse acquisition, and Aoxing Pharmaceutical is deemed to be the accounting acquirer in the reverse acquisition.

Following to the change in registered owners of Aoxing Pharmaceutical on July 9, 2010, a set of new Agreements had been entered into with all the then existing registered owners of Aoxing Pharmaceutical on the same day.

The Agreements dated July 9, 2010 were merely replacement of the Agreements dated November 1, 2007 and therefore, there was no significant change in the contractual terms between the Agreements dated July 9, 2010 and November 1, 2007. The then existing registered owners of Aoxing Pharmaceutical, Shaanxi Biostar and Biostar had mutually agreed that no consideration would be paid / payable upon the execution of the Agreements on July 9, 2010. The interest of Biostar in Aoxing Pharmaceutical was not and would not be affected by the replacement for the Agreements.

Following to the change in registered owners of Aoxing Pharmaceutical on May 15, 2013, a set of new Agreements had been entered into with all the existing registered owners of Aoxing Pharmaceutical on May 24, 2013.

The Agreements dated May 24, 2013 are merely replacement of the Agreements dated July 9, 2010 and therefore, there is no significant change in the contractual terms between the Agreements dated May 24, 2013, July 9, 2010 and November 1, 2007. The existing registered owners of Aoxing Pharmaceutical, Shaanxi Biostar and Biostar had mutually agreed that no consideration would be paid / payable upon the execution of the Agreements on May 23, 2013. The interest of Biostar in Aoxing Pharmaceutical was not and would not be affected by the replacement for the Agreements.

The Agreements provide that Shaanxi Biostar has controlling interest in Aoxing Pharmaceutical as defined by Accounting Standards Codification (“ASC”) 810, Consolidation, an Interpretation of Accounting Research Bulletin (“ARB”) No. 51, included in the Codification as ASC 810, Consolidation, 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”).

In October 2011, Aoxing Pharmaceutical entered into and completed a Share Transfer Agreement (the “Weinan Share Transfer Agreement”) to acquire Shaanxi Weinan Huaren Pharmaceuticals, Ltd. (“Shaanxi Weinan”) from the holders of 100% of equity interests in Shaanxi Weinan. Therefore, Shaanxi Weinan became a wholly owned subsidiary of Aoxing Pharmaceutical. Shaanxi Weinan is engaged in manufacturing of drugs and health products.

In April 2013, Aoxing Pharmaceutical executed a supplemental agreement to the Weinan Share Transfer Agreement (the “Weinan Supplemental Agreement”) with all the former equity holders of Shaanxi Weinan to acquire 13 drug approval numbers which were excluded from the Weinan Share Transfer Agreement due to incomplete re-registration. The Company acquired ownership of the 13 drug approval numbers for which re-registration has been completed in April 2013. The aggregate purchase price was approximately $10.2 million, consisting of approximately $8.8 million in cash and 1,602,564 shares of the Company’s common stock, valued at approximately $1.4 million.

The Company, through its subsidiary and the Agreements with Aoxing Pharmaceutical, is engaged in the business of developing, manufacturing and marketing over-the-counter (“OTC”) and prescription pharmaceutical products in the PRC.

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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 (“US GAAP”).

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 ASC 810, Consolidation which requires a VIE to be consolidated by a company if that company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (1) the obligation to absorb losses of the VIE or (2) the right to receive benefits from the VIE”.

In determining Aoxing Pharmaceutical is a VIE of Shaanxi Biostar, the Company considered the following indicators, among others:

Shaanxi Biostar has the full right to control and administer the financial affairs and daily operation of Aoxing Pharmaceutical and has the right to manage and control all assets of Aoxing Pharmaceutical. The registered owners of Aoxing Pharmaceutical as a group have no right to make any decision about Aoxing Pharmaceutical’s activities without the consent of Shaanxi Biostar.

o	Shaanxi Biostar is assigned all voting rights of Aoxing Pharmaceutical and has the right to appoint all directors and senior management personnel of Aoxing Pharmaceutical. The registered owners of Aoxing Pharmaceutical possess no substantive voting rights.

o	Shaanxi Biostar is committed to provide financial support if Aoxing Pharmaceutical requires additional funds to maintain its operations and to repay its debts.

o	Shaanxi Biostar is entitled to a management fee equal to Aoxing Pharmaceutical’s net profits and is obligated to assume all operation risks and bear all losses of Aoxing Pharmaceutical. Therefore, Shaanxi Biostar is the primary beneficiary of Aoxing Pharmaceutical.

Additional capital provided to Aoxing Pharmaceutical by the Company was recorded as an interest-free loan to Aoxing Pharmaceutical. There was no written note to this loan, the loan was not interest bearing, and was eliminated during consolidation. Under the terms of the Agreements, the registered owners of Aoxing Pharmaceutical are required to transfer their ownership of Aoxing Pharmaceutical to the Company’s subsidiary in the PRC when permitted by the 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 registered owners of Aoxing Pharmaceutical have pledged their shares in Aoxing Pharmaceutical as collateral to secure these Agreements.

Unaudited Interim Financial Information

These unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. Therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

The consolidated balance sheets and certain comparative information as of December 31, 2013 are derived from the audited consolidated financial statements and related notes for the year ended December 31, 2013 (“2013 Annual Financial Statements”), included in the Company’s 2013 Annual Report on Form 10-K. These unaudited interim consolidated financial statements should be read in conjunction with the 2013 Annual Financial Statements.

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Use of Estimates

The preparation of the consolidated financial statements in conformity with US GAAP 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. Estimates are used for, but not limited to, the accounting for certain items such as allowance for doubtful accounts, depreciation and amortization, impairment, inventory allowance, taxes and contingencies.

Note Receivable

During the year ended December 31, 2013, the Company accepted a promissory note of approximately $1.6 million (RMB 10 million) as settlement of a customer’s account receivable. The promissory note is guaranteed by a PRC bank, non-interest bearing, and due on June30, 2014.

Inventories

Inventories are valued at the lower of weighted average cost or market value. 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 consisted of the following:

	March 31,		December 31,
	2014		2013

Raw materials	$	401,851	$	423,192
Work in process		106,094		93,125
Finished goods		146,383		224,530
Goods in transit		78,550		89,464
	$	732,878	$	830,311

Property and 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. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

Buildings	30 years
Building improvements	30 years
Machinery & equipment	5-10 years
Furniture & fixtures and vehicles	5-10 years

Property and equipment consisted of the following:

	March 31,			December 31,
	2014			2013

Buildings	$	3,623,923		$	3,653,390
Building improvements		2,999,474			3,023,864
Machinery & equipment		1,201,588			1,209,401
Furniture & fixtures		68,330			68,886
Vehicle		133,302			134,386
Construction in progress		2,133,578			2,150,927
		10,160,195			10,240,854
Less: Accumulated depreciation		(2,632,877	)		(2,512,154	)
	$	7,527,318		$	7,728,700

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Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years. Management evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. The Company’s land use rights will expire between 2053 and 2056. The Company’s proprietary technologies, including drug approvals and permits, were mainly contributed by four ex-owners of Aoxing Pharmaceutical and acquired from Shaanxi Weinan acquisition. All of the Company’s intangible assets are subject to amortization with estimated useful lives of:

Land use rights	50 years
Proprietary technologies	10 years

The components of finite-lived intangible assets are as follows:

	March 31,			December 31,
	2014			2013

Land use rights	$	3,511,662		$	3,540,216
Proprietary technologies		18,952,674			19,106,783
		22,464,336			22,646,999
Less: Accumulated amortization and impairment		(6,086,145	)		(5,512,505	)
	$	16,378,191		$	17,134,494

The estimated future amortization expenses related to intangible assets as of March 31, 2014 are as follows:

Years Ending December 31,
2014	$	1,720,920
2015		2,294,560
2016		1,142,318
2017		1,036,060
2018		1,036,060
Thereafter		9,148,273

In April 2013, the Company acquired 13 drug approval numbers from former equity holders of Shaanxi Weinan with total consideration of approximately $10.2 million (note 1).

During the year ended December 31, 2013, the Company recognized an impairment of intangible assets of $240,091. The intangible assets were related to a drug approval number for a product that was discontinued.

During the year ended December 31, 2013, the Company sold intangible assets relating to two drug approval numbers with a carrying value of approximately $0.2 million to an arm’s length party for approximately $1.4 million (RMB 8.5 million), resulting in a gain on disposal of approximately $1.2 million – (Note 3c).

Share warrants

In accordance with ASC815 and EITF07-05, share warrants with a term of down-round provision and that are issued as a multiple instrument in a single transaction are initially in recognised at fair value at grant date as a financial liability and that a portion of the net proceeds from the single transaction equals to the fair value of share warrants at grant date is allocated to the share warrants as an instrument. At each reporting period date, the fair value of the share warrants will be re-measured and the fair value changes will be reported as gain/loss on Statement of Operations and Comprehensive Income.

Recent accounting pronouncements

As of the date this quarterly report is filed, there are no recently issued accounting pronouncements which adoption would have a material impact on the Company’s financial statements.

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Note 3 – DEPOSITS AND OTHER RECEIVABLES

Deposits and other receivables consisted of the following:

	March 31,		December 31,
	2014		2013

Current portion
a) Deposits paid for research and development of new medicine	$	2,069,167	$	2,781,323
b) Deposits paid for purchase of inventory		283,273		654,429
c) Receivable from disposition of two drug approval numbers		-		1,390,661
d) Receivable from land use rights disposed in 2011		811,438		455,427
Other receivables		729		734
Deposits and other receivables	$	3,164,607	$	5,282,574

Non-current portion
e) Deposits paid for intended acquisition of a health product manufacturer		3,894,903		3,926,573
	$	3,894,903	$	3,926,573

Deposits paid for research and development less amounts recognized as research and development expense. In December 2010, the Company entered into an agreement with a research institution to jointly develop a new drug for treatment of cardiovascular disease. The development is to be carried out by the research institute. Pursuant to the agreement, the Company’s total commitment is about $11.5 million, in exchange for 60% share of the intellectual property upon successful development of the drug. In the event that the research institute fails to successfully develop the drug, the Company’s contribution is fully refundable.

b.	Deposits paid for purchase of inventory represents prepayments of inventory to one supplier.

d.	During the year ended December 31, 2011, the Company disposed two land use rights reclaimed by local governments. As of March 31, 2014, approximately $0.8 million has yet to be received.

In November 2013, the Company signed a letter of intent to acquire 100% interest in a health product manufacturer for an aggregate consideration of approximately $9.2 million (RMB 56 million), consisting of approximately $4.9 million (RMB 30 million) in cash and shares of the Company’s common stock valued at approximately $4.3 million (RMB 26 million), subject to the completion of a due diligence report and certain conditions set out in the letter of intent being met. The deposit is fully refundable if certain conditions set out in the letter of intent are not met.

Note 4 – LOAN RECEIVABLES

On November 20, 2012, the Company advanced RMB 60 million ($9.5 million) to a third party as a commercial loan, interest bearing at 13% per annum. The principal and interest were to be repaid on December 31, 2013.

On December 23, 2013, the term of the loan was extended to June 30, 2014. As of March 31, 2014, the loan receivable balance is approximately $10.0 million including accrued interest income of $0.3 million.

As at March 31, 2014 and December 31, 2013, the carrying amount of the loan receivables approximate its fair value due to short maturity.

Note 5 – STOCKHOLDERS’ EQUITY

Reverse stock split

On April 3, 2012, the Company filed Articles of Amendment to the Company’s Articles of Incorporation with the Secretary of State of the State of Maryland to effect a one-for-three reverse stock split of the issued and outstanding common stock of the Company (the “Reverse Split”). Par value remained unchanged at $0.001 after the reverse split. The Reverse Split became effective on April 3, 2012. The Reverse Split was duly approved by the Board of Directors of the Company without shareholder approval, in accordance with the authority conferred by Section 2-309(e)(2) of the Maryland General Corporation Law.

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In accordance with SEC Staff Accounting Bulletin Topic 4C “Equity Accounts: Changes in Capital Structure”, the changes in the capital structure arising from the Reverse Split must be given retroactive effect in the balance sheet, and an appropriately cross-referenced note should disclose the retroactive treatment, explain the change made and state the date the change became effective. Unless otherwise stated, the number and price of common stocks, including warrants and options and other related disclosures made throughout these consolidated financial statements retroactively reflected the effect of such Reverse Split.

(a) Common stock

As of March 31, 2014 and December 31, 2013, the Company has 100,000,000 shares of common stock authorized, 14,326,113 and 12,676,113 shares issued and outstanding at par value of $0.001 per share respectively.

For the year ended December 31, 2013	Shares issued		Value
i. issued in connection with the execution of the Weinan Supplemental Agreement, to acquire 13 drug approvals from the former equity holders of Shaanxi Weinan. (Note 1), valued at $0.85 per share, representing the fair value of the shares at the date of the execution of the Weinan Supplemental Agreement		1,602,564		$	1,362,179
ii. awarded to employees based on 2012 Incentive Stock Plan, fair value at $0.82 per share		750,000			613,647
iii. issued to two consulting firm corporate advisory services during the year, average fair value at $1.00 per share		110,000			110,550
iv. issued to a consulting firm and the consulting firm’s employees for an one year corporate advisory agreement from November 29, 2013, fair value at $1.81 per share		220,000			398,200
Total common stock issued during the year ended December 31, 2013		2,682,564		$	2,484,576

For the three months ended March 31, 2014	Shares issued		Value
v. issued to selected investors through public offering, valued at $2.49 per share less financing costs		1,650,000		$	3,862,533
Total common stock issued during the three months ended March 31, 2014		1,650,000		$	3,862,533

The amount $3,862,533 is allocated to the following amounts :-

i) Common share		1,650
ii) Warrant liabilities - note b)below		960,894
iii) Additional paid-in-capital		2,899,989

	$	3,862,533

Common stock issued as stock awards for items ii), iii), and iv) above were fully vested and not subject to forfeiture when issued. For the stock awards issued for item iv), as of March 31, 2014, $132,733 was recorded as stock-based compensation and $265,467 was recorded as deferred stock-based compensation.

For the three months ended March 31, 2014 and 2013, stock-based compensation expense of $99,550 and $6,147 respectively was included in general and administrative expenses.

(b) Warrants

On March 13, 2014, in connection with the public offering (Note 5v), the Company issued warrants to purchase an aggregate of 660,000 shares of common stock with a per share exercise price of $3.23. Additionally, the Company issued warrants to the placement agents to purchase 99,000 shares of common stock in the aggregate on the same terms as the warrants sold in the offering. The warrants are exercisable immediately as of the date of issuance and expire three years from the date of issuance.

In accordance with the Company’s stated accounting policy in note 2, the warrants are initially recognised as a financial liability at fair value at grant date. As the issuance of warrants and shares is a single transaction, an amount $960,894 was allocated from the net proceeds to the warrants.

As at March 31, 2014 and December 31, 2013, the Company has 936,451 and 177,451 warrants outstanding, with weighted average exercise price of $4.31 and $8.95, respectively.

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The following table summarizes the Company’s outstanding warrants as of March 31, 2014 and December 31, 2013.

			Outstanding as at,
Expiry date	Exercise Price		March 31, 2014		December 31, 2013
June 30, 2014	$	8.22		10,784		10,784
November 1, 2014*		9.00		166,667		166,667
March 12, 2017		3.23		759,000		-
				936,451		177,451

* The Company has the right at any time, on at least forty-five (45) day written notice, to redeem the outstanding warrants at a price of three cents ($0.03) per share provided the market price of the Company’s common stock equals to or exceeds $13.5 on each trading day for twenty (20) consecutive trading days ending on the trading day prior to the date that the Company intends to redeem the warrants.

The following tables summarize activities for the Company’s options for the three months ended March 31, 2014.

			Weighted Average
	Number of options		Exercise Price ($)		Remaining Life (years)
Balance, December 31, 2013		386,222		7.81		1.08
Balance, March 31, 2014		386,222		7.81		0.90

Vested and exercisable as at March 31, 2014		386,222		7.81		0.90

At March 31, 2014, there was no unrecognized compensation cost related to outstanding stock options.

Note 6 - INCOME TAXES

The Company was incorporated in the United States of America (“USA”) and has operations in one tax jurisdiction, i.e. the PRC. The Company generated substantially all of its net income from its operations in the PRC for the three months ended March 31, 2014 and 2013, and has recorded income tax provision for the periods.

Uncertain Tax Positions

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. For the three months ended March 31, 2014 and 2013, 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 - STATUTORY RESERVES

The Company’s subsidiaries and VIE in the PRC 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 with China’s Company Laws, an enterprise’s income, after the payment of the PRC income taxes, must be allocated to the statutory surplus reserves. The proportion of allocation for reserves is 10 percent of the profit after tax to the surplus reserve fund, and the cumulative amount shall not exceed 50 percent of registered capital.

Use of the statutory reserve fund is restricted to set offs against losses, expansion of production and operation or increase in the registered capital of a company. Use of the 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 March 31, 2014 and December 31, 2013, the Company’s VIE had allocated approximately $7.1 million and $7.1 million, respectively, to these non-distributable reserve funds.

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Note 8 - EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share of common stock:

	Three Months Ended March 31,
	2014		2013

Basic earnings per share:
Numerator:
Net income used in computing basic earnings per share	$	306,670	$	560,974

Denominator:
Weighted average common shares outstanding		13,024,446		9,993,549
Basic earnings per share	$	0.02	$	0.06

Diluted earnings per share:
Numerator:
Net income used in computing diluted earnings per share	$	306,670	$	560,974

Denominator:
Weighted average common shares outstanding		13,024,446		9,993,549
Weighted average effect of dilutive securities:
Stock warrants and options		6,197		-
Shares used in computing diluted earnings per share		13,030,643		9,993,549
Diluted earnings per share	$	0.02	$	0.06

Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation.

Note 9 - COMMITMENTS

In November 2013, the Company signed a letter of intent to acquire 100% interest in a health product manufacturer for an aggregate consideration of approximately $9.2 million (RMB 56 million), consisting of approximately $4.9 million (RMB 30 million) in cash and shares of the Company’s common stock valued at approximately $4.3 million (RMB 26 million), subject to the completion of a due diligence report and certain conditions set out in the letter of intent being met. As of March 31, 2014, the Company has paid a deposit of approximately $3.9 million which is fully refundable if certain conditions set out in the letter of intent are not met. If the conditions set out in the letter of intent are met, the Company will be committed to pay the remaining $1 million in cash and $4.3 million in stocks.

Note 10 - RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2014, the Company obtained an advance of $107,677 from a director, who is also an officer of the Company. The advance was unsecured, non-interest bearing and payable upon demand.

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Note 11 - SEGMENT INFORMATION

For the three months ended March 31, 2014 and 2013, all revenues of the Company represented the net sales of pharmaceutical products. No financial information by business segment is presented. Furthermore, as all revenues are derived from the PRC, no geographic information by geographical segment is presented. All tangible and intangible assets are located in the PRC.

Note 12 –RISKS CONCENTRATION

For the three months ended March 31, 2014, two customers accounted for 46% of the Company’s total revenue. The loss of any of these customers could have a material adverse effect on the Company’s financial position and results of operations.

The following table illustrates the Company’s risks concentration:

Sales risks concentration
	Percentage of total sales during the
Customer	Three Months Ended March 31,
	2014			2013

A		30	%		17	%
B		16	%		17	%
Total risks concentration		46	%		34	%

Note 13 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events for potential recognition and disclosure through the date of financial statements are issued.

No significant event occurred from December 31, 2013 to the date these consolidated financial statements are filed with the Securities Exchange Commission that would have a material impact on the Company’s consolidated financial statements.

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

The following discussion should be read in conjunction with 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.

You should read the following discussion and analysis in conjunction with our unaudited financial statements contained in this report as well as the audited financial statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operation’s and Risk Factors” contained in our Annual Report on Form 10-K, as amended to date, for the fiscal year ended December 31, 2013. We undertake no obligation and do not intend to update, revise or otherwise publicly release any revisions to our forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.

Overview

Biostar Pharmaceuticals, Inc. (“we”, the “Company” or “Biostar”) was incorporated on March 27, 2007 in the State of Maryland. Our business operation is conducted in China primarily through our variable interest entity (“VIE”), Shaanxi Aoxing Pharmaceutical Co., Ltd. (“Aoxing Pharmaceutical”), which we control through contractual arrangements between Aoxing Pharmaceutical and our wholly owned subsidiary, Shaanxi Biostar Biotech Ltd. (“Shaanxi Biostar”).

On March 28, 2010, we, through Shaanxi Biostar, entered into an agreement to acquire the assets of Xi’an Meipude Bio-Technology Co., Ltd., a Xi’an-based medical equipment manufacturer (“Meipude”), for RMB7.85 million ($1.2 million), including certain assets registered to a family member of an original Meipude shareholder. We took control over the assets of Meipude on March 29, 2010. To facilitate the transfer of some of the assets, however, we were required to acquire all of the outstanding equity interests of Meipude, which we subsequently applied for deregistration on January 18, 2011.

In October 2011, Aoxing Pharmaceutical entered into a Share Transfer Agreement to acquire Shaanxi Weinan Huaren Pharmaceuticals, Ltd. (“Shaanxi Weinan”) from the holders of 100% of equity interests in Shaanxi Weinan. The aggregate purchase price is RMB 61 million (approximately $9.55 million), in cash and payable in several tranches.

Shaanxi Weinan owns drug approvals and permits for a portfolio of 86 drugs and one health product, all of which, were added to the Company’s current drug portfolio following the completion of this acquisition. The Company completed this acquisition on October 25, 2011, and the name of the acquired company changed to Shaanxi Weinan Aoxing Pharmaceuticals, LLC. We are in the process of integrating the administration, operation and sales functions of Shaanxi Weinan with those of Aoxing Pharmaceutical.

We currently manufacture and sell six over-the-counter (“OTC”) medications, fourteen prescription-based pharmaceuticals, six health products, and one medical device which are sold and distributed in over 25 provinces and provincial-level cities throughout China. We also have exclusive supply contract with a hospital to supply four pharmaceutical products. Our best-selling product, Xin Ao Xing Oleanolic Acid Capsule (“Xin Aoxing Capsule”), is a state-approved OTC drug for treatment of Hepatitis B.

Agreement to co-develop new liver cancer drug

In March 2014, the Company signed a letter of intent with the Research Institute of Pharmaceuticals at Shaanxi University of Chinese Medicine to develop a new liver cancer drug based on Oleanolic Acid injection.

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March 2014 Registered Offering

On March 10, 2014, Biostar Pharmaceuticals, Inc. (“Biostar” or the “Company”) and certain institutional investors entered into a securities purchase agreement (the “Purchase Agreement”) in connection with an offering (“Offering”) pursuant to which the Company agreed to sell, and the investors agreed to purchase 1,650,000 shares of the Company’s common stock and warrants to purchase up to 660,000 shares of the Company’s common stock, for aggregate gross proceeds, before deducting fees to the placement agents and other estimated offering expenses payable by the Company, of approximately $4.1 million. The warrants will be immediately exercisable upon issuance and will remain exercisable for three years thereafter at an exercise price of $3.23 per share. The exercise price and number of shares underlying the warrants are subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The net proceeds from the offering will be used for working capital and other general corporate purposes. Moody Capital Solutions, Inc. and Axiom Capital Management, Inc. served as the placement agents for the offering. The Offering was effected as a takedown off the Company’s shelf registration statement on Form S-3 (File No. 333-192963), which became effective on January 3, 2014, pursuant to a prospectus supplement to be filed with the Securities and Exchange Commission.

Results of Operations

Net Sales

	Three Months Ended March 31,										%
	2014					2013					change
Aoxing Pharmaceutical Products			%					%
Xin Aoxing Oleanolic Acid Capsule	$	5,077,309		38.6	%	$	5,443,928		45.0	%		(6.7	) %
Other Aoxing Pharmaceutical products		2,971,494		22.6	%		2,502,174		20.6	%		18.8	%
Sub-total		8,048,803		61.2	%		7,946,102		65.6	%		1.3

Shannxi Weinan Products
Shaanxi Weinan products		2,727,745		20.7	%		2,083,214		17.4	%		30.9	%
Shaanxi Weinan products (new)		230,949		1.7	%		-		0.0	%		n/a
Sub-total		2,958,694		22.4	%		2,083,214		17.4	%		42.0	%

Hospital products		2,173,667		16.4	%		2,062,593		17.0	%		5.4	%

Total sales	$	13,181,164		100.0	%	$	12,091,909		100.0	%		9.0	%

For the three months ended March 31, 2014, total net sales increased by approximately $1.1 million or 9.0% compared to the same period in 2013. The increase is mainly attributable to the increase in sales volume of other Aoxing products and Weinan products and the addition of 4 new products at Shaanxi Weinan. The increase in sales volume is mainly due to the positive image spread by the hospital using our products. Our sales prices didn’t change much in the first quarter of 2014.

Cost of sales

	Three Months Ended March 31,										%
	2014					2013					change
Aoxing Pharmaceutical Products			%					%
Xin Aoxing Oleanolic Acid Capsule	$	824,112		13.9	%	$	1,367,670		25.3	%		(39.7	) %
Other Aoxing Pharmaceutical products		2,104,038		35.5	%		1,745,882		32.3	%		20.5	%
Sub-total		2,928,150		49.4	%		3,113,552		57.6	%		(6.0	) %

Shannxi Weinan Products
Shaanxi Weinan products		1,239,245		20.9	%		895,723		16.6	%		38.4	%
Shaanxi Weinan products (new)		188,223		3.2	%		-		-			n/a
Sub-total		1,427,468		24.1	%		895,723		16.6	%		59.4	%

Hospital products		1,572,458		26.5	%		1,393,744		25.8	%		12.8	%

Total cost of sales	$	5,928,076		100.0	%	$	5,403,019		100.0	%		9.7	%

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For the three months ended March 31, 2014, cost of sales increased by approximately $0.5 million or 9.7%, compared to the same period in 2013. This increase is mainly due to the increase in sales volume of other Aoxing products and Weinan existing products and the addition of 4 new products at Shaanxi Weinan. The increase in the production workers’ salary also contributed to the increase in the cost of sales.

The % change in cost of sales of Xin Aoxing decreased in more extent than that of net sales because in 2013, as a promotion, Xin Aoxing was sold in bundle with some gift products which cost was also included in Xin Aoxing’s cost of sales.

The % change in cost of sales of hospital products increased in more extent than that of net sales was mainly due to the higher labor costs.

Gross Profit

	Three Months Ended March 31,
	2014					2013
	Gross Profit		Product Gross Margin %			Gross Profit		Product Gross Margin %
Aoxing Pharmaceutical Products
Xin Aoxing Oleanolic Acid Capsule	$	4,253,197		83.8	%	$	4,076,258		74.9	%
Other Aoxing Pharmaceutical products		867,456		29.2	%		756,292		30.2	%
Sub-total		5,120,653		63.6	%		4,832,550		60.8	%

Shaanxi Weinan Products
Shaanxi Weinan products		1,488,500		54.6	%		1,187,491		57.0	%
New Product		42,726		18.5	%		-		n/a
Sub-total		1,531,226		51.8	%		1,187,491		57.0	%

Hospital products		601,209		27.7	%		668,849		32.4	%

Total gross profit	$	7,253,088		55.0	%	$	6,688,890		55.3	%

Gross profit increased by approximately $0.6 million or 8.4% for the three months ended March 31, 2014, as compared to the same period in 2013. The increase in gross profit was due primarily to the increase in sales volume of Other Aoxing Pharmaceutical products and Weinan existing products. The addition of 4 new products at Weinan also contributed to the increase in gross profit.

The overall gross profit margin was largely unchanged in the first quarter of 2014 compared to the same period of last year mainly because the increase in labor cost was offset by the decrease in the cost of sales of Xin Aoxing as mentioned above.

Operating Expenses

	Three months ended March 31,
	2014					2013
	Operating expenses		% of net sales			Operating expenses		% of net sales			% change
Advertising expenses	$	1,788,541		13.6	%	$	1,886,681		15.6	%		(5.2	%)
Selling expenses		1,934,722		14.7	%		2,197,346		18.2	%		(12.0	%)
General and administrative expenses		3,597,993		27.3	%		1,077,748		8.9	%		233.8	%
Research and development expenses		694,944		5.3	%		796,001		6.6	%		(12.7	%)
Total operating expenses	$	8,016,200		60.8	%	$	5,957,776		49.3	%		34.6	%

Total operating expense increased by approximately $2.1 million or 34.5% for the three months ended March 31, 2014, as compared to the same period last year. The increase is attributable to the increase in general and administrative expenses. During the period ended March 31, 2014, the Company made provision for doubtful accounts of $2.3 million.

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Advertising expenses accounted for 13.6% and 15.6% of total net sales for the three months ended March 31, 2014 and 2013, respectively. As market of our products and sales channels is becoming more established, and our brands are becoming more well-known to households, we have been reducing the amount spent on advertising campaigns.

Selling expenses consist mostly of sales salaries, commission and other selling expenses. Overall decrease was approximately $0.3 million or 12.0%. As market of our products and sales channels is becoming more established, and our brands are becoming more well-known to households, we have also been reducing the amount spent on selling activities.

General and administrative expenses consist of salaries and wages, amortization and depreciation, stock based compensation and other general and administrative expenses. During the three months ended March 31, 2014 and 2013, general and administrative expenses increased by $2.5 million or 233.8% mainly due to a provision for doubtful accounts of $2.3 million as a result of uncertainties on the collectability of accounts receivable.

We make periodical assessments as to the progress of our research and development projects, and charge to expense as appropriate, as these projects reach different stages or project milestones. We incurred approximately $0.7 million and $0.8 million in research and development expenses for the three months ended March 31, 2014 and 2013, respectively.

Provision for Income Taxes

For the three months ended March 31, 2014 and 2013, our income tax expense was approximately $0.3 million and $0.5 million, respectively. The lower income tax was the result of lower income before income taxes which was negatively affected by the higher general and administrative expenses. We are subject to the uniform corporate income tax rate of 25% in China. The calculation of effective tax rate includes the operating results of all our subsidiaries and the U.S. parent company.

Liquidity and Capital Resources

As of March 31, 2014, we had cash and cash equivalents of approximately $7.1 million and net working capital of approximately $35.8 million. On March 10, 2014, we and certain institutional investors entered into a securities purchase agreement in connection with an offering pursuant to which the Company agreed to sell, and the investors agreed to purchase 1,650,000 shares of the Company’s common stock and warrants to purchase up to 660,000 shares of the Company’s common stock, for aggregate gross proceeds, before deducting fees to the placement agents and other estimated offering expenses payable by the Company, of approximately $4.1 million. The net proceeds from the offering will be used for working capital and other general corporate purposes. At March 31, 2014, cash and cash equivalents were mainly denominated in RMB and were placed with banks in the PRC. These cash and cash equivalents may not be freely convertible into foreign currencies and the remittance of these funds out of the PRC may be subjected to exchange control restrictions imposed by the PRC government.

On an on-going basis, we take steps to identify and plan our needs for liquidity and capital resources, to fund our operations and day to day business operations. Our future capital expenditures will include, among others, expanding product lines, research and development capabilities, and making acquisitions as deemed appropriate.

Based on our current plans for the next 12 months, we anticipate that the sales of the Company’s pharmaceutical products will be the primary organic source of funds for future operating activities in 2014. However, to fund continued expansion of our operation and extend our reach to broader markets, and to acquire additional entities, as we may deem appropriate, we may rely on bank borrowing, if available, as well as capital raises. There is no assurance that we will find such funding on acceptable terms, if at all.

Net cash provided by operating activities for the three months ended March 31, 2014 was approximately $3.1 million. This was primarily due to our net income of approximately $0.3 million, adjusted by non-cash related expenses including provision for doubtful accounts of approximately $2.3 million, depreciation and amortization of approximately $0.7 million, research and development expenses of $0.7 million, stock-based compensation of approximately $0.1 million, and non-cash decrease in deferred tax assets of approximately $0.1 million and accrued interest income of approximately $0.3 million, then decreased by unfavorable changes in working capital of $0.9 million. The unfavorable changes in working capital mainly resulted from an increase in accounts receivable and loan receivable, partly offset by a decreased in deposit and other receivable, an increased in accounts payable and accrued expenses and an increase in income tax payable.

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Net cash provided by operating activities for the three months ended March 31, 2013 was approximately $6.2 million. This was primarily due to our net income of approximately $0.6 million, adjusted by a non-cash increase in deferred tax assets of approximately $0.4 million, and non-cash related expenses including depreciation and amortization of approximately $0.5 million and research and development expenses of approximately $0.8 million, offset by non-cash accrued interest income of $0.4 million and then increased by a net increase in working capital items of approximately $4.0 million. The net increase in working capital items was mainly due to decrease in accounts receivable and increase in accounts payable and accrued expenses, offset by increase in inventories, prepaid expenses and decrease in value added taxes payable.

Net cash provided by financing activities for the three months ended March 31, 2014 was approximately $4.0 million, consisting net proceeds of $3.9 million from a public offering with warrants and $0.1 million advance from a related party.

Net cash used in financing activities for the three months ended March 31, 2013 was approximately $1.6 million, consisting repayment of an advance from a related party.

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 a customer was to deteriorate further, resulting in an impairment of their ability to make payments, additional allowances may be required. Such differences could be material and could significantly impact cash flows from operating activities.

The following are steps the Company takes in collecting accounts receivable:

Step 1: After the payment term has been exceeded, the Company stops taking orders from the delinquent customer and allows the responsible 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. The Company’s normal sales term is 90 days credit period.

Step 2: If the sales person’s collection efforts are not successful, the Company 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 not successful, the Company will commence legal action to collect the accounts receivable.

Our policies for writing off the accounts receivable are as follows:

If after taking legal action, it appears that an accounts receivable is not likely to become collectible, such accounts receivable will be written off if it is more than two years old.

If during the collection period, the customer provides bankruptcy or other insolvency documentation, the corresponding accounts receivable will be written off.

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 for such customer will be written off if it is more than two years old.

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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.

Stock-Based Compensation

Our stock-based compensation expense is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton (BSM) option-pricing model and is recognized as expense over the requisite service period. The BSM model requires various highly judgmental assumptions including expected volatility and option life. Changes in these assumptions could materially impact the financial position and results of operations.

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.

Research and Development

The remuneration of the Company’s research and development staff, materials used in internal research and development activities, and payments made to third parties in connection with collaborative research and development arrangements, are all expensed as incurred. Where the Company makes a payment to a third party to acquire the right to use a product formula which has received regulatory approval, that payment is accounted for as the acquisition of a license or patent and is capitalized as an intangible asset and amortized over the shorter of the remaining license period or patent life (See above “Intangible Assets”).

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.

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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 RMB. 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. The 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 the 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.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets, exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. We adopted this guidance as of January 1, 2010 and applied it to the Meipude and Shaanxi Weinan acquisitions.

Contractual Obligations

The following table sets forth our contractual obligations as of March 31, 2014:

	Payments due by period ($ million)
	Total		Within 1 year		1-3 years		3-5 years		>5 years
Research and development contracts		0.8		0.8		-		-		-

Purchase of a health product manufacturer		5.3		5.3		-		-		-
								-		-
Total contractual obligations	$	6.1	$	6.1	$	-		-		-

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).

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a “smaller reporting company” as defined by Regulations S-K and as such, are not required to provide this information.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), under the supervision and with the participation of our management, including the Chief Executive Officer and Interim Chief Financial Officer (the “Certifying Officers”), have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Certifying Officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective such that the material information required to be filed with our SEC reports is recorded, processed, summarized, and reported within the required time periods specified in the SEC rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

At present, the Company is not engaged in or the subject of any material pending legal proceedings.

Item 1A. Risk Factors.

We are a “smaller reporting company” as defined by Regulations S-K and as such, are not required to provide this information.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended March 31, 2014, neither the Company, nor any of its affiliated purchasers repurchased any of the Company’s securities. The Company did not sell any unregistered securities during the same fiscal period.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

1.1	Placement Agency Agreement, dated March 1, 2014, by and away the Company, Moody Capital Solutions, Inc. and Axiom Capital Management, Inc. (7)
3.1	Articles of Incorporation filed with the corporate secretary of State of the State of Maryland on March 27, 2007 (1)
3.2	Articles of Amendment filed with the corporate secretary of State of the State of Maryland on August 1, 2007 (1)
3.3	Articles of Amendment filed with the corporate secretary of State of the State of Maryland on September 14, 2007 (1)
3.4	Certificate of Designation for the Series B Convertible Preferred Stock as filed with the corporate secretary of State of Maryland on November 2, 2009 (2)
3.5	Articles of Amendment to the Articles of Incorporation of Biostar Pharmaceuticals, Inc. (3)
3.6	Bylaws (1)
4.1	2009 Incentive Stock Plan ** (4)
4.2	2011 Stock Option Compensation Plan (5)**
4.3	2012 Stock Option Compensation Plan (6)**
4.1	Form of Warrant to purchase Shares of Common Stock by the Company in favor of the Investors. (7)
10.1	Securities Purchase Agreement, dated March 10, 2014, by and between the Company and the Investors. (7)
31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1	Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2	Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Document

* Filed herewith.

** Management agreement or compensatory plan or agreement.

(1) Incorporated by reference from the Company’s Registration Statement on Form SB-2 (File No. 333-147363) filed with the SEC on November 13, 2007.

(2) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on November 3, 2009.

(3) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2012.

(4) Incorporated by reference from the Company’s Schedule 14A filed with the SEC on October 1, 2010.

(5) Incorporated by reference from the Company’s Registration Statement on Form S-8 filed with the SEC on August 17, 2012.

(6) Incorporated by reference from the Company’s Proxy Statement on Schedule 14A filed with the SEC on September 21, 2012.

(7) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on March 10, 2014.

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SIGNATURES

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. (Registrant)

Date: May 15, 2014	By:	/s/ Ronghua Wang
		Ronghua Wang, Chief Executive Officer and President (Principal Executive Officer)

Date: May 15, 2014	By:	/s/ Qinghua Liu
		Qinghua Liu, Interim Chief Financial Officer (Principal Financial and Accounting Officer)